Morningstar has issued a HOLD recommendation on Merck & Co. Inc., maintaining a fair value estimate of $120, with the stock currently trading at $105.88. Merck’s wide economic moat, largely attributed to its flagship cancer drug, Keytruda, is supported by an expanding pipeline and a robust vaccine portfolio, notably Gardasil. Despite potential headwinds, including Keytruda’s impending 2028 patent expiration, Merck’s strategic R&D investments and promising drug pipeline offer long-term growth potential. Investors are advised to consider Merck as a steady performer in the pharmaceutical sector, though diligence is recommended given medium-level uncertainty around pricing and regulatory pressures.

Merck’s Financial Performance and Fair Value Estimate

Q3 Financials and Valuation: Merck’s latest closing price of $105.88 reflects an approximate 12% discount to Morningstar’s fair value estimate of $120. This valuation accounts for Merck’s consistent revenue growth through its oncology and vaccine segments, while acknowledging potential challenges, including generic competition.

Market Position: With a market capitalization of $263.57 billion, Merck ranks among the top pharmaceutical companies globally, driven by strong demand for Keytruda and Gardasil.

Keytruda: The Core Driver of Merck’s Revenue and Growth

Immuno-Oncology Market Leadership: Keytruda holds a dominant position in the immuno-oncology landscape, particularly for non-small cell lung cancer (NSCLC), and is projected to generate peak sales of over $40 billion. Its success has positioned Merck at the forefront of the cancer treatment market, ensuring robust near-term revenue streams.

Pipeline Support and Patent Losses: With Keytruda’s U.S. patent set to expire in 2028, Merck is focusing on a subcutaneous formulation that could extend patent protection through the 2030s. Merck anticipates that this new version will capture a substantial share of Keytruda’s sales, reducing the impact of generic competition.

Gardasil and Vaccine Portfolio Performance

Gardasil Growth Trajectory: Gardasil, Merck’s HPV vaccine, continues to show strong international sales, particularly in China. Though its growth is expected to decelerate, Gardasil remains a critical revenue contributor, supporting Merck’s financial resilience.

Expanding Vaccine Portfolio: Merck’s vaccine division is bolstered by Capvaxive and other vaccines targeting unmet needs, reinforcing the company’s commitment to preventive healthcare.

Strategic Acquisitions and R&D Investments

Pipeline Development and Partnerships: Merck’s partnerships with AstraZeneca (Lynparza) and Daiichi Sankyo enhance its drug pipeline in oncology, while recent acquisitions, including Acceleron, further diversify its portfolio. These strategic moves are expected to yield long-term benefits and mitigate the risks associated with patent expirations.

New Drug Potential: With drugs like Winrevair (for rare diseases) and V940 (cancer vaccine) showing promise, Merck’s R&D investments continue to focus on high-growth areas with strong pricing power.

Risks and Uncertainty

Medium-Level Uncertainty: Merck faces medium-level uncertainty, primarily from regulatory pressures and potential pricing reforms, especially in the U.S. market. The patent cliff for Keytruda in 2028 poses a significant risk, though the company’s proactive pipeline strategy is aimed at offsetting this challenge.

Disclaimer: Investors are encouraged to conduct due diligence and consider all financial risks before making any investment decisions.