Invest in innovation - 5 stock picks

Investing in the cutting edge is inherently risky. But these five firms -- either technology companies working on breakthoughs or mature businesses benefiting from new trends -- are best positioned to turn innovation into profits.

Gilead Sciences

Gilead Sciences stock pick

Fighting infectious diseases one new pill at a time

A decade ago patients with HIV, the virus that causes AIDS, often took a cocktail of different drugs to manage their illness. In recent years this giant biotechnology company has come to market with three single-tablet medications to keep the disease in check: Atripla, Complera, and Stribild. The last of those treatments was approved by the Food and Drug Administration in 2012.

"These drugs make it easier for HIV patients to adhere to the regime," says John Barr, manager of the Needham Aggressive Growth Fund (NEAGX), which counts Gilead (GILD, Fortune 500) among its top holdings. "The medical results have been stunning." Barr adds that Gilead's profit growth -- 15% a year for the past five years -- has been fueled by these innovative treatments.

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John Lutz, a manager for the Frost Growth Equity fund (FACEX) and a Gilead shareholder, expects a "monster launch" from hepatitis C drug Sovaldi (also known as sofosbuvir), which the firm acquired when it purchased rival Pharmasset in 2012. Piper Jaffray analyst Joshua Schimmer says it "may be one of the most important drugs ever for the biotech industry." Hepatitis C affects 150 million people worldwide and kills more Americans each year than HIV.

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The FDA just approved the drug, and advisers for the European Union have issued a positive opinion on it. If it gets the greenlight abroad, the drug could soon double Gilead's revenues and profits. Barclays analyst C. Anthony Butler says the company's hepatitis C-related sales could hit $7.4 billion by 2015 and $9.8 billion by 2017.

The big risk: Sovaldi still awaits official European approval. Expectations are so high, any delay could harm the stock.

What's more, Gilead's work in treating AIDS is politically charged. The company is being pressured by AIDS activists to lower the cost of its HIV drugs (annual doses of Stribild run around $28,000), especially for those who need it in the developing world. If Gilead is forced to cut prices or work more closely with generic-drug makers to develop cheaper knockoffs, that could pressure profit margins.

Why it's a buy: While its 22 P/E isn't cheap, earnings are expected to grow more than 30% annually for several years. Lutz says the market is underestimating Sovaldi's potential, particularly in the first few years of release.

  @lamonicabuzz - Last updated January 21 2014 04:19 PM ET
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