Biotech stocks, on balance, had a year to forget in 2022. An unsavory mix of profit-taking, clinical setbacks, a stricter Food and Drug Administration (FDA), geopolitcal unrest, rising interest rates, and good old fashioned risk aversion sent key indicators like the SPDR S&P Biotech ETF spiraling downward this year.

Hammering this point home, the SPDR S&P Biotech ETF plummeted by a staggering 53% -- from its prior three-year high -- through the first 11 months of 2022. And as a direct result of this mass exodus of capital from the space, the once-sizzling IPO market in biotech has suddenly gone ice cold. 

Cost versus value graph.

Image Source: Getty Images.

Can biotech rebound in 2023? While biotech may have taken a devastating haymaker from this year's unfavorable macroeconomic conditions, there are several good reasons to think that the industry can shake off this turmoil and return to form relatively soon. After all, biotech writ large is still notching major wins in scores of hard-to-treat indications such as cancer, cardiovascular disease, diabetes, infectious diseases, and rare diseases. 

Which biotech stocks sport the most attractive risk-to-reward ratios heading into 2023? My top three picks for next year are Altimmune (ALT 3.72%), Karuna Therapeutics (KRTX 0.27%), and Viking Therapeutics (VKTX 4.94%). Read on to find out more about these three growth-oriented biotech equities. 

Altimmune: Obesity will be a major theme in 2023

After being largely ignored by the pharmaceutical world for the better part of the past two decades, the obesity epidemic is poised to became a central theme for drug manufacturers in 2023 and beyond. Underscoring this point, the number of drugs in phase 2 or 3 development for obesity more than doubled this year relative to 2017, according to a report by Evaluate Pharma. Obesity has suddenly become a hotbed of pharmaceutical research thanks to a slew of scientific breakthroughs in this therapeutic category, as well as the staggering commercial opportunity inherent in this underserved market.    

Within this space, the clinical-stage biotech Altimmune is one name investors will definitely want to keep tabs on in 2023. Altimmune is slated to release the 24-week interim analysis from pemvidutide's ongoing mid-stage obesity trial in the first-quarter of next year. This data, if positive, ought to light a fire underneath the drugmaker's stock. In fact, this midstage obesity trial is a major impetus behind Wall Street's eye-catching $28 consensus price target on Altimmune's shares. This price target implies an upside potential of 226% from current levels. 

Karuna: A top player in the neuroscience renaissance

The 2020s are shaping up to be a particularly fruitful era for neuroscience research. Last August, for example, the clinical-stage neuroscience company Karuna scored a late-stage win for its lead product candidate KarXT (xanomeline-trospium) as a treatment for adults with schizophrenia. As a result, Karuna is gearing up to submit the drug for regulatory review with the FDA in mid-2023. If approved for this high dollar indication, the drug is expected to hit $1.7 billion in sales by 2028, and nearly $5 billion in annual sales at peak.  

Why is Karuna's stock a top buy heading into 2023? While a regulatory win certainly isn't guaranteed in this case, KarXT's emerging clinical profile comes across as a major step forward in the treatment of this devastating neurological disorder.

This fact has two clear implications for Karuna's future. First off, there ought to be tremendous demand from healthcare providers for this medication upon approval. In other words, KarXT's commercial ramp should be fairly quick, which bodes well for the company from an organic growth standpoint. Second, Karuna would likely become a top buyout candidate with an FDA-approved schizophrenia drug in hand. 

Viking: An incredibly undervalued liver disease play

Viking Therapeutics is a small cap biotech focusing on metabolic and endocrine disorders. The company's core value proposition centers around its oral nonalcoholic steatohepatitis (NASH) candidate VK2809. VK2809 is currently in a midstage trial for patients with biopsy-confirmed NASH.

NASH is an increasingly common liver ailment that lacks any type of FDA-approved pharmaceutical intervention. This underserved pharma market has been valued by industry experts at between $30 billion to $50 billion a year in annual sales -- that is, if any drugs can successfully cross the finish line in clinical trials. 

What's on tap for Viking in 2023? The key catalyst for Viking next year will be the top line readout for VK2809 in biopsy-confirmed NASH. This midstage data is expected to be released sometime during the first half of 2023.

What's important to understand is that a successful readout in this high-value indication could spark a lucrative licensing deal or perhaps a buyout. That being said, NASH has proven to be a particularly difficult indication to drug, meaning that investors may want to keep any starter positions on the small side for the time being.