A Safer Way to Play the Drug Sector

Even though big pharmaceutical companies are stumbling and biotechs are staggering, smart investors have been making money in the sector by thinking a bit differently -- specifically, by betting on companies that conduct tests for drugmakers.

Large drug companies are furiously cutting costs, while biotech start-ups often lack the financial cushion to conduct a full set of their own trials for experimental products. That leaves a growing niche for contract research organizations, or CROs, to which drugmakers outsource clinical and preclinical trials. As a result, many CRO stocks have soared as major drugmakers' shares have stagnated.

"Contract research organizations were flying under the radar for a long time," says Alex Morozov, who tracks CROs for the independent financial research firm Morningstar. "Two or three years ago, investors began to notice." ...