The loss looks ugly. The strategy behind it isn't.
Merck reported a $4.24 billion net loss for Q1, tied largely to a $3.62-per-share charge from its acquisition of biotech Cidara Therapeutics. Stripping out one-time items, the company posted an adjusted loss of $1.28 per share, smaller than the $1.51 loss Wall Street had penciled in.
Revenue came in at $16.29 billion, beating analyst expectations of $15.82 billion.
Keytruda Is Still the Whole Story
Keytruda, Merck's cancer immunotherapy, brought in $8.03 billion in the quarter, up 12% from a year ago and ahead of the $7.78 billion analysts expected. The drug accounts for roughly half of Merck's total pharmaceutical revenue.
The newer injectable version of Keytruda generated $128 million in sales. That's small now, but it matters: the original IV version goes off patent in 2028, and the injectable is the bridge to keeping that revenue inside Merck.
Winrevair, a treatment for a rare and deadly lung condition, is the other bright spot. Sales hit $525 million, up 88% from a year ago, beating the $487 million analysts expected.
The Acquisition Game
The Cidara write-down isn't a problem - it's the plan. Merck has been buying biotechs aggressively to fill the gap between now and 2028, when Keytruda loses U.S. patent protection.
Cidara is developing a flu prevention drug, and other targets are getting added to the pipeline. This is what drug companies do when a top-selling drug is heading off patent: spend now, smooth the cliff later.
The accounting hit lands immediately, but the revenue (if the bets work) shows up over the next decade. Investors tend to look through these acquisition charges when the strategic logic is clear.
Merck's pharmaceutical unit grew 5% in the quarter to $14.35 billion, and its animal health division (which sells products for dogs, cats, and cattle) grew 13% to about $1.79 billion. Animal health is becoming a steadier earnings stream alongside the swings of drug launches and patent cliffs, and management called out higher demand for both livestock and companion animal products this quarter.
The Gardasil Problem
Gardasil, Merck's HPV cancer vaccine, isn't recovering. Sales fell 19% to $1.07 billion, with weak demand in China, Japan, and the U.S.
Merck halted shipments of Gardasil into China last February. The company also blamed "unfavorable public-sector purchasing patterns," meaning governments aren't ordering as much.
That's a roughly $250 million quarterly hole that needs filling, and it's not clear when or if it gets filled.
What To Watch
Merck nudged its full-year revenue range up at the low end to $65.8-$67 billion and raised its adjusted EPS outlook to $5.04-$5.16, citing both underlying business strength and foreign exchange tailwinds.
The next test is whether the buying spree starts producing late-stage drugs by the time Keytruda's patent runs out. Type 2 diabetes drugs Januvia and Janumet face generic competition later this year, which makes the post-Keytruda pipeline even more important.
The clock on 2028 is already running.
