How to Make Money from Pharma Stocks

Investors could get good returns in the health-care sector and use it to protect themselves from wild price swings in other areas if they pick the right shares, despite the fact that many big-cap health-care stocks took a battering in 2007, Luis Correia, fund manager at Clariden Leu, told "Squawk Box Europe" Monday.

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Pharmacy benefit management companies, which are third-party administrators for drug programs, are a good bet, Correia said, because they benefit from the shift to generic drugs. Clariden Leu’s best performing fund in 2007 was focused on the growing generic sub-sector.

"Investors should not just play the sector by buying a few of the large-cap pharma stocks, they might again be disappointed," Correia said.

"They really need to look deeper into the sector, looking to sub-sectors like health-care services … the same is valid for medical technology and bio-technology," he added.

Watch for New Products

Correia said a rule of thumb was to look at new product cycles to decide which stocks would yield results.

"As long as companies are able to introduce new products … they will also deliver very interesting investment performances," he said.

Correia added that the health-care sector may face a possible setback if Barack Obama becomes the next U.S. president, because the Democrats have previously been vocal about reforming the Medicaid system and bringing down product prices.

"There is a certain risk, this is another reason why we need to be careful where we invest, we need to pick stocks which are less vulnerable on pricing pressure," he said.

Beaten-down large-cap pharma stocks such as the UK’s AstraZeneca could provide opportunities, because they are at very low valuations, Correia added: "The only way these stocks can go is up and the way they would go up by a positive surprise from their research and development effort."

© 2009 CNBC.com