Merck (MRK): Discounted Valuation and Keytruda's Crossroads – Is a Turnaround Ahead?

Merck & Co. (MRK) finds itself at a pivotal juncture. Despite its undeniably low valuation multiples, the pharmaceutical giant faces near-term headwinds from slowing earnings growth and looming patent expirations. The question for investors is clear: Can Merck's discounted price-to-earnings (P/E) and strong industry position offset these risks, or does the stock remain a hold until key catalysts materialize? Let's dissect the data.

Valuation: A Discounted Bargain or a Red Flag?

Merck's current Forward P/E of 8.55–8.89 is a stark contrast to its industry peers, which average 13.49–13.76. This gap is even more pronounced when considering the PEG ratio, a metric that factors in growth expectations. Merck's PEG of 0.71–0.82 is well below the industry's 1.24–1.26, suggesting the market is undervaluing its growth prospects relative to its peers.

The stock's 19.6% year-to-date decline versus the industry's 0.3% gain underscores investor skepticism. However, Merck's Forward P/E of 8.55 is also below its own 5-year average of 12.89, implying further de-risking may have already occurred. For value investors, this could represent a buying opportunity—if the company can stabilize earnings momentum.

Earnings Estimates: A Near-Term Slump, but Full-Year Optimism?

Analysts have grown cautious in the short term. The consensus EPS estimate for the upcoming quarter has dipped 0.1% over the past month, signaling skepticism about Merck's ability to reverse its earnings decline. The year-over-year EPS drop of 10.96% projected for Q2 2025 highlights the challenges Merck faces, including pricing pressures and declining sales for legacy drugs.

Yet, the full-year outlook remains cautiously positive. Analysts still expect $8.92–$8.93 EPS for 2025, a 16.6–16.73% increase from 2024. This contrast suggests investors are pricing in short-term pain but not long-term failure. The Zacks Rank #3 (Hold) reflects this mixed outlook, as does the fact that #1-ranked stocks historically outperform by +25% annually.

Keytruda: The Elephant in the Room

Merck's flagship drug Keytruda, which accounts for ~50% of pharma sales, is both a blessing and a burden. While its approval for new cancer indications continues to drive growth—particularly in combinations with therapies like Moderna's mRNA vaccine V940—its patent expiration in 2028 looms large. Competitors like Summit Therapeutics' ivonescimab (a PD-1/VEGF inhibitor) threaten to erode its dominance sooner.

Merck's plan to extend Keytruda's exclusivity via a subcutaneous formulation—pending FDA approval in September 2025—could buy critical time. If approved, this formulation's faster administration could boost sales and delay generic competition. Investors should monitor this decision closely, as it could rekindle optimism in the stock.

The Post-Exclusivity Playbook

Merck isn't sitting idle. Its pipeline includes therapies like Winrevair (for pulmonary arterial hypertension), which could diversify revenue post-2028. However, these drugs are still in trials, and success isn't guaranteed. The company's ability to execute on these projects will determine whether it can sustain its valuation discount or narrow it over time.

The Investment Thesis: Buy the Dip, or Wait for Catalysts?

The Zacks Industry Rank of 31–38 (top 13–16% of all industries) suggests the broader pharmaceutical sector remains attractive. Yet Merck's own struggles—slowing earnings, regulatory risks, and Keytruda's trajectory—keep it from shining.

For now, the stock's valuation offers a margin of safety, but near-term risks are real. The upcoming Q2 earnings report and the FDA decision on Keytruda's subcutaneous formulation are critical catalysts. If Merck can deliver a beat on earnings or secure FDA approval, the stock could rebound sharply. Conversely, a miss or regulatory setback might push it lower.

Final Call: Monitor, Then Act

Investors should treat Merck as a wait-and-see play. The valuation is compelling, but the company needs to prove it can stabilize earnings and execute on its pipeline. A buy rating is premature without clearer catalysts, but aggressive investors might consider a small position at current levels. For most, waiting until the September FDA decision and Q3 earnings report would reduce downside risk while preserving upside potential.

In short, Merck is a stock where valuation wins could outweigh near-term losses—if the right pieces fall into place. Stay vigilant.