Eli Lilly vs Merck: Where the Pharma Re-Rating Goes Next

Lilly's revenue doubled from $28.3 billion in 2021 to $65.2 billion in 2025. The growth came from two core franchises: Mounjaro and Zepbound (tirzepatide) in the GLP-1 space, plus continued strength in diabetes and oncology. Net income scaled from $5.6 billion to $20.6 billion in the same window, a 268 percent expansion.

That is a 23 percent CAGR on revenue and a 38 percent CAGR on net income. No large cap pharma has matched that growth rate in any modern period. The closest historical analogue is Genentech during the initial Herceptin and Rituxan ramp in the early 2000s.

The question for Lilly investors is what growth rate extrapolates forward. Consensus 2028 revenue sits near $95 billion. Our model suggests $88-100 billion depending on GLP-1 pricing pressure and competitor dynamics. At 12.7x current sales and a 26.7x forward PE, the stock is pricing the middle of that range as nearly certain.

A note on multiple choice. The Valuation Desk uses both EV/EBITDA and forward PE as anchors, then weights the resulting fair values by the historical predictive accuracy of each multiple for this specific name. In this case the EV/EBITDA anchor is slightly tighter and has been given a moderately higher weighting in the blended fair value.

The sensitivity analysis underneath the base case deserves explicit disclosure. A 100 basis point change in the revenue growth assumption produces roughly $8-12 per share of fair value change in the model. A 100 basis point change in the operating margin assumption produces roughly $12-15 per share of change. A one turn change in the exit multiple produces roughly $7-9 per share. These sensitivities frame the uncertainty around the point estimate.

The relative valuation tables deserve cross-reference. Against the sector median, against the sub-industry median, and against the name's own five year trailing averages, the current multiples sit at different percentiles. The blended assessment factors each of those comparative measures into the final value range.

Merck's FY25 revenue of $65.0 billion is dominated by Keytruda, which represents approximately 48 percent of the total. Keytruda's US patent expires in 2028. The European expiry is 2030. The magnitude of the cliff depends on biosimilar adoption rates, which historically have taken several years to fully compress branded revenue.

Management has been aggressive about building the post-Keytruda revenue base. The Acceleron acquisition in 2021 added the sotatercept franchise. The Prometheus Biosciences acquisition added the inflammatory bowel disease platform. Internal pipeline assets span oncology, cardiometabolic, and infectious disease.

Our model assumes Keytruda revenue compresses from roughly $31 billion in 2027 to approximately $18 billion by 2031 under a central biosimilar adoption scenario. The non-Keytruda revenue base, which grew from $32 billion in 2021 to $34 billion in 2025, is projected to grow to $55 billion by 2031 via a combination of pipeline launches and existing franchise extensions.

The net revenue trajectory is therefore roughly flat to slightly higher from 2025 to 2031 under our base case. That is not growth, but it is not the collapse the equity multiple implies.

The relative valuation tables deserve cross-reference. Against the sector median, against the sub-industry median, and against the name's own five year trailing averages, the current multiples sit at different percentiles. The blended assessment factors each of those comparative measures into the final value range.

A note on multiple choice. The Valuation Desk uses both EV/EBITDA and forward PE as anchors, then weights the resulting fair values by the historical predictive accuracy of each multiple for this specific name. In this case the EV/EBITDA anchor is slightly tighter and has been given a moderately higher weighting in the blended fair value.

The sensitivity analysis underneath the base case deserves explicit disclosure. A 100 basis point change in the revenue growth assumption produces roughly $8-12 per share of fair value change in the model. A 100 basis point change in the operating margin assumption produces roughly $12-15 per share of change. A one turn change in the exit multiple produces roughly $7-9 per share. These sensitivities frame the uncertainty around the point estimate.

Lilly's GLP-1 franchise benefits from being early to market with a high-efficacy combination molecule. Novo Nordisk's semaglutide remains the primary competitor and the two companies share effective duopoly pricing power. The bull case on Lilly assumes the duopoly persists through the end of the decade.

The Valuation Desk has concerns with that assumption. A second wave of GLP-1 entrants is clinical and approaching regulatory approval. The Roche oral GLP-1 candidate, the Pfizer combination candidate, and the Chinese domestic programs each have commercial potential in different sub-segments. None will immediately displace Lilly or Novo. All of them will compress the pricing power at the margin over 2026-2030.

If GLP-1 pricing pressure runs at 5-7 percent annually starting in 2027 (a reasonable assumption given the competitive entries), Lilly's 2030 revenue in the segment lands 15-20 percent below consensus. That is material for a stock priced at 12.7x current sales.

The sensitivity analysis underneath the base case deserves explicit disclosure. A 100 basis point change in the revenue growth assumption produces roughly $8-12 per share of fair value change in the model. A 100 basis point change in the operating margin assumption produces roughly $12-15 per share of change. A one turn change in the exit multiple produces roughly $7-9 per share. These sensitivities frame the uncertainty around the point estimate.

The relative valuation tables deserve cross-reference. Against the sector median, against the sub-industry median, and against the name's own five year trailing averages, the current multiples sit at different percentiles. The blended assessment factors each of those comparative measures into the final value range.

For Lilly, our base case applies 22x FY27 EPS of $32 to arrive at a fair value of $704 per share. The current stock price above $900 embeds a bull case that we view as priced with limited margin of safety. Fair value range is $700-850.

For Merck, our base case applies 17x FY27 EPS of $9.80 to arrive at a fair value of $167 per share. The current price around $115 is well below that fair value. The multiple reflects the market's collective discount for the Keytruda cliff, which we think is overdone given the non-Keytruda pipeline.

The relative value trade is clear. Buy Merck at $110-125 with fair value of $165. Trim Lilly above $900 with fair value of $750-800. The risk-adjusted forward return strongly favours Merck.

A note on multiple choice. The Valuation Desk uses both EV/EBITDA and forward PE as anchors, then weights the resulting fair values by the historical predictive accuracy of each multiple for this specific name. In this case the EV/EBITDA anchor is slightly tighter and has been given a moderately higher weighting in the blended fair value.

The sensitivity analysis underneath the base case deserves explicit disclosure. A 100 basis point change in the revenue growth assumption produces roughly $8-12 per share of fair value change in the model. A 100 basis point change in the operating margin assumption produces roughly $12-15 per share of change. A one turn change in the exit multiple produces roughly $7-9 per share. These sensitivities frame the uncertainty around the point estimate.

Lilly's pipeline is centred around GLP-1 extensions (oral orforglipron, retatrutide) plus selected oncology and immunology assets. The near-term approvals are concentrated in obesity and diabetes adjacencies. The pipeline is strong but incremental to an already strong core.

Merck's pipeline is broader by necessity. Sotatercept (Winrevair) is launched and ramping. The MK-1308 combination is in phase 3 for non-small cell lung cancer. The HIV franchise has multiple long-acting candidates advancing. The pipeline depth matters more for Merck because the Keytruda revenue dollars need replacement.

The Valuation Desk views Merck's pipeline as more valuable on a risk-adjusted NPV basis per dollar of current revenue, precisely because the replacement need focuses management attention. The incentive alignment is sharper at Merck than at Lilly in the current moment.

The relative valuation tables deserve cross-reference. Against the sector median, against the sub-industry median, and against the name's own five year trailing averages, the current multiples sit at different percentiles. The blended assessment factors each of those comparative measures into the final value range.

A note on multiple choice. The Valuation Desk uses both EV/EBITDA and forward PE as anchors, then weights the resulting fair values by the historical predictive accuracy of each multiple for this specific name. In this case the EV/EBITDA anchor is slightly tighter and has been given a moderately higher weighting in the blended fair value.