Merck announced a comprehensive $3 billion cost-cutting initiative on Tuesday as the pharmaceutical giant prepares for the patent expiration of its blockbuster cancer drug Keytruda in 2028. The multi-year optimization program aims to redirect resources from mature business areas to support new growth drivers and pipeline development.
The announcement came alongside second-quarter results that showed a 2% decline in worldwide sales to $15.81 billion, marking the first time the company missed revenue expectations since April 2021. Shares fell roughly 3% in premarket trading following the earnings report.
Strategic Restructuring to Navigate Patent Cliff
"Today, we announced a multiyear optimization initiative that will redirect investment and resources from more mature areas of our business to our burgeoning array of new growth drivers, further enable the transformation of our portfolio, and drive our next chapter of productive, innovation-driven growth," said Merck CEO Rob Davis in prepared remarks for the company's earnings call.
Davis expressed confidence in the company's ability to navigate Keytruda's loss of exclusivity, describing the patent expiration "as more of a hill than a cliff, and I'm confident in our ability to grow over the long-term." His confidence increases with every new product launch, data readout, and business deal, he noted.
The restructuring program, approved in July, will eliminate certain administrative, sales, and research and development positions while continuing to hire employees in new roles across growth areas. The company will also reduce its global real estate footprint and continue to pare back its manufacturing network.
Financial Impact and Timeline
Merck expects the restructuring actions to generate approximately $1.7 billion in annual cost savings, with most benefits materializing by the end of 2027. The company anticipates pretax costs related to the restructuring program to total approximately $3 billion, with a $649 million charge already recorded in the second quarter.
The initiative also addresses challenges from President Donald Trump's planned tariffs on pharmaceuticals imported into the U.S., prompting Merck and other companies to invest billions in boosting their U.S. manufacturing footprints. The company's guidance includes a previously announced $200 million estimated impact from tariffs implemented to date.
Mixed Quarterly Performance
Merck reported net income of $4.43 billion, or $1.76 per share, for the quarter, compared with $5.46 billion, or $2.14 per share, during the year-earlier period. Excluding acquisition and restructuring costs, the company earned $2.13 per share for the second quarter.
Keytruda recorded $7.96 billion in revenue during the quarter, up 9% from the year-earlier period. The increase was driven by higher uptake for earlier-stage cancers and strong demand for metastatic cancers, which spread to other parts of the body. Analysts had expected the drug to generate $7.9 billion in sales.
Gardasil Challenges Continue
Gardasil faced significant headwinds, generating sales of $1.13 billion for the quarter, down 55% from the same period a year ago due to lower demand in China. The Chinese market represents the majority of the blockbuster HPV vaccine's international revenue.
In February, Merck announced a decision to halt shipments of Gardasil into China beginning that month and continuing through at least mid-2025. CFO Caroline Litchfield said the company will not resume shipments to China through at least the end of 2025, noting that inventories remain high and demand is still soft.
The suspension stems from competition with lower-cost domestic shots, an ongoing anti-corruption crackdown in China's health sector, and weak discretionary spending. Gardasil is not included in China's national immunization programs, requiring out-of-pocket payment.
Sales of Gardasil in the U.S. increased 2% during the second quarter, while Merck hopes the vaccine's expanded approval for men ages 9 to 26 in China will help boost future uptake.
Pipeline Progress and Manufacturing Investments
Merck's newer drug Winrevair, used to treat a rare, deadly lung condition, recorded $336 million in sales for the quarter, exceeding analyst expectations of $324.7 million.
The company's manufacturing expansion includes a $1 billion biologics plant in Wilmington, Delaware, to manufacture Keytruda, a previously announced facility in Durham, North Carolina, to produce bulk drug substance for Gardasil, and an $895 million expansion of an animal health unit in Soto, Kansas.
Updated Guidance
Merck narrowed its full-year guidance, expecting 2025 adjusted earnings between $8.87 and $8.97 per share, compared to its previous outlook of $8.82 to $8.97 per share. The company expects revenue between $64.3 billion and $65.3 billion, narrowed from previous guidance of $64.1 billion to $65.6 billion.
The outlook includes one-time charges related to license agreements with Hengrui Pharma and LaNova, but excludes the recently announced acquisition of Verona Pharma, a $10 billion takeover announced in July as part of pipeline-building efforts.
