Earlier this week, Merck (MRK Quick QuoteMRK - Free Report) announced a definitive agreement to acquire Verona Pharma (VRNA Quick QuoteVRNA - Free Report) for approximately $10 billion. The deal will add Verona’s Ohtuvayre, approved for the maintenance treatment of chronic obstructive pulmonary disease (COPD). This addition will strengthen Merck’s cardio-pulmonary pipeline and portfolio as the drug’s differentiated profile provides a significant edge over its competitors.

Ohtuvayre’s unique dual inhibition of PDE3 and PDE4 sets it apart from existing COPD treatments by combining bronchodilation and anti-inflammatory effects in a single inhaled therapy. Ohtuvayre was approved by the FDA in June last year, while regulatory filings in the EU are expected soon.

Verona is also evaluating Ohtuvayre in separate clinical studies for other respiratory diseases, including bronchiectasis, cystic fibrosis (CF) and asthma.

Investors cheered the acquisition, which is aimed at diversifying MRK’s business from oncology, and the upcoming patent loss of its blockbuster PD-L1 inhibitor Keytruda. However, when considering investing in MRK stock, there are several other factors that need to be taken into account.

Let’s understand the company’s strengths and weaknesses to better analyze how to play the stock.

Keytruda: Merck’s Biggest Strength

Merck boasts more than six blockbuster drugs in its portfolio, with Keytruda being the key top-line driver. Keytruda, approved for several types of cancer, alone accounts for around 50% of the company’s pharmaceutical sales. The drug has played an instrumental role in driving Merck’s steady revenue growth over the past few years.

Keytruda’s sales are gaining from rapid uptake across earlier-stage indications, mainly early-stage non-small cell lung cancer. Continued strong momentum in metastatic indications is also boosting sales growth. The company expects continued growth from Keytruda, particularly in early lung cancer.

Merck is working on different strategies to drive Keytruda's long-term growth. These include innovative immuno-oncology combinations, including Keytruda with LAG3 and CTLA-4 inhibitors. In partnership with Moderna (MRNA Quick QuoteMRNA - Free Report) , Merck is developing a personalized mRNA therapeutic cancer vaccine (V940/mRNA-4157) in combination with Keytruda for patients with certain types of melanoma and non-small cell lung cancer (NSCLC). Merck and Moderna are conducting pivotal phase III studies on V940, in combination with Keytruda, for earlier-stage and adjuvant NSCLC and adjuvant melanoma. 

Merck is also developing a subcutaneous formulation of Keytruda that can extend its patent life. This formulation is under review in the United States and an FDA decision is expected in September.

MRK’s Pipeline Progress & Strategic M&A Deals

Merck has been making meaningful regulatory and clinical progress across areas like oncology (mainly Keytruda), vaccines and infectious diseases while executing strategic business moves.

MRK’s phase III pipeline has almost tripled since 2021, supported by in-house pipeline progress as well as the addition of candidates through M&A deals. This has positioned Merck to launch around 20 new vaccines and drugs over the next few years, with many having blockbuster potential. Merck’s new 21-valent pneumococcal conjugate vaccine, Capvaxive, and pulmonary arterial hypertension drug, Winrevair, have the potential to generate significant revenues over the long term. Both products have witnessed a strong launch.

Merck has other promising candidates in its late-stage pipeline, such as enlicitide decanoate/MK-0616, an oral PCSK9 inhibitor for hypercholesterolemia, tulisokibart, a TL1A inhibitor for ulcerative colitis and Daiichi-Sankyo-partnered antibody-drug conjugates. To foray into the lucrative obesity market, Merck has in-licensed global rights to an investigational oral GLP-1 receptor agonist, HS-10535, from Chinese biotech Hansoh Pharma.

MRK’s Keytruda Faces Patent Expiration in 2028

Merck is heavily reliant on Keytruda. Though Keytruda may be Merck’s biggest strength and a solid reason to own the stock, it can also be argued that the company is excessively dependent on the drug, and it should look for ways to diversify its product lineup.

There are rising concerns about the firm’s ability to grow its non-oncology business ahead of the upcoming loss of exclusivity of Keytruda in 2028.

Also, competitive pressure might increase for Keytruda in the near future. In 2024, Summit Therapeutics (SMMT Quick QuoteSMMT - Free Report) reported positive data from a phase III study (conducted in China by partner Akeso) in patients with locally advanced or metastatic NSCLC, in which its lead pipeline candidate, ivonescimab, a dual PD-1 and VEGF inhibitor, outperformed Keytruda. Summit believes iivonescimab has the potential to replace Keytruda as the next standard of care across multiple NSCLC settings.

Declining Sales of MRK’s Gardasil in China

Sales of Gardasil, which is Merck’s second-largest product, are declining due to weak performance in China, which resulted from sluggish demand trends amid an economic slowdown. Lower demand in China led to above-normal channel inventory levels at Merck’s commercialization partner in China, Zhifei. Accordingly, Merck decided to temporarily halt shipments of Gardasil in China. At the midpoint of the total revenue guidance for 2025, Merck assumes no further Gardasil shipments to China this year.

However, Gardasil sales remain strong in almost every major region outside China, including the United States.

MRK is also seeing declining demand for its diabetes products and the generic erosion of some drugs.

MRK Share Price Valuation & Estimates

Merck’s shares have lost 14.0% so far this year against an increase of 1.7% for the industry. The stock has also underperformed the sector and the S&P 500, as seen in the chart below.

Merck Stock Underperforms Industry, Sector & S&P 500

Image Source: Zacks Investment Research

From a valuation standpoint, Merck appears attractive relative to the industry. Going by the price/earnings ratio, the company’s shares currently trade at 8.99 forward earnings, lower than 15.16 for the industry as well as its 5-year mean of 12.82.

MRK Stock Valuation

Image Source: Zacks Investment Research

Merck’s EPS estimates for both 2025 and 2026 have declined over the past 60 days.

MRK Estimate Movement

Image Source: Zacks Investment Research

Long-Term Investors Should Stay Invested in MRK Stock

Merck’s problems are numerous at present, including persistent challenges for Gardasil in China, potential competition for Keytruda, and rising competitive and generic pressure on some of its drugs. All these factors have raised doubts about Merck’s ability to navigate the Keytruda loss-of-exclusivity period successfully. Consistently declining estimates and price depreciation reflect analysts’ pessimistic outlook for the stock.

However, Merck has one of the world’s best-selling drugs in its portfolio, generating billions of dollars in revenues. Though Keytruda will lose patent exclusivity in 2028, its sales are expected to remain strong until then. Merck’s new products, Capvaxive and Winrevair, are witnessing strong launches and have the potential to generate significant revenues over the long term.

The VRNA deal, once closed, should also help fill the potential revenue gap created by Keytruda’s upcoming loss of exclusivity. Ohtuvayre's commercial launch is off to a solid start. During the first quarter, Ohtuvayre brought in sales worth $71.3 million, which grew 95% sequentially.

We believe investors with a long-term horizon should stay invested in this Zacks Rank #3 (Hold) stock due to its strong fundamentals, a promising pipeline and potential strong sales from its new products. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.