Biotech stocks can generate eye-catching returns on capital in a few short years. For example, Vertex Pharmaceuticals (VRTX -0.69%) and Galapagos N.V. (GLPG -0.07%) have both made early investors market-crushing gains since their debuts on the Nasdaq.

These two-high flying biotechs, though, are on the cusp of entering a new chapter in their life cycle -- an issue that's almost certain to dramatically alter their underlying value proposition. Armed with this insight, let's break down the bull and bear case for each company to consider which stock is the better buy right now.  

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The case for Vertex

Vertex is the undisputed king of cystic fibrosis. The drugmaker currently has three drugs approved for the rare lung disorder: Kalydeco, Orkambi, and Symdeko. And with a virtual monopoly in hand, Vertex's top line has been going gangbusters over the past few years. In the most recent quarter, for example, the company reported a healthy 34% bump in year-over-year sales to a stellar $857.3 million. That's easily one of the highest growth rates within the large cap biopharma space.  

Looking ahead, Vertex plans to maintain its competitive edge through a triple combination for cystic fibrosis (using either VX669 or VX445 as the backbone therapy). Although it's not yet clear which triple combination therapy Vertex will decide to submit to regulators, Wall Street expects the approved version to generate almost $5 billion in annual sales by 2024. Vertex thus sports the most valuable non-oncology drug candidate right now, according to EvaluatePharma. 

The drawback is that most -- if not all -- of Vertex's future growth is already baked into the stock. Underscoring this point, the drugmaker's shares are trading at close to 10 times next year's projected sales, which is a sky-high valuation any way you slice it.

The other key point to consider is that the explosive growth forecast for Vertex's triplet combination is expected to come at the expense of the drugmaker's other cystic fibrosis drugs. So this experimental medication won't have a cumulative impact on the drugmaker's top-line.

Another bit of bad news is that a few companies are attempting to muscle their way into the cystic fibrosis market -- threatening to undermine Vertex's singular revenue stream. Vertex might be able to head them off at the pass with this powerful triplet therapy, but there is a chance at least that the company won't be able to absolutely dominate the cystic fibrosis market in the next decade. 

The case for Galapagos

Galapagos is a Belgian-Dutch clinical-stage biotech developing therapies for a wide range of inflammatory diseases. Although the company has been in existence for two decades, however, it is only now closing in on its first regulatory approval through a collaboration with Gilead Sciences (GILD -0.01%) for the JAK1 inhibitor filgotinib.

Last March, Gilead and Galapagos reported that filgotinib's dual late-stage trials for rheumatoid arthritis were a success. The duo thus plans on filing for the drug's regulatory approval in the U.S. within the next few months. As a best-in-class JAK1 for rheumatoid arthritis, Wall Street thinks the drug should haul in around $3 billion in peak sales. But if Gilead's clinical team can broaden the drug's label to include other high-value indications such as Crohn's disease and ulcerative colitis, this peak sales figure could grow to a whopping $6.6 billion within the next 10 years. 

Beyond filgotinib, Galapagos is also advancing mid- to late-stage candidates for idiopathic pulmonary fibrosis, systemic sclerosis, and atopic dermatitis. While a broad clinical pipeline can be a drag for development-stage companies, Galapagos has a monstrous cash position of approximately $1.37 billion (at current exchange rates) and filgotinib should also net the company several additional milestone payments over the next few years. Galapagos, in turn, shouldn't need to issue secondary offerings on a regular basis to cover its rather expansive clinical pipeline.

The one glaring downside with this biotech is that it licensed away the bulk of filgotinib's commercial opportunity. That's not unusual for a pre-revenue biotech by any stretch, but this situation does place an upper limit on Galapagos' upside potential stemming from filgotinib's commercialization. 


As a pure growth play, Galapagos should turn out to be the better pick than Vertex. Vertex's valuation simply isn't attractive at this point -- even with its high-value triplet combo for cystic fibrosis nearing a regulatory filing. Galapagos' enterprise value, on the other hand, is only about three times the company's current cash position. With a robust clinical pipeline and a marquee partnership with Gilead in hand, Galapagos' stock is arguably a steal at these levels.