It's very common in the life sciences industry for small biotech companies to partner with larger pharmaceutical businesses. The biotech company typically has innovative treatments in the pipeline with years of clinical trials ahead of them, while the pharma company generally has the cash and resources to help get through regulatory approvals and ramp up manufacturing and sales.
Vertex Pharmaceuticals (NASDAQ:VRTX) and CRISPR Therapeutics (NASDAQ:CRSP) have formed a partnership for just that reason. The companies are hoping to be first to market with the groundbreaking CTX001 therapy using CRISPR-Cas9 gene editing to treat, and perhaps cure, sickle cell disease (SCD) and transfusion-dependent beta thalassemia (TDT).
Comparing apples and oranges
With both companies focused on the same goal of being first to market with a CRISPR-Cas9 treatment, investors should be asking "Which stock is the better buy?" To answer that, we need to dig into some of the unique advantages these partners bring to the table:
Market position: It's a profitable business with a durable franchise based on its highly effective treatments for cystic fibrosis (CF). The high safety and efficacy of the CF treatments coupled with a long-term patent portfolio should keep revenue and profitability high for years.
Cash: It finished last year with $6.7 billion in cash and generated more than $3 billion in free cash flow. That much cash provides a lot of optionality to fund another blockbuster or acquire another company with a later-stage pipeline.
Pipeline: It's focused on deploying all that cash to fund internal development and external partnerships. CRISPR Therapeutics is an industry-leading partner in a promising field with a solid chance of being first to market with a gene-editing treatment worth billions.
Valuation: The stock price is down 29% from its 52-week high over concerns about limited growth potential in the CF market and a decision to stop development of two early-stage pipeline candidates. As a result, Vertex has a P/E ratio of less than 20, versus an average of 31 for the S&P 500.
Market position: Co-founder Emmanuelle Charpentier was awarded the 2020 Nobel Prize in Chemistry for the discovery of CRISPR-Cas9 gene editing. The company's mission is "developing transformative gene-based medicines for serious human diseases." CTX001 is one of the first attempts to translate CRISPR research into medicine.
Cash: The company finished the first quarter with $1.8 billion in cash. In April, CRISPR announced it had received an additional $900 million payment from Vertex to increase its stake in CTX001. With a first-quarter net loss of $113 million, that cash infusion gives CRISPR more runway to support the years of research and development ahead before generating any sales.
Pipeline: In addition to CTX001, CRISPR has several cancer immunotherapy programs in clinical trials, along with an early-stage regenerative medicine program targeting diabetes. Vertex is also a partner in a number of other CRISPR-Cas9 in-vivo (in the body) research programs.
Valuation: The stock price is up 732% from its IPO in 2016, although it's 47% off its January high, which was set when the market reacted to positive clinical trial results from competitor Intellia Therapeutics. With a market cap of $8.9 billion and essentially no sales, it's easy to build a case that CRISPR Therapeutics is overvalued.
And the winner is ...
Biotech and pharma companies tend to appeal to different investors, and these two companies present an interesting choice if you're deciding to buy one or the other.
You might pick Vertex Pharmaceuticals if you like the idea of a strong franchise generating tons of cash with upside potential from promising investments. One way to think about Vertex: Would you like to be a limited partner in a venture capital fund having a very informed view of where to invest on the frontier of medicine? If so, Vertex may be the stock for you.
You might pick CRISPR Therapeutics if you don't mind valuation concerns or price volatility, and/or if you're not worried too much about a non-zero chance that the company will fail after a problem in clinical trials. One way to think about CRISPR: Would you like to be part owner of a baseball team where everyone in the lineup is swinging for the fences and you either win big or lose big? If so, CRISPR may be the stock for you.
Still undecided? Then consider investing in both, putting a bit more in the one you find more aligned with your investing style. Gene editing has the potential to change the way healthcare is delivered, and both these companies are in the middle of that transformation. For patient, buy-and-hold investors, Vertex Pharmaceuticals and CRISPR Therapeutics could be good additions to your portfolio.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.