Biotech, a happening but highly volatile sector, again found itself in rough waters this year due to the drug pricing issue. This is evident from the 20.8% decline witnessed by the NASDAQ Biotechnology Index in the year-to-date period. Besides, strained balance sheets and macroeconomic woes are not making things any easier.

What the Sector Went Through

Even though exorbitant drug prices have always been a concern, the issue of drug price hikes initially made it to the headlines in Sep 2015 due to former U.S. presidential candidate Hillary Clinton’s “price gouging” tweet. Since then, several well-known companies like Mylan N.V. and Valeant Pharmaceuticals International, Inc. have drawn immense flak for massive increases in drug prices.

While Clinton’s strong criticism of drug price hikes cast a shadow over the entire sector initially, Donald Trump’s unexpected victory in November sent them rallying. This was probably because Trump had not been as vocal as Clinton about drug price hikes during the campaign. As a result, the biotech sector witnessed a 9% increase post the election results.

However, the post-election rally came to an abrupt halt when the President-elect clarified that his intentions were misinterpreted and that he actually plans to target excessive drug price hikes. Winner of Time’s “Person of the Year” title, Trump stated in an interview with the magazine, “I’m going to bring down drug prices. I don’t like what has happened with drug prices.”

But will the next year mark a turnaround for this sector? Let’s find out.

As usual, mergers and acquisitions, and licensing deals in the sector continued to be in the limelight in 2016. Horizon Pharma plc acquired California-based Raptor Pharmaceuticals Corp., while Pfizer Inc. took over oncology-focused biotech company Medivation, Inc. for approximately $14 billion. Again, Shire plc merged with Baxalta Incorporated in a deal worth approximately $32 billion. This trend should continue in 2017 as companies begin developing new therapies and interesting pipeline candidates.

Collaborations between large-cap and development-stage companies should continue, particularly in the immuno-oncology space and to some extent in other therapeutic areas like autoimmune and cardiovascular.

Interestingly, several products gained approval this year. Eli Lilly and Company gained accelerated approval in the U.S. for Lartruvo, in combination with doxorubicin, for the first-line treatment of soft tissue sarcoma. Sarepta Therapeutics, Inc. received a huge boost with the regulatory nod for Exondys 51 for the treatment of Duchenne muscular dystrophy. Biogen Inc. and Ionis Pharmaceuticals, Inc. got a boost with the FDA approving their spinal muscular atrophy treatment Spinraza within three months of the regulatory filing.

Apart from new product approvals, biotech companies continue to work on label expansion of their existing drugs to boost their commercial potential.

Note that a big development in the medical space is the ongoing focus on biosimilars. This is an opportunity that biotech companies are vying to capitalize on because of its high-revenue potential. Meanwhile, the widespread outbreak of the deadly Zika virus has brought companies such as Inovio Pharmaceuticals, Inc. among others into the limelight.

The future of the biotech sector is shrouded in uncertainty until Trump formalizes his healthcare plan. Nevertheless, the abovementioned factors indicate that this might be the perfect time to invest in some solid biotech stocks.

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4 Outperformers for the New Year

With the help of the Zacks Stock Screener, we have picked four biotech stocks with a Zacks #2 (Buy) and a VGM Score of “A” or “B.” Here V stands for Value, G for Growth and M for Momentum, and the score is a weighted combination of these three metrics. Such a score allows you to reduce the negative aspects of stocks and zero in on the outperformers. We have finally picked the stocks that have outperformed the Medical - Biomedical and Genetics industry.

Performance of Top Picks Vs Sector (Last 3 Months)

Investors can safely bet on Tarrytown, NY-based Regeneron Pharmaceuticals, Inc. (REGN Quick QuoteREGN - Free Report) , which is focused on the development of treatments for eye disorders, cholesterol management, rheumatoid arthritis, asthma, atopic dermatitis, pain, cancer and infectious diseases. Its flagship product, Eylea, continues to drive the top line.

Regeneron has surpassed earnings expectations in all the three reported quarters of 2016. The stock has a long-term earnings growth rate of 21.5%. The Zacks Consensus Estimate for 2016 earnings improved 3.8% and 1.8% in 2017 over the last 60 days. The company’s expected growth rate for the current year is 5.6% and 5.1% for 2017. Though the stock lost 5.8% in the past three months, it has outperformed the industry’s decline of 6.6%. The stock has a VGM Score of “B”. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

South San Francisco, CA-based, Exelixis, Inc. (EXEL Quick QuoteEXEL - Free Report) , a cancer-focused company, is a good pick too. The company has a VGM Score of “B.” It posted an average positive surprise of 38.52% in the trailing four quarters. While the Zacks Consensus Estimate for loss narrowed approximately 23% for 2016, earnings estimates for 2017 have increased 25% over the last 60 days. The company’s expected growth rate is 42.4% and 110.7% for 2016 and 2017, respectively. In the past three months, the stock has gained 19%, outperforming the industry.

We also suggest investing in Mountain View, CA-based VIVUS, Inc. . VIVUS delivered an average positive surprise of 59.73% in the trailing four quarters. The developer of treatments for obesity, sleep apnea, diabetes and sexual health has a VGM Score of “A.” The Zacks Consensus Estimate for loss has narrowed approximately 34.9% for 2016 and 7.4% for 2017 over the last 60 days. The company’s expected growth rate for the current year is 33.9%. We note that in the past three months, the stock gained 2.6% and hence outperformed the industry.

Last but not least, we have picked Copenhagen, Denmark-based Genmab A/S (GNMSF Quick QuoteGNMSF - Free Report) , which is focused on the development of differentiated antibody therapeutics for the treatment of cancer. The stock has a VGM Score of “B.” The Zacks Consensus Estimate for earnings surged 305.9% in 2016 and 4.3% in 2017 over the last 60 days. The company’s expected growth rate is 10.7% and 16.4% for 2016 and 2017, respectively. In the past three months, the stock inched up 0.6%, thereby outperforming the industry.

Bottom Line

The drug pricing issue is here to stay. However, the need of the hour is to strike a balance between innovation and affordability. In fact, the CEO of Regeneron finds price hikes “ridiculous” and feels that “as an industry, we have to innovate and innovate.” Moreover, Allergan Inc.’s CEO, Brent Saunders even issued a document on the website entitled “Our Social Contract with Patients,” which outlines a plan of self-regulatory policies. It remains to be seen if other companies indeed follow suit.