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The Drug Stock Paradox

Drug stocks: what's up? Drug stocks have had a miserable month; the NYSE Arca Pharmaceutical Index down nearly 6 percent, far underperforming the fractional gain in the S&P 500. What gives? Aren't drug stocks supposed to be defensive names?

It's not a coincidence that the decline has corresponded to the troubles in Europe. First, many of the drug companies are European: Novartis (Switzerland), Sanofi (France), and AstraZeneca , all based in the U.K.

Not surprisingly, these Europe-based companies are for the most part down more than U.S.-based companies like Lilly or Pfizer .

Second, there is a real risk that there will be significant spending cuts in European health care spending as part of deficit-reduction measures. Remember, much of Europe's health care system is controlled by state governments. Many analysts and traders believe that pharmaceuticals are the easiest target. Why not promote generics over a cut in admissions to hospitals or reduce reimbursements for elective surgery?

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