Despite the market volatility, the biotech sector continues to outperform the broad market, and with the second-quarter earnings reports out of the way, analysts across Wall Street have had a chance to review the results and make some calls for going forward. In a new research report, JPMorgan highlights its favorite biotech stocks to buy after the second-quarter earnings print. The report divided the stocks into five different “buckets” and we screened the stocks for those with the best upside potential. Three top candidates popped up.

Alexion Pharmaceuticals

The rumors have flown for some time that this stock might be a potential acquisition target, but in the spring it was the big buyer. Alexion Pharmaceuticals Inc. (NASDAQ: ALXN) bought Synageva Biopharma for a whopping $8.4 billion in cash and stock. That move added products and pipeline to compliment Soliris, the company’s only marketed product. Soliris is prescribed for the treatment of patients with myasthenia gravis, a rare neurological disorder, which reportedly affects an estimated 13,600 people in the United States.

While Soliris sales beat consensus estimates when the company reported earnings, and 2015 revenue guidance was increased, it was below what some on Wall Street expected. The JPMorgan analysts feel it may be conservative, and they think the company could post better sales than expected and are higher on guidance for 2015. They rate the stock as a core biotech holding.

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The analysts also point out that Alexion is no longer in what they term a “clinical data vacuum,” with plenty of late and intermediate stage clinical pipeline readouts in the next 12 to 18 months.

The JPMorgan price target for the stock is $249. The Thomson/First Call consensus price target is $225.61. The stock closed on Wednesday at $191.01.
PTC Therapeutics

This company falls into the J.P. Morgan binary event bucket. PTC Therapeutics Inc. (NASDAQ: PTCT) is a global biopharmaceutical company focused on the discovery, development and commercialization of orally administered, proprietary small molecule drugs targeting an area of RNA biology referred to as post-transcriptional control. Post-transcriptional control processes are the regulatory events that occur in cells during and after a messenger RNA is copied from DNA through the transcription process. PTC’s internally discovered pipeline addresses multiple therapeutic areas, including rare disorders, oncology and infectious diseases.

The JPMorgan team recently upgraded the stock as they feel that, based on physician feedback and increased confidence in the Phase 3 ACT DMD study for Translarna in Duchenne muscular dystrophy, which they believe may be released in October, the stock holds a positive risk-reward profile into the clinical data release.

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The JPMorgan price target of $100 is a bit less than the $101.11 consensus target. Considering the shares closed most recently at $39.01, this could be a moon-shot if the team is correct.

Merrimack Pharmaceuticals

This stock makes the list in the pullback bucket, as it has come down almost 30% from the highs printed in late April. Merrimack Pharmaceuticals Inc. (NASDAQ: MACK) is a biopharmaceutical company discovering, developing and preparing to commercialize innovative medicines paired with companion diagnostics for the treatment of cancer. Merrimack seeks to gain a deeper understanding of underlying cancer biology through its systems biology-based approach and develop new insights, therapeutics and diagnostics to improve outcomes for cancer patients. Merrimack has multiple oncology therapeutics in clinical development and additional candidates in late stage preclinical development.

Merrimack has a New Drug Application under review for its top drug MM-398, which was shown to treat pancreatic cancer in Phase 3 trials. Fully one-quarter of patients using the drug have survived, which is a high percentage when you consider that late-stage pancreatic cancer is almost always quickly lethal. JPMorgan likes the chances for approval and anticipates a strong product launch.

The JPMorgan price target is posted at $15, and the consensus target is $15.17. Shares closed Wednesday at $10.50.

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While these stocks are only appropriate for very aggressive and risk-tolerant accounts, the JPMorgan team has done an outstanding job of looking for high-probability success, and in biotech investing, that is the most crucial component for investors.

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