The Hidden Cracks Behind Merck's 32% Stock Surge: Patent Cliffs and Pipeline Pressure

Merck’s impressive 32.3% rally over three months has captured investor attention, with the stock consistently trading above its 50-day and 200-day moving averages since November. Yet beneath this bullish surface lies a more complex narrative that warrants caution, particularly for those seeking near-term gains.

The Gardasil Problem and Near-Term Revenue Headwinds

While Keytruda commands attention as Merck’s lead revenue driver, the company faces immediate headwinds in its vaccine portfolio. Gardasil, historically the company’s second-largest product, experienced a dramatic 40% sales decline during the first nine months of 2025. This deterioration stems primarily from China’s economic slowdown, where weak demand forced Merck’s commercialization partner Zhifei to accumulate excess inventory. The company subsequently halted shipments to allow inventory normalization.

Beyond Gardasil’s struggles in China and Japan, several other vaccines—Proquad, M-M-R II, Varivax, Rotateq, and Pneumovax 23—posted declining sales during the same period. These near-term revenue pressures, combined with generic erosion affecting certain drugs and softening demand for diabetes products, create meaningful headwinds despite Keytruda’s strength.

Keytruda’s Dominance Masks Portfolio Vulnerability

Keytruda remains undeniably impressive. The immunotherapy generated $23.3 billion in sales across the first nine months of 2025, representing 8% year-over-year growth. Its dominance is staggering—the drug accounts for more than 50% of pharmaceutical revenues. Expansion in early-stage non-small cell lung cancer and sustained momentum in metastatic indications continue driving uptake.

Merck’s strategic initiatives underscore confidence in Keytruda’s longevity. The FDA-approved subcutaneous formulation Keytruda Qlex offers faster administration than intravenous delivery and extends patent protection well beyond the 2028 exclusivity cliff for the IV version. Additionally, the company is advancing personalized mRNA cancer vaccine combinations (V940/mRNA-4157) with Moderna in phase III studies.

However, this heavy reliance on a single product creates structural vulnerability, especially as competitive threats intensify.

Rising VEGF Inhibitor Competition and 2028 Patent Cliff

The competitive landscape for Keytruda is shifting materially. New dual PD-1/VEGF inhibitor approaches are emerging as potential game-changers. Summit Therapeutics’ ivonescimab, a VEGF inhibitor that targets both PD-1 and VEGF pathways simultaneously, demonstrated superiority over Keytruda in a phase III study for advanced non-small cell lung cancer conducted in China. Summit believes ivonescimab could establish a new standard of care across multiple NSCLC settings, effectively displacing Keytruda’s position.

This competitive dynamic reflects a broader therapeutic shift. Single-target therapies like Keytruda face limitations that VEGF inhibitor combinations are designed to overcome. Pfizer’s recent acquisition of exclusive global ex-China rights to SSGJ-707—another dual PD-1/VEGF inhibitor from China’s 3SBio—signals industry-wide recognition of this trend. Even Merck is developing its own dual PD-1/VEGF inhibitor, acknowledging the technology’s potential.

The 2028 patent expiration looms as an existential challenge. With Keytruda’s IV formulation losing exclusivity that year, and new VEGF inhibitor competitors circling, Merck’s ability to maintain market share faces genuine pressure.

M&A Spending and Earnings Estimate Revisions

Merck’s aggressive acquisition strategy reflects anticipation of the 2028 transition. The company closed the $9.2 billion acquisition of Cidara Therapeutics this month, adding CD388, a first-in-class long-acting antiviral candidate for seasonal influenza prevention. Last year’s $10 billion Verona Pharma deal brought Ohtuvayre, a differentiated chronic obstructive pulmonary disease maintenance therapy with multibillion-dollar revenue potential.

These M&A deals carry significant integration costs. Consequently, consensus earnings estimates for 2026 have declined from $9.23 per share to $7.94 over the past 60 days—a material compression that reflects both the acquisition burden and underlying growth concerns.

Pipeline Expansion and New Product Launches

On the positive side, Merck’s late-stage pipeline has nearly tripled since 2021 through internal development and M&A additions. The company targets approximately 20 new drug launches over coming years, with multiple blockbuster candidates. Recent regulatory successes include Capvaxive (pneumococcal vaccine), Winrevair (pulmonary arterial hypertension), and Enflonsia (RSV antibody), all experiencing solid commercial uptakes.

Late-stage candidates include a doravirine/islatravir fixed-dose HIV combination (FDA decision expected April 2026), an oral PCSK9 inhibitor for cholesterol management, and tulisokibart for ulcerative colitis. These products could help offset Keytruda revenue decline post-2028.

Valuation Perspective and Growth Concerns

From a valuation lens, Merck appears reasonable. Trading at 13.15x forward earnings versus 17.86x for the industry average, the stock trades slightly above its five-year mean of 12.48x. It remains substantially cheaper than peers like AbbVie, Novo Nordisk, Eli Lilly, AstraZeneca, and J&J.

Yet valuation alone cannot offset fundamental growth concerns. The company’s 10.3% one-year stock performance trails the industry’s 21.6% gain, reflecting investor skepticism about sustainable growth beyond the current cycle.

The Investment Verdict

Short-term traders should exercise caution. Despite the 32% rally, the stock carries a Zacks Rank #5 (Strong Sell) rating. Declining earnings revisions, near-term vaccine revenue pressures, intensifying VEGF inhibitor competition, and structural concerns about navigating the 2028 patent cliff collectively temper upside enthusiasm.

Long-term investors may benefit from waiting for clearer visibility on non-Keytruda growth drivers and more tangible evidence that new products and VEGF inhibitor strategies can adequately replace Keytruda’s revenue contribution. While management execution on pipeline delivery and M&A integration deserves credit, current valuation and forward estimates fail to adequately compensate for these execution and competitive risks.