Is Merck Stock a Bargain Buy?

Merck (NYSE: MRK) is a top healthcare company with one of the best drugs ever made in its portfolio: Keytruda. While there are concerns about its patent losses in the future, its sales are still growing. And the company has been working on ways to try and extend its growth into new areas. Plus, other drugs could generate billions more in the future.

Despite this potential, the stock has fallen by 25% in the past 12 months -- so is it a bargain buy right now?

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Keytruda's sales rose by 21% last quarter

During the last three months of 2024, Merck achieved solid 9% revenue growth (excluding the impact of foreign currency), with its top line hitting $15.6 billion. A big part of that was Keytruda, which brought in $7.8 billion on its own, as it achieved an organic growth rate of 21%. There has been an increase in demand for the drug, as it can help patients battle multiple types of cancers.

But while its growth has been impressive, the risk is also evident. The drug accounted for half of the company's sales last quarter. Merck is hoping that a new subcutaneous version of the drug (it's currently administered intravenously) could help offset the loss of sales, as its key patent expires in 2028. A new version could have patent protection until 2040, and perhaps even beyond that.

The big question is, even if successful, whether many patients will opt for the new form of treatment, which may be more convenient, since it wouldn't need to be administered in a hospital setting. But at a lower price, patients may still prefer generic or biosimilar versions of the IV form for the sheer cost savings. It seems inevitable that Keytruda's sales will decline; it's really a question of how much and how quickly.

Merck has other promising treatments in its portfolio

Although Keytruda is a huge part of its business, Merck does have other products that can also generate billions in revenue in the future.

Gardasil, its vaccine for the human papillomavirus (HPV), may generate $11 billion in revenue by 2030, according to the company's estimates. Demand has, however, been a bit underwhelming of late, particularly in China, which is a key market for the vaccine. But if you believe the company's projections, there could be a few more billion dollars in revenue from this product alone; Gardasil's sales totaled $8.6 billion last year.

An even more promising blockbuster drug may be Winrevair, which the Food and Drug Administration approved last year as a treatment for pulmonary arterial hypertension. Analysts believe that it may generate $6 billion in sales by 2029, and that it could also peak at $11 billion. Given that is in its early growth stages, this may have the largest impact on Merck's top line in the years ahead.

The company has also secured the rights to an experimental weight loss drug for up to $2 billion from Chinese healthcare company Hansoh Pharma. Given how massive the obesity drug market could be, topping $100 billion and more in the future, having an approved weight loss pill could also rake in billions for Merck down the road. While this is more of a long shot at this stage, it's an intriguing development for investors to monitor.

Is Merck's stock worth buying right now?

Merck's stock has been mired in bad news, with concerns around Keytruda and Gardasil's underwhelming performance weighing on its valuation. But to its credit, management is making moves that could offset potential declines in revenue in the future. And with multiple years still to go before Keytruda loses patent protection, all hope is not lost, not by a mile.

The healthcare stock is trading at a fairly modest 14 times its trailing earnings, and it offers a good margin of safety for investors willing to take a chance on the business. A lot of downside risk is effectively priced into the stock today, which is why it could make for a compelling buy.

While there is some uncertainty around Merck, I find the company's pipeline promising, and I think the moves management is making are encouraging ones. And at a cheap price tag, this could indeed prove to be a bargain buy years from now.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Merck. The Motley Fool has a disclosure policy.