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Better Buy: Vertex Pharmaceuticals vs. Regeneron Pharmaceuticals

By Prosper Junior Bakiny - Apr 1, 2020 at 7:08AM

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One of these biotech stocks holds a monopoly in the market for drugs that treat cystic fibrosis; the other is looking to develop a treatment for COVID-19. Which one is the better buy today?

Amid the stock market sell-off, some companies have performed much better than the stock market. For instance, shares of biotech company Vertex Pharmaceuticals (VRTX 0.31%) are down by about 1% year to date, whereas the S&P 500 is down by 21.3% since the beginning of the year. Regeneron Pharmaceuticals (REGN 0.38%) -- another biotech company -- has performed even better, with its shares climbing by 28% year to date. Regeneron's performance so far this year is due in large part to its attempts to develop a treatment for COVID-19. Given this factor, it is worth wondering whether Regeneron can keep up this pace -- and continue outperforming Vertex -- moving forward. Which one of these two biotech stocks should investors buy right now?

Product lineup and pipeline 

Vertex is best known for its monopoly on drugs that treat the underlying causes of cystic fibrosis (CF), a rare genetic condition that affects the lungs and the digestive system. CF affects approximately 75,000 patients in North America, Europe, and Australia. Vertex has several approved drugs for the treatment of CF, but the company's latest approval was arguably its most important yet. Back in October, the U.S. Food and Drug Administration (FDA) approved Trikafta, a combination of three drugs -- elexacaftor, ivacaftor, and tezacaftor -- that treats patients with the most common CF mutation.

Man standing in front of two diverging paths.

Image Source: Getty Images.

Thanks to this approval, Vertex's addressable market expanded to 90% of patients with CF, including 27,000 people in the U.S. alone. Beyond its drugs that treat CF, Vertex has several exciting pipeline products. For instance, Vertex's partner CRISPR Therapeutics (CRSP 2.13%) is developing a promising product called CTX001 that could treat sickle cell disease and transfusion-dependent b-thalassemia, which are rare blood disorders. Thanks to its robust lineup of CF treatments, as well as its pipeline, Vertex's future looks bright.

Regeneron also has several interesting products -- most notably, Eylea, an eye medicine; Dupixent, a treatment for atopic dermatitis (eczema); and Libtayo, a skin cancer medicine. Bayer (BAYR.Y 3.75%) holds the rights to Eylea outside the U.S., while Sanofi (SNY 1.62%) holds the global rights to Dupixent. Regeneron collects collaboration revenue from Sanofi for Dupixent. Regeneron is currently investigating Dupixent as a potential treatment for several other conditions, including chronic obstructive pulmonary disease. Lastly, the company's attempts to develop a treatment for COVID-19 deserve mention.

Regeneron and Sanofi are currently evaluating Kevzara -- already approved for moderate-to-severe rheumatoid arthritis -- as a treatment for the rapidly spreading disease. Regeneron is also looking to develop a "novel multi-antibody cocktail" that could prevent people from contracting the SARS-CoV-2 virus that causes COVID-19, or treats those who already have the virus. Regeneron could benefit immensely if it successfully develops a treatment for COVID-19.

Financial results 

During the fourth quarter, Regeneron recorded total revenue of $2.17 billion -- 13% higher than the year-ago period -- and the company's net income based on generally accepted accounting principles (GAAP) was $792 million, representing a 3% year-over-year decrease. By contrast, Vertex recorded revenue of $1.4 billion, a 63% year-over-year increase, and the company's GAAP net income decreased by about 66% to $583 million. Additionally, Vertex benefited from a one-time, non-cash tax benefit of $1.56 billion in 2018.

As a result, the company's GAAP net income was abnormally high in 2018. Thus, investors shouldn't think too much of Vertex's GAAP net income for the fourth quarter decreasing by 66%. The company's non-GAAP net income for the quarter was $444 million, a 32% year-over-year increase. Also, Vertex has grown its revenue faster than Regeneron over the past three years, a trend that is set to continue thanks to Vertex's monopoly on drugs that treat the underlying causes of CF. 

VRTX Revenue (Quarterly) Chart

VRTX Revenue (Quarterly) data by YCharts

Valuation

Both of these stocks are a bit expensive, but Regeneron is cheaper than Vertex at the moment. Regeneron is currently trading at 18 times future earnings, while its price-to-earnings growth (PEG) ratio is 0.4. Vertex's forward price-to-earnings (PE) ratio is 31, and its PEG ratio is also 0.4. However, Vertex is more attractively valued than it was at the beginning of the year due to the recent sell-off, whereas Regeneron has grown more expensive over the same period.

The verdict

Vertex recently announced that the ongoing outbreak shouldn't disrupt its supply chain, but the company will pause enrollment in some clinical trials and delay the start of new ones as a result of the COVID-19 pandemic. Even taking this into account, I believe Vertex is the better buy, particularly for investors focused on the long term. Regeneron's attempts to develop a treatment for COVID-19 may enable the company's stock to perform better than Vertex's in the short-run, but many other companies have joined the hunt for a treatment for the potentially deadly disease.

Unless Regeneron wins the race to find a treatment for COVID-19, which seems unlikely at this point, the company won't be able to sustain its performance on the stock market year to date. By contrast, Vertex's strong lineup of products will allow the company to grow its revenue and earnings faster than Regeneron, and Vertex's stock performance will likely pick up eventually as a result. In short, Vertex's dominance in the CF market tips the scale in its favor in this matchup.

Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends CRISPR Therapeutics. The Motley Fool recommends Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Vertex Pharmaceuticals Incorporated Stock Quote
Vertex Pharmaceuticals Incorporated
VRTX
$293.07 (0.31%) $0.91
Regeneron Pharmaceuticals, Inc. Stock Quote
Regeneron Pharmaceuticals, Inc.
REGN
$626.28 (0.38%) $2.38
Sanofi Stock Quote
Sanofi
SNY
$44.12 (1.62%) $0.70
Bayer Stock Quote
Bayer
BAYR.Y
$13.83 (3.75%) $0.50
CRISPR Therapeutics Stock Quote
CRISPR Therapeutics
CRSP
$79.11 (2.13%) $1.65

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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