Merck (MRK): Profit Recovery, Keytruda Risks and the Cash‑Fueled Defense of a Blockbuster

FY2024 Earnings Rebound — The Numbers That Change the Narrative#

Merck reported a swing to $17.12 billion in net income for FY2024, up a calculated +4,593.15% versus FY2023, and produced $18.1 billion of free cash flow in the same year. That magnitude of recovery followed a reset year (FY2023 net income $365 million) and reflects a rapid restoration of operating leverage: operating income rose to $20.22 billion, lifting operating margin to 31.51% from 4.91% a year earlier. At the same time, Merck ended FY2024 with $13.24 billion in cash and equivalents and reduced net debt to $23.87 billion, improving balance‑sheet optionality for capital allocation.

Those headline moves are traceable to the company filings and financial releases for FY2024: revenue climbed to $64.17 billion, gross profit to $48.98 billion, and EBITDA was $25.71 billion, according to Merck's reported financials Merck investors: Financial results. The combination of restored margins and strong cash generation gives management flexibility to pursue lifecycle defense for Keytruda, advance ADCs and novel oncology assets, continue dividends and buybacks, and pursue selective acquisitions.

Why this matters now: the scale of FY2024 profit and cash recovery materially changes Merck’s strategic options at the most consequential inflection point in the company’s recent history — the run‑up to Keytruda exclusivity expiries and intensifying competitive pressure in immuno‑oncology.

Financial Trend Synthesis: Quality of Earnings and Cash Flow Strength#

Merck’s FY2024 results are not just a headline swing in reported earnings; they show quality beneath the surface. Free cash flow grew from $9.14 billion in FY2023 to $18.1 billion in FY2024, an independent calculation of +98.00% year‑over‑year. Free cash flow was approximately 105.7% of reported net income in 2024 (18.1 / 17.13), indicating that cash generation backed the rebound rather than being driven by one‑time accounting items. Operating cash flow likewise improved to $21.47 billion in 2024 from $13.01 billion in 2023 Merck investors: Financial results.

Balance‑sheet dynamics also strengthened: net debt declined from $28.21 billion at end‑2023 to $23.87 billion at end‑2024, a calculated reduction of -15.39%. Using FY2024 EBITDA, net debt/EBITDA is approximately 0.93x (23.87 / 25.71) by our calculation — comfortably low for a large integrated pharmaceutical company and a useful metric when measuring ability to fund M&A or defend core franchises.

There are minor differences between the company’s TTM ratio disclosures and the simple year‑end calculations above — for example, TTM debt/equity and current ratio figures vary slightly because they use rolling TTM inputs. Where discrepancies arise we prioritize the raw year‑end line items reported on the balance sheet and income statement and note variance where relevant.

Income Statement and Balance Sheet (Selected Years)#

(Values from company filings; see Merck investors: Financial results.

(Data from Merck balance sheet and cash‑flow statements: Merck investors: Financial results.

Competitive Dynamics: Keytruda at the Crossroads#

Keytruda remains the single most important product in Merck’s commercial and strategic calculus. The product’s broad label expansion over the past decade turned a PD‑1 pioneer into a franchise with multibillion annual sales, and that installed base is what underpins much of Merck’s top‑line stability. But the market is now bifurcating: value accrues to both innovators who can demonstrate differentiated efficacy and to lower‑cost biosimilars once exclusivity lapses.

Late‑stage competitive data have hardened the near‑term risk set. Results from the HARMONi program and related disclosures for ivonescimab have shown efficacy differentials in advanced NSCLC that, if replicated in mature overall survival readouts and across geographies, could reallocate first‑line market share in large indications BusinessWire: Ivonescimab HARMONi NSCLC results, Daiichi Sankyo news: Ivonescimab HARMONi results. Those head‑to‑head differentials—PFS and ORR advantages reported in targeted cohorts—create a plausible pathway for competing PD‑1/PD‑L1 agents to displace Keytruda in specific high‑volume tumor types.

Concurrently, multiple biosimilar PD‑1 programs are progressing through late‑stage trials and regulatory review in key markets. The arrival of biosimilars typically compresses price and branded revenue; industry modeling commonly assumes branded biologic erosion of 30–60% within three years of biosimilar entry depending on interchangeability, formulary rules and payer behavior Biosimilars News: Keytruda biosimilars Phase III updates. Reuters and other outlets have highlighted 2028 as a watershed year for US exclusivity timelines, with secondary patents and lifecycle filings potentially extending certain protections in select jurisdictions Reuters: Merck Keytruda patent expiry forecasts.

Taken together, the threat matrix is two‑pronged: clinical displacement by novel immunotherapies in specific high‑value indications, and price/volume loss from biosimilar penetration post‑exclusivity.

Merck’s Strategic Response — Defense, Diversification, and Deployment of Cash#

Merck’s strategic response is layered and funded by the improved cash generation noted above. First, lifecycle management is front and center: the company is rolling out a subcutaneous Keytruda formulation (U.S. launch in 2025 per company announcements) to capture administration convenience, preserve prescribing inertia, and create incremental IP that can blunt immediate biosimilar substitution Merck press release: Keytruda subcutaneous launch 2025, FDA: Keytruda subcutaneous approval.

Second, Merck is accelerating diversification inside oncology via ADCs and other novel modalities. The company and partners secured Breakthrough Therapy Designation for ifinatamab deruxtecan (I‑DxD) in extensive‑stage small cell lung cancer (ES‑SCLC), and interim data have shown encouraging objective response rates that support Phase 3 validation programs Merck press release: Ifinatamab deruxtecan BTD, FDA press announcement: BTD for Ifinatamab deruxtecan. If these agents receive approvals and integrate into practice, they would create discrete revenue streams that reduce reliance on Keytruda sales.

Third, capital allocation is pragmatic: the company continued to pay a $3.20 annual dividend per share (TTM dividend data) and repurchased stock modestly, while retaining low leverage and the ability to pursue targeted M&A should strategic assets become available. Management’s demonstrated ability to convert improving operating performance into meaningful cash flow—combined with net debt/EBITDA near 0.93x by our calculation—gives Merck optionality to both invest organically and to act on inorganic opportunities.

Strategic and Financial Tradeoffs — Where the Execution Risk Lies#

Merck’s defense strategy depends on three execution vectors. The first is legal and IP strategy: extending effective exclusivity through additional patents, formulations and label expansions can delay or shrink biosimilar uptake, but litigation costs and uncertain outcomes mean this is a probabilistic defense. The second is clinical execution: if Merck’s ADCs and combination regimens deliver durable clinical benefit and favourable safety profiles in Phase 3 registrational programs, they can produce differentiated commercial footholds. The third is commercial execution and payer negotiation: even with new formulations or new drugs, pricing and formulary decisions will determine how much of Keytruda’s revenue can be preserved.

From a financial perspective, the tradeoffs are clear. Management must balance near‑term shareholder returns (dividends and buybacks) against continued R&D and targeted acquisitions to refill the pipeline. Merck’s FY2024 R&D expense remained significant — $17.94 billion — underscoring the company’s willingness to fund future growth, but that level of investment compresses operating leverage unless matched by product commercialization success Merck investors: Financial results.

Historical Context: How This Compares to Prior Cycles#

Merck’s FY2024 rebound resembles prior cycles where one or two major product swings materially changed company earnings: the firm has historically absorbed patent cliffs and reinvested in pipeline growth. The 2023 profit reset followed a period of elevated R&D (and certain one‑time items) that depressed operating income; the 2024 recovery shows the company’s capacity to re‑leverage a diversified portfolio when key products and combination strategies perform. That pattern — hit, invest, recover — is familiar in large pharma, but the scale and strategic importance of Keytruda make the coming 3–5 years uniquely consequential for Merck’s long‑term trajectory.

Forward‑Looking Considerations and Catalysts#

The principal near‑term catalysts to watch are (1) biosimilar regulatory filings and launch timelines in major markets, (2) confirmatory OS and regulatory readouts for competitors like ivonescimab in NSCLC, (3) Phase‑3 readouts for Merck’s ADC programs (e.g., IDeate‑Lung trials for ifinatamab deruxtecan), and (4) quarterly cadence of Keytruda sales and indication growth as disclosed in company earnings. Each of these items has direct top‑line implications and will materially affect revenue scenarios modeled by analysts.

Importantly, market expectations encoded in forward multiples suggest some optimism on Merck’s ability to offset erosion; forward PE estimates collected by analysts point to single‑digit forward PEs across 2025–2029 in aggregate, reflecting expectations of continued earnings power provided lifecycle strategies work. Investors should watch the pace at which Keytruda label expansions and subcutaneous uptake are reflected in the product’s revenue mix.

What This Means For Investors#

• Balance‑sheet and cash‑flow flexibility: Merck’s FY2024 cash generation and lower net debt create the firepower to defend Keytruda commercially and to fund next‑generation oncology programs without materially risking financial stability. The company’s net debt/EBITDA near 0.93x (our calc) and healthy current assets support that position.

• Keytruda is both an asset and a risk: the franchise remains central to revenue but faces credible near‑term threats on two fronts — biologic competitors showing efficacy advantages in targeted indications, and biosimilars that will press price once core exclusivities lapse around the late 2020s in the US (with secondary patents possibly extending protection in some uses). Successful lifecycle plays (SC formulation, label expansion) and early ADC approvals would materially change downside scenarios.

• Quality of earnings: the FY2024 recovery was supported by cash — free cash flow was ~105.7% of net income — which reduces the risk that 2024 was purely an accounting turn. That improves confidence in capital allocation choices but does not eliminate operational execution risk in oncology pipeline programs.

• Watch the cadence: quarterly Keytruda sales trends, regulatory decisions on biosimilars, and Phase‑3 ADC readouts are the high‑impact events that will reprice upside and downside scenarios.

Key Takeaways#

Merck delivered a decisive earnings and cash‑flow recovery in FY2024: $17.12B net income, $18.1B FCF, improved leverage and sizable R&D investment to defend and extend Keytruda's franchise. Those financial results give Merck the optionality to pursue lifecycle strategies (including the subcutaneous Keytruda launch), accelerate ADC and novel oncology programs (I‑DxD Breakthrough Therapy Designation), and manage capital returns. At the same time, the company faces concrete competitive risks from both efficacy‑differentiated rivals (ivonescimab) and emerging biosimilars. The near‑term story for investors is therefore a classic large‑cap pharma tradeoff: robust cash and strategic tools versus execution risk on clinical and legal fronts that will determine how much of Keytruda’s historic value is preserved.

Sources and Attribution#

Financial statements and balance‑sheet items cited above are from Merck’s FY2024 filings and investor disclosures Merck investors: Financial results. Competitive and program‑level citations: ivonescimab HARMONi results reported by company and partners BusinessWire: Ivonescimab HARMONi NSCLC results, Daiichi Sankyo news. Ifinatamab deruxtecan Breakthrough Therapy and related data from Merck and FDA announcements Merck press release: Ifinatamab deruxtecan BTD, FDA press announcement: BTD for Ifinatamab deruxtecan. Keytruda subcutaneous program and launch details per company releases and FDA entry Merck press release: Keytruda subcutaneous launch 2025, FDA: Keytruda subcutaneous approval. Biosimilar pipeline context from industry trackers Biosimilars News: Keytruda biosimilars Phase III updates and patent timing commentary Reuters: Merck Keytruda patent expiry forecasts.

[MRK] remains a company at the center of a pivotal industry inflection: robust cash and restored profitability provide the tools to defend a blockbuster, but the outcome will hinge on clinical readouts, patent litigation timelines, and payer behavior in the era of biosimilars. This is an active watchlist story — not a binary outcome — where each new data readout or regulatory filing will materially reshape the revenue scenarios embedded in the market’s expectations.