3 Top Biotech Stocks to Buy in April

By Brian Feroldi, Sean Williams, and George Budwell Markets Fool.com

The biotech sector is fraught with risk, but that doesn't mean that every biotech stock should be avoided. To help you identify a few potential winners, we asked a team of healthcare experts to share abiotech stock that they think is a smart buy right now. They pickedTG Therapeutics (NASDAQ: TGTX),Alkermes (NASDAQ: ALKS), andLexicon Pharmaceuticals (NASDAQ: LXRX). Here's why.

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Image source: Getty Images.

This small-cap biotech wasn't even on Wall Street's radar a month ago

George Budwell(TG Therapeutics): I'm considering adding the small-cap biotechTG Therapeutics to my portfolio this month because of its outstanding long-term upside potential as an emerging player in the high-value blood cancer market.

The short story is thatTG Therapeutics'experimental leukemia drugTG-1101 (ublituximab) basically shocked Wall Street last month by generating an 80% overall response rate when used in combination with AbbVie's Imbruvica in a late-stage trial for high-risk chronic lymphocytic leukemia (CLL) patients. By contrast, the overall response rate among patients receiving Imbruvica alone was only 47%, according to the company.

The particularly interesting part is that TGTherapeutics was sporting a sub-$300 million market cap prior to this late-stage data readout, implying that Wall Street had little to no faith in TG-1101's ability to improve clinical outcomes in CLL patients. However, the drug now seems to have a solid case for an accelerated regulatory approval in the U.S. by the middle of next year.

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Perhaps equally as important from an investing standpoint, TG-1101 appears to have the potential togenerate peak sales of at least several hundred million for just this first indication, depending on its price and adoption rate. Estimates for TG-1101's peak sales just in CLL run up to $1 billion annually.So, despite this stock's monstrous doubling in share price since this data release less than a month ago, the company's present market cap of $659 million is arguably still a downright bargain. And that's not even accounting for any additional upside from the biotech's remaining clinical activities in oncology, as well as multiple sclerosis.

Extended gains ahead

Brian Feroldi(Alkermes): Once upon a time, Alkermes was a drugmaker exclusively focused on drug delivery. The company specialized in taking approved drugs and reformulating them to have an extended release. The company partnered with other drugmakers to churn out a handful of blockbuster drugs, allowing it to bank a juicy royalty payment. This low-risk strategy translates into fast-growing sales measured in the hundreds of millions of dollars each year, which I think is a solid business model.

However, what makes Alkermes a compelling biotech stock to buy right now is that it has been developing a few proprietary compounds of its own. The most exciting product in development is ALKS-5461, a drug in phase 3 trials aimed at treating major depression. Management is targeting an approval for ALKS-5461 by the Food and Drug Administration (FDA) later this year, and if all goes well, it could be producing revenue in 2018.

Alkermes has two other pipeline drugs that are worth keeping an eye on. ALKS-3831, anantipsychotic being studied in schizophrenia, is completing a pivotal study later this year. If the data looks good, it too could be in regulators' hands by year-end. Meanwhile, ALKS-8700 is a promising treatment for multiple sclerosis that should be sent off for approval in 2018.

With a dependable royalty business supporting revenue growth in the near term and multiple catalysts ahead with potential approval of proprietary products, I think that there's a strong case to be made for investing in Alkermes today.

A next-generation diabetes player you need to know

Sean Williams (Lexicon Pharmaceuticals): While I'd normally be steering biotech investors toward drugmakers that are already generating a profit, or darn-near close to it, my top idea this month is probably two or three years away from recurring profitability: Lexicon Pharmaceuticals.

Lexicon hit a milestone in late February with the FDA approving Xermelo, the company's orally administered therapy for carcinoid syndrome diarrhea. Though Xermelo's peak annual sales are only expected to fall between $300 million and $540 million, based on various Wall Street estimates, it's the simple fact that Lexicon will be generating recurring revenue, which can lessen its cash burn, that investors are going to cheer.

However, the real reason to own Lexicon isn't Xermelo. Instead, it's the potential for sotagliflozin, a next-generation oral inhibitor of SGLT1 and SGLT2 (glucose transport proteins) for type 1 and 2 diabetes. There are a number of SGLT2 inhibitors already on the market, including Johnson & Johnson's Invokana and Eli Lillyand Boehringer Ingelheim's Jardiance. Rather than working in the liver or pancreas as prior therapies had done, SGLT2 inhibitors block glucose absorption in the kidneys to maintain better glycemic balance. The addition of the SGLT1 inhibitor in sotagliflozinblocks glucose absorption in the intestines.

Initial trial data from sotagliflozin has been encouraging -- so encouraging that Lexicon landed a licensing deal with Sanofithat netted it $300 million up front and the opportunity to earn up to $1.4 billion in various development and sales milestones. Lexicon is responsible for handling the costs to develop sotagliflozin for the less common type 1 diabetes, while Sanofi will cover the trial costs in the more common type 2 diabetes.

If approved, sotagliflozin could easily have blockbuster potential, with Wall Street's estimate of $1.73 in annual earnings per share by 2020 indicative of the drug's possible approval and sales growth. Given that Lexicon's stock has fallen by 19% over the trailing six months, now could be the time to scoop up what could be the next promising diabetes player.

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Brian Feroldi has no position in any stocks mentioned. George Budwell has no position in any stocks mentioned. Sean Williams has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Johnson and Johnson. The Motley Fool recommends Alkermes. The Motley Fool has a disclosure policy.