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3 Top Biotech Stocks to Buy in May

The iShares Nasdaq Biotechnology ETF (NASDAQ: IBB) -- which is an exchange-traded fund that holds nearly 200 biotech stocks -- has drastically underperformed the S&P 500 over the last three years. That fact suggests that there are bargains to be found in the biotech space.

So which biotechnology stocks are smart buys right now? We asked these three Motley Fool investors -- all well-schooled in healthcare -- to weigh in, and they picked Vertex Pharmaceuticals (NASDAQ: VRTX), Jazz Pharmaceuticals (NASDAQ: JAZZ), and Neurocrine Biosciences (NASDAQ: NBIX).

Dollar signs in a drug packet
Dollar signs in a drug packet

Image source: Getty Images.

A huge first-mover advantage

Keith Speights (Vertex Pharmaceuticals): Vertex was sizzling hot last year, with its share price more than doubling. The biotech stock has cooled off so far in 2018, but I think that gives investors a great opportunity to buy Vertex before it takes off once again.

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Vertex currently has three cystic fibrosis (CF) drugs on the market: Kalydeco, Orkambi, and Symdeko. There are currently no other approved drugs that correct the malfunctioning protein produced by the CFTR gene that causes CF. This gives Vertex a monopoly in treating the rare disease for now.

Around 44,000 CF patients have gene mutations that are addressable by Vertex's current drugs. The company is moving forward with several late-stage studies of new triple-drug combinations that hold the potential to treat another 24,000 CF patients. While AbbVie (NYSE: ABBV) and Galapagos (NASDAQ: GLPG) are also developing triple-drug CF combos, Vertex has a clear head start.

The biotech's first-mover advantage is significant. Vertex already knows where all the CF patients are. It should easily beat its rivals to market with triple-drug combos. And because CF patients typically don't switch from a therapy that works for them (something Vertex has already discovered with its other drugs), getting to market first is crucial.

Vertex is also targeting 10 other indications, including sickle cell disease and pain. CEO Jeff Leiden said in March that the biotech doesn't have to be successful in all these areas, or even half of them. Success for just one or two pipeline programs would mean sustained growth for a long time to come.

Music to value investors' ears

Sean Williams (Jazz Pharmaceuticals): In an industry filled with rabbits, sometimes choosing the slow-and-steady turtle wins you the race. That's why I believe Jazz Pharmaceuticals is worth a look in May.

In recent years, Jazz has faced a lot of scrutiny. In particular, lead drug Xyrem, which is used to treat narcolepsy, has undergone major price hikes over the past decade, making Jazz one of a number of companies that have drawn the ire of consumers. The fear of drug-pricing controls has long overhung this company. However, this concern has never merited more than passing attention, given that Congress can't agree on anything when it comes to healthcare reform.

Additionally, there were mounting fears that Xyrem, which made up $1.19 billion of Jazz's $1.62 billion in 2017 sales, could face generic competition earlier than expected. The good news here is that Jazz reached an agreement with Hikma Pharmaceuticals (NASDAQOTH: HKMPY) in April of last year to keep authorized generics off pharmacy shelves until Jan. 1, 2023. That gives Jazz roughly five more years of practically unchallenged sales and pricing power for Xyrem.

With its bad news now dealt with, investors can finally turn their attention to two key catalysts. First, there's the continued growth of Xyrem. Price increases aside, Jazz recently filed a supplemental new drug application to expand Xyrem's label to include cataplexy and excessive daytime sleepiness in pediatric narcolepsy patients. It's not out of the question that Xyrem continues to grow by between 7% and 10% per year through 2022, in my opinion.

There's also a lot of excitement surrounding the August 2017 launch of Vyxeos, a cancer drug designed to treat two types of acute myeloid leukemia that often carry a poor diagnosis. With sales of Vyxeos expected to range between $130 million and $155 million in 2018, and Jazz running clinical studies on a possible expansion into the broader indication of myelodysplastic syndrome, Vyxeos has the potential to easily surpass Wall Street's peak annual sales expectation for the drug of between $200 million and $250 million.

With nearly double-digit sales growth expected annually through 2021 and Jazz valued at just 10 times Wall Street's 2019 full-year EPS estimate, I believe Jazz represents a rare breed of growth and value in the biotech industry.

Growing fast with multiple shots on goal

Brian Feroldi (Neurocrine Biosciences): I'm a conservative biotech investor, so I like to wait for a company to prove that it has developed a winning drug discovery platform before I get on board. I also want the company to be on rock-solid financial footing and have an impressive pipeline in place. One company that checks all those boxes perfectly is Neurocrine Biosciences.

Neurocrine has already crossed the finish line with a drug called Ingrezza, a treatment for a neurological disorder called tardive dyskinesia. Ingrezza has been flying off the shelf since it was launched a year ago, and market watchers expect sales to grow by triple digits this year to $395 million. Sales are expected to grow another 62% next year to $638 million, which should be large enough to allow the company to start generating meaningful profits. That fact alone sets Neurocrine apart from most biotech stocks.

Like any biotech worth its salt, Neurocrine also boasts an exciting late-stage pipeline. The drug that I'm most excited about is called elagolix, which the company is developing in partnership with biotech giant AbbVie. This compound is currently pending FDA approval as a treatment for endometriosis, and a go/no-go decision is expected within the next few months. Peak sales estimates for elagolix in endometriosis are around $1.5 billion, and Neurocrine will earn a 20% royalty payment on sales. The thumbs-up would turn into a financial windfall for shareholders.

What's more, elagolix is also being studied in a phase 3 program as a hopeful treatment for uterine fibroids. The company expects to have the drug sent off for approval for this indication in early 2019. Regulatory success would drive the drug's peak sales potential even higher.

If all of the above wasn't exciting enough, Neurocrine also boasts another compound called opicapone in its pipeline that is currently pending approval as a treatment for Parkinson's disease. While it isn't expected to be as big a seller as elagolix, the drug still could add tens of millions in sales to the company's top line if approved. Management expects to have the drug in the FDA's hands by the first half of 2019.

In total, Neurocrine offers investors fast revenue growth and profits in the near term thanks to the continued rollout of Ingrezza, and it boasts several lucrative drugs in the pipeline. If you're a conservative biotech investor, it doesn't get much better than that.

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Brian Feroldi has no position in any of the stocks mentioned. Keith Speights owns shares of AbbVie. Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.