Gilead Sciences Stock: What Could Go Wrong?

By Todd Campbell Markets Fool.com

In the wake of weakening hepatitis C drug revenue and key trial disappointments, Gilead Sciences (NASDAQ: GILD) shares have tumbled over the past year. Is now a good time to buy? Before you decide, it could help to understand what risks remain for the company and its investors.

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Image source: Getty Images.

No. 1: Competition expands

In the third quarter, sales of Gilead Sciences' megablockbuster hepatitis C drugs slipped 31% from a year ago. The company blamed the drop on a maturing market with fewer patients that must be treated immediately, and the launch of competing drugs that have driven Gilead Sciences' net drug prices lower.

While lower sales last year provide easier comparisons in 2017, and newly launched drugs that improve outcomes for tougher-to-treat genotypes could stabilize Gilead Sciences' sales, the hepatitis C drug market isn't getting any less competitive.

AbbVie, Inc.(NYSE: ABBV) is already awaiting a Food and Drug Administration decision on its next-generation successor to Viekira Pak, and that successor is easier to dose than Viekira Pak, can be given over as few as eight weeks, and delivers high cure rates across genotypes.Those advantages could help stabilize AbbVie's hepatitis C market share, which has declined in the past year.

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Similarly, Merck & Co.'s (NYSE: MRK) Zepatier may be a niche drug right now, but Merck's R&D team is knee-deep in developing its own next-generation solutions. In November, the company highlighted midstage trial results for a combination therapy that delivered functional cure rates as high as 100% for 12 weeks of treatment. High cure rates were also noted in patients receiving the combination for a shorter eight-week duration.

Drug goliath Johnson & Johnson (NYSE: JNJ) shouldn't be forgotten in the indication, either. While Olysio was a flash-in-the pan top seller in the indication, Johnson & Johnson has mid- to late-stage work underway on regimens that could reduce treatment duration to as little as six weeks and reestablish it in the indication. Results from trials are expected later this year, and if they're positive, shorter duration treatment could eventually reshape patient care and negatively impact Gilead Sciences' market share.

Given that hepatitis C revenue still accounts for 45% of Gilead Sciences' sales, the threat of growing competition in indication can't be discounted.

No. 2: HIV growth slows

Rising demand for Gilead Sciences' HIV medicine was a bright spot for the company in 2016. HIV drug sales climbed more than 20% year over year in the third quarter alone.However, HIV drug sales growth could moderate from here. Last year, growth was driven by the launch of new combination therapies that include Gilead Sciences' TAF, a safer formulation of the commonly prescribed Viread.

Because TAF poses less of a risk to kidneys and bones than Viread, TAF-containing combination therapies are being prescribed in more patients, including those whose disease is more advanced, or patients with comorbidities.

Gilead Sciences is still in the process of refreshing its HIV drug line-up with TAF, but that refresh is maturing, and that could mean that it gets harder to deliver the same levels of growth as last year in 2017.

Also, like in hepatitis C, competitors are attempting to win away market share. For example,ViiV Healthcare, a joint venture spearheaded by GlaxoSmithKline(NYSE: GSK), is actively pursuing new HIV therapies that could make it more difficult for Gilead Sciences to maintain its market share dominance. In December, ViiV announced that a single tablet, two-drug combination that includes Johnson & Johnson's Edurant met its primary endpoint in phase 3 studies. A filing for FDA approval is slated for this year.

No. 3: Expansion plans fall short

A cornerstone of Gilead Sciences' long-term strategy is the expansion of the company's product lineup beyond hepatitis C and HIV. Unfortunately, those efforts haven't borne much fruit.

In 2014, the company launched a highly promising new cancer drug, Zydelig, for use in chronic lymphocytic leukemia, or CLL. Industry analyst pegged the drug as a potential billion-dollar blockbuster when it launched, but Zydelig's sales have fallen far shy of those projections.Instead, doctors have embraced AbbVie's Imbruvica, a competing CLL drug that launched around the same time as Zydelig, but that has arguably fewer question marks regarding its safety. Management shut down label expansion trials for Zydelig following patient deaths early last year.

Management says it remains committed to developing cancer treatments, but it's had setbacks, including last year's failure of momelotinib in myelofibrosis, a rare form of leukemia.

Gilead Sciences is also attempting to enter the big autoimmune disease market via a collaboration with Galapagos on filgotinib, a drug in phase 3 trials for rheumatoid arthritis, Crohn's disease, and ulcerative colitis. Those are multibillion dollar indications, but phase 3 studies only recently begun, and there's no guarantee that they will pan out.

Looking forward

Gilead Sciences has a proven ability to develop top-selling medicine, and trial failures are far from uncommon, so it's possible that last year was an anomaly for the company. Italso has a great advantage over peers because of its blue-chip balance sheet. With $31 billion in cash at its disposal and tens of billions in annual sales, it has plenty of cash flow to invest in drug development.

Furthermore, investors aren't paying a lot to buy the recently struggling biotech. At current prices, its shares are trading at just seven times forward EPS estimates. Buyers also benefit from a rising dividend payout that currently translates into a 2.65% yield.

Nevertheless, there's still uncertainty associated with this company and its ability to rekindle growth, and that means investors will need to watch the coming quarters closely for signs that it's back on track.

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Todd Campbell owns shares of Gilead Sciences. His clients may have positions in the companies mentioned.The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool recommends Johnson and Johnson. The Motley Fool has a disclosure policy.