Merck stock rose about 2% on Friday morning after Deutsche Bank upgraded the company from Hold to Buy and increased its price target to $150.00 from $115.00. The bank's move signals an implied upside of roughly 26% versus Thursday's closing price of $119.24.
Deutsche Bank analyst James Shin framed the upgrade around the view that markets are overstating the downside risk associated with Keytruda's pending patent expiration. In his written analysis, Shin states: "We believe the market is currently undervaluing MRK, largely due to Keytruda's looming patent cliff. Our analysis indicates a clear path for MRK to navigate this transition effectively."
Shin's financial outlook for Merck is more upbeat than the Street consensus. Deutsche Bank models a trough earnings figure of roughly $11 per share, compared with the approximately $10 per share consensus among analysts. The note points to historical precedent where clarity around a trough has led to valuation re-rating, citing AbbVie's experience when markets accepted that Humira's trough was manageable and its valuation multiple expanded from 11x to 15x.
Beyond earnings math, Deutsche Bank's report suggests Merck may already have visibility to low-single-digit terminal revenue growth excluding Keytruda. The bank highlights Merck's pipeline and recent dealmaking as sources of potential revenue replacement. Acquisitions referenced by the note include Winrevair, Ohtuvayre, and CDTX. Deutsche Bank projects these assets, combined with Merck's broader pipeline, could contribute more than $35 billion in risk-adjusted revenue by 2035, which the bank says could help smooth the transition after Keytruda.
The analyst upgrade and higher price target reflect a view that the market's focus on the patent cliff may be overstated relative to Merck's ability to offset lost Keytruda sales. The note uses earnings trough clarity and pipeline prospects as the basis for a Buy rating and the higher valuation target.
Bottom line - Deutsche Bank's revision to Buy and its $150 target rest on a combination of a higher trough earnings estimate, the potential for valuation multiple expansion if trough risks are perceived as manageable, and pipeline and acquisition-driven revenue that could supply significant risk-adjusted sales through 2035.