Vertex Pharmaceuticals (NASDAQ:VRTX) and Alexion Pharmaceuticals (NASDAQ:ALXN) have each figured out the same winning strategy. Focus on a rare genetic disease. Develop an effective drug for it. Achieve commercial success. Then repeat the process.

The strategy has worked out tremendously for both companies. Vertex has achieved greater success in recent years, though. Which biotech stock is the better pick now for long-term investors? 

Gloved hands holding two test tubes

Image source: Getty Images.

The case for Vertex

In 2012, Vertex's Kalydeco became the first drug to win FDA approval in treating the underlying genetic cause of cystic fibrosis (CF). Over the next few years, the company expanded the numbers of CF patients that Kalydeco could treat across the world. It also launched new CF drugs that were even more powerful, Orkambi and Symdeko. Last year, Vertex won FDA approval for its most promising CF drug yet -- Trikafta. 

Vertex dominates the CF market. There aren't any other approved drugs that address the underlying cause of the disease. This dominance has fueled a meteoric rise in the biotech's revenue, with sales skyrocketing more than 560% over the last five years. It's also made Vertex highly profitable: The company generated profits totaling nearly $1.2 billion in 2019.

Impressive growth should continue for years to come. Wall Street analysts project that Vertex's earnings will increase by an average of nearly 28% annually over the next five years. That rate of growth should be attainable with Vertex lining up new reimbursement deals for its drugs in key markets and especially with the prospects of Trikafta soon winning European regulatory approval.

The obvious question for Vertex, though, is: What's next? Vertex isn't finished targeting CF. It's evaluating another triple-drug CF combination treatment in a phase 2 clinical study and is partnering with CRISPR Therapeutics to develop a gene-editing therapy that can help the 10% of patients who can't be treated with existing therapies (including Trikafta).

Vertex is also expanding beyond CF. The company has a promising non-opioid pain program in phase 2 testing. It has another phase 2 study under way for VX-814, which targets alpha-1 antitrypsin deficiency (AATD). Like CF, AATD is a genetic disease caused by protein folding defects. The biotech's early stage pipeline includes a gene-editing therapy developed by CRISPR Therapeutics that targets rare blood diseases beta-thalassemia and sickle cell disease.

The company has a big cash stockpile (over $3.8 billion at the end of 2019) to use in making deals to bolster its growth prospects. Vertex has already put its cash to use, establishing several collaborations with other drugmakers and acquiring Semma Therapeutics last year. Semma has a promising preclinical program focused on curing type 1 diabetes. 

The case for Alexion

Alexion's flagship drug, Soliris, won FDA approval in treating rare genetic blood disease paroxysmal nocturnal hemoglobinuria (PNH) in 2007. The biotech picked up additional approvals for other rare indications in subsequent years, including atypical hemolytic uremic syndrome (aHUS), generalized myasthenia gravis (gMG), and neuromyelitis optica spectrum disorder (NMOSD).

Soliris has fueled astronomical revenue growth for Alexion over the last 12 years. But the drug faces the prospects of losing patent exclusivity in the not-too-distant future. The good news is that Alexion already has a successor to Soliris on the market -- Ultomiris. Market researcher EvaluatePharma ranked Ultomiris as the top new drug launched in 2019

Alexion also has a couple of other drugs that generate solid sales, albeit not at the blockbuster level of Soliris. Strensiq is approved for treating perinatal, infantile, and juvenile-onset hypophosphatasia (HPP), a genetic disease that causes abnormal development of bones and teeth. Kanuma treats lysosomal acid lipase deficiency (LAL-D), a rare genetic disease that impacts lipid metabolism.

Much of Alexion's pipeline focuses on picking up additional indications for Ultomiris. The drug is currently approved by the FDA for treating PNH and aHUS. Alexion is evaluating Ultomiris in nine late-stage studies targeting other diseases. The biotech also has five other late-stage programs and five programs in phase 2 testing.

Like Vertex, Alexion has a nice cash stockpile to potentially use in funding business development deals. The company reported cash, cash equivalents, and marketable securities of more than $2.7 billion at the end of 2019. Alexion has already used some of its cash, closing on the $930 million acquisition of Achillion Pharmaceuticals earlier this year.

Better buy

Alexion clearly beats Vertex on one front -- valuation. Its shares trade at less than 10 times expected earnings while Vertex stock trades at more than 33 times expected earnings. However, I think Vertex is the better biotech stock to buy right now because of its tremendous growth prospects.

Vertex doesn't face any notable headwinds over the next few years. Alexion does with the loss of exclusivity for Soliris, even though Ultomiris should enable the company to overcome its challenges. I look for Vertex to continue reigning as a juggernaut in CF and achieve success in other indications over the next 10 years.

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