Merck & Co. (MRK) Stock Analysis – Heads or Tails?

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Merck (MRK)

Merck & Co. (MRK) stock fundamentals, overview

Merck & Co. (MRK) was founded in 1891 as the American subsidiary of the German Merck Group, and after World War I became an American-owned and independent company. Today, the company is headquartered in Rahway, New Jersey, and is one of the world's largest pharmaceutical companies. Its business profile includes the development and distribution of prescription drugs, vaccines, biological therapies, diagnostics, and veterinary products worldwide.

Merck & Co. employs approximately 75000 people. The company's top-selling product is the immunotherapy cancer drug Keytruda, which generated $29.5 billion in revenue last year, accounting for nearly half of the company's total revenue. Also notable is the HPV vaccine Gardasil, which generated 13% of revenue, or about $8.6 billion. Animal health products also play an important role, accounting for about 9% of total revenue.

Market capitalization: ~200 billion USD
Investor relations: https://www.merck.com/investor-relations/
iO Charts share subpage: MRK

Merck (MRK) stock price

📒Table of Contents📒

I have created a table of contents to make it easier for you to navigate the longer articles:

〽️Market segment analysis〽️

In this section, I examine the dynamics of the market segment, how it operates, who the main players are, and what tailwinds or headwinds the players in the given market have to deal with. I will not analyze companies in depth, but I will touch on the market share of individual companies.

Merck & CO. (MRK) is a company that primarily produces oncology drugs. To understand how it works, you need to analyze the pharmaceutical industry itself. It is not a single market, but rather a collection of specialists who focus on a specific sub-area. Merck & Co. (MRK) is best known for its Keytruda drug, which is the world's highest-grossing oncology drug, ahead of Abbvie's (ABBV) Humira, an autoimmune disease treatment. Let's take a step back and look at how the pharmaceutical industry actually works. The following lines are mostly taken from my analysis of Novo Nordisk (NVO), but I have adapted some of them to Merck & Co. (MRK). You can find the analysis of the former stock here, and it's worth reading this as well: Novo Nordisk stock analysis (NVO).

Every drug has a brand name and an active ingredient behind it, which explains its mechanism of action. For example, Keytruda, manufactured by Merck & Co. (MRK), is a biologic anticancer drug that is administered as a concentrated solution for intravenous infusion and contains the active ingredient pembrolizumab. Keytruda does not have a tablet or other form other than those already mentioned.

In the pharmaceutical industry, there are basically two types of drugs. These can be:

🔬 1. Chemically produced small molecule drugs

  • 🔬Generic drugs can be made from them
  • 🔬When their patent expires, a completely identical generic can be made, molecularly the same, cheaper, meaning they are very easy to copy. Copy drugs are typically 50% cheaper than the original.
  • 🔬These are simple, well-known compounds that can be produced in the laboratory by chemical synthesis.
  • 🔬E.g. ibuprofen, paracetamol (these are fever reducers), atorvastatin (cholesterol reducer), metformin (for diabetes) and thousands of others.
  • 🔬The entry of generic copies of drugs into the market is also supported by the Waxman-Hatch Act of 1984, which increases competition and pushes down prices. Today, generic drugs account for 75% of the market (2009 data)

If you take out the medicines you find at home, they will typically be chemically produced preparations. For example, look at the active ingredients in painkillers or fever reducers, all manufacturers typically use the same ones.

The difference between generic and biosimilar drugs
source: iO Charts, the difference between generic and biosimilar drugs

🧬 2. Biologically derived drugs – large, complex, protein-based molecules

  • 🧬biosimilar medicines can be made from them.
  • 🧬They are "produced" by living cells (e.g. bacteria, yeast, mammalian cells), genetically programming the cells to produce the desired protein.
  • 🧬E.g. insulin analogs, monoclonal antibodies (Keytruda, Humira), growth hormones and so on.
  • 🧬They are too complex to be 100% molecularly copied, so only a functionally similar, but not perfect, copy can be made, this is called a biosimilar drug.
  • 🧬They are typically developed by biotechnology companies like Amgen (Amgn) or Biogen (Biib), although now every major pharmaceutical company has such products. In fact, biotechnology companies are also pharmaceutical companies, they just work with a different toolkit.

The above is interesting because chemically produced drugs are much easier to copy than biologically produced ones and their cost is also lower, as they do not require nearly as complex procedures. The point of both is that "copy" drugs are much cheaper than if a company had to develop the drug first. That's why a patent protects the company that registered the original drug for years and prevents competitors from entering the market with cheaper drugs, except in one or two special cases, as you will see.

☝🏼One of the most difficult parts of the pharmaceutical industry to analyze is whether or not the drugs developed by pharmaceutical manufacturers will be successful, and what the cost implications of events related to post-launch side effects, such as lawsuits, are.

Pharmaceutical companies develop multiple drugs in parallel, in different areas of their profile. The pipeline, which can be translated as a product development chain, refers to the development process during which new drug candidates progress from initial laboratory research to marketing authorization. The pipeline consists of several stages and is key to the strategy of every pharmaceutical company, as future revenues and growth potential depend on the success of these new molecules.

💊Main stages of drug development:

  1. 🩸Pre-clinical research: Laboratory and animal testing; safety, mechanism of action, and toxicity testing are performed. It usually takes 1-3 years.
  2. 🩸Phase I clinical trial: It involves a small number of healthy volunteers, aiming to determine safe dosing and side effects. It usually lasts one to two years, involving 20-100 patients.
  3. 🩸Phase II study: It is already underway with the involvement of patients, and the goal is to determine efficacy and the ideal dose. It usually takes two to three years, involving 100-300 patients.
  4. 🩸Phase III study : A large number of patients, the effectiveness of the drug is tested in comparison to placebo or other therapy, and statistically proven efficacy and safety are the main considerations. It is also called a large sample or late clinical phase study. It can last up to 3-5 years, involving thousands of people.
  5. 🩸Registration/Authorization: submission to authorities (e.g. EMA, FDA), approval, which is something that many drugs fail to achieve, despite the fact that development goes through the four-step process listed above.
  6. 🩸Phase IV (post-marketing): Even after market launch, side effects and long-term effects are monitored.

💰Development time and costs

Developing a new drug can take 10 to 15 years and cost up to $1 billion, including the cost of failed projects, but creating an oncology drug costs even more. This incredibly expensive and time-consuming process partly explains why the industry is so focused and profit-oriented. Most drugs also never recoup their development costs, so companies need a few blockbusters to fund the many failed developments.

☝🏼Specific examples:

  • 💊Merck & Co. (MRK), Keytruda (pembrolizumab, against cancer): Keytruda was first developed in 2006 by Organon, a subsidiary of Schering-Plough, in collaboration with LifeArc, before being acquired by Merck & Co. (MRK) in 2010. Clinical trials began in 2011, and FDA approval was granted in 2014. In total, it took about eight years from discovery to approval. Although specific figures for Keytruda are not available, it is estimated that developing a new oncology drug currently costs between $2 billion and $3 billion.
  • 💊Abbvie (ABBV), Humira (adalimumab, against inflammatory, autoimmune diseases): Humira's active ingredient, adalimumab, was discovered by Cambridge Antibody Technology (CAT) around 1993, and the first clinical trials began in 1999. The drug received FDA approval in 2002, so the entire development cycle was approximately nine years. Similar to Keytruda, no specific cost data is available for Humira.
💡The success rate is extremely low: Less than 10% of molecules that reach the preclinical phase eventually reach the market. Therefore, pipeline management and diversification, i.e. running many parallel projects at the same time, is vital for pharmaceutical manufacturers.

🥺What are the dreaded diseases?

The term "dreaded diseases" is not an official medical category, but rather a colloquial, journalistic, or educational term, and usually refers to diseases that:

  • ☠️have a high mortality rate,
  • ☠️cause serious, long-term or irreversible health damage,
  • ☠️or they can cause mass illness.

Typically, this includes:

  • 💀cancer diseases (e.g. lung cancer, pancreatic cancer, brain tumors)
  • 💀serious infectious diseases (HIV/AIDS, Ebola, plague, bird flu)
  • 💀diseases associated with nervous system degeneration (Alzheimer's disease, ALS)
  • 💀serious cardiovascular diseases (heart attack, stroke)
  • 💀incurable autoimmune diseases (some forms of multiple sclerosis)

The word is emotionally charged and is often used in the media to attract attention rather than for scientific categorization.

Of the above, the most well-known disease is cancer, which is part of the oncology category, for which Merck & Co (MRK) manufactures its drugs. According to the WHO report, this already affects one in five people, which is roughly 1.6-1.7 billion people. Two years ago, approximately 20 million new cases of cancer were registered annually, and 9.7 million people died from this disease in the same year, meaning the mortality rate is extremely high.

It is no coincidence that pharmaceutical manufacturers pay special attention to the development of cancer drugs due to the very high number of cases and the high rate of negative outcomes.

🧾 How long is a drug patent?

  • 📜Basic patent term: 20 years from the filing date
  • 📜However, in the case of medicines, licensing takes a long time, so the patent can be extended by +5 years through the "Supplementary Protection Certificate" (SPC), but this is rare, usually it is extended by 2-3 years.
  • 📜In the USA, the FDA can grant additional exclusive distribution rights (e.g. for biological agents for 12 years), these are not patent protection, but market protection.

🔄 What happens after the patent expires?

  1. 👪Biosimilar or generic versions may appear.
  2. 🏁Competition puts price pressure on the original manufacturer, the price can drop by up to 30–70%.
  3. 🏭The manufacturer loses the exclusive distribution right, so its revenues decrease, this is called the "patent cliff".
  4. 💊Companies are therefore trying to bring new indications, new formulas or combination therapies to market to extend the lifespan of the product.
  5. 👨🏼‍⚕️In many cases, manufacturers develop biosimilars themselves to retain a share of the market, as their development is cheaper than the original product.

For example, in the case of Keytruda, Merck is already working hard on new immunotherapy combinations and new PD-1 inhibitor molecules to maintain its dominance even after the patent expires.

📌In practice: Between 2020 and 2023, I had exposure to a lot of pharmaceutical companies, I certainly had shares in GSK, Amgen, Pfizer, Bristol-Myers Squibb, Abbvie and Merck, as well as their spin-offs, but I got out of most of them precisely because of the above, difficult-to-predict problems. A good example of losing a patent is the Humira drug developed by AbbVie, which expired in the USA in 2023, and several biosimilar competitors have appeared, e.g. Amgevita and Hyrimo. AbbVie's revenue for Humira fell from 23 billion USD to 14 billion USD in one year, which is a brutally big difference. That's why I got out of the stock two years ago at around 170 USD.

🇺🇸How is the American health insurance system structured?

Normally, if you want to buy something from a manufacturer, you go to their store and buy their product. This is a two-element chain, but often there is a distributor who intervenes as an intermediary in the process, so the chain is more of a three-element chain. For example, the bread is baked by the baker, the retail chain buys it, and you go to the retail chain's store and buy the bread from there.

☝🏼This is not the case in the American healthcare system, where the same six elements are present, which is one of the reasons why the American government spends an awful lot on health insurance, which is 17-18% of GDP. The basis for comparison is the EU average, which is 11%, in Germany it was 12.9% during the COVID pandemic, while in Austria it was 11.2%.

1.🏭Pharmaceutical manufacturer

The pharmaceutical manufacturer is responsible for the development, manufacture and initial distribution of the drug. The products are usually sold to wholesalers or directly to pharmacies. It is very difficult to buy drugs directly from the pharmaceutical manufacturer, but there are efforts to do so, such as the NovoCare cash-pay model from Novo Nordisk (NVO). The problem with many intermediaries is that:

  • 🏭The pharmaceutical company develops the drug, so there is a large cost on their side
  • 🏭patents expire
  • 🏭The manufacturer has the products approved by the FDA
  • 🏭The manufacturer must compete with the competition

🚨Yet, it only receives 13% of the money in the healthcare system.

2.🏥Health insurers

Health insurers, such as UnitedHealth, Cigna, and Anthem, cover the cost of providing patients with medications. They work with PBMs to optimize drug prices and ensure patient access.

3.🧾Pharmacy Benefit Manager (PBM)

PBMs are intermediaries who negotiate with health insurers and drug manufacturers. They are responsible for obtaining discounts and rebates on the price of drugs and managing the drug list (formulary). PBMs also often contract with pharmacies to determine payments and co-payments. A PBM is essentially a broker who negotiates the price of a drug so that it can be included in the health care system and reach more patients. It keeps a portion of the negotiated amount for itself and returns the rest to the insurer.

4.💊Pharmaceutical wholesalers

Wholesalers, such as McKesson, Cardinal Health, and AmerisourceBergen, purchase drugs from manufacturers and distribute them to pharmacies, hospitals, and other healthcare providers. They are called pharmaceutical distributors.

5.🏥Pharmacies

Pharmacies are the final point of contact for patients to receive their prescribed medications. Pharmacies have direct contact with patients and are often the ones who collect co-payments. Many distributors also have pharmacy chains.

6.👤Patients

Patients eventually receive the medications and usually pay a co-pay for the medication. The amount of the co-pay depends on the insurance plan and the type of medication.

📌In practice: To summarize the above, the pharmaceutical company manufactures the drug, tests it, and if it is successful, it goes to the drug regulatory agency, the FDA, and gets the drug approved. After FDA approval, through various insurances such as Medicaid, Medicare, and private insurance, the demand appears that the population needs the drug. The insurer turns to the PBM to lower the prices at the pharmaceutical manufacturer and add the drug to the formulary list according to the insurer's requirements. Once this is done, the doctor examines the patient, writes the prescription, the subsidized part of which is paid by the insurer, or rather, the state through the insurer. The patient goes to the pharmacy, where he pays a co-payment, where the drug reaches the pharmacy through drug retailers. Isn't it clear as day? If not, here is an even more complicated diagram of the healthcare value chain:

the US healthcare value chain
source: Drug Channel Institute, the US healthcare value chain

The problem with all of this, apart from being unnecessarily complicated and expensive, is that most of the money in the healthcare system doesn't go to those who take the risk in developing the drugs. Instead, it's distributed as follows:

  • pharmaceutical manufacturer: 13%
  • hospitals: 28%
  • doctors' offices: 26%
  • the administrative cost of health insurance: 8%❗
  • insurers and PBMs: 25%❗(maybe we should buy insurance companies? 🤔)

🫰🏼Who pays the medicine bill?

As I mentioned above, the price of oncotherapy drugs is very high, with Keytruda listed at 191000 USD, which the vast majority of patients would not be able to pay out of pocket. In the USA, once the FDA has approved the commercialization of a drug, state insurance systems such as MediCare and MedicAid decide in a separate process on the conditions under which the drugs will be reimbursed. Private insurers such as Blue Cross, Aetna, Cigna, UnitedHealthCare (UNH), etc., use their own internal protocols to decide whether to include a drug on their own list of subsidized drugs. The insurer often makes a deal with the manufacturer and thus receives a discount on the list price for the given drug.

If an insurer accepts the drug:

  • 🫰🏼Usually 80–90% of the cost of the drug is paid by the state (and not the insurance company, they are just intermediaries).
  • 🪙The patient pays a co-payment, which can be 5–20%, or even thousands of dollars per year.
  • 💰Some nonprofit funds also cover the deductible, especially for cancer patients.

And why is all this important and what was my point? The price of medicines in the USA is much higher than in Europe, for example.

☝🏼The bottom line from the above is: if an insurance company adds a very expensive but subsidized drug to the formulary list, it will become available to a much larger audience. Thus, such cases usually significantly increase the revenues of the company that developed the drug, but the profit per dose is also less.

🧾 Example: Merck & Co.'s Keytruda

  • FDA approval: 2014
  • Accepted by Medicare and private insurers (as it is a life-saving, first-line treatment)
  • Merck gives discounts, but at list price a year is up to 150000–180000 USD (otherwise it would be 191000 USD)
  • The patient typically only pays a few thousand USD out of pocket if they have insurance

In Europe, the situation is somewhat simpler, because most countries have state health insurance, which usually reimburses up to 90% of the price of medicines. In the US, however, this is not the case. Last year, an estimated 26 to 28 million people in the US did not have health insurance, which is 7 to 8% of the population. This number has decreased in recent years due to the Affordable Care Act, also known as Obamacare, but millions still live without insurance.

🙋‍♂️Merck & Co. (MRK) specialties🙋‍♂️

In this section, I examine what specialties the analyzed company has, what its position is in the market, and whether it does anything differently than its competitors. If so, what and how, and what impact does this have on their operations.

Let's start with the story of Merck & Co. (MRK), because it's both very interesting and a great way to highlight the risks oncology companies run. Merck & Co. (MRK) was founded in the late 1800s, when most of the big pharmaceutical giants were founded. From the sound of the name, you can guess that Merck & Co. (MRK) was not an American, but originally a German company, founded in 1668!, in Darmstadt. Merck KGgA, also known as the Merck Group, still exists today. A distant relative of the founder Friedrich Jacob Merck, Georg Merck settled in the USA in 1891 and founded Merck & Co. (MRK) in New York.

After World War I, the American subsidiaries of defeated Germany were nationalized by the government, and Merck & Co (MRK) eventually came under American control, which was bought back by Georg Merck at an auction. Merck is known for developing the active ingredient MDMA, better known as ecstasy, around World War I, but even before the two companies split, they had active ingredients that we today classify as narcotics.

Around World War II, the pharmaceutical industry as we know it today grew out of the isolation of penicillin, which was first discovered in England in 1920, but because it was very difficult to produce, it fell into oblivion, until the antibiotic was rediscovered in 1940. English scientists came to America and commissioned several companies to mass-produce penicillin, one of which was Merck & Co. (MRK). The company owes its current reputation not to this, but to a series of successes in the 80s under Roy Vagelos, when most of its products reached $1 billion, tripling profits and doubling revenue. In 1980, revenue was only 2 billion USD, while at the turn of the millennium it was already 40 billion USD.

Between 2000 and 2010, there was a period of decline, which not only pushed the stock price to the bottom, but also revenues decreased from 40 billion to 20 billion USD. This was due to several factors at once:

  • ❌The product development chain, or pipeline, has been emptied due to unsuccessful clinical trials
  • ❌They burned a lot of money on failed experiments
  • ❌The Vioxx painkiller lawsuit cost the company billions of USD

Among the above problems, the emptying of the product development chain highlights one of the biggest risks for biotechnology companies: if there are not enough drugs in the pipeline, it is extremely difficult for the company to replace a single blockbuster name. Moreover, pharmaceutical patents must be formulated in a very precise manner; generally, only one molecule can be protected per indication, which is why it is important that the products can be used against as many diseases as possible. 

💡Moreover, years pass before clinical trials begin after patents are registered, so even though the patent protects the given drug for 20 years, in reality the pharmaceutical manufacturer usually only profits from it for 14-15 years. The FDA can extend this by 2-3 years, but even then, drugs cannot be protected by patents for more than 17-18 years.

And that brings us to 2002, when one of Merck & Co.'s (MRK) competitors, Bristol-Myers Squibb (BMY), acquired a company called Medarex, which was working on an antibody called PD-1, which was discovered by Tasuku Honjo in 1990. PD-1 is a checkpoint protein found on the surface of T cells and is often called the body's brakes. Normally, this receptor stops the immune system from attacking its own tissues, which is important in preventing excessive immune reactions and autoimmune diseases. However, many tumors exploit this mechanism: cancer cells produce a ligand called PD-L1, which binds to PD-1 and turns off T cells, so that the immune system does not attack them. The PD-1 antibody blocks the connection between the PD-1 receptor and the PD-L1/PD-L2 ligands, thereby releasing the brakes on the immune system, so that T cells can recognize and attack cancer cells again, Medarex has discovered.

BMY took Medarex's PD-1 drug to Phase II studies in 2010 and renamed it Opdivo. Merck & Co. (MRK) previously acquired a company, Schering-Plough, which acquired another company, Organon, which partnered with LifeArc, which also conducted PD-1-based trials. When Medarex announced what they had discovered, it became clear to Merck how valuable their previous purchase was and they immediately began clinical research at the company with tremendous force, closing their four-year disadvantage against BMY by 2014 and then approving the drug for metastatic non-small cell lung cancer, thus permanently turning Merck & Co. (MRK) into an oncology giant.

To give you an idea of ​​the difference in the success of the two drugs, because Merck came to market before Bristol-Myers Squibb, I included last year's revenue data:

  • 🎗️MRK Keytruda: 29.5 billion USD
  • 💊BMY Opdivo: ~9.3 billion USD

💊Merck & Co.'s (MRK) highest-grossing drug: Keytruda

Keytruda (active ingredient: pembrolizumab) is a biologic drug, specifically a monoclonal antibody, developed by Merck & Co. (MRK). It is not generic and cannot be easily copied, as it is a complex immunotherapy product produced from living cells.

🧬 What is Keytruda?

Keytruda is a type of immune checkpoint inhibitor: it binds to the PD-1 protein, activating the immune system to recognize and destroy tumor cells.

Indications (as of this year, it is approved for more than 40 different tumor types):

  • 🎗️Melanoma
  • 🎗️Non-small cell lung cancer
  • 🎗️Renal cell carcinoma
  • 🎗️Head and neck cancer
  • 🎗️Bladder cancer
  • 🎗️Cervical cancer
  • 🎗️Classical Hodgkin lymphoma, etc.

💰 How much does it cost?

The price of Keytruda is very high, it is one of the most expensive oncology drugs:

  • Price in the US: a single infusion (200 mg, every 3 weeks) is approximately $10000–$13000, and can be as high as $150000–$180000 per patient annually. The current list price in the US is $191000.
  • Merck generated over $25 billion in revenue two years ago and $29.5 billion last year from Keytruda sales alone, making it the world's top-selling drug (ahead of Humira, an autoimmune disease drug made by AbbVie, and Ozempic, which is currently the world's second-highest-grossing drug).

⏳ Development time

  • The research began around 2006.
  • It received its first FDA approval in 2014, initially for melanoma.
  • The development time was therefore eight years, involving thousands of patients and costing hundreds of millions, and according to some estimates, over 1 billion USD.

The drug is protected by a patent until 2028, so it is currently not possible to make biosimilar drugs from it. From the above, it is clear that it is very worthwhile to develop blockbuster drugs, but the risk of a company failing with a given drug is also huge.

🤔How do we analyze Merck & Co. (MRK) and other biotechnology companies?

Biotechnology companies have an extreme risk-return profile, and this segment contains the majority of companies that have gone bankrupt over time. Although many people don't know it, the most research-intensive sector is the pharmaceutical industry. They typically spend around 20% of their revenue on research and development, which puts them ahead of even chip manufacturers. To find out if a biotech company truly has a competitive advantage, we need to examine:

  • ❓what kind of product development chain does the company have, how many drugs are there and what clinical phase they are in,
  • ❓what trademarks it has and for how long, and how difficult it is to copy the given medicine with a biosimilar,
  • ❓If the drug trials are successful, what kind of pricing power will their drugs have in the market? This can be estimated from the pricing of competing drugs and the expected indications of the drugs.

The more diverse a drug is, that is, the more indications it has, the better for the manufacturer, because on the one hand, they do not have to develop new products, and on the other hand, the product can be protected for these uses as well. The development of oncology drugs is particularly expensive, even among biotechnology companies, and in return, they can charge an awful lot for them.

💰How does Merck & Co. (MRK) make money and what market advantages does it have?💰

In this section, we examine what exactly the company does to generate revenue, what products and services it has, how indispensable they are. Does it have any competitive advantage (economic moat), how defensible is it, and whether the trend is decreasing or increasing, and what is likely to happen in the long term.

Merck & Co. (MRK) not only generates its revenues from oncology drugs, but they account for the largest portion of its revenue by far. It generates its revenues from the following areas:

Total revenue: ~$63.6 billion

  • pharmaceuticals: $56.67 billion
  • animal health: 6.1 billion USD
  • other product sales: 0.82 billion USD

Animal health is a mature market, having been part of the company's portfolio since roughly the 1950s and 60s. They used to have a women's health segment, but that was spun off into a company called Organon in 2021. Such spin-offs are very typical of the industry, with Viatris being a spin-off from Pfizer, while Novo Nordisk (NVO) spun off Novozymes.

Within pharmaceuticals, the 2024 revenues are as follows:

  • Oncology:
    • 🩸KEYTRUDA: 29.5 billion USD, oncology drug, ~40+ indications
    • 🩸Lynparza: $1.3 billion, PARP inhibitor anti-cancer drug, mainly for the treatment of ovarian, breast, pancreatic and prostate cancers.
    • 🩸Lenvima: USD 1 billion, targeted anti-cancer agent (tyrosine kinase inhibitor), mainly for the treatment of thyroid, liver and kidney cancer.
    • 🩸WELIREG: USD 0.5 billion, HIF-2α inhibitor for the treatment of VHL disease-associated tumors (e.g., renal cancer, central nervous system hemangioblastoma).
    • 🩸WINREVAIR: $0.4 billion, a drug for the treatment of pulmonary arterial hypertension that improves the function of the pulmonary blood vessels.
  • 💉Vaccine industry:
    • 💉GARDASIL: 8.58 billion USD, HPV vaccine
    • 💉PROQUAD, MMR II and VARIVAX: $2.4 billion, combination and single-component vaccines given to children to prevent measles, mumps, rubella and chickenpox.
    • 💉BRIDION: 1.7 billion USD, an injection used to rapidly reverse the effects of non-depolarizing muscle relaxants (e.g. rocuronium, vecuronium) after surgery.
    • 💉LAGEVRIO: USD 0.96 billion, antiviral drug for the treatment of COVID-19 (molnupiravir).
    • 💉AXNEUVANCE: $0.8 billion, 15-valent pneumococcal vaccine for the prevention of pneumonia and other invasive pneumococcal diseases.
    • 💉PREVYMIS: $0.78 billion, a drug used to prevent CMV infection in organ transplant patients.
    • 💉ROTATEQ: USD 0.7 billion, oral rotavirus vaccine to prevent diarrheal and vomiting diseases in infants.
    • 💉SIMPONI: USD 0.5 billion, TNF inhibitor biologic drug for the treatment of, among others, rheumatoid arthritis, psoriatic arthritis and ulcerative colitis.
  • 🍭diabetes preparations:
    • 🍭JANUVIA/JANUMET: USD 2.26 billion, blood sugar-lowering drugs for the treatment of type 2 diabetes (DPP-4 inhibitor or in combination with metformin). Will lose patent protection in the US in 2026.

From the above, it can be seen that Merck & Co. (MRK)'s biggest problem is that Keytruda accounts for 46% of revenue and its patent expires in three years. This is likely to result in significant revenue losses as biosimilar products flood the market. It's really impossible to say how big the revenue drop will be, this is the patent cliff phenomenon.

📌Note: It's fortunate that we don't really have to guess about the price of drugs falling, as a study by Berndt&Atkin was conducted in 2011, which states that if a drug loses its exclusivity, copycat versions appear on the market at 50% of the price. This causes a market loss of around 25% in a very short time, while it causes a price drop of 27% in one year and 37% in two years, according to the study. Moreover, this is an accelerating process and this is already a 14-year study, so a larger market loss and price drop can actually be expected. Interestingly, manufacturers usually react to this by maintaining or raising the price! so that there is no direct competition with the products. Since the trademark expires in 2028, but the drug's revenue will increase until then, it is estimated that it will be 32-33 billion USD at the moment of expiration.

💡If we take into account the above one-quarter market loss, then out of the 33 billion USD, there will be 25.4 billion USD in revenue if the drug does not follow the price drop. If so, then after one year it will only generate 18.5 billion in revenue.

Besides Keytruda, the only strong blockbuster is Gardasil, which accounts for 13% of revenues. Its patent also expires in 2028. Since its turnover has slowly decreased, we can only expect it to be around 8 billion USD. When combined with Keytruda, the two drugs generate revenue of 40-41 billion USD, a decline that Merck & Co. (MRK) will have to make up for in just over two years.

💡To give you an idea of ​​the proportions, their third highest-grossing drug, Proquad, MMR II and Varivax variants, bring in 2.5 billion USD. Of these, 16 would need to be brought to market, while for a product with an average revenue, say something like Lenvima, 40! new products would need to be brought to market.

To see how likely this is, we need to examine Merck. & Co.'s (MRK) product development chain, i.e. what products are in the pipeline. You can see this on this search page. Total:

  • 💊50 Phase II studies are underway
  • 💊30 Phase III studies are underway
  • 💊5 development programs are under approval
According to Merck & Co.'s (MK) 2025 Q2 report, the current product development chain
source: Merck & Co. (MRK) 2025 Q2 report based on the current product development chain

The figure above shows the pipeline of Merck & Co. (MRK), and it is worth interpreting it from right to left. Drugs under approval typically represent procedures for new indications in different markets, rather than new drugs. For example, getting Keytruda approved for use in the US and EU markets in Japan may bring some additional revenue, but it will not fundamentally change the drug's position. Other drugs on the list of drugs awaiting approval include:

✅Merck & Co (MRK) drugs awaiting approval

  • Capvaxive: A 21-valent pneumococcal conjugate vaccine developed for adults to prevent invasive pneumococcal infections (e.g. sepsis, meningitis) and pneumonia.
    • 👥Case number: There are ~150000 cases requiring hospitalization, and the disease causes approximately 1.5-2 million adult deaths worldwide.
    • 👛List price: ~ 300 USD
  • Enflonsia: a long-acting monoclonal antibody developed for the prevention of lower respiratory tract diseases caused by respiratory syncytial virus (RSV) in newborns and young infants.
    • 👥Case number: In children under five years of age, it affects 60000-80000 people, and 3.6 million infants are hospitalized for RSV worldwide.
    • 👛List price: ~ 550 USD
  • Winrevair (active ingredient: sotatercept): approved for the treatment of pulmonary arterial hypertension (PAH, WHO Group 1). PAH for short.
    • 👥Case number: 40000 person
    • 👛List price: ~14000 USD per vial (3-week supply)
  • MK‑8591A: A once-daily, two-component tablet antiretroviral (ART) product for the treatment of HIV-1 infection.
    • 👥Case number: 1.2 million people
    • 👛List price: no price listed yet

Of the above, Winrevair is assumed to be a blockbuster, with an annual cost of 238000 USD, which is the equivalent of seventeen 3-week doses, meaning the maximum revenue from this could be approximately 10 billion USD. The drug was developed by Acceleron, which Merck acquired four years ago for $11.5 billion. It has indications not only for PAH, but also for osteoporosis, anemia, and multiple myeloma, meaning that new indications could be added to the range of uses, just as it was the case with Keytruda. One thing to keep in mind, however, is that the above figures would mean that Merck & Co. (MRK) would have 100% market share and everyone would get the drug, which is obviously unlikely. For those who are more interested in the matter, look for the ZENITH clinical trial.

Let's see what Merck & Co. (MRK) says about its own product development chain according to its report for the last quarter of last year:

Merck & Co. (MRK) Q2024 4 guidance
source: Merck & Co. (MRK) Q2024 4 information

In the picture, only 2 products have names, these can be commercialized, the rest either have only a code name, or the name of the active ingredient, so these are clinical trials, or a combination of Keytruda, like pembrolizumab + berahyaluronidase alfa, you can see this in the first picture under the name MK-3475A. What follows from this? That the clinical trials were not completed in 8 months, which is completely understandable, but this means the company has less and less time to show off something big.

There is another Phase III drug in the list above that may be interesting, this one in the picture above goes by the code name MK-0616 and is an oral PCSK9 inhibitor for hypercholesterolemia, so a pill. There is no price yet, but based on its competitors, it could be 10-15000 USD per year. This is interesting because 2.6 billion people in the world have high cholesterol levels, of which severe hypercholesterolemia may affect 3-5% of people, which is 90-130 million people, which is a huge market, but there are also many competitors, you can find a good article about it here: Merck's Oral Drug CandidateI don't want to continue my already highly speculative discussion, but for those who want to delve deeper into these, there is a pretty good Fortune Well article about it: Merch Touts New Blockbuster Drugs.

☝🏼One thing to note, however: neither Keytruda nor the future blockbuster drug Winreavir are Merck & Co.'s (MRK) own developments. Consequently, an essential part of the company's growth is the subsequent sale of products resulting from acquisitions.

🏰Economic moat🏰

In this segment, I examined whether the company has any economic competitive advantage, which Warren Buffett referred to as an “economic moat,” which deters competitors from besieging the company’s fortress, i.e. its business, and taking over its market. In the case of Merck & Co. (MRK), these could be the following:

  • 🫸Cost/scale advantage: yes. All large pharmaceutical companies have an advantage of scale over smaller companies. Since most blockbuster drugs target large markets, ramping up production and having the right size manufacturing capacity is key.
  • 🫸Switching cost: very strong. Especially in the oncology segment, where patients' lives can depend on the effectiveness of the drugs. It is no coincidence that Keytruda, which belongs to this category, has become the world's highest-grossing drug. No patient will switch between cancer drugs.
  • 🫸Network effect: none.
  • 🫸Intangible assets, know-how, trademark: yes. The pharmaceutical industry is the most research-intensive industry, full of all kinds of patents and trademarks. In fact, this provides the basis of the economic moat, with which they can differentiate themselves from competitors and prevent them from taking their market. Moreover, Merck & Co. (MRK) derives its revenues mainly from oncology research, where the above is particularly effective, in contrast to, say, the market for chemical-based, generic drugs.
  • 🫸Barriers to entry: very high. Especially in the case of the oncology market. Drug research requires an enormous amount of research and development resources, the return on drugs is doubtful, a large production capacity is needed for distribution, trust is very important, so it is extremely difficult to enter the market. Most small players are immediately acquired by the more capital-rich, it is no coincidence that most large pharmaceutical manufacturers can look back on a 100-year history. The market is constantly concentrating as the capital power of mega-corporations grows.

Merck & Co. (MRK)'s economic moat is unquestionable, especially in the oncology sector, at least until 2028. Keytruda is the world's highest-grossing drug, but the company is not only strong in oncology, but also in vaccines. The problem is patent expiration and how they will replace their blockbuster drugs. Especially since they had a first-mover advantage with Keytruda. Internal clinical trials and future acquisitions may provide a solution to this, but for now, there is no substitute product in sight that could replace the brutal Gardasil and Keytruda duo, which currently generate nearly 60% of revenue.

🎢Merck & Co. (MRK) metrics🎢

In this section, I examined what metrics characterize the company, how it stands on the revenue side, what margins it operates with, whether it has debt, what the balance sheet shows. I look for items that are extreme – too high debt, high goodwill, etc. - what return on capital the company works with, what its cost of capital is, how the revenue and cost sides are structured. I also examine trends, owner value creation, and how the company uses the cash generated.

📈What is the S&P 500 yield?📉

Compared to previous tests, I have introduced a new section to compare the metrics below. Since many people use the US stock market index as a benchmark and also buy S&P 500 ETFs, it is worth looking at what companies are doing in aggregate (of course, you should be happy if the company you are analyzing exceeds these values).

S&P 500 2024 data:

  • SP&500 revenue growth: +7%
  • SP&500 profit growth: +10%
  • SP&500 gross margin: 45%
  • SP&500 net margin: 13%
  • SP&500 ROE: 15%
  • S&P 500 ROIC: 12%
  • S&P 500 ROCE: 11%

Let's start with the usual, revenue, which can basically be divided into two categories: Product categories and territorial. Let's look at the former, because there is a perfect picture of it in the 2024Q4 report, which I would add that the bottom one is ophthalmology, a business worth a few billion USD, which is how the total revenue of 63.6 billion USD came together.

(MRK) 2024 Q4 report, revenue by category
source: Merck & Co. (MRK) 2024 Q4 report, revenue by category

As for the territorial distribution of revenues, unfortunately the price is a bit thick and it does not show that the sales of the blockbuster drug Gardasil in China have significantly decreased. Since Keytruda and Gardasil account for ~60% of the revenue, Merck did not have a very good year, and the total revenue decreased minimally, which is exactly what the purple percentage values ​​in the chart show. The growth in previous years was also driven by these two drugs, with roughly 53% of the revenue coming from the US, while 22% comes from Europe.

Merck & Co. (MRK) Revenue by Geographic Distribution
source: fiscal.ai, Merck & Co. (MRK) revenues by geography

Margins are developing very similarly to revenues, with a steadily increasing gross margin, but essentially the other indicators are also very good, which is sometimes worsened by the impact of a major acquisition. The business is strongly cash-generating, but although it is not classified as a fixed cost, research and development, which ensures the company's competitive advantage, also consumes significant amounts, as you will see in the following picture.

Merck & Co. (MRK) margins
source: fiscal.ai, Merck & Co. (MRK) margins

Merck & Co (MRK) has a fairly typical cost structure. I've drawn COGS, which is about 10%, which is basically the cost of maintaining production and sales, which is a little higher than administrative costs. On the one hand, manufacturing itself is not that cheap, and on the other hand, advertising costs fall into the SG&A category, and drugmakers advertise quite a lot. The orange color shows research and development, which is misleading because on the accounting side, it is written off immediately in the given year, even though its effect is obviously spread over years, and this is the basis of the moat of drug companies. Or, acquisitions, as you will see later. Returning to R&D, this 28% is an extremely high figure, the company is pumping cash into product development with full force. Merck & Co. (MRK) is particularly good at large-sample, late-phase research, so if any company can do it, MRK has a chance to get something out of it.

Merck & Co. (MRK) cost structure
source: fiscal.ai, Merck & Co. (MRK) cost structure

The former idea is closely related to Merck & Co. (MRK)'s debt and cash position, as acquisitions are usually financed with these or through equity issuance. The image below shows the following:

  • 💰income: ~63.6 billion USD
  • 🤑profit: ~16.4 billion USD
  • 🫰🏼cash: 8.62 billion USD
  • 💸net debt: $26.78 billion (42% of revenue, 160% of profit)
  • 💶net debt/EBITDA: ~ 0.93
  • 👛interest coverage, EBIT/interest: ~ 18.9

The level of debt would be acceptable if the company only had to make smaller acquisitions, but in recent years, $10 billion acquisitions have flown by. As time runs out and Merck & Co. (MRK) approaches its 2028 patent expiration date, the pressure on the company to acquire will increase if it doesn't want to lose a lot of revenue. More about this in the acquisitions section.

Merck & Co. (MRK) cash and debt
source: fiscal.ai, Merck & Co. (MRK) cash and debt

🧮What do ROIC and ROCE metrics show?🧮

ROIC – Return on Invested Capital – shows how efficiently the company uses its total invested capital to generate profit. Read more here.

  • It shows the company's fundamental value creation capability.
  • It filters out the impact of the financing structure.
  • If ROIC exceeds the cost of capital (WACC), the company is creating value.

ROCE – Return on Capital Employed – shows how efficiently the company uses its long-term financing sources. Read more here.

  • It measures the profitability of business activities.
  • It does not take into account tax effects.
  • A good basis for comparison between different industry players.
IndicatorWhat does it measure?Who is it useful for?When is it considered good?
ROCETotal return on capitalLong-term investorsIf higher than the industry average
ROICReturn on invested capitalEquity investorsIf higher than WACC
ROEReturn on equityShareholdersIf stable and sustainably high

Merck & Co. (MRK) shareholder value creation

On the owner value side, I usually look at how the company uses the free cash generated. Basically, a company can do the following things with cash:

  1. reinvests it into the business (this is actually reflected in the high 28% research and development costs)
  2. reduces debt (slowly increases)
  3. pays dividends (currently the company pays a 4% dividend)
  4. buys back shares (the number of shares has not decreased in the last few years)
  5. acquires other companies (the pharmaceutical market is quite acquisitive in nature)

As the classic question goes: which should I start with, the good news or the bad? I'll start with the former. Merck & Co. (MRK) is a dividend-paying company, paying a 4% dividend at the time of writing, with a payout ratio of ~48.6%. That's $3.24 per share for one year, which equates to roughly $8 billion. Merck & Co. (MRK) approved a $10 billion share buyback program this year, with an open-ended deadline, so we don't know if it will happen yet.

On paper, Merck is giving back a lot to its investors. The bad news is that it hasn't been doing so well over the past decade, with the purple graph dropping below 0% several times, which is hectic to say the least. This is because of acquisitions that burn money. It's no use paying dividends or buying back 0.7% of shares each year if its debt is growing. How good of a deal is it to pay out $8 billion when Merck & Co. (MRK) is trading at a discount? Investors would be much better off if this amount were used for opportunistic share buybacks, value-creating investments, or research and development that could find the future Keytruda. Although this has not happened yet, I would bet big money that when Keytruda's patent expires and revenue starts to fall, the first thing they will do is tap into the dividend.

Merck & Co. (MRK) dividend payment and share buyback
source: fiscal.ai, Merck & Co. (MRK) dividend payment and share buyback

The above paints a pretty bleak picture for the company's future, even though the value creation metrics are still good. The WACC is around 6.5-7%, the ROIC is 24%, which is a significant difference, meaning the company is creating quite a lot of value... When it's not acquiring something big, that's why there are rough gaps in the graph. And the problem with this is that as the "patent loop" tightens, the company will be forced to make new acquisitions, unless it finds the goose that lays the golden eggs again, which it did in 2014.

Merck & Co. (MRK) ROIC, ROE and ROCE values

source: fiscal.ai, Merck & Co. (MRK) ROIC, ROE and ROCE values
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💵Merck & Co. (MRK) Acquisitions💵

In this section, I examine how acquisitive the nature of the company is and what impact each acquisition had on the life of the company, if any.

Merck & Co. (MRK) is one of the largest acquirers in the pharmaceutical industry. I went back to 2014 for acquisitions, and I included the Schering-Plough acquisition in the list, since that's where Keytruda comes from, and you could rightly say it changed the company's life. The sad thing about the acquisition below is that:

  • ✅In 1995: 70% of its revenues were generated from drugs launched on the market through internal developments
  • ❌In 2025: 50-60% of its revenues come from external sources, i.e. from companies developed by others but acquired

This, with a few exceptions like Novo Nordisk (NVO), is true for the entire industry, it has become the norm today that everyone is buying everyone else. The list below is long, but I don't remember any other company that has had so many acquisitions in recent years that wasn't a serial acquirer!

Merck & Co. (MRK) acquisitions between 2014-2025

2009

  • 🧪 Schering-Plough (≈ 41 billion USD): This large-scale acquisition saw Merck acquire Organon, where pembrolizumab (Keytruda) was first humanized, which is why I included it on the list. Of course, other drugs came from the acquisition, such as Nasonex (allergy), Temodar (brain tumor treatment), Claritin (allergy).

2014

  • 💊 Idenix Pharmaceuticals (~ 3.85 billion USD): invested in the development of drugs against chronic viral diseases.
  • 🧬 OncoEthix (~$375 million): added early-stage oncology developments to Merck's leading research portfolio. Hepatitis C antivirals, although the market shrank rapidly after Gilead's breakthrough, Merck still entered.

2015

  • 💉 Cubist Pharmaceuticals (~$9.5 billion): a company focused on antibiotics and the treatment of hospital infections. The company was given drugs Cubicin (daptomycin, serious bacterial infections), Zerbaxa and Avycaz (against multidrug-resistant bacteria). Strong hospital antibiotics portfolio.

2016

  • 🧪 IOmet Pharma: new immunotherapy approaches in oncology.
  • 🫁 Afferent Pharmaceuticals (up to 1.25 billion USD): developing treatments for chronic cough and pain.

2017-2019

  • 🐄 Vallée SA: expansion of the Brazilian animal health portfolio.
  • 🧫 Rigontec: Developer of RNA-based immunotherapies.
  • 🦠 Viraltics: cancer therapeutic solutions based on oncolytic viruses.
  • 📡 Antelliq Group: digital tracking technology for animals.
  • 🧬 Immune Design: development of immunotherapy vaccines and cancer drugs.
  • 🔬 Peloton Therapeutics: drugs targeting neoplastic diseases (e.g. cancer).
  • 🧪 Tilos Therapeutics: research into immunomodulatory antibodies.
  • 🧠 Calporta: development of therapies for neurodegenerative diseases.
  • 🐟 Vaki: aquaculture technologies, digital solutions.

2020

  • 🦠 Themis Bioscience: vaccines, including those with COVID-19 potential, immunotherapy development.
  • 💉 VelosBio: anticancer antibody-drug conjugates.
  • 💊 OncoImmune: immunomodulatory treatments, COVID-19 and oncology topics.
  • 🧬 Seattle Genetics: strategic investment in ADC technology.
  • 🐄 Quantified Ag: animal health sensors.
  • 🐖 IdentiGEN: genetic tracking in animals.

2021

  • 🧬 Pandion Therapeutics (≈ 1.85 billion USD): targeted treatment of autoimmune diseases.
  • 💊 Acceleron Pharma (≈ 11.5 billion USD): Developments for the treatment of PAH and anemia. The blockbuster drug Winrevair, containing the active ingredient sotatercept, comes from here, so it is not an internal development either.
  • 🐓 PrognostiX Poultry Ltd: poultry health diagnostic solutions.

2022

  • 🐄 Vence: GPS-based animal husbandry and monitoring technology.
  • 🧬 Imago BioSciences (≈ 1.4 billion USD): hematology and oncology therapeutic developments.

2023

  • 🧪 Prometheus Biosciences (≈ 10.8 billion USD): precision therapies for autoimmune and inflammatory bowel diseases (e.g. Crohn's, ulcerative colitis). These are still in the development phase, but could be blockbusters in the long run.
  • 🧠 Caraway Therapeutics: targeted therapies for neurodegenerative diseases.

2024

  • 🧬 Harpoon Therapeutics (≈ 680 million USD): Developer of TriTAC immuno-oncology technology.
  • 🧪 ABC (≈ 208 million USD): Increasing the security of ADCs.
  • 👁️ EyeBio (≈ 3 billion USD): ophthalmology drug development. Restoret, an ophthalmic therapy for the treatment of macular degeneration and retinal diseases, but this is also under development.
  • 🧬 Modifi Biosciences (≈ 1.3 billion USD): DNA-targeted cancer therapies with a unique molecular mechanism.

2025

  • 🫁 Verona Pharma (~$10 billion): Ohtuvayre, a COPD drug, is a major addition to the respiratory portfolio. The drug brought in $42 million last year, but only $36 million in the fourth quarter. In the first quarter of this year, revenue was $71.3 million, a 95% increase, meaning the drug is scaling quickly.

The problem with the above is that many acquisitions either work out for Merck & Co. (MRK) or they don't. If not, the company is destroying significant shareholder value by burning through investors' money. This is usually called a write-off, which is written off from goodwill in accounting as an impairment. This means nothing more than that the company overpaid its fair value, so the write-off actually appears as a loss. In the image below you can see the Merck & Co. (MRK) goodwill category, which has not been impaired. As much as I searched for information, Merck & Co. (MRK) does not seem to have taken many write-downs, which is good, it has not destroyed too much value.

source: fiscal.ai, Merck & Co. (MRK) goodwill value

One of the biggest overpayments of all time was the AOL Time Warner acquisition more than two decades ago, which created $128 billion in goodwill. This was written down to $37 billion shortly thereafter. To give an example from the pharmaceutical industry, six years ago Bristol Myers-Squibb (BM) paid 74 billion USD, including debt, for a company called Celgene, which I think I can rightly use the term transformative acquisition. What can you see in the image below? From 2019 to 2020, revenue increased from 22 to 42.5 billion USD, which was followed by the company's debt, which increased from 5.6 to 48 billion USD! With the acquisition, they also assumed Celgene's debt, and within the framework of the deal, they not only paid in cash, but also issued shares. The number of shares increased from 1.6 billion shares to 2.2 billion, so there was significant share dilution. Goodwill was not written off here either, so no value was destroyed on paper, but not much has changed in 60 months.

Bristol Myers-Squibb (BMY) revenue, debt and goodwill value
source: fiscal.ai, Bristol Myers-Squibb (BMY) revenue, debt and goodwill value

How have investors rewarded this over the past 5 years? Bristol Myers-Squibb (BMY) posted a -5.6% CAGR, meaning its price fell from USD 63.3 to USD 47.5. Let's conclude with Merck & Co. (MRK):

☝🏼Transformative acquisitions are very dangerous because it is incredibly difficult to judge their outcome. And the patents of acquired companies will also expire over time, unlike debt, which does not disappear on its own, nor does the destruction of ownership value. I hope that Merck & Co. (MRK) will not be forced to do the same.

🤵Merck & Co. (MRK) management🤵

In this section, I examine who runs the company and how. What is the bonus system, how much risk – skin in the game – do the managers take on while running the company? Is there a family connection, or perhaps a special “heritage” factor?

In the case of pharmaceutical companies, I think that, in addition to the CEO and the CFO, the head of research and development is a key player, as it primarily depends on him or her whether the company can maintain its competitive advantage. As drug patents expire, new and new drugs have to be developed, which means that biotech companies are running a very expensive research and development treadmill.

  • Chief Executive Officer (CEO): Robert M. Davis, has held the position since 2021 and is also the Chairman of the Board. He was the CFO from 2014 until his appointment. He also holds positions in other companies, e.g. Executive Vice President at Project Hope, and has worked for Duke Energy, Baxter, and Eli Lilly. His compensation is $23.19 million per year. He owns one million shares worth ~$85 million.
  • Chief Financial Officer (CFO): Caroline Litchfield, has held the position since 2021 and is also the Vice Chairman of the Board. She was previously responsible for corporate finance at Merck. She is an independent director of Verizon. She has been employed by Merck since 1990. Her compensation is $7.5 million per year. She owns 344000 Merck & Co. (MRK) shares, valued at ~$30 million.
  • Research and Development Manager (R&D): Dean Li, PhD, is also the vice chairman of the board. He is the founder of Recursion Pharmaceuticals, teaches at the University of Utah, and also serves as interim CEO of ARUP Laboratories. He has served at numerous other biotech companies. His compensation is $10.9 million per year. He owns 330000 shares of Merck & Co. (MRK), valued at ~$28 million.
Merck & Co. (MRK) Proxy Statement 2024
source: Merck & Co. (MRK) Proxy Statement 2024, top executives

I could go on and on, but two rather negative things emerge from the above list: the fact that senior management members also dominate the board of directors. This is typically the problem of whether these are conflicting positions or not, since you become your own controller. The fact that there are also 9 independent directors who counterbalance the 3 Merck executives also makes things worse.

💸Compensation of Merck & Co. (MRK) management

The key question is whether the interests of the managers and the company are aligned, otherwise the former will not be interested in thinking in the long term in accordance with the interests of the shareholders, but will prioritize short-term goals. This is usually the reason for the boost in EPS using accounting methods and the like.

Both the CEO and the NEOs, who are the company's top executives and are among the top 3 highest-paid executives in the US, receive the following compensation:

  • base salary: this is what it sounds like
  • housing: of course, top leaders are provided with housing,
  • other compensations: car, telephone, technical equipment for work, etc.
  • non-stock-based bonus: this essentially means cash added to base salary, this is tied to the scorecard table below
  • stock-based compensation: means a callable stock option, this is the table marked with PSU

Management is paid a high salary, but I don't think it's outstanding by industry standards. What's nice is that most of the executive compensation is based on long-term, performance-based metrics.

source: Merck & Co. (MRK) Proxy Statement 2024, basis of compensation

The above goals are set by the Compensation and Management Development Committee. None of the top executives are members of the committee, which controls the salaries of the executives and makes them interested in making decisions in line with the interests of the company.

The left-hand point table is called that because the 4 categories are scored based on the proxy document, and if the managers do not reach a certain score, then the bonuses are not awarded. I think the most important thing to watch out for is revenue growth, because without growth, there is not much of a stock price increase in the long term. Developments in the pipeline are essential for a pharmaceutical manufacturer to move forward, and it is no coincidence that this industry is the most development-intensive.

Merck & Co. (MRK) Proxy Statement 2024, scorecard-based compensation
source: Merck & Co. (MRK) Proxy Statement 2024, scorecard-based compensation

The compensation is set relative to two similar groups. One is pharmaceutical companies, the other is ancillary companies, which are mostly based on non-pharmaceutical companies, such as 3M or Verizon. The first is perfectly fine, but the second is not a particularly good practice in my opinion. How does Merck & Co. (MRK) compare to, say, IBM or Walmart?

source: Merck & Co. (MRK) Proxy Statement 2024, PSU-based compensation

In the table on the right you can see the metrics for performance-based compensation, the 3-year averaging helps to smooth out outliers. This typically includes stock options. The most important sentence in the accompanying document is that these can only be called if there is no very strong underperformance compared to the results achieved by the median group. You can see the actual numbers in the table below, broken down into its components:

Merck & Co. (MRK) Proxy Statement 2024, executive compensation
source: Merck & Co. (MRK) Proxy Statement 2024, PSU-based compensation of executives

One more addition to the above: both the CEO and NEOs are required to hold a minimum amount of stock relative to their base salary, meaning they also have to take on risk. In the case of the CEO, it is 6x, but currently it is much higher, which is a positive reinforcement, as are all other leaders, except for Betty Larson, the head of HR, who was newly appointed.

source: Merck & Co. (MRK) Proxy Statement 2024, composition of executive compensation
👏🏼After reading the compensation document, my head was spinning. It's incredibly complicated to calculate bonuses, I think a simpler system could have been developed. But I don't think the system is bad, the interests of management and the company are largely aligned.

🆚Competitors: Merck & Co. (MRK) opponents🆚

In this section, I examine who the competitors of the analyzed company are, what is their market position, whether they are in a subordinate, secondary or superior role. What is their market share and what is their specialty? Are they losing or gaining market share to their competitors?


Merck & Co. (MRK) competes in quite a few drug categories, as they have oncology, vaccine-related products, they are in the diabetes market, and they also have immunology and veterinary drugs. If I look at the categories only, then:

  • ✅Oncology (immunotherapies): Merck's Keytruda competes with BMY's Opdivo, and developments from J&J, Roche and AstraZeneca are also to be reckoned with.
  • ✅Vaccines: Pfizer (COVID-19, pneumococcal), GSK (MMR, etc.), J&J are also significant players.
  • ❌Diabetes: Novo Nordisk and Eli Lilly dominate this segment, although Merck is also present (Januvia/Janumet). I don't think Merck & Co. (MRK) can make a dent here.
  • ❌Immunology/autoimmune: J&J (Stelara), Roche, BMS are also active in this space.
  • 🤔Animal health: Takeda, Zoetis and others could be competitors.

Of course, the above cannot be ignored, but since their two main names are a cancer drug and an HPV vaccine, which account for 60% of their revenues, it is worth looking at who the strong companies are in this space.

🩸Opponents of Merck & Co.'s (MRK) Keytruda drugs

Merck & Co. (MRK) has competing drugs on the market with Keytruda
source: BioSpace, Merck & Co.'s (MRK) Keytruda-competing drugs on the market

Let's start with the immuno-oncology segment, there's a great article about it, you can find it here. In the image above you see immune checkpoint inhibitors that bind to the PD-1 protein. In the image, the challengers, Keytruda, entered the market ten years ago, and 15 other similar drugs appeared, yet Keytruda prevailed, with roughly 35% of the drug's sales coming from treating lung cancer patients. In addition, it has more than 40 other indications, which is why other competitors have not been able to make a dent in the market, even though they only rely on the PD-1 protein.

However, Summit Therapeutics did a trial in China with a drug called Ivonescimab, which targets not only the PD-1 molecule, but also a molecule called VEGF. The main result of the study was that progression-free survival, the time until the cancer starts to grow again, was 11 months for Summit's new drug, while it was only 5 months for Keytruda. Based on these results, Summit seems to be more effective than Keytruda. The problem with this is that the Chinese trials do not allow the drug to be introduced to the US market, so the clinical trials will have to be repeated there again, which is about two years from October 2024, because this was only started then. In addition to Keytruda, other drugs targeting VEGF can also be given as a second agent, and there is already data on this treatment in the US, and they are not much better than using only Keytruda and chemotherapy, which is the standard procedure. So far, it seems like the biggest threat to Keytruda is the expiration of its own patent in 2028. Let's not forget about the most significant of the above drugs (sales data for 2024):

  • Opdivo: 9.3 billion USD
  • Tecentriq: ~$4 billion
  • Imfinzi: 3.5 billion USD
  • Libtayo: $1.22 billion

💉Merck & Co. (MRK) Gardasil/Gardasil 9 vaccine

At first I didn't really understand how a vaccine that costs $268 can generate $8.5 billion in revenue annually, but then I read up on it and basically Merck & Co. (MRK) has squeezed everyone out of the US market, and has a complete monopoly on HPV vaccines. The reason for this is what I've written about several times in the analysis: It has many more indications than its competitors. It is effective against a total of 9 different HPV types, which is why it has the number 9 in its name.

Interestingly, Gardasil 9 competed with GSK's Cervavix, but it was withdrawn from the US market in 2016, and China and India have also developed their own HPV vaccines, which is why revenue from Gardasil 9 is currently falling. In essence, it can be said that there is only one HPV vaccine on the market in the US, which has dominated the market, and that is Gardasil. The CDC, the Centers for Disease Control and Prevention of the United States Department of Health, only recommends Gardasil-9 against HPV, so there is also a strong institutional tailwind regarding the vaccination.

In other words, it seems that the biggest threat to Gardasil 9 is the expiration of its own patent in 2028, but since it has strong government support, it is not certain that the market will be filled with biosimilars. Because Cervarix's main patents also expired between 2019-2021, as it is a drug introduced in the early 2000s and essentially no competitors have appeared on the market since then. And those who wanted it started their national vaccination programs, like China and India. They have already developed their own vaccine, which also means that outside of the USA, I don't really expect Gardasil 9 to be able to take market share from other products.

ManufacturerProduct2024 revenueComment
Merck & Co. (MSD)Gardasil / Gardasil 9≈ 8,6 billion USDMerck says revenue last year was ~8.6 billion USD; temporary halt to shipments to China in 2025 due to inventory depletion.
GSKCervarix (bivalent)N/A (not expanded)GSK does not disclose Cervarix sales separately; the vaccines category was £3.34 billion last year, including Cervarix
Beijing Wantai / Xiamen Innovax
(Chinese)		Cecoline (bivalent)N/A (no product level)Wantai Vaccine segment revenue was ~606 million yuan last year (-84.7% year-on-year); total corporate revenue was ~2.245 billion yuan (-59%). The decline was mainly due to price pressure on Cecolin
Walvax / Zerun BioWalrinvax (bivalent)N/A (no product level)Walvax's total revenue last year was ~387 million USD.
Serum Institute of India (SII)
(Indian)		Cervavac (quad-rival)N/A (not disclosed)An Indian government program has been launched; private price 2000 INR per dose, significantly cheaper for government procurement, up to ~200–400 INR per dose.

⚡What risks does Merck & Co. (MRK) face?⚡

In this section, I examine all the risks that could affect the company's long-term future. Currency, regulatory, market disruption, and so on.

There are some minor risks associated with Merck & Co. (MRK), which I have anticipated. Of course, the biggest risk, as I have already mentioned countless times, is patent expiration, which is both a research and competition risk, which I have elaborated on in more detail at the end of the chapter.

🏭Manufacturing and supply chain issues

  • 📦Production capacity and supply: In the case of Merck & Co. (MRK), I don't think this is as much of a risk as, for example, European manufacturers. On the one hand, they have already had to ramp up production due to Keytruda and Gardasil, and on the other hand, their main market is the US. In addition, they have opened numerous other plants in the past few months, which aims to expand production capacity:
    • 🏭North Carolina: USD 1 billion vaccine manufacturing plant in response to US tariffs
    • 🏭Delaware: $1 billion investment in Keytruda production, in preparation for patent expiration in 2028.
    • 🏭Kansas: A $95 million capacity expansion for vaccine production and storage, scheduled to be completed by 2030, will primarily support the animal health division.

📌Opinion: Merck & Co. (MRK) is clearly preparing for the post-Keytruda era and is trying to ramp up production to make room for new drugs, which seems like a smart move. They also announced a $3 billion cost-cutting plan that could mean laying off about 6000 people.

🛡️IT security risks

  • 💻Hacker attacks: There is no question that hacker attacks and cybersecurity are a very current threat. Pharmaceutical manufacturers keep very valuable secrets online, most of their know-how and research and development are stored electronically, there is no other way to process the results of years of testing, and more and more drug research is being conducted with the help of AI modeling. For example, a ransomware that encrypts all data could cause a big headache for the company, but there would certainly be a competitor who would be happy to buy the stolen research data.

📌Opinion: Starting from the digital transition and the fact that everything is increasingly moving online, this problem affects all pharmaceutical manufacturers.

⚖️Regulatory and political risks

  • ⚖️Medicare negotiations and prices: Under the Inflation Reduction Act, Medicare can negotiate prices with drug manufacturers, and if drug prices decrease significantly, it could affect the company's revenues.
  • 📜Regulatory challenges: Strict regulation of pharmaceuticals and a changing environment can pose risks for the company.

📌Opinion: In this respect, Merck & Co. (MRK) is in a rather fortunate position. Gardasil 9 has been practically cemented by regulatory institutions, and Keytruda, due to its very diverse uses, is a difficult product to replace, and it is not by chance that it dominates the market. Of course, the big question is what will happen after 2028, and whether drugs awaiting approval in the future will pass the FDA's filter, this may primarily affect the drugs Capvaxive and Winrevaire, and their introduction in other markets.

🎯Pharmaceutical industry lawsuits

  • Patent disputes: Typically, such legal disputes arise in connection with generic drugs.
  • Product liability lawsuits: lawsuits due to the side effects of drugs. In the case of oncology drugs, these are very rare, because unfortunately these are the diseases where you can only choose between the greater and the lesser evil, so patients accept the side effects because of their serious condition. However, Merck & Co. (MRK) does not only produce such drugs, so such a lawsuit is always hanging in the air.
  • Antitrust and competition law litigation: These are always antitrust lawsuits and are typically filed against the state. Considering that besides Keytruda, there are 5-6 other companies that produce oncology drugs, and that the company is also involved in other subsegments, there is not that much concentration.
  • Consumer claims and class action lawsuits: better put: mass lawsuits. It's a typical Hollywood movie theme that the evil pharmaceutical/chemical manufacturer is sued by citizens, but this is a completely real scenario that has happened many times in history.
  • Regulatory lawsuits and government investigations: It may not necessarily be a lawsuit, but it may also take the form of a ban, for example, the American FDA not authorizing the distribution of a drug or withdrawing it from the market. More than one drug has failed as a result of FDA investigation.

📌Opinion: Most people think of pharmaceutical lawsuits as consumer lawsuits, and rightly so. These are high-profile, public-society cases that can lead to mass boycotts of certain products. For example, there was a lawsuit between Merck and the United States over the painkiller Vioxx. The company had to pay roughly $5 billion in damages, which left its mark on its performance in the mid-2000s.

🪑Merck & Co. (MRK) patents expired: the three-legged chair

To shore up revenue from Keytruda's decline, Merck & Co. (MRK) is launching new drugs. This solution is what pharmaceutical experts refer to as a three-legged stool:

  • 💫Winrevair with sotatercept purchased from Acceleron: They are slowly bringing Winrevair to market, which is expected to bring in $2-3 billion at the low end of the scale and $8-9 billion at the high end of the scale. Merck is of course talking about the latter.
  • 💫Phase III clinical drug from Prometeus acquisition: Merck & Co. (MRK) has a drug in its pipeline, codenamed MK-7240, for the treatment of ulcerative colitis and Crohn's disease. The problem is that it competes in the same market as Humira and other second-generation treatments, so the market segment is quite saturated. However, it is a fairly large area, affecting 5-10 million people, and the drugs are quite expensive, with prices ranging from about 25000 USD per year. For example, the list price of Humira is 23099 USD.
  • 💫Antibody-drug conjugate: The third pillar that I would focus on is again related to cancer. They are focusing on a new drug model, called antibody-drug conjugates. To do this, they acquired a company called VelosBio for $3 billion, and they entered into a partnership with a company called Daiichi for $4 billion. These are phase II drugs and so far, no one has really been able to develop them.

I would like to say a few words about the antibody drug conjugate, what it is all about, the point is this: the antibody-drug conjugate is a completely new drug model. The goal is to provide the anticancer efficacy of chemotherapy, but with far fewer side effects. Even new therapies like immunotherapy (such as Keytruda) are often combined with chemo, not replaced. For this reason, research has been ongoing for years on how to maintain the power of chemotherapy without the side effects. Antibody-drug conjugates try to achieve this: they bind a chemotherapy drug to an antibody specifically targeting a specific tumor so that it is not active in other parts of the body, only where the tumor is located.

So you can see how this whole story is related to Keytruda: The effects of basic oncology drugs could be combined with chemotherapy, but in a single agent. This is possible because a company called Daiichi Sankyo, in collaboration with AstraZeneca, has developed T-DXd, also known as trastuzumab deruxtecan, which is marketed as Enhertu, an antibody-drug conjugate that has shown remarkable results in previously very difficult-to-treat breast cancer subtypes. And not only in efficiency, but also in revenue, Enthertu raised 7.2 billion USD in three years. This success has sparked a real race in the field of antibody-drug conjugates, in which Merck & Co. (MRK) has entered with $7 billion.

😢There's only one big problem with the above: they're either Phase II or III drugs, or they have a much smaller market than Keytruda and Gardasil. Let's assume that all three drugs are approved and they are actually able to complete clinical trials in 2.5 years, even then their revenue will only be the same as it is now.

However, one thing was not mentioned, which seems like a much more obvious solution: expanding late-stage and pending Keytruda applications to other diseases. Because it already has more than 40 different indications, but if it becomes 50 or even more, it will be very difficult to develop biosimilars for it. Let's say we manage to create a biosimilar for each application, we are still talking about fifty different drugs. Due to the many-in-one nature of Keytruda, its use may continue in the long term, as it will be worth paying the premium for it.

🤔What are the chances of a Merck & Co. (MRK) blockbuster?

Anyone who has heard of Michael Mauboussin's base rate theory knows that it's good to contrast our own internal observations with an external statistical result, which often shades the picture. In the case of Merck, it's worth looking at what happened to a pharmaceutical company in the past when the patent on a blockbuster drug expired. I found a few from the past 10 years:

💊 Medicine🏢 Manufacturer📅 END OF PATENT📉 Impact
zocorMerck2006~−80% in a short time
Advair/SeretideGSK2010$8.3 billion (2013) → $5.6 billion (2015)
LipitorPfizer2011−66% in two years, −71% quarterly
DiovanNovartis2012Generic ~18 months late
lantusSanofi2015~−10% global, −30%+ in US
RemicadeJohnson & Johnson2016−9.7% global, −6.5% US annual decline
NeulastaAmgen2018–2019−28% (2019), −29% (2020)
HerceptinRoche2019−12% sales, ~CHF 1.5B biosim impact
TecfiderBiogen2020−15% in Q3, rapid revenue decline
HumiraAbbVie2023USD 21.1 billion → USD 14.4 billion, ~−30–40%/year
vyvanseTakeda2023Profit collapse, organizational restructuring

One thing that is not clear from the above is whether pharmaceutical companies have managed to make up for the loss of revenue. For example, Abbvie did, they made up for the revenue lost due to Humira in 2 years with Skyrizi and Rinvoq, but unfortunately this is rare. Usually, many years of decline followed, as Merck experienced once in the 2000s.

Abbvie overcame the 2023 Humira patent expiration in 2 years
source: fiscal.ai, Abbvie recovered from 2023 Humira patent expiration in 2 years

I made a self-check list that confirms the thesis about the company:

  1. low or zero debt: YES/PART/NOT
  2. significant economic advantage that can be protected in the long term: YES/PARTLY/NO
  3. excellent management: YES/PARTLY/NO
  4. excellent indicators, significant owner value creation: YES/PART/NOT
  5. The majority of the total return comes from reinvesting the cash generated, not from dividends: YES/PARTLY/NO
  6. appropriate company valuation: YES/PARTLY/NO

The above list also includes two PARTIAL valuations. Without Keytruda and Gardasil, Merck & Co. (MRK) would clearly not have a significant economic advantage. I think there is too much uncertainty with this company to say that everything will continue as before after 2028 and that Merck & Co. (MRK) will easily recover from the shock caused by patent expirations. Investors don't really believe this either, which is reflected in the depressed share price.

👛Merck & Co. (MRK) Valuation👛

In this section, I will examine the company's current valuation compared to historical values ​​and consensus fair values.

Rating metrics

In the two rows below you can see valuation metrics. The first row shows the current valuation, the second row shows the historical valuation. Although I don't think these metrics are particularly good - they hide a lot - they can be used as a benchmark.

  • Share price (2025-08-15) 82.76 USD; P/E: 12.81; EV/EBITDA: 8.2; P/FCF: 14 (Based on Finchat.io)
  • Historical median valuation (10-year average): P/E: 25.33; EV/EBITDA: 15.35; P/FCF: 22.41 (Based on Gurufocus)

Why don't you see a DCF model in this segment? Because each input data produces a huge variance in the output, and most of the data is an estimated value. Therefore, the valuation will never actually be a single exact number, but rather a range can be defined where the current valuation falls.

You should apply a margin of safety to this price range, according to your risk appetite.

So don't expect an exact price, no one can say this for a stock. However, there are fair value prediction services, almost every major stock screening site has one, I've aggregated them below. However, if you want a good stock support service, subscribe to The Falcon Method (The Falcon Method), entry prices are given for the stocks analyzed there.

Rating

  • Wall street estimates: 92.53-176.01=134.27 USD (I took into account the Alphaspread, the average of the two extreme values:)
  • Peter Lynch Median P/E: $114.6
  • Morningstar: $111 (4 stars)
  • Gurufocus: $116.78
  • AlphaSpread: $121.9 (32% undervaluation compared to the base case)
  • SimplyWallst: $208.3

Average (based on 6 reviews): $143.5 (43% underrated)

Peter Lynch Valuation Chart for Merck & Co. (MRK)
source: Gurufocus, Peter Lynch valuation chart for Merck & Co. (MRK)

How to interpret the numbers? The above “margin of safety” rule should be applied according to your convictions, so if you really believe in the company, you can buy it at fair value, but if you proceed in 10% increments (whose convictions are strong), the math would look like this:

  • 10% margin of safety: 143.5*0.9=129.15 USD
  • 20% margin of safety: 143.5*0.8=114.18USD
  • 30% margin of safety: 143.5*0.7=100.45 USD
  • 40% margin of safety: 143.5*0.6=86.1 USD
  • 50% margin of safety: 143.5*0.5=71.75 USD

Of course, the list could go on and on, but the point is that the right buy price for you is determined by your level of conviction. Here's the usual EVA chart from Interactive Brokers:

source: Interactive Brokers, EVA framework

Regarding the above, also not very recent picture, I would like to mention that a year ago, at around 116 USD, the market was essentially pricing zero growth in Merck & Co. (MRK). This is not surprising, everyone is afraid of patent expiration, especially since the company has already had a bad decade. This is reflected in the negative FGR, the stock is practically trading well below its fair value. Another blow was the decline in Gardasil 9 volumes in China, as you will see in the next chapter. Merck & Co. (MRK) is still very cheap, but there's a good reason for that.

🌗Significant news and the last quarter🌗

In this section, I will examine what happened in the last quarter, whether there were any significant news/events. If the company reports semi-annually, we examined this period.

Merck & Co. (MRK) reported its second quarter 2025 results on 07-29-2025, which had a few surprising elements, but the main direction remained: to prepare for patent expirations in 2028.

📜Merck & Co. (MRK) 2025 Q2 Quarterly Report

  • 💰 Income and profit
    • 🤑Total revenue: USD 15.8 billion, 2% year-on-year decrease
    • 💰GAAP earnings per share (EPS): $1.76 (down from $2.14 last year)
    • 👛Non-GAAP EPS: $2.13, exceeding analyst expectations (about $2.02)
  • 📈 Margin and costs
    • 💵Gross margin: 77.5% (76.8% a year earlier, so increased)
    • 🪙EBITDA margin: 38.7% (44.6% a year earlier, so decreased)
    • 🫰🏼net margin: 28% (33.9% a year earlier, so decreased)
    • 🧬Research and development (R&D) expenses: +16%, mainly due to a licensing fee of around USD 200 million (Hengrui Pharma) for the acquisition of global development, manufacturing and sales rights (excluding China) for the Lp(a) inhibitor candidate HRS-5346. The drug is in Phase II clinical trials, so not much is known about it yet.
    • ✍🏼Selling and administrative (SG&A) expenses: 2-3% decrease, mainly due to lower marketing and administrative expenses
  • 💊 Product and market
    • 🩸💉Keytruda: sales +9%, nearly 8 billion USD, still the main driver of the company
    • 💉Gardasil (HPV vaccine): 54-55% annual decline (~1.1 billion USD), mainly due to reduced demand from China
  • 🔧 Strategic steps
    • 〽️$3 billion annual savings through targeted cost reductions, job cuts, real estate and manufacturing network optimization
    • Acquisition: Verona Pharma (~$10 billion transaction), adding Ohtuvayre (COPD treatment) to the portfolio
    • Updated annual guidance:
      • Income: USD 64.3–65.3 billion
      • Earnings per share (EPS): $8.87–$8.97

☝🏼Positives: It is very clear that Merck & Co. (MRK) is consciously preparing for the 2028 patent expiration:

  • 💚they are cutting costs worth more than 3 billion USD, laying off 6000 employees
  • 💚invest in other pharmaceuticals that should fill the gap
  • 💚They are trying to ramp up production
  • 💚There are many new experimental drugs in the development pipeline that could lead to something

👎🏼Negatives: the main negative is the same as in the past year, which is why the price dropped from 130 USD to 80; everyone is afraid of the expiration of the Keytruda and Gardasil 9 patents. However, there is something else:

  • 🖤Sales of Gardasil 9 in China have collapsed, something that was already evident at the end of last year, as distributor Zhifei overstocked it and stopped shipping it to China. Demand has fallen by 55%.
  • 🖤National vaccine programs are causing vaccine prices to fall, for example, the Chinese vaccine is 60% cheaper per dose than Gardasil 9
  • 🖤So far, no blockbuster drug has emerged from Phase III trials that could replace Keytruda, so Merck is practically in a race against time.

Next report: 2025.10.30

✨Other interesting facts about Merck & Co. (MRK)✨

Everything that was left out of the previous ones, or if there is any special KPI - key performance indicator - or concept that needs to be explained, is included here.

Morphine and cocaine: After Wilhelm Adam Sertürner isolated morphine from opium in 1805, Merck pioneered the industrial production of morphine (from 1827). From 1884, Merck also assisted in the production and distribution of cocaine. Sigmund Freud, author of Über Coca (1884), was an enthusiastic supporter of Merck's cocaine research, testing the drug on himself as a promising treatment for depression.

Official name of the active ingredient: The active ingredient must be the same in all languages, this is the INN, issued by the WHO. It cannot be misleading or similar to another active ingredient. It can contain a suffix that indicates the drug group, this is the stem list. The WHO has a list of “INN stems” that is several hundred pages long, where each suffix has a therapeutic meaning. For this reason, if you know the suffix of a drug, you can often tell what type of active ingredient it contains. Some examples:

  • -mab = monoclonal antibody (trastuzumab, nivolumab)
  • -pril = ACE inhibitor (enalapril, lisinopril)
  • -statin = cholesterol-lowering (atorvastatin, rosuvastatin)

In many cases, they create artificial words that mean nothing in either language, because this way they can avoid negative associations.

Brand names of the drugs: The brand name of medicines should usually be written in capital letters, this is determined by the manufacturer, but must be approved by the authorities. The goal: to have an easy-to-remember, catchy, trademarkable name.

Aspects:

  • It should be short and easy to pronounce in multiple languages.
  • It should not be confused with other medicines already on the market (especially by sound).
  • From a marketing perspective, it may suggest the effect (claritin – “clear” = pure, allergy-free; Viagra – power, Niagara Falls association).
  • It cannot refer to a specific disease name (for regulatory reasons).

Example: Keytruda

  • Official active ingredient: pembrolizumab (INN). The -mab suffix indicates that it is a monoclonal antibody.
  • Brand name: Keytruda, the manufacturer (Merck & Co.) chose it, and it is likely the “Key” (key) and a fancy word, referring to the drug being the key to fighting cancer.

🔑Key Performance Indicators (KPIs)🔑

Keytruda and Gardasil revenue numbers: The entire Merck & Co. (MRK) story is so dependent on these two drugs that I would be watching the earnings and related measures very closely.

Research results of competing drugs: What is in the pipeline can be a competitive advantage and a revenue-generating product. Since there are twenty drugs in Phase III, with a clinical trial period of two to five years, another blockbuster could be released by 2028. It's quite difficult to read pharmaceutical reports and research, but I would definitely follow this too.

Acquisitions: are also important for two reasons, because they will certainly increase debt or dilute shares, and there may be forced acquisitions or desperate moves by management.

Merck & Co. (MRK) Summary

Summary of the analysis, drawing lessons.

Merck & Co. (MRK)'s situation is most similar to the case of a coin toss: the end result will be either heads or tails. The main problem is the same as it was years ago, after the amazing success of Keytruda, the Gardasil-9 vaccine also did well, but it is feared that there will be nothing to replace them in 2028 when their patents expire. Merck's management is already preparing to avert apocalyptic events, they have acquired relatively well so far, they are reducing costs, and there are many Phase III drugs in the product development chain. Unfortunately, the past is not in their favor; they already had a bad decade in the 2000s, for similar reasons.

Let's play with the idea: IF the tests are completed on time, IF one or more new blockbuster drugs are developed, IF they are approved by the FDA, and IF they generate at least the same amount of revenue as the revenue decline of Keytruda and Gardasil-9, then everything will be fine, and there is a good chance that the price will start to rise. The biggest problem is that too many consecutive probabilistic events in investing usually do not favor investors. It is simply difficult for me to judge the outcome of this story, but this is a characteristic of the pharmaceutical industry, with a few exceptions. One such example is Novo Nordisk (NVO), the analysis of which can be found here: Novo Nordisk stock analysis (NVO) – Selling faster than it consumes.

🤔I don't think it's worth betting too much on the success of Merck & Co. (MRK) right now, but adventurous investors will likely disagree with me, as the stock is trading well below its fair value.

Frequently Asked Questions (FAQ)

What is Merck?

Merck & Co., Inc. (MRK) is a US-based, global pharmaceutical company that develops and markets innovative medicines, vaccines, biologics, and veterinary products. Outside the United States, the company is known as Merck Sharp & Dohme (MSD). It is the manufacturer of several medicines and vaccines used worldwide, such as Keytruda and Gardasil.

What is Merck KGaA?

Merck KGaA is a German-based global chemical and pharmaceutical company founded in 1668 and headquartered in Darmstadt, Germany, and is considered the world's oldest still-operating pharmaceutical company. Its main areas of activity are pharmaceuticals, biotechnology, and specialty chemicals, including laboratory research products, electronic materials, and pharmaceutical active ingredients. It is important to note that this is not the same as the American Merck & Co.: in the United States and Canada, the American company owns the rights to the name "Merck", while the German Merck is known there as EMD Serono or EMD Millipore.

What is Keytruda?

Keytruda is an immunotherapy cancer drug containing the active ingredient pembrolizumab. It is a monoclonal antibody that blocks a protein called PD-1 on immune cells, helping the body's own immune system recognize and destroy cancer cells. It is approved for the treatment of several types of cancer, including melanoma, lung cancer, and bladder cancer. It is the world's highest-grossing drug.

What is Gardasil?

Gardasil is a human papillomavirus (HPV) vaccine that protects against several types of HPV, including those that cause cervical cancer, some other cancers, and genital warts. It is also available in four- and nine-component versions, which provide broader protection against HPV-related diseases.

What is oncology?

Oncology is the branch of medicine that deals with the prevention, diagnosis, treatment, and research of cancer. It includes various therapeutic methods, such as surgery, radiotherapy, chemotherapy, and immunotherapy, as well as clinical research aimed at developing new treatment options.

Which broker should I choose to buy shares?

There are several aspects to consider when choosing a broker - we will write a complete article about this - but I would like to highlight a few that are worth considering:

  • size, reliability: The bigger a broker, the safer it is. Those with a banking background – Erste, K&H, Charles Schwab, etc. – are even better, and well-known brokers are typically more reliable.
  • expenditures: Brokers operate with various costs, such as the account management fee, the portfolio fee - which is the worst cost -, the purchase/sale fee and the currency exchange cost (if USD is not deposited in the brokerage account)
  • Availability of instruments: It doesn't matter which broker has which market available, or whether they add the given instrument upon request and how quickly.
  • account type: cash or margin account, the latter can only be used for options. For Hungarian tax residents, having a TBSZ account is important, but citizens of other countries also have special options – such as the American 401K retirement savings account – which are either supported by the broker or not.
  • surface: is one of the most underrated aspects, and it can be a real pain. Anyone who had an account with Random Capital, a now-defunct Hungarian broker, knows what it's like to work on a platform left over from the 90s. Erste's system is lousy slow, Interactive Brokers requires a flight test, and LightYear believes in simple but modern solutions.

Based on the above, I recommend the Interactive Brokers account because:

  • the world's largest broker with a strong background
  • a few million instruments are available on it, and shares listed on multiple markets – e.g. both the original and the ADR – of a single share are often available
  • Interactive Brokers a discount broker, they have the lowest prices on the market
  • you can link your Wise account to them, from which you can quickly transfer money
  • Morningstar's analyses are available for free under the fundamental explorer (good for analysis)
  • EVA framework data is available under fundamental explorer (useful for analysis)
  • they have both cash and margin accounts, Hungarian citizens can open a TBSZ
  • you can use three types of interfaces: there is a web and PC client and a phone application

Legal and liability statement (aka. disclaimer): My articles contain personal opinions, I write them solely for my own entertainment and that of my readers. The articles published here do NOT in any way exhaust the scope of investment advice. I have never intended, do not intend, and am unlikely to provide such in the future. What is written here is for informational purposes only and should NOT be construed as an offer. The expression of opinion is NOT in any way considered a guarantee to sell or buy financial instruments. You are SOLELY responsible for the decisions you make, and no one else, including me, assumes the risk.

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