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Better Buy: Celgene Corporation vs. Gilead Sciences

Cory Renauer, The Motley Fool

You would have done quite well to buy and hold shares of either Celgene Corporation (NASDAQ: CELG) or Gilead Sciences (NASDAQ: GILD) over the past decade. Both soared more than 185% over the period despite running into some trouble that has depressed both stocks recently.

Which of these beaten down biotechs is the better buy at the moment? Let's weigh key opportunities against incoming threats to see which has a better chance of outperforming in the years to come.

Man with briefcase facing a fork in the road.

Image source: Getty Images.

The case for Celgene Corporation

Celgene's biggest problem is front and center in its product lineup. The company's multiple myeloma therapy Revlimid still makes up around 63% of total sales and will probably begin losing ground to generic competition in 2022.

Unfortunately, efforts to offset future Revlimid losses with new drugs keep running into obstacles. A Crohn's disease candidate the company licensed for $710 million in 2014 flopped in a pivotal trial last October. More recently, the FDA refused to file an application for a multiple sclerosis candidate Celgene spent $6 billion to get its hands on. 

If those late-stage pipeline snafus don't make you nervous about the company's ability to eventually offset Revlimid losses, the outlook for the company's first foray into immunology might. Otezla quickly became a blockbuster psoriasis drug with over $1.3 billion in annual sales last year. In 2018, Celgene expects annual sales of its top non-Revlimid growth driver to reach just $1.5 billion. That's hardly a pace to complain about, but it won't keep the needle moving forward once generic competition for Revlimid sets in.

Earlier this year, Celgene closed on a $9 billion acquisition of Juno Therapeutics to get its hands on experimental cancer therapies that do a terrific job for patients but still haven't proven themselves in any commercial setting. The chimeric antigen receptor T-cell (CAR-T) therapy furthest along the development timeline is JCAR017. In a high-dosage group within a larger clinical trial, 13 of 19 patients with a difficult-to-treat form of lymphoma achieved complete remission at three months. 

While these results are nothing short of amazing, Novartis and Gilead Sciences launched similar therapies in the last half of 2017. Sadly, it doesn't look like U.S. insurers are in a hurry to pay for these pricey treatments. During the first three months of 2018, Novartis recorded just $12 million in Kymriah sales.

The case for Gilead Sciences

Investors will want to look for signs that Gilead might be having better luck marketing Yescarta when the company reports next month. It needs all the help it can get offsetting losses from a hepatitis C franchise in freefall. Sales of next-generation drugs that can cure the otherwise chronic disease tanked 38% to $9.1 billion last year, and fourth-quarter sales suggest the franchise is on a $6 billion annualized run rate that still hasn't found a bottom.

It's hard to feel good about a company when its leading franchise nose-dives, but investors might have a new growth driver to look forward to. Before hepatitis C antivirals took center stage, Gilead made its mark treating HIV, and its latest offering in this space could be one of the biggest new drug launches of 2018. 

Gilead's new treatment ticks a lot of boxes that should allow it to overtake a fierce competitor -- Juluca from GlaxoSmithKline. The FDA limited Juluca's addressable patient population to those already suppressing the virus with their current medication. Biktarvy is available to this group plus patients new to HIV treatments. Biktarvy is a tiny, once-daily pill that was so well tolerated during clinical trials that it's hard to imagine patients switching down the road.

Biktarvy sales expectations vary, but even conservative estimates hover around $5 billion per year at its peak. Even though it launched in February, some analysts think Biktarvy sales can hit $1 billion before 2018's finished. Look for signs of strong initial uptake when the company reports first-quarter earnings on May 1.

GILD Free Cash Flow (TTM) Chart

GILD Free Cash Flow (TTM) data by YCharts.

The better buy now?

Although the future looks a bit grim for both companies, it's important to note they're priced for mediocrity. Celgene's missteps have soured investor sentiment enough that the stock trades at just 10.6 times earnings expectations. Optimism for Gilead is slightly higher, but at 11.2 times forward earnings, it's just a hair pricier than Celgene.

Both companies are extremely profitable, but Gilead still generates more than twice as much free cash flow as Celgene. That's one reason Gilead can pay a dividend that offers 3.1% right now while making huge investments in tomorrow's blockbuster drugs.

Celgene's assembled an impressive pipeline of drugs from outside sources, but its recent missteps in later development stages are troubling. Gilead's hepatitis segment can only fall so much further, and Biktarvy is already on pharmacy shelves. I'm happy to hold on to shares of both, but Gilead looks like the better stock for cautious investors right now.

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Cory Renauer owns shares of Celgene and Gilead Sciences. The Motley Fool owns shares of and recommends Celgene and Gilead Sciences. The Motley Fool has the following options: short May 2018 $85 calls on Gilead Sciences. The Motley Fool has a disclosure policy.