Biotech Bubble Bursting? 3 Stocks I Want to Buy

Source: Celgene

The biotech industry has been one of the market's brightest shining stars over the past two years. The iSharesNasdaq Biotechnology ETF has surged ahead by 50.5% since the end of 2013, trouncing the S&P 500's 14% return during the period. But stocks don't rise -- or fall -- in a straight line, so it's not too surprising to see biotechnology stocks dropping this week.

While some unproven biotech stocks have notched gains that have pushed them to unsustainable valuations, here are three profitable ones that I want to buy -- or increase my exposure to -- as they tumble.

1. CelgeneA top-shelf product line, rock-solid financials, and a promising pipeline of potential new drugs makes Celgene my favorite biotech company to buy if shares drop.

Celgene is a dominant player in the treatment of multiple myeloma. Its drug Revlimid is the best-selling second line therapy for multiple myeloma patients, and its drug Pomalyst is the fastest-growing third-line treatment for the disease.

Last year, Revlimid sales totaled nearly $5 billion, and this year, thanks to a label expansion allowing for its use as a first-line treatment, sales are expected to jump to between $5.6 and $5.7 billion. Since winning FDA approval in 2013, Pomalyst has become the top-selling third-line treatment, with sales jumping 123% to $680 million last year.

Additionally, Celgene also markets the cancer drug Abraxane, which saw its sales grow 17% to $236 million in Q4, and the psoriasis drug Otezla, which thanks to a strong launch last year has Celgene thinking it could have another billion-dollar blockbuster drug on its hands.

Those drugs are generating plenty of shareholder-friendly profits. In the past year, Celgene's net income grew 21% year over year to $3.1 billion, leading to EPS of $3.71, up from $2.98 in 2013. That profit success gives Celgene one of the best balance sheets in the industry, including a cash and investments stockpile of $7.5 billion, up from $5.7 billion the year before.

With rising sales giving the company more financial flexibility, Celgene is plowing considerable money back into research and development. It's developing its own next-generation cancer and autoimmune drugs, but it's also collaborating with some of the most intriguing emerging biotech companies, including Agios and bluebird bio. Those efforts should allow Celgene to deliver plenty of new revenue-boosting drugs over the coming decade. Given this backdrop, it's probably not hard to see why I'm such a fan of this company -- especially if shares can currently be bought for less its current forward P/E of 19.

2. Amgen Amgen has a few more question markets than Celgene, namely risks tied to patent expiration on top-selling drugs like Neupogen that could cause the company to lose market share to biosimilars.

While the patent risk is real, I think that -- for the right price -- there are some good reasons to pick Amgen up if it went on sale.

Although Neupogen sales could slip, the company still has top sellers, including the $4.7 billion per year Enbrel and the $2.25 billion per year Xgeva and Prolia.

Importantly, Amgen hasn't stopped innovating.

In January, the company won FDA approval for a new immunotherapy, Blincyto, which is designed to treat a rare form of acute lymphoblastic leukemia. Despite a small patient population, a price tag of $64,260 per month means that this drug could generate hundreds of millions in sales per year. A bigger revenue impact; however, could come from Repatha. Repatha is a PCSK9 inhibiting cholesterol-busting drug that the FDA will make a decision on approving in August. If the FDA green-lights the drug, analysts think Repatha's peak annual sales could be $2 billion or more.

Blincyto and Repatha are great examples of the ongoing innovation at Amgen, but they're not the only reasons to own the company. Amgen has also announced a cost-cutting plan that it believes will allow it to boost profits.

Amgen believes it can shave $1.5 billion in expenses annually by 2018, and that has the company forecasting that it will deliver double digit EPS growth in each of the next three years. With growth like that, there could be plenty of room for shares to head higher over the long haul, which may make this a good one to slip into long-term portfolios on a dip.

3. Gilead SciencesI'm already long-time owner of Gilead Sciences stock, but I'd love to buy more if shares get even cheaper.

I expect that Gilead Sciences' dominance in HIV and hepatitis C will continue for the foreseeable future; if so, then Gilead Sciences' blue-chip worthy balance sheet should offer up plenty of opportunity for the company to reward investors with research investments, dividend increases, and share buybacks.

The company's market share-leading HIV therapies include five drugs that are on pace to deliver over one billion dollars each in sales this year, and with patent protection for these drugs stretching into the 2020s and HIV patients living longer, it's likely that these medicines will remain a key contributor to Gilead Sciences' bottom line.

A bigger question mark is whether or not Gilead Sciences can maintain its leadership in hepatitis C. Thanks to the launch of the pan-genotype HCV drug Sovaldi in December 2013 and the genotype 1 therapy Harvoni last October, Gilead Sciences' hepatitis C sales totaled $12.4 billion last year, leading to a 122% increase in the company's revenue.

Facing tough comparisons and new competition, Gilead Sciences' growth will likely slow to the mid- to high-single-digit percentages this year, but I believe that the company is the best positioned to roll-out the next generation of pan-genotype HCV drugs. If so, then a global patient population in excess of 150 million people could mean that Gilead Sciences will remain a big player in this indication for years to come, and that would likely mean EPS growth that makes the company an even bigger bargain than its forward P/E ratio of 9.6 suggests.

Source: Gilead Sciences

Tying it togetherBiotech stocks are notoriously fickle, and they can trade widely based on the market's whims and whispers, which makes them best suited to risk tolerant investors that can handle the occasional stumble. For those investors, I think that it could make a lot of sense to buy a drop in Celgene Corp, Amgen, and Gilead Sciences shares for the long haul.

The article Biotech Bubble Bursting? 3 Stocks I Want to Buy originally appeared on Fool.com.

Todd Campbellowns shares of Celgene Corporation and Gilead Sciences. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned.The Motley Fool recommends bluebird bio, Celgene, and Gilead Sciences. The Motley Fool owns shares of Gilead Sciences. 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.