The 3 Best Growth Stocks to Buy in the Biotech Sector

Investors may want to keep an eye on biotech growth stocks, which are typically associated with the risk-on trade. Case in point: The sector ran up in January, but when the broader-market rally fizzled, it sold off hard as investors sought safer havens. Yet, with renewed optimism in the market as banking sector fears ease, the SPDR S&P Biotech ETF (NYSEARCA:XBI) is up 4.4% over the past week.

Looking at the flip side of the coin, one could argue that biotech growth stocks are also a recession-proof trade.  An aging population requires medications and treatments as they seek to live longer, healthier lives. To this end, there has been incredible innovation in areas such as gene therapies, immuno-oncology, precision medicine, machine-learning drug discovery and treatments for previously unmet medical needs.

In other words, it’s an exciting time to be a biotech investor. Just ask Andy Acker, manager of the Janus Henderson Global Life Sciences Fund (NASDAQ:JAGLX).

“Last year was a year of positive [drug clinical trial] data, and this year could be the year of new product launches,” he told Barron’s. “The [Food and Drug Administration (FDA)] has 75 new medicines pending approval decisions. So, this could be the year of the most new-product approvals of all time, as the previous high was 59 drugs back in 2018.”

Below are my top three biotech growth stocks to buy.

Axsome Therapeutics (AXSM)

First up on my list of biotech growth stocks to consider is Axsome Therapeutics (NASDAQ:AXSM). The $2.7 billion company focuses on novel therapies for central nervous system disorders. It has two approved drugs on the market and two others that it plans to submit for FDA approval this year.

The first is sleep-disorder drug Sunosi, which it acquired from Jazz Pharmaceuticals (NASDAQ:JAZZ) for $53 million. The drug is a dopamine-norepinephrine reuptake inhibitor and the only one of its kind to treat narcolepsy, with nearly $58 million in 2021 sales. Axsome began selling the drug in the United States in May and in international markets in November. The company ended 2022 with $44.8 million in Sunosi sales.

Axsome’s other approved drug, Auvelity, is even more exciting from an investment perspective. It’s a fast-acting oral treatment for depression, also the first of its kind, that launched in October. The drug reportedly takes effect within a week, while other antidepressants can take weeks or months. Auvelity is also being evaluated to treat agitation in people with Alzheimer’s disease and to help people quit smoking.

Finally, Axsome has two other drugs — AXS-07 for treating migraines and AXS-14 for fibromyalgia — that it plans to submit for FDA approval this year.

The stock is down 19% year to date, but it is up 78% over the past 12 months. Given the potential of Auvelity and Axsome’s other therapies, the company’s $2.7 billion market cap does not adequately reflect its long-term potential.

Reata Pharmaceuticals (RETA)

Another one of the hottest biotech growth stocks to look into is Reata Pharmaceuticals (NASDAQ:RETA). The stock is up 137% so far this year, including a nearly 200% jump on March 1.

The explosive rally followed FDA approval of Skyclarys, the company’s treatment for a neurological disorder called Friedreich’s ataxia. The inherited neurodegenerative disorder is rare, with just 5,000 people in the U.S. diagnosed so far, according to Reata. But it is a progressive disease with severe consequences.

“Patients with Friedreich’s ataxia experience progressive loss of coordination, muscle weakness, and fatigue, which commonly progresses to motor incapacitation and wheelchair reliance by their teens or early twenties, and eventually death,” the company’s press release states.

Skyclarys is the only treatment currently available in the U.S. for Friedreich’s ataxia. While the orphan drug’s approval is certainly welcome news for patients, it’s also great news for RETA investors. Seeking Alpha contributor Stephen Ayers estimates Reata could see peak annual revenue for Skyclarys of between $800 million and $1 billion in the U.S. alone.

A number of analysts have made significant increases to their price targets for RETA stock since Skyclarys’ approval. Most recently, Cantor Fitzgerald upped its price target to $138 from $121, implying upside of more than 50%.

CRISPR Therapeutics (CRSP)

Last up we have CRISPR Therapeutics (NASDAQ:CRSP), which specializes in gene-based medicines for serious diseases. Gene editing is cutting-edge technology and CRISPR Therapeutics is a key player.

The company made headlines this week when it signed a licensing deal with Vertex Pharmaceuticals (NASDAQ:VRTX) to accelerate the development of a type I diabetes treatment using Vertex’s hypoimmune cell therapies.

This is not the companies’ first collaboration.  Since 2015, they have been working on a therapy known as exagamglogene autotemcel (exa-cel), which is currently being considered for the treatment of sickle cell disease and transfusion-dependent beta thalassemia. The FDA granted exa-cel a rolling review, and it is nearing approval by the European Medicines Agency (EMA), as well.

If successful, this one-time treatment could be a game-changer for the company given the currently limited treatment options, providing a big potential catalyst for shares.

On the date of publication, Ian Cooper did not have (either directly or indirectly) any positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.