4 Biotech Stocks Poised to Surprise This Earnings Season - AbbVie (NYSE:ABBV)

Despite the lackluster start to the year, things are now looking up as we stand in the thick of the Q2 earnings season. A majority of the companies that have reported so far fared better than expectations, giving investors something to cheer for.

Amid a challenging macro backdrop, the healthcare sector has been choppy since the beginning of 2016, continuing the volatile streak from the second half of 2015. The biotech sector also took a beating in the second half of 2015 due to pricing issues. The NYSE ARCA Biotech Index (^BTK) and NASDAQ Biotechnology Index (^NBI) have declined 7.1% and 10.1%, respectively, so far this year.

Notwithstanding the decline, things appear far better now than they did a quarter ago for the biotech sector. Biogen Inc. BIIB topped both earnings and revenues expectations, while Gilead Sciences GILD beat on earnings but missed on revenues. Amgen AMGN and AbbVie, Inc. ABBV also managed to top both earnings and sales expectations and lifted their view.

Meanwhile, M&A and licensing deals should continue to take center stage in the sector. In Jun 2016, Shire plc SHPG acquired Baxalta to further strengthen its rare disease portfolio. Aegerion Pharmaceuticals AEGR and QLT Inc. QLTI entered into a definitive merger agreement in Jun 2016 to form a new company, Novelion Therapeutics Inc., while Swiss major Novartis NVS is reportedly looking to buy AstraZeneca AZN, as per Reuters.

On the other hand, new product approvals, along with label expansion of existing drugs and regular pipeline updates related to key drugs, should keep investors' attention glued to the sector.

Given the strong fundamentals, healthy pipelines and the drive to find innovative treatments for rare diseases, the biotech space promises bountiful opportunities for investors. 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 quite daunting. 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. https://www.zacks.com/earnings/earnings-surprise-predictions/

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 four biotech stocks we believe are best positioned to stand out in the ongoing earnings season:

Cambridge, MA-based Ironwood Pharmaceuticals, IRWD carries a Zacks Rank #2 and has an Earnings ESP of +13.30%. This commercial-stage biotechnology company is focused on the development and commercialization of treatments primarily addressing gastrointestinal diseases.

The company's lead drug, Linzess, is indicated for patients suffering from irritable bowel syndrome with constipation or chronic idiopathic constipation. The company is working to boost Linzess sales, which should aid its own performance. Ironwood is scheduled to report second-quarter results on Aug 4. Although it has a mixed track record, having beaten estimates in two of the last four quarters and missed the same in the other two, the combination of a positive Earnings ESP and a favorable rank indicates a likely earnings beat this quarter.

San Rafael, CA-based BioMarin Pharmaceutical Inc. BMRN carries a Zacks Rank #3 and an Earnings ESP of +4.00%. The company is scheduled to report second-quarter 2016 results on Aug 4. The company has five approved products in its portfolio – Vimizim, Naglazyme, Kuvan, Aldurazyme and Firdapse. BioMarin's track record has been decent so far, with the company beating estimates in three out of the last four quarters. A consistently strong performance of Vimzim should enable the company to beat estimates this quarter.

Another stock that appears poised to beat earnings this quarter is Wilmington, DE-based Incyte Corporation INCY, a biopharmaceutical company focused on the discovery, development and commercialization of proprietary therapeutics. The company's approved drug, Jakafi, is approved for the treatment of patients with intermediate or high‑risk myelofibrosis and patients with polycythemia vera who have had an inadequate response to or are intolerant of hydroxyurea.

In Jun 2016, Incyte entered into a share purchase agreement with Ariad Pharmaceuticals ARIA whereby it gained the latter's European business as well as the rights to its leukemia drug, Iclusig, in the EU and 22 other countries. The deal has expanded Incyte's footprint in Europe. Moreover, the company has an impressive track record with a trailing four-quarter average positive surprise of 101.83%. Incyte's current Zacks Rank #2 and Earnings ESP of +300.00% indicate a likely earnings beat this quarter. The company will report results on Aug 9.

Acceleron Pharma Inc. XLRN, a clinical-stage biopharmaceutical company, is scheduled to report second-quarter results on Aug 4. The company is focused on the discovery and development of novel therapeutic candidates that engage the body's ability to rebuild and repair its own cells and tissues. Its pipeline comprises luspatercept, sotatercept, dalantercept and ACE-083. The company has a mixed track record but its current Zacks Rank #3 and a positive Earnings ESP of +7.41% makes us reasonably confident of an earnings beat this quarter.

Bottom Line

Although obstacles remain in the form of biosimilars and currency headwinds, investors would do well to keep an eye on these potential outperformers given their solid Zacks Rank and positive Zacks Earnings ESP.

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