It's usually really hard to narrow a long list of stocks down to one top pick. Usually -- but not always. The decision actually isn't all that difficult when it comes to biotech stocks.
There are around 600 publicly traded biotechs, and one of them clearly stands out from the pack. The best biotech stock on the market right now is Vertex Pharmaceuticals (VRTX 1.63%). Here are three reasons why.
1. Fast-growing revenue and profits
Some might disagree with me, but I think that profitability is a key criterion for ranking as the top biotech stock. If we exclude biotechs that are losing money, we eliminate roughly 95% of the biotech stocks from consideration. Of course, the best biotech stock won't just be squeaking by; it will have fast-growing revenue and profits.
Vertex certainly fits the bill on both counts. The company reported revenue of $1.54 billion in the third quarter, up 62% year over year. Its adjusted earnings more than doubled to nearly $700 million.
This momentum will almost certainly continue. Vertex recently won European approval for cystic fibrosis (CF) drug Kaftrio. The drug, known as Trikafta in the U.S., has become a megablockbuster in less than a year on the U.S. market. Vertex has also picked up additional approvals in recent months. In the U.S., it won approval for CF drug Kalydeco in treating infants. The European Commission also approved a combination of Symkevi with Kalydeco in treating children ages six to 11.
2. A strong moat
Some of the biotechs that are delivering solid revenue and earnings growth rely only on one approved product. Most of them face competition in their respective markets. Vertex's lineup includes four approved drugs. It arguably claims the strongest moat among its peers.
Vertex has the only approved products for treating the underlying cause of CF, a rare genetic disease that affects more than 70,000 individuals worldwide. Assuming the company can win additional indications for its existing drugs, Vertex should be able to treat roughly 90% of these patients.
AbbVie, Eloxx, and Proteostasis Therapeutics are the closest to catching up with Vertex. However, the three drugmakers' CF candidates are only in phase 2 testing right now. Even if they ultimately win approvals for their products, Vertex will probably have further extended its market dominance. CF patients who have experienced positive outcomes with Vertex's drugs aren't likely to switch to a new therapy.
3. A promising pipeline
Vertex announced a setback in October with the discontinuation of its development of VX-814, a candidate targeting the treatment of rare genetic disease alpha-1 antitrypsin deficiency (AATD). The company's pipeline still has several other promising programs, though.
VX-814 wasn't Vertex's only AATD candidate. The biotech is also evaluating VX-864 in a phase 2 study treating the rare disease. This other candidate is a different chemical molecule than VX-814, so the safety issues related to VX-814 won't necessarily affect VX-864. If the program is successful, Vertex could have another huge opportunity on its hands. AATD affects an estimated 100,000 Americans -- more individuals than CF affects worldwide.
Vertex is also focused on APOL1-mediated kidney diseases, rare conditions caused by mutations to the APOL1 gene. The company is evaluating VX-147 in a phase 2 study. Initial results are expected next year.
Just last weekend, Vertex and CRISPR Therapeutics reported encouraging results for gene-editing therapy CTX001 in treating rare blood disorders sickle cell disease and beta thalassemia. Seven patients with beta thalassemia and three patients with sickle cell disease in the companies' phase 1/2 studies have effectively been cured after treatment with CTX001.
I won't go into detail on the rest of Vertex's pipeline, but there is one program that warrants special attention. Vertex plans to advance an experimental cell therapy for treating type 1 diabetes into clinical testing in 2021. It's still early, but the company is cautiously optimistic about the potential for transforming treatment of these diseases, which impact more than 1.2 million Americans.
In a league of its own
Sure, there are other biotechs with fast-growing revenue and profits. Other drugmakers have moats. Some have strong pipelines. But I think that Vertex's combination of these strengths puts it in a league of its own. It's also a big plus that the company boasts a cash stockpile of $6.1 billion (and growing) that it can and likely will put to use in building its pipeline even more.
My Motley Fool colleague Sean Williams recently included Vertex as one of five growth stocks to buy for a Biden bull market. Vertex was the only biotech stock that Sean mentioned. I think he's right on target with his analysis. You're not going to find a better biotech stock to buy than Vertex.