NEW YORK (TheStreet) -- Which big pharmaceutical stocks should investors stay away from in 2015?

A bit of background for novice investors: U.S. pharmaceutical companies create, manufacture, distribute and research generic and branded drugs. The industry accounts for slightly over a quarter of the entire healthcare sector, TheStreet Ratings says.

The NYSE Arca Pharmaceutical Index is up 2.4% compared to the NYSE Composite Index which is essentially flat so far this year.

The pharmaceutical industry faces "unprecedented challenges from stringent environmental regulations and patent expirations on billion-dollar products," according to TheStreet Ratings. "Industry experts believe that generic competition will wipe out more than $60 billion from U.S. industry sales over the next five years as more than three dozen drugs lose patent protection. ... The FDA is rejecting more drugs on safety concerns and a lack of compelling evidence of definite advancement from existing drugs."

 

That said, personalized medicine has begun to make an impact on the industry with dozens of "exciting new drugs for the treatment of dire diseases such as cancer, AIDS, Parkinson's, and Alzheimer's are either on the market or are very close to regulatory approval," TheStreet Ratings says. "The industry has shifted its focus from blockbuster drugs (chemistry-based drugs) to specialized products, geared towards specific disorders."

So how to separate the winning pharma stocks from the losers? Using TheStreet Ratings, TheStreet's proprietary stock rating tool, we found the worst-rated large-cap pharmaceuticals.

TheStreet Ratings projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.

Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.

The six large-cap pharma stocks on the list all have "hold" ratings, with a C+ or worse grade from TheStreet Ratings. Click through to see which pharmaceutical stocks made the list.

Note: Year-to-date returns are based off of Friday's closing price.

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6. AstraZeneca (AZN - Get Report)
Rating: Hold, C+

2014 Return: 18.7%
YTD Return: -4.24%

AstraZeneca PLC is engaged in the discovery, development, and commercialization of medicines for cardiovascular and metabolic disease; oncology; respiratory, inflammation, and autoimmunity; and infection, neuroscience, and gastrointestinal disease areas worldwide.

"We rate ASTRAZENECA PLC (AZN) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures and increase in net income. However, as a counter to these strengths, we also find weaknesses including disappointing return on equity and weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 15.1%. Since the same quarter one year prior, revenues slightly increased by 0.2%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The current debt-to-equity ratio, 0.55, is low and is below the industry average, implying that there has been successful management of debt levels.
  • ASTRAZENECA PLC has improved earnings per share by 40.5% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, ASTRAZENECA PLC reported lower earnings of $0.98 versus $2.04 in the prior year. This year, the market expects an improvement in earnings ($4.20 versus $0.98).
  • Net operating cash flow has decreased to $1,842.00 million or 25.66% when compared to the same quarter last year. Despite a decrease in cash flow ASTRAZENECA PLC is still fairing well by exceeding its industry average cash flow growth rate of -55.25%.
  • The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. When compared to other companies in the Pharmaceuticals industry and the overall market, ASTRAZENECA PLC's return on equity is below that of both the industry average and the S&P 500.

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5. Jazz Pharmaceuticals (JAZZ - Get Report)
Rating: Hold, C+

2014 Return: 32.8%
YTD Return: 5.3%

Jazz Pharmaceuticals Public Limited Company, a specialty biopharmaceutical company, identifies, develops, and commercializes pharmaceutical products for various medical needs in the United States, Europe, and internationally.

"We rate JAZZ PHARMACEUTICALS PLC (JAZZ) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, expanding profit margins and increase in stock price during the past year. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth greatly exceeded the industry average of 15.1%. Since the same quarter one year prior, revenues rose by 32.0%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • The gross profit margin for JAZZ PHARMACEUTICALS PLC is currently very high, coming in at 91.25%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 8.40% trails the industry average.
  • Compared to where it was a year ago today, the stock is now trading at a higher level, regardless of the company's weak earnings results. We feel that the combination of its price rise over the last year and its current price-to-earnings ratio relative to its industry tend to reduce its upside potential.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Pharmaceuticals industry and the overall market on the basis of return on equity, JAZZ PHARMACEUTICALS PLC underperformed against that of the industry average and is significantly less than that of the S&P 500.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Pharmaceuticals industry. The net income has significantly decreased by 65.8% when compared to the same quarter one year ago, falling from $75.41 million to $25.77 million.

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4. Endo International (ENDP - Get Report)
Rating: Hold, C

2014 Return: -6.1% (as of March 4, 2014)
YTD Return: 9.4%

Endo International plc, a specialty healthcare company, develops, manufactures, markets, and distributes branded pharmaceutical and generic products, and medical devices worldwide

"We rate ENDO INTERNATIONAL PLC (ENDP) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations and increase in stock price during the past year. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, generally higher debt management risk and disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth greatly exceeded the industry average of 15.1%. Since the same quarter one year prior, revenues rose by 15.5%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Net operating cash flow has significantly increased by 83.24% to $284.84 million when compared to the same quarter last year. In addition, ENDO INTERNATIONAL PLC has also vastly surpassed the industry average cash flow growth rate of -55.25%.
  • Compared to where it was a year ago today, the stock is now trading at a higher level, regardless of the company's weak earnings results. Despite the fact that it has already risen in the past year, there is currently no conclusive evidence that warrants the purchase or sale of this stock.
  • Currently the debt-to-equity ratio of 1.76 is quite high overall and when compared to the industry average, suggesting that the current management of debt levels should be re-evaluated. Along with the unfavorable debt-to-equity ratio, ENDP maintains a poor quick ratio of 0.89, which illustrates the inability to avoid short-term cash problems.
  • Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company. Compared to other companies in the Pharmaceuticals industry and the overall market, ENDO INTERNATIONAL PLC's return on equity significantly trails that of both the industry average and the S&P 500.
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3. GlaxoSmithKline (GSK - Get Report)
Rating: Hold, C

2014 Return: -19.3%
YTD Return: 7.5% ($46)

GlaxoSmithKline plc creates, discovers, develops, manufactures, and markets pharmaceutical products, such as vaccines, over-the-counter medicines, and health-related consumer products worldwide.

"We rate GLAXOSMITHKLINE PLC (GSK) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its expanding profit margins and notable return on equity. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, generally higher debt management risk and weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The gross profit margin for GLAXOSMITHKLINE PLC is rather high; currently it is at 66.89%. Regardless of GSK's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, GSK's net profit margin of 18.43% compares favorably to the industry average.
  • GSK, with its decline in revenue, underperformed when compared the industry average of 15.1%. Since the same quarter one year prior, revenues fell by 43.7%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Pharmaceuticals industry and the overall market, GLAXOSMITHKLINE PLC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Pharmaceuticals industry. The net income has significantly decreased by 64.3% when compared to the same quarter one year ago, falling from $4,196.37 million to $1,498.59 million.
  • The debt-to-equity ratio is very high at 4.41 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company.


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2. Mallinckrodt (MNK - Get Report)
Rating: Hold, C

2014 Return: 92.7%
YTD Return: 11.6%

Mallinckrodt public limited company develops, manufactures, markets, and distributes specialty pharmaceutical products and medical imaging agents worldwide. The company operates through two segments, Specialty Pharmaceuticals and Global Medical Imaging.

"We rate MALLINCKRODT PLC (MNK) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance and increase in net income. However, as a counter to these strengths, we find that the growth in the company's earnings per share has not been good."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • MNK's very impressive revenue growth greatly exceeded the industry average of 15.1%. Since the same quarter one year prior, revenues leaped by 60.4%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Compared to its closing price of one year ago, MNK's share price has jumped by 91.27%, exceeding the performance of the broader market during that same time frame. Although MNK had significant growth over the past year, our hold rating indicates that we do not recommend additional investment in this stock at the current time.
  • MNK's debt-to-equity ratio of 0.78 is somewhat low overall, but it is high when compared to the industry average, implying that the management of the debt levels should be evaluated further. Despite the fact that MNK's debt-to-equity ratio is mixed in its results, the company's quick ratio of 1.84 is high and demonstrates strong liquidity.
  • Compared to other companies in the Pharmaceuticals industry and the overall market, MALLINCKRODT PLC's return on equity significantly trails that of both the industry average and the S&P 500.
  • MALLINCKRODT PLC' earnings per share from the most recent quarter came in slightly below the year earlier quarter. The company has reported a trend of declining earnings per share over the past year. However, the consensus estimate suggests that this trend should reverse in the coming year. During the past fiscal year, MALLINCKRODT PLC swung to a loss, reporting -$3.57 versus $0.06 in the prior year. This year, the market expects an improvement in earnings ($7.04 versus -$3.57).

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1. Salix Pharmaceuticals (SLXP)
Rating: Hold, C

2014 Return: 28.5%
YTD Return: 21.3%

Salix Pharmaceuticals, Ltd. acquires, develops, and commercializes prescription drugs and medical devices to treat various gastrointestinal diseases in the United States.

"We rate SALIX PHARMACEUTICALS LTD (SLXP) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, generally higher debt management risk and disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth greatly exceeded the industry average of 15.1%. Since the same quarter one year prior, revenues rose by 48.9%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Compared to its closing price of one year ago, SLXP's share price has jumped by 46.43%, exceeding the performance of the broader market during that same time frame. Although SLXP had significant growth over the past year, our hold rating indicates that we do not recommend additional investment in this stock at the current time.
  • SALIX PHARMACEUTICALS LTD has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, SALIX PHARMACEUTICALS LTD increased its bottom line by earning $2.14 versus $1.01 in the prior year. This year, the market expects an improvement in earnings ($3.94 versus $2.14).
  • The debt-to-equity ratio is very high at 5.57 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. To add to this, SLXP has a quick ratio of 0.59, this demonstrates the lack of ability of the company to cover short-term liquidity needs.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Pharmaceuticals industry and the overall market, SALIX PHARMACEUTICALS LTD's return on equity significantly trails that of both the industry average and the S&P 500.