Merck's Underperformance: Mispricing or Sector Shift?

Merck & Co. (MRK) has endured a stark underperformance in 2025, with a 12-month total return of -27.89% compared to the S&P 500's 18.15% gainMerck & Co. Inc. (NYSE:MRK) | Valuation Ratios^[3]. This divergence raises critical questions: Is Merck's stock a mispriced opportunity amid a resilient pipeline and undervalued fundamentals, or does it signal a deeper shift in investor sentiment toward the healthcare sector? To answer this, we dissect earnings trends, competitive dynamics, and valuation metrics.

Earnings Trends: A Tale of Two Drugs

Merck's struggles stem from declining sales of Gardasil, its HPV vaccine, which saw a 10% drop in 2024, primarily due to waning demand in ChinaMerck & Co. Inc. (NYSE:MRK) | Valuation Ratios^[3]. Tariff-related costs and supply chain disruptions have further pressured marginsUS FDA Approves Merck's Injectable Version of Blockbuster …^[4]. Yet, the company's crown jewel, Keytruda, continues to shine, generating $28 billion in sales over the past yearMerck at Goldman Sachs Conference: Pipeline and …^[1]. This duality underscores a key risk: Merck's reliance on a single blockbuster drug. While Keytruda's dominance in oncology provides near-term stability, its U.S. patent is set to expire in 2028, inviting biosimilar competitionMerck & Co., Inc.: Valuation Ratios, Analysts' Forecasts^[6].

Competitive Dynamics: Pipeline Strength vs. Sector Headwinds

Merck's therapeutic pipeline offers a counterbalance to these challenges. The company is on track to launch nearly 20 new assets by 2030, spanning cardiometabolic, immunology, and ophthalmology therapiesUS Healthcare Industry Outlook Report 2025 Featuring Market Influencers^[2]. Notable advancements include FDA approval of clozrovimab (an RSV treatment) and promising Phase III results for enlicitide, an oral PCSK9 inhibitorUS Healthcare Industry Outlook Report 2025 Featuring Market Influencers^[2]. However, the broader healthcare sector faces structural pressures. Regulatory scrutiny over drug pricing, reimbursement constraints, and the rise of biosimilars are reshaping competitive dynamicsMonthly Stock Sector Outlook (2025)^[5]. For Merck, geopolitical risks—such as ACIP's potential reevaluation of Gardasil recommendations—add another layer of uncertaintyMerck at Goldman Sachs Conference: Pipeline and …^[1].

Valuation Metrics: A Discounted Giant

Merck's valuation appears compelling relative to sector peers. As of Q3 2025, it trades at a P/E ratio of 11.89 and an EV/EBITDA of 7.86Merck & Co. Inc. (NYSE:MRK) | Valuation Ratios^[3], significantly below the healthcare sector averages of 38.03 and 11.2x, respectivelyUS FDA Approves Merck's Injectable Version of Blockbuster …^[4]. Analysts project a 27.73% upside, with an average price target of $107.44Merck & Co. Inc. (NYSE:MRK) | Valuation Ratios^[3]. This discount reflects both temporary headwinds (e.g., Gardasil's decline) and structural concerns (e.g., patent cliffs). Yet, Merck's robust financials—23.96% net margin and 8.24% ROEMerck & Co., Inc.: Valuation Ratios, Analysts' Forecasts^[6]—suggest the market may be overcorrecting.

Sector Outlook: A Potential Turnaround in 2025

The healthcare sector's underperformance in 2024—down 4.7% versus the S&P 500's 14.4% gainMonthly Stock Sector Outlook (2025)^[5]—has created a valuation trough. Analysts argue that this undervaluation, coupled with innovation in biotech and potential policy reforms, could drive a 2025 reboundMonthly Stock Sector Outlook (2025)^[5]. For Merck, this scenario hinges on mitigating short-term risks (e.g., supply chain resilience) while capitalizing on long-term growth drivers like Keytruda's expansion into new indications and its subcutaneous formulationUS FDA Approves Merck's Injectable Version of Blockbuster …^[4].

Strategic Investment Implications

Merck's underperformance reflects a mix of temporary challenges and sector-wide pressures. While Gardasil's decline and regulatory risks are legitimate concerns, the company's pipeline, financial strength, and undervaluation present a compelling case for strategic entry. Investors should monitor near-term catalysts, such as clesrovimab's commercialization and the healthcare sector's broader recovery. For those with a medium-term horizon, Merck's discounted valuation and innovation-led strategy could offer asymmetric upside.