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Better Buy: Intercept Pharmaceuticals vs. Gilead Sciences

Keith Speights, The Motley Fool

There's no doubt about it. Intercept Pharmaceuticals (NASDAQ: ICPT) is beating Gilead Sciences (NASDAQ: GILD) in the race to launch a drug for treating nonalcoholic steatohepatitis (NASH). A couple of key clinical setbacks for experimental NASH drug selonsertib gave Intercept a clear lead over Gilead.

But which of these two biotech stocks is the better buy? There's more to the story than just the race to market in NASH. Here's how Intercept and Gilead compare overall.

Two scientists in a lab, performing work with pipettes, a test tube, and a beaker.

Image source: Getty Images.

The case for Intercept Pharmaceuticals

You can sum up the argument for buying Intercept stock in one word: Ocaliva. It's the company's only approved drug. And it makes up Intercept's entire pipeline.

Ocaliva won FDA approval three years ago as a treatment for primary biliary cholangitis (PBC), a chronic liver disease where bile ducts become inflamed and can eventually collapse. Intercept's launch of the drug has been pretty good so far, with Ocaliva generating sales of $51.8 million in the first quarter of 2019. Full-year sales for Ocaliva are expected to be in the ballpark of $240 million.

But Intercept hopes that PBC is just a start. The biotech plans to file for FDA approval of Ocaliva in treating NASH in the third quarter of 2019, followed by a European filing in Q4. Assuming the drug wins those approvals, analysts think that Ocaliva could achieve sales of around $2 billion by 2024.

The chances of approval appear to be quite good, although there are no guarantees. Ocaliva demonstrated solid efficacy in phase 3 studies. The primary issue for the drug is its side effects, particularly itching caused by taking Ocaliva. However, that's more likely to be a challenge for Ocaliva in the marketplace down the road rather than a significant hurdle in winning regulatory approval.

Intercept also is evaluating Ocaliva in as a potential treatment for other chronic liver diseases. Phase 2 studies are under way for the drug in treating primary sclerosing cholangitis and biliary atresia.   

The company's market cap is currently under $3 billion. If Ocaliva wins approvals in NASH as expected, Intercept's shares should soar.

The case for Gilead Sciences

While Gilead Sciences would love to become a leader in NASH, the big biotech is already a leader in several other areas. Most importantly, Gilead dominates the HIV market. The company claimed six blockbuster HIV drugs last year with total HIV revenue of $14.6 billion.

The brightest star in Gilead's HIV lineup is Biktarvy. Sales for the drug continued to zoom higher in the first quarter. Biktarvy is now the best-selling HIV drug in the United States.

But there's another HIV drug in Gilead's pipeline that at least one analyst thinks could be a game-changer in HIV. GS-6207 is only in phase 1 clinical testing now. However, if the long-acting HIV therapy proves to be safe and effective in additional clinical studies, Gilead will have another huge winner to extend its HIV juggernaut.  

Gilead is also a leader in treating hepatitis C. The hepatitis C virus (HCV) drug market is now essentially a duopoly between Gilead and AbbVie. Although Gilead's HCV sales have been sinking over the past few years, it appears that the situation has stabilized. Gilead won't generate any growth with its HCV franchise, but it will definitely enjoy plenty of cash flow from its HCV drugs.

Another arena where Gilead stands out is the use of cell therapy in treating cancer. The company's 2017 acquisition of Kite Pharma brought Yescarta into Gilead's lineup. Sales for Yescarta totaled $90 million in Q1, but as the drug gains momentum and picks up approvals in additional indications it could be another blockbuster for Gilead. 

Gilead could emerge as a leader in two other areas. The company's immunology drug filgotinib should be a hit. Gilead expects to file for European approval of the drug later this year. And while the FDA wants Gilead to wait to file in the U.S. until a safety study is completed, new CEO Daniel O'Day appears to be pushing to find a way to win U.S. approval sooner rather than later. In addition, Gilead is still plugging away in NASH, with a couple of drugs other than selonsertib in phase 2 testing.

On top of all of this, Gilead sits on a huge cash stockpile of more than $30 billion. The company seems likely to use this cash to fund strategic bolt-on acquisitions in the future. Gilead will also continue to prioritize its dividend, which currently yields nearly 3.9%.

Better buy

Don't expect a whole lot of revenue and earnings growth from Gilead anytime soon. On the other hand, Intercept's revenue will probably skyrocket assuming Ocaliva wins approval for treating NASH. Because of this, my view is that Intercept will be the better stock over the next couple of years.

However, I think that Gilead Sciences and Intercept have a tortoise-and-hare kind of race going on. Gilead is the tortoise, while Intercept is the hare. Over the long term, Gilead could very well be the bigger winner thanks to its diverse lineup and pipeline combined with a boatload of money to buy assets that fuel growth even more. In the old proverb, it was the tortoise that eventually won the race.

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Keith Speights owns shares of AbbVie and Gilead Sciences. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool recommends Intercept Pharmaceuticals. The Motley Fool has a disclosure policy.