Is Merck's Recent Stock Decline a Buying Opportunity or a Warning Signal?

The recent 40% decline in Merck's stock price over the past year has sparked a critical debate: Is this a buying opportunity for value investors, or a warning signal of deeper structural challenges? To answer this, we must dissect the interplay between Merck's near-term headwinds and its long-term growth potential in a post-Keytruda world.

Near-Term Headwinds: A Perfect Storm of Challenges

Merck's second-quarter 2025 earnings report painted a sobering picture. Despite beating FactSet estimates with adjusted earnings of $2.13 per share, the company's total worldwide sales declined by 2%, driven by a 55% drop in Gardasil/Gardasil 9 sales. This was attributed to waning demand in China and Japan, where a national catch-up immunization program in Japan and timing of public-sector purchases in international markets created a vacuum.

Compounding these issues, Merck announced a multiyear $3.0 billion annual savings initiative, including layoffs across administrative, sales, and R&D functions. The restructuring incurred $649 million in charges during Q2 2025, while a $0.07 per share charge from the closure of a Hengrui Pharma license agreement further pressured earnings. Meanwhile, the $10 billion acquisition of Verona Pharma, expected to close in Q4 2025, has added financial complexity to an already strained balance sheet.

The company also narrowed its 2025 sales guidance to $64.3–$65.3 billion and revised non-GAAP EPS to $8.87–$8.97, reflecting foreign exchange pressures and operational inefficiencies. These factors have eroded investor confidence, with Merck's stock price declining in tandem with its revised guidance.

Long-Term Growth: The Post-Keytruda Era

Yet, Merck's long-term prospects remain anchored in its oncology pipeline, particularly Keytruda. In 2025, Keytruda generated $7.2 billion in sales—a 4% increase from 2024—despite looming biosimilar threats. The drug's 40 FDA-approved indications, including non-small cell lung cancer, melanoma, and urothelial carcinoma, underscore its entrenched position in the U.S. market.

Merck is proactively addressing biosimilar competition, which is expected to begin in 2028. A subcutaneous formulation of pembrolizumab, under FDA review with a PDUFA date of September 23, 2025, could improve treatment convenience and delay biosimilar adoption. Additionally, combination therapies—such as Keytruda plus Padcev (enfortumab vedotin) in urothelial carcinoma, which doubled median survival in Phase 3 trials—highlight the company's ability to expand Keytruda's therapeutic footprint.

Beyond Keytruda, Merck's pipeline is a critical growth lever. The company is advancing multiple antibody-drug conjugates (ADCs), including zilovertamab vedotin (targeting ROR1 in lymphoma) and sacituzumab tirumotecan (TROP2-directed for lung and breast cancer). These ADCs represent a $100 billion market opportunity, with Merck's OptiTROP-Lung03 and OptiTROP-Breast05 trials already showing promise.

Merck's small molecule pipeline, such as MK-1084, a KRAS G12C inhibitor, further diversifies its oncology portfolio. Early data from the KANDLELIT-001 trial in colorectal and lung cancer suggest potential for a drug targeting a historically "undruggable" mutation. Meanwhile, collaborations with biotech firms and academic institutions are accelerating innovation in biomarker-driven therapies and early-stage cancer detection.

The Biosimilar Cliff: A Looming Threat

The patent expiration of Keytruda in 2028 looms like a sword of Damocles. Biosimilars from Amgen, Samsung Bioepis, and Bio-Thera Solutions could erode Keytruda's market share rapidly, as seen with AbbVie's Humira (-60% revenue post-2018) and Roche's Herceptin (-50% by 2020). Merck estimates Keytruda's peak sales could reach $36 billion by 2028, but post-2028, revenue may fall to $20 billion or even $15 billion within four to five years.

Merck's efforts to mitigate this risk—such as the subcutaneous formulation and combination therapies—are commendable, but the patent dispute with Halozyme Therapeutics over the SC formulation's enzyme technology introduces uncertainty. If unresolved, biosimilars could gain an early foothold in the market.

Strategic Acquisitions and Diversification: A Path Forward

Merck's acquisition of Verona Pharma and its focus on ADCs and KRAS inhibitors signal a commitment to diversification. The company's 30+ ongoing registrational studies across 25 cancer types, including early-stage trials, could yield new revenue streams. However, Merck's reliance on Keytruda—accounting for 46% of total revenue—remains a vulnerability.

The company's cost-cutting measures, while necessary, risk slowing R&D progress. Investors must weigh whether these savings will sustain innovation or stifle long-term growth. Merck's ability to replicate Keytruda's success with its pipeline will determine its post-2028 viability.

Investment Implications

For investors, Merck's current valuation—trading at a 30% discount to its 52-week high—presents a nuanced opportunity. The stock's decline reflects near-term risks but also embeds a significant margin of safety. Merck's strong cash flow, robust pipeline, and strategic acquisitions suggest long-term value, but patience is required.

Recommendation: Investors with a 5–7-year horizon should consider a staggered entry into Merck, using pullbacks to accumulate shares. However, those with shorter timeframes or risk aversion may prefer to wait for clearer guidance post-2025's ASCO data and the SC Keytruda approval.

In conclusion, Merck's stock decline is a warning signal for near-term volatility but also a buying opportunity for those who believe in its long-term innovation and diversification. The key lies in balancing the urgency of biosimilar threats with the promise of a pipeline poised to redefine oncology.