HSBC upgrades Merck stock to Buy on 2025 opportunities

Investing.com -- HSBC (LON:HSBA) analysts raised their rating on Merck &Company Inc (NYSE:MRK) shares to Buy from Hold while maintaining a price target of $130.

The move comes amid a growing market confidence in the company’s ability to navigate through upcoming patent expirations. Merck (NS:PROR)'s credible strategy for dealing with the loss of exclusivity (LOEs) for key drugs later in the decade has been a contributing factor to the upgrade.

Merck's expertise in oncology and a rich clinical pipeline are seen as key strengths. The company's success in developing cancer treatments, particularly in the field of oncology, has been well-documented.

However, HSBC notes that the true value of Merck's pipeline is expected to be recognized only when early evidence of clinical success emerges, which is not yet reflected in current estimates and stock multiples.

One of the main opportunities identified for Merck in 2025 is the stabilization of Gardasil revenues in China, updates on subcutaneous Keytruda, and the launch trajectory of Winrevir.

“There is a dearth of significant readouts for Merck’s pipeline for 2025 that could change the trajectory of growth,” HSBC analysts said in a report.

“However, updates on Phase II Antibody-Drug Conjugates (ADC) assets might help the market appreciate the potential of these pipeline assets whilst including them in valuation and estimates,” they added.

Key risks for Merck in 2025, according to HSBC, include any signs of Gardasil's growth slowing in developed markets and challenges with the subcutaneous version of Keytruda. If these materialize, they could cast doubt on the market's expectation that Keytruda's patent cliff will level off rather than decline sharply.

The investment bank has adjusted its estimates for Merck downward to account for lower growth potential in Gardasil, particularly regarding its adoption in second-tier Chinese cities and among males.

Even with these revised estimates, HSBC believes that Merck's current valuation offers a significant margin of safety, “especially given its strategy to extend its oncology portfolio’s earning potential in the medium term,” analysts noted.

Looking ahead to the first half of 2025, the bank notes that there may be few clinical catalysts capable of significantly changing Merck's equity story. Nonetheless, Keytruda combination clinical trials could help the company maintain its volume and revenue share in the immuno-oncology market.