Aging Populations And Biotech Breakthroughs Will Drive Expansion

Key Takeaways

• Accelerated product launches, strong pipeline, and strategic reinvestment position Merck for higher growth, expanding margins, and sustainable earnings expansion.
  
• Global demand for chronic disease and vaccine solutions, plus advances in precision medicine, provide multi-decade revenue tailwinds and boost long-term market leadership.
  
• Overdependence on a narrow product range, tightening regulatory environments, and lagging innovation in diversified therapies may undermine future growth, margins, and competitive positioning.

Catalysts

Operates as a healthcare company worldwide.

• Analyst consensus generally acknowledges Merck's 20+ potential blockbusters, but this likely understates the upside because initial launches like WINREVAIR and CAPVAXIVE have outperformed, while the pipeline is seeing accelerated timelines and earlier-than-expected demonstration of efficacy, pointing to both faster and larger future top-line growth.
  
• While analysts broadly see Merck's reinvestment of $3 billion in savings as a way to support new growth drivers, this may dramatically underappreciate the impact of full pipeline funding coupled with focused SG&A, which could transform not only revenue but also operating leverage-driving both higher net margins and sustainable EPS expansion as new launches gain scale.
  
• Merck is structurally positioned to capitalize on surging worldwide demand for chronic disease treatments-including oncology and cardiometabolic therapies-due to population aging and expanding healthcare access in major emerging markets, a multi-decade tailwind for revenue and market share.
  
• Rapid and ongoing expansion of Merck's vaccine and infectious disease portfolio, including first-in-class launches like ENFLONSIA for RSV and a late-stage dengue vaccine candidate, positions the company for outsized revenue growth and margin improvement as global health expenditures and prevention initiatives increase.
  
• Breakthroughs in biotechnology and biomarker-driven precision medicine are accelerating Merck's R&D productivity, with a record number of registrational trials and novel mechanisms under development, driving a higher probability of both clinical and commercial success-thus materially raising the ceiling for long-term earnings growth.

Merck Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Merck compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Merck's revenue will grow by 6.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 25.8% today to 36.0% in 3 years time.
• The bullish analysts expect earnings to reach $27.6 billion (and earnings per share of $11.17) by about August 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 bullish analyst cohort, the company would need to trade at a PE ratio of 13.8x on those 2028 earnings, up from 12.4x today. This future PE is lower than the current PE for the GB Pharmaceuticals industry at 18.1x.
• 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 6.78%, as per the Simply Wall St company report.

Merck Future Earnings Per Share Growth

Risks

• Merck's heavy dependence on Keytruda, which represents roughly half of company revenues, leaves it highly exposed to the patent cliff post-2028; even management emphasizes the challenge of replacing this revenue, making future topline stability and earnings growth highly vulnerable to biosimilar competition.
  
• Growing government regulation and pricing pressure in key global markets, including the potential for "most-favored-nation" drug pricing in ex-U.S. markets and U.S. Medicare price negotiations, could compress margins and limit revenue growth, especially as new launches are increasingly scrutinized.
  
• Despite optimism, Merck's pipeline remains relatively concentrated in oncology and cardiometabolic areas; setbacks in late-stage clinical trials or underperformance of newly launched products like WINREVAIR, or new competition in these areas, could sharply impact revenue and net margin growth.
  
• Ongoing R&D productivity challenges are acknowledged, with rising operating expenses and full reinvestment of cost savings into R&D and SG&A; if these investments do not consistently yield successful and differentiated therapies ahead of fast-moving competitors, long-term earnings and returns on capital could disappoint.
  
• Accelerating industry trends in personalized medicine, biotech-driven innovation, and an overall shift towards prevention and non-traditional therapies risk leaving Merck's traditional pharma-oriented portfolio behind, which could erode market share and place future revenue streams at risk.

Valuation

• The assumed bullish price target for Merck is $127.59, which represents two standard deviations above the consensus price target of $100.41. 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be $76.7 billion, earnings will come to $27.6 billion, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 6.8%.
• Given the current share price of $80.79, the bullish analyst price target of $127.59 is 36.7% higher.
• 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.