Is Merck's Dip a Strategic Entry Point? Analyzing Earnings Headwinds and Undervalued Potential

Merck & Co. (MRK) has faced near-term turbulence following its Q1 2025 earnings report, which highlighted declining sales and adjusted earnings guidance. Yet beneath the headline numbers lies a complex narrative of structural growth opportunities, discounted valuation metrics, and critical regulatory milestones on the horizon. For investors weighing the stock's dip against its long-term prospects, the question is clear: Does Merck's current underperformance present a compelling entry point?

Earnings Underperformance: The Gardasil Headwind and New Product Momentum

Merck's Q1 sales of $15.5 billion marked a 2% year-over-year decline, driven largely by a 41% drop in Gardasil/Gardasil 9 sales due to reduced demand in China. This legacy vaccine's struggles contrast sharply with the strong performance of newer therapies. Keytruda, Merck's oncology powerhouse, grew 4% to $7.2 billion, fueled by expanded use in earlier-stage cancers like triple-negative breast cancer. Meanwhile, Winrevair, launched in Q2 2024 for pulmonary arterial hypertension, contributed $280 million in sales, while Capvaxive, a pneumococcal vaccine, added $107 million in its first full quarter.

The near-term earnings drag from Gardasil and elevated tariffs ($200 million in costs) have pressured short-term profitability, with non-GAAP EPS revised downward to $8.82–8.97 for /2025. Yet these headwinds are not insurmountable. Excluding foreign exchange impacts, Merck's sales grew 1%, and new products like Welireg (belzutifan) surged 62%, signaling a pipeline-driven transition.

Valuation: Discounted Multiples vs. Growth Potential

Merck's current valuation offers a stark contrast to its peers. With a Forward P/E of 10.97—below the Large Cap Pharmaceuticals industry average of 13.83—and a PEG ratio of 0.84 (vs. 1.26 for the sector), the stock appears undervalued relative to its growth trajectory.

Analysts project a 16.6% rise in full-year 2025 EPS to $8.92, even as near-term estimates face minor downward tweaks. While the Zacks #3 (Hold) rating reflects cautious near-term sentiment, the PEG ratio's sub-1 level suggests the market is undervaluing Merck's pipeline potential. The stock's 5-year EPS CAGR of 5.6% underscores steady growth, while its ROE of 17.5% remains robust for a pharma giant.

Near-Term Catalysts: Regulatory Wins and Pipeline Milestones

Merck's path to reaccelerated growth hinges on several pivotal catalysts:

1. Subcutaneous Keytruda (Q3 2025 PDUFA date): A faster, more accessible formulation could expand market share, particularly in settings where IV administration is impractical.
2. DOR/ISL (HIV therapy): Regulatory submissions by mid-2025 for this once-daily pill, which suppressed viral loads in 94% of Phase 3 patients, could solidify Merck's position in HIV.
3. Zilovertamab Vedotin: A Phase 3 trial in diffuse large B-cell lymphoma aims to establish Merck as a leader in CAR-T alternatives.
4. Hengrui Partnership: The $300M license fee for HRS-5346 (an Lp(a) inhibitor targeting cardiovascular disease) adds a novel asset to Merck's pipeline.

These milestones, if successful, could re-rate the stock, particularly if Keytruda's subcutaneous form boosts margins or Welireg's EU approvals drive European sales.

Risk Factors and Investor Considerations

• Gardasil's China Challenge: Merck's ability to rebound in China—its third-largest market—remains uncertain, though Gardasil sales grew 14% outside China in Q1.
• Pipeline Execution: Missed regulatory approvals or delayed launches could extend the earnings slump.
• Macro Risks: Trade tariffs and pricing pressures in global markets add volatility to near-term results.

Investment Thesis: A Contrarian Play on Long-Term Value

For investors with a 3–5 year horizon, Merck's discounted valuation and pipeline depth justify a cautious buy. At $80.32, the stock trades at 9.0x 2025 EPS estimates, offering a margin of safety against short-term risks. Key catalysts like the subcutaneous Keytruda approval and DOR/ISL's regulatory path could drive a valuation rebound.

Recommendation: Accumulate positions in dips below $80, with a target price of $95–100 by 2026 based on consensus EPS growth and normalized valuation multiples. Pair this with a stop-loss below $75 to mitigate Gardasil-related downside.

Conclusion

Merck's Q1 stumble underscores the volatility inherent in pharmaceutical investing, but its discounted valuation and transformative pipeline suggest the stock is pricing in worst-case scenarios. For investors willing to look beyond near-term headwinds, Merck's dip could prove a rare opportunity to buy a $65 billion+ revenue company at a valuation that barely reflects its growth assets. The next six months—marked by Keytruda's regulatory decision and DOR/ISL submissions—will be critical in determining whether this undervaluation persists or reverses.