Ahead of the Bell: Major pharmaceutical companies

Chris Schott said big pharma is no longer a strong defensive choice in a weak economy. The top issues facing drug makers include a more cautious Food and Drug Administration and a wave of patent expirations on blockbuster drugs over the next few years. Not all the companies have a promising drug candidate pipeline, he added, and the sector has also been hit by concerns about the effectiveness of drugs already on the market.

Schott named Merck his top pick, as he thinks shares should rise as the company builds sales of its diabetes treatment Januvia and its human papillomavirus vaccine Gardasil, along with restructuring efforts that are lowering its costs. Schering-Plough's buyout of Organon Biosciences--a $14.5 billion deal that closed in November--should allow the company to significantly improve its profit margins, he wrote.

Those two companies are also the most protected from a new "patent cliff"--a period where a large number of valuable drugs go off-patent--between 2010 and 2012, he said.

He gave "Neutral" ratings to Bristol-Myers Squibb Co. and Pfizer Inc. because some of their most important drugs will lose patent protection over the next few years. He said Wyeth has little to offer beyond its Alzheimer's drug candidate bapineuzumab, and Eli Lilly & Co.'s pipeline consists mostly of early-stage drugs. Schott is not convinced they can replace the top-selling products that will lose patent protection over the next few years.

In 2011, the patent on Bristol-Myers Squibb's blood thinner Plavix will expire, and a generic version of Pfizer's cholesterol drug Lipitor--the biggest-selling branded drug in the world--is also set to reach the market. Lilly will face generic competition for its anti-psychotic Zyprexa the same year.