Biotech has had a fairly volatile year thus far. Shares of the closely watched iShares Nasdaq Biotech Index (IBB -0.99%), for instance, have swung from double-digit gains to high single-digit losses at one point this year. With the index now roughly flat for the year, how will biotech perform for the rest of 2014? With first-quarter earnings mostly behind us and annual guidance in the bag, let's take a closer look at the top two biotechs in the Nasdaq Biotech Index, namely Gilead Sciences (GILD -1.15%)and Celgene Corp. (CELG), for clues on the industry's performance moving forward.
As Gilead goes, so goes biotech?
Because Gilead occupies the pole position in the Nasdaq Biotech index -- composing about 9% of the index -- I think it's fair to say that the biotech index's fortunes will heavily depend on Gilead's performance moving ahead. Fortunately, Gilead's first-quarter earnings were a barn-burner, blowing away consensus for both earnings and revenue. In the first quarter, Gilead reported product sales of $4.87 billion, with $2.27 billion of these sales coming from its newly launched hepatitis C drug Sovaldi. Shares have subsequently climbed over 16% since the company released its first quarter earnings, reversing its recent slump and pushing the index higher as well.
Looking ahead, Gilead looks like it has even more goodies up its sleeve that should keep the trend moving upward. Before the end of the year, we will hopefully see regulatory approvals for its once-daily fixed-dose combo of ledipasvir and Sovaldi as a treatment for hepatitis C genotype 1 infection in adults, as well as idelalisib indicated for the treatment of relapsed chronic lymphocytic leukemia.
Perhaps even more importantly, Gilead announced recently that it has increased its share buyback program by $5 billion, giving the company $7.9 billion in total to repurchase shares. Given that Gilead could have used this cash to make an acquisition or increase its own R&D efforts speaks volumes, in my opinion.
The one area of concern is potential competition hurting Sovaldi's record-breaking sales, as more companies seek approval for their own hepatitis C therapies. Indeed, I suspect this is the main reason Gilead declined to give annual guidance for Sovaldi sales, making it an issue that investors should pay close attention to moving forward.
Celgene starting to heat up again
Celgene is the second largest component of the Nasdaq Biotech index, making up about 8.5% of the index. What's noteworthy is that its shares have been a poster child for the volatility that has spread across almost all biotechs this year.
Like Gilead, however, Celgene's beat on first-quarter earnings and revenue have helped to turn the tide. Despite being down over 12% year to date, Celgene's shares have now climbed a little over 3% since reporting first-quarter earnings.
Celgene's woes began when the company provided a weaker-than-expected outlook for 2014 and were compounded by the ongoing patent litigation issues over Revlimid, the company's flagship cancer drug. Last week, we saw the first substantial hearing in the patent litigation process, called a "Markman hearing." According to most accounts of the hearing, Celgene may have the upper hand, which could help to stave off potential generic rivals for the next 10 years -- but stay tuned for more information.
With Celgene's earnings expected to grow close to 25% next year, a large share buyback program under way, and hopefully some better news incoming on the patent front, you might want to get this top biotech on your watch list.
Foolish wrap-up
The sunny optimism for biotech heading into the year hasn't panned out so far. That said, these top two names in the industry should give you reason to be hopeful going forward. We are seeing stellar earnings, and these companies remain committed to creating long-term value for their shareholders through increased share buyback programs, additional regulatory filings, and maintaining their competitive edges in the marketplace. Overall, my view is that the worst is probably behind us in terms of the prevailing negative sentiment that washed over the industry earlier this year. After all, it's hard to find companies growing revenues by double digits in any industry, and we're seeing that in both of these top names.
