Merck & Co.'s Keytruda Surge and Dividend Strength Offer Resilience in Volatile Markets

Merck & Co. (MRK) has long been a stalwart in the pharmaceutical industry, but its Q1 2025 results underscore a new era of strategic focus—one anchored by its oncology powerhouse, KEYTRUDA, and a commitment to sustaining dividend resilience amid sector-wide turbulence. Let's dissect how Merck is navigating headwinds like generic competition and foreign exchange pressures while positioning itself as a buy-and-hold candidate for income-oriented investors.

Keytruda: The Engine of Growth

KEYTRUDA's Q1 sales surged to $7.2 billion, a 4% year-over-year increase, driven by expanding use in earlier-stage cancers like triple-negative breast cancer and renal cell carcinoma. The drug's global uptake is broadening as regulatory wins pile up: its recent conditional EU approval for WELIREG—a first-in-class therapy—and the initiation of pivotal trials for Zilovertamab Vedotin in diffuse large B-cell lymphoma (DLBCL) highlight Merck's relentless push into new oncology niches.

Crucially, the subcutaneous formulation of KEYTRUDA (a faster, more convenient alternative to IV infusion) is under review by U.S. and European regulators. If approved, this could solidify its dominance in a crowded immuno-oncology space.

Financials: A Mixed Bag, But Momentum Is Building

While total sales dipped 2% to $15.5 billion due to foreign exchange headwinds, Merck's non-GAAP EPS rose 7% to $2.22, reflecting operational efficiency. The company's updated full-year EPS guidance ($8.82–$8.97) accounts for one-time charges tied to its Hengrui Pharma deal—a $200 million upfront cost for an Lp(a) inhibitor (HRS-5346) that could diversify its cardiovascular pipeline.

The decline in GARDASIL sales (-41% to $1.3 billion) is concerning, but context matters: China's regulatory delay for males aged 16–26 is now resolved, and ex-China sales grew 16% (excluding forex). Meanwhile, newer products like WINREVAIR (sales: $280 million) and its CAPVAXIVE EU approval for adults signal momentum in respiratory and infectious disease markets.

Dividend Resilience: A Bedrock of Stability

Merck's dividend track record is unmatched: a 42-year streak of annual increases, with a current yield of ~3.5% (as of June 2025). While the Q1 release didn't explicitly address dividend updates, management reaffirmed its focus on balancing R&D investments with shareholder returns.

With ~$11.3 billion in cash and equivalents, and a debt-to-equity ratio of ~0.3x, Merck has ample flexibility to fund its pipeline without diluting dividends. Even with tariffs adding $200 million in costs, its ~$64 billion sales guidance and low tax rate (15.5%–16.5%) suggest a solid cash flow cushion.

Sector Volatility: Navigating the Storm

The U.S. prescription drug pricing debate remains a wildcard. While Merck isn't immune to Medicare price caps or generic threats (e.g., LAGEVRIO's 71% sales drop), its portfolio diversification offers protection. Keytruda's patent expiry isn't until 2030, and its oncology pipeline—bolstered by WELIREG and Zilovertamab—extends its moat.

The company's strategic moves, like the Hengrui deal, also reflect a long-term view: paying upfront for potential blockbusters is risky but aligns with Merck's history of high-risk, high-reward bets (see: the $14 billion acquisition of Cubist Pharmaceuticals in 2015).

Valuation: A Bargain in a High-Valued Sector?

At a trailing P/E of ~15x and a forward P/E of ~12x (based on 2025 EPS guidance), Merck trades at a discount to peers like Roche (OTC: RHHBY) and Bristol-Myers Squibb (BMY). Its ~2.5% dividend yield vs. BMY's 2.1% and RHHBY's 1.8% adds to its appeal.

Investment Thesis

Buy for:
- Stability: A dividend aristocrat with a fortress balance sheet.
- Growth: Keytruda's global expansion and pipeline wins.
- Value: Undervalued relative to peers, with catalysts like subcutaneous KEYTRUDA approval in 2025.

Hold for: Investors wary of regulatory risks or the broader sector slowdown.

Avoid for: Those seeking high-growth biotechs; Merck's pace is methodical, not explosive.

Final Take

Merck's Q1 results reaffirm its dual strengths: a cash-cow oncology franchise and a dividend machine. While challenges like forex and generic erosion persist, the company's strategic discipline—evident in its pipeline bets and geographic diversification—suggests it can outpace peers in the coming years. For income investors, MRK remains a compelling buy at current valuations, especially if Keytruda's subcutaneous form gains approval later this year.

Stay vigilant, but stay invested.

Disclosure: This analysis is for informational purposes only. Consult a financial advisor before making investment decisions.