Merck & Co., Inc. Q3 FY2026 earnings call

• Clinical Milestones: Positive Phase III results for SAC-TMT in endometrial cancer showed near seven-month improvement in median overall survival. Landmark Phase III data for Entismeran (mRNA vaccine) plus Keytruda demonstrated improved recurrence-free survival in melanoma.
• Regulatory Approvals: Subcutaneous Keytruda approved in Japan and China; Keytruda Plus Passive approved in Europe for bladder cancer; Wellerag Plus Lumbema approved in the U.S. for renal cell carcinoma.
• Pipeline Progress: Initiation of Phase III Core Study for Remigremig in Group 2 pulmonary hypertension. Positive Phase IIb results for Tulasocobart in hidradenitis suppurativa, advancing to Phase III.
• Commercial Execution: Strong uptake of subcutaneous Keytruda (Q-Lex) in the U.S., targeting 30-40% adoption by end of 2027. Early positive prescription trends for Lipfendra, with over 11,000 scripts in Q3.
• Strategic Focus: Continued investment in R&D and launches to de-risk long-term growth beyond Keytruda loss of exclusivity (LOE). Confidence in achieving $70 billion+ revenue opportunity by mid-2030s, potentially exceeding previous estimates due to stronger-than-expected product profiles.

Total revenue was $18.1 billion, a 5% increase (4% ex-FX). Key segment drivers included: Oncology sales of $8.6 billion (Keytruda family +6%), driven by earlier-stage cancers and metastatic indications; Vaccines and Infectious Diseases saw Gardasil sales of $2 billion (+14%) and Vaxneuvine at $263 million (+7%); Animal Health grew 3%, with companion animal sales up 6%; Other segments including Winrevair ($830 million), Ohtive ($184 million), and Lipfendra contributed to growth, though Lipfendra is in early launch stages.

• Full-Year 2026 Revenue: Raised midpoint; expected range of $66.8 to $67.3 billion (3-4% growth), including ~1 percentage point benefit from foreign exchange.
• Full-Year 2026 EPS: Raised midpoint; expected range of $2.77 to $2.82, including ~15 cents benefit from FX and a $0.12 per share charge related to the Side Branch license agreement.
• Operating Expenses: Expected between $42.4 and $42.9 billion, reflecting increased investments in pipeline and launches.
• Gross Margin: Assumed to remain approximately 81%.
• Tax Rate: Revised upward to a range of 32% to 33%.
• 2027 Outlook: Modest revenue growth expected due to generic competition (Bridion, Adempus) and Keytruda LOE headwinds (> $2 billion impact), offset by new product contributions. Operating expenses expected to grow at a mid-to-high single-digit rate.

• Loss of Exclusivity: Significant revenue headwinds anticipated post-Keytruda LOE, compounded by generic entry for Bridion and Adempus.
• Regulatory Litigation: Ongoing injunctions in Europe regarding subcutaneous Keytruda (Q-Lex) may delay launches in several major markets, though U.S. trajectory remains strong.
• Market Dynamics: Potential policy impacts in Germany affecting pricing; increased hesitancy and reduced utilization in vaccines market.
• Clinical Development Risks: Dependence on successful readouts from late-stage trials (e.g., Entismeran in other tumor types, Remigremig in Barolo trial).
• Foreign Exchange: Volatility in currency rates impacting reported financial results.

Q: How does management view the 2027 earnings trajectory given increased R&D spend?

A: CFO Caroline Litchfield stated that 2027 is an investment year with moderate top-line growth, partially offset by >$2B in generic/LOE headwinds. She confirmed that while revenues may dip initially post-LOE, earnings are expected to grow as the company invests behind its pipeline, aiming to drive long-term value creation beyond the Keytroda cliff. The company views the LOE period as a temporary 'hill' before returning to strong growth.

Q: What is the strategic approach to KRAS G12C inhibitors like Caldaracib?

A: Dr. Dean Li explained that Merck aims to displace standard chemo-immunotherapy (Keynote 189) with a chemo-free regimen using Pembrolizumab plus Caldaracib. This strategy leverages the high potency and selectivity of Caldaracib to target the dominant KRAS G12C mutation. The company is moving quickly to first-line NSCLC trials, emphasizing speed and rigor to establish leadership in this space.

Q: How confident is management in translating Chinese clinical data for global SAC-TMT programs?

A: President Dean Li expressed high confidence, noting that early-phase Chinese data from partner Kahlun provided critical signals for global trial design. He highlighted that the positive results in endometrial cancer (TROPHUSE-005) were informed by these earlier studies. Management believes this translational capability allows them to efficiently expand SAC-TMT into broader indications beyond lung and breast cancer.

Q: What is the commercial outlook for Lipfendra despite competitive pressures?

A: President Brian Ford reported strong early uptake with over 11,000 prescriptions from 6,500 prescribers in Q3. He noted that most prescriptions are coming from patients already on background lipid-lowering therapies rather than switching off PCSK9s, indicating expansion of the addressable market. While access builds gradually, management sees Lipfendra as a multi-billion dollar opportunity, expecting broad commercial coverage by 2027.

Q: Can management update the $70 billion revenue opportunity framing for the mid-2030s?

A: Chairman Rob Davis indicated that the $70 billion estimate is likely conservative and subject to upside. He cited three key factors not fully priced in: the inclusion of the Turns acquisition, growing confidence in PD-1/VEGF bispecific combinations, and a stronger-than-expected commercial profile for Entismeran. He emphasized that recent clinical successes have de-risked the pipeline significantly, supporting a potential raise in this long-term target.