(MONEY Magazine) – Drug company stocks could use a good jolt of uppers. As could drug company stockholders, who have watched in dismay as uncertainties about health-care "reform" and price revolts by big customers sliced billions of dollars from drug stock valuations over the past 18 months. Once upon a time -- in 1991, say -- the way to buy drug stocks was to pick the companies with the best drugs, the best research and development or the best potential blockbuster products in their pipeline. Those were the days when drug companies could charge whatever they wanted for hot new drugs, producing profits lush enough to subsidize wonderful lifestyles for umpteen employees while delivering earnings increases of 15% or more every year. No more. Drug companies have already lost part of their pricing power to mass buyers of health-care products, such as managed-care plans, health maintenance organizations, corporations and retirement plans. No matter what happens to health reform in Washington, these mass purchasers will continue to drive down drug prices by demanding discounts. What's an investor to do? Here's a radical idea. Instead of picking the drug companies with the best long-term prospects, why not put your money into the companies with the least promising prospects?

Why? Simply because they are more likely to disappear. Here's the strategy. U.S. drug companies are being divided into two classes: predators and prey. However, as the predators gobble up their rivals, their stock prices are likely to lag. The prey, on the other hand, will get premium prices for their shares. As a wise man once said, the meek will inherit the whirlwind of takeover premiums.

Look at what just happened to American Cyanamid. It succumbed to American Home Products in a $9.7 billion hostile takeover, which valued Cyanamid at $101 a share -- or almost double its price in late June. How long do you think it will take American Home stockholders to see a similar 96% gain in their stock price? Don't strain your brain on that one, even if you have plenty of American Home's Anacin handy.

Clearly, you wanted to spend your summer vacation as a Cyanamid stockholder rather than as an American Home stockholder. (You don't want to be a Cyanamid employee, however, because American Home is sure to swing a nasty ax among that work force. But that's another story. And a depressing one.) Cyanamid has the dubious distinction of being the first U.S. drug giant to fall to a hostile takeover. It probably won't be the last. Psychology is all- important in the world of corporate combat, and Cyanamid's demise will doubtless send some drug execs scurrying after other drug companies in part to secure their own jobs before someone comes along to take over their companies and fire them. Therefore, Jack Lamberton, who is a drug analyst at NatWest Securities in New York City, suggests that the way to make money in drug company stocks in this environment is to buy the target rather than the acquirers. His thinking is that today's well-financed, cash-rich and nervous drug companies will pay vastly more for target companies' shares than the stock could possibly command from the investing public. Lamberton uses "burn and pillage" valuations. In other words, you pay a price based on the assumption that after you take over your target, you'll shut down its research and development, cut sales and manufacturing to the bone to increase efficiency, and feed the target's drug line through your existing distribution channels. Think of it as a financial neutron bomb that destroys jobs but leaves your newly acquired drug lines intact. Lamberton has gone through an interesting exercise, which is reflected in the box on page 29. The idea is to figure out how much a buyer could pay for a company if it stopped reinvesting in the acquired company's businesses. To be safe, he's assuming the acquirer has to pay a stiff 8.5% interest tab on money it borrows to make the acquisition. Lamberton values Upjohn at about 57% more than its market price as this is being written in late August, Abbott Labs at 19% and Schering-Plough at 11%. I'm not telling you to run out and buy the three companies on the list. For one thing, one or more may buy other companies, which will kill their stock prices. Or they may merge with other drugmakers, without either set of stockholders getting a premium price. Or they may make "strategic investments" for a chunk of others without doing a full-fledged takeover. Also, don't try to convince yourself that drug companies will become growth stocks again because health-care "reform" will increase drug sales to the 37 million Americans who are currently uninsured. Forget that one. Profit-margin declines on existing products will more than offset the gains these firms will get from any newly insured buyers. Forgive my quotation marks around the word reform. But I think that if anything major emerges from Washington, it will be a budgetary and bureaucratic nightmare rather than a bold initiative that fixes what's wrong with the health-care system. Back to the main event. In the long run, some drug companies will change their traditional ways of doing business -- drastically. As the power to prescribe drugs shifts from individual doctors who don't care much about price to big purchasers who care deeply about getting discounts, the drug companies that survive will have to learn to live less lavishly, spend their research- and-development money more wisely, cut back corporate bloat and become more efficient overall. But that's years away. For right now, health investors should simply pray that they have gotten their bets down on the prey.

CHART: NOT AVAILABLE CREDIT: Source: NatWest Securities CAPTION: Three prey worth hunting NatWest Securities' Jack Lamberton thinks bigger fish will be willing to pay anywhere from 11% to 57% premiums to acquire these three rumored drug company takeover targets.