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The pharma and biotech sectors have made a nice comeback this year with the NYSE ARCA Pharmaceutical Index gaining 11.7%, while the Nasdaq Biotechnology Index is up 17.7% year to date. This is in sharp contrast to 2016, which saw pharma and biotech stocks under a lot of pressure with the sector facing intense criticism for rising drug prices.

Drug pricing was not the only reason for the sector’s underperformance last year. A fewer number of drug approvals, high-profile pipeline failures, slower-than-expected new product launches and increasing competition were some of the other factors that weighed on the sector.

However, factors like ramp up in new product sales, R&D success and innovation, strong results, a higher number of FDA approvals and continued strong performance from key products have contributed to a sustained recovery in the sector in 2017.

Importantly, investors now seem more comfortable with the drug pricing scenario and are focusing more on the fundamentals of the sector. So what are the factors that could drive the sector’s performance? First and foremost, this is an industry that will continue to witness demand for its products given an aging population and the increasing prevalence of a wide variety of diseases. Strong pipelines, innovative treatments, impressive results, and increased health care spending should support growth. A faster drug approval process and the proposed removal of outdated regulations that drive up costs and slow down innovation should also provide benefits. The sector will receive an additional boost if more mergers & acquisitions (M&As) are announced in the coming quarters.

But drug pricing will remain a headline risk until there is more clarity on the situation. Other challenges for the sector include the growing presence of biosimilars, generic competition, a slowdown in the growth of legacy products and major pipeline setbacks.

How to Pick Winners

Anyone interested in biotech and pharma stocks will know that it could be challenging to pick winners in this “high risk - high returns” industry which is constantly growing and changing. Companies which hit the bull’s eye become overnight success stories with shares doubling or even tripling on positive news. However, negative outcomes have an equally strong effect on the shares and failure may very well spell doom for these companies.

In such a scenario, let’s take a look at stocks preferred by analysts who have a deep knowledge and understanding of the industry and its companies. We have zeroed in on five stocks with the help of our Zacks Stock Screener - these stocks have been given a Strong Buy or Buy rating by 80% or more brokers and sport a favorable Zacks Rank #1 (Strong Buy) or #2 (Buy).

Sangamo Therapeutics, Inc. (SGMO - Free Report) : California-based Sangamo is a clinical-stage biotech company that is focused on translating ground-breaking science into genomic therapies using its platform technologies in genome editing, gene therapy, gene regulation and cell therapy. The company has partnership agreements with big players like Pfizer (hemophilia A), Shire (Huntington’s disease) and Bioverativ (beta-thalassemia and sickle cell disease). In the next 8-12 months, Sangamo expects proof-of-concept data on SB-525 (hemophilia A), SB-FIX (hemophilia B), SB-318 (MPS I) and SB-319 (MPS II). Other value drivers could be the signing of partnership deals for the company’s central nervous system/tau and oncology assets.

Sangamo is a Zacks Rank #2 stock with 85.7% Strong Buy or Buy broker rating. Shares of Sangamo are up 445.9% year to date, significantly outperforming the industry’s 2.6% rally.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Sarepta Therapeutics, Inc. (SRPT - Free Report) : Cambridge, MA-based Sarepta is a commercial-stage biopharmaceutical company focused on the discovery and development of precision genetic medicines to treat rare neuromuscular diseases. The company’s key focus area is Duchenne muscular dystrophy (“DMD”). Sarepta’s DMD drug, Exondys 51, is performing well with the company raising its revenue outlook for 2017 following the release of third quarter results. The company is also progressing with its pipeline.

Sarepta is a Zacks Rank #2 stock with 93.3% Strong Buy or Buy broker rating. Shares of Sarepta are up 97.9% year to date, significantly outperforming the industry’s 2.6% rally.

Akebia Therapeutics, Inc. (AKBA - Free Report) : Akebia, a biopharmaceutical company headquartered in Cambridge, MA, is focused on delivering treatments to patients with kidney disease through hypoxia-inducible factor biology. The company’s lead pipeline candidate, vadadustat, is in development for the treatment of anemia related to chronic kidney disease in both non-dialysis and dialysis patients. Vadadustat is currently in late-stage development. Akebia has a collaboration and license agreement in the United States for vadadustat with Otsuka.

Shares of Akebia are up 47.8% year to date, significantly outperforming the industry’s 5.2% rally. Akebia is a Zacks Rank #2 stock with 80% Strong Buy or Buy broker rating.

Calithera Biosciences, Inc. (CALA - Free Report) : South San Francisco, CA-based clinical-stage pharmaceutical company, Calithera, is focused on the discovery and development of novel small molecule drugs directed against tumor metabolism and tumor immunology targets for the treatment of cancer. Lead pipeline candidate, CB-839, is being studied in combination with standard of care agents. The company also has a collaboration and license agreement with Incyte (INCY - Free Report) for its small molecule arginase inhibitors for hematology and oncology indications.  

Calithera’s shares are up 200% year to date, significantly outperforming the industry’s 5.2% rally. Calithera is a Zacks Rank #2 stock with 100% Strong Buy or Buy broker rating.

GlycoMimetics, Inc. (GLYC - Free Report) : Rockville, MD-based clinical-stage biotech company, GlycoMimetics is focused on the discovery and development of novel glycomimetic drugs that will address unmet medical needs resulting from diseases in which carbohydrate biology plays a key role. The company’s most advanced pipeline candidate is rivipansel, a pan-selectin antagonist being developed for the treatment of vaso-occlusive crisis in sickle cell disease. Rivipansel is in a phase III study being conducted by partner, Pfizer (PFE - Free Report) , with the study expected to complete in the second half of 2018. GlycoMimetics' wholly-owned pipeline candidate, GMI-1271, is in a phase I/II study for acute myeloid leukemia (“AML”) and a phase I study for multiple myeloma.

GlycoMimetics’s shares are up 134.4% year to date, significantly outperforming the industry’s 5.2% rally. GlycoMimetics is a Zacks Rank #2 stock with 100% Strong Buy or Buy broker rating.

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