The pharma/biotech sector has picked up this year after being battered by the drug pricing controversy in 2016. The first half has been pretty strong for companies in the space.

The NYSE ARCA Pharmaceutical Index has risen almost 9.8% year to date (YTD) after declining almost 10% last year. NASDAQ Biotechnology Index is up 17.7% YTD after sliding 19.1% in 2016.

The sector does have its share of challenges in the form of rising competition, high profile pipeline setbacks, slowdown in growth of mature products and the loss of exclusivity for certain key drugs. Though the drug pricing issue still prevails, investors, lately, are hoping that steep pricing will not be as damaging as feared previously.

Nonetheless, strong performance of newer drugs, evolving pipelines, impressive clinical trial results, new drug approvals, continued strong performance of legacy products and rising demand are some of the factors that promise a sustained recovery in the sector.

Meanwhile, there have been many more FDA drug approvals so far this year than in 2016.  A total of 23 drugs have gained FDA approval YTD, beating the total of 22 for the whole of 2016. With acceleration in the drug approval process, more innovation and a surge in new drug approvals are expected.

Though M&A activities and collaborations/deals have slowed down this year, chances are that they will pick up in the second half. With President Trump promising a major tax reform that will allow companies to bring back cash held overseas, acquisition activities are expected to pick up pace. Then again, the number of deals will still be less than the pharma industry, as it has been for many years.

Finally, the Republican administration’s vow to “repeal and replace” Obamacare bodes well for the sector’s growth.

How to Pick Likely Q2 Winners

Given the enormity of the healthcare space, selecting stocks that have the potential to beat estimates could appear to be quite daunting. 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 Earnings ESP.  More often than not, a positive earnings surprise delivered by a company leads to stock price appreciation.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with their upcoming 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%.  You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.