Comparing two leading biopharmas with solid management teams like AbbVie (NYSE:ABBV) and Gilead Sciences (NASDAQ:GILD) is no easy task. Given that most investors have to make tough decisions regarding their portfolios, though, I think it's worth the effort to consider which company offers the better long-term prospects.
While the Street has oft-tied AbbVie and Gilead at the hip because of their competing hepatitis C franchises, my view is that this is a poor, and frankly myopic, starting point.
The more insightful approach is to focus on the biggest threats to each company's main value drivers on a forward-looking basis. In other words, which biopharma has the stronger economic moat to sustain its current growth trajectory?
I believe this bottom-up approach, so to speak, clearly shows that AbbVie has a much brighter future than Gilead. Here's why.
AbbVie's focus on biologics gives it a leg up over Gilead
One of the main reasons why investors shouldn't put too much stock in the ongoing hepatitis C battle between AbbVie and Gilead is because these two companies don't share much else in common clinically or product-wise.
AbbVie's clinical pipeline and product portfolio, for instance, is chock-full of biological-based drugs. Gilead, on the other hand, has historically favored small molecule drugs, and its minor foray into biologics with simtuzumab -- as a potential treatment for an array of cancers -- hasn't panned out.
This is a major difference that shouldn't be glossed over by investors. Major pharma companies like Pfizer, Bristol-Myers Squibb, among others, have radically shifted their pipelines toward the development of biologics over the last decade because these types of drugs have a huge firewall against generic competitors, especially in the U.S.
As it stands right now, the current regulatory pathway in the U.S. for generic versions of biologics, or "biosimilars", is fraught with potential landmines. That's why it took five years since a formal regulatory framework for biosimilars was put into place for the Food and Drug Administration, or FDA, to approve its first biosimilar in Novartis' ZarxioTM -- a biosimilar of Amgen's white blood cell-boosting Neupogen. And even then, Amgen was immediately able to block Zarxio by launching a patent infringement suit .
AbbVie's main threat right now is the introduction of a biosimilar for its flagship rheumatoid arthritis drug Humira. Although Humira is scheduled to lose patent protection in the U.S. in late 2016, AbbVie's management believes that their family of patents surrounding various aspects of the drug could delay biosimilar competition for perhaps another decade. By then, the company should have already launched one of its experimental candidates intended to replace Humira.
Most importantly, though, AbbVie's ability to defend Humira on numerous fronts should give the company a good shot at generating double-digit top-line growth for years to come. And AbbVie's other late-stage experimental biologics such as elotuzumab -- indicated as a treatment for multiple myeloma --should help to round out its portfolio of biological-based drugs moving forward.
Gilead's chief threats should keep investors awake at night
Although Gilead boasts a successful HIV franchise, the company's main growth driver of late has undoubtedly been its hepatitis C drugs, Sovaldi and Harvoni. The launch of these two drugs caused revenues in the first-quarter to shoot up by 52% from a year ago.
Nevertheless, the future of the hep C market in general is highly uncertain, and Gilead's hepatitis franchise perhaps doubly so. Because Sovaldi is a traditional small molecule drug, numerous companies have been able to develop rival therapies -- a common theme within this class of pharmaceuticals.
And the biggest threat to Gilead's growth is indeed the development of other hep C therapies with a shorter treatment duration. AbbVie and Johnson & Johnson, among many others, all have promising experimental candidates undergoing clinical trials.
So, there is a real chance that Gilead's monstrous growth rate is peaking right now.
AbbVie and Gilead are both great companies headed by bright managerial teams. That's why I own both of these stocks.
In my view, though, AbbVie's biologics portfolio simply gives it a more plausible scenario for long-term growth.
Looking ahead, I would expect Gilead to address this discrepancy via an acquisition, but then again, the biotech's experience with simtuzumab, so far, may make it gun-shy when it comes to stepping too far outside of its core area of expertise. Time will tell.