CUTTING THE KISS, HAS THE MARKET BEEN KISSING MERCK IDVYNSO KEYTRUDA CATALYSTS SO HARD IT CAN’T TAKE IT

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Merck & Co. (MRK) has a lot to celebrate. The recent blockbuster expansions of both Keytruda and Keytruda Qlex and the FDA approval of IDVYNSO (the company's first non-INSTI, two-drug daily oral regimen for HIV-1 without tenofovir) are proof that the pharmaceutical behemoth can keep its mouth moving under pressure when it comes to delivering on clinical pipeline results.

But with the shares currently trading at a historically lofty price-to-earnings multiple, Wall Street asks: Has everybody already priced in perfection?The answer is: The ability to avoid the 2028 Keytruda patent cliff is the length of the odds, while IDVYNSO represents a diversified commercial rollout. Even more than that, Merck's new indications for Keytruda are steadily extending the key drug's runway. However, Merck's upside margin is very slim. The high price-to-earnings multiple means that Merck's recent regulatory wins are now the market's expected baseline.

In other words, Merck's shares are not being discounted at all because of their prospects; they're being priced as a high-growth machine. Merck has a fascinating plan to transform the company that has tripled its late-stage pipeline since 2021. Even so, the company has set a very high bar. More generally, Merck's gross margins are being weighed down by a generically eroded product pipeline. This includes aging blockbuster assets like Januvia, which have been and are still under attack from a massive generic assault, as well as Gardasil, which has already experienced considerable sales erosion in particular parts of the world.