Merck Falls 9% in 3 Months: Buy, Hold or Sell the Stock?

Key TakeawaysMerck faces headwinds like declining sales of the HPV vaccine, Gardasil, and diabetes drug, Januvia.Merck faces broader industry pressure as vaccine skeptic Robert F. Kennedy Jr. possibly next HHS secretary.Merck's shares have lost 15.3% in the past year compared with a decline of 3.9% for the industry.Merck MRK stock has declined 8.8% in the past three months. Merck faces its share of headwinds like declining sales of the human papillomavirus (HPV) vaccine, Gardasil, and diabetes drug, Januvia, and the upcoming loss of exclusivity blockbuster cancer drug, Keytruda. However, a lot of this price decline is due to the poor performance of the overall drug and biotech sector in the past couple of months after Trump picked Robert F. Kennedy Jr., a vaccine skeptic, to be the next secretary of the Department of Health and Human Services, the agency that oversees the FDA.This, coupled with disappointing third-quarter sales and profits, guidance cuts and pipeline setbacks, affected the overall performance of the drug and biotech industry.The decline in Merck’s stock price and the drug/biotech sector’s downturn have left investors confused about whether to buy, hold or sell MRK stock. Let’s understand the company’s strengths and weaknesses to better analyze how to play Merck’s stock.Keytruda: Merck’s Biggest StrengthMerck boasts more than six blockbuster drugs in its portfolio, with PD-L1 inhibitor Keytruda being the key top-line driver. Keytruda, approved for several types of cancer, alone accounts for around 50% of the company’s pharmaceutical sales. The drug has played an instrumental role in driving Merck’s steady revenue growth in the past few years.Keytruda’s sales are gaining from rapid uptake across earlier-stage indications, mainly early-stage non-small cell lung cancer. Continued strong momentum in metastatic indications is also boosting sales growth. The company expects continued growth from Keytruda, particularly in early lung cancer.Merck is working on different strategies to drive Keytruda's long-term growth. These include innovative immuno-oncology combinations, including Keytruda with TIGIT, LAG3 and CTLA-4 inhibitors. In partnership with Moderna MRNA, Merck is developing a personalized mRNA therapeutic cancer vaccine (V940/mRNA-4157), in combination with Keytruda, for treating adjuvant melanoma and non-small cell lung cancer. Merck is also developing a subcutaneous formulation of Keytruda that can extend its patent life.MRK’s Keytruda Faces Patent Expiration in 2028Merck is heavily reliant on Keytruda. Though Keytruda may be Merck’s biggest strength and a solid reason to own the stock, it can also be argued that the company is excessively dependent on the drug and should look for ways to diversify its product lineup.There are rising concerns about the firm’s ability to grow its non-oncology business ahead of the upcoming loss of exclusivity of Keytruda in 2028.Also, competitive pressure might increase for Keytruda in the near future. In 2024, Summit Therapeutics SMMT reported positive data from a phase III study (conducted in China by partner Akeso) in patients with locally advanced or metastatic NSCLC, in which its lead pipeline candidate, ivonescimab, a dual PD-1 and VEGF inhibitor, outperformed Keytruda. Summit believes iivonescimab has the potential to replace Keytruda as the next standard of care across multiple NSCLC settings.MRK’s Pipeline Progress & Strategic M&A DealsMerck made meaningful regulatory and clinical progress in 2024 across areas like oncology (mainly Keytruda), vaccines and infectious diseases while executing strategic business moves like the acquisitions of Eyebiotech Limited, Harpoon Therapeutics and Elanco’s aqua business. It also expanded its existing cancer deal with Japan’s Daiichi Sankyo and signed a collaboration with Exelixis EXEL to advance the development of the latter’s cancer candidate, zanzalintinib.Merck's phase III pipeline has almost tripled over the past three years, positioning it to launch several new vaccines and drugs over the next five years, with many having blockbuster potential. Merck’s new 21-valent pneumococcal conjugate vaccine, Capvaxive, and pulmonary arterial hypertension drug, Winrevair, have the potential to generate significant revenues for Merck over the long term. Both products are witnessing a strong launch.Merck has other promising candidates in its late-stage pipeline, such as MK-0616, an oral PCSK9 inhibitor for hypercholesterolemia, tulisokibart, a TL1A inhibitor for ulcerative colitis and Daiichi-Sankyo-partnered antibody drug conjugates.Declining Sales of Gardasil in ChinaSales of Merck’s second-largest product, its HPV vaccine, Gardasil, are declining in China due to a significant step down in shipments to Merck’s distributor and commercialization partner, Zhifei. Merck expects a decline in China shipments in the fourth quarter of 2024 and 2025. Though the company is working to increase promotional resources and patient education efforts to increase demand, it will take time. However, Gardasil sales remain strong in almost every major region outside China, including the United States. Merck is also seeing weakness in the diabetes franchise and the generic erosion of some drugs.MRK Stock Price, Valuation & EstimatesMerck’s shares have lost 15.3% in the past year compared witha decline of 3.9% for the industry. The stock has also underperformed the sector and the S&P 500 Index, as seen in the chart below. The stock is also trading below its 200-day moving average.Merck Stock Underperforms Industry, Sector & S&P 500Image Source: Zacks Investment ResearchFrom a valuation standpoint, Merck appears attractive relative to the industry. Going by the price/earnings ratio, the company’s shares currently trade at 10.56 forward earnings, lower than 15.47 for the industry as well as its 5-year mean of 13.30.MRK Stock ValuationImage Source: Zacks Investment ResearchThe Zacks Consensus Estimate for 2025 earnings has declined from $9.57 to $9.44 per share over the past 30 days.MRK Estimate MovementImage Source: Zacks Investment ResearchLong-Term Investors May Stay Invested in MRK StockThough Merck’s problems are many, the company has one of the world’s best-selling drugs in its portfolio, generating billions of dollars in revenues. Though Keytruda will lose patent exclusivity in 2028, its sales are expected to remain strong until then. Though Merck does not have any new product or pipeline candidate that can replace Keytruda’s sales when it loses patent protection, it has $14.6 billion in cash and short-term investments on its balance sheet, which it can use to buy companies with promising R&D programs.In 2025, Merck expects to deliver 6% to 7% revenue growth, almost the same as its expectations for 2024. It expects top-line growth in 2025 to be driven by Keytruda, especially in early-stage cancers, new products Welireg, Winrevair and Capvaxive, and the Animal Health segment, partially offset by declining sales of Gardasil in China.We believe investors with a long-term horizon should stay invested in MRK stock, while short-term investors should consider selling the same as the company may take some time to show strong earnings growth.Merck has a Zacks Rank #3 (Hold) at present. 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