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Better Buy: bluebird bio vs. Gilead Sciences

By David Jagielski - Feb 12, 2020 at 7:00AM

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Growth is a big question mark for both of these stocks, but for very different reasons.

Biotech stocks can be some of the hottest, best-performing stocks on the market. But they're also some of the riskiest.

That's why comparing bluebird bio (BLUE 2.04%), a biotech stock with enormous potential, against the more established healthcare giant Gilead Sciences (GILD 1.03%) is not as easy a decision as it may seem, whether you're a growth investor or not. Let's take a closer look at the two stocks to see which one is the better buy, and under what circumstances.

Does Bluebird's potential reward justify the stock's risks?

Although its market cap is already $5 billion, Bluebird has the potential to become much bigger. The key to all of that growth: Zynteglo. The drug treats people with transfusion-dependent thalassemia (TDT), a rare genetic blood disorder that requires blood transfusions.

Zynteglo is a gene therapy treatment that patients only need to use once to treat TDT and prevent the need for further transfusions. European health officials have given the drug the green light, and Bluebird announced that Germany will be its first market.  

The one large hurdle for the drug is that it comes at a price tag of $1.8 million. However, the company proposed an installment plan over five years for patients, if the treatment is effective. But if healthcare providers help patients cover the costs of the drug, it could be a significant growth opportunity for Bluebird.

People working in a lab.

Image source: Getty Images

The company has generated more than $50 million in sales in 2018 as well as over the past 12 months, primarily to do with collaboration revenue from arrangements that it has with Celgene and Regeneron. But those sales are nowhere near enough to cover the company's vast operating expenses, which in the past four quarters totaled $789 million, with $540 million of that related to research and development.

For Bluebird to be a success, investors are effectively betting on the success of Zynteglo. Bluebird does have other drugs that it's developing, including LentiGlobin, which treats people with sickle cell disease. However, it's the success of Zynteglo that will dictate whether Bluebird's stock will fly or not. Analysts are forecasting sales of $828 million for Zynteglo beta thalassemia by 2024.

Investing in Bluebird is a risky proposition that puts all of your eggs in one basket. The stock's valuation multiples are effectively worthless since they can change drastically once Zynteglo starts generating sales, which the company expects it'll start doing later this year.

Is Gilead's lack of growth a problem?

Gilead is a much more established brand than Bluebird, and there's less uncertainty about its business, but the one area where it's lacking is growth. The company released its year-end results on Feb. 5 and sales were better than what analysts were expecting, despite rising by just 1.4% from the prior-year quarter. Full-year revenue was also up by a similar percentage.

The disappointing result for investors came in the company's adjusted diluted earnings per share (EPS) of $1.44, well below the $1.67 that analysts were projecting. The company is also forecasting a modest outlook for 2020, with EPS expected to increase by just 2%.

Sales from Gilead's HIV drugs continued to make up the bulk of the company's top line, with $16.4 billion from that segment accounting for about three-quarters of its total revenue for the year. The good news is that at a growth rate of 12% year over year, the products are still growing at a good rate.

Unfortunately, that's not the case for Gilead's other drugs, which continue to weigh down its top line. The company's growth challenges are evident by its very high PEG ratio, which currently sits at more than seven. Growth investors typically look for that multiple to be one or better.In contrast, Bluebird's PEG sits at 0.03.

Which stock is better?

Over the past 12 months, these stocks have gone in very different directions, as has the S&P 500:

GILD Chart

GILD data by YCharts

Gilead's flat returns could make the stock a good fit for income investors who are happy collecting the stock's 4% dividend every year. But for investors who want more growth, you'll want to look elsewhere.

While Bluebird has underperformed both the S&P 500 and Gilead, it has the potential to skyrocket if Zynteglo performs as well as the company hopes it does. But as enticing an option as Bluebird may be for growth investors, it's not a suitable one for those who aren't willing to take on a lot of risk.

Biotech stocks are risky in nature, and that's why for the majority of investors, Gilead is likely the better choice. While its growth may be a question mark, the company is still working on developing different drugs -- and all it takes is one home run to jump-start its revenue and send the stock soaring.

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Stocks Mentioned

Gilead Sciences, Inc. Stock Quote
Gilead Sciences, Inc.
$65.01 (1.03%) $0.66
bluebird bio, Inc. Stock Quote
bluebird bio, Inc.
$3.00 (2.04%) $0.06
Celgene Corporation Stock Quote
Celgene Corporation
Regeneron Pharmaceuticals, Inc. Stock Quote
Regeneron Pharmaceuticals, Inc.
$690.88 (0.71%) $4.86

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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