3 Top Biotech Stocks to Buy for the 2nd Half of 2018

It seemed almost like a blur, but the first half of 2018 is already history. Generally speaking, biotech stocks didn't perform as well during the first six months of the year as they did during the same period in 2017. But 2018 has plenty of time remaining.

Which biotech stocks are good picks to buy for the second half of the year? Among large-cap biotechs, Celgene (NASDAQ: CELG) is one of my top favorites. Moving down to mid-cap biotech stocks, I think Sage Therapeutics (NASDAQ: SAGE) appears to be a smart choice. My small-cap pick is Viking Therapeutics (NASDAQ: VKTX). Here's what I like about these three biotech stocks.

1. Celgene

I've owned Celgene when its stock was hot, and I've owned it when it was not. There hasn't been much heat for the big biotech over the last year. However, my hunch is that will change.

Celgene stock trades at less than eight times expected earnings. The biotech stock is cheap for two primary reasons. First, Celgene depends on Revlimid for 63% of its total revenue, and generic-drug makers are challenging the patents for Revlimid. Second, the company has experienced some pipeline setbacks, which makes investors even more anxious about the potential threat to Revlimid. These factors arguably make Celgene the riskiest big biotech stock on the market.

But Celgene continues to deliver exceptionally strong earnings. I don't see the stock going much lower as long as that doesn't change -- and I don't think it will. Any good news should provide a nice catalyst for the biotech. What's more, the mere anticipation of good news should boost the stock.

Investors have plenty of anticipating to do. Celgene should file yet again for approval of ozanimod in treating multiple sclerosis in early 2019. Solid phase 3 results for luspatercept in treating myelodysplastic syndromes (MDS), a group of rare blood disorders, should lead to regulatory filings in the first half of next year. Celgene also expects to submit cell therapy liso-cel (formerly known as JCAR017) for approval in 2019.

Those are just three potential blockbusters that Celgene has percolating in its pipeline, and there are more. In my view, the growth prospects for the biotech are really good. They're so good that I don't think Celgene will remain such a bargain for much longer.

2. Sage Therapeutics

Sage Therapeutics isn't profitable and has no products on the market. But with the biotech's market cap standing at more than $7.3 billion, investors are obviously expecting the situation for Sage to change dramatically in the not-too-distant future. I think those expectations will be met.

The U.S. Food and Drug Administration (FDA) is set to make an approval decision for Sage's lead candidate, an intravenous (IV) version of brexanolone, by Dec. 19, 2018. If all goes well, the drug will become the first therapy approved by the FDA for treating postpartum depression.

I think the chances for FDA approval are quite good based on the phase 3 clinical results for brexanolone. And if the IV formulation of the drug is successful, that bodes well for Sage's followup -- SAGE-217, an oral drug that's similar to brexanolone. The biotech is moving forward with a pivotal phase 3 study of SAGE-217 as a major depressive disorder treatment and expects to announce results in the fourth quarter of this year.

Sage could be looking at peak annual sales of $775 million for brexanolone and $2.5 billion for SAGE-217. I think the potential for these two drugs makes this biotech an attractive acquisition target.

3. Viking Therapeutics

Speaking of potential buyout candidates, I'd also put small-cap biotech Viking Therapeutics high on the list. Viking's share price has soared more than 130% so far this year, but I think it could go even higher.

Viking's pipeline isn't nearly as far along as Sage's. The biotech's lead candidate, VK5211, completed a phase 2 clinical study in November 2017 for stimulating muscle and bone formation in patients recovering from hip fracture. And the pipeline drug that has generated the most excitement among investors, VK2809, still is in phase 2 testing.

VK2809 is being evaluated for the treatment of non-alcoholic fatty liver disease (NAFLD) and high cholesterol. Viking expects to announce the results from the phase 2 study sometime in the second half of this year. Expectations of positive results are high, though, because of Madrigal Pharmaceuticals' (NASDAQ: MDGL) encouraging update from its own phase 2 study of MGL-3196 in treating non-alcoholic steatohepatitis (NASH), one of several diseases included in NAFLD.

What's important to know is that VK2809 and MGL-3196 use the same mechanism of action. Several large drugmakers are scrambling to develop NASH drugs. Madrigal could be thinking about selling, and if it's acquired, I think Viking will be in great demand, too.

The inevitable disclaimer

You probably know what's coming next. Investing in biotech stocks can be quite risky. That's especially true for small clinical-stage biotechs like Viking and Sage. But it's also applicable for larger biotechs like Celgene.

Bad news from the FDA can clobber big and small biotech stocks alike. So can disappointing clinical study results. Either scenario is possible for any of these three stocks.

Having said that, I think that the risk-reward propositions for Celgene, Sage Therapeutics, and Viking Therapeutics look pretty good. There's no guarantee that these stocks will be winners in the second half of 2018, but I like their chances.

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Keith Speights owns shares of Celgene. The Motley Fool owns shares of and recommends Celgene. The Motley Fool has a disclosure policy.