What’s Next For Merck After A Q1 Beat?

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Merck (NYSE: MRK) recently released its first-quarter results, surpassing Wall Street’s expectations for both revenue and earnings. The company reported revenue of $15.53 billion and adjusted earnings per share of $2.22, exceeding consensus estimates of $15.31 billion and $2.14, respectively. The strong performance was driven by continued growth in sales of Keytruda. However, sales of Gardasil experienced a significant decline due to soft demand in China. Despite the positive Q1 results, Merck lowered its outlook for 2025, citing an estimated $200 million in costs related to tariffs.

Following the earnings release on Friday, April 25th, Merck’s (MRK) stock price increased by 4%. However, year-to-date, MRK stock has underperformed the S&P 500 Health Care index, with a return of -17% compared to the index’s 0.2% gain. This underperformance can be partly attributed to the challenges faced by its HPV vaccine, Gardasil, in China due to reduced demand.

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How Did Merck Perform in Q1?

In the first quarter, Merck’s revenue of $15.53 billion, reflected a 2% year-over-year decrease. This decline was despite continued growth from Keytruda, which saw a 4% year-over-year increase in sales, reaching $7.2 billion. Additionally, Merck’s newer drugs, Winrevair and Capvaxive, are gaining traction. Conversely, Gardasil sales experienced a significant 41% year-over-year drop to $1.3 billion, primarily due to a continued softness in demand from China.

Merck’s adjusted gross margin improved by 40 basis points to 78%, benefiting from a favorable product mix. The company’s adjusted earnings per share reached $2.22. It’s worth noting that the first quarter of 2024 included a $0.26 per share charge related to the acquisition of Harpoon Therapeutics, which impacts the year-over-year comparison of the bottom line.

Looking ahead, Merck maintains its revenue guidance for the full year 2025, expecting sales to be between $64.1 billion and $65.6 billion. However, the company has lowered its adjusted earnings per share outlook to a range of $8.82 to $8.97, citing an estimated $200 million in tariff costs incurred to date.

What Are the Implications for MRK Stock?

While Merck’s first-quarter results were positive, the revised outlook indicates a slight reduction in margins and earnings. We estimate Merck’s valuation at $109 per share, suggesting a substantial 30% upside from the current trading price of $83. Currently, MRK stock is trading at a price-to-earnings (P/E) ratio of 11 times its trailing earnings per share of $7.79, which is below the stock’s historical average P/E of approximately 14 times.

Given the robust growth trajectory of Keytruda and the increasing momentum of Merck’s new drug launches, we believe the current lower valuation multiple presents an attractive investment opportunity for long-term investors. Furthermore, the company’s recent strategic acquisitions, including Prometheus Biosciences, Acceleron Pharma, Imago BioSciences, Harpoon Therapeutics, and EyeBio, are expected to contribute to both revenue and earnings growth in the coming years.

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