Equity Research: Merk Sharp and Dohme

We issue a "Hold" recommendation for Merck & Co. (MRK) with a 2026YE target price of $83.06, implying an 8.09% upside (7.44% annualized) from the current price of $76.84 as of May 31. The DCF valuation (absolute method) indicates that Merck is fairly valued, with limited upside potential of approximately 8% over the forecast period. Relative valuation metrics (P/E, EV/EBITDA, P/S) suggest that Merck trades in line with large-cap pharmaceutical peers, without a material discount. The company has a medium risk profile: strong cash flows and R&D leadership are offset by the looming Keytruda patent cliff in 2028 and elevated debt levels ($70.7B), which may constrain financial flexibility in a high-interest-rate environment. Merck’s R&D capabilities remain a strength, supported by $15.4B in strategic acquisitions (Prometheus, Imago) and its collaboration with Daiichi Sankyo, all of which enhance its oncology pipeline and partially mitigate Keytruda concentration risks. The dividend policy remains stable and attractive to income-oriented investors, though modest growth (~2–3% annually) limits re-rating potential. Low insider ownership (0.06%) raises concerns about management alignment, although high institutional ownership (e.g., Vanguard, BlackRock) adds stability. Merck’s low trading liquidity may deter short-term investors but aligns well with long-term holding strategies. While Merck is fundamentally solid with a robust pipeline, the limited upside does not justify a “Buy,” and absent major negative catalysts, a “Sell” is unwarranted. We therefore recommend holding the stock until there is greater visibility on post-Keytruda revenue streams and/or meaningful improvement in debt metrics or interest rate conditions.