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Just Say Yes to Drugs ... and Drug Stocks!

Anyone out there who sees hope in the stock market must be on drugs.

And I am: Lipitor and Norvasc from Pfizer , Vasotec from Merck , and four other pills, all of which I gobble every day to stop myself from blowing a gasket. So let me say, with some personal pill-popping experience, that this may be a great time to buy drug stocks.

A handful of drug deals worth more than $150 billion combined already are underway—Pfizer’s plan to buy Wyeth , Merck’s move to acquire Schering-Plough , Roche’s new success in luring the recalcitrant Genentech into its clutches. Now other companies will have to respond, and fast. Johnson & Johnson , a partner with Schering on the drug Remicade for rheumatoid arthritis, may have to put in a counterbid of its own or hunt other prey.

The druggies have gotten pounded with the entire stock market for the past year, but they also were hurt in the new Obama era because of investors’ fears of a government takeover of health care. Merck and Novartis have plunged 43 percent in a year, Pfizer is down 32 percent and on and on. But many drug stocks were up Thursday, and for long-term investors willing to tie up their money for two years or more, some great buys may be had. Here are a few reasons why:

--Urge to Merge: Unlike other major industries, Big Pharma has remained fragmented for far too long. No major player has much more than a 5% share of the entire industry. Companies instead hold far higher shares in vertical markets: Pfizer is big in erectile dysfunction (Viagra) and cardiovascular drugs. Genentech is big in cancer drugs, Lilly in diabetes and the central nervous system. Combine ‘em!

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--Obama Boom: While the industry and investors fear government forays into health care, such moves could fuel higher sales despite pricing pressure. Now that Congress has extended Medicare payments to cover drugs for the elderly, drugmakers may have to lower their prices—but far more patients are able to buy prescriptions, so the industry gains.

--The Wrinkled Windfall: We are, alas, getting older . . . and older and older. The graying (and balding) of Baby Boomers will mean that, in a decade or so, four points of GDP in the U.S. could move into health care, “and investors don’t realize this,” as the philanthropist and Wall Street wizard Michael Milken told me a couple of years ago. That equates to an extra $520 billion in annual spending on all forms of health care; drug sales will benefit.

So let the mating dance begin. My favorite target: Bristol-Myers Squibb . It has accumulated almost $9 billion in cash, including an $800 million haul from taking public a 17 percent stake in its Mead-Johnson unit last month. That offers even more cash if the company pushes Mead out the door entirely.

Bristol could hook up with Eli Lilly, notes my pal, Robert Langreth of Forbes, who is one of the best medical writers in the country. The two companies share ownership of Erbitux, the cancer drug from Imclone that got Martha Stewart in trouble. Plus, Bristol’s chief, James Cornelius, came from Lilly. Deals happen when the people on both sides of the table like each other.

Elsewhere, Bristol also is in cahoots with Sanofi on the blood-thinner drug Plavix, so Sanofi may want to buy Bristol for total control of that franchise. Drawback: That drug loses patent protection in 2012, letting generics undercut its pricing by 90 percent.

Some years out, look for Novartis possibly to buy the combined Roche-Genentech. Novartis chief Daniel Vasela has wisely accumulated close to a one-third stake in Roche by wooing family holders.

And all the major players could shop for biotech boutiques, so watch this space as well.

A lethal caveat accompanies all this: As the bitter denizens of the blogosphere happily would tell you, I am a lousy stockpicker. My advice is worth what it costs: it is free. So I write this amidst high anxiety—my own and that of so many investors. But take a look at this drug thing yourself.

In the meantime, would someone please pass the Xanax?

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