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Merck Looks Like a Relative Bargain

Among the biggest gainers was Remicade, the drug used to treat Crohn's disease and rheumatoid arthritis, which grew 17% year over year to $574 million. Not to be outdone, the human papillomavirus vaccine Gardasil grew impressively at 15% to $665 million. It wasn't all good news, however. Sales of type-2 diabetes drug Januvia, which grew 5% in the July quarter, gave back all those gains this quarter.

I think at this point, it's safe to say that Johnson & Johnson's rival drug Invokana, which has been on the market for only a few months, is doing some damage to Januvia and has stolen some market share in areas like the U.S. and Japan, given that these were where Merck took the biggest hits. If not for the better-than-expected growth in areas like Europe and emerging markets, Januvia likely would not have posted any gains at all.

From an operational perspective, though, I believe Merck's management deserves an apology from the Street. There have always been concerns regarding the company's financial position, especially recently. Many of these concerns are still cited today as reasons to avoid the stock.

While Merck did report a 7% decline in third-quarter profits, the company's 92 cents per share was enough to beat consensus estimates by 4 cents. Not to mention, the profit decline, which coincided with a 1.2% decline in gross margins, was due to expenses-related charges such as restructuring costs, acquisitions and other one-time items.

I do realize that I've become somewhat of a Merck apologist. But the company's position is not as bad as what has been portrayed. I will grant that the weakness in the pipeline and the expiring of several patents are legitimate near-term threats. But Merck is trading virtually on no growth assumptions at all.

Plus with close to $20 billion in cash on the balance sheet, Merck is one key acquisition away from turning its fortunes around. With the stock trading at around $46 per share, I would be adding Merck as part of a long-term position, while also collecting one of the best dividend yields in the sector at 3.70%

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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