The stock already pays 17.5 times next year’s earnings. Cash flow stays strong, but Keytruda is half of sales and the cliff is 2028. Hold; expect the market, not a rerating.
Key points
- $8.37 billion Keytruda family sales in Q2 2026, 50% of company revenue.
- $16.1 billion trailing free cash flow; 4.6% yield at $142.82.
- $66.8 billion 2026 sales in my forecast, inside company guidance of $66.3, $67.3 billion.
The call
The price requires about $8.10 of 2027 earnings at 17.5 times, or a 4.6% free-cash-flow yield on this year’s cash. That is a full multiple for a franchise that still depends on one drug whose U.S. compound patent ends in December 2028.
I expect $70 billion of 2027 sales and $8.10 of earnings as Winrevair, Welireg, Qlex and Animal Health offset slower Keytruda growth. That lands at $142, even with the market. The 12-month climb already prices a shallow dip, not a rerating.
Revenue and free cash flow ($ billions)- Revenue
- Free cash flow
- Author FCF
SEC company facts through Q2 2026; 2026E and 2027E are the author’s forecasts
Valuation
| Item | Figure |
|---|
| 2027 sales (mine) | $70.0 billion |
| 2027 EPS (mine) | $8.10 |
| Multiple | 17.5 times |
| 12-month target | $142 |
| TTM free cash flow | $16.1 billion |
| Dividend (last 12 months) | $3.40 a share |
Seventeen and a half times is a normal large-cap drug multiple when cash conversion is high and the cliff is still two years out. Upside needs faster launch mix or a lower rate; downside is a 14, 15 times print if 2028 earnings talk disappoints. Hold, not sell: cash and the $0.85 quarterly dividend cushion a miss.
Keytruda family sales by half-year ($ billions)August 7 2026 10-Q product table; 2H26E and 2027E are the author’s
Risks
- Keytruda U.S. growth slows faster than management’s “shallow dip” if earlier-stage use saturates; watch Q3 and Q4 U.S. commentary on October 29.
- Acquisition charges and the $400 million SciBrunch hit keep non-GAAP EPS noisy; watch the tax rate and operating-expense guide.
- Qlex German injunction or U.S. patent fights delay the subcutaneous switch that is meant to defend share into 2029.
What would change my mind
A 2027, 2028 earnings bridge on the October 26 oncology day or October 29 call that shows a deeper than 5, 10% earnings drop would cut the multiple and the target.