What's Wrong With Merck's Stock?

Merck (NYSE: MRK) is a top pharmaceutical company coming off a good quarter that shows it is growing its top and bottom lines. Even with that growth, the stock still trades at a fairly modest valuation. Its stock price is up 5.3% this year, compared with 16% growth for the S&P 500 .

Why isn't Merck's stock doing better in 2024?

More importantly, could this healthcare company make for a good investment today?

Merck is still heavily reliant on Keytruda

When a pharmaceutical company such as Merck has an extremely successful product such as Keytruda, it can be both a blessing and a curse. Keytruda is a significant source of revenue growth for the business, but it's only a matter of time before investors start to question what happens after patents expire and what Merck will be able to rely on to make up for the inevitable decline in revenue.

The success of Keytruda is a big reason why investors are somewhat hesitant about Merck. Patents on this cancer treatment drug will run out in 2028, and although that's still several years away, investors want to remain confident in the company's ability to continue to grow.

It's hard to overstate the importance of Keytruda to Merck's business. The cancer treatment generated $7.3 billion in revenue in the most recent quarter (which ended in June), accounting for more than 45% of the company's top line ($16.1 billion). And at 21%, its organic growth remained impressive -- it was one of Merck's fastest-growing products during the period.

Merck's next largest product, Gardasil, a vaccine that prevents diseases related to the human papillomavirus (HPV), generated $2.5 billion in revenue last quarter and its sales rose at a much more modest rate of 4%. The stock took a bit of a hit this summer when news came out that Gardasil wasn't selling as well as expected in the Chinese market. For the company to win over investors, it's going to need to demonstrate that its business can grow without relying heavily on Keytruda.

There are multiple growth opportunities on the horizon

Although a lot of Merck's revenue comes from Keytruda, the company has been working on developing its pipeline and being less dependent on the highly successful blockbuster drug .

One of the keys to replacing the lost revenue will be new drugs, including Winrevair, a treatment for pulmonary arterial hypertension. By 2029, its sales could top $6 billion, according to analysts, and its peak could come in much higher at $11 billion. These aren't Keytruda-like numbers, but Winrevair along with other assets could help soften the blow for Merck and potentially ensure that its revenue rises.

A more modest growth catalyst is Capvaxive, which is a pneumococcal vaccine approved by regulators earlier this year. By 2027, it could bring in more than $1 billion in sales based on analyst estimates.

Merck is also investing in additional cancer treatments, reaching an agreement last year to pay Japanese-based Daiichi Sankyo $5.5 billion for the right to co-develop three of its antibody-drug conjugates. These are treatments that directly target cancer cells and can be potentially more effective than traditional chemotherapy, which can damage healthy cells.

With all of these opportunities to pursue and possibly more in the future, there's reason to remain optimistic that Merck can continue to grow its business even after patents for Keytruda expire.

Is Merck a good buy right now?

Investors can buy Merck's stock at a fairly reasonable multiple of 15 times next year's earnings (based on analyst estimates). It's a reasonably valued stock at a time when investors might find it hard to find good value in the markets. Although there is some uncertainty for the business, Merck is investing in its growth opportunities and is working to become more diverse, which should help make it a better investment in the long haul.

Provided that you're willing to be patient with the business as it evolves and expands, Merck can be a good stock to buy and hold. At its modest valuation, there's also a good margin of safety here for investors in case things don't go as planned for the business.

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 .