With the annual J.P. Morgan Healthcare Conference, where several biotech stalwarts like Celgene Corp (CELG - Analyst Report) and Vertex Pharmaceuticals Inc. (VRTX - Analyst Report) provided updates, investor focus will now shift to the next big thing in the biotech sector, the fourth quarter earnings season.

Although the sector has witnessed its share of ups and downs over the past few quarters, right now the market sentiment seems to be improving driven by upgraded guidance, product approvals, and encouraging pipeline updates. At the same time, growth prospects for the sector remain strong. This is why adding certain biotech stocks to your portfolio could be a good choice.
 
The biotech sector continues to be dominated by M&A activity and licensing deals. The biggest deal announced so far this year is Shire (SHPG) acquiring biotech company, Baxalta, Inc. (BXLT), for $32 billion. Meanwhile, other companies are looking to boost their portfolio and pipelines through new deals.
 
Meanwhile, the IPO market has seen a flurry of biotech fillings this year. 
 
Headwinds in the form of pricing concerns, biosimilar competition and the pricing of biotech drugs have come under pressure. This was most evident last year, when the biotech sector saw a major sell-off triggered by Democratic Presidential candidate Hillary Clinton’s "price gouging" tweet. Nevertheless, the innate strength of the sector has helped it to stage a strong comeback.
 
Thus, it may be a good idea to look at some companies in the biotech sector that have the potential to beat earnings in their upcoming releases. Although the earnings season is just starting, it is never too early to take positions in this bustling corner of the health care space. 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 the large number of biotech 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 Zacks 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%.
 
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

Below are four biotech stocks we believe are best positioned to stand out this earnings season.
 
Gilead Sciences Inc. (GILD - Analyst Report) is a Zacks Rank #1 stock with an Earnings ESP of +5.86%. The Zacks Consensus Estimate for fourth quarter 2015 is $2.90. The company has registered positive earnings surprises in each of the last four quarters with an average beat of 5.91%.
 
This Foster City, CA-based company focuses on the discovery, development and commercialization of drugs for several indications including human immunodeficiency virus (HIV) and liver diseases such as chronic hepatitis C virus (HCV) infection. Late last year, the company gained approval for another HIV treatment, Genvoya, making it the first tenofoviralafenamide (TAF)-based regimen to receive FDA approval. Meanwhile, the company continues to work to bring newer HCV therapies to market.
 
- Gilead is expected to report results on Feb 2.
 
Biogen Inc. (BIIB - Analyst Report), based in Cambridge, MA, is a global biopharmaceutical company focused on developing and commercializing therapies for neurological, autoimmune and hematologic disorders. The stock carries a Zacks Rank #2, with an Earnings ESP of +3.95%. The Zacks Consensus Estimate for the to-be-reported quarter is $4.05.
 
Biogen has a pretty good earnings track record with the company delivering positive earnings surprises in three of the last four quarters, with an average surprise of 6.86%. New products like Plegridy, Eloctate and Alprolix should perform well apart from Avonex and Tysabri.
 
- Biogen is set to report results on Jan 27.
 
Cytokinetics, Incorporated (CYTK - Snapshot Report) carries a Zacks Rank #3 with an Earnings ESP of +18.75%. Headquartered in South San Francisco, CA, the company focuses on discovering, developing, and commercializing first-in-class muscle activators as potential treatments for debilitating diseases in which muscle performance is compromised and/or declining. The company’s lead candidate tirasemtiv for amyotrophic lateral sclerosis enjoys orphan drug designation and fast track status in the U.S. The company has registered positive earnings surprises in three of the last four quarters.
 
- Cytokinetics is expected to report results on Feb 11.
 
Bristol-Myers Squibb Company (BMY - Analyst Report), based in Park Avenue, NY, is focused on discovering, developing and delivering innovative treatments for serious diseases. The stock carries a Zacks Rank #2, with an earnings ESP of +3.7%. The Zacks Consensus Estimate for the to-be-reported quarter is 27 cents.
 
Oncology drugs like Yervoy (skin cancer) and Sprycel (leukemia) should continue to perform well. Investor focus is expected to remain on updates on the company’s high-profile immuno-oncology drug, Opdivo. Meanwhile, other products like Orencia (rheumatoid arthritis) and anti-clotting drug Eliquis are also expected to perform well.
 
- Bristol-Myers is staled to report results on Jan 28.
 
Bottom Line
 
Despite challenges like increasing competition, pricing pressure and the launch of biosimilars, we believe that key industry fundamentals remain intact. Newer therapies should aid growth. A sneak peek at the space for some outperformers, backed by a solid Zacks Rank and a positive earnings ESP, could be a great idea for investors to still gain from this earnings season.