A few years ago, many investors valued drug stocks the way they value the top software makers, bidding them up to 30 or more times earnings. However, drug stocks are riskier than investors generally realize.

Because of that, while drug stocks can show fantastic profits, it might be more appropriate to value drug makers the way you value companies that are trying to bring new mineral discoveries into mines: at 10 times earnings or less.

Drug buyers have no brand loyalty; when a better drug comes along, use of the old standby collapses overnight. Drug companies must invest large sums to bring new drugs to market, and there is great risk that their drugs will fail to clear all the necessary hurdles. If a drug does fail, it can leave the developer with a return of zero.

In addition, if they pass all of the hurdles, drug makers face the peril of generic drug makers, who can duplicate drugs after the trademark period without putting in the original research-and-development expenses.

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We’ve often warned that drug stocks are riskier than investors realize. The cost of developing a new drug is huge, and the payoff, if any, is uncertain. As well, if investors come around to common-sense views, like the best treatment for diabetes is a combination of improved diet, more exercise and fewer calories, they may lose their appetite for the higher risks and costs of drug stocks.

While pure drug stocks are quite risky, the fields of medicine and health care offer a number of options that we recommend. We prefer health-care stocks with recurring revenue, which can come from the sales of lab supplies, maintenance on equipment or other sources. We feel that these revenue streams are safer from the sorts of risks faced by drug companies.

One example of such a stock is:

BECKMAN COULTER INC. (New York symbol BEC; WSSF Rating: Average), which makes lab equipment that doctors and medical researchers use to detect substances in bodily fluids.

Demand for Beckman’s automated systems remains strong among hospitals and clinics. This demand has offset lower sales to university labs caused by lower government funding. Hospitals prefer Beckman’s systems, since they require little human interaction. That helps cut their costs. Accurate detection of diseases also reduces the length of hospital stays for patients.