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Earnings ESP

After a sell-off in March, the biotech sector has bounced back. The rebound was due to strong earnings reports, product approvals, and acquisitions and licensing deals, which have helped the sector emerge from the sell-off as we gradually progress towards the second half of 2014.

On an overall basis, the NYSE ARCA Biotech Index (^BTK) and iShares NASDAQ Biotechnology Index (IBB) have gained approximately 18.5% and 13.2%, respectively in the first half of 2014.

Earnings have taken center stage over the last two weeks as most of the bigwigs reported strong results for the second quarter. Gilead Sciences (GILD - Analyst Report) reported better-than-expected second quarter results propelled by its blockbuster hepatitis C virus (HCV) drug Sovaldi, despite concerns regarding its high price. In fact, these concerns had led to the March sell-off in the biotech sector. Nevertheless, Sovaldi continues to outperform.

Biogen Idec (BIIB - Analyst Report) also surpassed expectations fueled by a significant contribution from its oral multiple sclerosis (MS) drug, Tecfidera. Moreover, the company upped its 2014 guidance yet again.

Meanwhile, Amgen’s (AMGN - Analyst Report) restructuring plan received a positive response. Amgen plans to cut its workforce by 12% – 15%, mostly in the U.S. starting later this year and continuing through 2015. The restructuring initiative should make the company leaner and more cost-efficient.

Regeneron (REGN - Analyst Report) and Vertex Pharmaceuticals (VRTX - Analyst Report) were the laggards, both missing expectations.

Apart from strong earnings, acquisition deals and regulatory updates on pipeline candidates have also brought some biotech stocks in focus. AbbVie (ABBV - Analyst Report) finally managed to lure Ireland-based Shire (SHPG - Analyst Report) into an acquisition agreement – the acquisition will not just lead to a lower tax rate, it will also provide a much-needed boost to AbbVie’s portfolio.

Some important products also got approved this quarter including Gilead’s Zydelig (cancer),   Durata Therapeutics’ (DRTX - Snapshot Report) Dalvance (acute bacterial skin and skin structure infections caused by susceptible gram-positive bacteria), and MannKind’s (MNKD) Afrezza (insulin human) among others. Most recently, the FDA approved The Medicines Company’s (MDCO - Analyst Report) antibiotic Orbactiv.

Although the second quarter earnings season is almost over, it is still not too late to join the biotech bandwagon. There are still a bunch of companies left to report results. We help you 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 movements.

How to Pick?

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 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 surprise is as high as 70%.

Below are three biotech stocks we believe are best positioned to stand out this earnings season.

Ultragenyx Pharmaceutical Inc. (RARE - Snapshot Report) is a Zacks Rank #3 stock with an Earnings ESP of +9.76%. The Zacks Consensus Estimate for the second quarter is a loss of 41 cents.

Based in Novato, CA, Ultragenyx Pharmaceutical, a clinical stage company, primarily focuses on the identification, acquisition, development, and commercialization of treatments targeting rare and ultra-rare diseases. The company’s key focus area is serious and debilitating metabolic genetic diseases. Ultragenyx’s pipeline includes biologics and small-molecule substrate replacement therapies.

We expect the company to report a narrower loss this season. Ultragenyx is expected to report second quarter earnings on Aug 11.

Netherlands based Prosensa Holding N.V. (RNA - Snapshot Report) also looks attractive with a Zacks Rank #3 and an Earnings ESP of +5.56%. Prosensa is engaged in the discovery and development of RNA-modulating therapeutics mainly for the treatment of genetic disorders. Its primary focus is on rare neuromuscular and neurodegenerative disorders such as Duchenne muscular dystrophy (DMD), myotonic dystrophy and Huntington's disease.

The Zacks Consensus Estimate for the second quarter is a loss of 36 cents. Prosensa has delivered positive surprises in two of the last four quarters with an average beat of 598.2%.

Prosensa is scheduled to report its second quarter results on Aug 12.

Another stock to watch out for is Tekmira Pharmaceuticals (TKMR). The recent outbreak of the Ebola virus has put the stock in the limelight. We would advise investors to cautiously watch Tekmira which currently carries a Zacks Rank #3 and an Earnings ESP of +161.54%.

Tekmira is scheduled to report second quarter results on Aug 13. Tekmira saw a ray of hope recently with the FDA converting its full clinical hold on the company’s Investigational New Drug Application (IND) for phase I candidate, TKM-Ebola to a partial clinical hold. The partial clinical hold on the candidate will enable the potential use of TKM-Ebola in individuals infected with the Ebola virus. We expect further updates on the same concurrent with the second quarter results.

Bottom Line
Most companies in the sector have reported better-than-expected second quarter results. We were also impressed by the positive guidance provided by the companies. However, challenges in the form of increasing competition and pricing pressure continue to loom large. 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.

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