Executive Summary
Merck delivered modest 1% revenue growth to $65.0 billion in 2025, with Keytruda representing 49% of total sales and growing 7%, while Gardasil declined 39% due to a China shipment pause. Non-GAAP EPS rose 17% to $8.98 as the company advanced restructuring programs targeting $3.0 billion in annual cost savings by 2027.
What happened
Merck reported worldwide sales of $65.0 billion in 2025, up 1% (2% excluding foreign exchange), driven by oncology franchise strength, cardiometabolic respiratory launches, and animal health products. This was partially offset by vaccines decline, immunology franchise loss (due to rights reversion to Johnson & Johnson in October 2024), and virology weakness. GAAP net income increased 7% to $18.3 billion, while non-GAAP net income rose 16% to $22.5 billion. Gross margin compressed 150 basis points to 74.8% due to higher restructuring costs (primarily accelerated depreciation), inventory write-downs (mainly vaccines), increased intangible amortization, and fair value step-up from the Verona Pharma acquisition. R&D expenses declined 12% to $15.8 billion, primarily reflecting lower business development charges ($750 million in 2025 versus $2.6 billion in 2024 for major acquisitions). Operating cash flow declined to $16.5 billion from $21.5 billion, reflecting higher tax payments ($6.1 billion versus $3.9 billion) and increased upfront/milestone payments ($3.0 billion versus $1.1 billion). The company returned $13.3 billion to shareholders through $8.2 billion in dividends and $5.1 billion in share repurchases.
Why it matters for investors
Merck's business model is highly concentrated around Keytruda, which now represents 49% of total sales, creating significant dependency on a single asset facing known patent expiration between 2028-2031. The company expects biosimilar competition to begin in December 2028 when the primary compound patent expires, with European competition starting in 2031. Additionally, the company anticipates Keytruda will be selected for IRA government price setting in 2027, with that price becoming effective January 1, 2029, leading to materially lower U.S. sales thereafter. The 39% Gardasil decline highlights execution risk in China, where above-normal inventory at the commercialization partner led to a complete shipment pause since February 2025 with no visibility on resumption. Broader pricing headwinds are materializing across the portfolio: Januvia is already subject to IRA price setting (effective January 2026), Janumet and Janumet XR will face government pricing in 2027, and Lenvima was selected for 2028. The company also entered an MFN Agreement requiring most-favored-nation pricing for new launches relative to specified countries, potentially constraining future pricing flexibility. On the positive side, restructuring programs are accelerating, targeting $3.0 billion in annual cost savings by end of 2027 (with $1.7 billion from the 2025 program alone), which management intends to fully reinvest in strategic growth areas. The pipeline is diversifying with approximately 80 Phase 3 trials underway across immuno-oncology, precision molecular targeting, and tissue targeting, though these are largely pre-approval and carry execution risk. The decline in operating cash flow to $16.5 billion (from $21.5 billion) and higher capital intensity ($4.1 billion capex, up from $3.4 billion) indicate tightening cash generation ahead of major patent cliffs.
Bullish points
Keytruda delivered $31.7 billion in sales (7% growth) with ongoing uptake in earlier-stage indications including TNBC, NSCLC, RCC, and HNSCC, and received multiple new approvals in 2025 including in combination with Padcev for urothelial carcinoma and MIBC, supporting near-term revenue durability before biosimilar entry.
Winrevair sales reached $1.4 billion in its second year on market with continued uptake in PAH, and the company received expanded indication approval in the U.S. and EU, representing a meaningful growth driver in the cardiometabolic and respiratory franchise.
Non-GAAP EPS grew 17% to $8.98, outpacing revenue growth, driven by margin expansion from lower R&D costs (down 12% to $15.8 billion) as major acquisition charges declined, demonstrating operating leverage despite restructuring headwinds.
The company has diversified its late-stage pipeline with approximately 80 Phase 3 trials across multiple therapeutic areas including novel oncology mechanisms (ADCs, BTK inhibitors, KRAS inhibitors), cardiometabolic (enlicitide decanoate oral PCSK9 inhibitor), infectious diseases (MK-1406 long-acting influenza prevention), and immunology, reducing long-term reliance on Keytruda.
Animal Health segment delivered 8% revenue growth to $6.4 billion with 10% profit growth to $2.1 billion, driven by livestock demand (up 13%), improved supply, and new product launches, providing a stable diversification stream separate from pharmaceutical pricing pressures.
Bearish points
Keytruda concentration risk is extreme at 49% of total sales, and the company explicitly expects material sales declines beginning in 2028-2029 due to biosimilar competition (starting December 2028 when primary patent expires) and IRA price setting (effective January 1, 2029), with European biosimilar entry expected in 2031.
Gardasil/Gardasil 9 sales collapsed 39% to $5.2 billion due to shipment pause to China beginning February 2025, with no resumption timeline provided and elevated inventory at the commercialization partner; a local nine-valent competitor was approved in China in May 2025, and CDC reduced recommended HPV doses for adolescents to a single dose in January 2026.
IRA government price setting is cascading across the portfolio: Januvia pricing became effective January 1, 2026, Janumet and Janumet XR effective January 1, 2027, Lenvima effective January 1, 2028, and Keytruda expected in 2029, with government pricing potentially affecting private market pricing and materially reducing profitability.
Operating cash flow declined 23% to $16.5 billion (from $21.5 billion) due to higher tax payments ($6.1 billion versus $3.9 billion) and increased business development spending ($3.0 billion versus $1.1 billion), while capital expenditures increased to $4.1 billion, indicating tightening free cash flow generation ahead of major revenue headwinds.
Gross margin compressed 150 basis points to 74.8% from 76.3%, driven by higher restructuring costs ($1.5 billion in cost of sales, up from $495 million), inventory write-downs (primarily vaccines), and increased intangible amortization ($2.8 billion versus $2.4 billion), with further pressure expected from ongoing restructuring programs through 2029.
The IRS issued Notices of Proposed Adjustment in April 2025 that would increase the one-time transition tax by approximately $1.3 billion plus $260 million in penalties (exclusive of interest); management disagrees but resolution could take years, and if unsuccessful, the impact could be material to financial statements.
Key highlights
Merck generated $65.0 billion in sales (up 1%) with Keytruda representing 49% of revenue at $31.7 billion (up 7%). The company reported GAAP net income of $18.3 billion (up 7%) and non-GAAP net income of $22.5 billion (up 16%), translating to non-GAAP EPS of $8.98 (up 17%). Gross margin declined to 74.8% from 76.3% due to restructuring costs, inventory write-downs, and intangible amortization. R&D expenses fell 12% to $15.8 billion as major acquisition charges declined year-over-year. The company approved a $3.0 billion restructuring program targeting $1.7 billion in annual savings by 2027, with total restructuring costs of $2.6 billion in 2025. Operating cash flow declined to $16.5 billion (down 23%) while the company returned $13.3 billion to shareholders via dividends and buybacks. Gardasil sales fell 39% to $5.2 billion due to China shipment pause. The company expects Keytruda biosimilar competition starting December 2028 and IRA price setting effective January 1, 2029. Approximately 80 Phase 3 trials are underway across therapeutic areas. The company acquired Verona Pharma for $10.4 billion in October 2025 and Cidara for $9.2 billion in January 2026.
Management commentary
Management emphasized the advancement of its science-led strategy through new approvals, clinical execution, and business development. The company highlighted successful launches including Enflonsia for RSV prevention, Keytruda Qlex subcutaneous formulation, and expanded Winrevair indication in PAH. Management noted the diversification of its oncology portfolio across three strategic pillars: immuno-oncology, precision molecular targeting, and tissue targeting, with numerous Phase 3 programs within each pillar. The company stated its capital allocation strategy prioritizes investments in key growth drivers and its broad pipeline, enabled by benefits from the multiyear optimization initiative. Management acknowledged the significant decline in Gardasil sales in China, stating it paused shipments beginning February 2025 due to above normal inventory levels at its commercialization partner and will not resume until inventory normalizes, with no material sales increase expected in 2026. Management disclosed expectations that Keytruda will be selected for IRA price setting in 2027 (effective January 1, 2029) and anticipates material U.S. sales decline thereafter. The company announced a three-year MFN Agreement with the U.S. government addressing administration drug pricing goals through direct-to-patient programs, Medicaid discounts, and most-favored-nation pricing for new launches relative to specified countries. Management stated the 2025 Restructuring Program is designed to position the company for its next chapter of growth, expecting cumulative pretax costs of approximately $3.0 billion with annual savings of approximately $1.7 billion substantially realized by end of 2027. Management noted it plans to invest approximately $20 billion in capital projects from 2025-2029, with more than $12 billion in U.S. investments.
What to watch next
Investors should monitor:
Timing and magnitude of Keytruda biosimilar market entry beginning December 2028 when the primary compound patent expires, with European competition expected in 2031, and the extent to which combination approvals and subcutaneous formulation provide differentiation or pricing power against biosimilars.
IRA government price setting impact on Keytruda when selected in 2027 (price effective January 1, 2029), including the negotiated price level and whether government pricing cascades to private payer contracts, materially reducing profitability of the company's largest asset.
Resumption timeline and normalized run-rate for Gardasil shipments to China following the February 2025 pause, competitive impact from the locally-approved nine-valent HPV vaccine (approved May 2025), and execution of launch expansion to males in China and Japan.
Clinical trial readouts and regulatory approvals for late-stage pipeline assets including enlicitide decanoate (oral PCSK9 inhibitor), MK-1406 (long-acting influenza prevention from Cidara acquisition), intismeran autogene (individualized neoantigen therapy with Moderna), and multiple antibody-drug conjugates across oncology indications.
Execution and actual cost savings realization from the $3.0 billion restructuring program targeting $1.7 billion in annual savings by end of 2027, including headcount reductions, real estate optimization, and manufacturing network alignment, and whether savings are fully reinvested as stated or contribute to margin expansion.
This summary is based solely on excerpts from the company's Form 10-K filing.