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This Is the Best Biotech Stock on the Market

Keith Speights, The Motley Fool

There are at least 500 biotech stocks on the market. They range from big biotechs with multiple blockbuster products to tiny biotechs that are years away from even hoping to win approval for their first drug. 

Choosing the best stock out of all of these biotechs isn't easy. You could make a compelling argument for quite a few of them. But after serious consideration, I think there's one biotech stock that stands out from the pack more than any other. Here are five reasons why the best biotech stock on the market is Vertex Pharmaceuticals (NASDAQ: VRTX).

Scientist holding a test tube in a rack with three other test tubes

Image source: Getty Images.

1. It's tapped less than half of its current addressable market 

Vertex claims three approved cystic fibrosis (CF) drugs on the market. Two of them -- Kalydeco and Orkambi -- are already blockbusters. Vertex's newest drug, Symdeko, is likely to reach the $1 billion annual sales mark this year. 

But despite its tremendous success, Vertex still has tapped less than half of the current addressable market for its three approved drugs. Of the estimated 39,000 CF patients eligible for one of Vertex's drugs, only around 18,000 are currently on treatment. Even if Vertex didn't win approvals for any new drugs or additional indications for its existing drugs, the biotech has significant room for growth in CF.

2. It's on track to expand its addressable CF market by nearly 75%

The really good news for Vertex, though, is that it does expect to win approvals for new CF drugs and expanded labels for its current drugs. Vertex thinks that picking up approvals for treating younger patients for its existing drugs will expand the addressable patient population from 39,000 to 44,000.

Vertex is also on track to submit for approval of a triple-drug combo by the middle of 2019. The biotech believes that a triple-drug regimen will enable it to treat another 24,000 patients worldwide. Overall, Vertex should be able to expand its addressable CF market by nearly 75% over the next few years.

3. It has no real competition in CF

Most biotechs face significant competition even for their best drugs. But Vertex doesn't. The company currently enjoys a virtual monopoly in CF with the only approved drugs that treat the underlying cause of the disease.

Granted, that could change in the future. AbbVie is developing triple-drug CF therapies that it licensed from Galapagos. But the big pharma company is well behind Vertex in development and the data released so far for Galapagos' drugs don't look promising for AbbVie's chances of beating Vertex. 

4. It's developing promising drugs beyond CF

Vertex CEO Jeff Leiden stated in the biotech's Q4 conference call that Vertex "has the potential for significant revenue and earnings growth through the mid-2020s, based solely on treating more patients with our approved and future CF medicines." He's right. However, Vertex is also developing promising drugs for treating indications other than CF.

The biotech has reported positive phase 2 results for pain drug VX-150 and hopes to advance the drug into pivotal late-stage clinical studies after it completes a phase 2b dose-ranging study. Vertex already has one experimental drug targeting treatment of alpha-1 antitrypsin deficiency (AATD) in phase 1 clinical testing and expects to move another AATD drug into phase 1 this year. The company is also partnering with CRISPR Therapeutics on gene-editing therapy CTX001, which is in early stage studies for treating rare blood disorders beta-thalassemia and sickle cell disease.

In addition, Leiden has indicated that Vertex will use its rapidly growing cash stockpile to fund acquisitions of earlier-stage pipeline assets. Vertex is especially focusing on "potentially transformative drugs for serious diseases" -- similar to the successful approach the company has taken with CF.

5. Its valuation doesn't fully reflect its growth prospects

There's no question that Vertex has tremendous growth prospects. The biotech can and almost certainly will continue to achieve significant growth in treating CF. It has multiple other promising avenues for growth as well. But Vertex's current valuation doesn't fully reflect those impressive growth prospects.

Vertex shares trade at nearly 44 times expected one-year earnings. That might seem expensive. However, the biotech's real growth spurt will occur over the next several years when its triple-drug combo is expected to be on the market. Vertex's price-to-earnings-to-growth (PEG) ratio, which reflects five-year expected growth, is a very low 0.87. Only a handful of biotechs have PEG ratios that low.

Best doesn't mean perfect

I think Vertex is the best biotech stock on the market. But best doesn't mean perfect. 

Like any biotech, Vertex faces risks that its pipeline candidates won't be successful in clinical testing or win regulatory approval. The company also could run into problems securing reimbursement for its drugs -- an issue that it's dealing with now in the United Kingdom. 

Overall, though, Vertex appears to be in great shape. The stock has more than doubled over the last two years. With plenty of room to grow in CF, promising new drugs targeting other indications in the pipeline, and no legacy drugs holding it back, Vertex is arguably as good as it gets for biotech stocks.

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Keith Speights owns shares of AbbVie and Vertex Pharmaceuticals. The Motley Fool owns shares of CRISPR Therapeutics. The Motley Fool recommends Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.