Biotech Head-to-Head: Gilead vs. Celgene

It's Fool versus Fool on this health care edition of Industry Focus. Michael Douglass argues for Gilead Sciences (GILD -0.31%), while Todd Campbell goes to bat for Celgene (CELG). Which of these biotech giants is the better investment?

Both companies have had great runs in recent years, and both have hugely successful drugs approved for major indications. One has a rock-solid balance sheet, while the other offers investors an unusually generous look into the future. They're both great buys, but is one a better choice for your investing style?

A full transcript follows the video.

Michael Douglass: Better buy: Gilead Sciences versus Celgene. This is Industry Focus.

[INTRO]

Hi Fools, health care analyst Michael Douglass here and I'm on the phone with contributor Todd Campbell, from New Hampshire. Todd, how's the weather up there today?

Todd Campbell: We actually have some sun shining.

Douglass: What? No, no, no!

Campbell: I know, it's shocking! It's shocking, and if you hear any noise in the background, that's the crew of people that are up on top of the roof, clearing the mountain of snow that has built up over the course of the last few weeks.

Douglass: Oh, gosh. Dan Caplinger, one of our very well-known contributors, the Director of Investment Planning for The Motley Fool, was showing me on FaceTime some of the stuff; just mountains of snow, people-sized, around his house. It's just incredible to me.

Campbell: Yes, this is an amazing year. But it's great. This is the perfect time to stay inside and research our stocks, right?

Douglass: Exactly, and what better stocks to research than Gilead Sciences and Celgene Corporation? These are a pair of big biotech stocks that have really been on a lot of investors' radar. They've both had, let's say, fairly incredible three- and five-year runs.

But let's unpack these stocks a little bit and talk about what the opportunities are. Full disclosure to anyone listening or watching, Todd and I, I think we both own both of these stocks, don't we?

Campbell: Yes, I own both of them so this is going to be like choosing between two favorite children!

Douglass: That is why we love our biotech. I'll go ahead and lead off with Gilead, and then Todd, why don't you talk Celgene? We'll have a little bit of interplay and then we'll wrap up with our two cents.

For me, Gilead Sciences, this is the HIV and now hepatitis C powerhouse. I think there's one number that really emphasizes just how big Gilead Sciences has gotten, compared to how it used to be -- or two numbers, I suppose.

The first one is diluted EPS, 12 months ended December 31, 2014, and that is $7.35. Go back one year to 2013, it was $1.81. We're talking an enormous -- almost 4x -- growth in earnings per share. That's the sort of growth that we want to see in biotech. We don't see it very often, but when we do, usually there are rich rewards.

This is a company that has really focused on rewarding shareholders through its tremendous hepatitis C success. Let me talk about the successes real quick. In HIV, I want to say it's 8 out of 10 newly diagnosed HIV patients are on a cocktail with a Gilead drug involved.

What we're seeing there is just enormous market share. Gilead is focused on helping develop the next generation of HIV cocktails and there will be a lot more about that in the coming months, but really huge opportunities for the company there.

Then let's not forget hepatitis C; Sovaldi brought in over $10 billion last year, in its first full year on the market. Harvoni is Sovaldi plus ledipasvir, which essentially means you can take it interferon and ribavirin-free for hepatitis C type 1 patients.

Enormous opportunity; early uptick looks like it could be as good as, maybe even better than Sovaldi, and it's a higher price point, so that's a huge opportunity for the company -- and this is a company that's instituted a dividend, which shows just how stable they think their cash flow is.

They're sitting on a mound of cash, they're beginning to fight in oncology. The future looks really bright for Gilead Sciences.

Campbell: I can't disagree with any of that! Gilead Sciences is, without a doubt, a cash flow king right now. It's cranking out a tremendous amount of money. There's no getting around it.

The only reason that I'm going to talk about Celgene today instead of Gilead is because I think that investors in biotech tend to focus on growth rates, and there's no doubt in my mind -- you highlighted these numbers; they're fantastic for 2014 -- the point that I would make, however, is that Celgene's outlook for 2015 is good, but it's nowhere near as good as it was in 2014.

That makes me think that, if you're an investor in biotechnology stocks and you're interested in a company that's going to put up some really solid top and bottom line growth, I think you want to focus on Celgene.

The reason that I like Celgene is this. Here's a company that has been there and done that, just like Gilead has. It's a market dominator in its indication. It markets a slate of different drugs, it's got almost $7.8 billion in sales in 2014, so you're not talking about an emerging play. This is a company that is established.

This year, it's looking at seeing its sales grow by 22%, to $9.0-9.5 billion, which is great. That's fantastic growth. I think, for comparison, Gilead's looking at 4.4-8.4% growth in 2015 on the top line, depending on whether or you're using the low end of their guidance or the high end of their guidance.

Celgene should grow its top line more quickly, but that's not the only reason I like Celgene. Celgene is one of the few companies that actually is willing to give investors insight years ahead.

They're willing to go out and say, "You know what? We're going to tell you not only where guidance is for this current year, but we're going to give you an indication of where we think we're going to be further out, too."

In January, that guidance for 2017 is for between $13 and $14 billion in sales. They're looking at growing their sales from $7.7 billion in '14 to $13-14 billion by '17, and they're saying that at 2020 their revenue is going to be at least $20 billion.

Now, Gilead's obviously bigger, but that's dramatic sales growth over the course of the next five years, that investors really shouldn't ignore.

Fueling that growth, without doubt, is still going to be Revlimid. Revlimid is their multiple myeloma drug. It's approved as a second line therapy for this important indication. In February -- actually very recently, a few days back -- the FDA just gave Celgene the go-ahead to start marketing that drug as a first line therapy.

As a result, Celgene thinks, "We've got Revlimid. If it's selling at about a $5 billion run rate right now, we think that that drug could do $5.6-5.7 billion this year, and maybe $7 billion by 2017," so that drug should continue to post up some really solid growth.

It's also got a multiple myeloma drug for third line treatment in Pomalyst, that saw its sales grow 123% last year, to $679 million, and it's got a pancreatic cancer drug, Abraxane, that saw its sales grow 31% to $848 million last year, so you've got a lot of different drugs here that are all growing relatively quickly.

As a result, you've got a company that has, like Gilead, a rock-solid balance sheet, kicking off substantial shareholder-friendly cash flow.

Those are some of the reasons that I'm a fan of Celgene.

Douglass: Sure. I think you brought up a really important point, which is that Gilead -- which, to be fair, I have the suspicion that they're sandbagging a little bit on their top line guidance -- but that's just my personal opinion. You're 100% correct, that revenue growth looks like it's slowing down pretty dramatically.

Of course, people are also concerned because Gilead Sciences is more aggressively discounting its drugs to go ahead and get those public payers; your Medicaids, and of course some of the private insurers and the PBMs who have been pushing back on Sovaldi and Harvoni's cost, and of course in Europe as well, where they really require a coming-together on the price and dropping it a little bit, so I think there are some concerns for Gilead.

But let me also highlight, if I may, when you look at valuation -- and we don't talk valuation very much here in biotech, because how do you value a company that doesn't have earnings or sales, as so many biotechs do? But with Gilead and Celgene we've got earnings, we've got sales, we've got pretty consistent cash flows going on here. We've got indications of where these companies are.

When you look at the fact that, on a trailing 12 month measure price to earnings, Celgene 51 times earnings for price, Gilead 14 times earnings. You look at the forward -- and this is based on analyst estimates, so of course it could move -- Celgene's at 29 and Gilead's at 10 times earnings.

For me, gosh, you're paying so much more per dollar of earnings, even through next year, for a Celgene as compared to a Gilead. For me, that valuation difference makes a difference. It's why, actually, of the two, I've more recently purchased Gilead because I was just like, "Gosh, I think it's comparatively undervalued."

Campbell: Yes, it's hard to argue against ... it's a cheap stock. Gilead is a cheap stock.

Douglass: Yes. I can't believe we're saying this in biotech, but there is actually a fairly cheap stock!

Campbell: It's kind of fun to have a cheap stock to talk about in this space. It is. It's an inexpensive stock, and I think that the reason that it's inexpensive is because everybody has known for a long time that it's going to be a competitive marketplace for hepatitis C.

How much forward ... stocks tend to trade based upon what's going to happen tomorrow, not necessarily what happened yesterday, so what a lot of people have probably said is, "If the growth rate's going to slow for this, how much of a premium do I want to pay for next year earnings, especially if I don't know who the dominant player is going to be?"

AbbVie (ABBV -0.94%) obviously coming out and releasing Viekira Pak in January, getting approval for it in December, has made a lot of people wonder, "How much market share will they get?"

I want to go out on record right now and say that there's no doubt in my mind, at least at this point, that Gilead is going to remain the dominant player in hep C this year. I think that Viekira Pak is an interesting drug. It will help a number of people. However, it's not nearly as good, in my eyes, as what Gilead's rolling out.

One of the other things, just to give a shout out, again, to the Gilead call here, is that we also have to think about what's going to happen later on down the pike. Who's going to have the next generation of shorter treatments in hepatitis C? I think Gilead's best positioned to do that as well.

That being said, I'm going to stick to my guns here and say that, in this space, I really think that investors are probably going to be more willing to reward Celgene's clarity into the future on revenue growth, than they will Gilead's.

These are both great stocks but I guess, in my eye, I tend to lean toward Celgene. But I'm obviously not going to try and talk you out of being long Gilead!

Douglass: Right! Especially, again, it's one of those things; "favorite" versus maybe "second favorite." Celgene and Gilead are both in both of our portfolios, and I think that's really important.

Folks, those of you who are listening, what do you think? What's your favorite biotech stock, whether or not it's Celgene or Gilead? Shoot us an email at [email protected].

Also, one of the things that we talk a lot about here at The Motley Fool is trying to find the next big thing, the next big growth stock, the next thing that could really change the world, whether it's a hepatitis C cure, or personalized medicine, or electric cars, or the Internet of Things -- all of this stuff.

If you want to hear about how one of our co-founders, David Gardner, really looks at and seeks out growth stocks, shoot us an email at [email protected] and we'll tell you about that -- and then also about the Rule Breakers service, which David Gardner runs, which also focuses on growth stocks and on finding those next market-beating multi-bagger opportunities. Stocks that would definitely fit into that viewpoint, I think, would include a lot of your biotechs.

In summation, I think our answer is basically, if you're listening to Todd, "If you've got money they both look pretty darn good, but Celgene may be a little bit better." If you're listening to me, "Both look pretty darn good, Gilead may be just a little bit better," but I certainly wouldn't be sorry to go the other side on this.

Again, we're both in both of these stocks because we think they're just both fantastic, incredible growth businesses with huge opportunities and bright futures ahead. Thank you everybody for listening and watching us on Fool.com. For The Motley Fool, I'm Michael Douglass. Have a fantastic rest of your week, and Fool on!