Merck & Co., Inc. (NYSE:MRK) has experienced a 10% decline in its stock price over the past three months, underperforming both its industry and the broader market. While some investors might view this dip as a reason to sell, others see it as an opportunity to buy a fundamentally strong company at a discounted price. The question remains: Is now the right time to invest in Merck stock?
Recent Performance and Market Reaction
Merck stock began its downward trend after the company released its second-quarter results on July 25, 2024. Despite beating earnings and sales estimates and slightly raising its full-year revenue guidance, Merck lowered its earnings outlook due to acquisition costs. Additionally, the company provided a cautious outlook on sales for its HPV vaccine, Gardasil, particularly in China. As a result, Merck’s stock has remained below its 50-day and 200-day moving averages since late July, leading some investors to question whether the stock’s decline will continue or if it represents a buying opportunity.
Merck’s Key Strength: Keytruda
One of Merck’s biggest strengths is its blockbuster cancer drug, Keytruda, which accounts for approximately 50% of the company’s pharmaceutical sales. Keytruda is approved for 40 different cancer indications worldwide and continues to see strong sales growth, particularly in early-stage non-small cell lung cancer and triple-negative breast cancer. The drug’s success has been a major driver of Merck’s revenue growth in recent years.
Merck is also pursuing various strategies to ensure the long-term growth of Keytruda. These include developing innovative immuno-oncology combinations with inhibitors like TIGIT, LAG3, and CTLA-4. Moreover, in partnership with Moderna (NASDAQ:MRNA), Merck is developing a personalized mRNA therapeutic cancer vaccine to be used in combination with Keytruda for treating adjuvant melanoma and non-small cell lung cancer.
Pipeline Progress and Strategic Acquisitions
Merck has made significant progress in its pipeline, particularly in oncology, vaccines, and infectious diseases. The company has also executed several strategic acquisitions to bolster its portfolio. Notable acquisitions include Eyebiotech Limited, Harpoon Therapeutics, and the aqua business of Elanco Animal Health Incorporated (NYSE:ELAN). Additionally, Merck expanded its partnership with Japan’s Daiichi Sankyo, focusing on developing innovative cancer treatments.
Merck is also poised to launch several new products in the coming years. Between 2025 and 2030, the company expects to secure approval for eight potential new products. Among these, Winrevair, a treatment for pulmonary arterial hypertension, and Capvaxive, a 21-valent pneumococcal conjugate vaccine, are expected to generate significant revenues. These new products are part of Merck’s broader strategy to diversify its portfolio and reduce its reliance on Keytruda as it faces patent expiration in 2028.
Merck Stock’s Valuation and Earnings Outlook
From a valuation perspective, Merck stock appears attractive compared to its industry peers. The company’s shares currently trade at 12.63 times forward earnings, which is below the industry average of 20.47 and Merck’s own five-year mean of 13.73. This makes Merck stock relatively cheap, especially compared to other large pharmaceutical companies like Novo Nordisk and Eli Lilly (NYSE:LLY).
However, the recent decline in Merck stock price has led to downward revisions in earnings estimates. The Consensus Estimate for Merck’s 2024 earnings has decreased from $8.54 to $8.13 per share, while the 2025 estimate has fallen from $9.98 to $9.76 per share. These revisions reflect concerns about the company’s ability to offset the impact of acquisition costs and competition.
Conclusion: Should You Buy Merck Stock?
Merck undoubtedly faces challenges, including declining Gardasil sales in China, rising competition, and the looming loss of exclusivity for Keytruda. Despite these concerns, Merck remains a fundamentally strong company with a robust pipeline, promising new products, and a strong market position in oncology.
While the recent decline in earnings estimates and stock price has made some investors cautious, Merck’s current valuation presents an attractive entry point for long-term investors. With one of the world’s best-selling drugs in its portfolio and several promising candidates in late-stage development, Merck stock could prove to be a rewarding investment for those willing to buy on the dip and hold for the long term.
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