NEW YORK (TheStreet) -- Pharmaceutical companies face increased risks if they do not have enough new drugs in the pipeline to replace those with expiring patents, or if tests on new drugs under development are negative, or new drugs are not approved by the Food and Drug Administration. Pharmaceutical companies address those risks by increased research and development, extending patents by tweaking the drug formulas, and by merging with other companies.

It doesn't always work, and the pharmaceutical industry has many more failures than successes. 

So, what are the worst pharmaceutical companies investors should be selling? 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 volatile aerospace and defense stocks to buy now. Year-to-date returns are based on June 24, 2015, closing prices. The highest-rated stock appears last.

OMER ChartOMER data by YCharts
3. Omeros Corporation (OMER)

Rating: Sell, D-
Market Cap: $820 million
Year-to-date return: -12.5%

Omeros Corporation, a biopharmaceutical company, discovers, develops, and commercializes small-molecule and protein therapeutics, and orphan indications targeting inflammation, coagulopathies, and disorders of the central nervous system.

"We rate OMEROS CORP (OMER) a SELL. This is driven by some concerns, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, weak operating cash flow and generally high debt management risk."

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

  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed compared to the Pharmaceuticals industry average, but is greater than that of the S&P 500. The net income has decreased by 12.2% when compared to the same quarter one year ago, dropping from -$16.64 million to -$18.67 million.
  • Net operating cash flow has significantly decreased to -$17.48 million or 56.89% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
  • Currently the debt-to-equity ratio of 1.51 is quite high overall and when compared to the industry average, suggesting that the current management of debt levels should be re-evaluated. Despite the company's weak debt-to-equity ratio, the company has managed to keep a very strong quick ratio of 3.52, which shows the ability to cover short-term cash needs.
  • 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, OMEROS CORP's return on equity significantly trails that of both the industry average and the S&P 500.
  • OMEROS CORP has improved earnings per share by 5.5% 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, OMEROS CORP reported poor results of -$2.22 versus -$1.39 in the prior year. This year, the market expects an improvement in earnings (-$1.50 versus -$2.22).

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