The biotech space is off to a good start in 2019. The biotech industry, comprising mainly small and mid-cap companies, has outperformed the broader Medical sector, whereas the large cap pharmaceuticals industry, comprising some of the largest drugmakers of the world, has lagged the sector so far in 2019.

The Zacks Biomedical and Genetics industry has increased 9.6% so far in 2019 compared with the broader Zacks Medical sector’s rise of 7.5%.

With increasing risk of recession in the United States amid tariff wars with several global trade partners, the biotech sector is expected to do well. Investors park their money in recession-proof industries like drug/biotech and consumer goods to avoid the risk of a downfall.

We note that the majority of the companies in the biotech sector have no marketed products, which results in operating losses. With no earnings and sales, growth of these companies is primarily driven by progress in their pipeline candidates in clinical stage. Several positive study data readouts and progress of candidates to advanced stage have pulled the sector higher in 2019 so far. Moreover, a rise in merger & acquisition (M&A) activity this year has fueled speculations of smaller companies being potential acquisition targets These speculations have boosted the stock price of these smaller players. The biggest deal of the year was Bristol-Myers’ acquisition offer of $74 billion to buy Celgene. Several other large-cap pharma, as well as bigger biotech companies, are entering collaboration deals with smaller ones to boost their pipeline.

The larger companies in the biotech sector, which hold the majority of the industry’s market capitalization, have a strong portfolio of drugs, commercial as well as a solid pipeline of innovative candidates. These big biotechs have a strong balance sheet and a steady stream of revenues. Among the bigwigs, Celgene, Vertex (VRTX  - Free Report), Biogen (BIIB - Free Report) and Amgen (AMGN  - Free Report) beat earnings estimates in the last quarter of 2018.

With rising M&A activity and risk of recession, the biotech sector is poised to pick up and adding stocks from this sector will likely boost portfolio returns.

Importantly, the Zacks Biomedical and Genetics industry features among the top 32% of the 256 Zacks-ranked industries.

Stocks to Buy

Here we have zeroed in on four companies from the biotech/drug sector which have performed well so far in 2019 and still hold upside. All these stocks have seen their share price and earnings estimates rise this year.

These stocks carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) and have a VGM Score of A or B.

Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 or 2 offer the best upside potential.

ANI Pharmaceuticals, Inc. (ANIP - Free Report)

ANI Pharmaceuticals sports a Zacks Rank #1. The company has a VGM Score of A. The Zacks Consensus Estimate for earnings has moved 1.2% and 0.6% north for 2019 and 2020, respectively, in the past 60 days. Shares of the company have rallied 50.5% so far this year.

ANI Pharmaceuticals, Inc. Price

ANI Pharmaceuticals, Inc. Price | ANI Pharmaceuticals, Inc. Quote

Kamada Ltd. (KMDA - Free Report)

Kamada sports a Zacks Rank #1. The company has a VGM Score of A. The Zacks Consensus Estimate for earnings has moved up 34.3% and 5% for 2019 and 2020, respectively, in the past 60 days. Shares of the company have rallied 15.8% year to date.

Kamada Ltd. Price

Kamada Ltd. Price | Kamada Ltd. Quote

Genomic Health, Inc. (GHDX - Free Report)

Genomic Health carries a Zacks Rank #2. The company has a VGM Score of B. The Zacks Consensus Estimate for earnings has moved up 21.1% and 6.4% for 2019 and 2020, respectively, in the past 60 days. Shares of the company have risen 7.3% so far in 2019.

Genomic Health, Inc. Price

Genomic Health, Inc. Price | Genomic Health, Inc. Quote

NewLink Genetics Corporation (NLNK  - Free Report)

NewLink Genetics carries a Zacks Rank #2. The company has a VGM Score of B. The Zacks Consensus Estimate for loss has narrowed 10.9% and 19.2% for 2019 and 2020, respectively, in the past 60 days. Shares of the company have rallied 25.7% in 2019.

NewLink Genetics Corporation Price

NewLink Genetics Corporation Price | NewLink Genetics Corporation Quote

However, a few companies faced developmental or regulatory setbacks. These setbacks wiped out the majority of the valuation of smaller companies dependent on a single candidate.