Can Merck Successfully Steer Through the Upcoming Headwinds?

Core Viewpoint - Merck is expected to face significant challenges impacting its long-term growth outlook, primarily due to the impending loss of exclusivity for its leading drug, Keytruda, in 2028, despite recent sales growth [1][11]. Group 1: Keytruda and Revenue Impact - Keytruda, a PD-L1 inhibitor, generated sales of $23.3 billion in the first nine months of 2025, marking an 8% year-over-year increase and accounting for over 50% of Merck's pharmaceutical sales [1][2]. - The intravenous formulation of Keytruda will lose patent exclusivity in 2028, prompting Merck to develop a subcutaneous formulation, Keytruda Qlex, which has its own patents extending beyond 2028 [3]. - The anticipated loss of exclusivity for Keytruda is a major concern for Merck's revenue stability moving forward [11]. Group 2: Declining Sales of Gardasil - Gardasil, Merck's second-largest product, saw sales of $4.20 billion in the first nine months of 2025, reflecting a 40% decline year over year, primarily due to weak demand in China and Japan [4][5]. - Management expects continued weakness in Gardasil sales in these markets as they head into 2026 [5]. Group 3: Regulatory and Competitive Challenges - The redesign of Medicare Part D under the Inflation Reduction Act, effective in 2025, poses additional challenges, with drugs like Januvia and Janumet facing government price setting starting in 2026 and 2027, respectively [6][7]. - Keytruda is also expected to be subject to government price setting in 2027, which could further impact U.S. sales post-2029 [7]. Group 4: Future Growth Prospects - Merck is focusing on new products like the 21-valent pneumococcal conjugate vaccine, Capvaxive, and the pulmonary arterial hypertension drug, Winrevair, to drive revenue growth after Keytruda's exclusivity ends [8]. - The Animal Health business is contributing positively to Merck's growth, and the company aims to achieve $3 billion in annual cost savings by the end of 2027 through optimization initiatives [9]. Group 5: Market Performance and Valuation - Merck's shares have increased by 27.5% over the past six months, outperforming the industry average of 19% [14]. - The company's price/earnings ratio stands at 11.56, which is lower than the industry average of 17.11 and its five-year mean of 12.49, indicating attractive valuation [15]. - The Zacks Consensus Estimate for 2025 earnings per share has risen from $8.92 to $8.98, while the estimate for 2026 has decreased from $9.44 to $8.37 [17].