25Q1 sales decreased 1.6% to $15.5 billion and were 2.0% below my estimate. Excluding currency, sales rose 1%. Sales gains in KEYTRUDA, WINREVAIR and Animal Health offset a 41% drop in GARDASIL sales, as a sharp drop in sales in China was only partially offset by gains in other regions. With margin increases and the non-repeat of a $626 million acquisition charge, GAAP diluted EPS rose 7.2% to $2.01, above my estimate of $1.64. Non-GAAP diluted EPS increased 7.4% to $2.22, exceeding my estimate of $1.90, as I did not adequately consider the absence of the 24Q1 acquisition charge. Restructuring costs were also lower and margins otherwise higher than I anticipated.
Despite the better-than-anticipated results, management reduced its guidance range for 2025 non-GAAP EPS slightly from $8.88-$9.03 to $8.82-$8.97, due to a 50 bp cut in its non-GAAP gross margin expectations and a $200 million increase in projected non-GAAP operating expenses, due to tariffs, partially offset by a 50 bp cut in its non-GAAP effective tax rate and a slightly lower projected share count. With the updated 25Q1 figures and guidance, I have raised my forecast for 2025 sales slightly from $64.7 billion to $64.8 billion and my GAAP EPS estimate from $7.76 to $7.80, but lowered my non-GAAP EPS estimate from $8.91 to $8.88. For 2026, I am now forecasting revenue of $70.9 billion (up from $69.7 billion, previously), GAAP EPS of $8.49 (down from $8.65) and non-GAAP EPS of $9.42 (down from $9.67). I also see Merck’s cash increasing from $13.2 billion in 2024 to $17 billion in 2025 and then to $32.0 billion, moderately lower than my previous forecast. If realized, most of the cash will not sit on the balance sheet, but instead be deployed in business development transactions, including acquisitions, or possibly increased share repurchases.
Since my previous report (2/26), Merck’s stock has fallen 13.2%, worse than the 0.6% slip in the S&P 500, and the 11.3% drop in the NYSE ARCA Pharmaceutical Index. This mostly reflects negative investor sentiment about the pharmaceutical industry as a result of tariffs, hints of international reference pricing and changes at the FDA, such as personnel cuts, that could hurt or delay future drug approvals. Investors remain concerned about KEYTRUDA’s loss of exclusivity in 2028. Yet, the company’s pipeline has potential non-risk adjusted sales of $50 billion, which it believes positions it well to navigate the KEYTRUDA LOE period. Merck is also investing heavily to onshore its manufacturing.
Based upon this latest price decline, I am lowering my price target for a third time from $109 to $90. The revised target equates to only 10.6 times projected 2026 GAAP EPS of $8.49, and 9.5 times 2026 non-GAAP EPS of $9.52. The peer group average is 10.7 times forward earnings. At the current price of $77.59, the total return potential is 20%, including the 4.2% yield. Thus, I am maintaining my performance rating of “1” (Buy). Ultimately, I believe that Merck stock’s recovery potential exceeds the price target, but the stock has been trending down for more than a year now with no clear sign of a bottom. Despite yesterday’s 2% bounce in the S&P 500, for example, MRK’s stock was flat. The poor relative performance could be presaging a consequential change in industry and company fundamentals; but if and when the stock price stabilizes, it may be set for a meaningful rebound, assuming no deterioration in the macro backdrop.
This is a summary of Lark Research’s recent report on Merck & Co., Inc. (MRK). To obtain a copy of the report, please reach out to Steve Percoco using the contact information provided below.
June 20, 2025 (Report published on May 27, 2025.)
Stephen P. Percoco
Lark Research
839 Dewitt Street
Linden, New Jersey 07036
(908) 975-0250
admin@larkresearch.com
© 2015-2025 by Stephen P. Percoco, Lark Research. All rights reserved.
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