3 Reasons Gilead Sciences Inc. Stock Could Fall

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If you haven't read the bookDecisive: How to Make Better Choices in Life and Work by Chip and Dan Heath, it's worth your time to check it out. A key step the Heath brothers suggest for making good decisions is to prepare to be wrong.From time to time, I like to revisit my previous investing decisions by following this advice.

One of my largest holdings is Gilead Sciences (NASDAQ: GILD). I've enjoyed nice returns from the big biotech over the last few years. My view has been that Gilead is still poised to perform well over the long run. But what if I'm wrong? Here are three potential issues that could cause Gilead's stock to fall.

1. Hepatitis C headwinds

Harvoni sales sputtered in the second quarter, down almost 29% from the prior-year period. While sales of Sovaldi increased by 5%, it wasn't nearly enough to make up for Harvoni's decline. Gilead clearly faces headwinds with its hepatitis C franchise, resulting in shares falling by nearly 20% this year. If these challenges persist, the biotech's stock could drop even more.

The launch of Merck's (NYSE: MRK) rival hep C drug, Zepatier, has made life more difficult for Gilead. Zepatier compares pretty well against Harvoni from an efficacy standpoint, and Merck set the drug's list price well below that of Harvoni. This caused Gilead to offer discounts, which hurt total revenue.

Competition from Merck isn't going away. Payers love that they can leverage the market dynamics changed by the emergence of Zepatier to hold Gilead's feet to the fire. Of course, they use the same tactics with Merck to get the best pricing possible.

Could Gilead's latest hep C drug, Epclusa, improve the biotech's fortunes? Maybe. Epclusa generated $64 million in the second quarter. That might not sound like a huge number, but those sales were made in only three days. (The FDA approved Epclusa on June 28.)However, this impressive start for Epclusa might not help Gilead too much; the new drug could cannibalize sales of Harvoni and Sovaldi as much or more than it wins market share from Zepatier.

2. Pipeline problems

With its hepatitis C franchise challenges, Gilead's future growth prospects rely heavily on pipeline candidates. The most important of these candidates in my view is simtuzumab. The drug, which targets treatment of non-alcoholic steatohepatitis (NASH), is currently in phase 2 clinical testing. Analysts project thatsimtuzumab could reach peak annual sales of $12 billion if approved.

There's a lot riding on that tiny little "if." Simtuzumab must first do well in phase 2, advance to phase 3, complete late-stage testing successfully, and then win approval. It's easy to imagine plenty of ways that path could be derailed. If Gilead doesn't produce a winner withsimtuzumab, you can bet that its shares will suffer.

Other pipeline problems could also crop up. Gilead has seven phase 3 clinical trials in progress and another 18 phase 2 studies under way. These candidates don't have the lofty expectations set for simtuzumab, but a handful of clinical failures would no doubt take a toll on Gilead's stock.

3. Awful acquisition

Gilead's cash stockpile stands at $24.6 billion (including cash, cash equivalents and marketable securities.) It wouldn't be a big surprise to see the company use some of that money to make a significant acquisition in the months ahead. Some deals, though, can end up hurting more than helping.

A potential acquisition of Medivation is now off the table for Gilead. The big biotech was reportedly one of several companies in the hunt for the up-and-coming biotech. WhileMedivation's prostate cancer drug Xtandi and pipeline candidates talazoparib andpidilizumab could have helped Gilead beef up its oncology business, Pfizer wanted Medivation enough to pony up $14 billion.

The risk with scenarios like the one with Medivation where there are multiple bidders is that the winning buyer can pay too much.Wall Street usually doesn't react favorably when a company pays more for an acquisition target than the conventional wisdom anticipates. If Gilead buys another company at a premium price that investors don't like, expect the big biotech's shares to decline even more.

Wrong answers

Any or all of these factors could cause Gilead's stock to fall. However, I don't think they actually will.

While I don't expect huge growth from the biotech's hepatitis C drugs over the next few years, I don't think sales will plummet. Epclusa should be a big winner for Gilead, helping the company to compete more effectively against Merck.

As for pipeline problems, anything can happen. However, Gilead's track record in advancing drugs all the way through to regulatory approval is quite good.

What about an awful acquisition? Again, Gilead's history shows the company tends to make smart decisions when buying other companies. Many thought Gilead paid too much for Pharmasset back in 2011. However, that $11 billion purchase looks really smart now, since the acquisition led to Gilead's success with Sovaldi and Harvoni.

I continue to think the long-term prospects for Gilead are solid despite the possible risks. I'm hanging on to this biotech stock for the long run. But I'm prepared to be wrong.

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Keith Speights owns shares of Gilead Sciences. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has the following options: short October 2016 $85 calls on Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.