Since the peak of the biotech index in late July, the industry has dropped a staggering 24% through the end of the third quarter, versus the 10% drop in the S&P 500. There are numerous reasons why, not the least of which is populist political rhetoric calling for lower drug prices and more industry regulation. These things sound good to the masses but don’t take into account the huge research and development costs for drugs.

A new research piece from Merrill Lynch notes that when meeting with investors recently they seem concerned about headline risks for the duration of the election cycle as politicians know that the rhetoric resonates with voters. They say, given that scenario, to stay with large cap stocks with predictable growth and solid pipelines and catalyst potential.

The Merrill Lynch analysts have six stocks that fit the bill, and we focus on four that may have the biggest upside potential.

Alexion Pharmaceuticals

Rumors have flown for some time that this company may be a potential acquisition target, and 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 that reportedly affects an estimated 13,600 people in the United States.

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While Soliris sales beat consensus estimates when Alexion reported second-quarter earnings, and 2015 revenue guidance was increased, it was below what some on Wall Street expected. Many analysts have pointed out that Alexion is no longer in what some term a “clinical data vacuum,” with plenty of late and intermediate stage clinical pipeline readouts in the next 12 to 18 months.

Merrill Lynch notes that researchers will present new data on the long-term efficacy and tolerability of Strensiq (asfotase alfa) in children with hypophosphatasia at the 2015 American Society for Bone and Mineral Research annual meeting being held in October.

The Merrill Lynch price target for the stock is $227. The Thomson/ First Call consensus price target is $225.33. The stock closed on Tuesday at $130.

BioMarin Pharmaceuticals

This is one of Wall Street’s favorites, and recently announced earnings were outstanding. BioMarin Pharmaceuticals Inc. (NASDAQ: BMRN) develops and commercializes innovative biopharmaceuticals for serious diseases and medical conditions. Its product portfolio comprises five approved products and multiple clinical and preclinical product candidates.

Over the past decade, BioMarin has become a top orphan drug company, and it looks poised to stay there. It is expected to post around $875 million in revenue this year and possibly $1.1 billion next year, following the approval of Vimizim, an enzyme replacement therapy for Morquio syndrome. BioMarin had raised its guidance for Vimizim to $200 million to $220 million from $170 million to $200 million.

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The company could have big readouts this year and expects continued solid performance from BioMarin’s marketed products. Many analysts eagerly await the drisapersen FDA Advisory Committee review later this year, with a decision expected on December 27. Most are handicapping about a 60% chance for approval. The company also received a favorable ruling from the patent trial and appeals board in the method of use patent application for drisapersen. This may block competition or force royalty payments.

The Merrill Lynch price target is $165. The consensus target is $160.65. Shares closed on Tuesday at $103.24.
Celgene

This large cap stock has solid upside potential for 2015 and next year, especially after the beating the biotechs have taken recently. Celgene Corp. (NASDAQ: CELG) has an outstanding partnered pipeline, which analysts think is low risk and has the potential to yield several blockbuster drugs . Some on Wall Street think that Celgene can grow earnings 15% on a compounded annual growth rate basis.

Celgene provided strong guidance earlier this year for its Otezla launch and encouraging feedback from doctors on the potential of new triplet regimens in myeloma. Analysts across Wall Street are raising their estimates for the drug as, after a little more than a year on the market, Otezla, which treats psoriasis and psoriatic arthritis, has achieved considerable popularity among physicians.

Celgene’s blockbuster blood cancer drug Revlimid continues to dominate. Pomalyst sales grew nearly 46% year over year last quarter. Cancer drug Abraxane also is growing at a respectable rate, so the company continues to have a strong lineup of top-selling drugs. While second-quarter numbers were solid, the third quarter and the rest of the year could prove to be better.

The $155 Merrill Lynch price target is well above the consensus target of $148.88. Shares closed on Tuesday at $112.19.

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Incyte

This company also is often rumored to be in the sights of a larger biotech company. Incyte Corp. (NASDAQ: INCY) has a current validated approach in hematology-oncology, and there’s reason to believe the three wholly owned clinical-stage assets the company has could drive several billion in revenue, something important for a company looking to acquire assets. Many on Wall Street are bullish on the company’s rich pipeline of small molecule therapies in all stages of development and see it as a key player in the cancer space.

Wall Street is very positive on the potential for Jakafi, a first-in-class JAK1/JAK2 inhibitor approved by the FDA for treatment of people with polycythemia vera who have had an inadequate response to or are intolerant of hydroxyurea. Jakafi is also indicated for treatment of people with intermediate or high-risk myelofibrosis (MF), including primary MF, post–polycythemia vera MF and post–essential thrombocythemia MF.

Wall Street is also very optimistic about Jakafi’s potential in solid tumors. They estimate a 70% likelihood of success in pancreatic cancer and still meaningful opportunity (30% to 40%) in other solid tumor settings, with potential for out-year U.S. sales to be boosted a whopping 50% or more. Pivotal data from the JANUS studies are expected in 2016.

The Merrill Lynch price target is $145, and the consensus target is $126.25. The shares closed most recently at $112.46.

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Biotech investing is for aggressive accounts. But these four top large cap names are very good bets for investors looking to add high-quality companies with less volatility and binary clinical data risk.

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