Executive Summary / Key Takeaways

• Merck is undergoing a strategic transformation, leveraging its scientific heritage and robust business development to build a diversified portfolio and pipeline capable of driving growth beyond the eventual loss of exclusivity for its blockbuster oncology drug, Keytruda.
• Recent financial performance reflects this transition, with strong growth in oncology and promising contributions from new launches like Winrevair and Capvaxive, offsetting headwinds from declining legacy products and market-specific challenges like Gardasil sales in China.
• The company's differentiated technology platform, particularly in biologics, vaccines, and novel modalities like ADCs and T-cell engagers, provides a competitive edge through enhanced efficacy, targeted delivery, and potential manufacturing advantages, underpinning future growth drivers.
• Management maintains confidence in the near and long-term outlook, providing specific 2025 guidance that factors in key opportunities and anticipated headwinds, while aggressively investing in R&D and manufacturing capacity, including significant expansion in the U.S.
• Key risks, including patent litigation, pricing pressures from healthcare reform (like the IRA), and geopolitical factors such as tariffs and market volatility in China, are actively being managed through strategic, operational, and legal countermeasures.

A Legacy Forged in Science, Focused on Future Growth

For over 130 years, Merck & Co., Inc. has stood as a pillar in the global healthcare landscape, driven by a foundational commitment to scientific discovery and patient well-being. While its history is rich with groundbreaking medicines and vaccines, the company today is defined by a dynamic strategic pivot – a deliberate and aggressive effort to diversify its portfolio and pipeline to ensure sustainable growth in the face of evolving market dynamics and the impending loss of exclusivity for its oncology powerhouse, Keytruda.

Merck operates primarily through two segments: Pharmaceutical and Animal Health. The Pharmaceutical segment, encompassing human health drugs and vaccines, is the dominant revenue driver, anchored by a broad portfolio spanning oncology, vaccines, hospital acute care, cardiovascular, virology, neuroscience, and diabetes. The Animal Health segment provides veterinary products and services, contributing a smaller but steadily growing portion of overall sales. This dual-segment structure provides a degree of diversification not always present in pure-play human pharma companies.

The strategic imperative is clear: build a robust pipeline of potential future blockbusters across multiple therapeutic areas and modalities. This has fueled a flurry of business development activity since 2021, nearly tripling the late-phase pipeline to over 20 unique assets. Significant transactions like the acquisitions of Harpoon Therapeutics (HARP), EyeBio, and the Curon asset, alongside extensive collaborations with partners such as Daiichi Sankyo (DSNKY), Moderna (MRNA), AstraZeneca (AZN), Eisai (ESALY), and Bayer (BAYRY), underscore Merck's "One Pipeline" approach – seamlessly integrating external science with internal R&D to accelerate innovation. This strategy is not merely about acquiring assets; it's about leveraging Merck's deep expertise in clinical development, regulatory affairs, and global commercialization to maximize the potential of these promising candidates.

Technological Edge: The Engine of Differentiation

At the heart of Merck's strategy lies its technological prowess, providing crucial differentiation in a highly competitive industry. While specific, universally quantifiable metrics for every technology are not always publicly disclosed, the company highlights several areas of technological advantage:

• Biologics Platform: Merck's experience in developing and manufacturing complex biologics, exemplified by Keytruda and newer assets like Winrevair, is a core strength. This platform enables the creation of highly targeted therapies with potentially superior efficacy profiles. For instance, Keytruda's clinical data demonstrates compelling overall survival benefits in multiple earlier-stage cancer settings, a key differentiator in the competitive oncology landscape.
• Vaccine Technology: Building on a long history in vaccines (e.g., Gardasil, M-M-R II), Merck continues to innovate. The recently approved Capvaxive, a 21-valent pneumococcal conjugate vaccine, is specifically designed to cover serotypes responsible for approximately 84% of invasive pneumococcal disease cases in adults aged 50 and older, offering broader coverage against prevalent strains compared to some competitors. The investigational RSV antibody, clesrovimab, designed as a single-dose passive immunization, demonstrated a significant reduction in RSV-associated hospitalizations (over 84% through 5 months) in clinical trials, highlighting the potential for differentiated preventative options.
• Novel Modalities: Merck is actively investing in emerging technologies like Antibody Drug Conjugates (ADCs) through collaborations with Daiichi Sankyo and Kelun-Biotech, and T-cell Engagers via acquisitions like Harpoon and Curon. These modalities offer targeted delivery of potent therapies, aiming to improve efficacy and reduce systemic toxicity. While early, the strategic intent is to develop differentiated profiles against existing and emerging treatments. The oral PCSK9 inhibitor program (enlicitide) represents a focus on novel delivery mechanisms for established targets, aiming for convenience and potentially improved patient adherence compared to injectables.
• Incretin Biology Expertise: Leveraging its experience with Januvia, Merck is exploring next-generation oral GLP-1 receptor agonists and combinations, aiming to compete in the rapidly evolving cardiometabolic and weight management space with potentially differentiated profiles.

The "so what" for investors is that these technological capabilities are not just scientific achievements; they are critical components of Merck's competitive moat. They enable the development of products with potentially superior clinical profiles, support premium pricing, contribute to higher gross margins (78.0% in Q1 2025), and position the company for leadership in key growth areas, offsetting the eventual decline of current blockbusters. Continued investment in R&D ($3.6 billion in Q1 2025) and manufacturing ($1.3 billion in capital expenditures in Q1 2025, including the WuXi Vaccines facility acquisition and significant U.S. investments) is essential to maintain this technological edge and translate pipeline potential into commercial reality.

Performance Reflecting Transition and Resilience

Merck's recent financial performance provides a snapshot of a company in transition, balancing the strength of its core business with the early contributions of new products and the impact of market-specific challenges. In the first quarter of 2025, worldwide sales were $15.5 billion, a 2% decrease compared to the prior year period. This decline was primarily driven by lower sales in vaccines (notably Gardasil in China), virology (Lagevrio), and immunology (due to the transfer of Remicade/Simponi rights).

However, this was partially offset by robust growth in key areas:

• Oncology: Keytruda sales grew 4% globally (6% ex-FX) to $7.2 billion, driven by continued uptake in earlier-stage indications (TNBC, NSCLC, RCC) and strong demand in metastatic settings (urothelial, endometrial cancers). Welireg sales surged 62% to $137 million, benefiting from increased adoption in previously treated advanced RCC, where it has become a market leader. Alliance revenues from Lynparza and Lenvima also contributed positively.
• Cardiovascular: The launch of Winrevair is off to a strong start, contributing $280 million in sales in Q1 2025, reflecting continued uptake in the U.S. since its Q2 2024 launch.
• Diabetes: The Januvia family saw a 19% increase in combined sales, primarily due to higher net pricing in the U.S. resulting from a strategic list price reduction to mitigate the impact of the Medicaid rebate cap removal under the American Rescue Plan Act.
• Animal Health: The segment delivered a solid 5% sales increase (10% ex-FX) to $1.6 billion, driven by livestock growth, including contributions from the acquired Elanco aqua business.

Profitability metrics in Q1 2025 showed resilience. Gross margin improved to 78.0% from 77.6% in the prior year, benefiting from favorable product mix and lower restructuring costs, despite higher intangible asset amortization. Operating expenses declined 5%, primarily due to a large R&D charge in Q1 2024 related to the Harpoon acquisition, partially offset by increased investment in the pipeline and promotional activities. Net income attributable to Merck was $5.1 billion, resulting in diluted EPS of $2.01.

Liquidity remains strong, with $8.6 billion in cash and cash equivalents at March 31, 2025. Operating cash flow in Q1 2025 was $2.5 billion, impacted by $700 million in milestone payments. The company continues to return capital to shareholders, paying $2.1 billion in dividends and repurchasing $1.2 billion of stock in Q1 2025, with a significant remaining share repurchase authorization of $11.2 billion. This financial strength provides the flexibility to fund ongoing R&D, pursue strategic business development, and manage debt obligations.

Navigating Headwinds and Charting the Course Ahead

While the overall trajectory is focused on growth, Merck faces several significant headwinds and risks. The most prominent near-term challenge is the situation with Gardasil sales in China. Following a significant step down in shipments to its partner Zhifei in mid-2024 due to elevated inventory and softer demand (influenced by the economic climate and anti-corruption drive), Merck temporarily paused shipments in February 2025. This is expected to result in a significant decline in China Gardasil sales in 2025 compared to 2024. Management estimates the China opportunity in the near term (2025 and next several years) to be in the $2 billion to $3 billion range, with potential growth driven by the male indication approval (received in Q1 2025). While the long-term $11 billion global Gardasil target was withdrawn due to the uncertainty in China, management remains confident in strong double-digit growth for the vaccine outside of China.

Healthcare cost containment efforts globally, particularly in the U.S. with the Inflation Reduction Act (IRA), pose a significant risk. Januvia has been selected for the first year of IRA price negotiation (effective 2026), and Janumet/Janumet XR for the second year (effective 2027). The Medicare Part D redesign is expected to negatively impact sales of certain products, including Winrevair and small molecule oncology drugs, by approximately $400 million in 2025. Merck is contesting the IRA program legally.

Geopolitical factors, including tariffs, are also a concern. The company expects approximately $200 million in additional expenses in 2025 from tariffs implemented to date, primarily impacting cost of sales related to China. To mitigate potential future pharmaceutical tariffs, Merck is aggressively investing in U.S. manufacturing ($12 billion since 2018, plus $9 billion committed through 2028) and adjusting its supply chain footprint.

Patent litigation remains an ongoing risk, particularly for key products like Bridion and the Januvia family, where generic challenges could shorten exclusivity periods. While favorable court rulings have extended U.S. exclusivity for Bridion (through July 2026) and the Januvia family (May 2026 for Januvia/Janumet, July 2026 for Janumet XR), adverse decisions in ongoing cases (e.g., Janumet SPCs in Europe, Keytruda patents with JHU, subcutaneous pembrolizumab patents with Halozyme (HALO), Lynparza generics) could impact future revenues. The IRS is also contesting the one-time transition tax under TCJA, potentially resulting in a material financial impact if Merck is unsuccessful in its vigorous contestation.

Despite these headwinds, management provided a confident outlook for 2025, maintaining its full-year non-GAAP revenue guidance of $64.1 billion to $65.6 billion, representing 1% to 3% growth (excluding FX). Non-GAAP EPS guidance is $8.82 to $8.97, factoring in anticipated BD charges ($200 million for Hengrui Pharma license) and tariff costs. The guidance reflects expected improved growth in the second half of the year, driven by the underlying momentum in the business outside of the specific China Gardasil headwind.

Competitive Dynamics: Strengths, Weaknesses, and Strategic Responses

Merck operates in a highly competitive global pharmaceutical market, facing off against giants like Pfizer (PFE), Eli Lilly (LLY), and AstraZeneca, among others. Each competitor brings distinct strengths and strategic focuses.

• Against Pfizer: Merck competes directly in oncology, vaccines, and animal health. While Pfizer leverages its immense scale and diversified portfolio, Merck's Keytruda has demonstrated superior efficacy in certain cancer indications, providing a competitive edge. Merck also holds a stronger market position in vaccines and animal health segments. Financially, Merck generally exhibits better profitability margins (e.g., higher gross and operating margins) than Pfizer, reflecting operational efficiency, although Pfizer's ROIC can be higher. Merck's strategic emphasis on targeted BD and partnerships allows for faster innovation cycles in certain areas, countering Pfizer's scale advantage.
• Against Eli Lilly: Competition with LLY is notable in neuroscience and oncology, but LLY's recent explosive growth is driven by its leadership in diabetes and obesity with Mounjaro. While Merck's oncology portfolio remains robust, LLY's focus on high-growth biotech areas has resulted in a faster overall revenue growth rate and superior profitability metrics (net margin, ROIC). Merck's strength lies in its broader diversification, particularly the Animal Health segment, which provides a stable revenue base not present at LLY. Merck's challenge is to accelerate innovation in high-demand areas to keep pace with LLY's rapid expansion and efficiency in specific therapeutic niches.
• Against AstraZeneca: Merck competes with AZN primarily in oncology and cardiovascular. While both companies have strong oncology pipelines, Keytruda's established efficacy and broad label provide a significant advantage for Merck. AZN demonstrates strong growth driven by its oncology and respiratory portfolios and exhibits better capital efficiency (ROIC). Merck's strategic partnerships and regulatory expertise contribute to faster market entry for some products, while AZN benefits from streamlined manufacturing processes that can lead to lower operating costs. Merck's Animal Health segment also provides a unique diversified revenue stream compared to AZN's human health focus.

Merck's competitive positioning is bolstered by its differentiated technology, particularly the clinical profile of Keytruda, the targeted design of vaccines like Capvaxive, and the novel mechanisms of action in its pipeline (e.g., Winrevair). However, it faces vulnerabilities from competitors' rapid growth in specific areas (LLY in cardiometabolic/obesity), manufacturing efficiencies (AZN), and the sheer scale and broad portfolios of large players like Pfizer. Merck's strategic response involves aggressive pipeline expansion through BD, focusing on differentiated assets and modalities, investing heavily in manufacturing capacity (especially in the U.S. to mitigate tariff risks), and leveraging its global commercial footprint and regulatory expertise to maximize the reach of new products. The company is also actively managing legal and regulatory risks, including patent defense and challenges to pricing policies.

Conclusion

Merck is navigating a pivotal period, transitioning from being predominantly defined by Keytruda to a future anchored by a more diversified portfolio. The company's strategic focus on leveraging leading-edge science, aggressively pursuing business development, and investing in manufacturing capacity is clearly aimed at building a sustainable growth engine. While facing near-term headwinds from market-specific challenges like the situation in China with Gardasil, ongoing pricing pressures, and potential tariff impacts, the underlying business momentum, driven by the strength of Keytruda and the promising launches of new products like Winrevair and Capvaxive, remains solid.

The expanded pipeline, rich with potential blockbuster opportunities across oncology, cardiometabolic, vaccines, and other areas, represents the core of the long-term investment thesis. Merck's technological differentiation provides a competitive moat, enabling the development of high-value products. While competitive pressures from peers like Pfizer, Eli Lilly, and AstraZeneca are significant, Merck's strategic responses, including targeted BD, manufacturing investments, and active risk management, position it to compete effectively. Investors should monitor the execution of the pipeline, the success of new product launches, and the company's ability to mitigate macro and regulatory headwinds as key indicators of its potential to deliver value and achieve its long-term growth ambitions beyond the Keytruda era.