Merck: From Discounted to Rediscovered - And Still Undervalued

A discounted valuation, resilient earnings power, and pipeline momentum point to upside beyond the recent rally.

For most of 2025, the market treated Merck (MRK) as a company in decline. From January through early November, the stock dropped roughly 17%, materially underperforming the broader pharmaceutical sector as investors fixated on a single issue: Keytruda’s 2028 loss of exclusivity (LOE). With nearly half of Merck’s revenue tied to this cancer therapy, the concern was understandable.

However, after months of bearish overhang, sentiment began to shift in November 2025. Merck’s stock has since surged over 30%, reflecting a broader market reassessment of its near-term potential. Yet, despite that rebound, the stock still trades at around 14x trailing earnings - a steep discount to the pharmaceutical sector average of closer to 27x.

Put simply, Merck continues to be valued like a company facing stagnation - despite a decade-long track record of growing revenue, expanding free cash flow, and improving capital efficiency, even through prior patent cliffs. In that light, the recent rally doesn’t look like irrational exuberance. It looks more like the early stages of a long-overdue repricing for a fundamentally strong and strategically evolving business.

Many investors still assume that Keytruda’s 2028 LOE will lead to sharp, near-term earnings pressure. But Merck’s strategic planning, pipeline depth, and lifecycle extensions suggest a more orderly transition.

For starters, Merck is extending the Keytruda franchise itself. A new subcutaneous version of the drug, protected by patents into the late 2030s, materially lengthens its commercial timeline. Meanwhile, the drug is moving into earlier-stage and adjuvant cancer indications, expanding its clinical footprint to include other use cases.

Second, biosimilar adoption in oncology is rarely swift. These aren’t interchangeable generics - they require rigorous clinical comparability, regulatory clearance, and gradual physician acceptance, particularly when dealing with life-saving treatments. That means revenue erosion is likely to be measured and delayed, not sudden.

On top of the above, Merck isn’t standing still. It’s actively building new revenue growth engines. Winrevair, acquired via Acceleron, is ramping up in pulmonary arterial hypertension with impressive momentum in both the U.S. and Europe. In oncology, Welireg is progressing across renal cancer indications, and the broader pipeline includes over 80 therapies in Phase III trials.

Meanwhile, the company’s vaccine platform is scaling with new launches like Capvaxive (pneumococcal) and Enflonsia (RSV), both expected to be multi-billion-dollar franchises. Even the Animal Health segment, often overlooked, posted 7% year-over-year growth last quarter - supporting margin resilience and diversification.

This isn’t a company bracing for impact. It’s one that’s strategically leveraging robust Keytruda-driven cash flows to fund its next cycle of growth - a transition that’s already in motion and gaining traction.

Merck’s financial strength reinforces the long case. From 2015 to 2024, revenue at Merck increased from $39.5 billion to $64.2 billion, catalyzed by the expansion of oncology, vaccines, and other high-value therapeutic treatments. Even as global drugmakers faced pricing pressure, tariff uncertainty, COVID-19 disruptions, and shifting reimbursement trends, Merck’s top-line growth continued to rise.

Merck continues to generate strong, consistent free cash flow - supporting both reinvestment and shareholder returns. Moreover, the company offers a dividend yield near 3%, with a track record of steady annual increases for more than a decade, underscoring its long-term commitment to capital return.

And to further bolster operational efficiency, Merck recently launched a $3 billion cost-savings initiative, slated for completion by 2027. This program acts as a meaningful margin buffer during the Keytruda transition, helping preserve profitability as the next wave of growth assets - spanning oncology, vaccines, and cardiology - scales across the portfolio.

Market sentiment has been more positive of late, but analyst expectations for Merck still arguably lag the company’s fundamentals. Of the 26 analysts covering Merck, 16 rate the stock a “buy”, with an average price target near $113/share. While that reflects growing confidence in the company’s long-term outlook, it also suggests the Street may still be undervaluing Merck’s execution strength, pipeline depth, and post-Keytruda durability.

With valuation multiples still trailing the broader pharmaceutical sector and strong cash flows fueling pipeline expansion, dividends, and buybacks, Merck looks well-positioned to exceed consensus expectations - provided current execution trends continue.

All told, the current narrative points to a compelling risk-reward setup. Merck’s performance remains robust, but the stock continues to trade at a discount to what its fundamentals and pipeline progress would otherwise support. With durable operations, expanding growth drivers, and promising new drugs, the company doesn’t need to outpace lofty expectations - it just needs to stay on course. If it does, there’s ample room for multiple expansion and continued outperformance in the stock.