Why Did Merck Stock Rise 65%?

Merck stock (NYSE: MRK) has gained over 65% in value since early January 2021 – jumping from levels of $70 then to around $115 now – vs. an increase of about 50% for the S&P 500 over this period. This can primarily be attributed to a significant 50% rise in the company’s revenue to $62 billion now, versus $42 billion in 2020. Furthermore, a 10% rise in the P/S ratio from 4.3x to 4.7x over this period has aided the stock price growth. Investors have rewarded MRK stock thanks to the massive uptick for its blockbuster drug – Keytruda.

However, the increase in MRK stock has been far from consistent. Returns for the stock were 2% in 2021, 49% in 2022, and 1% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that MRK underperformed the S&P in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment around rate cuts and tense geopolitical conditions, could MRK face a similar situation as it did in 2023 and underperform the S&P over the next 12 months — or will it see a strong jump? We think Merck stock is fully priced now. We estimate Merck’s Valuation to be $120 per share, aligning with its current market price. At its current levels, MRK stock is trading at 4.7x revenues, higher than the stock’s average P/S ratio of 4.4x seen over the last five years.

Merck’s revenue has risen at an average annual rate of 13.5% from $41.5 billion in 2020 to $60.1 billion in 2023. This growth has been driven by the success of Keytruda over the recent years. Keytruda has seen its label expand from Non-Small Cell Lung Cancer to Melanoma, Head & Neck, Cervical, Renal, and many more indications, resulting in a stellar 74% surge in sales to $25 billion in 2023, versus $14 billion in 2020. We think Keytruda will peak at around $32 billion in annual sales and decline thereafter with biosimilars entering the market. Currently, Samsung Bioepis, Amgen, Sandoz, and others are working on the development of Keytruda’s biosimilars.

Note that Keytruda accounted for 42% of total Merck’s sales in 2023 and its loss of market exclusivity will result in a meaningful decline in sales, and it will be challenging for Merck to bridge this gap. As such, Merck has been looking at inorganic growth, with acquisitions of Acceleron Pharma in 2021, Prometheus Biosciences in 2023, and Harpoon Therapeutics this year.

Other than Keytruda, Merck’s HPV vaccine – Gardasil – has been gaining market share and has seen its sales rise 126% to $8.9 billion in 2023, compared to $3.9 billion in 2020. Similar to Keytruda, Gardasil will also lose market exclusivity in the U.S. in 2028. However, the decline in Gardasil sales is expected to be less profound and hurting for Merck as opposed to Keytruda.

Now, Keytruda may face headwinds even in the near term. There could be likely an increased competition from Summit Therapeutics’ Ivonescimab and ImmunityBio’s Anktiva in lung cancer. Ivonescimab has shown great potential in clinical trials, while Anktiva secured U.S. regulatory approval earlier this year and is now covered by over a dozen insurance plans. ^[1]

Furthermore, Merck’s diabetes drug – Januvia – will be sold at a much lower rate of $113, versus its list price of $527, under Medicare. ^[2] Januvia garnered $2.2 billion in 2023 sales and with the recent price drop, it will likely see a meaningful fall in sales going forward.

Merck’s operating margin has contracted from 13.4% in 2020 to 4.9% in 2023. However, the 2023 margin decline for Merck can be attributed to a $10 billion charge recorded in Q2’23 from the Prometheus acquisition. If we look at the last twelve-month period, Merck’s operating margin of 25.7% fares much better than the levels seen in 2020.

Overall, Merck is poised to deliver mid-single-digit average annual top-line growth over the next three years, primarily led by Keytruda despite the potential headwinds in the near term. Although investors have rewarded the stock with a higher valuation multiple, is it worth picking now? We don’t think so. We don’t see any reason to expand the valuation multiple, especially in light of the potential threat to Keytruda. Furthermore, we believe that most of the positives are already priced in and investors willing to enter will likely be better off waiting for a dip.

While MRK stock looks fully valued, it is helpful to see how Merck’s peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 9/6/2024
[2] Cumulative total returns since the end of 2016

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1. Summit Therapeutics’ Press Release, May 30, 2024 [↩]
2. Medicare announces lower prices on 10 common, high-cost drugs, Berkeley Lovelace Jr., NBC, Aug 15, 2024 [↩]