Merck’s Latest Move: Why the Verona Deal Still Leaves Questions

Merck’s latest acquisition announcement sends a clear message about its urgency to address the looming Keytruda patent cliff. The pharmaceutical giant has agreed to purchase COPD drugmaker Verona Pharma for $10 billion, adding another potential blockbuster to its growing portfolio of post-Keytruda assets.

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The Verona Deal: What Merck Gets

Verona Pharma’s crown jewel is Ohtuvayre, an inhaled drug for chronic obstructive pulmonary disease that received FDA approval in June 2024. With projected peak annual sales of $4 billion, the drug represents a meaningful addition to Merck’s revenue diversification strategy. The acquisition comes as no surprise given our previous analysis highlighting Merck’s desperate need to address the Keytruda patent cliff arriving in 2028. Separately, see – ProKidney: What’s Happening With PROK Stock?

The Math Still Doesn’t Add Up

While this acquisition represents a step in the right direction, it’s clearly not enough to solve Merck’s fundamental challenge. The company faces a potential $15-20 billion erosion of Keytruda’s sales once biosimilar competition enters the market. Even if Ohtuvayre reaches its peak sales projection, this acquisition will likely deliver only $3-4 billion in annual revenue contribution, covering roughly 20% of the anticipated Keytruda decline.

The Bigger Picture

This deal fits into Merck’s broader diversification strategy, which includes the promising Winrevair for pulmonary arterial hypertension and a robust pipeline of 20 potential blockbuster drugs with $50 billion in combined potential. The company has demonstrated its willingness to deploy capital aggressively, following previous acquisitions like the $11.5 billion Acceleron purchase and the $680 million Harpoon Therapeutics deal.

However, the cumulative impact of these moves still appears insufficient to fully offset Keytruda’s eventual decline. While Merck has assembled a solid pipeline and initiated new product launches, the timeline remains compressed and the revenue gap substantial.

The Investment Reality

For Merck stock to see meaningful growth, the company needs to convince investors that it has a comprehensive solution to not only bridge the Keytruda biosimilar competition impact but to deliver sales growth even after the patent expiry. That level of confidence doesn’t seem to be materializing yet. For perspective, Merck stock is down 16% year-to-date, underperforming the broader S&P 500 index, which is up 7%, and some of its peers like Johnson & Johnson and AbbVie, both up 6%

The Verona Pharma acquisition represents progress, but it also highlights the magnitude of Merck’s challenge. At $10 billion for a drug with $4 billion peak sales potential, the company is paying premium prices for assets that provide only partial solutions to a massive revenue hole.

Looking Forward

Merck’s acquisition strategy demonstrates management’s awareness of the Keytruda cliff and their commitment to addressing it. However, the company will need several more deals of similar magnitude, successful pipeline execution, and perhaps some degree of market expansion to fully replace Keytruda’s contribution. Until investors see a clearer path to post-2028 growth, Merck’s valuation will likely remain under pressure despite these strategic moves. For perspective, at its current level of around $85, MRK stock is trading at a little under 11 times its trailing adjusted earnings of $7.79 per share. This is lower than the stock’s historical average price-to-earnings ratio of around 15 times. Of course, other factors are at play here, including slowing Gardasil sales in China. Also, see – Merck’s Valuation Ratios.

Overall, the race against the 2028 patent cliff continues, and while Merck is running hard, it’s not yet clear whether the company can cross the finish line with its growth story intact. Merck’s heavy reliance on Keytruda is a significant concern for investors, as nearly half of the company’s total sales come from this single drug. It’s precisely why sector diversification is a key factor we consider for our Trefis High Quality (HQ) portfolio. This strategic focus on ensuring a healthy mix of companies across sectors has enabled the HQ portfolio to outperform the S&P 500, achieving returns greater than 91% since its inception.

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