Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

After two glorious years on a blockbuster-powered rocket ship, Gilead is turning into a glider.

Bumpy Landing

The company's hepatitis drugs did $19 billion in sales in 2015 -- beating the world's best-selling individual drug, Humira, at $14 billion -- but missed analyst expectations in the second quarter. Sales of the drugs were down about $900 million, or 19 percent, from the same period last year, the company said on Monday afternoon. Gilead also cut revenue expectations for this year by $500 million.

It's not a massive cut in the context of the company's $30 billion in expected total sales, but it's worrying for a company that was already projecting a revenue decline for the year. Shares fell more than 7 percent in early trading on Tuesday. The company's cautious deal strategy is unlikely to provide relief any time soon. 

It's Going Down
Analysts now expect sales of Gilead's hepatitis C drugs to decline more rapidly going forward.
Source: Bloomberg

Hepatitis drug sales are being pressured by competition from Merck and AbbVie and by price erosion just about everywhere. The second-quarter sales decline is expected to continue; analysts have cut 2017 sales estimates for the hepatitis franchise by $1.6 billion in the past three months.

The math on these drugs doesn't favor Gilead. For one thing, the drugs are curative. And the sickest patients in the richest countries have already been treated. There's less urgency now to treat a slow-moving disease with very expensive drugs. Reaching more patients will require cutting prices. The franchise's growth days are almost certainly over. 

Starts Stopping
Fewer patients are starting treatment with Gilead's hepatitis drugs, and those that do are paying less.
Source: Gilead earnings slides

The company's solution has been to cut small deals expanding its pipeline beyond its core anti-viral (hepatitis and HIV) expertise. It's been taking its time, though: Gilead has spent about $12 billion on M&A over the past five years. But nearly all of that went to the $10.6 billion deal for Pharmasset and its hepatitis blockbusters. Over the same period, it has done 12 licensing deals, fewer than any other big biotech. 

There's plenty to be said for frugality and focus, but that approach has left Gilead without much in store to reverse its growth decline. The company expects only one more FDA approval this year, for one of its HIV treatments in hepatitis B, on top of three other approvals so far. Beyond that, it's mostly waiting for a lot of clinical trial data before it can really even talk about its long-term prospects. 

Expecting the company to pull another Pharmasset out of a hat is wishful thinking. But the company isn't making it easy for investors to envision future revenue growth.

Deals for small and early stage assets of the sort Gilead has been making take a long time to pay off, and investors tend to receive them more favorably when sales are growing.  

Too Choosy?
Gilead has licensed fewer drugs from other companies than other big biotechs in recent years
Source: Bloomberg

Gilead's caution may ultimately be vindicated. Its track record has earned it a certain amount of forbearance. But a nearly $120 billion market cap doesn't live on patience alone, and Gilead's caution means its revenue and stock price will keep falling. Facing years of accelerating sales declines, Gilead should worry less about getting a call or two wrong and more about being forgotten altogether. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net