I won't try to argue that Merck (NYSE:MRK) isn't cheap. But what I will argue is that Merck isn't significantly undervalued relative to its prospects and risks. When you look around the pharmaceutical sector and other, better, companies also trading at discounts, I don't see the need to reach on this one.

I don't believe there's much question that Merck will have to pay for its Vioxx issues; the only question is how much and how soon. More than 2,000 lawsuits have already been filed against Merck, and some pundits have speculated that the eventual number could reach 100,000.

Nobody knows how much a settlement would cost on a per-claimant basis, but two other cases may offer guidance. Lilly (NYSE:LLY) recently settled Zyprexa litigation for about $86,000 per claimant, and Wyeth has in some cases paid out more than $300,000 per claimant for diet-drug litigation.

Even if only 10,000 people come forward to sue Merck (a small number relative to the number of prescriptions), that could cost the company more than $3 billion in payouts. Although that wouldn't all come due at once (and that $3 billion is pure speculation at this point), that's still a pretty fair chunk of the company's cash on hand.

My next issue with Merck concerns its present leadership. While I have no reason to think that new CEO Richard Clark isn't a good man, he comes from the manufacturing side of the business instead of the research side. What Merck really needs now is fresh ideas on the R&D front, and I'm not sure that a manufacturing ace is automatically the logical pick to spearhead that effort. Furthermore, Merck has historically eschewed M&A activity, and by promoting from within, it's hard to see that philosophy changing.

Although I'll concede that new drugs like Gardasil and muraglitizar have strong potential, Merck's late-stage pipeline as a whole isn't especially deep. Apart from these two drugs, there are two other vaccines and an insomnia drug approaching approval, but that's about it. As a result, Merck is more or less playing with the hand it has -- there's not much additional help coming from the pipeline in the near term.

Value? I say not.
In taking the bull side of Merck, my esteemed colleague Rich Smith appears to be advocating the canary approach to stock investing -- listen closely and you hear "cheap, cheap."

Want to know why Merck is cheap? Because nobody thinks it's going anywhere. Not only does Merck have a feeble late-stage pipeline, but the company will also face increasing competition from generics and other branded pharmaceuticals over the next few years.

Looking at other big pharma peers, Merck is dead last when it comes to expected three- to five-year EPS growth. Yeah, I know, analysts' projections for future growth are as reliable as Nebraska weather. But ponder the magnitude of the fact that Merck is dead last with a forecast of 2%. More is expected of weak sisters like Bristol-Myers Squibb and AstraZeneca than of Merck, and in this case, I think the analysts are right.

So-called "value" stocks aren't values at all unless they can deliver the goods in terms of earnings and dividend growth. How, then, will Merck grow its dividend in an environment where it faces potential payouts for Vioxx litigation and earnings pressure from competition and a dearth of new products? The most obvious answer would seem to be "it won't."

Better ideas elsewhere
I actually don't hate Merck. I think investors with a very long-term view (like 10 years or so) can look at current prices as an attractive entry point. But that doesn't mean that Merck is the best idea in pharmaceuticals.

Why buy a troubled company like Merck when you can buy a company like Pfizer (NYSE:PFE) or Novartis? Why buy Merck when you could buy a turnaround like Schering-Plough (NYSE:SGP) or a growth story like Sanofi Aventis (NYSE:SNY)? Or, for that matter, a stable and proven grower like Johnson & Johnson (NYSE:JNJ) or Abbott Labs (NYSE:ABT)?

I'd say leave the canaries to pick at their birdseed -- I play for bigger stakes.

Want to read the opposing viewpoint? Check out Rich Smith's argument. Also read Stephen's rebuttal and Rich's rebuttal . Merck is an active stock recommendation in our Income Investor newsletter service. Check outthe latest dealfor new subscribers.Motley Fool Inside Valuehas recommended Pfizer.

Don't forget to vote! Yes, you can let us know who you think won this week's Duel by clicking here.

Fool contributor Stephen Simpson owns shares of Sanofi Aventis and Johnson & Johnson. The Motley Fool has a disclosure policy.