Merck cuts 2026 outlook by 43% on Gardasil plunge, margin squeeze
Pharmaceutical giant faces steep earnings decline as vaccine demand collapses in China and pandemic therapies fade
Merck & Co. delivered a stunning blow to investor confidence on Tuesday, slashing its 2026 earnings outlook by 43% compared with 2025 levels, as the pharmaceutical giant confronts collapsing vaccine sales in China, fading pandemic therapies, and mounting pressure on margins ahead of its blockbuster cancer drug's patent expiration.
The company forecast non-GAAP earnings per share of $5.00 to $5.15 for 2026, down sharply from $8.98 in 2025, according to regulatory filings. Even excluding a $3.65 per share charge related to the Cidara Therapeutics acquisition, adjusted earnings would reach only $8.65 to $8.80—still below last year's performance and well below analyst expectations of roughly $8.50 per share heading into the earnings release.
The guidance shock overshadowed better-than-expected fourth-quarter revenue of $16.4 billion, which beat Wall Street estimates ranging from $16.12 billion to $16.21 billion. However, earnings per share of $1.94 missed the consensus estimate of $2.08, missing the mark by nearly 7%.
The earnings decline reflects deepening challenges across Merck's product portfolio. Gardasil, the company's flagship human papillomavirus vaccine, suffered a catastrophic 39% plunge in full-year 2025 sales to $5.2 billion, with fourth-quarter sales dropping 34% to $1.03 billion. The collapse stemmed primarily from weakening demand in China, a market that had been a critical growth engine for the vaccine. Japanese demand also contributed to the decline, only partially offset by stronger US sales.
Pandemic-era treatments are proving equally problematic. Lagevrio, Merck's COVID-19 antiviral medication, saw sales plummet 61% in 2025 to just $380 million, with fourth-quarter revenue of $57 million representing a 53% decline from the prior year. The steep drop highlights the challenges facing pharmaceutical companies as COVID-19 transitions from pandemic to endemic status, rendering once-blockbuster treatments increasingly obsolete.
Margin pressures added to the gloom. GAAP gross margin in the fourth quarter compressed to 66.2%, down significantly from the full-year 2025 average of 74.8%. The deterioration reflects a combination of product mix shifts—away from higher-margin vaccines toward newer launches—and escalating costs from recent acquisitions.
Yet not all segments struggled. Keytruda, Merck's immuno-oncology powerhouse and the company's largest revenue generator, continued its steady ascent, climbing 7% to $31.7 billion in full-year 2025 sales. The drug generated $8.37 billion in fourth-quarter revenue alone, driven by strong uptake in earlier-stage cancer indications including triple-negative breast cancer, non-small cell lung cancer, and renal cell carcinoma. New product Winrevair, a treatment for pulmonary arterial hypertension, emerged as a bright spot, reaching $1.44 billion in sales for the year with $467 million coming in the fourth quarter.
But even Keytruda's growth casts a long shadow. The drug faces US patent expiration in 2028, with European exclusivity ending in 2031. Analysts project a steep decline in sales to $27.4 billion in 2029 from an estimated $33.7 billion in 2028—a 19% drop—with some forecasts suggesting revenue could fall below $15 billion within five years after patent loss. The looming "patent cliff" has prompted Merck to pursue a $3 billion cost-cutting initiative and expand through acquisitions, including recent deals for Harpoon Therapeutics and Cidara.
Merck's stock, which had rallied nearly 42% over the past six months to hit a 52-week high of $113.89, faced immediate pressure from the guidance reduction. Despite the dramatic earnings outlook cut, analysts have maintained a largely positive stance, with 14 firms issuing "Buy" ratings and a median price target of $120. However, those targets may face revisions as analysts digest the implications of Tuesday's announcement.
The 2026 guidance of $65.5 billion to $67.0 billion in sales represents only modest growth from 2025's $65.0 billion, underscoring the challenge Merck faces in finding its next act beyond Keytruda. The company cited stabilization in Gardasil's Chinese sales and the continued growth trajectory of Keytruda ahead of its patent expiration as key focuses for investors, but the dramatic earnings cut suggests a more prolonged period of transition than Wall Street had anticipated.
Merck's strategic pivot comes as the broader pharmaceutical industry confronts an era of patent cliffs across multiple blockbuster drugs. With Keytruda accounting for nearly half of the company's pharmaceutical revenue, finding replacement growth drivers has become an existential imperative. The company has emphasized its diverse pipeline and recent product launches, but Tuesday's guidance indicates that those bets are not yet delivering the earnings power needed to offset the structural headwinds facing its legacy portfolio.