Merck Stock Valuation Called Out for Being 'Rich' by RBC Capital Markets

Merck's stock price has been boosted by its promising pipeline of new treatments, but an investment bank is warning that the shares are already reflecting too much optimism.

RBC Capital Markets downgraded Merck to 'sector perform' while lifting its price target to $150, from around $152. The firm's message is not that Merck's research is stalling, but rather that the expectations embedded in the stock's value are high even though near-term growth looks modest.

RBC pointed to encouraging cancer-vaccine data as proof of Merck's recent string of positive trial headlines. However, the bank highlighted a major 'loss of exclusivity' looming in about two years when patents expire and cheaper generics or biosimilars become available.

The next few months are packed with potential catalysts, including new Sac-TMT data expected at the European Society for Medical Oncology (ESMO) meeting and trial results for TL1A, an anti-inflammatory drug candidate being tested in ulcerative colitis and hidradenitis suppurativa. RBC warned that if these readouts come in merely OK, the stock may not get much credit because investors were already assuming progress.