NEW YORK (TheStreet) -- With shares of Johnson & Johnson (JNJ - Get Report), Pfizer (PFE - Get Report) and Bristol-Myers Squibb (BMY - Get Report) all trading at near 52-week highs, there aren't many bargains left in the Big Pharma space. While I do believe Merck's (MRK - Get Report) pipeline struggles and expiring patents are valid concerns, the valuation has nonetheless become enticing, even if the expected returns might be low.
Before we dive into Merck's recent results, there's a reason why the company hasn't been invited to the Street's yearlong "drug party." While Merck does have -- what I believe to be -- an underrated portfolio of effective drugs, not all of them are doing equal work. Instead, over the past couple of quarters, the company has relied primarily on Singulair, its blockbuster once-a-day asthma drug, which at one point generated $5.5 billion in annual revenue.
Unfortunately, during that span, worldwide sales of Singulair have sputtered. What's more, as competition for Singulair has increased, cheaper-priced generic alternatives to some of Merck's other top-selling drugs, like Propecia and Clarinex, have been under attack due mostly to expiring patents, which opened the floodgates to copycat versions.
Smelling Merck's blood, rivals like Pfizer and GlaxoSmithKline (GSK - Get Report) have positioned themselves to exploit the weakness and steal share. Even so, I believe if Merck's management holds firm to its promise of delivering near-term growth through licensing deals and/or acquisitions, these shares may be undervalued to their long-term potential. But if Merck's recent earnings serve as an indication, it's going to take some time.Unlike most, I tend to look at Merck's results -- as underwhelming as they may appear -- with more of a "glass half full" view. While it's true that third-quarter revenues were down 4% year-over-year to $11 billion, I see it as a 7% improvement from the 11% decline in the July quarter. Likewise, when breaking down the company's segmental performance, I noticed a similar pattern. Pharmaceutical sales were down 4% to $9.5 billion, which was significantly impaired by a 53% decline in sales for Singulair. This, however, is not a surprise. As I've noted, the drug, whose patent expired last year has been on a consistent decline. What was a surprise, however, was the sequential improvement in overall pharmaceutical performance, which posted a 12% decline in the July quarter. Here, too, management posted an 8% improvement.