Big Pharma Matchup: Valeant vs Gilead

While small cap biotech is a minefield of volatility, the mega caps can be just as fickle, and indeed have been lately. The fortunes of double-digit or even triple-digit multibillion dollar companies can hinge on the success or failure of clinical trials that take a decade to complete and hundreds of millions of dollars to fund. A red light from the FDA can cause a sell-off in even the most established companies in the space, something that is largely incomparable in companies of similar size in other sectors.

Here are two big biopharmas, both with multibillion dollar portfolios and both of which have lost a combined $113 billion in market cap since August, and why one looks certain to outperform the other in 2016.

The two companies are Gilead Sciences Inc. (NASDAQ: GILD) and Valeant Pharmaceuticals International Inc. (NYSE: VRX).

Gilead’s valuation far outweighs that of Valeant, with the former at $128 billion, versus the $23 billion of the latter. This is a long-held a discrepancy, but one that has been seriously exacerbated over the past six months, during which Valeant has lost close to 70% of its market cap.

Gilead wins by a long way on price to earnings, with a 12-months trailing ratio of 7.56, versus 47.59 for Valeant. Gilead also wins out on dividend because Valeant doesn’t pay one.

These numbers, while championing Gilead over Valeant, aren’t where the real bias drivers lie, however. The real growth, or lack of it, lies in the disparity in the two companies’ pipelines. A quick count of Valeant’s pipeline; that is, all of its presently meaningful candidates (i.e., those with the potential to launch before the close of the decade), puts the number of candidates at 10.

Gilead’s pipeline includes four drugs, two for HIV and two for liver disease, that are up for approval across the coming quarters. A further nine, ranging from HIV to oncology to inflammatory conditions, are late stage clinical in or just completed Phase 3. A number of these have the potential to be blockbuster therapies, and they join Gilead’s hepatitis portfolio as representing double-digit percentage point portions of its annual revenues.

So why is Valeant’s pipeline so thin on the ground? This comes back to its eight-month, 70% decline in valuation. The company’s business strategy is not focused on R&D, unlike Gilead’s. Instead, it purchases legacy drugs and raises the price of these drugs – something that mass media picked up on last summer and that will undoubtedly play a part in this year’s elections in the United States. There’s reform coming, and Valeant is not well placed to absorb it. Gilead, while it likely will take a hit on any cap on new drug sales, should be able to brush off the reform and continue to grow, as a direct result of its deep late stage pipeline.

While both companies have lost strength over the past six months, against a backdrop of wider market weakness, Gilead has the resources and pipeline to recover, even if regulatory headwinds offer up some friction. In short, and to put it bluntly, Valeant does not.

By Matt Winkler