Merck & Co., Inc. (MRK) Earnings

Management highlights

### Strategic Progress and Portfolio Transformation - The company is on track to deliver on its stated goal of unlocking over $70 billion in commercial opportunity from more than 20 new products, which is expected to transform the product portfolio and drive long-term growth into the next decade. Clinical milestones to de-risk this opportunity have been achieved ahead of schedule. - As of Q2 2026, Merck is substantially stronger, more diversified, and better positioned for sustainable growth than it was five years prior when the current strategic plan was launched, anchored by maximizing Keytruda's potential, expanding oncology leadership, and building new growth drivers across therapeutic areas. - Capital allocation strategy remains unchanged: prioritizing growth investments (new product launches, pipeline), maintaining commitment to growing dividends over time, prioritizing science-driven business development, and targeting ~$3 billion in share repurchases in 2026 while maintaining an investment-grade credit rating. ### Clinical and Regulatory Milestones - Cardiometabolic: FDA approved Lipvendra, the first and only oral PCSK9 inhibitor for LDL cholesterol reduction in adults with hypercholesterolemia, approved via the FDA's accelerated National Priority Voucher process. Additional regulatory reviews are ongoing in the EU and China, and two fixed-dose combinations (with rosuvastatin, and with MK7262 oral LP(a) inhibitor) are in active development. - Oncology: Multiple new Keytruda indications were approved, bringing the total number of earlier-stage Keytruda-based regimen indications to 13. Positive top-line phase 3 results were reported for SAC-TMT (trope-2 directed ADC) in advanced/recurrent endometrial cancer, the first readout from the 17-trial global TROFUSE development program. The acquisition of Terns Pharmaceuticals completed during the quarter, adding late-stage CML candidate MK4208 to the hematology pipeline. - Immunology: Positive phase 3 top-line induction results were reported for Teliso-Keybart (Tulasocobar, anti-TL1A) in ulcerative colitis. A phase 2 study in hidradenitis suppurativa met all primary and key secondary endpoints, while a phase 2 study in SSC-ILD did not meet its primary endpoint. - HIV: Positive phase 3 results were reported for an investigational once-weekly oral Ferslatravir + Lenacapavir combination for virologically suppressed adults, and the once-daily Invenzo launched during the quarter. A phase 3 program is ongoing for Alimantravir, an investigational once-monthly oral HIV PrEP candidate, with pre-approval access plans already announced. - Infectious Disease: Enrollment for the phase 3 study of MK1406, a long-acting strain-agnostic influenza prevention antiviral, completed in the southern hemisphere, and the study will continue through a second northern hemisphere flu season to support a stronger global regulatory submission, with potential approval targeted for 2029.

Guidance

Management raised and narrowed full-year 2026 non-GAAP guidance compared to prior estimates: - Full-year total revenue guidance is revised to $66.3 billion to $67.3 billion, representing 2% to 4% year-over-year growth, including ~1 percentage point of positive foreign exchange impact based on mid-July exchange rates. - Gross margin is now expected to be approximately 81%, down from prior guidance due to higher inventory reserves. - Operating expenses are expected to be between $42 billion and $42.7 billion, including the $5.8 billion upfront charge for the Terns Pharmaceuticals acquisition and investment to advance MK4208; guidance does not assume additional large business development transactions. - Other expense (including Terns acquisition financing costs) is expected to be approximately $1.4 billion. - Full-year effective tax rate is expected to be 35% to 36%, reflecting the non-tax-deductible one-time Terns acquisition charge. - Non-GAAP EPS guidance is $2.66 to $2.76 (midpoint of $2.71), including a $2.31 per share one-time acquisition charge, ~12 cents per share in ongoing MK4208 development and financing costs, and ~15 cents per share of positive foreign exchange impact. - Key second half 2026 expectations: Q3 O2vare sales will be impacted by unwinding Q2 2026 specialty pharmacy purchase timing, with accelerated growth expected in 2027; U.S. Keytruda year-over-year growth will moderate as peak penetration is reached in key indications, plus the $250 million Q3 2025 wholesaler purchase timing benefit will not repeat in 2026; Vibridion U.S. sales will decline slower than previously expected due to lower-than-anticipated generic competition; second half 2026 other revenue will be significantly higher than the second half of 2025, driven by the revenue hedging program and an expected fourth quarter outlicense milestone receipt.

Segment performance

Total company Q2 2026 revenues were $16.6 billion, a 5% increase overall (4% ex-foreign exchange). - Oncology: Keytruda (including Keytruda Culex) sales grew 4% to $8.4 billion, accounting for 50.6% of total revenue. Keytruda Culex sales specifically reached $463 million. Wellerig sales grew 67% to $271 million. Gardasil sales increased 3% to $1.2 billion (7.2% of total revenue). Capvaxiv sales grew 40% to $184 million. New HIV product Invenzo launched during the quarter with early encouraging adoption. - Cardiometabolic and Respiratory: WinRiver sales grew 75% to $588 million (3.5% of total revenue). O2vare sales were $204 million, supported by stable prescription demand and timing of specialty pharmacy purchases. - Animal Health: Total sales grew 5%. Livestock sales grew 6% driven by higher ruminant and poultry product demand, while companion animal sales grew 5% supported by new product launches. Animal Health accounts for approximately 10% of total company revenue.

Risks & headwinds

- Forward-looking statements are inherently subject to risks and uncertainties, and actual results may differ materially from projections if underlying management assumptions prove inaccurate. Key risks are detailed in the company's 2025 10-K Item 1A risk factor disclosures. - U.S. Keytruda growth will moderate as the product reaches peak penetration across multiple key indications, creating headwinds for year-over-year growth in the second half of 2026. - The phase 2 study of Tulasocobar in SSC-ILD did not meet its primary endpoint, though management notes this is a challenging refractory disease with no approved anti-cytokine treatments, and the negative result does not invalidate the overall immunofibrosis targeting hypothesis for the asset. - Launch take-up for new products including Lipvendra is expected to be gradual as broad reimbursement and access is established, and it will take time to drive adoption in the large, underpenetrated primary care setting for lipid management.

Analyst Q&A

• Q: Given the positive SAC-TMT signal across all PD-L1 expression levels from partner data, will Merck run a broad SAC-TMT + Keytruda trial head-to-head against the current standard Keynote 189 regimen in first-line non-small cell lung cancer, and can SAC-TMT be combined with other IO agents? /

  A: Management confirms that a trial against the Keynote 189 standard of care is planned. SAC-TMT is viewed as a cornerstone ADC, and after the positive endometrial cancer readout that validates the development strategy, the company will evaluate both Keytruda and other IO agents (including its own MK2010) for combinations in lung cancer. Trials are being advanced quickly with seamless phase 2 to phase 3 designs.

• Q: With one positive phase 3 Tulasocobar readout in ulcerative colitis and a negative phase 2 in SSC-ILD, how should we understand the fibrosis targeting hypothesis and outlook for Crohn's disease? /

  A: Management notes that the negative SSC-ILD result came in a very challenging, refractory disease with no history of any approved anti-cytokine treatments. The placebo arm showed unexpected lack of progression, making it hard to demonstrate treatment benefit, so the result does not invalidate the broader immunofibrosis targeting hypothesis. The company remains on track to advance the asset in Crohn's disease, where a clear clinical signal exists.

• Q: What is your outlook for Merck's earnings profile during the Keytruda loss of exclusivity transition period between 2028 and the early 2030s? /

  A: Management reaffirms prior guidance that LOE will be a shallow hill rather than a cliff, with a small expected dip in earnings followed by a fast return to growth. On a non-risk-adjusted basis, the company still aspires to grow through the LOE period, driven by the $70 billion in new product opportunity that has de-risked faster than expected to date.

• Q: Why did Merck add an extra northern hemisphere flu season to the MK1406 (influenza prevention) phase 3 trial, and does this reflect low confidence in existing data? /

  A: The change is not driven by low confidence in MK1406 or negative early data. The extension enables a more robust regulatory filing, allows collection of data on diverse viral strains and subgroups, adds the key secondary endpoint of all-cause hospitalization that strengthens the value proposition for global regulators, and aligns with the existing 2029 launch timeline (CMC work to reduce doses from three to two is still the rate-limiting step for launch).

• Q: What is the biggest risk to hitting the $70 billion new product commercial opportunity, and which programs have increased confidence in the past six months? /

  A: Management states confidence is actually higher than it was in January 2026, because multiple key programs (SAC-TMT, IDXD, Tulasocobar) delivered positive readouts much faster than expected, and Lipvendra was approved several months ahead of expectations. With multiple large programs already clinically de-risked and launched products off to strong starts, management does not see major near-term risks to the opportunity at this time.