Merck: New Drugs Are Delivering, But The Stock Has Already Run Ahead

Merck: New Drugs Are Delivering, But The Stock Has Already Run Ahead

Merck (NYSE: MRK) reports Q2 2026 earnings before the bell today, and the headline story is no surprise: newer drugs are finally filling the pipeline gap that analysts have worried about for years. Winrevair is accelerating, Welireg is gaining international traction, Capvaxive is ramping, and Keytruda is still printing $8 billion-plus quarters. On the Q1 call, management raised the full-year 2026 revenue midpoint from $66.25 billion to $66.4 billion and nudged the non-GAAP EPS outlook higher to $5.04–$5.16 per share. The market called that momentum and bought the stock up. It is up roughly 58% over the past year and 21% year-to-date.

The question is not whether the growth story is real. It is whether the valuation has run past the operating proof. At roughly $128 a share and a $316 billion market cap, MRK is no longer the patient, undervalued pharma name it was a year ago.

What's Actually Driving the Growth

Keytruda remains the anchor. It brought in $8.03 billion in Q1 2026, up 12% year-over-year, with roughly $128 million coming from the newly launched subcutaneous version (Keytruda QLEX). That newer formulation matters because it positions Merck to retain more revenue when the IV version hits patent expiration in 2028. Keytruda accounts for roughly 55% of pharmaceutical sales, and management expects it to peak near $35 billion in 2028 before biosimilars - generic copies of large-molecule biologics - chip away at revenue. The subcutaneous switch is the insurance policy against that cliff.

But the real thesis shift is that other products are no longer just pipeline stories - they are revenue lines. Winrevair, Merck's pulmonary arterial hypertension drug acquired through the Acceleron buyout, posted $525 million in Q1 2026, up 88% from a year earlier. More than 1,600 new U.S. patients received prescriptions in the quarter. Full-year 2025 Winrevair sales were $1.4 billion. The drug is now a proven commercial engine, not a promise.

Welireg, an HIF-2-alpha inhibitor for kidney cancer, grew 43% to $199 million in Q1, supported by international rollout and expanded U.S. indications. Capvaxive, the 21-valent pneumococcal vaccine approved in 2024, pulled in $142 million in the quarter, building on $759 million in full-year 2025 sales. Ohtuvayre, the new COPD maintenance therapy from the Verona Pharma acquisition, posted $131 million in Q1 despite a CMS reimbursement headwind.

CEO Robert Davis called this the "broadest and widest pipeline we've had in years" and pointed to more than $70 billion in potential annual revenue from new growth drivers by the mid-2030s. That is a big number, but it is also a forward projection. The question for investors is whether the current stock price already assumes that pipeline converts.

The Drag Is Still There

Gardasil continues to be a problem. First-quarter sales fell 19% to $1.07 billion, driven by zero China shipments, continued softness in Japan, and timing-related weakness in U.S. public-sector purchases. Full-year 2025 Gardasil revenue was $5.2 billion, down 39% from 2024. Even with the easier Q2 comparable (since Q2 2025 was particularly soft), this is a structural decline, not a temporary blip. Meanwhile, Januvia fell 28% to $574 million in Q1 as generic competition and Inflation Reduction Act price pressure accelerate.

Management has already modeled $2.5 billion in revenue headwinds from Januvia generics and IRA pricing into the 2026 outlook. But erosion in legacy products is the reason Merck's overall revenue growth sits at roughly 3% ex-FX in Q1, not the double-digit pace the pipeline narrative might suggest.

Free Cash Flow Is Decelerating

Here is where the story gets less clean. Free cash flow for the trailing twelve months is roughly $14.1 billion, down 17% year-over-year. That is still a large absolute number, but the direction matters. Gross margin holds near 74% and operating margin is around 18%, but FCF growth is contracting as Merck ramps spending on R&D, sales forces for new launches, and integration costs from the Cidara and Terns acquisitions.

The Cidara deal hit Q1 earnings with a $3.62-per-share charge. The Terns acquisition, expected to close in May, will add another approximately $2.35-per-share one-time charge. Together these are roughly $6 billion in acquisition-related charges, and they sit on top of $82.7 billion in total debt and a debt-to-equity ratio near 107%. The balance sheet is not in distress - free cash flow covers debt service and the 2.6% dividend yield comfortably - but the capital structure is heavier than it was two years ago, and leverage will stay elevated until the new acquisitions start generating return.

Valuation Has Moved

This is the part that matters most for the rating. Merck trades at roughly 16.6x forward earnings and 4.8x trailing sales. For context, that is above Bristol-Myers Squibb (14.4x trailing PE, 2.7x sales) and Pfizer (19.0x trailing PE, 2.3x sales), both of which carry their own turnaround headwinds but trade at a steep discount. On an EV/EBITDA basis, MRK is at roughly 20.1x, compared to 8.5x for BMY and 13.4x for Pfizer.

The premium is not unexplained. Merck has faster growth, better margins, a diversified pipeline, and a real post-Keytruda plan. But 20x EV/EBITDA for a company growing revenue at 3% ex-FX with declining free cash flow is a multiple that demands the pipeline story to actually convert. It is the kind of valuation that justifies itself if Winrevair reaches $3–4 billion, Welireg becomes a $1 billion drug, and the next wave of launches (IDVynso in HIV, Ohtuvayre in COPD, Capvaxive in vaccines) all ramp on plan. If even one of those lags, the multiple starts looking stretched.

The stock has risen from roughly $78 at its 52-week low to the current $128 level. That is a 64% move. A significant portion of the post-Keytruda optimism is already baked in.

The Catalyst Clock

Today's Q2 earnings report is the next data point. Consensus expects roughly $16.4 billion in revenue and a GAAP EPS of roughly $0.16 (heavily impacted by the Cidara charge). The key numbers to watch are Keytruda QLEX uptake trajectory, Winrevair prescription growth, any Gardasil stabilization signals, and - most importantly - whether management reaffirms or raises the full-year sales and EPS outlook. A guidance increase would validate the momentum thesis. A hold would suggest the current price already reflects the case. A cut would be the signal to step back.

Beyond that, the pipeline faces a dense series of late-stage readouts and regulatory decisions through the second half of 2026, including the October PDUFA date for I-DXd (an antibody-drug conjugate for small cell lung cancer, developed with Daiichi Sankyo). Positive data supports the premium valuation. Misses or delays make it harder to justify.

The Rating: Hold

Merck is executing. The newer drugs are real revenue lines, not PowerPoint slides. The subcutaneous Keytruda launch, Winrevair's 88% growth, and the broader pipeline diversification represent genuine progress in managing the 2028 patent cliff. If the stock had fallen on temporary weakness, the operating setup would support a buy.

But it has not fallen. It has rallied roughly 58% over the past year, and the valuation now assumes that nearly everything in that pipeline converts on time and on plan. With 20x EV/EBITDA, declining free cash flow, $83 billion in debt, and legacy revenue still eroding in Gardasil and Januvia, there is not enough margin of error for the price to keep rising on narrative alone.

The thesis is intact. The entry point is not. I would wait for either a pullback toward the $110–$115 range or a Q2 print that includes a clear guidance upgrade before adding exposure. Until then, the risk/reward at current levels favors patience.

What would change the call: A Q2 revenue beat combined with an upward guidance revision to above $67 billion would support a Buy upgrade. Conversely, Winrevair deceleration, a failed pipeline readout in 2H 2026, or continued Gardasil collapse would warrant stepping aside.