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Merck's Future Looks Healthier

Richard Saintvilus

NEW YORK ( TheStreet) -- When I last discussed Merck's growth prospects, I told you the stock was a relative bargain given that shares of Johnson & Johnson , Pfizer and Bristol-Myers Squibb were all (then) trading near 52-week highs.

Merck wasn't a popular stock at the time due to concerns about the company's pipeline and expiring patents, but I believed it was still worthwhile. Since that call, shares of Merck have increased 20%. Last week, an FDA advisory panel recommended the approval of Merck's new allergy drug Ragwitek, so I expect the company's winning streak to continue.

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Analyst David Risinger of Morgan Stanley, who has a $60 price target on Merck, recently cited the company's immuno-oncology candidate MK-3475 as a reason to own the stock. While acknowledging that Merck's valuation may not be as compelling to value-oriented investors, Risinger warned against being too cautious. I agree. As I pointed out several months ago, there's still a long-term growth story developing with Merck.

I'm not trying to convince you Merck is superior to Pfizer and GlaxoSmithKline . That argument goes beyond the scope of this article. What I do know, though, is that Merck's management hasn't been dozing off at the wheel in the trailing twelve months. And with some strategic moves and a rededication to research and development, they've now positioned this company to regain the market share it has lost.

The Street has finally taken notice -- albeit long after my initial call. The company will report fourth-quarter and full-year earnings on Wednesday. Merck's management has remained steadfast about returning value to shareholders. They've done a solid job up to this point. But it's going to take more convincing to get new investors to buy in at near 52-week highs.

The Street will be looking for 88 cents per share in earnings on revenue of $11.36 billion, which would represent a 6% year-over-year increase in earnings and a 3% decline in revenue. Don't be swayed by the revenue number, as underwhelming as it may be. What will be more important to Merck will be the extent of the company segmental performance -- particularly in the pharmaceuticals area.

If there has been a legitimate gripe with this operation, it's that the Pharma segment, while producing healthy results, hasn't been effectively balanced over the past several quarters. What I mean here is, despite Merck's strong portfolio of effective drugs, some are working harder than others. And with a recent 53% drop in Singulair sales, its blockbuster once-a-day asthma drug, management must find growth in other areas.

The decline of Singulair, which at one point generated $5.5 billion in annual revenue, was expected. This is because the drug fell off patent in 2012. I believe this -- more than anything -- contributed to the 4% decline in pharmaceutical sales in the September quarter. Investors were spooked. But on the bright side, it was an 8% sequential improvement from the June quarter.

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Once cooler heads prevailed, investors soon came to this realization, which is why the stock now trades at a premium. And this brings us back to Ragwitek, which is designed to treat allergic reaction to short ragweed pollen. It's coming at a critical time, given that cheaper-priced generics to Merck's other top-selling drugs such as Propecia and Clarinex are under attack.

With the FDA advisory panel's seal of approval, Merck management should have no problem convincing FDA to follow through with a full approval of Ragwitek later this year, which will help the company deliver on its growth promises. With shares still climbing, the Street is expecting this, which means investors won't be as forgiving should expectations fall short. Another high single-digit profit decline and compressing margins (as in the third quarter) won't bode well for the stock, either.

All told, I've never bought into exaggerated claims that Merck was on its deathbed. The company is not fully recovered, but management deserves credit for the sick patient back to health. What's more, despite the renewed high expectations from the Street, I expect Merck to continue delivering strong results. And investors looking for exposure in Big Pharma will do well accumulating these shares as part of a long-term position.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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