A cloud of uncertainty has engulfed the financial markets as investors the world over have to deal with global macroeconomic challenges led by the China downturn and falling oil prices. 

The NYSE ARCA Biotech Index (^BTK) and NASDAQ Biotechnology Index (^NBI) have plunged 26.1% and 21.8% respectively so far this year. The second half of 2015 had seen a huge sell-off in the biotech sector after Democratic Presidential candidate Hillary Clinton’s tweet on price gouging reignited the debate on high prices of drugs. Stocks like Valeant Pharmaceuticals (VRX) were the most impacted losing more than half of their net worth as the company was accused of following the same business model as Martin Shkreli, whose company had spiked the price of Daraprim from $13.50 to $750.

Moreover, the threat from biosimilars also looms large on the biotech sector with the FDA approving the first biosimilar, Zarxio, a bisomilar version of Amgen’s (AMGN) blockbuster drug Neupogen in 2015.

In such a scenario, investors are anything but optimistic. Having said that, things are looking up for the health care sector as bigwigs like Gilead Sciences (GILD), Biogen (BIIB) and Amgen topped estimates; Amgen also increased its outlook for 2016. On the other hand, Celgene’s earnings miss came as a disappointment.

Meanwhile, M&A and licensing deals will continue to take center stage in 2016 with Shire (SHPG) announcing to acquire Baxalta Inc. (BXLT) for $32 billion right at the start of the year. The company boosted its rare disease portfolio with the acquisition of NPS Pharma in 2015.

On the other hand, the outbreak of the deadly Zika virus has put the spotlight on companies striving to come out with treatment options for the same. These include companies like Inovio Pharmaceuticals (INO) and Intrexon (XON). Inovio has collaborated with GeneOne Life Science to test and advance a DNA-based vaccine for preventing and treating the emerging and virulent Zika virus infection while Intrexon is developing the same through its subisidiary Oxitec.

Given the strong fundamentals, healthy pipelines and the drive to find innovative treatments for rare diseases, it is never late to enter the happening biotech sector. Here we help you to identify some companies in the biotech sector that have the potential to beat earnings in their upcoming releases. These stocks are well positioned in today’s market environment, and could see considerable upside riding on the aforementioned trends. An earnings beat should help these stocks gain investor confidence and show a favorable price movement.

How to Pick?
Given a large number of industry participants, pinpointing stocks that have the potential to beat estimates could appear to be a daunting task. But our proprietary methodology makes it fairly simple. One way to narrow down the list of choices this earnings season is by looking at stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Earnings ESP.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
 
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
Below are three biotech stocks we believe are best positioned to stand out as we take a stand in the ongoing earnings season:

Acorda Therapeutics (ACOR - Analyst Report) carries a Zacks Rank #2 with an Earnings ESP of +150.0%.  Acorda is a commercial-stage biopharmaceutical company focused on the development and commercialization of novel treatments that improve the lives of patients with neurological disorders. The company’s lead marketed product is Ampyra which is approved for the improvement of walking in MS patients. The company has registered positive earnings surprises in three of the last four quarters. The company is expected to results on Feb 11.

Nektar Therapeutics (NKTR - Analyst Report) carries a Zacks Rank #2 with an Earnings ESP of +2.38%. Headquartered in San Francisco, CA, the company primarily focuses on the development of drugs which utilizes its PEGylation and advanced polymer conjugate technology platforms. The company is developing several candidates across important therapeutic areas like oncology, pain, anti-infectives and immunology. The company’s approved drug, Movantik, is a once-daily oral peripherally acting mu-opioid receptor antagonist (PAMORA) medication for the treatment of opioid-induced constipation (OIC), in adult patients with chronic, non-cancer pain. The company has registered positive earnings surprises in three of the last four quarters. Nektar is expected to report results on Feb 23.

Cytokinetics, Incorporated (CYTK - Snapshot Report) carries a Zacks Rank #3 with an Earnings ESP of +6.45%. Headquartered in South San Francisco, CA, this late-stage biopharmaceutical company primarily focuses on the discovery and development of first-in-class muscle activators as potential treatments for debilitating diseases in which muscle performance is compromised and or declining.  Candidates which are currently in clinical development are skeletal muscle activators tirasemtiv and CK-2127107, and cardiac muscle activator omecamtiv mecarbil. The company’s lead candidate, tirasemtiv, is being evaluated for amyotrophic lateral sclerosis. The company has registered positive earnings surprises in three of the last four quarters. Cytokinetics is expected to report results on Feb 16.

Bottom Line   

Although the sector is set to face stiff competition from biosimilars, regulatory and pipeline updates should be the key area of focus in the coming quarters. Meanwhile, the companies will look out for licensing agreements, partnership/acquisition deals and restructuring initiatives. We expect investors to keep an eye on these potential outperformers given their solid Zacks Rank and positive Zacks Earnings ESP.