(FORTUNE Magazine) – Not long ago it seemed that Merck & Co., the $3.6-billion-a-year pharmaceutical giant based in Rahway, New Jersey, had lost its magic touch. Rosy profit growth came to a halt in the mid-1970s; since then the company has posted double-digit increases in earnings per share in only four years. Though the company's research capabilities remained awesome, successful new drugs were a rarity. Many of Merck's existing products that were profit powerhouses, moreover, fell under siege from cheaper generic drugs. But now the stock is perking up, and security analysts say Merck has discovered an antidote to those ills. Late in 1985 the Food and Drug Administration approved the company's application to begin marketing Primaxin, an antibiotic used for a broad spectrum of infections. Merck is also expecting imminent FDA approval of Vasotec, a treatment for hypertension. In another year or two the company could get the green light on a new compound to reduce high cholesterol. Says Richard Vietor of Merrill Lynch, who recommends the stock: ''This is a company that is ready to deliver for investors after ten years on the sidelines.'' Analysts are most excited about Vasotec, a so-called ACE inhibitor that is used in the treatment of hypertension. ACE inhibitors -- the letters stand for angiotensin-converting enzyme -- interfere with the body's ability to retain water and salt, thereby controlling blood pressure. They also relax arteries, easing blood flow. The $3-billion hypertension market is now dominated by another group of drugs called beta blockers. But analysts feel that ACE inhibitors, along with another category called calcium channel blockers, made by Pfizer and Marion Laboratories, will garner more of the market because they have fewer adverse side effects. Squibb has beaten Merck in bringing out an ACE inhibitor, but Vietor believes both companies will cash in. ''It won't be a question of Squibb vs. Merck,'' he says, ''but beta blockers vs. ACE inhibitors, which should gain an increasing share of the market.'' His optimism is shared by Ronald Stern, a drug stock analyst at First Boston Corp. Stern figures that within three years Merck's Vasotec could generate $200 million in sales, good for an additional 45 cents a share in earnings. Wall Street has projected the drug company's 1985 earnings at $7.50 a share. Analysts are equally upbeat on the prospects for Primaxin, Merck's new antibiotic. The drug will be used chiefly by hospitals to treat seriously ill patients who develop sudden new infections. Finding the root cause of an infection can take hours or even days -- a potentially life-threatening delay. But because Primaxin has proved effective against 98% of all known types of infection, doctors can confidently prescribe it before knowing the precise cause of the illness. ''Primaxin could be another $200-million drug within three years,'' figures First Boston's Stern. Though Merck's stock has outpaced the broad market averages over the past year, analysts think there's more to come. At a recent price of $135 per share, the stock is selling at more than 15 times expected 1986 earnings. That's 30% above the average price-earnings multiple on Standard & Poor's 500- stock index, notes Drexel Burnham Lambert's David Lippman. But he thinks that within a year, as new products come out, Merck's P/E could reach a 50% to 60% premium over the market's. Now that's healthy.

CHART: TEXT NOT AVAILABLE Getting Better After a stretch of lackluster performance, Merck's stock is finally perking up.