Our one-trick-pony trade has pulled up lame.
Just over a year ago, we recommended two drugmakers, each reliant on a single treatment for a hefty portion of revenue ("Celgene and Gilead: Two Drugmakers With 30% Upside," Feb. 6, 2016). Celgene (ticker: CELG) has gained 27% since then, and Gilead Sciences (GILD) has dropped 22%. The Standard & Poor's 500 index is up 25% in that stretch.
We doubled down on Celgene last summer ("Celgene: More Than a One-Drug Wonder," June 18, 2016); the stock has gained 26% since, versus 14% for the index. Expect Celgene to continue climbing, but the outlook for Gilead is challenging.
Celgene generated 61% of its revenue last year from the blood-cancer drug Revlimid. Gilead got 43% of revenue from Harvoni for hepatitis C, plus its predecessor drug, Sovaldi. The similarities pretty much end there. Celgene's drug can grow for years on rising overseas prescriptions and new combination therapies for its key use, multiple myeloma. It is also being tested for another blood cancer, follicular lymphoma.
Gilead's revenue from Harvoni and Sovaldi is expected to plunge 57% this year. Estimates have fallen sharply since our story.
This disaster for Gilead investors is wonderful news for patients. Hep C is a virus, so those who have been infected can spread it. Gilead's drugs don't just treat it; they can cure it. They have been so successful that the patient population is shrinking.
New, competing drugs are pressuring prices. Eventually revenue could stabilize, and Gilead, which trades at a scant eight times earnings, could use its vast free cash flow to buy other medicines. But it's too early to invest, according to UBS analyst Carter Gould, who took over coverage last month with a Hold rating and a price target that implies only 8% upside from recent levels.
Celgene, at 17 times earnings, is a rare example of a big drug company with rapid revenue growth. There, Gould predicts a 12% gain.
Celgene and Gilead each banked on a single drug. The strategy worked better for Celgene.