Celgene (CELG) and Gilead Sciences (GILD -0.44%) are two big biotechs facing dramatically different outlooks for the future. Their stock prices reflect that reality. Celgene's share price is up more than 30% over the last 12 months, while Gilead stock is down by a double-digit percentage during the same period.
But the past is the past. Which of these biotech stocks is the better buy for investors now? Here's how Celgene and Gilead Sciences compare.
The case for Celgene
Why buy Celgene stock? The main reason can be summed up in one word: growth. Celgene's earnings have grown by nearly 25% annually over the last five years. The biotech is expected to turn in a similar performance over the next five years, with Wall Street analysts projecting annual earnings growth of 21%.
A key driver of that expected growth is Celgene's current product lineup. Sales for the biotech's No. 1 product Revlimid continue to climb and could double over the next five years. By 2022, the drug is projected to be the top-selling cancer drug in the world.
While Revlimid is Celgene's biggest moneymaker, the company has other fast-growing blockbuster drugs. Sales for multiple myeloma drug Pomalyst soared 33% year over year in the first quarter of 2017. Autoimmune disease drug Otezla saw sales jump nearly 24% over the prior-year period.
Celgene's pipeline should produce several new stars for the biotech as well. Ozanimod is in late-stage clinical studies targeting treatment of relapsing multiple sclerosis and ulcerative colitis. The drug is also in a phase 2 study for treating Crohn's disease. If approved for all three indications, ozanimod could reach peak annual sales in the ballpark of $7 billion.
The company also hopes to continue its dominance in blood cancer with several pipeline candidates. Luspatercept appears to be the most promising. The drug is being evaluated in late-stage studies for treating myelodysplastic syndromes (a group of disorders in which the bone marrow can't produce enough healthy blood cells) and beta thalassemia (an inherited blood disorder in which the body can't produce an important component of hemoglobin). Celgene thinks the drug could generate annual sales of at least $2 billion.
And there's more! Celgene's pipeline includes eight other candidates with the possibility of approval by 2022 that the company believes could be blockbusters. One other compound could bring in at least $500 million per year.
The case for Gilead Sciences
Growth doesn't appear to be on the table for Gilead Sciences. Sales for its hepatitis C franchise are plunging. Competition exerting pressure on prices is one factor. However, the bigger issue is that Gilead's drugs have cured so many hep C patients that there aren't as many new ones remaining seeking treatment.
There are a couple of reasons to seriously consider buying Gilead stock, though. One is if you're looking for an investment that generates steady income. Gilead is one of only a handful of biotechs to pay a dividend. Its yield currently stands at 2.9%. The company initiated its dividend program in 2015 and has increased the payment 10% each year since. Gilead uses only 20% of earnings to fund the dividend program, so further hikes should be in store.
The second reason to buy Gilead Sciences is that the stock is dirt cheap. Shares currently trade at less than 10 times expected earnings. Of course, the first question investors should ask about a stock trading at such a low earnings multiple is: What's the outlook for earnings down the road?
At first glance, Gilead's earnings prospects don't seem too bright. Even though sales are growing in general for the company's other drugs, particularly some of its newer HIV therapies, the drag from the hep C drugs is hard to overcome. Wall Street analysts think Gilead's earnings will fall by more than 8% annually over the next five years.
Investors should consider two things about the biotech's situation, though. First, even if earnings fall as Wall Street expects, Gilead will still be a bargain with the cash flow that it should continue to generate. Second, Gilead's situation will change.
The biotech's pipeline includes several candidates with tremendous potential. Its bictegravir/F/TAF combination could dominate the HIV market. Gilead's experimental drugs for treating nonalcoholic steatohepatitis (NASH) could also be huge. More important (at least in the shorter term), is that Gilead has the cash and motivation to make acquisitions that change its dynamics.
I own both of these biotech stocks. And I'm holding on to both of them. However, the choice as to which is the better pick right now is an easy one. My vote is for Celgene.
There are some risks for Celgene, particularly with respect to potential pipeline setbacks. However, the growth prospects for the biotech are compelling. While Celgene doesn't have the bargain-basement valuation that Gilead does, shares trade at only 15 times expected earnings. Factoring in the biotech's long-term growth opportunity, its valuation appears even more attractive. I have thought for a while that Celgene is one of the best stocks on the market. My opinion still hasn't changed.