3 Biotech Stocks to Bet on this Earnings Season

The biotech industry, which has been growing at a rapid pace, shows no signs of slowing down if the beginning of 2014 is any indication. The NYSE ARCA Biotech Index (^BTK) has gained more than 33% in the last 6 months and approximately 13.7% since the start of the year. Some biotech stocks like Gilead Sciences Inc. (GILD) have witnessed a significant rise in their stock price. Factors working in their favor include impressive performance of existing products, successful launches, regulatory approvals and pipeline progress.

Biotech companies have been attracting a lot of attention with big pharma players resorting to biopharmaceuticals to bolster their beleaguered pipelines. For example, Sanofi (SNY) is planning to increase its stake in Regeneron Pharmaceuticals, Inc. (REGN). Merger and acquisition (M&A) and licensing activities in this segment have increased significantly with pharma companies targeting biotech stocks that have attractive pipeline candidates or technology that can be used for the development of novel therapeutics. A few days back, Novartis (NVS) acquired a privately held biotechnology company, CoStim Pharma in order to strengthen its cancer immunotherapy research program.

Additionally, the industry has been in the news this year with several companies going public.

The earnings season is on its last leg with several biotech companies having already released their fourth quarter numbers and guidance for 2014. However, it is not too late to join the biotech bandwagon. 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 gain investor confidence and show 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 Zacks Earnings ESP (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.

United Therapeutics Corporation (UTHR), based in Silver Spring, Md., is a Zacks Rank #2 (Buy) stock with an Earnings ESP of +15.39%. The Zacks Consensus Estimate for the fourth quarter is $1.69.

United Therapeutics is a biotechnology company focused on the development and commercialization of therapeutic products for patients with chronic and life-threatening diseases. The company has delivered positive earnings surprises in two of the last four quarters.

Key growth driver Remodulin should continue with its strong performance in the fourth quarter. Other products like Tyvaso and Adcirca are also expected to do well.

-United Therapeutics is scheduled to announce its fourth quarter 2013 financial results before the opening bell on Feb 25.

Medivation, Inc. (MDVN) is a Zacks Rank #2 stock with an Earnings ESP of +36.36%. The Zacks Consensus Estimate for the fourth quarter stands at a loss of 11 cents. The company has a solid track record of delivering positive surprises with an average beat of 32.57% in the last four quarters. The company is expected to beat expectations in the fourth quarter as well.

The San Francisco, Calif.-based biopharmaceutical company is engaged in the development and commercialization of therapies targeting serious diseases for which there are limited treatment options.

The company’s sole marketed product - Xtandi is expected to continue with its impressive performance in the fourth quarter.

Medivation will be reporting fourth quarter 2013 results after market close on Feb 27.

Idenix Pharmaceuticals Inc. (IDIX), based in Cambridge, Mass., is focused on the discovery and development of therapies for the treatment of patients suffering from hepatitis C virus (:HCV). The stock carries a Zacks Rank #2, with an Earnings ESP of +13.64%. The Zacks Consensus Estimate for the fourth quarter is a loss of 22 cents.

Although the surprise history for the stock has been unimpressive in the past, it is poised for a beat this fourth quarter. The company’s restructuring initiative should help contain some of its losses.

Idenix is expected to report fourth quarter 2013 earnings on Feb 24.

Bottom Line

While a number of biotech companies are seeing improvements in their financial results, some challenges in the form increasing competition remain. The companies are nevertheless looking for better strategies to emerge as winners. 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.

Read the analyst report on UTHR

Read the analyst report on MDVN

Read the analyst report on IDIX


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