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

Merck's stock has underperformed the industry and S&P 500 this year, driven by macroeconomic uncertainty and concerns over future growth as Keytruda's patent expiration approaches in 2028 and Gardasil sales decline in China. While Keytruda remains a strong revenue driver, accounting for roughly 50% of pharmaceutical sales, Merck faces potential competition and generic erosion in other segments; however, the company's pipeline progress, strategic M&A, and promising new products like Capvaxive and Winrevair offer long-term growth potential, leading to a hold rating.

Analysis

Merck's (MRK) stock has significantly underperformed its industry, sector, and the S&P 500 year-to-date, declining 21.3% against an industry decrease of 4.5%, and currently trades below its 50-day and 200-day moving averages. This underperformance is attributed to broader macroeconomic uncertainties, particularly tariff-related tensions, and company-specific challenges. Despite these headwinds, Merck's primary revenue driver, Keytruda, which accounts for approximately 50% of pharmaceutical sales, continues to exhibit strong growth from uptake in earlier-stage indications and metastatic settings. Merck is pursuing strategies to extend Keytruda's lifecycle, including a subcutaneous formulation (FDA decision expected in September) and combination therapies, such as with Moderna's V940/mRNA-4157. However, the looming patent expiration of Keytruda in 2028 raises concerns about future growth, exacerbated by potential competition from candidates like Summit Therapeutics' ivonescimab. Another significant challenge is the declining sales of Gardasil in China due to sluggish demand and a temporary halt in shipments, with Merck assuming no further shipments to China in 2025. Merck also faces generic erosion for some products. Positively, Merck's phase III pipeline has nearly tripled since 2021, positioning it for approximately 20 new product launches, with recently launched Capvaxive and Winrevair showing strong initial uptake. The company is also advancing candidates like enlicitide decanoate and has in-licensed HS-10535 for the obesity market. From a valuation perspective, MRK appears attractive with a forward P/E ratio of 8.39, below the industry's 14.51 and its own 5-year mean of 12.93. However, EPS estimates for 2025 and 2026 have declined over the past 60 days, reflecting analyst pessimism. Merck believes the impact of potential pharmaceutical tariffs is manageable in the short term due to its global supply chain and inventory levels.

Key Decisions for Investors

• Investors should monitor the sales trajectory and market penetration of new products like Capvaxive and Winrevair, as these are crucial for diversifying revenue ahead of Keytruda's 2028 patent expiry.
• Closely track clinical trial data and market reception for Keytruda's potential competitors, such as Summit Therapeutics' ivonescimab, and progress on Keytruda's subcutaneous formulation which could extend its franchise value.
• Consider the current valuation, which appears attractive relative to peers and historical levels, but weigh this against declining EPS MRNA estimates and the ongoing challenges with Gardasil sales in China.
• Maintain awareness of the broader macroeconomic environment, particularly trade and tariff policies, despite Merck's current assessment of manageable impact, as this could still affect sentiment and operational costs for the pharmaceutical sector.