Merck (MRK)

Global pharmaceutical company Merck (NYSE:MRK) announced better-than-expected revenue in Q3 CY2025, with sales up 3.7% year on year to $17.28 billion. The company expects the full year’s revenue to be around $64.75 billion, close to analysts’ estimates. Its non-GAAP profit of $2.58 per share was 9.9% above analysts’ consensus estimates.

Company Overview

With roots dating back to 1891 and a portfolio that includes the blockbuster cancer immunotherapy Keytruda, Merck (NYSE:MRK) develops and sells prescription medicines, vaccines, and animal health products across oncology, infectious diseases, cardiovascular, and other therapeutic areas.

Looking ahead, the branded pharmaceutical industry is positioned for tailwinds from advancements in precision medicine, increasing adoption of AI to enhance drug development efficiency, and growing global demand for treatments addressing chronic and rare diseases. However, headwinds include heightened regulatory scrutiny, pricing pressures from governments and insurers, and the looming patent cliffs for key blockbuster drugs. Patent cliffs bring about competition from generics, forcing branded pharmaceutical companies back to the drawing board to find the next big thing.

Merck's primary competitors in the pharmaceutical space include Pfizer (NYSE:PFE), Johnson & Johnson (NYSE:JNJ), Novartis (NYSE:NVS), Roche (OTCQX:RHHBY), Bristol Myers Squibb (NYSE:BMY), and AstraZeneca (NASDAQ:AZN). In animal health, Merck competes with Zoetis (NYSE:ZTS), Elanco (NYSE:ELAN), and Boehringer Ingelheim.

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $64.23 billion in revenue over the past 12 months, Merck is one of the most scaled enterprises in healthcare. This is particularly important because branded pharmaceuticals companies are volume-driven businesses due to their low margins.

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Merck grew its sales at a mediocre 7% compounded annual growth rate. This wasn’t a great result compared to the rest of the healthcare sector, but there are still things to like about Merck.

We at StockStory place the most emphasis on long-term growth, but within healthcare, a half-decade historical view may miss recent innovations or disruptive industry trends. Merck’s recent performance shows its demand has slowed as its annualized revenue growth of 4.1% over the last two years was below its five-year trend.

Merck also reports sales performance excluding currency movements, which are outside the company’s control and not indicative of demand. Over the last two years, its constant currency sales averaged 6.1% year-on-year growth. Because this number is better than its normal revenue growth, we can see that foreign exchange rates have been a headwind for Merck.

This quarter, Merck reported modest year-on-year revenue growth of 3.7% but beat Wall Street’s estimates by 1.7%.

Looking ahead, sell-side analysts expect revenue to grow 4.6% over the next 12 months, similar to its two-year rate. This projection doesn't excite us and indicates its newer products and services will not catalyze better top-line performance yet. At least the company is tracking well in other measures of financial health.

Merck has been an efficient company over the last five years. It was one of the more profitable businesses in the healthcare sector, boasting an average operating margin of 23.6%.

Analyzing the trend in its profitability, Merck’s operating margin rose by 17.6 percentage points over the last five years, as its sales growth gave it operating leverage. This performance was mostly driven by its recent improvements as the company’s margin has increased by 21 percentage points on a two-year basis.

In Q3, Merck generated an operating margin profit margin of 39%, up 15.5 percentage points year on year. This increase was a welcome development and shows it was more efficient.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Merck’s EPS grew at a spectacular 12.9% compounded annual growth rate over the last five years, higher than its 7% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Merck’s earnings to better understand the drivers of its performance. As we mentioned earlier, Merck’s operating margin expanded by 17.6 percentage points over the last five years. On top of that, its share count shrank by 1.6%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

In Q3, Merck reported adjusted EPS of $2.58, up from $1.57 in the same quarter last year. This print beat analysts’ estimates by 9.9%. Over the next 12 months, Wall Street expects Merck’s full-year EPS of $8.65 to grow 4.9%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Merck has shown robust cash profitability, giving it an edge over its competitors and the ability to reinvest or return capital to investors. The company’s free cash flow margin averaged 20.7% over the last five years, quite impressive for a healthcare business.

Taking a step back, we can see that Merck’s margin expanded by 2.2 percentage points during that time. This is encouraging because it gives the company more optionality.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Merck’s five-year average ROIC was 14.5%, beating other healthcare companies by a wide margin. This illustrates its management team’s ability to invest in attractive growth opportunities and produce tangible results for shareholders.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Merck’s ROIC has decreased over the last few years. Only time will tell if its new bets can bear fruit and potentially reverse the trend.

Merck reported $18.64 billion of cash and $35.4 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $30.3 billion of EBITDA over the last 12 months, we view Merck’s 0.6× net-debt-to-EBITDA ratio as safe. We also see its $853 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Merck blew past analysts’ constant currency revenue expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. Overall, we think this was a solid quarter with some key areas of upside. The market seemed to be hoping for more, and the stock traded down 2.4% to $84.48 immediately following the results.

Updated: December 4, 2025 at 11:12 PM EST

Before making an investment decision, investors should account for Merck’s business fundamentals and valuation in addition to what happened in the latest quarter.

Merck is a high-quality business worth owning. For starters, its revenue growth was decent over the last five years. On top of that, its scale makes it a trusted partner with negotiating leverage, and its rising cash profitability gives it more optionality.

Merck’s P/E ratio based on the next 12 months is 12.1x. Scanning the healthcare space today, Merck’s fundamentals really stand out, and we like it at this price.

Wall Street analysts have a consensus one-year price target of $105.92 on the company (compared to the current share price of $101.01), implying they see 4.9% upside in buying Merck in the short term.