Jim:    Earlier, we took our head-to-head series one step further, and talked about key metrics... Lowe's (LOW) versus Home Depot (HD)...

Now, we're looking at drugs, big pharma...  two household names you ask me about all the time...   Pfizer (PFE) and Johnson & Johnson (JNJ)...  I know from the Lightning Round, you're all ears about these...

So, I've got to give you what you want, right...

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Now, here's the deal...

People don't understand how to do what I'm about to describe. They see PFE, at $19, down and out, and think it's got to be cheap, because it's off huge from its high... and they see the 6.5% yield. Then they see JNJ, of a point and change from its high, with a puny 2.6% yield... and they think, hey, time to sell JNJ and to get into PFE... But no, no, no, no... not at all!...

Because we don't value drug stocks on price. No. We buy drug stocks... not for the yield... These are not municipal bonds, for heaven's sake...

We buy them for three things... consistent long-term growth, invention, and patent protection... and, by those scores, PFE is expensive. JNJ is cheap.

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Now we use a 10-point scale around here to measure stocks, to see if they're worth buying. The first 5 points of the scale are a stock's sector. 50% of a stock's forward performance is dictated by the sector...

But, because I want to focus on the key metrics for big pharma tonight, we're not going to spend as much time on the other parts of the 10-point scale. Just know that, right now, with recession looming and no clear sign of a turning economy, and 309 days before we get a housing bottom... Well, let's just say that pharmaceuticals are safe. But the problem is that pharmaceuticals themselves aren't able to generate the kind of growth that triumph over pathetic low-growth to no-growth economy... in part, because of a lack of new products, and a termination of valuing the old ones, because of patent expiration...

Plus the democrats... big fans of confiscatory logic... hate big pharma... and view it as the enemy... and there's little doubt that they'll come out ahead in November...

So let's give the sector only a 3 out of 5, because of all those problems... In other words, it is not as safe as a utility stock, or a biotech even...

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Next, we always look at growth and consistency, when using the 10-point scale...

With big pharma, that means we focus on the key metrics... what big drugs are losing patent protection, what they've got in the pipeline, and what they've done to offset the fact that they're losing patents left and right...

There was a time when drug companies led a balanced life... some over-the-counter drugs, the kind you see in the aisles of the drug stores, and some prescription drugs that you get behind the counter... The drug companies liked the high margins of prescription meds, so one-by-one, they shed the low-margin front-of-the-drugstore products for drugs that can be prescribed. PFE was all over this trend, but not JNJ. In fact, PFE sold its consumer products division to JNJ last year... It was a big loss for PFE, even though they didn't seem to know it... they gave all the streams of low-income, low-margin to JNJ, but JNJ's cleaning up on it...

And JNJ waits for big, new drugs to be approved. PFE can't, because the cupboard's bare...

JNJ gets 24% of its sales from the consumer segment, meaning stuff in the aisles at CVS... 40% from drugs, alright... PFE gets 92% of its sales from drugs, and only 8% from other, and that's mostly animal and healthcare... I don't see a lot of chickens and cows in that Walgreens!...

So, JNJ has a better product mix, but what about those patent expirations... the next key metric?... Who's in the most trouble?

Between now and 2011, JNJ will lose about $3.8 billion worth of annual sales, due to five big patent expirations. That's bad, but PFE is much worse. From now until 2011, it's going to lose $6.6 billion in annual sales, due to seven patent expirations. And worse, one of those is Lipitor, their biggest franchise. People on the Street look at that cholesterol franchise and they think, this is a bond that will stop paying. Who wants to own that?

2 points to JNJ, okay... for keeping the boring stuff, and not having that many patent expirations, compared to PFE, which I think is going to get crushed by patent expirations, and doesn't have much to offset them at the front of the CVS...

Now the score is 5 to 3, okay...

That patent expiration thing is just horrible, and you really want these kind of boring things (basic consumer products like JNJ has)...

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Now, about the pipelines... the next key metric... as drug development is big pharma's endless task, as it tries to replace lost growth...

JNJ expects to have 7-10 new products for approval between 2008 and 2010... PFE expects to start 15-20 Phase III trials - right before approval - between 2008 and 2009, with between 24 and 48 programs in Phase III by the end of 2009. Between 2010 and 2012, PFE is looking to have between 15-20 submissions to the FDA. That is a much bigger pipeline than JNJ's, so we're going to give a point to PFE, okay...

JNJ still leads 5 to 4...

PFE will need every one of these birds in the bush because, right now, it is almost devoid of birds in the hand...

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Then there are the intangibles...

This is really important when it comes to drugs...

Culture... JNJ has a great culture... PFE, unfortunately, has none to speak of...

Management at PFE... run by a lawyer... That means it might as well be run by a wrecking crew... Warren Buffett owns JNJ and let's face it... when you've got the Buffett halo, you're innocent until proven guilty...

So give another point to JNJ... I know that's subjective, but I have to give it to you the way I see it.

6 to 4... JNJ wins.

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How's that stack up to what the market's paying?...

JNJ has a price-to-earnings multiple of 15x on next year's earnings. That's where we put the P/E... I used to teach this at Goldman Sachs, believe it or not... while PFE trades at 7.7x... Wow, PFE seems cheap right?...

And I've got to say that I think the market is valuing JNJ actually right... and PFE could be cheap, but here's the thing... I don't want to own PFE... It's got a 4.

So, even with the stock at $19.28... even though it yields 6.5%... my verdict is that you can't buy it. JNJ is cheaper, because it's got all those other things that we look at... and, on a pullback to $68, I want to own it.  

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Jim's comments AFTER the interview:     Rob Gross, you're a winner.  Guys, if you're like me, and you're looking for a play on how to deal with the fact that people can't get a new lease, I don't think you've got to look any further than Rob Gross' company... Monro Muffler Brake Inc. (MNRO)... It is down 5 points from its high.  It's at $20 bucks.  Hey, what's not to like?...