A Better Way to Play Pharma

This column was originally published on RealMoney on Nov. 8 at 8:07 a.m. EST. It's being republished as a bonus for TheStreet.com readers.

Over the past few weeks, I have heard a couple of different analysts refer to big domestic pharma stocks as bonds, and that got me to thinking. The idea of a drug stock as a proxy for a bond doesn't hold up very long, but perhaps the higher-yielding drug stocks could be a proxy for Treasury inflation-protected securities, or TIPS. But how do these match up against pharma ETFs as a way to play the sector? Let's take a look.

I maintain very little exposure to big American pharma -- clients own Johnson & Johnson(JNJ Quote), but that's it. And I invest in overseas drug companies in the context of foreign diversification.

The problem I see with American drug companies is that they have poor prospects for double-digit revenue growth. Pfizer(PFE Quote) has about $52 billion in revenue. Consensus for 2006 is no revenue growth. Will it be able to find $5 billion in new revenue for 2007? If it does, will it then be able to find $6 billion in 2008? I don't see how it can. If it can't, it's reasonable to believe the stock will idle, assuming no death-blow news to one of its drugs. ...