Merck & Co. (MRK) experienced a challenging 2024, with its stock price declining by approximately 10% against a backdrop of a surging S&P 500, which registered a 23% gain. This underperformance contrasts sharply with the robust growth witnessed by other pharmaceutical giants like Eli Lilly and AbbVie, which saw their stock prices climb by 31% and 15%, respectively. Merck’s lackluster performance can be primarily attributed to a confluence of factors, most notably the declining sales of its flagship HPV vaccine, Gardasil, particularly in the Chinese market, and increasing competition for some of its key drugs, including Januvia. This performance raises questions about the company’s future trajectory and the potential for its stock to recover.
Merck’s 2024 performance was shaped by three key trends. First, Keytruda, the company’s leading oncology drug, continued its remarkable growth trajectory, expanding its market share through approvals for new indications. Keytruda’s last twelve-month (LTM) sales reached an impressive $28 billion, up from $25 billion in 2023, solidifying its position as a cornerstone of Merck’s revenue stream. Second, Gardasil, another key revenue driver, encountered significant headwinds, particularly in China, due to a crackdown on the healthcare industry, which impacted vaccination rates. Consequently, Gardasil’s LTM sales plateaued at $9 billion, mirroring the 2023 figure, and marking a stark departure from the robust 31.5% annual average growth rate observed in the preceding three years. Third, Merck experienced an improvement in gross margins, primarily driven by lower royalty rates for both Keytruda and Gardasil, offering a silver lining amidst the challenges.
To counter the potential impact of future revenue decline, especially as Keytruda faces looming biosimilar competition anticipated around 2029, Merck embarked on a series of strategic acquisitions in 2024. These acquisitions, including Elanco’s aqua business, Harpoon Therapeutics, LaNova Medicines, Curon, and EyeBio, represent a concerted effort to diversify the company’s portfolio and strengthen its presence in both pharmaceuticals and animal health. These strategic moves underscore Merck’s recognition of the need to proactively address the impending loss of exclusivity for Keytruda, which currently constitutes a substantial portion of the company’s revenue.
The impact of these developments on Merck’s stock price was evident. MRK stock steadily declined from around $110 in early January 2024 to $99 by year-end. Over a longer four-year period, MRK’s performance has been volatile, mirroring the fluctuations of the broader market. Returns varied significantly, with 2% in 2021, a substantial 49% in 2022, followed by a mere 1% in 2023, and a negative 6% in 2024. This volatility underscores the inherent risks associated with individual stock investments and highlights the benefits of diversified portfolios.
Looking ahead to 2025, there are reasons for cautious optimism regarding Merck’s prospects. Keytruda is expected to continue driving growth, fueled by approvals for additional indications. However, the challenges faced by Gardasil in China may persist, continuing to weigh on the company’s vaccine sales. Furthermore, Merck’s diabetes drugs, Januvia and Janumet, are likely to face intensified competition. On a positive note, the company’s animal health business is poised to benefit from the increasing trend of pet ownership in the U.S., and the higher gross margins achieved in 2024 are expected to be maintained thanks to a favorable product mix.
A potential catalyst for Merck in 2025 is the anticipated regulatory decision on clesrovimab, an antibody for RSV treatment in infants. If approved, clesrovimab holds the potential to generate significant revenue, with estimated peak annual sales reaching $4 billion. The U.S. FDA has set a deadline of June 10, 2025, for its decision, making it a pivotal event for the company. Overall, with MRK stock trading at a relatively modest 4x trailing revenues, compared to its three-year average P/S ratio of 4.5x, the potential headwinds for Gardasil appear to be largely factored into the current valuation.
In conclusion, while Merck faced significant challenges in 2024, leading to a decline in its stock price, the company is poised for a potentially brighter 2025. The continued growth of Keytruda, coupled with the potential approval of clesrovimab and a robust animal health business, provide reasons for optimism. However, the ongoing challenges facing Gardasil and increased competition for other drugs warrant careful consideration. The company’s strategic acquisitions and focus on innovation will be crucial in navigating these challenges and positioning itself for long-term growth. With its current valuation appearing to reflect the existing headwinds, MRK stock presents a potential opportunity for investors, although the volatile nature of the pharmaceutical industry and the specific challenges faced by Merck necessitate a thorough assessment of the risks and potential rewards.
