This earnings season, there's no doubt that Gilead Sciences (NASDAQ:GILD) is one of the top-notch stocks to own in the healthcare market. With guidance being increased not once but two times this year, investors are excited to see that the healthcare giant is posting profits $3 billion higher than estimated.

Meanwhile, Teva Pharmaceuticals (NYSE:TEVA) is acquiring another company's generics unit to increase its growth in this space. With numbers like these, it's tough to decide which company to invest in.

A full transcript follows the video.

Michael Douglass: Healthcare, mergers, and acquisitions continue; and Gilead Sciences' earnings. This is Industry Focus.

Hi, Fools! Healthcare analyst Michael Douglass, and I am on Skype with Todd Campbell today. Todd, a lot of news coming out of healthcare. We're in the middle of earnings season and we've got a very exciting earnings for Gilead Sciences to cover, which is a perennial favorite for both of us. First off, let's talk about Teva and Allergan (NYSE:AGN). This is the latest multibillion-dollar merger discussed in healthcare.

Teva is spending $40.5 billion to purchase Allergan's generics business which includes about 1000 generics. Let's dive into the deal and see what the investing takeaway is here.

Todd Campbell: It's not like we didn't have enough to discuss this week without this deal.

Douglass: I know.

Campbell: With all the earnings that are coming out.

Douglass: But Chris Hill promised Market Foolery listeners that we would be covering it, so we are covering it.

Campbell: It's our pleasure to do it!

Douglass: Absolutely.

Campbell: Teva has been a lightning rod for contention and debate for a little over a year now because of the patent expiration on its multiple sclerosis drug, Copaxone. That drug didn't have patent protection and after legal issues it's facing off against some competitors. Copaxone accounts for 21% of Teva's sales so people were worried about what the company was going to do for future growth.

They've just answered the question: "We're going to buy it." They had been fighting pretty hard to try to acquire competitor Mylan. This deal trumps that. Basically, it ends the negotiations by Mylan. For about the same amount of money, they end up getting Allergan's very attractive generics pipeline.

This is a business that already does $6.75 billion in annual sales, it's got a bunch of interesting drugs under development in the specialty area that could fuel future growth, and importantly, this is where the company will be able to generate some future upside to their earnings and offset some of the risk that could be tied to a biosimilar version of Copaxone.

Douglass: Right. Certainly, there's been a lot of news in the last year around litigation on Copaxone and one generic coming with others on the way. It's certainly good news for Teva investors that the company still sees opportunities for growth and has picked up a pretty attractive portfolio.

On the Allergan side, it's interesting because Allergan and Actavis have pretty recently combined and now you've got Allergan getting rid of a lot of that generic scale that Actavis had brought to that merger.

Campbell: It's almost like they took Allergan's name and decided "We're just going to be Allergan. We don't even want to be this other business that we once were."

Douglass: Although, as you pointed out before we started, they are still keeping the biosimilars portfolio.

Campbell: Yeah. They didn't get rid of everything. Allergan investors still have the potential to benefit from future biosimilars that were being worked on. Think about it this way: When Actavis paid $66 billion to buy Allergan, they're getting $40 billion of it back. I think it's a good move for everybody. Generic business is a low-margin business and we've said this before in other areas of healthcare -- be it insurers or whatnot -- when you have a low-margin business, scale really does matter.

Combining Teva's existing business with this newly acquired business they think they'll be able to shave about $1.4 billion a year in savings by combining these two entities. That should give it low-double-digit to mid-double-digit earnings accretion next year. They're modeling for 20% earnings accretion in the two years following that.

You could argue this might be too expensive, that they're paying too much for this business, but they're making money on the deal. They're buying it smart, they're buying earnings growth, and I think that means investors now have to look at Teva again and say, "Do I want this in my portfolio?" it's now the ninth-largest drugmaker in the world. It's one you have to be thinking about.

Douglass: Yeah. For Allergan, this gives them a lot of optionality now in terms of what they're going to do with that cash. They've been doing a bit on the M&A front, but you've got to wonder what else they'll be going after.

Campbell: I would imagine most of their focus from here is going to continue to be building out the aesthetics business as they did the Kythera acquisition earlier this year. I think there's a lot to like about both companies, but this is an investing program. We do like to try and educate people on what the takeaway might be. In this case you'd probably say that Teva is probably a bit more risky than Allergan, but it's also trading cheaper on forward estimates.

Maybe if you're a bit more risk tolerant you lean that way. If you're less risk tolerant, you'll lean the other way.

Douglass: Sounds good to me. Let's hop on over to Gilead Sciences, a company that I think neither of us have any reservations about expressing how generally bullish we are on the company. Certainly, earnings which were announced last night I would say highlighted the reasons you and I are both shareholders of the company. At least that was the case for me.

Todd, let's boil down earnings. We'll get to individual top-line and bottom-line numbers, but boil down the call. What was the most important number that you heard?

Campbell: For full disclosure -- and you and I have talked about Gilead a few times in the past -- I am an owner of the stock and I was very happy to see the results they put up last night. I would say, of all the numbers that were thrown out -- and there were a lot of them -- it was like picking your favorite child; 300,000. That's the number that they think is sustainable for the number of patients they can treat annually with their hepatitis C drugs.

If you look at what they're treating right now, last quarter they said they treated about 60,000 patients, up from 45,000 Q4, and they treated about 130,000 in the U.S. in the first six months. That's about what they treated all of last year. If you say you can annualize out around 300,000, with the 20 billion run rate we're running at just in the second quarter just for hepatitis C; that's pretty good.

Douglass: Yeah. Of course, there's the possibility of some additional softness in that market and pair restrictions are still going to be something they'll have to handle and work with both in the U.S. and in Europe. For a lot of the European countries, there are certain budget caps on healthcare expenditures and certain line items. So, Gilead's going to have to be smart about exactly how they meet those or whether they can negotiate those up and how they can work with that.

It's definitely a really important number, though. I'm going to break my own rule. I asked you for one number; I'm going to give two. I'm sorry. I'm going to call it "host privilege." The first was 90%. That's their market share in hepatitis C patients -- 90%.

Campbell: It's an incredible number when you think of all of the worry and investor concern heading into the January launch of AbbVie's Viekira Pak. Give credit where credit is due, though. Viekira pack sales grew 67% quarter over quarter in the second quarter. You're still talking about year-over-year growth of 40% for Gilead off a much larger base.

Again, 12 billion in hepatitis C sales last year, and the potential running now annualized close to 30 billion; that market share number is pretty darn impressive.

Douglass: When anyone talks about Gilead they always talk about hepatitis C. They don't always talk about HIV, which is another huge portfolio and a place that Gilead has a great deal of market shares. Specifically, 8 out of 10 treatment naïve patients begin therapy on a Gilead drug.

When you think about the massive population that needs help with HIV and what a huge percentage of the people who are getting help through Gilead; that really highlights that massive opportunity for them and how huge their market share is. Gilead is a company in both of these spaces that has said clearly, "We're just going to be the big dog in these two spaces." They've really managed to make that happen. It's an incredible thing to see.

Campbell: I think you've got to look at the HIV business as the bread and butter of Gilead. It's one that's easily forgotten, and it really shouldn't be. You're still talking about a business that does more than $10 billion annually for this company [...] Last quarter sales were up about 8% year over year. That's nothing to sneeze at.

A lot of that growth is coming because the market share wins. Eight out of every 10 new patients diagnosed is getting treated with Gilead medicine. This is an important indication that offers a lot of future potential. A lot of people aren't really modeling in the benefit from the new formulation of Viread Taf that's going to be rolled out in combination therapies going from here on out.

They've got an FDA decision date in November, another one coming next March. If the FDA grants approval of those, you've got a drug that now poses less risk to kidneys, and could theoretically get used in more compromised patients. The reality is, if you look at HIV and where we've come in that last 20 years, a lot of that is due to the advances that were made by Gilead.

Patients are living longer, more normal and healthier lives. Unfortunately, since there's no cure, the result gives investors a lot of confidence in the future outlook for this company.

Douglass: Speaking of outlook, you segued into a very nice point that I think Gilead really highlighted for us yesterday. When you look at company management, one of the things you have to think about is whether company management talks a big game and fails to deliver, or if company management gives us a really accurate picture of what things look like, or does the company management tend to sandbag a bit on expectations.

Gilead has a bit of a reputation from people I've talked to for being fairly conservative in their outlook. I think the fact that they've now raised their 2015 guidance twice and there have only been two quarters in 2015; that's a pretty good highlight to the fact that they do tend to under promise and over deliver a bit.

Campbell: I've been in this business a while. If there's one thing I truly believe, it's that great management teams know to do exactly that. Underpromise, overdeliver. Ratchet down the expectations of investors and then deliver market-beating results. That's what Gilead seems to do time and time again.

This is the third quarter in a row that they've outpaced forecasts on the bottom line. You and I were laughing earlier about how if you look at what they came into in 2015, they were expecting to earn about $26 billion in revenue. Now they're at $29 billion. That's a $3 billion sandbag, if you will.

Douglass: I suppose you could say that's "only" 12% to 15% upside. That's $3 billion; that's no chump change.

Campbell: A lot of Gilead's competitors would love to be able to up their guidance by $3 billion.

Douglass: I think that's a great thing. I want to highlight one other quote. This isn't particularly investing related, but I thought it was funny. From the Gilead Sciences call, a question came in from an analyst about whether there were any mid-cap companies that Gilead thought looked potentially undervalued. John Milligan, the president and COO, responded: "In terms of your question of undervalued, small to mid-cap stock; we're not in the business of giving stock tips to folks. I think I will continue to decline that."

Campbell: You've got to give him credit for trying.

Douglass: I appreciated the analyst for trying. I've got to say, for better or for worse, unfortunately, Gilead does not give out stock tips. That's why there are people like us to talk through stocks.

Todd, as always, a pleasure. Thank you for your two cents on these really big breaking news stories. We'll have a lot more to cover in Industry Focus healthcare edition as earnings season continues. Next week, I will be out and Kristine Harjes will be stepping in for me to host. You can all look forward to fewer vocalized pauses and a fantastic podcast presence.

As always, please send along your questions. We have lots of them. We love answering them and we certainly read them all, even if we don't get to answer them all on the show or in writing. That's Again, that's Thanks much, check back to The Motley Fool for all of your investing needs, and Fool on!

As always, people on this program may have ownership or other positions on the stocks that were mentioned on this show, and The Motley Fool may have formal recommendations for or against those stocks. So don't buy or sell anything based just on what you hear. Do your own research. That's the Foolish way, and that is how you do stock research. Thanks much!

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