How Merck (MRK) Makes Its Money: Oncology and Vaccine Fundamentals

Few large-cap pharmaceutical companies are as closely identified with a single product as Merck & Co. Any serious Merck stock analysis has to start with that fact and then work outward, because the company that reported $65.0 billion of worldwide sales in 2025 is also the company whose best-selling cancer medicine loses its main US patent protection in December 2028. Those two statements sit uneasily together, and the gap between them is where most of the interesting questions about the business live. This article walks through what Merck actually sells, how the most recent reported quarter looked, what management has been buying and cutting, and which numbers are worth tracking as the decade progresses.

How Merck's Revenue Is Actually Split

Merck reports in two segments. Pharmaceutical is by far the larger: full-year 2025 pharmaceutical sales were $58.1 billion, up 1% both as reported and excluding foreign exchange. Animal Health is the smaller but structurally different second business, covering vaccines and medicines for livestock and companion animals.

Within pharmaceuticals, oncology dominates. Keytruda (pembrolizumab), together with its newer subcutaneous formulation Keytruda Qlex, generated $31.7 billion in 2025, growth of 7% both nominally and excluding exchange effects. That single franchise represented roughly 55% of pharmaceutical sales for the year. Vaccines are the second pillar, with Gardasil the largest contributor, and the remainder is spread across hospital acute care, cardiometabolic and other categories.

The second quarter of 2026, reported on 4 August 2026, showed the same shape. Total worldwide sales were $16.6 billion, up 5% year on year and 4% excluding exchange movements. The Keytruda family contributed $8.4 billion of that, up 5% as reported and 4% ex-FX, driven by uptake in earlier-stage cancer settings alongside continued metastatic use. Animal Health delivered $1.8 billion, rising 5% excluding exchange impacts, with livestock sales up 6% and companion animal sales up 5%.

For anyone new to the name, that concentration is the first thing to internalize. Merck is not a diversified pharmaceutical company in the way that some peers are. It is an oncology company with a substantial vaccines business, a genuinely good animal health division, and a long tail of smaller products.

Keytruda: The Engine, and the Clock Attached to It

Keytruda is a PD-1 checkpoint inhibitor approved across a very wide range of tumor types. Its commercial strength comes from breadth: dozens of approved indications, an expanding footprint in earlier-stage disease where treatment durations are defined and patient numbers are large, and a position in combination regimens that makes it difficult to displace.

The complication is exclusivity. The US compound patent covering Keytruda is expected to expire in December 2028, with European market exclusivity expected to run to 2031. Because the franchise is so large, the arithmetic is unforgiving — a product responsible for more than half of pharmaceutical revenue cannot lose protection without a visible effect on the consolidated top line.

Merck's most concrete response has been formulation. The FDA approved Keytruda Qlex, a subcutaneous fixed combination of pembrolizumab and berahyaluronidase alfa, on 19 September 2025, covering 38 solid tumor indications already approved for the intravenous product. The commercial logic is that a subcutaneous injection administered in minutes is more convenient for patients and less infusion-chair-intensive for providers, and that patients converted before biosimilar intravenous pembrolizumab arrives may be harder to switch back.

Management has framed the opportunity as roughly 30% to 40% of eligible patients converting, a ceiling set largely by the fact that most Keytruda patients receive it in combination with chemotherapy that still requires infusion. Early evidence is measurable rather than decisive: Keytruda Qlex recorded $463 million of sales in the second quarter of 2026, helped by the establishment of a permanent reimbursement J-code in April 2026 and by growing adoption among monotherapy patients. That figure is the single most useful number to track quarter by quarter, because it is the clearest read on whether the conversion strategy is working at the pace management has described.

The Launch Portfolio Building Underneath

The other half of the response is a set of newer products intended to carry more weight as Keytruda's contribution changes. Three showed real momentum in the second quarter of 2026.

• Winrevair (sotatercept-csrk), for pulmonary arterial hypertension, recorded $588 million in the quarter, growing 75% year on year, with more than 1,800 new patients in the US receiving prescriptions during the period.
• Capvaxive, the adult pneumococcal conjugate vaccine, contributed $184 million, up 40%, driven by international launch uptake and higher US demand.
• Ohtuvayre (ensifentrine), a first-in-class maintenance treatment for chronic obstructive pulmonary disease, contributed $204 million.

Ohtuvayre did not come from Merck's own laboratories. It arrived with the acquisition of Verona Pharma, agreed at $107 per American Depositary Share for a total transaction value of approximately $10 billion and completed in October 2025. That deal is a fair illustration of Merck's approach: rather than wait for internal programs to mature on the right timetable, the company has been willing to pay for commercial-stage or near-commercial assets with long runways.

Gardasil, meanwhile, remains a large but more complicated line. Second-quarter 2026 sales were $1.2 billion, up 3%, with international markets growing 6% while the US was roughly flat as softer demand and the timing of CDC purchases were largely offset by price. The vaccine's trajectory in China has been the main swing factor in recent years, and it is worth watching as a separate story from the oncology business.

Deals, Costs and Why the Reported EPS Looks Odd

A newcomer glancing at the second quarter of 2026 would see a GAAP loss per share of $0.54 and a non-GAAP loss per share of $0.13 and reasonably wonder what went wrong. The answer is a single accounting event rather than a deterioration in trading. Merck completed the acquisition of Terns Pharmaceuticals in May 2026, paying $53.00 per share for equity value of approximately $6.7 billion, and booked the upfront cost as a research and development charge. Reported figures put that one-time charge at roughly $5.7 billion, or $2.31 per share.

The asset acquired is MK-4208 (formerly TERN-701), an investigational oral allosteric BCR::ABL1 tyrosine kinase inhibitor for Philadelphia chromosome-positive chronic myeloid leukemia, which has received Breakthrough Therapy Designation from the FDA. It is a hematology asset in a company whose oncology strength has been in solid tumors, and it is squarely a post-2028 bet.

The same charge runs through full-year guidance, which Merck raised and narrowed alongside the second-quarter results. The company now expects 2026 revenue of $66.3 billion to $67.3 billion, growth of 2% to 4% including roughly one percentage point of foreign exchange benefit at mid-July rates. Non-GAAP earnings per share guidance is $2.66 to $2.76 — a range that still carries the $2.31 Terns charge inside it. Adding that charge back implies underlying earnings of roughly $4.97 to $5.07 per share, which is the figure to hold in mind when comparing the company against its own history. Gross margin is assumed at approximately 81%, and operating expenses at $42.0 billion to $42.7 billion, a range that includes the Terns upfront charge and further investment to advance the program.

Running alongside the deal-making is a cost program. Merck has committed to approximately $3 billion of annual savings by the end of 2027, with around 6,000 roles affected globally across administrative, sales and research functions, plus a reduction in real estate. The timing is deliberate: the program completes a year before Keytruda's US patent expiry, and management has said the savings are intended for reinvestment rather than pure margin capture.

Balance Sheet, Cash Flow and the Dividend

Two large acquisitions inside a year have consequences. The carrying value of loans payable and long-term debt, including the current portion, stood at $53.9 billion at 30 June 2026. Against that, cash generation has been strong: cash provided by operating activities was $9.3 billion in the first six months of 2026, compared with $5.8 billion in the first six months of 2025.

The dividend has been steady through all of this. Merck declared a quarterly dividend of $0.85 per share in each quarter of 2026, an annualized rate of $3.40. Measured against the underlying earnings figure implied by guidance once the Terns charge is added back — roughly $4.97 to $5.07 — that represents a payout in the region of two-thirds of earnings, with the headline GAAP and non-GAAP figures temporarily distorted by the acquisition accounting. Cash flow rather than reported EPS is the more useful cover test in a year like this one.

Any Merck stock analysis that stops at the income statement will therefore miss part of the picture. The question that matters over the next three years is whether operating cash flow holds up well enough to fund the dividend, continued business development and the reinvestment the cost program is meant to enable, all at the same time.

Risks and What Would Change the Picture

The risks are reasonably well defined, which is itself unusual.

• Concentration. A franchise producing $31.7 billion a year and losing US protection in December 2028 is the dominant variable. Nothing currently in the portfolio replaces it on a like-for-like basis.
• Conversion execution. If subcutaneous uptake stalls well short of the 30% to 40% band management has described, the defensive value of Keytruda Qlex shrinks accordingly.
• Pipeline binary risk. Assets such as MK-4208 are early enough that clinical or regulatory disappointment is a live possibility, and $6.7 billion has already been expensed against that possibility.
• Vaccine demand and policy. Gardasil's regional demand patterns, CDC purchase timing and the wider policy environment for vaccines all introduce volatility that has little to do with oncology.
• Deal-driven leverage. With $53.9 billion of debt on the books at the half-year, further large acquisitions come with a rising financing cost attached.

Merck is not alone in facing a concentrated exclusivity event — Bristol Myers Squibb (BMY) and Pfizer (PFE) have both navigated their own cliffs, with varying success — and the comparison is instructive precisely because the outcomes have differed so much depending on what was in place beforehand. Merck's partnership with Moderna (MRNA) on individualized neoantigen therapy in melanoma, which combines an mRNA candidate with pembrolizumab, is one of the more visible attempts to extend the franchise's relevance beyond the molecule itself.

What to Watch from Here

Merck heads into the second half of 2026 with rising revenue, a raised guidance range, a portfolio of launches that are growing quickly from small bases, and a well-flagged patent event roughly two years out. Those facts pull in different directions, and reasonable investors weigh them differently.

Four things would meaningfully change the picture. First, the quarterly trajectory of Keytruda Qlex sales relative to the stated 30% to 40% conversion ambition. Second, whether Winrevair, Capvaxive and Ohtuvayre continue compounding at anything like their current rates, since together they need to become a material revenue block rather than a rounding item. Third, evidence on MK-4208 and the rest of the post-2028 pipeline. Fourth, whether operating cash flow — $9.3 billion in the first half of 2026 — remains robust enough to carry the $3.40 annualized dividend, the $53.9 billion debt load and continued business development simultaneously.

Those are the measurable items. Everything else in the Merck story between now and December 2028 is commentary on how they resolve.