After an unhealthy performance in 1999, which saw US drug groups under-performing their stock market by 32 per cent, and a slow start to the current year, investors are renewing acquaintance with the "old world" reliables, including the drug sector.

However, volatility in the share prices of many of the major pharmaceutical stocks reflects the uncertainty that exists in the sector at present. Specific factors weighing on the industry include the potential US healthcare reform (the US is the world's largest drugs market) and a decline in the number of drug launches expected this year.

More significantly, however, many of the giants of the industry are facing patent expiry on some of their biggest sellers. Eli-Lilly is a good example, as its well-known antidepressant, Prozac, has lost patent protection in Europe and looks set to face US expiration in 2001. Prozac generated sales of $2.6 billion (€2.7 billion) for Eli-Lilly in 1999 and there are fears the company will suffer a sizeable loss in market share as competitors strive to develop cheaper alternatives to the original.

The uncertainty has led to a quickening in the pace of consolidation in the industry in recent months.

The proposed mergers of Glaxo Wellcome with Smithkline Beecham and Pfizer with Warner Lambert are both designed to produce higher growth rates, principally by spending more on research & development in the hope that it will bring more drugs to the market.

Over the longer term, four key ingredients must be considered by investors:

a pipeline of new drugs capable of sustaining top-tier revenue growth;

security from generic competition;

a sales base capable of supporting R&D and;

the distribution power to maximise the opportunities from the pipeline.

For Sharetrack investors a disciplined buy/sell strategy, focusing on relative prices and playing the volatility will likely prove the key to investing in the sector in coming weeks. A direct dosage of companies that keep their names in the headlines positively through drug approvals, R&D breakthroughs and further consolidation activity may inject investors with a favourable fix.

Shane Lynch and Laura De Voy are employees of Goodbody Stockbrokers.