Why Merck's 32% Rally Isn't Enough to Change the Bearish View

Core Insights - Merck's stock has increased by 32.3% over the past three months, indicating strong bullish momentum as it trades above its 50-day and 200-day simple moving averages [1] - Keytruda, Merck's leading drug, accounts for over 50% of its pharmaceutical sales, generating $23.3 billion in sales during the first nine months of 2025, an 8% year-over-year increase [2][3] - The company is facing challenges with declining sales of Gardasil, which fell by 40% due to weak demand in China, and is expected to see further declines in 2025 [13][14] Keytruda's Performance and Strategy - Keytruda's sales are benefiting from increased uptake in early-stage non-small cell lung cancer and continued momentum in metastatic indications [3] - Merck is pursuing innovative strategies to sustain Keytruda's growth, including new immuno-oncology combinations and a subcutaneous formulation approved by the FDA [4][5] - The company is also developing a personalized mRNA therapeutic cancer vaccine in collaboration with Moderna, which is currently in pivotal phase III studies [4] Pipeline and M&A Activities - Merck's phase III pipeline has nearly tripled since 2021, positioning the company to launch around 20 new vaccines and drugs in the coming years, including Capvaxive and Winrevair [7] - Recent acquisitions, such as Cidara Therapeutics for $9.2 billion and Verona Pharma for approximately $10 billion, are expected to enhance Merck's product offerings and revenue potential [11][12] Financial Performance and Valuation - Merck's shares have risen 10.3% over the past year, but the stock is still viewed as underperforming compared to the industry, trading at a price/earnings ratio of 13.15, lower than the industry average of 17.86 [19][22] - Earnings estimates for 2026 have decreased from $9.23 to $7.94 per share, attributed to costs from recent M&A activities [25] Challenges and Market Outlook - Merck's reliance on Keytruda raises concerns about its ability to diversify its product lineup ahead of the drug's patent expiration in 2028 [16] - Competitive pressures are increasing, particularly from dual PD-1/VEGF inhibitors that may challenge Keytruda's market position [17][18] - Short-term investors may be cautious due to ongoing challenges with Gardasil and the potential impact of competition on Keytruda [29]