Shares of biotech stocks have been volatile this year, but the sector is still outperforming the broader markets.

The Nasdaq Biotechnology Index is up 8.6% this year, while the S&P 500 is barely in positive territory, up 0.26%.

"That said, we maintain that selectivity is still extremely important in the sector," JPMorgan analysts wrote in a note on Tuesday.

The analysts highlighted favored biotech stocks in five key "buckets" coming out of third-quarter earnings season.

Of the five biotech stocks JPMorgan favors, which should you buy? We've added ratings from TheStreet Ratings, TheStreet's proprietary ratings tool, for another perspective.

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.

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1. Neurocrine Biosciences Inc. (NBIX - Get Report)
Bucket: Long term
Market Cap: $4.7 billion
Year-to-date Return: 143%

Neurocrine Biosciences, Inc. discovers and develops pharmaceuticals for the treatment of neurological and endocrine-related diseases and disorders in the United States.

12-Month Revenue Growth: 1,254.96%
12-Month Net Income Growth: -28.73%
12-Month EPS Growth: 11.76%

JPMorgan Rating/Price Target: Overweight/$70 December 2016
JPMorgan Said: In our view, long term, there are compelling commercial levers for both 98854 and Elagolix that are not completely appreciated. For Elagolix, we are frequently told that our estimates for endometriosis and uterine fibroids are conservative, and we do not deny there are upside levers in the model (we estimate ~$1B for each indication). That said, we have taken a conservative approach to our model, and we wait for label language/launch dynamics before materially adjusting our estimates (we would add that Elagolix is not the key value driver NBIX shares, given the partnership with AbbVie). Related to wholly owned 98854, which is the key valuation driver for NBIX shares, in our view, we believe the drug is well positioned competitively in what is likely to be a multi-billion dollar market. One aspect that we believe is underappreciated, based on our prior payer work, is that the tardive dyskinesia market could be very price sensitive. Given 98854 is likely to be offered at lower pricing than Teva's SD-809, we believe this could be a competitive advantage for the agent.

TheStreet Said: TheStreet Ratings team rates NEUROCRINE BIOSCIENCES INC as a Hold with a ratings score of C-. TheStreet Ratings Team has this to say about their recommendation:

We rate NEUROCRINE BIOSCIENCES INC (NBIX) 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 largely solid financial position with reasonable debt levels by most measures, solid stock price performance and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including feeble growth in the company's earnings per share, deteriorating net income and poor profit margins.

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

  • Compared to its closing price of one year ago, NBIX's share price has jumped by 174.10%, exceeding the performance of the broader market during that same time frame. Regarding the stock's future course, our hold rating indicates that we do not recommend additional investment in this stock despite its gains in the past year.
  • NBIX has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign.
  • NEUROCRINE BIOSCIENCES INC 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. Earnings per share have declined over the last two years. We anticipate that this should continue in the coming year. During the past fiscal year, NEUROCRINE BIOSCIENCES INC reported poor results of -$0.82 versus -$0.69 in the prior year. For the next year, the market is expecting a contraction of 6.1% in earnings (-$0.87 versus -$0.82).
  • 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 Biotechnology industry. The net income has significantly decreased by 79.3% when compared to the same quarter one year ago, falling from -$13.38 million to -$23.99 million.
  • You can view the full analysis from the report here: NBIX

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2. Dynavax Technologies Corp. (DVAX - Get Report)
Bucket: Binary event
Market Cap: $920 million
Year-to-date Return: 42%

Dynavax Technologies Corporation, a clinical-stage biopharmaceutical company, discovers and develops novel vaccines and therapeutics in the United States. It development programs focus on the areas of vaccine adjuvants, cancer immunotherapy, and autoimmune and inflammatory diseases.

12-Month Revenue Growth: -51.38%
12-Month Net Income Growth: -25.43%
12-Month EPS Growth: -1.17%

JPMorgan Rating/Price Target: Overweight/$35 December 2016
JPMorgan Said: Based on comments during our Fall Conference Call Series, top-line data are likely to focus on co-primary endpoints of overall safety and seroprotection rates in diabetic patients relative to Engerix B. On the safety side, we believe the three prior DSMB reviews are de-risking and note that in the prior phase 3 trial, the incidence of AEs, SAEs, and autoimmune events/rare serious autoimmune events were actually lower on a percentage basis for Heplisav than for Engerix. Related to efficacy, Dynavax is expecting similar seroprotection rates in diabetics to the broader population (~90%) and for Engerix B to also behave similarly to prior studies (~70% or potentially slightly lower). We note that Heplisav has shown impressive seroprotection rates in key subgroups, some of which are difficult to treat (age, gender, BMI, smoking status). While we have questions on the commercial market for Heplisav and the pace of penetration into the diabetic market, we like DVAX shares ahead of the HBV-23 binary event.

TheStreet Said: TheStreet Ratings team rates DYNAVAX TECHNOLOGIES CORP as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:

We rate DYNAVAX TECHNOLOGIES CORP (DVAX) a SELL. This is driven by several weaknesses, 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. Among the areas we feel are negative, one of the most important has been generally deteriorating net income.

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 Biotechnology industry average, but is greater than that of the S&P 500. The net income has decreased by 1.0% when compared to the same quarter one year ago, dropping from -$29.82 million to -$30.12 million.
  • 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 Biotechnology industry and the overall market, DYNAVAX TECHNOLOGIES CORP's return on equity significantly trails that of both the industry average and the S&P 500.
  • The revenue fell significantly faster than the industry average of 13.4%. Since the same quarter one year prior, revenues fell by 46.2%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
  • DYNAVAX TECHNOLOGIES CORP has improved earnings per share by 25.4% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. However, we anticipate underperformance relative to this pattern in the coming year. During the past fiscal year, DYNAVAX TECHNOLOGIES CORP continued to lose money by earning -$3.35 versus -$3.80 in the prior year. This year, the market expects earnings to be in line with last year (-$3.35 versus -$3.35).
  • This stock has increased by 53.80% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the future course of this stock, we feel that the risks involved in investing in DVAX do not compensate for any future upside potential, despite the fact that it has seen nice gains over the past 12 months.
  • You can view the full analysis from the report here: DVAX

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3. Merrimack Pharmaceuticals (MACK)
Bucket: Near-term downside risk
Market Cap: $1 billion
Year-to-date Return: -22.8%

Merrimack Pharmaceuticals, Inc., a biopharmaceutical company, engages in discovering, developing, and preparing to commercialize medicines paired with companion diagnostics for the treatment of cancer primarily in the United States.

12-Month Revenue Growth: 32.69%
12-Month Net Income Growth: -2.97%
12-Month EPS Growth: 3.85%

JPMorgan Rating/Price Target: Overweight/$14 December 2016
JPMorgan Said: We are encouraged by the physician feedback related to Onivyde in post-gem pancreatic cancer and believe the pipeline has interesting assets, which is the basis of our Overweight rating. That said, we see important risks heading into YE15/early 2016 and thus are cautious on MACK shares in the near term.

TheStreet Said: TheStreet Ratings team rates MERRIMACK PHARMACEUTICALS as a Sell with a ratings score of D-. TheStreet Ratings Team has this to say about their recommendation:

We rate MERRIMACK PHARMACEUTICALS (MACK) a SELL. This is driven by multiple weaknesses, 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 and feeble growth in its earnings per share.

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 when compared to that of the S&P 500 and the Biotechnology industry. The net income has significantly decreased by 52.7% when compared to the same quarter one year ago, falling from -$27.90 million to -$42.59 million.
  • MERRIMACK PHARMACEUTICALS's earnings per share declined by 40.7% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, MERRIMACK PHARMACEUTICALS continued to lose money by earning -$0.80 versus -$1.32 in the prior year. For the next year, the market is expecting a contraction of 31.3% in earnings (-$1.05 versus -$0.80).
  • The revenue fell significantly faster than the industry average of 13.4%. Since the same quarter one year prior, revenues fell by 41.3%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • After a year of stock price fluctuations, the net result is that MACK's price has not changed very much. Although its weak earnings growth may have played a role in this flat result, don't lose sight of the fact that the performance of the overall market, as measured by the S&P 500 Index, was essentially similar. Turning our attention to the future direction of the stock, we do not believe this stock offers ample reward opportunity to compensate for the risks, despite the fact that it rose over the past year.
  • You can view the full analysis from the report here: MACK

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4. Amicus Therapeutics Inc. (FOLD - Get Report)
Bucket: Pullbacks
Market Cap: $1.2 billion
Year-to-date Return: 14%

Amicus Therapeutics, Inc., a biopharmaceutical company, develops and commercializes therapeutic products for rare and orphan diseases.

12-Month Revenue Growth: n/a
12-Month Net Income Growth: n/a
12-Month EPS Growth: n/a

JPMorgan Rating/Price Target: Overweight/$18 December 2016
JPMorgan Said: Indeed, the pullback on the US migalastat update was overdone, in our view, given the value of the US migalastat component alone. We understand there are still some questions related to management credibility; however, we have been encouraged that Amicus has been active with investors over the past six weeks. While Amicus shares have rallied, we like the setup going into 2016 from this ~$10/share level given 1) the EU migalastat path is straightforward and 2) we believe the totality of the data for migalastat will result in a regulatory path forward in the US, without the need for additional clinical trial work. Furthermore, we believe that the Pompe program and the Zorblisa program are largely excluded from current levels, both of which we have a positive bias on.

TheStreet Said: no rating available

 

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5. Idera Pharmaceuticals Inc. (IDRA - Get Report)
Bucket: Undervalued/Unfollowed
Market Cap: $329 million
Year-to-date Return: -25.6%

Idera Pharmaceuticals, Inc., a clinical-stage biopharmaceutical company, focuses on the discovery, development, and commercialization of novel therapeutics for oncology and rare diseases in the United States.

12-Month Revenue Growth: -18.67%
12-Month Net Income Growth: -47.75%
12-Month EPS Growth: -9.3%

JPMorgan Rating/Price Target: Overweight/$6 December 2016
JPMorgan Said: Idera is underfollowed, in our view, with only about three analysts covering the company (source: Bloomberg). Key data from the IMO-8400 phase 1/2 trial in R/R Waldenstrom's macroglobulinemia will be presented at ASH next month and is likely to be a significant catalyst for IDRA shares, in our view.

TheStreet Said: TheStreet Ratings team rates IDERA PHARMACEUTICALS INC as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:

We rate IDERA PHARMACEUTICALS INC (IDRA) a SELL. This is driven by a few notable weaknesses, 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 and weak operating cash flow.

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 underperformed when compared to that of the S&P 500 and greatly underperformed compared to the Biotechnology industry average. The net income has decreased by 20.2% when compared to the same quarter one year ago, dropping from -$9.46 million to -$11.37 million.
  • Net operating cash flow has decreased to -$11.76 million or 46.04% 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.
  • 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 Biotechnology industry and the overall market, IDERA PHARMACEUTICALS INC's return on equity significantly trails that of both the industry average and the S&P 500.
  • The revenue fell significantly faster than the industry average of 13.4%. Since the same quarter one year prior, revenues fell by 33.3%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
  • IDRA's debt-to-equity ratio is very low at 0.01 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with this, the company maintains a quick ratio of 11.57, which clearly demonstrates the ability to cover short-term cash needs.
  • You can view the full analysis from the report here: IDRA

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