The biotech sector has seen a lot of changes over the last year. And when we talk of biotechs, we’re reminded of one of its big success stories – Gilead (GILD). Gilead’s blockbuster hepatitis C virus (HCV) drug Sovaldi was a clear winner in the HCV market ever since it was launched. The company strengthened its position further in the HCV market with the approval of Harvoni.

Gilead faced a setback in late 2014 with AbbVie's (ABBV) hepatitis C drug, Viekira Pak, gaining approval. AbbVie went on to ink a deal with Express Scripts (ESRX) and got listed in the latter’s National Preferred Formulary. Express Scripts' independent Pharmacy & Therapeutics Committee determined Viekira Pak to be at least clinically equivalent to Sovaldi and Harvoni, which were excluded from the National Preferred Formulary. Gilead’s shares were hit badly following the news.

 
However, Gilead has been signing up with quite a few pharmacy benefit managers and health care benefit companies for its HCV drugs. Given the current situation, we expect the HCV market to remain in focus this year.
 
Meanwhile, mergers and acquisitions continue in the biotech sector. With tax inversion deals losing their luster (in Sep 2014, the U.S. Department of Treasury issued a notice in order to discourage tax inversion deals), several companies are back to pursuing small biotech companies instead.
 
Earlier in the month, we saw Shire plc (SHPG) announcing its intention to acquire NPS Pharmaceuticals, Inc. (NPSP) for approximately $5.2 billion with the main attraction being the latter’s rare disease portfolio and pipeline.
 
In 2014, we have seen several immuno-oncology deals. Interest in this field remains unabated in 2015 with quite a few deals already being announced so far this year. We saw Agenus (AGEN) announcing an immuno-oncology agreement with Incyte Corp. (INCY). AstraZeneca (AZN) announced a similar deal with a privately held biotechnology company, Omnis Pharmaceuticals. We expect to see more such deals in the coming quarters in this highly lucrative therapeutic area.
 
Several small biotech companies continue to work on the development of treatments for diseases which have no approved products. Intercept Pharmaceuticals (ICPT), a U.S. biotech company, is working on bringing non-alcoholic steatohepatitis treatments to market. Meanwhile, other biotech companies like Tekmira (TKMR) and Chimerix (CMRX) should remain in focus for their Ebola vaccine candidates.
 
The challenges notwithstanding, most of the biotech stocks are exploring their own ways to stay afloat in the competition. Thus, 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 favorable 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 this earnings season.
 
Ariad Pharmaceuticals Inc. (ARIA - Snapshot Report) based in Cambridge, MA, is a Zacks Rank #3 stock with an Earnings ESP of +50.00%. The Zacks Consensus Estimate for the fourth quarter 2014 is at a loss of 16 cents per share. The company has registered positive earnings surprises in three of the last four quarters with an average beat of 6.89%.
 
Sales of Iclusig, the company’s sole marketed product, is expected to continue to grow this quarter as well. The company received some welcome news earlier this month with the European Commission sanctioning the Committee for Medicinal Products for Human Use’s recommendation regarding the use of Iclusig for its approved indications. The decision helped remove an overhang on the benefit-risk aspect of the drug’s usage in the EU.
 
The company announced early in January that it expects Iclusig net sales to be approximately $55 million in 2014. Ariad is expected to report its fourth quarter results on Feb 24.
 
Zacks Ranked #2 stock, BioCryst Pharmaceuticals, Inc. (BCRX - Snapshot Report), can be another good option for investors looking to invest in the biotech sector this earnings season. The stock has an Earnings ESP of +25.00%. The Durham, NC based company registered positive earnings surprises in two of the last four quarters with an average beat of 6.93%. The Zacks Consensus Estimate for the fourth quarter 2014 is a loss of 20 cents per share.
 
BioCryst’s top-line, which relies on royalties, collaborative and other research and development revenues, is expected to rise this quarter. The company progressed well with its Ebola vaccine candidate, BCX4430, during the quarter, on which it receives collaboration revenues. Also, the company’s acute uncomplicated influenza treatment, Rapivab, was approved towards the end of the quarter.  
 
BioCryst is expected to report fourth quarter results on Feb 25.
 
Investors may also try Pharmacyclics Inc. (PCYC - Analyst Report), which sports a Zacks Rank #2 along with an Earnings ESP of +21.59%. Based in Sunnyvale, CA, the stock has a solid earnings track record having delivered positive earnings surprises in three of the last four quarters. The Zacks Consensus Estimate for the fourth quarter 2014 is 88 cents per share.
 
The company’s sole marketed product, Imbruvica, which is approved for different types of blood cancer, should continue performing well. Imbruvica could achieve blockbuster status this year. Pharmacyclics is expected to report fourth quarter results on Feb 19.
 
Bottom Line
 
While a number of biotech companies are seeing improvements in their financial results, there are others up against stiff challenges. These companies are nevertheless striving to stay afloat in the competition. 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.