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Keytruda will generate $25 billion in sales for Merck this year. But its patent is about to expire, leaving Merck with a gaping hole to fill—and a stock price that could be at risk.

This week’s quarterly results from Merck looked pretty good, all things considered: Sales and earnings came in ahead of Wall Street expectations and the company raised its revenue outlook for the year.

There was no immediate reason, then, for the startling selloff that followed. Merck lost $30 billion in market value by lunchtime and ended the day down 10%. Ultimately, analysts blamed a seemingly minor side note in the report: Demand for the company’s HPV vaccine, known as Gardasil, was down in China, and executives couldn’t say why.

For Merck investors, the selloff is a warning. Big pharma companies survive—and thrive—on the success of a few big drugs. Any disruption can throw the business into disarray.

But if Merck investors are anxious about Gardasil, they could soon have bigger worries. The company is facing the largest patent expiration in the industry’s history.

Ten years ago, the Food and Drug Administration approved Keytruda, a groundbreaking medicine that promised to turn the body’s own immune system against cancer cells. Keytruda helped to launch a wave of immunotherapy drugs that has revolutionized how doctors treat cancer. For Merck, the payoff was particularly broad.

Merck sponsored hundreds of human studies of the medicine. Trial after trial showed that Keytruda worked far better than existing treatments. In advanced skin cancer, where survival rates a year after diagnosis had been only 25%, Merck eventually showed that patients on Keytruda survived more than 2½ years on average, and that nearly 40% of patients were alive after seven years.

Today, countless patients owe years of their lives to Keytruda. The FDA has expanded its approval of the drug dozens of times to cover new cancers and new indications, and it has become an era-defining drug; one of the most important medicines ever discovered by the pharmaceutical industry.

With a list price of $22,600 when administered every six weeks, Keytruda is now the top-selling drug in the world. Analysts, according to FactSet, expect sales to peak at $33.3 billion in 2027.

But the nature of success in the pharmaceutical industry means that the enormous Keytruda revenue will soon pose a problem of unprecedented scale for Merck. The company currently relies on the medicine for roughly 40% of its total revenue.

Merck expects the patents protecting Keytruda to expire in the U.S. in 2028, at which point it will begin facing competition from copycat medicines known as biosimilars. Amgen and Samsung Bioepis are already testing their own versions of Keytruda. A large handful of biosimilars could be on the market by 2028 or 2029.

And that will happen just as Keytruda becomes eligible for a government program that could allow Medicare to pay reduced prices for the medicine beginning in 2028.

That could all spell a dramatic revenue drop for Merck as the decade comes to a close. The overall impact is impossible to predict given the unprecedented size of the Keytruda market, the complexity of biosimilar competition, and the novelty of the Medicare price negotiation program.

But a long history of patent expirations in the pharma industry suggests that Merck will face a revenue hole of some $16 billion by 2029 or 2030, and that’s assuming that multiple things go right.

And yet Wall Street isn’t paying much attention to Merck’s vulnerability. Heading into the second-quarter earnings report, 23 analysts rated the stock a Buy, with just five Holds and not a single Sell. The stock has returned 64% over the past three years, more than double the S&P 500.

And while traders have punished Pfizer and Bristol Myers Squibb for their own coming patent expirations, Merck’s valuation has remained steady. The company’s stock trades at 12 times estimated earnings for next year.

Rivals that face similar patent issues fetch lower multiples. Pfizer trades at 11 times 2025 earnings estimates, while Bristol trades at just seven times. Both companies could lose billions in annual revenue due to patent expirations by the end of the decade.

For Merck, Keytruda’s patent expiration is no secret. Executives have been fielding investor questions on the topic for at least five years.

Company executives have sought to turn investor attention past the Keytruda expiration and into the next decade. “I see it as more of a hill than a cliff,” Merck CEO Rob Davis said on an investor call in April. “My confidence that we’re going to come back with fast growth after this is very high.”

Davis’ confidence is well earned. In September 2021, in his first months as CEO, Davis made a risky $11.5 billion bet on a biotech company called Acceleron Pharma, which was then testing a new cardiovascular medicine. The trial returned positive results a year later, vindicating Davis’s acquisition. The FDA approved the drug, now called Winrevair, earlier this year. Analysts expect sales to hit $6 billion in 2029, according to FactSet. Jefferies analyst Akash Tewari estimates that Winrevair could eventually peak with $11 billion in annual sales.

Despite the China worries, Gardasil has become a key product for Merck. After growing more than 20% annually in recent years, sales could hit nearly $10 billion in 2024. Vaccines are generally exempt from patent worries, so Gardasil sales could keep climbing for years.

What’s more, Merck has a packed pipeline. Early this year, Merck said that by the early 2030s, it could see more than $20 billion in annual revenue from cancer drugs currently under development, plus $15 billion in revenue from Winrevair and a handful of other cardiometabolic drugs, plus billions more from tulisokibart, an immunology drug acquired in Davis’ $10.8 billion buyout of Prometheus Biosciences.

That adds up to a potential $35 billion in revenue, enough to keep Merck bulls more than satisfied despite the looming Keytruda expiration. “We have a very broad and deep portfolio with multiple levers,” Davis tells Barron’s. The pipeline, he says, may be the biggest in Merck’s history.

Much of Wall Street agrees. “It’s my favorite idea in the space,” says Chris Shibutani, who covers Merck for Goldman Sachs.

But pipelines are far from guaranteed, and disappointments are part of the process.

One thing Merck does not have is its own version of the hot new weight-loss medicines that have made Eli Lilly and Novo Nordisk worth more than half a trillion dollars each. An acquisition of an obesity-focused biotech like Viking Therapeutics could excite investors. Davis has said the company will continue to make deals.

For the foreseeable future, though, Keytruda remains vital to Merck’s future. The company is betting on its strategy—call it Keytruda 2.0—to extend the financial value of the drug well past its expiration.

Today, every dose of Keytruda is administered intravenously during a 30-minute session at a hospital or clinic. Merck is currently testing a new version of Keytruda that could be quickly injected into the skin.

That new subcutaneous version would be more convenient for patients and doctors, but would also have big commercial benefits for Merck. It would mean that the biosimilar versions of intravenous Keytruda that hit the market in 2028 would need to compete with Merck’s new subcutaneous version, which competitors wouldn’t be allowed to copy, leaving open an avenue for Merck to hold on to significant Keytruda revenue.

Merck executives say the new version of the drug could also be exempt from the Medicare price negotiation program.

Davis told investors in April that roughly half of Keytruda volume could move to a subcutaneous version by 2028. He implied there would be a competitive price for the treatment to achieve “quick adoption,” presumably an effort to stave off competition from biosimilar offerings.

It’s a somewhat daring approach to replace billions in annual revenue, particularly since the subcutaneous treatment approach remains in trial. Even so, analysts say the idea has connected with investors.

“Nobody thinks it’s a home run, like every payer is going to let this happen,” says Daina Graybosch, an analyst at Leerink Partners who covers the stock. “But people assume that there’s a certain proportion of patients and payers that will have a real access reason to use this.”

Still, if the plan falls through, the stock could take a hit. “For investors, it will be a big deal,” Graybosch says.

Data from a key trial of the subcutaneous version of Keytruda are expected later this year. Those results need to be positive for Merck to move forward as planned. The trial combines Keytruda with an enzyme called hyaluronidase that helps disperse injected drugs through the body.

Merck rivals Roche and Bristol have licensed versions of the same enzyme for their subcutaneous cancer drugs.

Merck has already abandoned a plan for a subcutaneous Keytruda without that enzyme. A trial of that treatment met its predefined goal, but analysts at South Korea–based Shinhan Securities who spotted the results in a federal database highlighted slightly higher death rates among lung cancer patients who took the subcutaneous shot than among those who took the intravenous Keytruda. The company says the differences weren’t significant.

As Barron’s reported in June, Merck chose not to publicize those results, a decision at odds with its transparent approach to other Keytruda trials.

A successful trial for subcutaneous Keytruda won’t resolve the other issue hanging over Merck—whether the new treatment will be exempt from Medicare price negotiation.

The answer will come down to how the next administration interprets a portion of the Inflation Reduction Act that empowers Medicare to negotiate some drug prices—leaving plenty of uncertainty for investors.

The Centers for Medicare and Medicaid Services has yet to issue guidance for the 2028 price negotiation process. CMS can negotiate new Medicare prices for many drugs 13 years after approval, but existing guidance suggests that timeline gets reset when an older drug is combined with another medicine. That’s what Merck intends to do with Keytruda.

Davis says Merck is “quite confident” that subcutaneous Keytruda will be exempted from the price negotiation program, based on the language CMS has published so far.

That may not be the final word, however. Richard Frank, a senior fellow at the Brookings Institution and director of the think tank’s Center on Health Policy, says that the guidance leaves open too many questions. “You could add aspirin to anything and call it a combination product,” Frank says. “Obviously they are not going to allow that to happen.”

In comments he submitted to CMS, Frank said that the guidance on combination drugs doesn’t “offer sufficiently complete direction.” He told Barron’s that he expects CMS to clarify the guidance this fall.

Ultimately, though, Merck’s Keytruda pricing could become part of the political football that takes place as Medicare rolls out its closely watched negotiation program. That isn’t a game Wall Street can easily forecast.

Davis, for his part, says the outcome isn’t make-or-break for Merck. “I have multiple paths to get where I need to be,” he says.

He repeated his mantra about Keytruda’s expiration. “When I talk about the hill versus the cliff, it’s taking the totality of all of that opportunity, and the fact that we have more coming in our pipeline,” he says. “We’re going to continue to invest.”

Merck’s fundamentals remain solid. The pipeline is strong, and the executive team has a record of successful acquisitions. But Keytruda’s long-term success could be out of the company’s control. It’s a wild card worth billions of dollars. And as of now, Merck’s stock doesn’t reflect the risk.