Investing in biotech stocks might just be a great idea. The industry as a whole -- as measured by the SPDR S&P Biotech ETF Index -- provided a return of 45.5% over the past three years, narrowly outperforming the S&P 500 and its 44.5% return over the same period. Of course, there are scores of biotech companies to consider investing in, but let's turn our attention to two in particular: Intercept Pharmaceuticals (NASDAQ:ICPT) and Gilead Sciences (NASDAQ:GILD).

There are important differences between these two companies. For instance, Gilead Sciences' portfolio of products is diverse, whereas Intercept Pharma currently has only one product on the market. However, Intercept Pharma was the better performer last year: The company's shares grew by 22.95%, easily topping Gilead Sciences' 3.88% return. Will Intercept Pharma continue to outpace Gilead Sciences? Let's look at both companies' businesses and find out which is the better buy.

Female pharmacist standing in a pharmacy and smiling.

Image Source: Getty Images.

The case for Intercept 

Intercept's only drug on the market is Ocaliva, a medicine for primary biliary cholangitis (PBC). PBC is a chronic liver disease that, if left untreated, can eventually lead to liver failure. Ocaliva is generating growing sales. During the third quarter, Intercept's total revenue was $61.9 million. The bulk of the company's revenue -- $61.5 million, to be exact -- came from sales of Ocaliva, representing 32% year-over-year sales growth.

However, Ocaliva could have a more significant opportunity ahead. Intercept recently submitted a New Drug Application (NDA) to the U.S. Food and Drug Administration for Ocaliva as a potential treatment for fibrosis due to nonalcoholic steatohepatitis (NASH).

The potential market for this indication is exciting. Not only are there no approved therapies for fibrosis caused by NASH, but the condition is predicted to become more prevalent in the coming years. For instance, NASH is projected to become the leading cause of liver transplant in the U.S., taking the top spot from Hepatitis C. In other words, if Ocaliva gains approval for liver disease caused by NASH, Intercept's revenue could soar along with the company's stock price.

The case for Gilead Sciences

Gilead Sciences' best hopes rest on its lineup of products for the prevention and treatment of HIV. This lineup includes such products as HIV prevention drugs Truvada and Descovy, as well as HIV treatments such as Genvoya and Biktarvy. During the third quarter, Gilead Sciences' HIV product sales were $4.2 billion, 13.5% higher than the year-ago period. Note that HIV sales accounted for about 75% of Gilead Sciences' revenue. 

Besides its HIV business, Gilead Sciences could benefit immensely from its partnership with biotech company Galapagos NV (NASDAQ:GLPG). Back in July of last year, Gilead Sciences made an upfront payment of $3.95 billion to Galapagos as well as a $1.1 billion equity investment. The equity investment increased Gilead Sciences' stake in Galapagos from 12.3% to 22%. 

Gilead Sciences also received the right to "develop and commercialize all current and future programs in all countries outside Europe." Thus, per the agreement, Gilead Sciences acquired the rights to Galapagos' pipeline candidates, including GLPG1690, a potential treatment for idiopathic pulmonary fibrosis that is currently in phase 3 testing. Gilead Sciences' deal with Galapagos could help the company beef up its portfolio and decrease its top-line exposure to its HIV business. 

Profitability and valuation

Neither company was profitable during the third quarter. Intercept recorded a net loss of $84.8 million, while Gilead Sciences' net loss was $1.2 billion. But while Gilead Sciences' revenue of $5.6 billion was much higher than Intercept's $61.9 million, the latter seems to be more attractively valued when taking into account future earnings growth. Intercept's price-to-earnings growth ratio (PEG) is currently 1.07, while Gilead Sciences' PEG is 5.29.

Verdict

There are good arguments for both companies. If Ocaliva gets approved for fibrosis due to NASH, Intercept Pharma's shares will likely skyrocket, thus rewarding the company's shareholders. However, Gilead Sciences looks like a better long-term bet as its portfolio is far more diversified, and the company's partnership with Galapagos may yield exciting products to help it keep its revenue afloat. I'd personally opt for Gilead Sciences if I had to pick one, but I think both of these biotech stocks are worth considering.