HSBC Upgrades Merck & Company Inc. to Buy

HSBC analysts have upgraded their rating on Merck & Company Inc (NYSE:MRK) from Hold to Buy, while maintaining a price target of $130.

Market Confidence and Strategy

This upgrade is driven by increasing market confidence in Merck's capacity to manage upcoming patent expirations. The firm’s solid strategy for addressing the loss of exclusivity (LOEs) for major drugs later this decade has contributed to this positive outlook.

Strengths in Oncology and Clinical Pipeline

Merck is recognized for its expertise in oncology and a robust clinical pipeline, particularly in developing cancer treatments.

However, HSBC cautions that the true value of Merck's pipeline will be fully appreciated only when early clinical successes are reported, which are not currently reflected in existing estimates and stock metrics.

Opportunities and Risks for 2025

One significant opportunity for Merck noted for 2025 is the stabilization of Gardasil revenues in China, updates on subcutaneous Keytruda, and the rollout trajectory of Winrevir.

The analysts state, "There is a dearth of significant readouts for Merck’s pipeline for 2025 that could change the trajectory of growth." However, positive updates on Phase II Antibody-Drug Conjugates (ADC) assets may help the market recognize the potential of these assets in valuation and estimates.

Risks also exist. Any signs of slowing growth in Gardasil in developed markets or challenges with the subcutaneous version of Keytruda could undermine expectations that the patent cliff for Keytruda will stabilize rather than sharply decline.

HSBC has revised its estimates for Merck downward, accounting for lower growth potential in Gardasil, especially concerning its acceptance in second-tier Chinese cities and among male patients. Despite these revisions, HSBC maintains that Merck's current valuation provides a substantial margin of safety—particularly in light of its strategy to enhance the earning potential of its oncology portfolio in the medium term.

Future Outlook

Looking ahead to the first half of 2025, HSBC notes that there may be few clinical catalysts that could significantly alter Merck's equity narrative. Nevertheless, ongoing Keytruda combination clinical trials may help the company sustain its volume and revenue share in the immuno-oncology market.