Merck's (MRK) near-term catalysts remain attractive, but execution risks are underestimated at its current valuation following the recent downgrade, RBC Capital Markets said in a note Friday.

The brokerage said bullish investors expect stronger post-Keytruda growth, greater pipeline optionality and upside from catalysts including ESMO, TL1A and a potential Sac-TMT interim readout in Q4, with Sac-TMT seen to add "many billions" in revenue not currently reflected in its model.

Merck's valuation appears stretched relative to historical levels, with high expectations for upcoming catalysts creating downside risk if results disappoint, while elevated pipeline expectations could limit the scope for future earnings upgrades, according to the note.

The brokerage said Merck needs to demonstrate stronger commercial execution to support its longer-term growth outlook as it navigates a post-Keytruda loss-of-exclusivity period, with growth potentially remaining modest for several years and margins facing pressure.

RBC Capital Markets has a sector perform rating on the stock, with a $150 price target.

Shares of Merck were up 3.2% in Friday trading.

Price: 153.73, Change: +4.74, Percent Change: +3.18