Merck & Co. (MRK): Financial Resilience vs. the Keytruda Cliff

Two Numbers That Define Merck's Moment: Profit Rebound and Keytruda Concentration#

Merck closed FY2024 with $17.12 billion of net income, a dramatic reversal from $0.37 billion in 2023, even as Keytruda remained the company's single largest commercial engine — roughly $29.5 billion in 2024. That juxtaposition — a restored profit run-rate alongside acute product concentration — is the organizing risk for Merck’s next phase of capital allocation and operational strategy. The company’s FY2024 cash generation and a larger balance sheet give it options today, but Keytruda’s U.S. exclusivity cliff and policy-driven price pressure in 2028 create a discrete timeline for successful pipeline execution and strategic diversification.

FY2024 performance: profitability recovery, cash flow strength#

Merck’s FY2024 top line was $64.17 billion, a +6.74% increase versus FY2023, driven by continued oncology strength and recovery across several franchises. Operating income expanded to $20.22 billion, producing an operating margin of 31.51%. Net margin finished at 26.68%, reflecting the large swing in bottom-line items and normalization versus FY2023’s depressed net profit.

Free cash flow was a particularly notable outcome: Merck reported $18.10 billion of free cash flow in 2024, representing an FCF margin of ~28.22% (FCF / revenue). Cash at year-end climbed to $13.32 billion, up $6.41 billion from 2023, after $7.84 billion of dividends and $1.31 billion of share repurchases. The company also completed $4.09 billion of acquisitions in 2024, contributing to a measured but active M&A posture.

These figures give Merck both near-term flexibility to invest in commercialization and R&D and the capacity to sustain capital returns while pursuing bolt-on deals — a structural advantage as the company addresses Keytruda concentration risk.

(Primary financials above are taken from Merck’s FY2024 financial statements, filed Feb 25, 2025.)

Income-statement trends and the quality of the recovery#

A quick decomposition of the last four fiscal years shows how unusual 2023 was and how substantially 2024 reversed that anomaly. Revenue grew from $48.70B in 2021 to $64.17B in 2024 — a 3-year CAGR of 9.63%. Net income, however, swung from $13.05B (2021) to $0.37B (2023) then back to $17.12B (2024), driven by a combination of one-time items in 2023 and operating leverage in 2024.

Merck’s EBITDA margin recovered to 40.06% in 2024 (EBITDA $25.71B), supporting strong cash conversion: operating cash flow was $21.47B, producing the reported $18.10B of free cash flow after capital expenditures of $3.37B.

Those cash metrics suggest the earnings rebound in 2024 was not purely accounting-driven. Operating cash flow and free cash flow both surged year-over-year, supporting dividends and selective buybacks while still allowing M&A activity.

Table: Income statement snapshot (2021–2024)#

Balance-sheet and leverage: flexible but watchful#

Merck finished FY2024 with total assets of $117.11B and total stockholders’ equity of $46.31B. Total debt stood at $37.11B and net debt at $23.87B (after $13.24B of cash and cash equivalents). Using FY2024 EBITDA of $25.71B, my calculation gives a Net Debt / EBITDA of ~0.93x, indicating low leverage and substantial headroom for additional investment or repurchases if management chooses.

Note: a TTM ratio reported in some vendor outputs shows Net Debt / EBITDA of ~1.05x — a discrepancy likely driven by timing differences (TTM vs FY measures) and alternative EBITDA definitions. Where timing differs, I prioritize the FY2024 consolidated figures filed Feb 25, 2025 for clarity, but the divergence is immaterial to the broader conclusion: leverage is modest by large-cap pharma standards.

Current liquidity is adequate: total current assets were $38.78B versus current liabilities of $28.42B, yielding a calculated current ratio of 1.37x at year-end 2024. That ratio differs slightly from some vendors’ TTM current ratios (1.41x); again, timing and rounding create small variations.

Table: Balance sheet & cash-flow highlights (2021–2024)#

The strategic pivot: sequencing pipeline, M&A and cost savings against a 2028 deadline#

Merck’s strategic imperatives are plainly shaped by timing. Keytruda generated roughly $29.5 billion in 2024 and remains the company's dominant franchise. U.S. patent protection is expected to lapse in 2028, and the Inflation Reduction Act’s price-setting mechanisms also begin to bite that same year. Facing that discrete calendar, Merck is pursuing three parallel levers: accelerated pipeline commercialization, bolt-on acquisitions to diversify revenue, and a structural cost program to free up funding for launches while preserving the dividend.

The company has signaled a cost-optimization program targeting up to $3.0 billion in annual savings by end-2027, with about $1.7 billion of run-rate savings expected earlier in that timetable. Those savings are explicitly allocated to commercialization and to maintain capital returns during the transition.

Inorganic action has already been used to accelerate diversification. Merck completed the $10 billion acquisition of Verona Pharma in July 2025 (company announcement) to secure Winrevair (sotatercept) and commercial capability in pulmonary and cardiometabolic disease. Winrevair reached $1 billion cumulative sales by Q2 2025, with quarterly run-rates reported in early 2025 near $280 million in a single quarter — tangible evidence that Merck can win outside oncology when it executes.

For oncology succession, one of the clearest near-term programmatic changes is the prioritization of ADCs and targeted therapies that can either replace volume lost from Keytruda or augment new combinations. Ifinatamab deruxtecan (I-DXd), developed in partnership with Daiichi Sankyo, received FDA Breakthrough Therapy Designation for pretreated extensive-stage small cell lung cancer (ES-SCLC) in August 2025, a milestone that accelerates its regulatory path and elevates its commercialization priority. (See Merck press release and Daiichi Sankyo statement on the designation.)

Pipeline economics and the replacement challenge: how much must Merck replace?#

Quantifying the revenue replacement challenge is straightforward and sobering. If Keytruda sales move from ~$29.5B in 2024 toward an illustrative downside of $15–20B by 2030 under rapid biosimilar penetration and IRA price pressure scenarios, Merck faces a gap of $10–15B (or more) in high-margin revenue relative to today’s footprint.

Merck’s mid-term projection articulated in investor materials and echoed by analysts is that a combination of oncology succession and growth in cardiometabolic/pulmonary franchises could create multi‑$10 billion revenue offsets by the early–mid 2030s. Winrevair and other cardiometabolic assets are central to that thesis: the company projects cardiometabolic/pulmonary franchises could contribute meaningfully (management commentary and investor materials).

But a critical arithmetic point frames the investment challenge: even with robust cost savings of $3.0B, a large portion of the Keytruda gap must be filled by new product revenue and M&A. That requires timely approvals, successful launches, and durable uptake — not only clinical success but commercial execution in a crowded specialty biologics market.

Competitive dynamics: durable advantages, but crowded spaces#

Merck’s competitive strengths are clear: a deep, diversified pipeline; established commercial infrastructure; and healthy cash generation. Its oncology portfolio includes next-generation assets — ADCs (I-DXd), KRAS programs (MK-1084), and other targeted constructs — that, if approved, would compete directly with programs from Roche, BMS, AstraZeneca, Pfizer and others.

The ADC and KRAS spaces are intensely competitive, but Merck’s combination strategy (monotherapies plus rational combinations) seeks to capture revenue quickly through label-expansion and combinatorial regimens in indications where Keytruda-era combinations were standard. The Breakthrough Therapy Designation for I-DXd (Merck / Daiichi Sankyo) is an example of a clinical milestone that materially de-risks timing, although the commercial runway for any single product is still uncertain.

Outside oncology, Winrevair’s early commercial traction argues Merck can launch differentiated specialty biologics outside its historical sweet spot. That capability matters because it shortens the time to meaningful revenue diversification compared with multi‑year internal development alone.

Capital allocation: dividend sustainability, buybacks and M&A sequencing#

Merck returned $7.84B in dividends in 2024 and repurchased $1.31B of stock. With free cash flow at $18.10B, core cash generation supports current capital returns and a disciplined M&A program. The trailing twelve-month EPS (~$6.53) and the current share price near $84.79 produce a P/E of ~12.99x (price / EPS), consistent with the peer group’s mid-teens multiples but reflecting both the near-term uncertainty over Keytruda and the company’s strong cash profile.

Dividend policy appears intact: the dividend per share of $3.20 implies a payout ratio of approximately 48.99% on the latest EPS figure (3.20 / 6.53), a sustainable level given robust free cash flow. Management’s decision to preserve the dividend while pursuing M&A and cost savings signals a prioritization of shareholder income continuity.

Merck’s balance sheet flexibility — net debt under 1x EBITDA — gives it the ability to pursue larger strategic acquisitions if the right assets are priced attractively. The challenge for management is value-accretive M&A that meaningfully offsets the Keytruda gap without overpaying, and doing so while maintaining investment in high-return internal R&D.

Risks, timing and the biggest execution sensitivities#

The core risk for Merck is timing: Keytruda’s revenue cliff is a calendar risk tied to exclusivity and policy changes around 2028. If the company’s prioritized pipeline programs (ADCs, KRAS inhibitors, cardiometabolic biologics) do not secure approvals or fail to scale commercially on the timetable required, the company may face material EPS pressure in the late 2020s. Execution risks include slower-than-expected physician adoption, payer contracting headwinds, and the pace of biosimilar penetration.

Operational trade-offs also matter. The cost program (targeting up to $3.0B) must be delivered without undermining commercialization capability for the very assets expected to replace Keytruda revenue. M&A carries integration and valuation risk; the Verona transaction (July 2025) is an early proof point but not a total solution.

Finally, any unanticipated regulatory or reimbursement shifts beyond current IRA design — or more aggressive biosimilar competition in immuno-oncology — would accelerate revenue pressure in ways management may struggle to offset even with good execution.

Catalysts to watch and near-term milestones#

Several discrete events will drive investor reassessment: regulatory milestones for I-DXd and other ADCs, Winrevair quarterly sales cadence and geographic expansion, the pace and realization of the cost-savings program (Milestones in 2026–2027), and any further M&A announcements. Quarterly earnings that continue to show strong free cash flow and stable dividends will reinforce the narrative that Merck can fund its transition; conversely, any signs of slower commercialization for key pipeline assets would crystallize downside risk.

For the near term, trackable metrics include quarterly Winrevair sales, R&D spend trajectory versus the stated cost-savings allocations, and the cadence of FDA reviews and approvals for prioritized oncology assets. The I-DXd Breakthrough Therapy Designation is a positive milestone (Merck and Daiichi Sankyo press releases), but commercialization scale and timing remain the real tests.

Key takeaways#

Merck enters the late-2020s with three simultaneous advantages: robust FY2024 cash generation ($18.10B FCF), a low-leverage balance sheet (Net Debt / EBITDA ~0.93x), and a large, diversified pipeline augmented by targeted M&A. Those strengths provide meaningful optionality to invest in commercialization and defend capital returns. However, the concentrated nature of revenue around Keytruda (roughly $29.5B in 2024) creates a calendarized execution pressure: 2028 is an inflection point.

If the pipeline delivers timely approvals and Merck realizes cost savings while extracting commercial upside from assets like Winrevair and I-DXd, the company has capacity to materially narrow the Keytruda gap. If execution slips, the company will face clear EPS pressure in the late 2020s that would force harder trade-offs among dividends, buybacks and M&A.

What this means for investors#

Merck’s FY2024 results demonstrate operational and cash-flow resilience, and management has laid out a credible — if challenging — multi-prong plan to replace a meaningful portion of Keytruda revenue through pipeline launches, selective M&A and cost optimization. The balance sheet and free cash flow should allow the company to defend the dividend and fund prioritized launches over the next three years.

The critical questions investors must monitor are timing and proof points: can new launches (especially ADCs and cardiometabolic biologics) convert to sustained high-single- or low-double-digit billion-dollar franchises quickly enough to offset accelerated erosion in Keytruda revenue starting around 2028? Watch regulatory readouts for I-DXd and commercial metrics from Winrevair as the immediate evidence set.

Merck is not without risk; the company’s advantages reduce the probability of severe financial stress, but they do not eliminate sensitivity to a compressed timeline. The coming 24–36 months will determine whether Merck’s combination of R&D execution, disciplined M&A and cost savings can preserve the company’s long-term earnings trajectory.

Final synthesis#

Merck’s FY2024 scorecard is a study in resilience: restored profitability, strong cash conversion, and a low-leverage balance sheet give management the tools to execute a complex succession plan. The company’s strategy — prioritize next‑generation oncology assets, expand cardiometabolic/pulmonary franchises via bolt-on deals, and realize structural cost savings — is coherent and appropriately calibrated to the 2028 exclusivity horizon.

Yet the timetable is unforgiving. Success depends on multiple product launches and commercial wins across distinct therapeutic areas within a tight window. The next several quarters should provide critical evidence: incremental sales growth for Winrevair, milestone approvals and pivotal data for prioritized oncology assets (notably I-DXd), and transparent delivery of the announced cost-savings program. Together, those outputs will determine whether Merck’s financial resilience translates into replacement growth or merely buys time before the Keytruda-induced reallocation of revenue becomes materially evident.

(Selected factual claims on I-DXd Breakthrough Therapy Designation: see Merck press release and Daiichi Sankyo release cited in the company sources.)