Keep an Eye on these 3 Biotech Stocks - Earnings ESP

The biotech industry, which reported robust growth last year and was off to a strong start early in 2014, witnessed a major sell-off in the last couple of months. The NYSE ARCA Biotech Index (^BTK) and NASDAQ Biotechnology Index (^NBI) have declined more than 7.8% and 7.9%, respectively, in the last 2 months.

The sell-off was triggered by lawmakers issuing a letter to

questioning the pricing of its recently approved hepatitis C virus (HCV) treatment, Sovaldi. The drug, priced at $84,000 for an 84-day treatment (12 weeks), came under the scanner for being way too expensive. This led to further speculations about lawmakers putting pressure on biotech companies to cut their prices.

It is however worth noting that this sell-off was more due to a change in sentiment rather than a shift in industry fundamentals. Recently, a trend reversal has also been noticed with the NYSE ARCA Biotech Index and NASDAQ Biotechnology recovering approximately 4.6% and 5.5%, respectively last week. Investor expectations from biotech companies are building up as the Q1 earnings season kicks in. Several major biotech companies are expected to report their first quarter earnings this week.

The currently subdued prices provide investors an attractive entry point. In fact, it is a good idea to zero in on a handful of biotech stocks that are poised to beat earnings estimates this quarter. An earnings beat should help these stocks regain investor confidence and send share prices higher.

Given the 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 Zacks

(Expected Surprise Prediction).

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 this earnings season.

based in Foster City, CA, is a Zacks Rank #3 (Hold) stock with an Earnings ESP of +22.67%. The Zacks Consensus Estimate for the first quarter is 75 cents.

Gilead is focused on the discovery, development and commercialization of drugs for human immunodeficiency virus (HIV), liver diseases such as hepatitis B virus (HBV) and HCV, respiratory, oncology /inflammation and cardiovascular related diseases. The company has delivered positive earnings surprises in two of the last four quarters.

Key growth drivers – Viread, Complera and Stribild – should continue with their strong performance in the first quarter. However, the main focus will be on Sovaldi which has blockbuster potential – this is the first full quarter for Sovaldi which was launched in Dec 2013.

Gilead is scheduled to announce its first quarter 2014 financial results after the closing bell on Apr 22.

is a Zacks Rank #1 stock with an Earnings ESP of +8.14%. The Zacks Consensus Estimate for the first quarter stands at $2.58. The company has a solid track record of delivering positive surprises with an average beat of 15.62% in the last four quarters. The company is expected to beat expectations in the first quarter as well.

The Cambridge, MA-based biotechnology company is engaged in the development and commercialization of therapies targeting autoimmune disorders including multiple sclerosis, neurodegenerative diseases and hemophilia. 

Tecfidera should continue performing well in the first quarter. Additionally, Tysabri and Avonex should remain strong contributors to the top line.

Biogen will be reporting first quarter 2014 results before the markets opens on Apr 23.

, based in Cheshire, CT, is focused on the development and commercialization of life-transforming drugs for treating patients suffering from ultra-rare disorders. The stock carries a Zacks Rank #2, with an Earnings ESP of +10.68%. The Zacks Consensus Estimate for the first quarter is $1.03.

The company has registered a positive earnings surprise in each of the last four quarters with an average beat of 8.07%. The company is expected to surpass expectations on the back of its sole marketed product, Soliris, and also aided by lower taxes.

Alexion is expected to report first quarter 2014 earnings on Apr 24 before the opening bell.

Despite the pressure on biotechs this quarter due to the recent sell-off, investing in this sector will be rewarding for those investors who are willing to be patient. While a number of biotech companies are facing challenges in the form of increasing competition, they are nevertheless looking for better strategies to emerge as winners.

Biotech companies have been attracting a lot of attention with a lot of merger and acquisition activity going on. A sneak peek at the space for some outperformers, backed by a solid Zacks Rank and a positive Zacks Earnings ESP, could be a great idea for investors to gain from this earnings season.