After a dreadful 2016, biotech stocks have sprung back to life this year as possibilities of a draconian crackdown on drug prices ease out. The unveiling of a health care refurbish plan by Senate Republicans, in the meanwhile, has reinstated investors’ confidence in the Republicans’ ability to achieve another major legislative reform related to tax.

President Trump has promised to change the tax code so that companies can bring back cash held overseas. This in turn is expected to spur a series of buyouts among innovation starved biotech companies looking for growth. Hence, investing in solid biotech stocks that are poised to give returns that are several times their cost seems to be judicious.

The Best Way to Beat the Market: Buy Biotech Stocks

Biotech stocks have been hot of late, with the SPDR S&P Biotech ETF (XBI) hovering around its annual high. In fact, the month of July has been the best for XBI, historically. According to recent data from Schaeffer's Quantitative Analyst Chris Prybal, XBI has averaged a monthly gain of 5.4% in July. Also, watch out for Health Care Select Sector SPDR Fund (XLV), which ended higher in July, 80% of the time in the last decade.

Alexion Pharmaceuticals, Inc. , Regeneron Pharmaceuticals Inc (REGN Quick QuoteREGN - Free Report) and Celgene Corporation are some of the biotech stocks that have given stellar returns during the third quarter and second half of the year, historically. While Alexion Pharmaceuticals averages a third-quarter gain of 16.2%, its shares averaged a gain of 26.17% in the second half of the year. Regeneron Pharmaceuticals boasts an average gain of 19.03% for the third quarter and a 27.06% second-half gain, which is incidentally the second best of the S&P 500 members. Celgene has averaged a third-quarter gain of 11.7%, and a second-half gain of 12.98%.

Biotech stocks have already doubled the gains of the Dow Jones this year. The Nasdaq Biotechnology Index (IBB) soared over 16%, while the blue-chip index gained around 8%. IBB is expected to move north, as biotech sales are projected to increase from $107 billion this year to $128 billion by 2019, as per FactSet. This means consumers will be buying 20% more drugs by 2019.

Drug Pricing Woes Ebb

The biotech sector has come alive and there is perfect reason for this. Investors have, lately, started to feel that high drug pricing issues won’t be as damaging as feared during the presidential election last year. Fears that price control could be put in place have restrained investors from making big bets on biotech companies.

Moreover, politicians are likely to crack down on products that are visible to consumers like EpiPen. We shouldn’t forget that such a product is relatively cheap compared to some of the expensive specialized therapies. Furthermore, the pharma industry did a commendable job by showing politicians that drug costs constitute a relatively small portion of overall healthcare expenses. At the same time, they have argued that expensive drugs can save money by eliminating chronic diseases and keeping people out of hospitals.

Republican Healthcare Bill: Shot in the Arm for Drug Makers

Senate Republicans’ unveiling of the Healthcare Bill was also a shot in the arm for drug companies, as they hope that the much-awaited tax reforms will get implemented (read more: Republicans Present Healthcare Bill: Top 5 Gainers).

President Trump’s business tax plan should also benefit biotech companies. He plans to trim business tax rate to 15% from 35%. The lower tax burden is expected to boost profits for large biotech companies. Such firms can, in the meantime, repatriate cash held overseas and only pay 10% tax on it, as per Trump’s policy. This extra cash can be further utilized for stock buybacks, boosting earnings, paying dividends or investing in drug research.

Biotech M&A to Return

If biotech firms are able to repatriate the hundreds of billions of dollars stranded in overseas operations, it will boost acquisition activities. Such companies already have $500 billion in cash to invest in merger and acquisitions, while Jay Rao, a medical doctor and money manager at Balyasny Asset Management, said that “M&A and consolidation are inevitable” in the biotech sector.

Rao added that “advances in biology and science are breathtaking, and they are creating tangible benefits for patients”. Prime examples of such companies are Regeneron Pharmaceuticals, Vertex Pharmaceuticals Incorporated (VRTX Quick QuoteVRTX - Free Report) and Kite Pharma Inc .

5 Best Biotech Stocks to Buy in the 2nd Half

Taking the aforesaid bullish trends into consideration, it will be prudent to invest in five solid biotech firms that are multibaggers. Such stocks essentially have strong fundamentals, thus being great investment options. Also, these companies flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Vertex Pharmaceuticals is engaged in the discovery, development, manufacturing and commercialization of medicines for serious diseases. The company has a Zacks Rank #2. Its expected growth rate for the current year is 492.2%, more than the Medical - Biomedical and Genetics industry’s projected gain of 5.5%. Vertex Pharmaceuticals has outperformed the broader industry in the year-to-date period (+74.6% vs. +7%).

Alimera Sciences Inc is engaged in the research, development and commercialization of prescription ophthalmic pharmaceuticals. The company has a Zacks Rank #2. Its expected growth rate for the current year is 73.8%, better than the Medical - Biomedical and Genetics industry’s projected gain of 5.5%. Alimera Sciences has outperformed the broader industry in the year-to-date period (+27.7% vs. +7%).

Enzo Biochem, Inc. (ENZ Quick QuoteENZ - Free Report) is a bioscience company focused on delivering and applying technology capabilities to produce products and services. The company has a Zacks Rank #1. Its expected growth rate for the current year is 65%, better than the Medical - Biomedical and Genetics industry’s projected gain of 5.5%. Enzo Biochem has outperformed the broader industry in the year-to-date period (+59.2% vs. +7%). You can see the complete list of today’s Zacks #1 Rank stocks here.

Sarepta Therapeutics Inc (SRPT Quick QuoteSRPT - Free Report) is a biopharmaceutical company. The company focuses on the discovery and development of ribose nucleic acid (RNA)-targeted therapeutics for the treatment of rare neuromuscular diseases. The company has a Zacks Rank #2. Sarepta Therapeutics’ expected growth rate for the current year is 47.5%, more than the Medical - Biomedical and Genetics industry’s estimated gain of 5.5%. The company has outperformed the broader industry in the year-to-date period (+24.1% vs. +7%).

EXACT Sciences Corporation (EXAS Quick QuoteEXAS - Free Report) is a molecular diagnostics company. The company focuses on the early detection and prevention of some forms of cancer. The company has a Zacks Rank #1. EXACT Sciences’ expected growth rate for the current year is 18%, higher than the Medical - Biomedical and Genetics industry’s projected gain of 5.5%. The company has outperformed the broader industry in the year-to-date period (+179.1% vs. +7%).

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