NEW YORK (TheStreet) -- Johnson & Johnson (JNJ) recently announced it will file for regulatory approval to start developing ten new drugs with big potential by 2019. The company said in a statement Wednesday that each of the new drugs can potentially bring in more than $1 billion in revenue.

The pharmaceutical industry has outperformed the market so far in 2015. The S&P Pharmaceuticals Select Industry Index grew 13.37% (tracked by the (XPH) ETF) versus 4.16% for the S&P 500, on a year-to-date comparison.

The pharmaceutical industry is having a strong year. Investors have benefited from the abundance of mergers and acquisitions in the industry this year. Pharmaceutical company deals are motivated by the desire to beef up the new drug pipeline and streamline heavy research costs.

So what are the best pharmaceutical companies investors should be buying? 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 pharmaceutical companies made the list. And when you're done, be sure to read about which biotech companies to buy now. Year-to-date returns are based on May 20, 2015, closing prices. The highest-rated stock appears last.

MRK ChartMRK data by YCharts
3. Merck & Co., Inc. (MRK)

Rating: B+

Market Cap: $170.8 billion
Year-to-date return: 6.5%

Merck & Co., Inc. provides health care solutions worldwide.

"We rate MERCK & CO (MRK) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, notable return on equity, reasonable valuation levels, expanding profit margins and increase in stock price during the past year. We feel its 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:

  • The debt-to-equity ratio is somewhat low, currently at 0.63, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.09, 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, MERCK & CO's return on equity exceeds that of both the industry average and the S&P 500.
  • The gross profit margin for MERCK & CO is currently very high, coming in at 94.01%. It has increased significantly from the same period last year. Despite the strong results of the gross profit margin, MRK's net profit margin of 10.11% significantly trails the industry average.
  • Compared to where it was 12 months ago, the stock is up, but it has so far lagged the appreciation in the S&P 500. Looking ahead, unless broad bear market conditions prevail, we still see more upside potential for this stock, despite the fact that it has already risen over the past year.

If you liked this article you might like

The 6 Medications Being Used to Tackle the Opioid Epidemic

Dow, S&P 500 Set New Records as Fed Moves to Unwind Balance Sheet

Stocks In Negative Territory as Chances for December Hike Surge

The Wait for 'Milestone' Fed Meeting Keeps Stocks in Flux