Key Takeaways

Reliance on a small number of flagship drugs and pricing pressures threaten Merck's long-term revenue and margin prospects.
Regulatory challenges and increased competition from generics and biosimilars could hamper the company's growth and profitability.
A strong late-stage pipeline, proactive product launches, acquisitions, and cost optimization position Merck for diversified, sustained growth despite looming patent expirations.

Catalysts

About Merck

Operates as a healthcare company worldwide.What are the underlying business or industry changes driving this perspective?

Intensifying global pressure on drug pricing from policymakers, insurers, and patients-including the prospect of government-mandated price cuts and the impending impact of the Inflation Reduction Act-threatens to erode future revenue growth and compress net margins across Merck's flagship and pipeline products.
Merck remains heavily reliant on Keytruda, which is projected to face loss of exclusivity in late 2028 or early 2029, and the inability to fully offset this revenue cliff with new launches or pipeline progress could result in a sharp and sustained decline in top-line growth and long-term earnings, despite management's expectations that this will be a hill not a cliff.
The increasing prevalence of health disparities and access issues in low
and middle-income countries poses a significant barrier to realizing new revenue streams in emerging markets, limiting Merck's addressable market and the financial returns from its diversified pipeline as global population aging accelerates.
Rising regulatory scrutiny and the threat of longer or more costly approval pathways are likely to drive up operational and legal expenses, with potential delays or failures in advancing Merck's most important late-stage assets, thus putting further pressure on margins and threatening the sustainability of earnings growth.
The advancement of biosimilars and generics-combined with payer and government preferences shifting rapidly toward lower-cost alternatives-could accelerate revenue erosion not only for legacy drugs but also for newer, high-value therapies, ultimately weighing on both gross margin and net income outlook through the end of the decade.

Merck Earnings and Revenue Growth

Merck Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

This narrative explores a more pessimistic perspective on Merck compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
The bearish analysts are assuming Merck's revenue will grow by 2.8% annually over the next 3 years.
The bearish analysts assume that profit margins will increase from 25.8% today to 30.6% in 3 years time.
The bearish analysts expect earnings to reach $21.2 billion (and earnings per share of $8.43) by about July 2028, up from $16.4 billion today. The analysts are largely in agreement about this estimate.
In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.4x on those 2028 earnings, down from 12.5x today. This future PE is lower than the current PE for the GB Pharmaceuticals industry at 17.6x.
Analysts expect the number of shares outstanding to decline by 0.86% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 6.4%, as per the Simply Wall St company report.

Merck Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

Merck's extensive and expanding late-stage R&D pipeline across oncology, cardiometabolic diseases, HIV, and vaccines provides the company with the potential for multiple new blockbuster launches, which could drive sustained revenue and earnings growth over the long term.
The company is proactively managing the anticipated loss of exclusivity for KEYTRUDA by launching new products such as WINREVAIR and CAPVAXIVE, which are already showing strong early sales, helping to offset revenue pressure and supporting overall top-line stability.
Strategic acquisitions like Verona Pharma and business development initiatives add both near-term and future diversified growth drivers, broadening Merck's portfolio and reducing dependency on any single product, which can help protect net margins and long-term growth.
Merck is leveraging multiyear cost optimization programs to reallocate $3 billion from lower-growth areas into high-potential pipeline assets, which can improve R&D productivity, support innovative launches, and maintain operating margins even as investment increases.
Secular trends such as increasing worldwide prevalence of chronic diseases, aging populations, and expanded global access to healthcare position Merck's portfolio for increased demand, potentially driving robust growth in revenue and earnings over the coming years.

Valuation

How have all the factors above been brought together to estimate a fair value?

The assumed bearish price target for Merck is $82.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Merck's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $141.0, and the most bearish reporting a price target of just $82.0.
In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $69.1 billion, earnings will come to $21.2 billion, and it would be trading on a PE ratio of 11.4x, assuming you use a discount rate of 6.4%.
Given the current share price of $81.75, the bearish analyst price target of $82.0 is 0.3% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

Global Pricing Pressures Will Erode Margins Amid Rising Regulatory Scrutiny

Shared on 30 Apr 25

Shared on 23 Apr 25