Merck Faces Multiple Challenges: Will It Steer Through Successfully?

Merck MRK is expected to face several hurdles over the next few years that could affect its long-term growth trajectory, starting with the anticipated loss of exclusivity of its blockbuster PD-L1 inhibitor, Keytruda, in 2028. The company's biggest revenue driver, Keytruda, is approved for several types of cancer indications and accounts for around 50% of the company’s sales.

Keytruda generated sales worth $7.21 billion in the first quarter of 2025, up 6% year over year. The drug remains a key driver of Merck’s top-line growth.

Though Keytruda will lose patent exclusivity in 2028, its sales are expected to remain strong until then. Merck remains heavily dependent on Keytruda for growth. Our model estimate for Keytruda suggests a CAGR of 5.4% over the next three years.

MRK’s second-largest product is Gardasil, which is a vaccine for the prevention of certain cancers caused by human papillomavirus (HPV). Though the vaccine’s sales rose consistently till 2022, it started witnessing sluggish sales from 2024.

Sales of the vaccine have been declining due to weak demand trends in China amid an economic slowdown. Gardasil sales declined 40% in the first quarter of 2025 and 3% to $8.58 billion in 2024.

However, Gardasil sales are strong in almost every major region outside China, including the United States and Japan, driven by higher demand. Our model estimate for Gardasil suggests a negative CAGR of 6.4% over the next three years.

Additionally, Merck expects an unfavorable impact from the Medicare Part D redesign under the Inflation Reduction Act (IRA), which takes effect in 2025. Merck expects the government price setting to hurt sales of its diabetes drug, Januvia/Janumet, in 2026. Keytruda is expected to be selected in 2026 for government price setting, which will become effective from 2028.

Despite the ongoing headwinds and the upcoming challenges, we believe Merck’s new 21-valent pneumococcal conjugate vaccine, Capvaxive, and pulmonary arterial hypertension (PAH) drug, Winrevair, have the potential to support top-line growth once Keytruda loses exclusivity in 2028. Both products have witnessed a strong launch so far. The company is also looking for ways to diversify its product lineup, especially by growing its non-oncology business to navigate the potential challenges.

Medicare Part D Changes to Hurt Other Drugmakers' Sales

In 2022, in the United States, Congress passed the IRA, which made significant changes to how drugs are covered and paid for under Medicare, including penalties for significant increases in the prices of drugs.

Among other measures, the IRA requires the U.S. Department of Health and Human Services to effectively set prices for certain single-source drugs and biologics reimbursed under Medicare Part B and Part D.

Similar to Merck, other players like J&J JNJ, Pfizer PFE, Eli Lilly LLY and Amgen also expect an unfavorable impact of the Medicare Part D redesign on their top line. J&J expects Medicare Part D redesign to hurt sales of drugs like Stelara, Tremfya, Erleada and PAH drugs. Lilly expects the government price setting to hurt sales of its diabetes drug Jardiance in 2026. Pfizer expects the government price setting to hurt sales of its key drugs, Vyndaqel, Ibrance, Xtandi and Xeljanz. Amgen’s Enbrel and Otezla will be under Medicare price setting beginning in 2026 and 2027, respectively.

MRK's Price Performance, Valuation and Estimates

Year to date, shares of Merck have lost 18.2% compared with the industry’s decrease of 1.1%.

From a valuation standpoint, Merck appears attractive relative to the industry. Going by the price/earnings ratio, the company’s shares currently trade at 8.71 forward earnings, lower than 14.93 for the industry and its 5-year mean of 12.83.

The Zacks Consensus Estimate for 2025 earnings has declined from $8.94 per share to $8.91, while the same for 2026 has decreased from $9.77 to $9.73 over the past 60 days.

Merck currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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