The biotech sector is witnessing changing dynamics with the focus shifting from large caps to smaller companies with high growth potential. Several big biotech players are being weighed down by pricing pressure and are feeling the threat of biosimilars.

Pricing concerns in the biotech industry surfaced toward the end of last year after pharmacy benefit manager Express Scripts (ESRX -Analyst Report) entered into an agreement with AbbVie Inc. (ABBV -Analyst Report) adding the latter’s lower priced Viekira Pak to its formulary, as an exclusive option for patients suffering from genotype 1 hepatitis C virus (HCV) infection. With this move, the leading pharmacy benefit manager removed Gilead Sciences Inc.’s (GILD - Analyst Report) high-priced Sovaldi and Harvoni and Johnson & Johnson’s (JNJ - Analyst Report) HCV drug Olysio from its National Preferred Formulary.

Since then, Gilead has entered into agreements with several pharmacy benefit managers and health care service companies. It even went on to state on its fourth quarter earnings call that it is undertaking several pricing measures including an increase in discount, charge back and rebates.

In the mean time, the first biosimilar has been approved in the U.S. Sandoz -- a Novartis company (NVS - Analyst Report) -- gained approval for Zarxio, a biosimilar version of Amgen’s (AMGN - Analyst Report) blockbuster drug, Neupogen. Several other companies including Hospira (HSP - Analyst Report) are looking to introduce biosimilars in the U.S.

Earlier this year, Hospira announced that it has submitted a Biologics License Application looking to get Retacrit (a biosimilar to Epogen and Procrit) approved in the U.S. Hospira already markets several biosimilars in Europe including Retacrit and Nivestim (a biosimilar to Neupogen).

Attracted by its lucrative biosimilars portfolio and pipeline, which is potentially worth multi-billion dollars, Pfizer (PFE - Analyst Report) has entered into an agreement to acquire Hospira in a deal valued at approximately $17 billion.

According to Pfizer, the worldwide biosimilars market is expected to be worth approximately $20 billion by 2020. Introduction of biosimilars is expected to directly affect the market for branded biotech drugs and eat into their share.

In such a scenario, biotech companies with newer therapies or interesting pipeline candidates have been attracting a lot of attention. Big players are resorting to merger and acquisition (M&A) deals and licensing activity to bolster their beleaguered pipelines. Last month, AbbVie entered into an agreement to acquire Pharmacyclics (PCYC - Analyst Report) in a deal valued at approximately $21 billion to gain partial rights to Imbruvica. Imbruvica is expected to generate U.S. net product revenues of approximately $1 billion in 2015.

While the M&A frenzy shows no signs of slowing down, it is a great time to go beyond familiar names in the biotech sector and indulge in some cheap growth stocks. These pint-sized stocks are not only easy for the pockets but also ensure outsized returns in a trending market.

How to Pick?

Picking the correct growth stocks from so many options could be a daunting task. However, with the assistance of our new style score system, one can locate stocks that have a solid growth potential.

Our Growth Style Score condenses all the essential metrics from the company’s financial statements to get a true sense of the quality and sustainability of its growth. Our research shows that stocks with Growth Style Scores of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or #2 (Buy) offer the best investment opportunities in the growth investing space.

For finding the best growth picks, we first short listed biotech stocks that have a Zacks Rank #1 or #2 and carry a Growth Style Score of ‘A’ or ‘B.’ Finally, we zeroed in on three stocks that are priced less than $10. These stocks have bright prospects and their attractive price serves as a perfect opportunity for investors to jump in and ride the growth curve.

Geron Corp. (GERN - Analyst Report)

Geron is a clinical stage biopharmaceutical company focused on the development of its sole pipeline candidate, imetelstat, a telomerase inhibitor, for hematologic myeloid malignancies. Late last year, the company entered into an exclusive collaboration and license agreement with Janssen Biotech, Inc., a unit of Johnson & Johnson, for the development and commercialization of imetelstat.

This Menlo Park, CA-based company carries a Zacks Rank #2. The company has seen its current year estimate narrowing to a loss of 1 cent over the last 60 days. Geron currently has a Growth Style Score of A.

Anthera Pharmaceuticals, Inc. (ANTH - Snapshot Report)

The Hayward, CA-based company is focused on developing and commercializing drugs for serious and life-threatening diseases including systemic lupus erythematosus and exocrine pancreatic insufficiency due to cystic fibrosis. The company’s pipeline boasts of two late-stage candidates – Sollpura and blisibimod.

Adding to the positives, this Zacks Rank #2 stock has witnessed a narrowing of loss estimate to $1.17 from $1.37 for its current year over the last 30 days. Anthera also has a Growth Style Score of A.

Cytori Therapeutics, Inc. (CYTX - Snapshot Report)

San Diego, CA-based Cytori is a biotech company with no approved product in its portfolio. However, the company has collaboration agreements with several big companies including Amgen.

This Zacks Rank #1 stock has a Growth Style Score of B. The stock has witnessed a favorable revision in estimates for the current year over the last two months.

Conclusion

Despite challenges like increasing competition, pricing pressure and the launch of biosimilars, we believe that key industry fundamentals are intact. Newer therapies should aid growth. In this case, scouting beyond the well-known names with the help of Zacks' style score system can help one find the best stocks for their portfolio and earn impressive returns.