Dear Mr. Berko:

I have $12,000 and would like to buy either Merck, Bristol-Myers, GlaxoSmithKline or Pfizer. Please tell me which of these four issues has the best potential and that’s the single issue I will buy.

B.L., Waterloo, Ia.

Dear B.L.:

Since 2001, there have been few shining stars in the drug industry. The share prices of most big drug issues have weakened, wilted, withered and wasted away.

During the past three years, Merck & Co. Inc. (MRK) imploded from $75 to $30; Bristol-Myers Squibb Co. (BMY) shares got battered from $70 to $23; GlaxoSmithKline PLC (GSK) shares shattered from $60 to $41; and Pfizer Inc. (PFE) helplessly watched its share price get dashed from $46 to $30.

There are five major reasons for this wholesale collapse:

1. Big pharma’s drug pipelines are running at near-empty. During the past decade, the costs to develop a new drug and get it ready for market have more than tripled and the timeline has nearly doubled.

2. Meanwhile, patent protections on profitable drugs are expiring. Merck is losing Zocor, GlaxoSmith is losing Paxil and Wellbutrin, Bristol-Myers is taking the pipe because its popular Taxol, BuSpar, Monopril, Paraplatin and Serzone will expire soon and Pfizer faces looming patent expiration for its three Zs: Zoloft, Zithromax and Zyrtec.

3. An increase in the co-payments required by health insurers is crimping prescription volume.

4. Medicare legislation and those myriad new drug-care card plans that were supposed to mitigate rising costs have failed ignominiously. The choice of plans is intimidating and overwhelming, the application procedure is terribly tedious and exasperating and the pricing scheme is as complicated as Rubik’s Cube. But some thousands of determined consumers have managed to make the system work for them and I guess that’s acceptable for government work.

5. Finally, increased exposure to suits by attorneys encouraged by a legal system run amok and a growing conviction among consumers that they are entitled to awards far in excess of actual damages has also dampened investors’ enthusiasm.

And that’s all that’s wrong with the drug stocks today.

As a long-term value investor, I can’t pick a favorite among the four issues. That’s sort of like asking me which of my grandchildren I like best.

BMY ($23.45) has a handsome $1.12 dividend that yields 4.8 percent, earnings for 2005 and 2006 may continue lower and the stock may continue to underperform the market for the next 12 to 18 months. But the company has a few seeds in its pipeline that should germinate next year to produce some attractive profits in late 2006 and early 2007.

MRK ($27.14) has a $1.52 dividend that yields a swell 5.6 percent, which may increase a few pennies during the next few years, even with the Vioxx problem. Merck’s net profit margins (29.7 percent) are hugely impressive and there are various potential developments that could jump the stock in the coming 12 to 18 months. There will be about $2 billion in revenue loss as Vioxx is pulled off the shelf and the 2006 patent expiration for Zocor will reduce revenues by nearly $5 billion.

GSK ($42.55) pays a dividend of $1.46, which yields a tidy 3.4 percent. While GSK’s net profit margins (20.4 percent) are not as good as MRK’s, its respiratory drugs, antiviral and central nervous system medicaments continue to grow the company’s revenues, earnings and dividends. Even though GSK may get socked with more than $1 billion in fines, the company’s current portfolio is well-regarded in the medical industry. GSK should continue to report record revenue, earnings and dividend growth.

PFE’s ($26.90) 68-cent dividend yields 2.5 percent, which is just about the average yield on a 12-month certificate of deposit. The company’s purchases of Warner Lambert in 2000 and Pharmacia in 2003 have created impressive cost synergies. This behemoth’s portfolio may be the most diversified in the drug industry and its 31 percent net profit margins are the envy of the competition. Earnings for 2003 were $1.75 per share, and the company expects to earn $2.12 in 2004, over $2.35 in 2005 and $2.55 in 2006.

So you see I can’t recommend just one of these four issues. Today’s valuations, compared with those of the past, are exceptionally low, and with few exceptions, most of the issues in the drug sector have been hammered well below their fair value. If you put equal dollar amounts in each of these four issues, you will have a 4 percent return on your portfolio. That’s a great return for a growth portfolio of the best companies in the world and probably a rare opportunity in timing, too.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.