Merck tops estimates on Keytruda strength and narrows profit outlook, as it lowers estimated tariff hit

Merck reported third-quarter adjusted earnings of $2.58 per share and revenue of $17.28 billion, both exceeding analyst expectations, largely driven by a record $8.14 billion in Keytruda sales, up 10% year-over-year, though slightly below analyst estimates for the drug. The company narrowed its full-year profit and revenue guidance, citing factors such as lower estimated tariff costs and an amended AstraZeneca deal, while also outlining $3 billion in cost reductions by 2027 to prepare for Keytruda's 2028 patent expiration. Despite the overall beat, shares declined over 2% premarket, potentially influenced by a 24% drop in Gardasil sales due to China market issues and a sales miss for the newer drug Winrevair.

Analysis

Merck reported strong third-quarter results, with adjusted EPS of $2.58 and revenue of $17.28 billion, both exceeding Wall Street expectations of $2.35 and $16.96 billion respectively. This performance was primarily driven by its oncology blockbuster Keytruda, which achieved record sales of $8.14 billion, marking a 10% year-over-year increase, though it slightly missed analyst estimates of $8.24 billion.

Despite the earnings beat, Merck narrowed its full-year 2025 adjusted EPS guidance to $8.93-$8.98 and revenue guidance to $64.5-$65 billion. This adjustment incorporates lower estimated tariff costs and benefits from an amended AstraZeneca deal. However, the market reacted negatively, with shares falling over 2% premarket, likely due to underlying concerns.

Key product weaknesses included Gardasil sales declining 24% year-over-year to $1.75 billion due to low demand in China, and the newer lung drug Winrevair missing analyst expectations with $360 million in sales. Merck's strategic response includes a $3 billion cost reduction plan by 2027 to mitigate the revenue impact from Keytruda's patent expiration in 2028, signaling proactive management of future headwinds.

Key Decisions for Investors

• Monitor Keytruda's growth trajectory and any further updates on its patent cliff mitigation strategies, as its performance remains central to Merck's valuation.
• Assess the impact of persistent Gardasil weakness in China and Winrevair's slower-than-expected ramp-up, as these represent potential drags on future growth despite overall strong results.
• Evaluate the revised 2025 guidance for any further adjustments related to tariff costs or M&A integration, and consider the implications of the $3 billion cost-cutting initiative on long-term profitability and operational efficiency.