Merck's valuation metrics present a mixed picture. While it has a higher-than-average Quant Valuation (A), its overall Quant Rating is at a HOLD (6.38 out of 10). With the company trading at a P/E Non-GAAP (TTM) of 12.40, compared to the sector median of 17.79, and a GAAP P/E forward of 11.43, also lower than the sector median of 25.51, on the surface, the company appears to be trading at cheap valuations. Digging deeper, the EV to Sales number is above the sector mean, signaling some overvaluation. The market shows some promise but is still uncertain. These points lead to a score of 7/10.

Looking at Merck's (MRK) Q1 2024 balance sheet, the company has strong financial strength. This comes from its cash position of $13.242B, along with a manageable short-term debt of $149M. There are strengths in the company’s ability to keep growing organically without raising funds, and its revenue stream as well. Further supporting the company’s low risk, MRK carries an A+ credit rating with Standard and Poor’s.

Merck (MRK) exhibits an above-average rating of A+ from Seeking Alpha's Quant Ratings for profitability. That comes in from its Cash From Operations (TTM) being at $21.47B. Moreover, the company’s operating margins are above a five-year average. This all allows the company to invest in new discoveries as well as offset losses from new competitors. It is important to note, however, that these revenues are based highly on Keytruda, and they still need to improve their sales to compensate for any loss that might be coming.

Merck's leadership, currently directed by CEO Robert Davis, will be facing a few challenges to develop a good pipeline and make sound financial decisions. It is very important that a transition and rotation of their key revenue source takes place with so many drug patents expiring soon. To continue innovation, the company needs to address these execution problems, which indicates that Merck’s Management Quality is scored at an average of 5/10.

Merck has a leading position in the market and enjoys the patent protection of many of their key products. The main source of revenue comes from Keytruda and has an impact at the market that is above average. However, all of these products are sure to become a challenge in the future as the sector is always prone to seeing patent challenges and more approvals for new market entrants that can potentially lead to new competitive alternatives.

Merck has levered free cash flow which will be key to assessing how the business is handling the transitions in revenue for its best-selling cancer drug, since more clinical developments and R&D activity will hinge on this success. As of December 2024, Merck’s cash is above $21B (TTM), meaning it can comfortably handle its present capital commitments. As a result of its high potential for revenue generation, it scores an 8.

Merck, known as MSD outside of North America, has a 39% share of total pharmaceutical drug revenue in most major markets. The current goal for the company is to retain a key presence and also grow the market through a balanced approach between long term strategic partnerships, R&D, and drug development to support their long-term strategies.

Merck has a combination of both intellectual property from their drugs and property, plant and equipment. As a result of the various new drug applications, returns on assets for Merck should continue to be strong in the future. If the company cannot continue to generate these positive returns in the coming years, the company could experience serious financial problems. For this reason, and taking into account that 56% of sales come from just two sources, it can only score a 7.

Merck (MRK) faces multiple financial and operational challenges. A large area of concern stems from loss of exclusivity in 2028 for Keytruda, as well as some potential regulatory changes or challenges and the success of competing new medications and treatments. Given the potential damage and high dependency to a key source of funds, the score in this category can only be considered average.