Merck's Stock Surge Reflects Earnings Beat and Keytruda Innovation, Yet Risks Linger

What happened

Merck's stock surged 41% over the past six months, driven by Q3 earnings that exceeded expectations and the FDA's approval of a subcutaneous formulation for Keytruda, bolstering investor confidence. This aligns with the DeepValue report's BUY thesis, which cites Merck's attractive valuation with a P/E around 11 and a DCF intrinsic value of $148 per share versus the current $84 price. The company's restructuring program targeting $1.7 billion in annual savings by 2027 and active capital returns, including a new $10 billion buyback authorization, further supported the rally. However, critical risks persist, such as the 2028 loss of exclusivity for Keytruda under the Inflation Reduction Act and ongoing challenges in the Gardasil vaccine segment in China. While the surge highlights near-term operational strength, it does not fully mitigate long-term uncertainties around pricing pressures and competitive threats.

Implication

The stock surge reinforces the BUY thesis by demonstrating Merck's ability to deliver on earnings and innovate with Keytruda's subcutaneous approval, enhancing near-term cash flow prospects. However, the 41% rally may have compressed the margin of safety, requiring closer scrutiny of whether the current price adequately discounts future headwinds like the 2028 LOE and IRA impacts. Keytruda's lifecycle defenses and vaccine diversification offer growth levers, but adoption rates and payer dynamics will be crucial to sustain momentum amid intensifying competition. The restructuring savings and capital returns provide operational flexibility, yet execution missteps or prolonged China weakness could undermine valuation support. Overall, investors should maintain a balanced approach, focusing on quarterly updates for signs of durability or deterioration in key franchises to inform holding or adjustment decisions.

Thesis delta

The recent surge and positive developments do not fundamentally shift the BUY thesis, as they were anticipated in the DeepValue report's analysis of valuation and execution. However, the rally underscores increased market recognition of Merck's near-term strengths, potentially narrowing the discount to intrinsic value but not eliminating the upside from the DCF model. Investors should continue monitoring watch items like IRA milestones and Keytruda durability for any material changes that could warrant a reassessment.