MRK Down 21% YTD: Should You Buy, Hold or Sell the Stock?

Merck's (MRK) shares have declined 21.3% YTD, underperforming the industry and S&P 500, due to macroeconomic uncertainty and concerns surrounding Keytruda's patent expiration in 2028 and declining Gardasil sales in China. While Keytruda remains a key revenue driver, accounting for 50% of pharmaceutical sales, the company faces potential competition and generic erosion of other drugs; however, new products like Capvaxive and Winrevair, along with a promising pipeline, could offset these challenges, leading to a "Hold" rating.

Analysis

Merck's (MRK) stock has significantly underperformed, declining 21.3% year-to-date, lagging its industry (down 4.5%), the broader sector, and the S&P 500, while trading below its 50-day and 200-day moving averages. This underperformance is attributed to macroeconomic uncertainties, including tariff tensions and potential US drug pricing policy changes, alongside company-specific challenges. Keytruda, accounting for approximately 50% of pharmaceutical sales, remains a primary revenue driver, fueled by uptake in earlier-stage indications like non-small cell lung cancer (NSCLC). Merck is pursuing strategies to bolster Keytruda's longevity, including immuno-oncology combinations, a personalized mRNA vaccine (V940/mRNA-4157) with Moderna, and a subcutaneous formulation awaiting an FDA decision in September. The company's phase III pipeline has nearly tripled since 2021, with around 20 new drug and vaccine launches anticipated, including the strongly launched Capvaxive and Winrevair, and promising candidates like enlicitide decanoate and tulisokibart. However, Merck faces substantial headwinds: Keytruda's patent expiration in 2028 raises concerns about future growth and diversification, exacerbated by emerging competition, such as Summit Therapeutics' ivonescimab, which outperformed Keytruda in a phase III NSCLC study in China. Furthermore, sales of Gardasil, Merck's second-largest product, are declining in China due to weak demand and inventory issues, leading Merck to assume no further shipments to China in its 2025 revenue guidance, although sales remain strong elsewhere. Declining EPS estimates for 2025 and 2026 reflect analyst pessimism. Despite these challenges, Merck's valuation appears attractive, with a forward P/E ratio of 8.39, below the industry average of 14.51 and its five-year mean of 12.93. The company believes the impact of potential pharmaceutical tariffs is manageable in the short term.

Key Decisions for Investors

• Investors should weigh Merck's current attractive valuation and robust pipeline, including new launches like Capvaxive and Winrevair, against significant risks such as Keytruda's 2028 patent cliff, increasing competition, and persistent Gardasil sales issues in China.
• Monitor upcoming catalysts closely, particularly the FDA decision on the subcutaneous formulation of Keytruda expected in September and the decision for clesrovimab in June, as these could materially impact future revenue projections.
• Evaluate Merck's progress in diversifying its revenue base and advancing its non-oncology pipeline to mitigate over-reliance on Keytruda, especially in light of Summit Therapeutics' ivonescimab data and declining analyst EPS estimates for 2025-2026.