(FORTUNE Magazine) – What does this crazy election mean to the drug sector?

Whatever the election outcome, pharmaceuticals stocks will experience some volatility over all the negative press coverage of drug pricing. However, gridlock in Washington makes it unlikely that any major health-care reform legislation will get through until well after the 2002 election cycle. This environment should support continued healthy pharmaceuticals pricing--as well as earnings growth for the sector.

Are you surprised at how well drug stocks performed in 2000?

To a certain extent these stocks have been the anti-Nasdaq. The fundamental characteristics in the U.S. drug market have been incredibly healthy. We've seen exceptional growth, along with reasonable pricing and strong new products.

What trends are driving that?

Doctors are writing more prescriptions, and direct-to-consumer advertising is getting more consumers to ask their doctors about what's available. There has been extraordinary growth in products like [Pfizer's] Celebrex and [Merck's] Vioxx, both of which treat arthritis and pain. We have also been impressed with sales of Merck's Fosamax, for the osteoporosis market. New product launches are showing very strong traction.

What trends are you paying attention to over the next few months?

Overall volume demand in the marketplace relative to pricing. The ability of the pharmaceuticals industry to retain premium pricing is a critical component of profitability. We're also watching new products: Almost every company we monitor is expecting at least one major product launch as we go into 2001. And we're watching the level of consolidation activity.

So where would you suggest that investors put their dollars?

The mid-cap area is definitely going to prosper. That includes specialty pharma companies like Allergan, Forest Laboratories, King Pharmaceuticals--mid-stage pharmaceuticals companies that are registering very high rates of growth. Also, the hybrid generic pharmaceuticals stocks, like Alpharma, Barr Labs, and Watson Pharmaceuticals, should do well. And I suspect the major drug companies, which are generating low-teen to low 20% earnings growth, are well positioned to excel in a slower economic environment.