10-Q: Merck & Co. Q1 2026 Earnings: Mixed Results Amidst Strategic Acquisitions

Merck & Co. reported a net loss for Q1 2026, impacted by significant acquisition charges, though operational sales showed a 5% increase driven by oncology and animal health segments.

Summary

• Merck & Co. reported a net loss of $4.24 billion for the first quarter ended March 31, 2026, compared to a net income of $5.08 billion in the prior year period.
• Total sales increased by 5% to $16.29 billion, driven by growth in oncology, cardiometabolic and respiratory, and animal health segments.
• Research and development expenses surged to $12.59 billion, primarily due to a $9.0 billion charge for the acquisition of Cidara Therapeutics and a $5.8 billion anticipated charge for the Terns Pharmaceuticals acquisition.
• The company announced a definitive agreement to acquire Terns Pharmaceuticals for approximately $6.7 billion, expected to close in May 2026.
• Cash provided by operating activities was $3.92 billion, while cash used in investing activities was $10.21 billion, largely due to acquisitions.
• The company anticipates annual cost savings of approximately $1.7 billion from its 2025 Restructuring Program by the end of 2027.

Sentiment

Score: 3

Explanation: StockSavvy.ai views this as a negative sentiment due to the reported net loss, significant increase in R&D expenses driven by acquisitions, and declines in key product sales, despite operational sales growth.

Positives

• Total sales increased by 5% to $16.29 billion, driven by strong performance in oncology (Keytruda, Welireg) and animal health.
• The oncology franchise saw a 12% growth in sales, with Keytruda/Keytruda Qlex sales reaching $8.03 billion.
• Animal Health segment sales grew 13% to $1.79 billion.
• Cash provided by operating activities increased to $3.92 billion from $2.50 billion in the prior year.
• The company expects annual cost savings of approximately $1.7 billion from its 2025 Restructuring Program by the end of 2027.
• Keytruda received multiple regulatory approvals in China, U.S., and Europe in early 2026 for various cancer indications.
• Winrevair sales increased 88% to $525 million, indicating strong uptake for the PAH treatment.

Negatives

• Merck reported a net loss of $4.24 billion for the quarter, a significant reversal from a net income of $5.08 billion in Q1 2025.
• Research and development expenses increased dramatically to $12.59 billion from $3.62 billion, heavily impacted by acquisition charges.
• The company recorded a $9.0 billion charge to R&D expenses for the acquisition of Cidara Therapeutics.
• Sales of Gardasil/Gardasil 9 declined 19% to $1.07 billion, primarily due to lower demand in China and unfavorable CDC purchasing patterns in the U.S.
• Januvia/Janumet sales declined 28% to $574 million due to lower net pricing, volume declines, and generic competition.
• Lagevrio sales decreased 73% to $28 million due to declining COVID-19 cases.
• The company faces ongoing pricing pressures and potential impacts from government healthcare cost containment measures, including Medicare price negotiations.

Risks

• Global efforts toward health care cost containment continue to exert pressure on product pricing and market access worldwide.
• The Inflation Reduction Act (IRA) has introduced government price-setting for certain Medicare drugs, impacting Januvia, Janumet, and potentially Keytruda.
• The company is involved in various legal proceedings, including product liability lawsuits (Gardasil/Gardasil 9, Dr. Scholls Foot Powder), patent litigation, and securities litigation.
• The acquisition of Terns Pharmaceuticals is subject to customary closing conditions and a tender offer by Merck.
• The company anticipates that ongoing pricing pressures and cost-reduction measures by governments and third parties will continue to negatively affect sales and profits.
• The company is contesting proposed adjustments from the IRS regarding a one-time transition tax, which could result in a material impact if unsuccessful.
• The company faces potential patent expirations and generic competition for key products like Bridion, which will lose market exclusivity in the U.S. in July 2026.

Future Outlook

Merck anticipates that ongoing pricing pressures and government cost-containment measures will continue to negatively affect sales and profits. The company expects continued sales decline for Januvia and Janumet following loss of market exclusivity in May 2026, and for Lagevrio due to declining COVID-19 cases. The company expects to achieve annual cost savings of approximately $1.7 billion from its 2025 Restructuring Program by the end of 2027.

Management Comments

• The Company disagrees with the proposed adjustments from the IRS and will vigorously contest the NOPAs through all available administrative and, if necessary, judicial proceedings.
• Merck anticipates that all of these actions and additional actions in the future will continue to negatively affect sales and profits.
• The Company believes the asserted patent is invalid and not infringed in the Capvaxive litigation.
• Merck is vigorously defending the Gardasil case and believes that evidence presented in court will show that Gardasil had no role in causing any of plaintiffs conditions.

Industry Context

StockSavvy.ai notes that Merck's Q1 2026 results reflect broader industry trends of significant R&D investment in pipeline development and strategic acquisitions to bolster growth, alongside increasing pricing pressures and regulatory scrutiny, particularly concerning government healthcare cost containment measures like Medicare price negotiations.

Comparison to Industry Standards

• Merck's R&D spending as a percentage of sales in Q1 2026 was approximately 77% ($12.59 billion R&D / $16.29 billion Sales), which is exceptionally high, even for the pharmaceutical industry, largely due to acquisition-related charges. Typical R&D spending for large pharmaceutical companies ranges from 15-25% of sales.
• The company's gross margin of 74.2% is within the typical range for large pharmaceutical companies, though it has declined from 78.0% in the prior year due to increased amortization and restructuring costs.
• The net loss reported in Q1 2026 is a significant deviation from industry norms for established pharmaceutical giants, which typically report consistent profitability. This loss is primarily attributable to one-time acquisition-related expenses rather than operational underperformance.

Legal Proceedings

• Product liability lawsuits involving Gardasil/Gardasil 9, alleging various personal injuries, with a multidistrict litigation ongoing.
• Product liability lawsuits related to Dr. Scholls foot powder, alleging exposure to asbestos-contaminated talc.
• Securities litigation (Cronin v. Merck & Co., Inc.) alleging materially false and misleading statements regarding demand for Gardasil/Gardasil 9 in China.
• Derivative lawsuits against current and former officers and board members based on similar allegations as the securities class action.
• Antitrust litigation concerning RotaTeq, alleging anticompetitive vaccine bundling schemes.
• Patent litigation concerning generic and biosimilar challenges to Merck's products, including Bridion, Januvia/Janumet, Keytruda, Lenvima, Lynparza, and Capvaxive.
• Civil Investigative Demands from the DOJ related to diversity, equity, and inclusion programs and price reporting under the Medicaid Drug Rebate Program.
• Ongoing inquiries from Chinese governmental agencies regarding operations.

Related Party Transactions

• The company has a collaboration with AstraZeneca PLC for Lynparza and Koselugo, involving shared development and commercialization costs and profit sharing.
• A collaboration with Eisai Co., Ltd. for Lenvima, involving joint development and co-commercialization with profit sharing.
• A collaboration with Bayer AG for sGC modulators like Adempas and Verquvo, involving joint development and commercialization with profit sharing.
• A collaboration with Ridgeback Biotherapeutics LP for Lagevrio (molnupiravir), with profit sharing and reimbursement of certain costs.
• A collaboration with Daiichi Sankyo for three DXd ADC candidates and gocatamig, involving joint development and commercialization with cost and profit sharing.
• A collaboration with Moderna, Inc. for intismeran autogene (V940/mRNA-4157), with shared costs and profits.
• A global collaboration with Bristol-Myers Squibb Company for Reblozyl, involving royalties paid to Merck.
• A funding arrangement with Blackstone Life Sciences for development costs of MK-2870 (sacituzumab tirumotecan).

Stakeholder Impact

• Shareholders: Impacted by the net loss, acquisition charges, and potential future impacts of pricing pressures and litigation.
• Employees: Affected by restructuring programs involving elimination of positions, though new hires are expected in strategic growth areas.
• Customers: May experience price changes due to government negotiations and the company's MFN Agreement.
• Creditors: The company has secured a $6.0 billion credit facility to fund acquisitions, impacting its debt structure.
• Suppliers: No direct impact mentioned, but potential shifts in manufacturing footprint due to restructuring could affect some suppliers.

Next Steps

• Anticipates closing the acquisition of Terns Pharmaceuticals in May 2026.
• Intends to use proceeds from long-term debt financing to repay borrowings under the $6.0 billion credit agreement.
• Expects to repurchase approximately $3.0 billion of treasury shares under its stock repurchase program during 2026.
• Will continue to contest IRS proposed adjustments regarding the one-time transition tax.
• Awaiting decisions on appeals related to Gardasil product liability litigation and patent litigation for various products.
• Anticipates increased shipments of Enflonsia in the second half of 2026.

Key Dates

Recommendation

While Merck's operational sales show growth and its pipeline remains robust with significant R&D investment, the reported net loss, substantial acquisition-related charges, and ongoing legal and regulatory challenges necessitate a cautious approach. The company's strategic acquisitions and pipeline advancements are positive long-term indicators, but the immediate financial impact and market pressures warrant a 'hold' recommendation until greater clarity emerges on the integration of acquisitions and resolution of legal/regulatory issues.

Keywords

Merck & Co., Form 10-Q, Quarterly Report, Pharmaceuticals, Biotechnology, Acquisition, R&D Expenses, Sales