Potential Risks Which Gilead Sciences, Inc. (NASDAQ:GILD) Should Address

Gilead Sciences, Inc. (NASDAQ:GILD)‘s weak earnings in the first quarter highlighted the troubles the drug maker is grappling with, as it struggles to grow its bottom and top line. Revenue and profit falling short of estimates all but came as a surprise for investors, as most of them had high expectations. However, this served to underlined the risks the company is facing.

Pricing pressure woes compounded by a fierce legal tussle with Merck & Co., Inc. (NYSE:MRK) are some of the problems the company is grappling with. Gilead’s overdependence on its blockbuster Hepatitis C drugs has also been called into question as new alternatives flock the market.

Overdependence on Harvoni a Sovaldi

Harvoni and Sovaldi currently account for nearly 56% of the company’s total revenues. Given the level of competition in the industry, Gilead needs to reduce its reliance on the two drugs for profits. Slowing sales of the two drugs could come to haunt the company, especially if sales generated in Q1 are anything to go by.

Gilead Sciences, Inc. (NASDAQ:GILD) is already feeling the pressure of competition in the sector. Merck starting to sell its own Hepatitis C drug Zepatier should lead to another round of pricing battles in the sector. Such a tussle could significantly erode the drug maker’s returns going forward.

Sovaldi and Harvoni generated a combined $12.5 billion in revenue last year out of a global haul of $19.1 billion. With the emergence of other alternatives in the sector, it will be hard for Gilead to replicate the same feat, further affirming why it needs to diversify its drug portfolio.

The battle for market share can only be fearsome going forward as more drug makers try to get a piece of the multi-billion Hepatitis C marketplace. Even though Gilead was able to get a nice head start on its competitors, it is not immune to the dangers of other drugs, which could inflict severe wounds going forward.

Merck Royalty Threat

Merck & Co., Inc. (NYSE:MRK) winning a recent legal tussle involving two patents is another headwind that poses more risks to Gilead going forward. The financial repercussion of the decision is still unknown.

Merck is currently pushing to have a piece of the multibillion-dollar sales of the two hepatitis C drugs. The jury will decide how much Gilead owes Merck in royalties for the 2013 and 2015 period. Once this is done, US District, Judge Beth Lesbon, is to determine a royalty rate for future sales of the two hepatitis C drugs

In the worst-case scenario, the company may have to pay a 10% royalty on the two drugs sales in the US. A more realistic scenario could see the company incurring a 3.5% royalty going forward. The royalty tussle is a big problem for Gilead given that it comes at a time when sales of Sovaldi and Harvoni are expected to flatten as competition intensifies.

Pricing Pressures

Gilead Sciences, Inc.(NASDAQ:GILD)’s first quarter profit was down by 18% as pricing pressure resulted in lower US sales for the two hepatitis C drugs. Chief Financial Officer, Robin Washington, has already acknowledged that an increase in discounts required to open up access to more patients is a big problem. A modest shift in sales to deeply discounted government players is another hurdle that the company will have to bypass if it is to shore up its earnings.

Bottom Line

Gilead Sciences, Inc. (NASDAQ:GILD) will continue to generate significant profits from the two Hepatitis C drugs in the short term. Going forward, pricing pressure and competition could significantly eat into its market share significantly reducing its returns.

The drug maker has been under immense pressure in the recent past to make blockbuster acquisitions. Such a move could allow the company to gain access to other drugs as one of the ways of reducing its reliance on Harvoni and Sovaldi. With $21.3 billion in cash, Gilead Sciences, Inc. (NASDAQ:GILD) should consider this option if it is to pick itself from the disappointments of the first quarter.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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