Merck Stock (MRK) Bulls Cheer $10Bn Verona Pharma Gamble

Business Insider

9 hours ago

Merck & Co. (MRK) is betting on acquisitions to offset the looming revenue loss from the upcoming patent expiration of Keytruda (pembrolizumab). Its latest move— the $10 billion acquisition of Verona Pharma (VRNA) —adds a promising blockbuster candidate for Chronic Obstructive Pulmonary Disease (COPD), a market worth an estimated $23 billion.
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By broadening its pipeline beyond oncology, Merck aims to regain investor confidence, especially as its stock has lagged behind the broader market in recent years.
In my view, Merck's latest bet is likely to pay off, making me cautiously Neutral about its stock ahead of Keytruda's 2028 primary U.S. patent expiration date.
The 'Keytruda Cliff' Represents Merck's Greatest Challenge
Merck's biggest challenge is no secret—the looming patent expiration of Keytruda is the clearest example of the broader 'patent cliff' many pharmaceutical giants face. We're talking about blockbuster drugs generating over $10 billion annually, like Eliquis, Stelara, and Humira. In Merck's case, Keytruda brought in $29.5 billion last year —nearly half of the company's total revenue of $64.17 billion. That level of dependence makes the eventual decline in Keytruda sales a major concern.
Given that Keytruda is a biologic, the impact of biosimilar competition tends to be less abrupt than with traditional generics. Analysts expect sales to decline more gradually, potentially falling to around $15 billion within four to five years of the patent's expiration. Still, declining revenue is never a good look for a company, and Merck now faces the critical task of replacing that lost income.
One part of Merck's strategy is to introduce a subcutaneous version of pembrolizumab, which offers the convenience of shorter treatment times for both patients and healthcare providers. If it proves to be as effective as the intravenous version, it could gain traction for its ease of use. However, while this could help extend Keytruda's commercial life, it's unlikely to fully bridge the revenue gap. Payers may not be willing to pay a premium for convenience alone, especially once lower-cost biosimilars hit the market.
Merck Bets Big on Ohtuvayre as It Looks Beyond Keytruda
As part of its broader strategy, Merck is also leaning heavily on acquisitions and promising pipeline assets. Its recent interest in Verona Pharma's Ohtuvayre came as little surprise. Approved by the FDA in June 2024, Ohtuvayre has quickly gained traction. It's considered a 'first-in-class' treatment for COPD, uniquely combining non-steroidal anti-inflammatory effects with bronchodilation in a single molecule—an important innovation, given that many COPD patients continue to struggle with symptoms despite multiple existing therapies.
In the first quarter of 2025, Ohtuvayre generated $71.3 million in sales, beating analyst expectations. Forecasts now suggest the drug could achieve peak annual sales of over $4 billion. In addition, it's being explored for other respiratory conditions, including non-cystic fibrosis bronchiectasis and asthma, potentially broadening its commercial impact even further.
Further Strategic Acquisitions Bolster Merck's Pipeline
Before Verona, Merck had been active in expanding its pulmonary and oncology portfolio. Think back to the $11.5 billion purchase of Acceleron Pharma in 2021 for its pulmonary arterial hypertension therapy, Winrevair. This asset generated $419 million in sales last year. In another example, Merck's more recent $680 million acquisition of Harpoon Therapeutics bolstered its immunotherapy pipeline.
That's the nature of big pharmaceutical companies like Merck—blockbuster drugs eventually run their course. The real challenge is building a sustainable 'flywheel effect,' where profits from a hit like Keytruda are reinvested into developing the next wave of blockbuster therapies. When internal R&D falls short, companies often turn to acquisitions—but that's typically a more expensive route.
For instance, developing a drug like Ohtuvayre in-house would likely have cost Merck a fraction—perhaps less than 10%—of the $10 billion it paid to acquire Verona Pharma. That said, Merck has the financial flexibility to make such moves. With a debt-to-assets ratio near historical lows, the company is well-positioned to pursue strategic investments without overextending itself.
Judging by its Price-to-Earnings (P/E) ratio of just 12.2, which trades 55% lower than its sector median (26.98), the market isn't confident in Merck's ability to replace Keytruda. This is, at least in part, owed to Merck's underwhelming near-term revenue growth prospects. Its forward year-over-year revenue growth of 4.4% is 45% lower than the sector median of 8%.
Certainly, Merck's ability to resolve these 'growing pains' will determine the future direction of its stock.
Is Merck a Buy, Sell, or Hold?
On Wall Street, Merck sports a Moderate Buy consensus rating based on 10 Buy, seven Hold, and zero Sell ratings in the past three months. MRK's average stock price target of $103.60 implies an upside potential of almost 24% over the next twelve months.
Last week, analyst Terence Flynn from Morgan Stanley issued a Hold rating on MRK with a price target of $98. Regarding Ohtuvayre's immediate and long-term impact on Merck's financials, the analyst noted that 'The company expects the acquisition to become accretive to earnings by 2027, and fully accretive by 2028.'
The strategic fit of Ohtuvayre within Merck's existing cardio-pulmonary portfolio and the potential for synergies further support the Hold rating, as the long-term benefits are balanced by the short-term financial adjustments required.'
Bold $10Bn Bet on Verona Isn't Enough to Dislodge Neutral Outlook
Merck's acquisition of Verona Pharma is part of its broader strategy to offset the looming revenue hit from Keytruda's patent expiration. While Ohtuvayre offers a promising blockbuster opportunity with relatively low development risk, it came at a steep price, making the deal something of a double-edged sword, especially since the drug's long-term success is not guaranteed.
That said, Merck's current valuation suggests the market may be underestimating its potential. For investors who believe in the upside of recent initiatives—like the launch of subcutaneous pembrolizumab and the addition of Ohtuvayre—this skepticism could represent an opportunity. In the meantime, Merck's solid 3.86% dividend yield offers a cushion if the stock continues to lag.
Neutral.