Biotechs companies offer big risk, but big reward as well. These are seen as some of the more speculative companies in the market because a single word from governing health care agencies, such as the U.S. Food and Drug Administration (FDA), can make or break these companies.

Analysts often weigh in on these companies, and there are a number of factors that play a role in how analysts view these stocks. Some analyst reports are driven by company pipelines, while others look at the potential for M&A.

Merrill Lynch took a look at the biotech industry, considered these factors, and made a few picks that could play out in 2018.

The brokerage firm detailed in its report that it believes in a few things — a scarcity of pipelines with blockbuster potential, balance sheets of large cap biotech and major pharma flush with cash and slowing top-line growth — have the potential to make the perfect storm for an uptick in M&A activity in 2018.

Merrill Lynch noted that there are many names “ripe” for takeout, while large cap names are encapsulated with slower growth and need to invest in their pipelines.

According to the report:

Vertex Pharmaceuticals Inc. (NASDAQ: VRTX) is breaking out from a bullish continuation pattern after completing a 2-year+ consolidation bottom. Upside is seen to the $200 area. Celgene Corp. (NASDAQ: CELG), Alexion Pharmaceuticals, Inc. (NASDAQ: ALXN), and Incyte Corp. (NASDAQ: INCY) have weaker technical patterns and may have further downside risks. BioMarin Pharmaceutical Inc. (NASDAQ: BMRN) is forming a potential bearish top – a move below $77.98 would open $71 to the $60 area.

Buy-dip on several “Potential Blockbusters” Aimmune Therapeutics, Inc. (NASDAQ: AIMT), Audentes Therapeutics, Inc. (NASDAQ: BOLD), AveXis, Inc. (NASDAQ: AVXS), Bluebird Bio, Inc. (NASDAQ: BLUE), Esperion Therapeutics, Inc. (NASDAQ: ESPR), and Sage Therapeutics, Inc. (NASDAQ: SAGE) are buy-dip candidates given their bullish trends and favorable technical patterns. Intercept Pharmaceuticals, Inc. (NASDAQ: ICPT), Prothena Corp. PLC (NASDAQ: PRTA), Tesaro, Inc. (NASDAQ: TSRO) and Ultragenyx Pharmaceutical Inc. (NASDAQ: RARE) have bearish set-ups. Heron Therapeutics, Inc. (NASDAQ: HRTX) is bigger picture bullish, but may correct further on a move below $19.55. Clovis Oncology, Inc. (NASDAQ: CLVS) has bearish set-up and bulls need to push above $69 to invalidate.

Overall, the Nasdaq Biotechnology Index may expect positive returns for 2018, but the index is at risk to continue underperforming the S&P 500 index. However, out of this group, Merrill Lynch believes that the technical patterns favor small cap biotechs in the near to intermediate term and NYSE Arca biotech over longer term.

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