By CONRAD DE AENLLE SHARES of drug makers are usually in demand when the economic outlook is cloudy and investors are avoiding risk. The companies' stable earnings may be less appealing this time because the sector faces some new risks.
Widespread calls by political leaders to overhaul the health care system have hit the stocks, as has consternation over the feeble state of the industry leaders' pipelines - the inventory of drugs at various stages of development.
This is an especially critical issue today because manufacturers of generic drugs are more aggressive, bringing their products to market sooner. When companies do develop new drugs, regulators are far more wary of potential risks and less inclined to approve their use.
Some investment advisers say the sector is worth buying despite all the problems, or because of them. The stocks have been underrated for so long that their valuations may account for all of the bad news but very few of the positive developments.
"Most of these companies are trading at very low multiples of earnings," said Damien Conover, an analyst at Morningstar. "They only need a couple of blockbusters to move the needle on earnings and get some multiple expansion."
Some anticipated blockbusters seem to be just plain busts. The stocks of Merck and Schering-Plough sank last month, taking much of the sector with them, after a study found that their joint cholesterol treatment, Vytorin, formed by blending two other drugs, was not significantly more effective than Zocor, one of the components, which is available in generic form.
That provides a buying opportunity in Schering-Plough, according to Mr. Conover, who said the sellers of the stock have ignored several promising events, He highlighted its recent acquisition of Organon BioSciences, a European biotechnology company that should expand the parent's pipeline and research efforts.
Other selections include Novartis, a Swiss company, and Pfizer, which trades at less than 10 times estimated 2008 earnings and has a 5 percent dividend yield and $20 billion of cash.
Barry Ogden, manager of the Ivy Capital Appreciation fund, likes the other Vytorin casualty. Merck is valued at just 12 times earnings, which he said underestimates its strength in cardiovascular and diabetes treatments and ignores efforts to cut costs by measures like trimming its sales force.
His other favorites include Abbott Laboratories, which produces diagnostic and nutritional products in addition to prescription drugs, and Gilead Sciences, a global leader in H.I.V. drugs.
Some investors have shifted into midsize biotechs like Gilead that have products on sale or in advanced stages of development. These companies could remain independent or become acquisition candidates for big drug makers with more money than ideas.
Mr. Conover's biotech of choice is Biogen Idec. It has a strong portfolio of treatments for cancer and multiple sclerosis, and he thinks Pfizer could do worse than to use some of its cash stockpile to take over Biogen and "buy some growth."
ONE reason there is so much growth in biotech companies is their focus on large, complex molecules called biologics. They are hard to make, so companies can charge more for treatments based on them, and their complexity makes it more difficult to produce generic versions, Mr. Conover said.
He finds the threat from generics the biggest impediment facing the industry and its shareholders. For Mr. Ogden, the main source of low price-earnings multiples is politics, not commerce or science. Concern that a Democratic president and Congress would try to force drug makers to lower prices has depressed the sector. Whether or not it happens, Mr. Ogden said, the anxiety about it is overdone.
"Even if reimbursement rates don't change and there is no restructuring of the system, fear of it could pressure multiples further," he said, "but at these valuations, you've got to be predisposed to build positions in some of these names."
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