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Merck (MRK) Up 17% YTD on Keytruda Strength: Should You Buy?

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Merck’s (MRK - Free Report) stock has risen 17.5% so far this year, underperforming an increase of 24.2% for the industry, as seen in the chart below. 

Merck Stock Underperforms Industry

Zacks Investment ResearchImage Source: Zacks Investment Research

Merck boasts more than six blockbuster drugs in its portfolio, with PD-L1 inhibitor Keytruda approved for several types of cancer and alone accounting for more than 45% of the company’s pharmaceutical sales. The drug has played an instrumental role in driving Merck’s steady revenue growth in the past few years. Though Keytruda may be Merck’s biggest strength and a solid reason to own the stock, it can also be argued that the company is excessively dependent on the drug and should look for ways to diversify its product lineup.

Let’s delve deeper and understand how to play Merck’s stock.

Keytruda is Merck’s Biggest Strength

Keytruda is already approved for the treatment of many cancers globally. Its sales are gaining from rapid uptake across earlier-stage indications like triple-negative breast cancer and renal cell carcinoma, as well as early-stage non-small cell lung cancer, for which approval was received in the United States in October 2023. Continued strong momentum in metastatic indications is also boosting sales growth. The company expects continued growth from Keytruda, particularly in early lung cancer.

Merck is working on different strategies to drive the long-term growth of Keytruda. These include innovative immuno-oncology combinations, including Keytruda with TIGIT, LAG3 and CTLA-4 inhibitors. In partnership with Moderna (MRNA - Free Report) , Merck is developing a personalized mRNA therapeutic cancer vaccine (V940/mRNA-4157) in combination with Keytruda for the treatment of adjuvant melanoma and non-small cell lung cancer.

Pipeline Progress & Strategic M&A Deals

Merck made meaningful regulatory and clinical progress this year across areas like oncology (mainly Keytruda), vaccines and infectious diseases while also executing strategic business moves like the acquisitions of Eyebiotech Limited, Harpoon Therapeutics and Elanco Animal Health Incorporated’s (ELAN - Free Report) aqua business. All this pulled up the stock price.

This year, Merck has initiated pivotal phase III studies on four of its cancer candidates, most of which it added to its pipeline from the acquisitions and collaboration deals made in 2022.

Merck also has some key new products lined up for launch. Between 2025 and 2030, Merck expects eight potential new product approvals. We believe that among these, Capvaxive and Winrevair have the potential to generate significant revenues for Merck over the long term. Winrevair (sotatercept) was approved for pulmonary arterial hypertension in March 2024 while it is under review in the EU, with a decision expected in the second half of 2024. Capvaxive (V116), Merck’s 21-valent pneumococcal conjugate vaccine, was approved in the United States in June 2024.

Attractive Valuation & Rising Estimates

From a valuation standpoint, Merck appears attractive relative to the industry. Going by the price/earnings ratio, the company’s shares currently trade at 13.73 forward earnings, lower than 20.71 for the industry.

MRK Stock Valuation

Zacks Investment ResearchImage Source: Zacks Investment Research

The Zacks Consensus Estimate for 2024 earnings has risen from $8.62 to $8.63 per share over the past 30 days. For 2025, earnings estimates have risen from $9.92 to $9.94 per share over the same timeframe.

MRK Estimate Movement

Zacks Investment ResearchImage Source: Zacks Investment Research

Conclusion

Merck does have its share of problems, like generic competition for several drugs and rising competitive pressure, mainly on the diabetes franchise. There are concerns about the firm’s ability to grow its non-oncology business ahead of Keytruda's loss of exclusivity later in the decade.

Nonetheless, we believe the strong demand for Keytruda and Gardasil vaccines to prevent HPV-related cancers, a significant contribution from new products like Welireg and Vaxneuvance vaccine, and the Animal Health segment can keep driving top-line growth. Merck is pinning hopes on PAH drug Winrevair to boost its top line once Keytruda loses exclusivity. Though Keytruda will lose patent exclusivity in 2028, its sales are expected to remain strong until then. Merck has other promising candidates in its late-stage pipeline like MK-0616, an oral PCSK9 inhibitor for hypercholesterolemia, tulisokibart, a TL1A inhibitor for ulcerative colitis and Daiichi-Sankyo-partnered antibody drug conjugates or ADCs.

Merck’s stock has shrugged off its 2023 underperformance by rising decently this year. The stock has been trading above its 200-day moving average since mid-December last year.

Investors may consider buying this Zacks Rank #2 (Buy) stock as the company has one of the world’s best-selling drugs in its portfolio, generating billions of dollars in revenues. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Consistently rising earnings estimates clearly highlight analysts’ optimistic outlook for further growth. Merck’s stock is reasonably valued and buying this fundamentally strong company at the current price can prove to be beneficial for long-term investors.


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