Biotech stocks have been soaring over the last few years due to an uptick in innovation and a growing demand for healthcare services across the board. As a result, valuations across this high-flying space have ballooned -- making it increasingly difficult to suss out attractive bargains.

Having said that, the top biotechs Celgene Corp. (NASDAQ:CELG) and Gilead Sciences (NASDAQ:GILD) are the rare exceptions to this general trend. Read on to find out why these two biotech titans might be compelling buys right now.

Dial labeled "Sales" turned to maximum power.

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Celgene's cellar-dwelling valuation might be a once-in a lifetime buying opportunity 

Celgene's industry-leading sales growth has apparently fallen on deaf ears of late. The company's shares, after all, are trading at a 16% discount relative to the Street's consensus 12-month price target, and some bolder analysts -- such as those at Leerink Swann -- even think the biotech's shares could be presently undervalued by as much as 25%. Put simply, Celgene might be one of the cheapest large cap biotechs available right now.

So why is Celgene trading at such an attractive valuation? The core factors at play are the real world capability of Celgene's internal and external pipelines to drive long-term growth, the fate of President Trump's corporate tax reforms, and the specifics regarding Trump's plan to lower prescription drug prices.

Digging into the details, some industry insiders are concerned that Celgene's experimental relapsing multiple sclerosis (RMS) treatment called ozanimod might not have the efficacy profile required to penetrate all that deeply into an already crowded field. That's an immensely important issue because this drug is forecast to eventually become one of Celgene's top sellers, with its peak sales ranging from $4 to $6 billion within the next decade.

Compounding matters, the company has also fallen behind some of its biggest rivals in the hotly contested immuno-oncology race -- highlighted by the clinical setbacks in its adoptive cell therapy partnership with Juno Therapeutics.

These two headwinds -- ozanimod's unclear commercial future and Celgene's unenviable position in the immuno-oncology race -- are key because corporate tax reform doesn't appear likely in this political climate. More to the point, Celgene may remain hesitant to repatriate any of its unremitted foreign profits to pursue additional pipeline opportunities, or to buy new sources of revenue via M&A in the event of further unexpected setbacks. And of course, the fact that drug prices have been under heavy scrutiny lately has only added to investors' concerns about Celgene's long-term growth potential.  


Image Source: Getty Images.

On the bright side, there are a number of analysts that believe that the concerns over ozanimod are largely overblown, and that Celgene's shotgun approach to immuno-oncology will eventually pay big dividends. And another reassuring factor is that the more drastic price control measures that were being floated during the presidential campaign last year -- such as the importation of cheaper drugs from abroad -- now appear to be off the table altogether. So there's no overwhelmingly good reason to believe that Celgene's profitability is going to tank under the current administration. 

The bottom line is that Celgene's robust and extremely deep clinical pipeline -- which was validated most recently by ozanimod's success in RMS -- can almost certainly keep the company's top-line headed in the right direction. In other words, Celgene will continue to grow at a respectable clip regardless of these headwinds -- the only question is by how much. 

Gilead Sciences seems to have hit bottom

From 2013 to 2015, Gilead's top line was growing at an absolutely explosive rate thanks to its next-generation hepatitis drug franchise, consisting initially of the megablockbusters Sovaldi and Harvoni. Due to the launch of rival hep C therapies and a steep decline in demand, though, Gilead's hep C revenues have since fallen in an almost equally dramatic fashion.

What's left, for the most part, is a biotech with a staggering amount of cash and cash equivalents: approximately $72 billion when including Gilead's unremitted foreign earnings, which may become available if corporate tax reform becomes reality. Backing up this assertion, Gilead's HIV franchise is also under threat from both generics and forthcoming experimental-stage drugs, and its clinical pipeline has yet to produce another franchise-level drug capable of restarting the biotech's faltering growth engine. The net result is a company that has lost over a third of its value over just the past 18 months.

Now, the bright side is that Gilead's stock appears to have finally stabilized, as shown by its shares trading sideways in the last four weeks (down only 0.7% at the time of writing), and its short interest declining markedly from the beginning of the year.     

GILD Short Interest Chart

GILD Short Interest data by YCharts

The key issue is that Gilead may no longer have the luxury of waiting for either corporate tax reform or for valuations to come to down to more reasonable levels in order to begin to engage in M&A.

AbbVie, after all, is likely to bring a new pan-genotypic hep C drug to market soon, which would be the biggest competitive threat to Sovaldi and Harvoni so far. So with its core franchises in hep C and HIV under siege from all sides, Gilead's hand is going to be forced on the matter -- and short-sellers appear to be preparing for this growing possibility.  

Which therapeutic area might Gilead pursue via acquisition? The oncology space is the logical fit because of the field's projected 12.7% compound annual growth rate over the next five years running, combined with the biotech's known interest in building out a cancer drug franchise.

To go this route, though, Gilead may indeed have trouble locating deals at a reasonable price tag based on the staggering premiums being paid by other suitors for attractive oncology targets, which has been a sticking point for management according to public comments on the matter. At this critical juncture, though, Gilead has more than enough cash to get its top-line turned around, and the pressure is undoubtedly mounting on management to get a deal done soon, regardless of the cost.

In all, Gilead is a large cap biotech that's flush with cash, and primed to be a major player in the next wave of M&A as a result. Eventually the dam is going to burst and Gilead will add new sources of revenue through one or perhaps several acquisitions. And once this pivotal event occurs, Gilead will probably look like an absolute steal in hindsight.