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Image source: Flickr user www.vpsi.com. 

As an investor, you have a bounty of sectors and industries to choose from when investing in the stock market. However, few have performed better over the trailing five-year period than biotech stocks. Despite a recent pullback in the biotech sector as a whole, the SPDR S&P Biotech ETF is still up better than 235% over the trailing five-year period, more than three times the return of the broad-based S&P 500, which is up 68% over the same period.

Why so much love for biotech stocks? During a bull market investors are willing to accept more risk, and biotech certainly fits the mold, with emotions and projected future sales often shaping a stock's valuation. The long-term outlook for healthcare is also promising. With people living longer than ever, the need for medical care should only grow.

Three stocks to buy now in biotech
With this thesis in mind, as well as the biotech sector's recent sell-off, we'll take a brief look at three stocks to buy now in biotech. As a reminder, stocks are a two-way street -- they can fall just as easily as they can rise. That means you should take these buy suggestions as exactly that, suggestions, and do your own research to determine if these fit your portfolio and tolerance for investing risk.

Horizon Pharma (NASDAQ:HZNP)
In recent weeks Horizon Pharma, like much of the biotech sector, has taken heat for its pricing practices. Whereas few consumers were pleased with the way drugmakers priced their products before September, things really came to a head when privately-held Turing Pharmaceuticals raised the price of a recently-acquired parasite-killing drug by nearly 5,500%. Though Turing eventually backed down, the damage to the biotech sector was done, and regulators are actively searching for other unfair pricing practices.

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Image source: U.S. Food and Drug Administration.

One of Horizon's greatest advantages is also being perceived as a disadvantage at the moment. Among its many indications, Horizon deals in orphan disease drugs, or drugs that treat 200,000 or fewer people. Orphan drugs often come with special protections that keep generic competitors out of the picture, and because they rarely have a lot of competition, the producers can impose high price points to ensure they recoup their development costs. These price points appear to have Horizon in hot water -- but that's only a big problem if you actually believe prescription drug reform will occur. Personally, I believe there are far too many barriers preventing reform from taking place.

Instead, I'd encourage you to focus on Horizon's diversified portfolio of orphan, specialty care, and primary care products, its affinity for growing its portfolio by acquisition (call it a mini-Berkshire Hathaway if you'd like), and the fact that it moved its headquarters to Ireland last year. Ireland has a markedly lower corporate tax rate than the U.S., which should allow more of Horizon's revenue to go directly to its bottom line.

With the potential for as much as $2 in EPS by next year, I believe Horizon is worth considering as a stock to buy now in biotech.

Medivation (NASDAQ:MDVN)
The drop in Medivation's stock price has mirrored much of the sector as well. Medivation's key therapy is Xtandi, a drug developed in collaboration with Astellas Pharma (NASDAQOTH:ALPMY) that's designed to treat metastatic castration-resistant prostate cancer in both pre- and post-chemotherapy settings.

Xtandi

Image source: Astellas Pharma.

Xtandi faces two big hurdles: competition and price. Xtandi comes in with an annual price of tag of $74,500, or about $8,500 higher annually than competitor Zytiga. Xtandi also has to deal with a lot of competition in the mCRPC space. But when push comes to shove, Xtandi's clinical performance has been arguably the most impressive.

In the pre-chemotherapy setting Xtandi delayed the initiation of chemotherapy by 17 months over the placebo group, it reduced the risk of radiographic progression by better than 80%, and its overall response rate was 59%, compared to a mere 5% for the placebo group. In the post-chemo setting it was equally successful, providing a 4.8-month overall survival boost compared to the placebo in a 1,199-patient study. 

Xtandi's clear clinical benefits, and the fact that Medivation and Astellas are studying Xtandi as a possible treatment for breast cancer as well, gives me reason to believe that Xtandi could grow into a $4 billion drug by 2021 or 2022. With the possibility of $4 (or more) in EPS by 2018, I'd opine that Medivation may be a stock to buy now in biotech.

Jazz Pharmaceuticals (NASDAQ:JAZZ)
Another biotech stock to consider is Ireland-based Jazz Pharmaceuticals, a mid-cap company that's been heavily reliant on the growth of narcolepsy drug Xyrem.

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Image source: U.S. Food and Drug Administration.

Unlike Medivation and Horizon, drug pricing hasn't been a huge concern. Instead, Jazz seems to be constantly fighting off challengers to Xyrem's patents. It's previously fended off a possible generic entrant, and more recently has had to defend itself from Kyle Bass, founder of Hayman Capital Management, who's sought to invalidate Xyrem's patents. However, both are hurdles that Jazz has been able to thus far overcome.

Strong growth in Xyrem continues to dictate the pace for Jazz -- sales grew 30% to $247.8 million in the second quarter. Its remaining product portfolio was mixed, although Erwinaze, a treatment for acute lymphoblastic leukemia (ALL) in patients with hypersensitivity to E. coli-derived asparaginase and pegasparagase chemotherapy drugs, still demonstrates promise. Though not a common indication, demand for Erwinaze in Q2 2015 rose modestly on a year-over-year basis.

Like Horizon, Jazz is also located in Ireland, meaning it pays markedly lower corporate tax rates than its peers. This means Jazz can keep more of its profits rather than handing them over to the government, and it can help make Jazz's valuation look more attractive. Despite its reliance on Xyrem, projections of $16-plus in EPS by 2018 make Jazz an attractively priced stock to buy now in biotech.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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