Formerly energetic with the rest of the health care sector, Big Pharma has been in the doldrums the past few years. The casualty list is long: Bristol-Myers (NYSE: BMY), Pfizer (NYSE: PFE), Merck (NYSE: MRK), Johnson & Johnson (NYSE: JNJ), Eli Lilly (NYSE: LLY). None of these companies have outperformed the DJIA in the past five years and most are selling at or below where they were in February 2006. Ouch.

What has happened to our heroes of yesteryear? It wasn’t that long ago that Big Pharma was the closest thing there was to a sure bet, and the companies in this sector were especially attractive during uncertain periods, when investors wanted to bolster their defensive positions.

Have health care stocks in the pharmaceutical sector become like utility stocks — nice dividend yields with very little price appreciation?

A few factors jump out when you carefully diagnose the problem. Talk about health care reform has spooked investors for years, and the passage of Obama Care threatens to cut into the healthy margins Big Pharma has enjoyed in the past. How deep? No one knows at this point. But further government involvement in health care doesn’t bode well for the companies.

Then there is the industry consolidation that has taken place during the past decade. Despite all the trumpet blowing and promises, it hasn’t produced the promised efficiencies, and neither has it made R&D more productive.

The big players also have been hurt by generic competition, witness their efforts over the past few years to get into that business themselves. The importance of generics will become even more important as billions of dollars worth of blockbuster drugs lose their patents. At the top of the list is Pfizer’s cholesterol drug Lipitor, whose patent expires in 2011. Lipitor generated nearly $11 billion in sales last year. In 2012, more than $70 billion worth of drugs will come off patent and face generic competitors.

Despite the challenges facing Big Pharma, it’s important to keep in mind that the populations in the developed countries continue to age. In fact, prescription-tracker IMS Health projects that global pharmaceutical sales will increase by 5% to 7% in 2011, or 33% more than in 2010,  What’s more, a number of emerging markets are better able to afford health care, accounting for a substantial part of the growth. And let’s not lose sight of the fact that pharmaceuticals still ranks as one of the most cost-effective ways to treat and control disease.

But rather than trying to picks the winners among Big Pharma, investors might want to consider one of the three primary pharmaceutical ETFs:

• iShares Dow Jones U.S. Pharmaceuticals (NYSE: IHE)
• PowerShares Dynamic Pharmaceuticals (NYSE: PJP)
• SPDR S&P Pharmaceuticals (NYSE: XPH)

These health care ETF funds will allow you to diversify, and hopefully spread your risk around.

As of this writing, Barry Cohen owned a position in LLY, BMY and PFE.