Pharmaceutical giant Schering-Plough (NYSE: SGP) stepped into the earnings spotlight today, and it is reaping the rewards of a positive report. SGP posted fourth-quarter earnings of $480 million, or 27 cents per share; but adjusted earnings came in at $633 million, or 39 cents per share.

This beat fourth quarter results of a year ago, when the company lost $2.08 per. Today's announcement also handily trounced the Street's expectations of 30 cents per share for the quarter, per analysts' estimates.

After the initial rebuff of Swiss-based pharmaceutical giant Roche's offer to acquire the 44% of Genentech (NYSE: DNA) stock Roche does not currently own, DNA is coyly encouraging the completion of a deal at a higher price.

Genentech is among the leading biotech companies in the world. It is engaged in the discovery, development, manufacturing and commercialization of pharmaceutical products intended for treatment of previously untreatable illnesses.

In 1990, Roche acquired a 56% stake in the company. Since that time, the relationship between the two companies has been a model for similarly structured combinations.

Roche's offer of $89 per share for DNA was characterized by DNA as significantly undervaluing the company.

But this was hardly a "hit the road, Jack" response. DNA's board of directors has been encouraging the two sides to continue discussions, and recent comments suggest that the deal could come together soon.

In a period of economic distress, owning stocks with stable cash flows is a great way to avoid the carnage found in other parts of the market. One sector traditionally known to provide consistent cash flow to investors is the pharmaceutical industry.

Patent protection on drugs provides the industry with the ability to generate revenue unencumbered by competition. Investors generally pay a premium to own a piece of that stream -- no matter what is happening in the economy.

During the last few years, market premium for drug companies has been diminished. As drugs from the major pharmaceutical makers come off patent, revenues and cash flow suffers.

That fact explains why drug companies invest so much money on research and development. When older drugs come off patent they are replaced by a steady stream of new drugs.

What happens when that pipeline goes dry? Obviously, the company is not worth as much.

That has been the situation at Pfizer (NYSE: PFE). During the last five years, we have been hearing about a dwindling drug pipeline with no sign of abating. During that time, patents for working drugs only aged

It's been a tough year for many industries -- there's no denying it. Retailers of all stripes, oil companies, construction firms, financials, basic materials companies -- you name it, it's down.

So, are there any safe havens?

Historically, in times of economic uncertainty the pharmaceutical industry, along with consumer staples, is often the "go to" place where, at a minimum, you can count on a nice dividend yield to shield your portfolio from gigantic losses. Not anymore.

In this downturn even stalwarts such as Merck (NYSE: MRK) and Pfizer (NYSE: PFE) trade near their multi-year lows, despite offering generous yields.

What about biotechs? That sector has performed much better.

However, one of my favorite biotech names, Elan (NYSE: ELN), is struggling.

At the start of the year, ELN was looking strong. Its stock was up by 50% by mid-summer. Since then shares have collapsed and now trade in the mid-single digits.

I profiled the company on July 2, with one caveat: If late-stage testing of a new Alzheimer's drug called bapineuzumab doesn't go as planned, then ELN will trade lower.

About a month later, the company announced that the results of a Phase II clinical study showed the drug does safely treat the symptoms of Alzheimer's disease, but the results were not statistically significant, and the 234-person Phase II study would have to be broadened to a much larger Phase III study to be considered for FDA approval.

The shares fell 17% on the announcement, but that was just the start. As is often the case, when it rains, it pours.

Pfizer (NYSE: PFE) is out with earnings and they are solid. The company reported that net income more than doubled from Q2 '07, to $2.77 billion. Adjusted net income came in at 55 cents, a penny above estimates. MarketWatch reports, "Pfizer said it reaffirmed its full-Year 2008 revenue and adjusted net income targets. It's on track to achieve its total cost-reduction target."

The stock may very well trade up on this news. Keep in mind that while shares haven't performed well, with a 7% dividend yield, the stock may be an interesting play for investors looking for both income and a potential turnaround story.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 7/23/08.

"The pipelines of most Big Pharmas are bone dry; last year, the FDA approved the lowest number of new drugs (19) since 1983," notes Louis Basenese, editor of The Oxford Club.

"But opportunity always lurks in the wreckage, and one Big Pharma, in particular, is being unfairly punished." Here's his bullish outlook on Novartis (NYSE: NVS).

"Unlike others in the sector, Novartis doesn't suffer from an empty pipeline. It's launched more drugs globally than any other firm in the past seven years. It has more than 100 projects in phase II (or later) trials. And it expects to file at least six new drug applications this year alone.

"Plus, its products cover all bases, from vaccines to specialized drugs to generics to eye-care products, even animal health items. And most are enjoying rapidly expanding sales.

"Moreover, the company maintains a fortress-like financial position that includes a $10.8 billion cash horde. Management keeps raising the dividend, for 11 years and counting. And it recently announced a massive $9 billion stock-repurchase plan, too. Hardly the hallmarks of a sickly stock.

According to Reuters, big pharma concern Pfizer Inc. (NYSE: PFE) is planning ahead for growth. The company has been plagued by generic competition and a falling stock price, so management knows that it's got to tell investors something good so that they will realize that the drug maker is still in the game.

Pfizer wants to use the theme of international growth to boost its potential shareholder value. The company is looking at Asia and the emerging markets as catalysts. Can't blame Pfizer for that; not only is that theme not played out yet, but with the weak dollar, shareholders should welcome any aggressive stance in this regard (so long as the company can execute properly). Then there's the pipeline, which Pfizer is aiming to expand, hoping to get as many late-stage trials going as it can.

Shareholders will have to wait and see how Pfizer's rhetoric plays out, but you can't dismiss the stock as an interesting long-term idea. By now, I don't need to tell you that pharmaceuticals and providers of healthcare products will always be in need; in fact, stocks like Johnson & Johnson (NYSE: JNJ), Merck & Co., Inc. (NYSE: MRK), and Novartis AG (ADR) (NYSE: NVS) are all interesting for this very reason. I happen to be prone to Johnson & Johnson myself, but the thing I like about Pfizer is its juicy yield, which sits well above 5% right now. Also, the stock is near its lows, and it is in a narrow 52-week range. I don't necessarily expect it to rocket higher tomorrow, but if you are looking for a drug company to add to your portfolio, definitely check this one out as a potential value, and keep yourself informed about Pfizer's plans for the emerging markets.

At their investor day, Teva Pharmaceutical Industries Ltd. (ADR) (NASDAQ: TEVA), the world's largest generic drug maker, said that they expect to double revenues over the next 4 years. Teva predicts that they will grow faster than the generic market. While that is interesting in its own right, their view on the generic market in general is astounding.

"By 2012, Teva expects to have 30% of the U.S. market for generic prescriptions, up from about 20% now. Over 75% of U.S. prescriptions will be filled by a generic by 2012," the company said.

Wow! Three out of every four prescriptions will be filled by a generic in just four years from now. That's huge. If that is indeed the case Big-pharma needs to look out. Where are their profits going to come from? Even the big Bio-tech players are squirming over the possibility of bio-generics.

For big pharmaceutical companies, the largest business challenge is that patents are expiring on some of their most popular drugs. If they do not have new "blockbusters" to replace those, revenue is certain to fall. The solution is to raise prices on the best selling drugs and milk them before generics cut sales.

Unfortunately, while this may be a great deal for the companies, it is not so hot for patients and health-care costs. According to The Wall Street Journal [subscription required], "Pharmaceutical companies increased wholesale prices for the 50 top-selling branded drugs by an average of 7.82% in 2007." Prices on some drugs went up 50% or more.

Of course, the costs to produce these drugs is probably not rising much at all. What is obvious is that drug companies will probably face pressure from the government to keep prices down because the costs of health-care are still rising faster than GDP. The Congress may simply elect to put a cap on how much drug prices can rise. Or, the Feds may allow generics to come into the market sooner to provide alternative treatments that are cheaper.

But why should the government involve itself in an industry's pricing? The answer is that it is for the common good. That leaves out the companies themselves and their shareholders.

When the government interferes with the free market systems, it opens a Pandora's Box. Which industries will be regulated and which will not? Which affect the common good and which do not? Call it socialism, because that is what it is.

Douglas A. McIntyre is an editor at 247wallst.com.

Google (NASDAQ: GOOG) is expected to report EPS on 10/18. GOOG October at the money 570 straddle is priced at $35. GOOG October option implied volatility of 28 is near its 26-week average according to Track Data, suggesting non-directional risk.

Wyeth (NASDAQ: WYE) implied volatility Flat into $5 billion stock buyback. WYE, is engaged in the discovery, development, manufacture, distribution, and sales of products in pharmaceutical, healthcare and animal health. WYE announced a $5 billion share repurchase program. WYE has a market cap of $60 billion. WYE October option implied volatility of 27 is near its 26-week average of 25 according to Track Data, suggesting non-directional risk.

Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

Now that Merck & Co. (NYSE: MRK) and Schering-Plough Corp. (NYSE: SGP) both posted better-than-expected second quarter earnings, will investors show some love to big pharma?

Shares of Merck are down about 5% over the past three months while Schering-Plough has eeked out a mere 2.5% gain. Perhaps investors are worried about Merck's Vioxx legal battles, which so far it has largely won, and the controversy surrounding its cervical cancer vaccine Gardisal. Schering-Plough's $14.4 billion acquisition of Akzo Nobel's Oreganon unit may also be concerning some people. Maybe people think that if Pfizer Inc. (NYSE: PFE) is up the creek, all big drug companies are in the same boat.

Regardless, both companies posted impressive numbers that should quell the concerns of investors. Their stocks remain pretty cheap. Merck trades at a forward price-to-earnings multiple of 17, slightly cheaper than Schering-Plough's 20.

Merck, based in Whitehouse Station, New Jersey, reported net income of $1.65 billion or 77 cents, up from $1.5 billion, or 69 cents a year earlier. Revenue jumped 5.9% to $6.1 billion fueled by demand for blockbusters such as the high-cholestoral treatment Vytorin which it makes in a joint venture with Schering Ploug. Excluding some costs, Merck earned 82 cents, beating the 72 cent-average estimate of analysts surveyed by Thomson Financial. The revenue figure also beat the $5.77 billion, analysts had expected.

Vytorin also boosted results at Kenilworth, NJ-based Schering Plough. Net income climbed to $539 million, or 34 cents a share, more than doubling from $259 million, or 16 cents. Revenue jumped 14% to $3.2 billion. Excluding some costs, profit was 41 cents, beating the conesensus forecasts of 35 cents. Revenue also beat expectations of $3.07 billion.

In April, the short interest in Bristol-Myers (NYSE: BMY) fell 5.4 million shares to 18.8 million.

Wall St. expects Bristol-Myers to have a poor quarter. But, in the language of investing, that may already be "factored into" the price. BMY is in the classic Big Pharma hard spot, with some of its drugs going off patent which brings in generic competition. Two of the company's best sellers, Plavix and Pravachol, fall into this category.

But, all is not lost for Bristol-Myers. It has two newer drugs in the market, Orencia for rheumatoid arthritis and Sprycel for leukemia, and some analysts have high hopes for them.

At $28.50, the shares trade near their 52-week high. To some, that would say the shares should be avoided. But, as The Wall Street Journal (subscription required) pointed out, a number of significant uncertainties at the company are about to be resolved. The company is closer to settling with the federal government on charges that it paid illegal incentives to drug distributors. BMY is also probably close to getting a permanent CEO.

Some of the shorts exiting the stock must have weighed the good against the bad and decided that too many things might go right for the company.

Douglas A. McIntyre is a partner at 24/7 Wall St.

Putting the first quarter behind us, as many wish we would, gives us pause to look ahead in hopes of finding the gems of success that wait for us. Here are some of my areas of interest as dictated by gut instinct. Please, before you groan and wretch and move on to the next post, remember that in defiance of one major writer's claim that no one warned you of the bear(ish) market that passed by this way ... I did.

I had also suggested steering clear of big pharma quite some time ago. You may take note that all but a few of them have, at least temporarily, splattered on the wall. The clear exception I see at this time is Pfizer Inc. (NYSE: PFE), which I consider to be in turn-around mode. I'll even be so bold as to hint that you may want to watch it for some acquisition movement of some kind. Pfizer has a sharp, well-run operation with some fine projects on the table. I like Pfizer and have no reason to change my attitude towards it.

Here are some of my watch words for at least the next two quarters:

• Watch natural fibers including cotton, glass derivations, carbon, and cellulose. Apply liberal amounts of nano-technologies and your world vastly increases in breadth and scope.
• Pay attention to water in all it's forms and applications. You shall benefit if you move it ,use it ,split it, spend it, clean it, or own it.
• Continue to avoid bonds unless your slopping around with bundles of loose cash that you have nothing better to do with.
• Scrap metals remain solid and steady. Beware of mining, at least temporarily.
• Watch for increased use of wood as raw material in things other than home construction. In cost of materials, the dynamics are changing. Stay on top of what the manufacturing sector is hinting towards.
• Look hard at the building and maintenance of diesel engines. I'm receiving reports that biodiesel is having some negative impact on the current trucking fleet. Adaptations in materials and design will be needed soon to accommodate the changes in fuel make up. Be there and be ready.

That's what I have to offer you for right now. At this time I need to make one small apology. I hope those fine people who hold shares in General Electric (NYSE: GE) haven't lost faith in me yet. I promised you $40 per share and I still believe it's coming. Hold tight my friends, nothing good ever comes easy.

Pfizer (NYSE:PFE) and the other Big Pharma companies keep taking a pasting as their drugs come "off patent" and are greeted by competition from generic drug makers. As really big drugs like Lipitor move into that pool, the old line drug firms could lose billions of dollars in revenue.

But, the champagne was open at Pfizer today. It won a court case against generic giant Teva (NASDAQ:TEVA) over rights to the painkiller Celebrex, which is the world's top arthritis pain-killer. Teva had tried to get the FDA to approve a version for it to sell. Pfizer said this would violate its intellectual property.

Celebrex now belongs to Pfizer until 2015. The more money it can make off current drugs like this, the better the chance that it can invest in R&D to create new drugs for its pipeline. Otherwise, the company is toast along with its investors.

Douglas A. McIntyre is a partner at 24/7 Wall St.

Merck & Co. (NYSE:MRK) must now attract glass-is-half-full types as stockholders.

Who else but supreme optimists would buy stock in a drug maker facing more than 27,000 lawsuits regarding Vioxx, not including the Pennsylvania woman who recently dropped hers? Their faith that Merck will beat these cases is evident in the stock price.

Shares of Merck have jumped more than 39% over the past year, outperforming Pfizer Inc. (NYSE:PFE) Novartis AG (NYSE:NVS) and Schering-Plough Corp. (NYSE:SGP). Granted, beating Pfizer isn't that much of a victory, but still, that's a decent move.

Wall Street, which is awaiting Merck's fourth quarter results Jan. 30, expects the stock to climb further. The median target for Wall Street analysts is $48.50, according to Thomson Financial. Opinion, though, remains divided. Eleven analysts consider the shares either a strong buy or buy, 10 rate it a hold, and 3 a sell.

Merck has already said earnings this year are going to be lackluster and Wall Street is taking the company at its word. Analysts are forecasting earnings of 50 cents on sales of $5.38 billion, according to Thomson Financial. A year earlier, the company had a profit of 64 cents and revenue of $5.77 billion.

As Douglas McIntyre pointed out, Merck needs to convince investors that it's not Pfizer in the wake of that company's failed anti-cholesterol drugs. The Whitehouse, New Jersey-based company said last month that it will seek approvals for three important drugs this year and would have four more drugs in late-stage trials by mid-2007.

Also check out some other earnings reports that we're following, and let us know your thoughts on earnings expectations.