Merck Q1 2025 Earnings Overview: A Closer Look at Performance, Strategy, and Outlook

$Merck(MRK)$

Merck & Co. delivered a mixed set of results for the first quarter of 2025, reflecting both the strength of its blockbuster therapies and the challenges of a shifting global landscape. Revenue growth remained modest, impacted by foreign exchange headwinds and soft demand in certain markets, while earnings came in stronger than expected, aided by cost discipline and solid contributions from key products like Keytruda.

Despite facing pressure from international tariffs and weaker vaccine sales, Merck maintained its full-year revenue guidance and continues to invest aggressively in its pipeline and manufacturing infrastructure to sustain long-term growth.

Earning Overview

• Total Revenue came in at $15.5 billion, representing a 2% decline compared to Q1 2024. When adjusted for foreign exchange impacts, revenue showed slight growth of 1%, suggesting that core product demand remained resilient.

• GAAP Net Income rose to $5.08 billion, a 6.7% increase year-over-year. This was driven by higher operating efficiency, lower R&D expenses compared to last year’s one-time charges, and continued strength from oncology products.

• GAAP Earnings Per Share (EPS) reached $2.01, up from $1.87 in the same quarter last year.

• Non-GAAP EPS, which excludes certain one-time items, was $2.22, up 7% and ahead of analyst expectations.

These results reflect Merck’s ability to navigate through macroeconomic pressures while maintaining profitability and operational efficiency.

Fundamental Analysis

Keytruda (Pembrolizumab)

• Sales rose 4% to $7.2 billion, continuing to dominate Merck’s portfolio. The drug now accounts for approximately 46% of total company revenue, underscoring its status as one of the most commercially successful immuno-oncology therapies globally.

• Growth was driven by increased demand in both the U.S. and international markets, particularly in non-small cell lung cancer and melanoma indications.

Gardasil/Gardasil 9 (HPV Vaccine)

• Sales dropped 41% to $1.3 billion, reflecting sharp declines in demand in China and a slowdown in Japan’s catch-up vaccination programs.

• This decline was expected to some extent but came in steeper than anticipated, weighing on Merck’s overall vaccine segment.

Winrevair (Pulmonary Arterial Hypertension)

• The newly launched product generated $280 million in its first full quarter on the market, signaling strong initial adoption.

• Winrevair is viewed as a potential growth driver for the cardiopulmonary franchise and demonstrates Merck’s commitment to expanding into new therapeutic areas.

Animal Health Division

• Revenue for animal health rose 5% to $1.6 billion, or 10% when adjusted for currency.

• Growth was broad-based across livestock and companion animal products, reflecting stable demand and effective pricing strategies.

Guidance

Merck is taking proactive steps to protect and enhance its global supply chain, especially in light of rising geopolitical tensions:

• The company announced a $21 billion investment plan to expand its U.S. manufacturing capabilities and create a more resilient supply chain less exposed to international trade disruptions.

• Capital allocation remains disciplined, with continued investments in pipeline expansion, strategic partnerships, and share repurchases to enhance shareholder value.

• Full-Year Revenue Guidance: Maintained at $64.1 billion to $65.6 billion.

• Non-GAAP EPS Forecast: Adjusted slightly downward to $8.82–$8.97 due to $200 million in tariff-related costs and a licensing agreement.

Despite facing headwinds, Merck reaffirmed its revenue guidance of $64.1 billion to $65.6 billion for 2025, showing confidence in the stability of its core business.

However, non-GAAP EPS guidance was revised slightly downward to $8.82–$8.97, compared to the previous range of $8.88–$9.03. This revision incorporates the $200 million tariff impact and the licensing-related costs tied to its Hengrui Pharma agreement.

Free Cash Flow

• Free Cash Flow Yield: Merck’s free cash flow yield stands at around 9%, indicating a strong ability to generate cash relative to its market cap. This is well above the average for large-cap pharmaceutical companies and underscores the company’s healthy fundamentals.

• Operating Free Cash Flow Payout Ratio: The FCF payout ratio climbed to nearly 169% in the first quarter. This spike was primarily driven by a combination of higher-than-usual capital expenditures and milestone payments tied to collaborative research and licensing agreements. While temporarily elevated, this payout ratio reflects Merck’s commitment to reinvesting in its future rather than a decline in cash flow quality.

• Capital Investments: Merck continues to make aggressive capital investments, particularly in U.S.-based manufacturing infrastructure. The company has outlined a multi-year plan to deploy over $9 billion in capital projects through 2028 to build a more resilient and scalable supply chain for key biologics and vaccines.

Merck’s Q1 2025 free cash flow performance reinforces the company’s financial strength and strategic flexibility. While short-term earnings were impacted by external pressures, its ability to generate and deploy capital efficiently remains a key advantage. This strong cash position is not only cushioning the impact of current headwinds—it’s also laying the foundation for long-term growth and resilience in a competitive and evolving healthcare landscape.

Risks and Challenges

1. Patent Risk Merck, like many pharma companies, relies heavily on patent protections to sustain its profits. It frequently engages in costly and unpredictable legal battles to defend its intellectual property from generic competitors. Without strong patent protection, the incentive to invest billions into R&D disappears—why invest in developing a drug if competitors can immediately copy it?

2. Regulatory Risk Merck operates globally and must comply with a web of complex and ever-changing regulations. Each country presents its own regulatory challenges, and a policy shift in just one region can have a significant impact. Effective regulatory navigation is a core competency—but it remains a key risk.

3. R&D Risk Research and development is the lifeblood of any pharma company, and it’s expensive. The healthcare industry consistently ranks among the highest in R&D spend as a percentage of sales. Success in this area is crucial. While Merck has historically done well—creating blockbuster drugs that generate billions—past success is no guarantee of future results. If they fail to maintain this innovation pipeline, growth could stall.

• R&D Expenses fell 9% to $3.6 billion, mostly due to the absence of a $656 million charge related to the Harpoon Therapeutics acquisition in Q1 2024.

• The company reported strong progress in its pipeline, particularly in oncology. Key developments include:

  A Phase 3 trial of subcutaneous pembrolizumab, aiming to offer more flexible administration options.

  New data readouts across several cancer types, with a continued focus on combination therapies to extend Keytruda’s lifecycle.

  An exclusive licensing agreement for an investigational Lp(a) inhibitor to potentially address cardiovascular risk in patients with elevated lipoprotein(a) levels.

Valuation

Using my proprietary DCF model, I’ve calculated Merck’s intrinsic value at $144 per share. The current market price is just $83, which means the stock is significantly undervalued based on my analysis.

For additional context:

• The stock is trading near its 52-week low of $75.93.

• The trailing 12-month P/E ratio is just 12, which is low compared to historical norms.

• On Finbox, the forward P/E ratio is about 9.21, close to its lowest level since 2016.

So across the board—DCF, trailing P/E, and forward P/E—Merck appears undervalued.

Market sentiment

• Earnings Beat: Both GAAP and non-GAAP EPS exceeded Wall Street expectations, showing strong cost control and operational efficiency.

• Keytruda Strength: Investors remain confident in Keytruda’s long-term revenue potential, especially as it continues to expand into new indications and delivery formats (e.g., subcutaneous).

• Valuation Appeal: At a forward P/E of just over 9x, Merck is trading at a significant discount relative to peers, making it attractive to value-oriented and income-focused investors.

• Resilience Amid Tariffs: Despite $200 million in tariff-related costs, the company maintained its revenue guidance, which reassures investors about its ability to adapt.

• Pipeline Optimism: The continued investment in oncology and cardiovascular pipeline assets (like the Lp(a) inhibitor) is being well-received as a sign of long-term growth beyond Keytruda.

Bearish Sentiment Drivers

• Gardasil Weakness: The steep 41% revenue decline in Gardasil/Gardasil 9 created concern, especially since this franchise has historically been a strong growth contributor.

• EPS Guidance Cut: The slight downward revision in full-year non-GAAP EPS, though modest, raised some caution flags about cost pressures and margin compression.

• Patent Expiry Concerns: As Keytruda patent cliffs loom in the coming years (late 2028 U.S. exclusivity), some investors are questioning whether the pipeline will be able to fill the eventual revenue gap.

• International Risk Exposure: Tariff-related expenses and weakening demand in Asia for vaccines highlight Merck’s sensitivity to geopolitical and macroeconomic risks.

Conclusion

Even after factoring in the major risks, I believe the reward-to-risk profile is compelling. That’s why I’ve rated Merck as a Buy. Merck’s Q1 2025 performance highlights the durability of its business model, supported by continued dominance in oncology, steady innovation, and strong execution. While challenges remain—especially regarding international tariffs and Gardasil’s recent sales slump—the company’s financial position, pipeline momentum, and strategic investments paint a positive long-term outlook.

Investors will want to monitor how quickly Gardasil demand rebounds, whether Keytruda can maintain its growth trajectory, and how effectively Merck navigates ongoing geopolitical risks. But as it stands, Merck remains a fundamentally strong player in the global pharmaceutical landscape.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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