VALUATION HIGHLIGHTS

1. Oncology Drugs constitute 43% of the Trefis price estimate for Merck's stock.
2. Animal Health & Others constitute 16% of the Trefis price estimate for Merck's stock.
3. Cardiovascular constitutes 14% of the Trefis price estimate for Merck's stock.

WHAT HAS CHANGED?

MRK Stock Performance In Recent Years

MRK's stock performance over the past few years has been highly inconsistent. In 2021, the stock returned 2%, 49% in 2022, 1% in 2023, and -6% in 2024.

In contrast, the S&P 500 delivered returns of 27% in 2021, -19% in 2022, 24% in 2023, and 23% in 2024 - demonstrating that MRK underperformed the S&P in 2021, 2023, and 2024.

Q4 2025 Performance

Merck reported its Q4 2025 results on February 3, 2026, delivering a "beat and lower" performance: solid quarterly growth that was overshadowed by a conservative 2026 forecast and significant one-time acquisition charges.

Revenues reached $16.4 billion (+5% YoY), slightly exceeding analyst expectations. Full-year 2025 sales totaled $65.0 billion. Non-GAAP EPS was $2.04, a 19% increase compared to Q4 2024, beating consensus estimates.

The key growth drivers were:

1. Keytruda, the flagship oncology drug, which grew 7% to $8.4 billion in the quarter, fueled by earlier-stage cancer indications.

2. New launches, with notable contributions from Winrevair (pulmonary arterial hypertension) and Capvaxive (pneumococcal vaccine), with Winrevair sales surging 133% to $467 million.

3. Animal Health division, which saw revenues grow 8% to $1.5 billion, driven by livestock product demand.

On the flip side, Gardasil (HPV vaccine) sales plummeted 34% to $1.0 billion, primarily due to significantly lower demand and inventory shifts in China.

Merck's 2026 guidance was lower than Wall Street anticipated, signaling a "transition year" as the company absorbs acquisition costs and faces patent cliffs. The company expects sales in the range of $65.5-67.0B and Non-GAAP EPS of $5.00–5.15 for the year.

Cidara Acquisition

In early 2026, Merck finalized its $9.2 billion acquisition of Cidara Therapeutics. This deal is a cornerstone of Merck's strategy to diversify its portfolio beyond oncology and prepare for the eventual "patent cliff" of its blockbuster drug, Keytruda.

The primary driver of the deal is CD388, a "first-in-class" long-acting antiviral currently in Phase 3 trials. It is designed to prevent symptomatic Influenza A and B.

The Edge: Unlike annual flu shots that require an immune response, CD388 is a drug-Fc conjugate that provides immediate, passive immunity. It is intended as a once-per-season subcutaneous dose for high-risk individuals (e.g., the elderly or immunocompromised) for whom traditional vaccines may be less effective.

Loss of Marketing Exclusivity

In recent years, several of Merck's medications have lost their market exclusivity. This includes Zetia, Vytorin, Invanz, Dulera, Nasonex, and NuvaRing. The loss of patent protection has led to reduced sales amid increased competition.

Growth In Gardasil Sales Have Slowed

Merck has experienced success with Gardasil, the vaccine used to prevent HPV (human papillomavirus), which is linked to certain types of cancers and is therefore highly significant. Although the vaccine saw strong sales growth through immunization efforts in various regions, including Europe and China, its sales have recently slowed due to decreased demand in China.

Keytruda Is One of The Top Selling Drugs In Immuno-Oncology Space

Keytruda is gaining wider acceptance and has emerged as one of the leading drugs in the immuno-oncology field—a space currently headed by AbbVie's Humira, which generated over $29 billion in sales in 2024. The recent sales growth of Keytruda was largely driven by its success in treating lung cancer, and it is also performing strongly outside the U.S. With dozens of approvals already under its belt, the drug’s applications continue to expand. Moreover, with multiple phase 3 programs underway, Keytruda is expected to receive additional approvals for various indications, which should further support Merck's sales growth in the coming years.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Key drivers of Merck's value that present opportunities for upside or downside to the current Trefis price estimate for Merck:

Merck's Gross Profit Margins

• Merck's gross profit margin: Our forecast projects Merck's gross profit margin to rebound from its 2024 level of 73% to 80% after declining from 75% in 2021. However, failure to achieve this rebound and a further drop to 67% would pose a significant downside risk of 20% to our Merck price target. On the other hand, exceeding our margin expectations due to strong pricing trends presents a 10% upside potential.

BUSINESS SUMMARY

As one of the world's leading pharmaceutical companies by revenue, Merck provides a wide range of innovative healthcare solutions. Its offerings include prescription drugs, vaccines, biologic treatments, and products for animal health, all marketed through its own channels and collaborative ventures. Merck's business is organized into three primary divisions: Pharmaceuticals, Animal Health, and Alliances.

SOURCES OF VALUE

Oncology Drugs Portfolio

Merck's oncology division has experienced explosive growth, with sales skyrocketing from below $1.0 billion in 2014 to over $32 billion in 2024. This impressive expansion is primarily attributed to the strength of its oncology drug portfolio, particularly the leading role played by Keytruda. We anticipate this upward trend to continue, forecasting sales to surpass $40 billion by 2028.

KEY TRENDS

Loss of Patents Impacting Sales

Merck, consistent with the broader pharmaceutical landscape, is confronting the challenge of patent losses for significant drugs in its portfolio. Among these, its leading revenue generators, Keytruda and Gardasil, are projected to face biosimilar rivals in the coming 3-4 years.

Growing Threat of Generic Products

The rapidly expanding pharmaceutical market in emerging economies, known as 'Pharmerging,' presents a significant challenge to major pharmaceutical companies like Merck. These economies possess the technical expertise to produce generic versions of blockbuster drugs, often at substantially lower prices than the original branded medications.

This cost advantage can severely erode the long-term profitability of Big Pharma. For Merck, this threat extends to the future potential competition from biosimilars, which are essentially generic versions of its biologic drugs.

Globalization of Healthcare Reforms

In response to growing budget deficits, governments globally are seeking to control fiscal spending. As healthcare costs constitute a significant component of national budgets, it is widely anticipated that there will be a rise in healthcare legislation and reforms internationally. This trend is likely to negatively impact the revenue streams of the entire pharmaceutical sector.