3 Top Biotech Stocks to Buy in October

By Markets Fool.com

Image source: Getty Images.

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The biotech industry is on pace for a down year: TheFirst Trust NYSE Arca Biotech ETF (NYSEMKT: FBT), an exchange-traded fund that holds a broad portfolio of biotech stocks, has descended by double digits since the start of 2016, badly lagging the S&P 500.

That hints at the possibility that there might be bargains to be found in the sector, so we asked some Motley Fool healthcare contributors to highlight stocks they think are great buys right now. Here's what they had to say.

Moving into massive markets

Todd Campbell: Acadia Pharmaceuticals (NASDAQ: ACAD) recently launched its first and only commercial drug, Nuplazid, and the company's third-quarter earnings will give investors their first detailed look at whether or not it's winning traction among doctors as a treatment for hallucinations and delusions in Parkinson's disease patients.

Parkinson's disease psychosis, or PDP, affects about 40% of the 1 million patients with Parkinson's disease, and until now doctors had no other option than to prescribe antipsychotics off-label that can interfere with other Parkinson's medications. Because Nuplazid controls PDP symptoms without that drawback, it could be a top-seller.

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Image source: Acadia Pharmaceuticals.

If Q3 results show Nuplazid sales are ramping up quickly, then Acadia's stock could enjoy tailwinds in Q4, but an even bigger market-moving event may be the company's upcoming release of data from a trial evaluating Nuplazid in Alzheimer's disease psychosis.

If those results, which are expected prior to year's end, show that Nuplazid works for those with Alzheimer's disease, then they could clear the way for Nuplazid's use by another population of more than 1 million people. At least 25% of the 5 million Americans with Alzheimer's disease suffer from hallucinations and delusions.

Admittedly, there's no guarantee that doctors will flock to Nuplazid, nor that Acadia Pharmaceuticals' Alzheimer's disease trial will pan out. Nevertheless, the potential upside makes me think this is a stock worth buying in October.

I see a bright future

Brian Feroldi: Developed countries around the world are aging, which should keep the demand for drugs that treat vision loss on the rise. One clinical-stage biotech that looks well positioned to benefit from the trend is Ophthotech (NASDAQ: OPHT).

Ophthotech's lead product candidate is called Fovista. This drug is being studied as an add-on therapy to other top-selling eye disease drugs such as Novartis' Lucentis, Regeneron's Eylea, and Roche's Avastin.

In a phase 2B trial, Ophthotech showed that usingFovista in combination with Lucentis led to again of 10.6 letters from baseline on a standardized vision test. That was substantially ahead of the 6.5-letter gain that patients who only used Lucentis experienced. Those results were so good that Novartis decided to ink a $1 billion deal to secure the international rights to Fovista, which speaks volumes about the drug's long-term sales potential.

Ophthotech is set to report data from its phase 3 trial of Fovista in combination with Lucentis in the fourth quarter. Investors should get a read-out from another trial using Fovista with Eylea or Avastin in early 2017. If the data from those trials reaffirms Fovista's clinical benefits, then it should be in regulators' hands soon after.

All in all, Fovista holds promise to become part of a standard-of-care combination therapy in a growing, multibillion-dollar market. There are plenty of risks here, but the upside is so large that I think Ophthotech is a stock that risk-tolerant investors could learn to love.

One bad apple will not spoil this bunch

Sean Williams: Ligand Pharmaceuticals (NASDAQ: LGND) had a pretty miserable September, but I have every reason to believe October and the months to come will be far better.

The big concern for Ligand -- and why its share price tumbled 12% on Sept. 27 -- can be traced to the top-line data release from Amgen's (NASDAQ: AMGN) phase 3 CLARION study. This trial examined Amgen's multiple myeloma drug Kyprolis against Takeda Pharmaceuticals' Velcade over 54 weeks in newly diagnosed patients. The results showed that Kyprolis and Velcade produced almost identical progression-free survival statistics of 22.3 months and 22.1 months, respectively, and the non-mature survival data appeared to demonstrate favorability toward Velcade over Kyprolis -- albeit the difference wasn't considered statistically significant.

Since Ligand nets tiered royalties on Kyprolis that will likely total 2.5% of its net sales in 2016, there's concern that Ligand's near-term growth could slow if Kyprolis' demand weakens as a result of the CLARION results.

Image source: Getty Images.

The good news for long-term investors is that Ligand's portfolio is much larger than just Kyprolis. More than 150 drugs are currently being developed using its technology, andit's working with more than 90 different partners and licensees. Assuming it nets an average royalty between 3.5% and 4.5% of net sales, and even a relatively small number of those experimental therapies get approved, Ligand could double its sales and profits in the blink of an eye.

Furthermore, because Ligand is focused on royalty assets and not the lengthy process of drug development, its overhead costs tend to be substantially lower than those of its peers. It doesn't take a lot of revenue for Ligand to break even, which means potential weakness in Kyprolis sales is hardly a damning factor.

With Ligand's PEG ratio down to just 0.7, now looks like the time to consider buying.

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Brian Feroldi owns shares of Regeneron Pharmaceuticals.Like this article? Follow him onTwitter where he goes by the handle@Longtermmindsetor connect with him on LinkedIn to see more articles like this.

Sean Williams has no position in any stocks mentioned. Todd Campbell owns shares of Ophthotech. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.