After a couple of tough years in 2015 and 2016, biotech stocks made a comeback in 2017 and are off to a strong start in 2018, with the iShares NASDAQ Biotechnology ETF (IBB 1.51%) up 10% year to date already. The biotech world can be bewildering for all the technical jargon and nerve-racking volatility that comes with drug trial results and FDA decisions. But the field of medicine is changing rapidly, and fortunes will be made as new technologies produce therapies to treat diseases that were previously intractable.

For savvy investors willing to take some risk, Celgene (CELG), Alkermes (ALKS 0.79%), and Ligand Pharmaceuticals (LGND 1.98%) are three biotech stocks that are relatively easy to understand, have multiple bets that could pay off, and are particularly well poised for 2018. 

An R&D powerhouse

My first pick is the safest one. Celgene is a relative giant among biotech companies, both growing and profitable. The biotech's fourth-quarter results showed that revenue for the full-year 2017 grew 16% to $13 billion, and adjusted earnings per share rose 25% to $7.44. The company has four blockbuster drugs, including $8 billion Revlimid, and an expansive pipeline in hematology, oncology, and inflammation/immunology drugs.

Montage of drug research images on blue background.

Image source: Getty Images.

Yet despite that strong growth, 2017 was not a great year for Celgene's shareholders, and the stock price is depressed for what I feel are short-term issues. In October the company announced it was discontinuing trials of a potential blockbuster drug for Crohn's disease, GED-0301 (mongersen). The market is nervous because Revlimid accounts for 63% of the company's sales, and any setback in its pipeline programs means a longer period of dependence on a single drug. The company also announced Q3 revenue that missed expectations, mostly because the 12% growth of its psoriasis drug Otezla was considered disappointing. 

The worry is likely overblown, though. Revlimid is still early in its life and fueling growth, with sales up 21% in Q4, multiple trials for new indications under way, and patents that extend to 2024 in Europe and 2027 in the U.S. Otezla made a comeback in Q4, with sales up 20% from Q3 and up 22% year over year. And while the GED-0301 failure in Crohn's definitely hurt, the company has plenty going on in its pipeline that will cause that event to fade in investors' memories before long.

Celgene's drugs are currently in over 160 clinical trials, including 42 novel compounds across 60 indications. 2018 will see data readouts on eight phase 3 trials, initiation of eight other phase 3 or pivotal trials, and several New Drug Application submissions. The company believes it has at least 10 drugs in its pipeline that have billion-dollar sales potential. Furthermore, Celgene is generating free cash flow at a rate of over $1 billion per quarter, giving it plenty of options to acquire new drugs, such as with the deal it announced earlier this month to buy Impact Biomedicines and its potential blockbuster drug for a rare form of blood cancer, and its latest announced buyout of CAR-T developer Juno Therapeutics.

Despite high growth, financial strength, and a strong R&D program, Celgene stock is cheap. It sells at about 15 times the company's guidance for 2018 GAAP EPS, below the 19 times estimated 2018 earnings of the S&P 500.

Doctor holding the hands of a patient.

Image source: Getty Images.

On the verge of profitability with some major catalysts

Alkermes is a commercial-stage company that focuses on drugs for central nervous system disorders, and could have some major catalysts in 2018. Its two lead drugs, Vivitrol and Aristada, are growing rapidly, and although the company isn't profitable yet, it's getting close due to solid sales gains. Assuming the company delivers on its 2017 guidance, full-year revenue will be up 16% and non-GAAP earnings should come in between a loss of $0.10 and a profit of $0.09. Analysts expect the company to earn $0.46 in 2018.

Helping drive the company's core business is strong growth of Vivitrol, a treatment for opioid and alcohol dependence. The drug counters opioid addiction by suppressing cravings of patients that have been through detoxification, helping them overcome the urge to relapse. The monthly shot of Vivitrol is differentiated from other treatments in that it is not addictive itself or subject to abuse. Sales of the drug were slow to take off until Alkermes realized it needed to build a unique sales force to work with the criminal justice system and addiction recovery programs. Although that approach has opened the company up to criticism for its sales tactics at times, the increased focus on the opioid crisis and funding for recovery programs has been a boon for Vivitrol sales.

Besides being on the verge of profitability due to strong core sales, Alkermes expects a number of pipeline events in 2018 that could propel the stock. At the top of the list is submission of a New Drug Application for ALKS 5461, expected this month. The company believes the drug is the first anti-depression drug with a novel mechanism of action in 30 years, and preparations for launch are underway now. ALKS 3831 is a treatment for schizophrenia that avoids the side effects of weight gain and metabolic problems that the incumbent drug has, and a phase 3 trial for it should read out in the fall of 2018. Alkermes is partnering with Biogen on ALKS 8700, a drug for multiple sclerosis that improves on Biogen's $4 billion Tecfidera, and a tolerability study should read out in the first half of 2018, with submission to the FDA expected in the the second half. 

The valuation of Alkermes is hard to judge, as is the case of many biotechs. But two years ago, the stock plunged 44% in one day on a failed trial of ALKS 5461. The concerns over that drug have since been addressed, but the stock still has not recovered, and is still almost 30% below its peak of $80 the month before that disappointment.

Pills lying on top of paper money.

Image source: Getty Images.

Dozens of shots on goal, and rapidly growing profit

Most biotech stocks are subject to the risk of failed drug trials, which can decimate your position without any warning. How about a fast-growing and profitable biotech that has very little exposure to that risk? Ligand Pharmaceuticals owns technologies to help drug companies discover and develop new drugs. After it works with a partner to identify a new drug candidate, it collects milestone payments while the partner develops the drug and royalty payments when the drug is commercialized.

Certainly a partnered drug could fail in trials and Ligand would miss out on royalty payments. But part of the beauty of Ligand's model is that the risk is spread out over many partnered programs. The company has over 165 partnered programs with 95 different partners,  including some big hitters such as Eli Lilly, Bristol-Myers Squibb, Novartis, and Amgen. It's collecting royalties on 17 approved drugs for indications such as cancer, osteoporosis, fungal infections, and low blood platelets, and took in milestone and license payments on over 50 events in 2017. 

That diversification not only lowers risk, it also has produced some pretty impressive growth. For the first nine months of 2017, revenue increased 28% to $90.6 million and adjusted EPS grew 38% to $1.94. Not only are the number of partnered programs -- what the company calls "shots on goal" -- growing, but the average royalty rate on approved drugs is increasing, from below 4% on the underlying drug revenue in 2015 to over 5% projected in 2018. Ligand has a very lean cost structure, and since royalty and license fees have very low costs associated with them, the company's gross margin is 95%, meaning that new revenue streams fall straight to the bottom line. Ligand is averaging one new partnership deal a month, and two new drugs were approved by the FDA in Q3 and will soon be generating royalties. 

The growth and relatively low risk profile come at a cost, though. At a recent price of $146, Ligand sells for 38 times analyst estimates for 2018 earnings, higher than the market, but not too out of line considering its earnings growth.