Will Merck's Keytruda Continue to Drive Growth Amid Looming LOE?

Merck's Q1 2025 results show Keytruda driving approximately 50% of pharmaceutical sales, with a 6% year-over-year increase to $7.21 billion, though the company's stock is down 19.6% YTD. While Keytruda's patent expiry in 2028 raises concerns about future growth, Merck is pursuing strategies like mRNA combinations with Moderna and a new subcutaneous formulation to extend its market position, alongside relying on Winrevair and other pipeline drugs to offset the eventual loss of exclusivity; however, Summit Therapeutics' ivonescimab could pose a competitive threat.

Analysis

Merck's financial landscape is dominated by Keytruda, its flagship PD-L1 inhibitor, which accounted for approximately 50% of pharmaceutical sales and achieved $7.21 billion in revenue in Q1 2025, a 6% year-over-year increase driven by uptake in early-stage cancer treatments. However, this significant reliance on Keytruda, whose patent exclusivity expires in 2028, presents a considerable challenge to future growth, exacerbated by emerging competition such as Summit Therapeutics' ivonescimab, which showed positive Phase III results against Keytruda in NSCLC. To counteract this looming patent cliff, Merck is pursuing multiple strategic initiatives, including developing innovative immuno-oncology combinations, advancing a personalized mRNA cancer vaccine (V940/mRNA-4157) in partnership with Moderna, and developing a subcutaneous formulation of Keytruda, with an FDA decision expected in September that could extend its market presence. The launch of Winrevair for pulmonary arterial hypertension is also anticipated to bolster future revenues. Despite these efforts, Merck's stock has underperformed, declining 19.6% year-to-date, while the broader industry saw a 0.3% increase. From a valuation perspective, Merck trades at a forward P/E ratio of 8.55, substantially lower than the industry average of 15.12 and its own 5-year mean of 12.89, suggesting a potentially attractive entry point. However, earnings estimates for 2025 and 2026 have been revised downwards in the past 60 days, reflecting investor concerns about the company's long-term growth prospects beyond Keytruda.

Key Decisions for Investors

• Investors should closely monitor upcoming catalysts, particularly the FDA's September decision on Keytruda's subcutaneous formulation and clinical trial progress for the V940 mRNA vaccine, as these are pivotal for addressing the 2028 patent expiry.
• Despite Merck's attractive valuation relative to its peers and historical levels, the declining earnings estimates, significant stock underperformance, and acute dependence on Keytruda necessitate a cautious stance, emphasizing the need to track successful revenue diversification and management of competitive threats.
• The market penetration and revenue contribution of new products like Winrevair, alongside the evolving competitive dynamics with treatments such as Summit Therapeutics' ivonescimab, will serve as key indicators of Merck's capacity to sustain growth post-Keytruda.