The Worst-Case Scenario for Gilead Sciences, Inc.

By Keith Speights Markets Fool.com

The sun will come out tomorrow.

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Like Little Orphan Annie, Gilead Sciences (NASDAQ: GILD) shareholders are hoping better things are right around the corner. For the last year, the days have certainly been gray for the big biotech. I recently described a best-case scenario for Gilead, where everything goes its way. But what if that's not how things unfold? Here's what a worst-case scenario for the biotech might look like.

Image source: Getty Images.

1. Hepatitis C horror

Gilead estimates that sales for its hepatitis C virus (HCV) drugs will plunge between 39% and 49% this year compared to 2016. The biotech's actual results last year came closer to the low end of its outlook than the high end. History could very well repeat itself.

Company executives won't even try to predict when HCV sales might stabilize. In a worst-case scenario for Gilead, that stabilization happens soon -- but with much lower revenue than anyone expected.

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How could that happen? It would require payers to keep their purse strings tightened when it comes to reimbursing for patients who aren't as sick. AbbVie winnning regulatory approval for its next-gen HCV combo and following it up by grabbing a significant chunk of Epclusa's market share would add to Gilead's woes. Throw in a political deal in Washington that allows Medicare to negotiate drug prices makes for a perfect recipe for a hepatitis C horror story for Gilead.

2. Milligan doesn't get a mulligan

At least Gilead can count on its solid HIV franchise. The company has a new HIV therapy on the way, a bictegravir/F/TAF combination, that has been called its "Mount Everest."

CEO John Milligan doesn't seem to be worried about a potential threat from GlaxoSmithKline's (NYSE: GSK) two-drug combo that's in late-stage clinical studies. He thinks the safety and consistency of Gilead's triplet therapy will prevail over GlaxoSmithKline's product in the real world.

However, Glaxo's combo includes a generic drug. That means its price can be set considerably lower than what Gilead will charge for its regimen. Merck (NYSE: MRK) is also developing a two-drug combo featuring a generic drug. Gilead's product might be better, but the price tag matters to payers.

If Milligan is wrong in his thinking, there isn't much of a backup strategy for Gilead. Its only other HIV drug in the pipeline (other than Descovy for pre-exposure prophylaxis)is in a phase 1 clinical study.

Of course, there is an even worse scenario. If thebictegravir/F/TAF combo somehow failed to win regulatory approval,"Mount Everest" won't even be the size of a molehill. I don't see that happening, but never say never when it comes to the regulatory approval process.

3.Pipeline springs leaks

Gilead endured its fair share of pipeline setbacks in 2016. Eleclazine,GS-4997,GS-5745, andmomelotinib all ran into problems. What if the unlucky streak continues?

Although GS-4997 wasn't successful in treating pulmonary arterial hypertension (PAH) or diabetic kidney disease (DKD), Gileadhas high hopes for the experimental drug in treating non-alcoholic steatohepatitis (NASH). The ASK-1 inhibitor is currently in a late-stage clinical study. Serious problems could crush the biotech's hopes of winning in the potentially lucrative NASH market.

Another pipeline candidate with a lot of promise is JAK1 inhibitor filgotinib. The drug is being evaluated in late-stage studies for treatment of three indications: Crohn's disease, rheumatoid arthritis, and ulcerative colitis. The worst-case scenario would be for filgotinib to flop in those studies.

Gilead could potentially face headwinds even if the drug wins regulatory approval. The autoimmune disease market is already crowded. It's possible that filgotinib could fail to meet revenue expectations.

4. Buyout bust

A lot of investors (including yours truly) have pinned their hopes on Gilead making one or more smart acquisitions. John Milligan has publicly stated that the company fully intends to beef up its pipeline and is especially interested in the oncology area.I see two possibilities where Gilead might fumble in its acquisition strategy.

One is that the company could pay too much. Perhaps the biggest worry is that Gilead might make a run at Incyte (NASDAQ: INCY) with others jumping into the fray. Incyte's market cap already stands at $28 billion. A bidding war could drive the price up so much that Gilead might win the battle but lose the war.

Another bad scenario is that Gilead thinks too small. While investors wouldn't react kindly to the biotech overpaying by a hefty margin for a buyout, neither would they welcome a deal that didn't significantly improve Gilead's growth prospects.

The trick for Gilead is to acquire Incyte (or perhaps multiple smaller biotechs) that would generate enthusiasm without blowing all of its money in doing so. That's a trick that could prove to be, well, tricky.

Bet your bottom dollar?

If all four of these scenarios come to pass, Gilead Sciences is a cash cow that will run out of milk in the not-too-distant future. Will it really be this bad? I doubt it.

HCV sales might not look pretty this year or in the following years, but Gilead will still make plenty of money from its franchise. Even one analyst who thinks GlaxoSmithKline and Merck might mount a challenge to Gilead's "Mount Everest" calls the company's triplet therapy the "gold standard" for HIV.The chances of success for GS-4997 and filgotinib seem better than the chances for failure, based on prior clinical results.

As for the buyout picture, John Milligan has made it clear that Gilead will be "thoughtful and disciplined" in making acquisitions -- even though some want the biotech to forge ahead prices be damned. That doesn't sound like a CEO willing to overspend.At the same time, there are hints that Gilead is preparing for a major acquisition (or maybe several smaller ones that add up to a large sum of money).

Little Orphan Annie sang that you can bet your bottom dollar there'll be sun tomorrow. I'd take her bet rather than the worst-case scenario for Gilead Sciences.

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Keith Speights owns shares of AbbVie and Gilead Sciences. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has the following options: short June 2017 $70 calls on Gilead Sciences. The Motley Fool has a disclosure policy.