Despite being a volatile sector, the biotech segment has been growing well surpassing all expectations. The NYSE ARCA Biotech Index (^BTK) and NASDAQ Biotechnology Index (^NBI) have increased 12.4% and 18.1% so far this year.

Although the biotech sector has been witnessing changing dynamics in several aspects, mergers and acquisitions have shown no signs of slowing down. Earlier in the year, Shire plc (SHPG) boosted its rare disease portfolio with the acquisition of NPS Pharma. Last month, AbbVie (ABBV) entered into an agreement to acquire Pharmacyclics (PCYC) for approximately $21 billion to gain partial rights to Imbruvica. Also, Horizon Pharma (HZNP) announced that it will be acquiring Hyperion Therapeutics (HPTX).

Large pharma companies have particularly been on the lookout for smaller biotech firms with interesting candidates. We saw Roche (RHHBY) acquiring privately held French biotechnology company Trophos.

Meanwhile, like last year the hepatitis C virus (HCV) market remains a key focus area this year as well. The highly lucrative market has been witnessing pricing competition ever since pharmacy benefit manager Express Scripts (ESRX) chose to add AbbVie’s lower priced Viekira Pak to its formulary over other expensive HCV drugs like Gilead’s (GILD) Sovaldi and Harvoni and other drugs.

Another major development this year was the FDA approval of the first biosimilar - Sandoz’ (a Novartis (NVS) company) Zarxio, a biosimilar version of Amgen’s (AMGN) blockbuster drug, Neupogen. This news may be a threat for most of the biotech companies. But we note that many of these biotech companies are developing biosimilar candidates on their own and are trying to take advantage of this opportunity and enter the highly lucrative biosimilar market.

Biotech is thus a very happening corner of the investment world. It would be 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 price improvement.

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 favourable 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%.

Below are three biotech stocks we believe are best positioned to stand out as we enter the first quarter earnings season.

Biotech major, Amgen (AMGN), carrying a Zacks Rank #2 with an Earnings ESP of +1.44%, can be an attractive pick this earnings season. Amgen’s track record has been pretty good in the last four quarters with the company beating earnings estimates consistently. The average earnings surprise over the last four quarters is 9.72%.

Thousand Oaks, CA-based Amgen has a strong presence in the supportive cancer care, nephrology and autoimmune disease markets. First quarter revenues should be driven by products like Enbrel, Vectibix, Neulasta, Prolia and Xgeva.

Amgen will be reporting first quarter 2015 results after the market closes on Apr 21.

Biogen (BIIB) is a Zacks Rank #1 stock with an Earnings ESP of +0.26%. The Zacks Consensus Estimate for the first quarter is $3.90. The company has a solid track record having delivered positive surprises in three of the last four quarters with an average beat of 11.6%. The company is expected to beat expectations in the first quarter as well.

Biogen has a strong presence in the multiple sclerosis market. The Cambridge, MA-based biotechnology company is also engaged in the development and commercialization of therapies targeting other autoimmune disorders including neurodegenerative diseases and hemophilia.

Key drug, Tecfidera should continue to perform well in the U.S. and EU in the first quarter. Other products like Tysabri and Avonex should remain strong contributors to the top line.

Biogen will be reporting first quarter 2015 results before the markets opens on Apr 24.

Zacks Rank #3 stock, Vertex Pharmaceuticals (VRTX), carrying an Earnings ESP of +15.39%, is also worth a look this earnings season. Although Vertex’s earnings surprise track record has not been that good in the last four quarters with an average miss of 11.97%, things might go in favour of the company this quarter as it carries a perfect combination of a positive Earnings ESP and a Zacks Rank #3.

The Boston, MA-based company is focused on the discovery, development and commercialization of small molecule drugs targeting serious diseases. The company’s main area of focus is cystic fibrosis.

Its flagship product, Kalydeco, has been the largest contributor to revenues in the last few quarters and is expected to sustain its performance this quarter as well.

Vertex will be reporting first quarter 2015 results after market closes on Apr 29.

Bottom Line

The biotech sector is awaiting a lot of important regulatory updates and pipeline decisions in the coming quarters. Meanwhile, licencing agreements, partnership and acquisition deals and restructuring initiatives are expected to continue in the sector going forward. This 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.

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