Merck & Co., Inc. (MRK) stock intrinsic value fair value estimate & owner earnings analysis

Merck sells prescription medicines, vaccines and animal health products. Its 2025 sales were $65.0 billion, and one drug, the cancer immunotherapy Keytruda (including the new under-the-skin version, Keytruda Qlex), made up 49% of them. The rest comes from vaccines (Gardasil, Capvaxive, Enflonsia), newer medicines (Winrevair for pulmonary arterial hypertension, and Ohtuvayre for COPD, acquired with Verona Pharma in October 2025), older products in decline (Januvia/Janumet, Bridion), partnered cancer drugs (Lynparza, Lenvima, Welireg) and an animal health business with about $7 billion of sales. Merck's own filing says the main U.S. patent on Keytruda expires in December 2028, when biosimilar copies are expected, and the European patent in 2031. That date drives this valuation. Earnings base. We measure owner earnings as operating cash flow, with year-to-year working-capital swings removed, less stock compensation and the capital spending needed to keep the business as it is. On that basis, Merck earned $4.93 per share in 2021, $6.95 in 2022, $4.22 in 2023, $8.37 in 2024 and $7.41 in 2025. Adding back interest gives the cash the business produces before paying its lenders: $5.24, $7.32, $4.66, $8.88 and $7.93 per share. We use the median of 2021 to 2025, the years since the Organon spin-off: $7.32 per share, or about $18.1 billion on today's 2.47 billion shares. The window contains a one-off windfall (2022 sales of the COVID pill Lagevrio) and a one-off charge (the $5.5 billion Daiichi Sankyo collaboration in 2023), and the two roughly cancel. Two accounting judgments matter. First, the multi-billion-dollar charges for buying drug candidates (Prometheus in 2023, Cidara and Terns in 2026) are excluded from the earnings level because they are purchases, not operating costs. But Merck replaces its products partly by buying them, so every case below charges a continuing acquisition budget of $5 billion a year through 2032 and $3 to 3.5 billion after that, close to its 2016-2025 average of about $5 billion a year. Second, Merck's cash flow statement shows a working-capital outflow every year. Part of it can be traced: the last installments of the 2017 repatriation tax, which ended in 2025, and deferred Daiichi Sankyo payments that were already charged to 2023 earnings. Part of it, roughly $1 to 1.5 billion a year in an unitemized 'other' line, could not be traced from the filings. If it is a recurring cost, earning power is about $0.50 per share lower than we assume. Near-term path. Business cash per share fell 10.7% in 2025, mainly because Gardasil shipments to China stopped and cash taxes were higher. The base case holds 2026 at the $18.1 billion level, about 8% below 2025's actual result, not a further fall. The reason is in the June 2026 quarterly report: first-half sales were $32.9 billion, up 5%, Keytruda grew 5% in the second quarter, and Gardasil sales rose again. Base case: $35.37 per share. Keytruda grows 4% in 2027 and 2% in 2028. Then U.S. biosimilars launch, and Medicare's negotiated price arrives from 2029. Keytruda is expected in the list due February 2027, and a June 2026 proposed rule would apply that price to Keytruda Qlex as well. Sales fall 25% in each of 2029 and 2030 and 20% in each of 2031 and 2032, reaching about $8.7 billion by 2035. That is a loss of roughly 75%, the same scale Herceptin, Avastin and Rituxan suffered within four to five years of biosimilar entry. Each lost Keytruda dollar costs about 50 cents of after-tax cash. The rest of the pharmaceutical business grows 1% a year to 2035, below its roughly 2% a year since 2019 excluding Gardasil, because launched products (Winrevair, Capvaxive, Ohtuvayre) are offset by Januvia, Bridion, Lynparza and Lenvima losing exclusivity. Animal health grows 3% a year, below its record. As Keytruda fades, Merck resizes its costs, as it has after past patent losses, and the cash margin settles at 23% of sales by 2035, against the 25% to 30% it earned in 2016-2019. The business is worth about $128.4 billion. Debt net of excess cash is $41.1 billion, which leaves $87.4 billion for shareholders. Bear case: $14.04 per share. Keytruda stalls under drug-pricing pressure in 2027-2028 (the December 2025 agreement with the U.S. government on most-favored-nation pricing), then falls 30%, 35% and 30% in 2029-2031 as European challenges begin after data exclusivity ended in July 2026. That is an 85% loss by 2034. The acquired programs fail to fill the gap, and the rest of pharma shrinks 2% a year. This follows industry history: Pfizer's sales fell by about a quarter after Lipitor lost exclusivity, and Merck's own cash earnings sank in 2017 after Zetia and Vytorin lost theirs. Here total sales fall from about $67 billion to $39 billion by 2032, and the margin settles at 20%. The business is worth $79.7 billion. Debt is $45.1 billion, because refinancing after a downgrade costs more, which leaves $34.6 billion. Cash before acquisitions never falls below about $6 billion a year, against an interest bill of about $2 billion, but from 2029 today's dividend would not be covered. Bull case: $52.75 per share. Keytruda Qlex adoption extends growth (7% in 2027, 5% in 2028) and slows the decline to 15-18% a year in 2029-2032, with slower declines after that. Winrevair, Capvaxive, Ohtuvayre and Enflonsia lift the rest of pharma 2% a year to 2033, animal health grows 4%, and the margin settles at 25%, Merck's own pre-2020 level. The business is worth $171.3 billion. Net debt is $41.1 billion, which leaves $130.3 billion. Not credited in any case: enlicitide (oral cholesterol drug awaiting approval), sacituzumab tirumotecan, tulisokibart, Cidara's flu-prevention antibody, Terns' leukemia drug, and management's long-range revenue targets. None is approved or contracted. If they succeed, they add value. Their purchase cost is already in the debt. Debt. At June 30, 2026 Merck owed $53.9 billion, after paying for Cidara (about $9.2 billion) and Terns (about $6.7 billion, closed May 2026), and held $6.8 billion of cash, of which we count $4.8 billion as excess. Most of the bonds carry fixed coupons between 1.45% and 5.7% and mature as late as 2065. Those cheap long-term borrowing costs reduce the effective debt by about $8 billion in the base and bull cases and $4 billion in the bear case. No single maturity is large enough to threaten the company. Margin-of-safety price: $23. We are confident in the earnings level through 2028: the patent date is fixed, sales are still growing, and vaccines and animal health spread the risk. Beyond 2028 we are much less sure. The worst plausible outcome is a fast Keytruda collapse together with failed acquisitions, plus things no case models: the pricing agreement being extended to existing medicines, tariffs once the three-year delay negotiated in 2025 ends, or the Halozyme patent dispute over Keytruda Qlex. Merck would survive all of that, because its debt is long-dated and fixed-rate and it would still generate cash, but the dividend would be cut. The three things we are most likely to get wrong are how fast Keytruda erodes, the margin Merck settles at after the cliff, and whether the acquisitions pay off. Moving any one of them to the bear assumption costs roughly $5 to $10 per share. The assumed holding period is short: from now to the end of 2028 the business should produce about $15 per share of owner cash after acquisitions, and the dividend is about $3.40 a year. From a price of $23, valued at the end of 2028, the base case implies about $15 of cash plus $26 of remaining value, roughly 30% a year. The bear case implies about $17 in total, a loss. The bull case implies about $61. Because the spread is wide and the post-2028 business depends on acquisitions that are not yet proven, the margin-of-safety price is set where the median outcome clears 20% a year with room to spare and the bear case implies only a limited loss. That is $23. Our previous estimates were built on a different basis and are not comparable to these figures.