Merck Falls 14% YTD: Time to Buy, Sell or Hold the Stock?

Merck (MRK) faces a mixed outlook, with its shares down nearly 14% year-to-date due to concerns over its significant reliance on blockbuster Keytruda, which accounts for over 50% of pharmaceutical sales and faces loss of exclusivity in 2028 amid rising competitive threats. Despite these challenges, Merck is proactively strengthening its future pipeline with 20 potential new drugs and vaccines, including strong launches for Capvaxive and Winrevair, and executing strategic M&A like the $10 billion Verona Pharma acquisition. However, a sharp 48% decline in Gardasil sales in H1 2025 due to China's inventory issues and broader generic pressures remain headwinds, prompting a "wait-and-see" approach from analysts regarding the company's ability to navigate the post-Keytruda period.

Analysis

Merck's stock is under significant pressure, having declined nearly 14% year-to-date against a 1.6% rise for its industry, reflecting a conflict between its current strengths and considerable future uncertainties. The company's heavy reliance on its blockbuster drug Keytruda, which constitutes over 50% of pharmaceutical sales and grew 7% in the first half of 2025, is a primary concern ahead of its loss of exclusivity in 2028. This risk is amplified by emerging competition from dual PD-1/VEGF inhibitors, such as Summit Therapeutics' ivonescimab, which outperformed Keytruda in a phase III study. Compounding these challenges is a severe 48% drop in sales for its second-largest product, Gardasil, in H1 2025, driven by an economic slowdown and inventory issues in China that have prompted a halt in shipments through at least the end of 2025. In response, Merck is aggressively building its pipeline, which has tripled since 2021 and includes promising new launches like Capvaxive and Winrevair. Furthermore, the strategic $10 billion acquisition of Verona Pharma aims to bolster its cardio-pulmonary portfolio and diversify revenue. Despite these proactive measures, and a seemingly attractive valuation with a forward P/E of 8.95 versus the industry's 14.78, the mixed earnings estimates for 2025 (up) and 2026 (down) underscore the prevailing uncertainty regarding Merck's ability to successfully navigate its transition.

Key Decisions for Investors

• Investors should weigh the stock's discounted valuation, with a forward P/E of 8.95, against the substantial execution risk tied to the 2028 Keytruda patent cliff and the severe, ongoing revenue headwinds from Gardasil's collapse in China.
• Monitor key near-term catalysts that could alter the risk profile, including the upcoming FDA decision on the subcutaneous Keytruda formulation, the sales trajectory of new products like Capvaxive and Winrevair, and the successful integration of the Verona Pharma acquisition.
• A cautious or hold stance is warranted until there is greater clarity on Merck's ability to offset its challenges, specifically by observing any resolution to the Gardasil inventory issues in China and tracking the competitive progress of next-generation cancer therapies that threaten Keytruda's market share.