Money Trap

Gilead's Merck Loss Means It Should Spend More

It doesn't have the drugs to make up for vanishing HCV sales.
At Closing, May 25th
67.38 USD

Gilead Sciences Inc. is learning how losing money can sometimes force you to spend even more money.

The pharma giant may owe $2.54 billion to Merck & Co. Inc. for infringing on its hepatitis C (HCV) drug patents, a federal jury said on Thursday. A judge may yet decide Gilead has to pay as much as three times that figure and give up a portion of future sales.

That kind of money could pay for a few decently sized biotech acquisitions. But the threat of these losses shouldn't dissuade Gilead from doing such deals. If anything, it should encourage the company to splurge. 

This patent saga is far from over; Gilead will appeal, and legal wrangling could stretch for years. But the mere possibility of further damage to its already struggling HCV drugs should add urgency to Gilead's acute need to find other drugs to replace them. 


Gilead's shares have underperformed the rest of biotech as its hepatitis C sales have slowed

Source: Bloomberg

Gilead's HCV drugs have been a boon to the firm, generating more than $40 billion in sales since hitting the market in 2013. That has more than justified the $10.6 billion acquisition of Pharmasset that gave Gilead the drugs in 2012.

But competing drugs from AbbVie Inc. and Merck have hit the market since, giving payers leverage to pry discounts from Gilead. HCV sales have fallen precipitously as a result, bad news for a franchise that delivered 58.6 percent of the company's total sales in 2015. Thursday's legal setback won't help.

Decline and Fall

Aggressive price competition and a high cure rates mean expectations for Gilead's future HCV sales have fallen rapidly

Source: Bloomberg

Gilead doesn't have the drugs to replace that lost revenue, or to even come close. The company's HIV franchise is strong and growing with a new generation of treatments, but it faces stiff competition from GlaxoSmithKline PLC's Viiv joint venture and won't be nearly enough to make up for the HCV decline. 

Meanwhile, Gilead has had a succession of pipeline failures in the past year for drugs intended to treat ulcerative colitis, the liver disease NASH, myelofibrosis, and heart disease. The wave of disappointments does not boost confidence in the company's next wave of drug candidates.

The market has rendered a verdict on Gilead's increasingly bare cupboard: a P/E ratio lower than that of stodgy Pfizer Inc. or Johnson & Johnson.

Tarnished Value

Gilead's valuation has plummeted along with assumptions about the longevity of its HCV franchise and the potential of its pipeline

Source: Bloomberg

The company needs to restock, now more than ever. Even if it ends up paying $2.54 billion or more to Merck, it will still have a substantial portion of its $31 billion in cash to spare. 

A big chunk of that cash will likely come home from overseas under a friendlier Donald Trump tax regime. Gilead needs to start doling it out.

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

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    Max Nisen in New York at

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    Mark Gongloff at

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