What gives? Merck (NYSE:MRK) spends more than $3 billion a year and employs an army of scientists to research and develop new drugs, but in the last four years the pharmaceuticals giant has failed to squeeze out a single drug for diabetes or treating cancer, or even for fighting infections. In fact, since 2000, Merck has launched only three new drugs.

I shouldn't just pick on Merck. Pretty much all the other major drug companies are struggling with what's known as the R&D "pipeline problem." Patents on the drugs that are now making money for them are about to expire, and they have few new drugs in development to replace them. It's pretty hard to grow a company without new products.

Even worse, more and more of big pharma's most lucrative prescription drugs are now being sold as margin- squeezing, over-the-counter products. Market-stealing generic drugs continue to come on stream, and political debates over prescription imports from Canada and Medicaid reimbursements are casting a dark shadow over the whole industry.

Where's the love?
Not surprisingly, pharma stocks are losing investors' affection. Prices have fallen far in the past 12 months, reflecting lower R&D productivity, heightened competition, and slower earnings growth. The S&P 500 pharmaceuticals and biotech index added 3.1% this year, lagging gains of 4% for the broader market. Last year, the gap was wider: Pharmaceuticals gained only 6% against 26% for the market.

Fools know that the best buys are found among the unloved. So, with prices beaten down across the pharmaceuticals industry and the quarterly reporting season here, do any opportunities pop up?

Merck is probably suffering the most from the pipeline pickle. Sure, the company has forged clever and profitable supply agreements with U.S. wholesalers and European drug giant AstraZeneca (NYSE ADR: AZR) and marketing arrangements with Schering-Plough (NYSE:SGP). But gains from these deals will be offset in 2006 by the loss of patent protection on its cholesterol-lowering blockbuster, Zocor. At 14 times 2004 earnings, Merck trades at a discount to the sector multiple of 17. Only if you have faith in Merck's long-term, very-early-stage drugs does that low multiple spell a buying opportunity.

Eli Lilly (NYSE:LLY) offers some positives and a big negative. The company has the industry's best product pipeline relative to its more modest size and R&D budget. It's on track for the summer launch of antidepressant Cymbalta. Even better, the company doesn't have any near-term drags from patent expirations. Earnings were solid this week. Mind you, Eli Lilly is embroiled in a hotly contested patent challenge against its Zyprexa schizophrenia drug, which generates about one-third of Eli Lilly's annual sales and nearly half of its earnings. The stock will remain volatile until a patent ruling in midyear.

Still looking? Wyeth (NYSE:WYE) faces no patent expirations until 2007. Strong sales are expected from its antidepressant Effexor Prevnor and anti-arthritic drug Enbrel. But the stock trades at a discount to its peer group due to lingering worries that the company, which has taken more than $16 billion in charges related to the withdrawal of a line of diet drugs, may have to increase reserves again soon. A stronger-than-expected cash flow report this season could translate into an upside for Wyeth stock.

Then there's Bristol-Myers Squibb (NYSE:BMY). Over the next three years, more than $5.9 billion worth of its drugs will lose their patent protection. That will put a lot of pressure on new products -- especially antischizophrenic Abilify and Reyataz for HIV treatment - to drive sales and earnings.

It's hard not to like Pfizer (NYSE:PFE). Among other things, Pfizer plans to launch five blockbuster drugs, with potential sales of $1 billion each, through early next year. Pfizer posted first-quarter earnings growth of 27% this week. The company is on track for 22% growth in 2004, with cholesterol drug Lipitor contributing about one-fifth of the expected $54 billion in total revenue. Pfizer also has 14 drugs in late-stage development and a monster $8 billion R&D budget this year. Viagra, Zoloft, and Celebrex, products that contribute most to Pfizer's bottom line, will face more intense competition this year. Still, cash-rich Pfizer will continue to flex its marketing muscle.

A mixed bag
All in all, pharmaceuticals remains pretty much a mixed bag. Saggy share prices will no doubt offer a good time to buy some stocks, but a bad time to buy others. Knowing which ones will go up or down in this tricky industry demands not only research, but, alas, also a bit of guesswork.

Mind you, don't be surprised if pipeline-driven products re-emerge as the big stock-price driver. Companies that can translate R&D into profitable products will regain our love. Conversely, companies with thin pipelines or aging drugs will probably produce disappointing returns and face investors' wrath.

If you want to talk some more about Merck, check out the discussion board.

Fool contributor Ben McClure hails from the Great White North. Ben doesn't own any shares mentioned here. The Motley Fool is investors writing for investors.