Merck's higher outlook leans on early U.S. purchases and a lower tax rate

Merck & Co. sold $18.1 billion of medicines and vaccines in the September 2026 quarter, 4.7% more than a year earlier, and raised its sales and earnings guidance for the year. For a company whose biggest product, the cancer immunotherapy KEYTRUDA, is heading toward the end of its main U.S. patent protection, each raise to the forecast matters. Two parts of this one, though, come from timing and tax rather than from more demand: purchases pulled into the quarter, and a lower tax rate.

About $550 million of the quarter's sales came from the timing of U.S. customers' purchases. Caroline Litchfield, the chief financial officer, broke it down on the call: the KEYTRUDA and WINREVAIR portions are expected to reverse before the year ends, and most of the vaccine portion, chiefly the HPV vaccine GARDASIL, next year, when $250 million comes out. Without the $550 million, sales grew about 1.5% on the reported year-ago base, calculated from the reported figures. That overstates the slowdown somewhat, because the year-ago quarter carried a smaller timing benefit of its own, which management sized in August; the underlying rate sits between that figure and the reported one.

The guidance shows where the reversal lands. Subtract the nine months of sales already reported from the full-year range and the last three months left over are between 0.5% and 3.5% smaller than a year earlier, by our calculation from the guided range. Part of that is the timing gain unwinding. Part is older drugs losing sales to generic copies: the anaesthesia drug BRIDION and the diabetes pills JANUVIA and JANUMET together sold $539 million less than a year earlier, close to the size of the timing gain. Some of it may be caution; measured against the previous guide, the company has raised its sales range at each of its three updates since February.

Earnings follow the same pattern. Merck lifted its forecast for adjusted earnings per share, the non-GAAP measure it guides on, while cutting the tax rate it expects for the year by three percentage points. A rough reconstruction from the company's guided sales, gross margin, expenses and share count puts those three points at about 12 cents a share. The forecast rose about 8.5 cents at the midpoint, but only after absorbing a new charge of about the same size for the SciBrunch licence; set that aside and it rose about 20 cents, so the lower tax rate accounts for more than half of the underlying increase, calculated from the guided figures. The quarter looked similar: adjusted earnings per share fell from a year earlier despite the timing gain and a tax rate of 10.9%, which the company put down to one-off tax items.

The year's reported figure is also weighed down by three large charges for acquired drug candidates, from the Cidara and Terns acquisitions and a license with SciBrunch, all included in the forecast. Adding the company's own per-share figures for those charges back to the midpoint, and doing the same for the smaller charges in last year's result, leaves adjusted earnings 3.6% below last year's, calculated from the release figures, in a year when sales are guided higher. Interest is part of the gap. Other expense rose to $420 million in the quarter from $106 million a year earlier, mainly because of higher net interest expense, after the company's debt rose through the acquisitions.

Management also outlined next year. Ms Litchfield expects moderate sales growth, with new launches and the animal-health business partly offset by more than $2 billion of sales lost to generics on BRIDION, the JANUVIA family and the lung-pressure drug Adempas, while underlying operating expenses rise at a mid- to high single-digit rate. She called it "another year of investment". Her case is that this spending builds the business that follows KEYTRUDA, and she said she expects earnings to grow as the patent expiry approaches.

The pipeline has dates attached. The U.S. regulator accepted Merck's application for sac-TMT in previously treated endometrial cancer in October and set a decision date of 15 June 2027, though the company said it hopes for approval sooner.