NEW YORK (TheStreet) -- The pharmaceutical business can be risky. Drugs in development might not work; the Food and Drug Administration may not approve them; and even if it's approved, it could do poorly in the marketplace.

Yet, pharmaceutical companies are protected by patents, and those patents allow them to recoup their research and development investments and then some should they produce a winner. The industry is also frothy with mergers and acquisitions, which can be profitable for investors. Pharmaceutical company deals are motivated by the desire to beef up the new drug pipeline and streamline heavy research costs.

If a company creates a blockbuster drug or gets acquired, the rewards can be huge for investors.

So what are the best large-cap pharmaceutical companies investors should buy? Here are the top three, according to TheStreet Ratings, TheStreet's proprietary ratings tool.

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.

Check out which three large-cap pharmaceutical companies made the list. And when you're done be sure to read about which telecom stocks to buy now. Year-to-date returns are based on April 21, 2015 closing prices. The highest-rated stock appears last -- read more to see which one is No. 1.

NVO ChartNVO data by YCharts
3. Novo Nordisk A/S (NVO - Get Report)

Rating: Buy, A
Market Cap: $147 billion
Year-to-date return: 33.6%

Novo Nordisk A/S, a healthcare company, engages in the discovery, development, manufacture, and marketing of pharmaceutical products worldwide. It operates in two segments, Diabetes Care and Biopharmaceuticals.

"We rate NOVO NORDISK A/S (NVO) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its notable return on equity, expanding profit margins, solid stock price performance and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

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

  • Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. Compared to other companies in the Pharmaceuticals industry and the overall market, NOVO NORDISK A/S's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • The gross profit margin for NOVO NORDISK A/S is currently very high, coming in at 83.76%. Regardless of NVO's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, NVO's net profit margin of 25.97% significantly outperformed against the industry.
  • Looking at where the stock is today compared to one year ago, we find that it is not only higher, but it has also clearly outperformed the rise in the S&P 500 over the same period, despite the company's weak earnings results. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • NVO's debt-to-equity ratio is very low at 0.02 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Although the company had a strong debt-to-equity ratio, its quick ratio of 0.99 is somewhat weak and could be cause for future problems.
  • NVO, with its decline in revenue, slightly underperformed the industry average of 10.8%. Since the same quarter one year prior, revenues fell by 16.1%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.
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RDY ChartRDY data by YCharts
2. Dr. Reddy's Laboratories Ltd. (RDY - Get Report)

Rating: Buy, A+
Market Cap: $9.6 billion
Year-to-date return: 11.5%

Dr. Reddy's Laboratories Limited operates as an integrated pharmaceutical company in India. It operates in three segments: Global Generics, Pharmaceutical Services and Active Ingredients (PSAI), and Proprietary Products.

"We rate DR REDDY'S LABORATORIES LTD (RDY) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. 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, solid stock price performance, reasonable valuation levels and expanding profit margins. We feel these strengths outweigh the fact that the company shows 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 10.8%. Since the same quarter one year prior, revenues slightly increased by 1.4%. 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.
  • The current debt-to-equity ratio, 0.38, is low and is below the industry average, implying that there has been successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.18, which illustrates the ability to avoid short-term cash problems.
  • Compared to its closing price of one year ago, RDY's share price has jumped by 40.30%, exceeding the performance of the broader market during that same time frame. Regarding the stock's future course, although almost any stock can fall in a broad market decline, RDY should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • DR REDDY'S LABORATORIES LTD's earnings per share declined by 15.0% 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, DR REDDY'S LABORATORIES LTD increased its bottom line by earning $2.10 versus $1.79 in the prior year. This year, the market expects an improvement in earnings ($2.14 versus $2.10).
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SHPG ChartSHPG data by YCharts
1. Shire PLC (SHPG)

Rating: Buy, A+
Market Cap: $48.9 billion
Year-to-date return: 17.5%

Shire plc, a biopharmaceutical company, together with its subsidiaries, researches, develops, licenses, manufactures, markets, distributes, and sells pharmaceutical products.

"We rate SHIRE PLC (SHPG) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, solid stock price performance and compelling growth in net income. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."

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

  • The revenue growth came in higher than the industry average of 10.8%. Since the same quarter one year prior, revenues rose by 18.9%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • SHPG's debt-to-equity ratio is very low at 0.10 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.39, which illustrates the ability to avoid short-term cash problems.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Pharmaceuticals industry and the overall market, SHIRE PLC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • Powered by its strong earnings growth of 260.00% and other important driving factors, this stock has surged by 66.33% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, although almost any stock can fall in a broad market decline, SHPG should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Pharmaceuticals industry. The net income increased by 3294.2% when compared to the same quarter one year prior, rising from $64.00 million to $2,172.30 million.
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