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A decade and a half ago, I remember sell-side analysts pounding the table on the big pharmaceutical companies. Their multiples were 25 times trailing or higher, and we were told that was a good deal. They were cash machines and most of them had a blockbuster drug that targeted aging baby boomers. The most memorable was Pfizer (NYSE:PFE), who took a failed blood-pressure med and put the zing back into the love lives of millions of middle-aged couples. Other companies reduced cholesterol and made mountains of money. Aren’t you glad you bought ‘em when the multiples were way up there?

Fast forward past the Medicare prescription drug thingy, patent expirations, healthcare “reform," and a scary, global financial crisis. Drug companies look a lot different. Teens, even single-digit, multiples. No bona fide blockbuster drugs with many stalwarts coming off patent, and nothing really that spectacular in the pipeline.

Not too exciting? Well, they do have Amazon.com (NASDAQ:AMZN)-sized warehouses full of cash. So what’s the plan now? PFE’s shown its hand. It's decided to buy instead of build. Two other giants, Lilly (NYSE:LLY) and Merck (NYSE:MRK), have chosen seemingly different paths. Both could pay off handsomely but are still fraught with risk.

LLY has decided to take a page from the old Smith Barney handbook and make its money the old-fashioned way: Earn it. The first step was tapping John Lechleiter as CEO in 2008. A card-carrying LLY lifer, Lechleiter started as a chemist 31 years ago. Under his leadership, LLY has set an organic course to growth by focusing its energy on new drugs rather than acquiring their pipeline. Still, it's a company that will lose patent protection over the next seven years on drugs that represented 74% of sales in 2009. LLY trades around 33.97 at 7.79 times trailing earnings and yields 5.77 percent. It's got a little better than $6 billion on the balance sheet.

With MRK’s recent appointment of Ken Frazier, formerly its top lawyer, to CEO, the path could be one of two. Frazier’s claim to fame was guiding the company through the Vioxx legal swamp. Rather than settling en masse, MRK pretty much took each case on one by one and came out relatively successful. The first thought would be that the company wants to put itself on the block. Who better than our first-string legal eagle to clean it up before we close? Sounds like the most logical guess.

The second path would be a bit more sinister. Since Frazier did such a great job with the Vioxx challenge, he’s the only choice to lead us through another Cat 5 legal storm that’s on the radar. Either way, the company's focus seems to be on risk management rather than hitting a pharmacological home run. The stock trades around 35.50 at 12.7 times trailing and yields 4.28%. The future’s a bit “mercky,” (pardon the pun) but not a bad deal for a world-class, big company with some yield.

Who knows what 2011 will bring to the table? Hopefully, good stuff. But with the dicey situation in Europe, stubborn domestic unemployment, a housing market that’s bottoming at best, and the great unknown of interest rates, equity portfolios should probably continue to play defense. Big, cheap, pharmas with sick dividend yields should help.

Disclosure: None

Source: A Tale of Two Pharmas: Outlooks for Lilly and Merck