Merck Stock Surges Despite Lagging Business Fundamentals
Merck (MRK) stock has surged 76.4% over the past year, outpacing five other major drugmakers including Eli Lilly, Johnson & Johnson, and Pfizer. Despite this impressive performance, Merck's business fundamentals tell a different story. The company ranks last among six peers in operating margin at 10.5%, the lowest in the group. This figure includes a substantial $5.7 billion one-time charge for an acquisition, which significantly impacted profitability. Merck's revenue grew 4.6% over the same period, placing it fourth in the group.
In stark contrast, Eli Lilly achieved a 49.6% revenue growth while maintaining a remarkable 49.7% operating margin. Yet, its stock returned only 51.7%, less than Merck's 76.4% gain. This disparity highlights that Merck's stock price may be driven by expectations of future growth rather than current performance. Additionally, comparing price-to-earnings (P/E) ratios is challenging because both Merck (112.3) and Pfizer (36.6) reported losses in at least one of their last four quarters.
Merck's current success hinges heavily on KEYTRUDA, its cancer therapy, which generated $8.4 billion in revenue during the second quarter of 2026. However, management expects U.S. KEYTRUDA growth to moderate. The company is banking on over 20 new products, representing more than $70 billion in commercial opportunity. WINREVAIR, a drug for pulmonary arterial hypertension, is one of the newer products, with sales of $588 million in the quarter, up 75%. However, these newer drugs are still small, and building this lineup has come at a cost to Merck's profit.
Merck anticipates its revenue to grow 2% to 4% in 2026, reaching $66.3 billion to $67.3 billion. While management raised this forecast on its August 4, 2026 call, it also lowered its full-year non-GAAP earnings forecast due to the Terns Pharmaceuticals acquisition charge. The company expects only a shallow dip and a fast return to growth when KEYTRUDA loses its exclusivity. However, the risk remains that newer drugs may not arrive quickly enough to sustain this growth. A recent setback includes the voluntary withdrawal of a U.S. application for a cancer drug Merck is developing with Daiichi Sankyo.