When the medicine cabinet is bare, it is time to go shopping. Cash-rich pharmaceutical companies that find they're running short of blockbuster drugs have decided it makes more sense to shop for another company with attractive products than to research and develop their own.

They've turned 2009 into the year of the pharma mega-deal:

— Pfizer Inc., with generic competition for its popular drug Lipitor expected in late 2011, agreed to acquire Wyeth to expand into vaccinations and biologics. It also gains drugs whose patents expire further into the future.

— Swiss-based Roche Holding AG struck a deal to buy the remaining 44 percent stake of Genentech Inc. that it didn't already own. This gives it a tighter grasp on that biotech firm's prolific drug pipeline.

— Merck & Co., facing patent losses of its major drugs Cozaar/Hyzaar in 2010 and Singulair in 2012, agreed to purchase Schering-Plough. In doing so, it gains potential blockbuster drugs in cardiovascular and rheumatoid arthritis treatment.

Besides adding profitable new drugs to replace those soon to lose sales to generics, such deals usually help diversify companies by adding product lines less dependent on traditional research. Most experts believe the dealing isn't over yet.

"With their big patents expiring, pharmaceutical companies need more 'shots on goal' in product development, and these acquisitions will allow for that," said Linda Bannister, health-care analyst with Edward Jones & Co. in St. Louis. "Mergers also allow them to cut back their sales representative staffs, as well as move forward with their best drugs rather than simply duplicate those of competitors."

Because it is difficult to accurately predict deal-making and what new drugs will be approved and become profit centres, an investor should carefully construct as multifaceted a health-care portfolio as possible, Bannister said.

Her typical investor portfolio would include large pharma stocks such as Eli Lilly & Co. (LLY) and Pfizer (PFE), a generic drug maker such as Teva Pharmaceuticals (TEVA), a device maker like Medtronic Inc. (MDT) and an orthopedic company such as Stryker Corp. (SYK). Other holdings she considers worthy of inclusion are Johnson & Johnson (JNJ) and Abbott Laboratories (ABT).

To add the bright promise of biotechnology but spread out its inherent volatility and risk, she recommends the exchange-traded fund SPDR S&P Biotech (XBI).

That ETF tracks the Standard & Poor's Biotech Select Industry index of 27 stocks from the S&P Total Market index. While the fund includes a few established biotechnology firms, nearly half of the companies in its portfolio don't even have drugs on the market yet. The fund's top holdings were recently Myriad Genetics Inc. (MYGN), Theravance Inc. (THRX), Isis Pharmaceuticals (ISIS), Alkermes Inc. (ALKS) and Genzyme Corp. (GENZ) "Every drug introduced has to be a $1 billion blockbuster to support the spending on research and development that went into it," said James Molloy, pharmaceutical analyst with Caris & Co. in Boston. "Pharmaceutical companies have the cash and the capacity to take on additional companies that might be a good fit or will deliver a new portion of the market for them."

The slower regulatory process of recent years has taken its toll on new discoveries and added to the desperation of companies whose reputations were built on popular drugs. The steady demand for pharmaceuticals and the aging of the baby boomer generation continue to bode well for the industry, but companies cannot escape patent expirations and generic competition.

"Drug development drives pharmaceuticals, and there hasn't been a whole lot of that development for five years," said Les Funtleyder, health-care strategist for Miller Tabak & Co. LLC in New York. "There are companies that need drug pipelines and there are smaller companies that have it."

Although pharmaceutical firms have been consolidating for a long time, mega-mergers don't always create greater shareholder value, Funtleyder said. Drugs are an innovation business, and mergers won't help unless they actually lead to new products in the laboratory, he said. Nine out of 10 drugs fail, and it is crucial to produce successes to make up for those failures, he said.

Yet the combinations continue. There are usually three large companies in most types of industries, said Molloy, who predicts the number of major US pharmaceutical companies will similarly wind down to just three majors.

"For example, Pfizer and Merck will definitely survive — though the latter merger deal is actually structured as Schering is buying Merck," said Molloy. "On the other hand, if you consider Eli Lilly & Co. and Bristol-Myers Squibb Co. (BMY), I wouldn't be surprised to see a combination of those two."

Exchange-traded funds are gaining popularity as a means of diversifying risks of the pharmaceutical industry.

SPDR S&P Pharmaceuticals (XPH), an ETF that tracks an equally weighted index of the 22 pharmaceutical firms in the Standard & Poor's 500, is recommended by both Funtleyder and Molloy. With ongoing litigation at so many drug companies, that ETF effectively diversifies away some company-specific risk. Its top holdings were recently Allergan Inc. (AGN), Watson Pharmaceuticals Inc. (WPI), Perrigo Co. (PRGO), Medicines (MDCO) and Bristol-Myers Squibb.

Finally, Molloy recommends iShares Dow Jones US Pharmaceuticals (IHE), which is an index fund that measures performance of the US pharmaceutical market, and PowerShares Dynamic Pharmaceuticals (PJP), which includes 30 US-based drug stocks chosen quantitatively.

Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, 555 N. Central Ave., Suite 302, Phoenix, AZ 85004-1248, or by e-mail at andrewinv@aol.com.