Is Merck (MRK) a Buy Ahead of the Keytruda Patent Cliff?

Merck & Co. (MRK) stands at a critical juncture as its flagship oncology drug, Keytruda, approaches its 2028 patent expiration. With Keytruda generating $8.1 billion in sales during Q3 2025 alone, the looming "patent cliff" threatens to erode a significant portion of its revenue. However, Merck's aggressive strategic initiatives, diversified pipeline, and recent partnerships suggest the company is proactively positioning itself to mitigate these risks. This analysis evaluates whether Merck's forward-looking moves and undervalued stock justify a long-term investment thesis.

Strategic Moves to Buffer Revenue Risks

Merck has adopted a multifaceted approach to extend Keytruda's market dominance and diversify its revenue streams. A cornerstone of this strategy is the product hop to Keytruda Qlex, a subcutaneous injection version approved by the FDA in late 2025. By shifting patients to this reformulated drug, Merck aims to leverage its robust patent portfolio-over 100 patents, including those for the new formulation-to delay biosimilar competition. According to Merck's financial health analysis, the company projects that 40% of Keytruda users could transition to Qlex by 2027, effectively extending its exclusivity timeline.

Complementing this is a $3 billion cost-cutting initiative by 2027, which will redirect resources to high-growth areas like R&D and manufacturing. GuruFocus reports that Merck recently opened a $1 billion biologics plant in Delaware to bolster Keytruda production, ensuring supply chain resilience. Additionally, the acquisition of SpringWorks Therapeutics for $3.9 billion in April 2025 has expanded Merck's rare tumor portfolio, adding immediate revenue and long-term growth potential in niche oncology markets.

Diversified Pipeline and Partnership-Driven Innovation

Merck's pipeline is increasingly diversified beyond Keytruda. High-growth products like Winrevair, a pulmonary hypertension treatment, saw 141% growth in Q3 2025, signaling strong demand in rare disease markets. The company is also advancing late-stage assets such as the oral PCSK9 inhibitor Enlicitide Decanoate, which could capture a share of the cholesterol-lowering market.

Partnerships further strengthen Merck's innovation engine. An exclusive licensing agreement with Hengrui Pharma for an investigational Lp(a) inhibitor highlights its focus on cardiometabolic therapies, a sector with growing unmet medical needs. These collaborations, combined with internal R&D investments, position Merck to offset Keytruda's eventual revenue decline with new blockbuster candidates.

Valuation Analysis: Undervalued Amid Conservative Market Pricing

Despite these strategic strengths, Merck's stock trades at a P/E ratio of 13.1x, significantly below the pharmaceutical industry average of 20.0x. Analysts project 2025 revenue of $64.75 billion and non-GAAP earnings per share of $8.96, reflecting resilience even as vaccine sales like GARDASIL decline. A discounted cash flow (DCF) analysis suggests Merck is undervalued by 53.4%, with an intrinsic value of $215.04 per share compared to its current price of ~$100. Analysts have upgraded the stock to "Outperform" with a $130 price target, underscoring confidence in its pipeline and cost-cutting efforts.

Conclusion: A Buy for Long-Term Investors

Merck's proactive measures to extend Keytruda's lifecycle, diversify its revenue base, and invest in high-growth areas make it a compelling long-term investment. While the patent cliff poses a risk, the company's strategic depth-including product reformulations, cost discipline, and a robust pipeline-mitigates this threat. With a low P/E ratio and a DCF-derived intrinsic value far exceeding its current price, Merck appears undervalued. Investors willing to look beyond short-term patent concerns may find significant upside potential in a company that is clearly preparing for the next phase of its growth story.