In the late 1990s, it was commonplace for investors to get high on the big-name drug stocks, which wowed Wall Street with robust 20%-plus annual returns.

The last five years, though, these stocks have been dogs — until very recently, that is, when a jittery market prompted skittish investors to seek out the drug giants as a way to get more defensive.

If you’re one of the buyers, veteran investment adviser Richard Moroney thinks you’re buying a stiff case of the sniffles that won’t be easily cured.Why so? Because except for two names, Johnson & Johnson and AstraZeneca, “the 10 biggest drug companies are basically dead stocks for the next 12 months,” Mr. Moroney told me.

In effect, the veteran editor of the monthly investment newsletter, Dow Theory Forecasts of Hammond, Ind., thinks such pharmaceutical bigwigs as Pfizer, Merck, and Eli Lilly — the darlings of many institutional investors — should be shunned at this point. Ditto the remaining five big names, namely Abbott Laboratories, GlaxoSmithKline, Novartis, Sanofi-Aventis, and Wyeth.

Granted, there are decidedly positive long-term trends that augur well for the industry. One is the surging aging population, with the number of Americans 65 or older expected to rise 45% by 2020. Another is ballooning expenditures on prescription drugs, which are projected to climb from $219 billion this year to $446 billion by 2015.

But during the next year, Mr. Moroney argues, the drug industry negatives far outweigh the positives. Chief among them:

• Slowing revenue and profit growth.

• Growth expectations have come down sharply, with expected earnings gains fairly modest.

• Pricing has either flattened or gone down.

• The new product cycle outlook is not very exciting.

• There’s a scarcity of growth catalysts.

• Well-publicized product problems, such as Merck’s painkiller, Vioxx, which was pulled from the market after studies showed the drug increased the risk of heart attacks and strokes.

The billions of industry dollars spent annually on research and development are losing their clout, as evident from the decline in new drug approvals in recent years. As of now, only three of every 10 drugs on the market are realizing enough revenue to cover R&D costs.

It’s much tougher to generate enough new products to compensate for revenues lost from growing patent expirations, which, in turn, is leading to swelling competition from generics.

Consensus profit estimates vividly illustrate why the drug giants, once heralded as growth stocks, are no longer the portfolio heroes they used to be. In the next five years, for example, earnings are pegged to grow at a below-average 9% a year, down from 14% over the last five years and way off from the 22% annualized growth they recorded in the preceding five years.

These sinking numbers, Mr. Moroney said, have led to a grim stock story. In the last five years, the 10 largest drug stocks have averaged an annualized total return of less than 1%, a huge decline from the 20% yearly returns they achieved in the prior five years.

Our drug bear, who sees more of the same for these stocks, contends it will be very tough (for the big drug names) to add a lot of points in the next 12 months, given the unfavorable environment.

Elaborating on his two exceptions, Mr. Moroney said Johnson & Johnson and AstraZeneca offer solid fundamentals, the prospects for double-digit earnings growth in the next five years, and potential stock gains of 15% to 20% in the next 12 months.

In J&J’s case, he pointed out, new products, which accounted for 33% of last year’s sales, are expected to continue to make significant contributions to growth, thanks to an improving pipeline. New drugs under development have increased from two in 2002 to 18 currently, including three approved by the Food & Drug Administration.

Further, J&J, the parent of Tylenol, could file applications for 10 more new drugs before the end of next year. Another plus is last June’s $16.6 billion acquisition of Pfizer’s consumer products division, which will expand J &J ownership of top consumer brands, such as Listerine, Visine, and Benedryl.

At 17 times expected year-ahead earnings of $3.85 a share, J&J, which also operates large medical device and consumer products businesses, giving it one of the industry’s more diversified revenue streams, trades below its fiveyear average forward P/E multiple of 20. Earnings growth is pegged at 10% annually in the next five years.

AstraZeneca’s key to future growth is its product pipeline, which features six drugs in late-stage trials and more than 100 projects in development. Although its pipeline is viewed by many industry watchers to be riskier than those of most rivals, it contains a number of potential blockbuster drugs.

Several of the British drugmaker’s important drugs face generic competition, but the company expects current products — asthma inhaler Symbicort and cholesterol treatment Crestor — to keep driving profit growth. What’s more, AstraZeneca hopes to expand the uses of these drugs.

The shares of AstraZeneca, best known for its acid-reflux treatments, Prilosec and Nexium, have jumped more than 30% in the past year. Despite this rise, the stock trades at only 16 times estimated year-ahead earnings of $3.86 a share, which is below its five-year average forward P/E of 19. Per-share profit growth is pegged at 29% this year, 6% next year and 13% annually during the next five years.

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