After a volatile 2015, the year ahead marks an important period for the biotech industry. Thanks to new technologies, discovery and development are moving at a rapid pace. The NASDAQ Biotechnology Index and NYSE ARCA BIOTECH INDEX were up 10.6% and 10.4%, respectively, comparing favorably with the overall stock market which had a rather lackluster year with the S&P 500 being down 0.7%.  

Importantly, for 2016, the fundamentals of the biotech sector still look strong.

M&A activity, which dominated the industry for the last couple of years, is expected to continue in 2016. Action on the M&A front continues to be strong among biotech companies with new therapies or interesting pipeline candidates attracting attention. Baxalta BXLT is set to be acquired by Shire plc SHPG for $32 billion.

Apart from M&A deals, industry bellwethers are also pursuing licensing activity to bolster their beleaguered pipelines. Immuno-oncology continues to be one of the favorite therapeutic areas in this regard. Last year, we saw a number of deals in which large-cap health care companies have shown interest in developing immuno-oncology therapies.

Celgene Corp. (CELG - Analyst Report) entered into a global collaboration for the development and commercialization of immunotherapies with Juno Therapeutics, Inc. (JUNO - Analyst Report). However, the deals are not limited to this therapeutic area alone. Other areas like hepatitis C virus (HCV) are also attracting a lot of attention.

In order to boost the bottom line, several health care companies are resorting to initiatives like restructuring, streamlining of operations by divesting non-core/redundant assets, cost cutting through job cuts and lowering operating expenses, which include cutting research and development (R&D) expenses. Several companies including Bristol-Myers Squibb Co. (BMY - Analyst Report) and Biogen (BIIB - Analyst Report) announced job cuts last year. This trend is expected to continue this year as well.

Meanwhile, with several product approvals and pipeline updates lined up, 2016 looks to be promising. Gilead Sciences, Inc. (GILD - Analyst Report) expects to receive a final decision from the FDA by Jun 28, 2016, on its once-daily, fixed-dose combination of its blockbuster HCV infection drug, Sovaldi with velpatasvir for the treatment of genotype 1-6 chronic HCV infection. Encouraging news on the clinical front could also boost the stock price.

In the second half of 2015, the biotech sector saw a major sell-off triggered by pricing concerns. Democratic Presidential candidate Hillary Clinton’s "price gouging" tweet had set the ball rolling. However, the sector staged a strong rebound with stocks posting solid gains toward the end of the year.

This was not the first time that pricing concerns surfaced in the biotech sector. High prices of biotech drugs have been a topic of debate, off and on. Although pricing concerns may resurface in 2016, it is expected that strong fundamentals will see the sector through once again.

Top Picks

The start of a brand new year looks to be the right time to focus on some biotech stocks with strong fundamentals, good prospects and a favorable Zacks Rank. Here’s a look at five such stocks.

Our first pick is of course the biotech major, Gilead (GILD), known for its revolutionary blockbuster hepatitis C virus (HCV) drugs, Sovaldi and Harvoni. This Zacks Rank #1 (Strong Buy) company is based in Foster City, CA. Late last year, the company gained approval for another HIV treatment, Genvoya, making it the first tenofoviralafenamide (TAF)-based regimen to receive FDA approval. Meanwhile, as mentioned above, the company continues to work to bring newer HCV therapies to market.

Second on our list is a Zacks Rank #1 stock – Horizon Pharma (HZNP - Analyst Report) – a biotechnology company, which focuses on areas like arthritis, pain, inflammatory and orphan diseases. This Dublin, Ireland based company has products like Vimovo, Duexis, Actimmune and Rayos.

The company has been quite active on the acquisition front over the past few quarters. Last year, the company acquired Hyperion Therapeutics in a deal valued at about $1.1 billion. This deal has allowed Horizon to strengthen its position in the orphan disease market with the addition of a couple of urea cycle disorder drugs to its portfolio.

Another company that looks attractive is Cambridge, MA-based AVEO Pharmaceuticals, Inc. (AVEO - Analyst Report). AVEO is a development-stage biopharmaceutical company that focuses on the development of treatments targeting cancer using its proprietary human response platform. AVEO has made significant progress with its lead pipeline candidate, tivozanib, which is currently in late-stage development.

Meanwhile, the company has secured Novartis (NVS) as a partner for cachexia candidate, AV-380, which is a huge positive for the company. AVEO carries a Zacks Rank #2 (Buy).

New Haven, CT-based Achillion Pharmaceuticals, Inc. (ACHN - Analyst Report) is a biopharmaceutical company focused on the development of treatments for infectious diseases and immune system disorders. The company has inked an agreement with Johnson & Johnson (JNJ - Analyst Report) for its HCV portfolio last year. The HCV space offers significant commercial potential. Achillion holds a Zacks Rank #2.

Our final pick is Inovio Pharmaceuticals, Inc. (INO - Analyst Report), a Plymouth Meeting, PA-based clinical stage biopharmaceutical company, carrying a Zacks Rank #2. Inovio has secured major partnerships with large pharmaceutical companies like AstraZeneca (AZN - Analyst Report) and Roche (RHHBY - Analyst Report). These partners not only lend expertise to Inovio, but also provide the required funding for the development of candidates.

Bottom Line

Understanding trends and staying ahead of them are crucial for earning profits. If you are looking for a biotech pick that has the potential to move in the right direction, definitely keep an eye on the aforementioned stocks. All of these stocks are well poised to deliver in the near term.

Want to find the best stocks for 2016? Find out more information about the market-crushing Zacks Top 10 list here >>>

Get the latest research report on RHHBY - FREE

Get the latest research report on AZN - FREE

Get the latest research report on BMY - FREE

Get the latest research report on JNJ - FREE

Get the latest research report on GILD - FREE

Get the latest research report on CELG - FREE

Get the latest research report on BIIB - FREE

Get the latest research report on AVEO - FREE

Get the latest research report on INO - FREE

Get the latest research report on ACHN - FREE

Get the latest research report on JUNO - FREE

Get the latest research report on HZNP - FREE

- See more at: http://www.zacks.com/stock/news/203387/5-biotech-stocks-ready-to-crush-the-market-in-2016?cid=CS-TALKMARKETS-FT-203387#sthash.vw9FOnUW.dpuf