10-Q: Merck Q2 Earnings Decline Amid Restructuring & Vaccine Slump

Merck reports a significant drop in second-quarter net income and sales, driven by vaccine declines and increased restructuring costs, despite strong oncology growth and new product launches.

Summary

• Worldwide sales for the second quarter of 2025 were $15.81 billion, a 2% decrease compared to $16.11 billion in the same period of 2024.
• Net income attributable to Merck & Co., Inc. for Q2 2025 was $4.43 billion, down 18.8% from $5.46 billion in Q2 2024.
• Diluted Earnings Per Share (EPS) for Q2 2025 was $1.76, a decrease from $2.14 in Q2 2024.
• Sales for the first six months of 2025 were $31.34 billion, a 2% decrease from $31.89 billion in the first six months of 2024.
• Net income attributable to Merck & Co., Inc. for the first six months of 2025 was $9.51 billion, down 6.9% from $10.22 billion in the first six months of 2024.
• Diluted EPS for the first six months of 2025 was $3.77, down from $4.02 in the first six months of 2024.
• Research and Development (R&D) expenses increased 16% in Q2 2025 to $4.05 billion, primarily due to a $200 million upfront payment for a license agreement with Hengrui Pharma and increased clinical development spending.
• Restructuring costs surged to $560 million in Q2 2025, up from $80 million in Q2 2024, reflecting new and ongoing optimization programs.
• Cash provided by operating activities significantly decreased to $5.79 billion in the first six months of 2025, compared to $8.73 billion in the same period of 2024, largely due to higher upfront and milestone payments for collaborations and acquisitions.
• The company announced a new 2025 Restructuring Program in July 2025, estimated to cost approximately $3.0 billion pretax, with expected annual cost savings of approximately $1.7 billion by the end of 2027.
• Merck entered into a definitive agreement in July 2025 to acquire Verona Pharma plc for approximately $10 billion, adding Ohtuvayre (ensifentrine) for COPD.
• Sales of Gardasil/Gardasil 9 declined 55% in Q2 2025 and 48% in the first six months of 2025, primarily due to lower demand in China, where the company paused shipments in February 2025 and expects no further shipments through at least the end of 2025 due to elevated inventory.
• Keytruda sales grew 9% in Q2 2025 and 7% in the first six months of 2025, driven by increased demand and pricing in the U.S. and uptake in earlier-stage indications internationally.
• The company expects Januvia and Janumet to lose U.S. market exclusivity in May 2026, and Janumet XR in July 2026, due to patent expiries and government price setting under the IRA.
• Merck purchased $2.5 billion (29 million shares) of its common stock for treasury during the first six months of 2025, with $9.9 billion remaining under authorization.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to significant declines in net income, EPS, and cash from operations, coupled with substantial restructuring costs and major sales drops for key vaccine products like Gardasil in China. While oncology performance remains strong and new products are launching, these positives are overshadowed by the overall financial downturn, ongoing legal challenges, and the anticipated negative impact of the IRA on future sales of diabetes drugs. The large share repurchase program is a positive for shareholders, but the underlying operational and financial results for the period are concerning.

Positives

• Keytruda sales demonstrated strong growth, increasing 9% in Q2 2025 and 7% in the first six months of 2025, driven by higher demand and pricing in the U.S. and uptake in earlier-stage indications globally.
• New product launches like Capvaxive generated $129 million in Q2 2025 and $236 million in the first six months of 2025, showing continued uptake in the U.S.
• Winrevair, a cardiovascular therapy, saw significant uptake with sales of $336 million in Q2 2025 and $615 million in the first six months of 2025 following its U.S. launch in Q2 2024.
• The Animal Health segment showed robust growth, with sales increasing 11% in Q2 2025 and 8% in the first six months of 2025, driven by higher demand across all species and improved supply.
• Positive topline results were announced for MK-0616 (enlicitide decanoate), an investigational PCSK9 inhibitor, in Phase 3 trials for hyperlipidemia, meeting primary and key secondary endpoints.
• The FDA approved Enflonsia (MK-1654) in June 2025 for RSV prevention in infants, with ACIP recommending its inclusion in the Vaccines for Children Program, and availability expected in July 2025.
• Merck's gross margin improved slightly to 77.5% in Q2 2025 and 77.7% in the first six months of 2025, primarily due to a favorable product mix.
• The Federal Circuit affirmed Merck's patent term extension for Bridion, securing its U.S. exclusivity through July 27, 2026.
• The company's Board of Directors authorized an additional $10 billion for common stock repurchases in January 2025, demonstrating commitment to shareholder returns.

Negatives

• Overall worldwide sales declined by 2% in both the second quarter and first six months of 2025 compared to the prior year periods.
• Net income attributable to Merck & Co., Inc. decreased by 18.8% in Q2 2025 and 6.9% in the first six months of 2025.
• Diluted EPS declined by 17.7% in Q2 2025 and 6.2% in the first six months of 2025.
• Sales of Gardasil/Gardasil 9 plummeted by 55% in Q2 2025 and 48% in the first six months of 2025, primarily due to a significant decline in demand in China and Japan, with shipments to China paused through at least the end of 2025.
• Sales of Lagevrio decreased by 25% in Q2 2025 and 60% in the first six months of 2025 due to declining COVID-19 cases.
• Sales of Simponi and Remicade ceased due to marketing rights reverting to Johnson & Johnson on October 1, 2024, resulting in a 100% decline in sales for these products.
• Dificid lost U.S. market exclusivity in July 2025, with significant sales declines anticipated for the remainder of 2025 and thereafter.
• The BLA for accelerated approval of MK-1022 (patritumab deruxtecan) in the U.S. was voluntarily withdrawn after the confirmatory Phase 3 trial did not meet statistical significance for overall survival.
• Phase 3 trials for Keytruda (KEYNOTE-937 for HCC and LEAP-014 for esophageal SCC) did not show statistically significant improvement in primary endpoints.
• Cash provided by operating activities decreased substantially by $2.93 billion in the first six months of 2025 compared to the same period in 2024, largely due to higher upfront and milestone payments.
• The company faces significant legal challenges, including product liability lawsuits for Dr. Scholls Foot Powder and Gardasil/Gardasil 9, and ongoing antitrust litigation for Zetia.

Risks

• Global efforts toward health care cost containment continue to exert pressure on product pricing and market access worldwide.
• The Inflation Reduction Act (IRA) in the U.S. will lead to government price-setting for Januvia (effective January 1, 2026) and Janumet/Janumet XR (effective January 1, 2027), which is expected to result in significant sales declines for these products.
• The company is suing the U.S. government regarding the IRA's Drug Price Negotiation Program.
• Increased utilization of the 340B Federal Drug Discount Program and restrictions on the company's ability to identify inappropriate discounts are negatively impacting performance.
• Tariffs implemented by the U.S. government are expected to result in approximately $200 million of additional expenses in 2025, primarily reflected in Cost of sales.
• The U.S. government's potential imposition of tariffs on pharmaceutical products and a Most Favored Nation drug pricing policy could further adversely affect the company's business.
• The Internal Revenue Service (IRS) issued Notices of Proposed Adjustment (NOPAs) in April 2025, proposing to increase the one-time transition tax by approximately $1.3 billion and penalties of approximately $260 million, which the company will vigorously contest and could be material if unsuccessful.
• Manufacturing delays for ProQuad and Varivax are anticipated to cause supply constraints in some international markets during 2025.
• Generic competition for Bridion in the EU and Japan is causing sales declines, and Dificid lost U.S. market exclusivity in July 2025, leading to anticipated significant sales declines.
• The significant decline in Gardasil/Gardasil 9 sales in China due to elevated inventory levels and a pause in shipments through at least the end of 2025 poses a substantial revenue risk.
• Ongoing product liability lawsuits related to Dr. Scholls Foot Powder and Gardasil/Gardasil 9, including a trial adjourned to September 15, 2025, for Gardasil, could result in adverse outcomes.
• Securities litigation alleging materially false and misleading statements regarding Gardasil/Gardasil 9 demand in China could lead to unspecified monetary damages and corporate governance reforms.
• Patent litigation, including challenges to Keytruda and subcutaneous pembrolizumab patents, could result in significantly shortened periods of exclusivity and potential intangible asset impairment charges if adverse outcomes occur.

Future Outlook

The company anticipates that global healthcare cost containment efforts, including changes from the U.S. Inflation Reduction Act (IRA) and potential tariffs, will continue to negatively affect sales and profits. Specifically, Januvia, Janumet, and Janumet XR are expected to face significant sales declines in the U.S. from 2026 due to patent expiries and IRA price setting. The 2025 Restructuring Program is expected to be largely completed by the end of 2027, with certain manufacturing actions extending to the end of 2029, aiming for approximately $1.7 billion in annual cost savings by 2027. The 2024 Restructuring Program is expected to be substantially completed by the end of 2031, with cumulative annual net cost savings of approximately $750 million. The company expects to continue its pace of share repurchases for the remainder of 2025. The acquisition of Verona Pharma plc is expected to close in the fourth quarter of 2025. The company expects the impact of the global minimum tax to be approximately 2% for full year 2025. The company will not make any further Gardasil/Gardasil 9 shipments to China through at least the end of 2025 due to continued lower demand and elevated inventory levels.

Management Comments

• We are responsible for establishing and maintaining disclosure controls and procedures and internal control over financial reporting.
• We have designed such disclosure controls and procedures to ensure that material information is made known to us by others within those entities.
• We have designed such internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting.
• We evaluated the effectiveness of our disclosure controls and procedures and concluded they are effective as of June 30, 2025.
• We disclosed any material changes in internal control over financial reporting during the most recent fiscal quarter.
• We have disclosed to our auditors and audit committee all significant deficiencies and material weaknesses in internal control over financial reporting, and any fraud involving management or other employees with a significant role in internal control over financial reporting.
• The 2025 Restructuring Program is designed to position the Company for its next chapter of growth and to successfully advance its pipeline and launch new products across multiple therapeutic areas.
• We will continue to hire employees into new roles across all strategic growth areas of the business despite eliminating certain positions.
• The 2025 Restructuring Program is part of our multiyear optimization initiative anticipated to achieve $3.0 billion in annual cost savings by the end of 2027, which will be fully reinvested into strategic growth areas of the business.
• We expect the pace of share repurchases to continue at this level for the remainder of 2025.

Industry Context

Merck's performance reflects broader trends in the pharmaceutical industry, including the increasing pressure on drug pricing from government initiatives like the U.S. Inflation Reduction Act, which is impacting key revenue drivers like Januvia. The company's strategic focus on oncology, particularly with Keytruda, aligns with the industry's shift towards high-growth, innovative cancer therapies. However, the significant decline in vaccine sales, especially Gardasil in China, highlights the volatility and regional specific challenges in the vaccine market. The ongoing restructuring efforts are indicative of a wider industry trend towards optimizing operations and manufacturing footprints to enhance efficiency and adapt to evolving market dynamics and pipeline needs, particularly as new modalities emerge. The acquisition of Verona Pharma for respiratory diseases and licensing agreements for novel compounds like MK-7262 demonstrate a continued strategy of external innovation to diversify and strengthen the pipeline beyond core oncology assets, a common approach among large pharmaceutical companies to counter patent cliffs and competitive pressures.

Comparison to Industry Standards

• NA

Legal Proceedings

• Approximately 575 product liability cases are pending against Merck in various state courts related to alleged asbestos-contaminated talc in Dr. Scholls foot powder, causing mesothelioma.
• Approximately 125 product liability cases are pending against Merck in federal or state court involving Gardasil/Gardasil 9, with plaintiffs alleging various personal injuries, predominantly postural orthostatic tachycardia syndrome (POTS).
• In the Gardasil MDL, summary judgment was granted for Merck in 16 bellwether cases on implied preemption grounds, which plaintiffs have appealed to the Fourth Circuit.
• New multi-plaintiff complaints related to Gardasil/Gardasil 9 were filed in New Jersey state court, removed to federal court, and Merck has requested transfer to the Gardasil MDL.
• A Gardasil product liability trial in California state court commenced on January 28, 2025, and was adjourned to September 15, 2025, with Merck providing no financial consideration for the adjournment.
• The company's subsidiaries in China receive inquiries from various Chinese governmental agencies regarding their operations, some related to matters involving other multinational pharmaceutical companies.
• The company receives inquiries and is subject to preliminary investigation activities from competition and other governmental authorities outside the U.S., which could lead to formal proceedings and monetary fines/remedial undertakings.
• A putative class action, Cronin v. Merck & Co., Inc., et al., was filed in February 2025, alleging violations of federal securities laws due to materially false and misleading statements and omissions regarding Gardasil/Gardasil 9 demand in China.
• A derivative lawsuit, Collins v. Davis, et al., was filed in July 2025 against certain Merck officers and board members, asserting claims of Exchange Act violation, breach of fiduciary duty, waste of corporate assets, and unjust enrichment based on the same allegations as the securities class action.
• In the Zetia Antitrust Litigation, Merck Defendants reached settlements with direct purchaser and retailer plaintiffs and an indirect purchaser class in 2023.
• Insurer Plaintiffs' cases (United HealthCare, Humana, Centene, Kaiser) in the Zetia MDL were remanded to various district courts, with motions to dismiss filed and partially granted; Merck Defendants filed third-party complaints seeking indemnification.
• In patent litigation, the Federal Circuit affirmed Merck's favor regarding Bridion's patent term extension, securing U.S. exclusivity through July 27, 2026, despite settlements allowing some generics to enter in January 2026.
• Settlements with over two dozen generic companies allow their versions of Januvia and Janumet to enter the U.S. market in May 2026, and Janumet XR in July 2026, based on a later-expiring salt/polymorph patent.
• Supplementary Protection Certificates (SPCs) for Janumet expired in April 2023 for most European countries, with ongoing proceedings to determine validity and potential damages.
• Merck filed a patent infringement lawsuit in Tokyo District Court against Sawai Pharmaceuticals Co., Ltd. and Medisa Shinyaku Co., Ltd. seeking an injunction against their generic sitagliptin product.
• Merck filed a complaint against The Johns Hopkins University (JHU) concerning a joint research collaboration for Keytruda, alleging breach of contract and seeking declaratory judgment of noninfringement, while JHU counterclaimed for willful infringement of nine U.S. patents.
• The PTAB instituted review of all nine challenged JHU patents, with a final decision finding all claims of the first challenged patent unpatentable; the district court case is stayed pending PTAB outcomes.
• Halozyme, Inc. publicly alleged that its patents cover Merck's subcutaneous pembrolizumab candidate, leading Merck to file post grant review (PGR) petitions challenging validity, four of which have been instituted by the PTAB.
• Halozyme, Inc. filed a complaint in the U.S. District Court for the District of New Jersey alleging infringement by Merck's subcutaneous pembrolizumab activities of 15 patents.
• Generic companies have filed applications to sell generic versions of Lynparza, with AstraZeneca and Merck filing patent infringement lawsuits; the earliest FDA approval for generics is September 2027, with a trial expected in 2026.

Related Party Transactions

• Merck has collaborative arrangements with AstraZeneca PLC for Lynparza and Koselugo, sharing development and commercialization costs and profits equally. Merck made sales-based milestone payments aggregating $700 million to AstraZeneca in the first six months of 2025.
• Merck has a strategic collaboration with Eisai Co., Ltd. for Lenvima, jointly developing and commercializing the product and sharing applicable profits equally.
• Merck has a worldwide clinical development collaboration with Bayer AG for sGC modulators including Adempas and Verquvo, sharing development costs and profits on sales.
• Merck has a collaboration agreement with Ridgeback Biotherapeutics LP to develop and commercialize Lagevrio, with profits from the collaboration split equally.
• Merck and Daiichi Sankyo have a global development and commercialization agreement for three DXd antibody drug conjugate (ADC) candidates, sharing research and development costs and profits worldwide (excluding Japan). Merck received an upfront cash payment of $170 million from Daiichi Sankyo related to the expansion of their agreement to include gocatamig.
• Merck and Moderna, Inc. have a collaboration and license agreement to jointly develop and commercialize intismeran autogene (V940/mRNA-4157), sharing costs and profits equally.
• Merck has a global collaboration with Bristol-Myers Squibb Company (BMS) for Reblozyl, co-promoting in North America and receiving tiered royalties ranging from 20% to 24% based on sales levels. Merck pays a 22% royalty on net sales of Winrevair to BMS under a licensing agreement.

Stakeholder Impact

• Shareholders: Experienced a decrease in net income and EPS, but benefited from increased dividends and significant share repurchases, with an additional $10 billion authorization for buybacks. However, future profitability is at risk from patent expiries and IRA pricing.
• Employees: Subject to restructuring programs (2025 and 2024) that involve headcount reductions in sales, administrative, and R&D organizations, but also new hiring in strategic growth areas.
• Customers: May experience supply constraints for certain vaccines (ProQuad, Varivax) due to manufacturing delays. Benefit from new product launches (Capvaxive, Enflonsia, Winrevair) and continued availability of key oncology drugs. Face potential changes in drug pricing due to government policies like the IRA.
• Suppliers: The acquisition of WuXi Vaccines' Dundalk facility indicates a strategic move to optimize manufacturing, potentially impacting existing or future supplier relationships.
• Creditors: The company's debt profile shows a slight improvement in the total debt to total liabilities and equity ratio. Debt repayments and new debt issuances are part of ongoing financial management.

Next Steps

• Closing of the Verona Pharma plc acquisition is expected in the fourth quarter of 2025, subject to customary conditions.
• Merck will make a $300 million payment to LaNova Medicines Ltd in the third quarter of 2025 following the completion of technology transfer for MK-2010 (LM-299).
• Expert discovery in the Gardasil MDL is set to commence on September 2, 2025, with summary judgment briefing to follow.
• The Gardasil product liability case in California state court is adjourned until a new trial date of September 15, 2025.
• The PDUFA date for MK-3475A (subcutaneous pembrolizumab) is September 23, 2025.
• The PDUFA date for the supplemental BLA seeking to update the Winrevair U.S. product label is October 25, 2025.
• A continuation payment of $750 million related to raludotatug deruxtecan is due from Merck to Daiichi Sankyo in October 2025.
• The company expects to continue its pace of share repurchases for the remainder of 2025.
• The company will not make any further Gardasil/Gardasil 9 shipments to China through at least the end of 2025.
• Results from the three Phase 3 trials in the CORALreef clinical development program for MK-0616 (enlicitide decanoate) will be presented at a future scientific congress.
• Subsequent final decisions in the eight remaining PTAB proceedings challenging JHU patents related to Keytruda are expected in the fall.
• The district court stay in the Keytruda/JHU litigation is expected to continue until at least the issuance of all subsequent final decisions from the PTAB.
• The company will vigorously contest the IRS's Notices of Proposed Adjustment regarding the one-time transition tax through all available administrative and, if necessary, judicial proceedings.
• The company expects the impact of the global minimum tax to be approximately 2% for full year 2025.
• The company is currently evaluating the effects of the H.R.1 One Big Beautiful Bill Act (OBBBA) but does not expect a material tax impact.

Key Dates

Recommendation

Merck presents a mixed financial picture. While its oncology franchise, particularly Keytruda, continues to demonstrate strong growth and new product launches like Winrevair and Capvaxive show promise, the overall financial performance for Q2 and the first six months of 2025 is concerning, with significant declines in sales, net income, and cash from operations. The substantial drop in Gardasil sales due to issues in China, coupled with the impending loss of market exclusivity for Januvia/Janumet and the impact of the IRA, represent significant headwinds. The company's aggressive restructuring programs aim for future cost savings, but also incur substantial immediate costs. Ongoing legal proceedings and IRS tax disputes add uncertainty. The robust share repurchase program and dividend increases are positive for shareholders, but the underlying operational challenges and future revenue risks suggest a 'hold' recommendation. Investors should monitor the execution of restructuring, the recovery of vaccine sales in key markets, the impact of IRA pricing, and the outcomes of major legal and patent disputes.

Keywords

Pharmaceuticals, Biotechnology, Oncology, Vaccines, Animal Health, Keytruda, Gardasil, Restructuring, SEC Filing, 10-Q, Drug Pricing, Patent Litigation, Acquisitions, Clinical Trials, COPD, RSV