It's been a rough couple of months to be a biotech focused investor. Since peaking in price over the summer, biotech stocks on the whole have basically been in free-fall. The iShares Nasdaq Biotechnology ETF (NASDAQ: IBB), which holds a huge collection of biotech stocks of all different sizes, has fallen nearly 20% in the last 3 months alone.
When an entire sector is sold off hard, us Fools like to go bargain hunting and put our money to work in the strongest names in the group at discount prices.
Biotech blue-chips Gilead Sciences (NASDAQ:GILD) and Celgene (NASDAQ:CELG) are two of the strongest names in the healthcare sector, and each has seen its share price decline in the last few months, which might make right now a good time to scoop up shares. But which one of these behemoths is more deserving of your investment dollar today?
The hit or miss nature of biotech drugs tends to make the sector a risky place to put capital to work, so many investors demand huge future growth prospects to compensate for the risk they are taking. As such, the companies that provide fast growth tend to be more attractive investments.
Both Gilead and Celgene has been putting up stellar results over the past few years, which is a big reason that both of these companies have been massive winners for investors. Celgene's profits have grown at more than 25% per year over the past 5 years, which is an impressive number. However, Gilead has been the real growth machine over that time period -- its profits have grown by an astounding 48% per year!
Of course, investors in either company today only really care about future growth, and analysts are expecting big things from both companies from here. Thanks in large part to its Hepatitis C treatments Harvoni and Sovaldi, analysts are looking for Gilead to grow its bottom line by more than 16% annually over the next 5 years, which is a solid growth rate for a company of Gilead's size.
On the other hand, analysts are more positive on Celgene's near term future growth. Thanks in part to fast-growing medications like multiple myeloma treatment Pomalyst/Imnovid and the recently-completed acquisition of Receptos, analysts are expecting the company to grow its profits by 25% per year.
Single drug dependence
While each of these companies has several different drugs on the market producing revenue, they each have become very dependent on the success of one key drug that has been driving near term growth -- so if something should happen to their big drugs, each company could be in trouble.
Harvoni, which is Gilead's lead Hepatitis C treatment, was responsible for nearly 45% of its revenue last quarter. When you add in Sovaldi, its other Hepatitis C treatment, that number balloons to more than 60%. This may be worrying to investors as competition in the space has been heating up, with AbbVie launching a competing Hepatitis C treatment, called Viekira Pak, pricing it aggressively in an attempt to steal share. Gilead's revenue growth hasn't slowed down since Viekira Pak was launched, but this certainly should be watched closely.
Celgene's investors also have to be mindful about revenue concentration, as its multiple myeloma treatment Revlimid was responsible for more than 64% of Celgene's total revenue last quarter. Celgene has certainly been making moves to reduce its dependence on the drug; its other multiple myeloma treatment, Pomalyst/Imnovid, and its recent acquisition of Receptos should help it expand into new indications, but for now Revlimid sales remain king.
Earlier in the year, Celgene announced that it would be adding $4 billion to its share repurchase program, which, when added to previous authorizations, gave it around $5.1 billion in total purchasing power to chip away at its share count, which at current prices represents over 5% of shares outstanding.
Not to be outdone, Gilead announced a huge $15 billion buyback program, which is a monstrous number that could reduce shares outstanding by 10% at current market prices. Better yet, the company also began paying a dividend for the first time earlier this year, with shares currently yielding around 1.7%.
While both companies are clearly using their capital to create value for shareholders, Gilead's bigger program and dividend give it the edge.
Celgene has certainly gotten investors excited about its growth prospects, as its shares are currently trading for about 44 times trailing earnings. However, when you look out to next year's earnings estimates, the company's P/E ratio drops all the way to 19, which may be a fair price to pay for a quality company like Celgene.
Gilead, on the other hand, can't seem to get most investors excited. Despite putting up some huge growth in the past, its shares are only trading for around 11 times trailing earnings. If you look at next year's estimates, they are trading for less than 9 times earnings.
And the winner of this Battle Royale is...
While I strongly feel that both of these companies will do well for investors over the next 5 years, when forced to choose I'd give the edge to Gilead right now. While Celgene looks poised for faster growth in the coming years, Gilead offers investors the rare investing trifecta of growth, value, and income, which makes it too good of a deal for this investor to pass up.
Brian Feroldi owns shares of Gilead Sciences. The Motley Fool owns shares of and recommends Celgene and Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.