Biotech stocks have underperformed in the U.S. stock market by a wide margin this year.
The sector’s most popular index, the iShares Biotechnology ETF (NASDAQ:IBB), is down 5% since Jan. 27. However in recent days, it’s been making a comeback as it rose nearly 3% between Aug. 28 and Sept. 1. The mini-rally suggests that investors are finally realizing that the sector is still investable even without historically low interest rates.
Moreover, Federal Reserve Chairman Jerome Powell indicated last month that rate cuts may be implemented sooner than expected. So a major relief rally by biotech stocks could be developing. In fact, biotech companies are making huge strides in developing treatments for major illnesses ranging from Alzheimer’s to Sickle Cell Disease.
Let’s examine the three best biotech stocks to buy in line with these trends.
Eisai (ESAIY)
Japanese drug giant Eisai (OTC:ESAIY) partnered with Biogen (NASDAQ:BIIB) on an Alzheimer’s drug, Leqembi, approved by the Food and Drug Administration (FDA) in July.
Moreover, Robert W. Baird estimated that in a recent survey, 41% of the doctors’ agreed that mild cognitive impairment or mild dementia patients could be treated with the drug.
The bank believes that Leqembi could generate almost $30 billion of revenue over the next three years.
Eisai’s entire market capitalization is only $18 billion. Given Baird’s data and estimate, along with the stock’s low market capitalization, Eisai’s shares are extremely undervalued. At this point, it’s one of the best biotech stocks to buy.
Madrigal (MDGL)
In my recent article, Madrigal (NASDAQ:MDGL) “has developed a potential treatment for a form of liver disease called non-alcoholic steatohepatitis, or NASH, with liver fibrosis”.
The FDA has given the treatment “breakthrough” status, suggesting that the agency is enthusiastic about the drug. According to the company, no approved treatment for NASH currently exists.
Research firm Vantage Market Research estimates that the global market for NASH treatments will total over $108 billion in 2030. Pfizer (NYSE:PFE), also working on a NASH drug, estimates that 27 million Americans will develop the illness in seven years.
MDGL stock has declined nearly 30% in the last three months. According to Seeking Alpha columnist Stephen Ayers, Wall Street thinks that weight-loss drugs will prevent many cases of NASH from developing. But data shows that two-thirds of patients stop taking the weight-loss drugs within a year. Also, many people may not have access to those drugs. This is because they are either uninsured or insurance companies won’t cover such treatments.
Given the high likelihood that Madrigal’s drug will be a blockbuster and the stock’s relatively low market capitalization of $3.42 billion, MDGL could be one of the three best biotech stocks to buy.
Vertex Pharmaceuticals (VRTX)
On Aug. 1, Vertex (NASDAQ:VRTX) reported strong Q2 results, as its top line surged 14% year over year (YOY) to $2.49 billion. Further, its net income climbed to $815.7 million, up from $810.5 million YOY.
The company is a leader in marketing treatments for cystic fibrosis and continues to develop new, impressive drug candidates for that disease.
Moreover, Vertex is partnering with CRISPR Therapeutics (NASDAQ:CRSP) on a gene therapy for Sickle Cell Disease. A recent study found that the therapy would be cost-effective if priced between $1.35 million and $2.05 million. This suggests that the treatment will be lucrative for Vertex.
In a May note to investors, investment bank Piper Sandler was bullish on the company’s cystic fibrosis treatments. It predicted that its Sickle Cell drug would gain FDA approval either late this year or early 2024.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.