Merck Unveils Cost-Cutting Plan: Can it Create Long-Term Value?

Along with its second-quarter results on July 29, Merck MRK announced a new multi-year optimization initiative, which is expected to save $3 billion in annual costs by the end of 2027.As part of this restructuring initiative, the company is looking to cut certain administrative, sales, and research and development (R&D) jobs and reduce its global real estate footprint. Merck plans to reinvest these savings into higher-growth areas of its pipeline development and broaden its long-term product portfolio.The re-investments from the restructuring savings can be viewed as part of Merck’s ongoing effort to diversify its business and grow its revenue base, which currently remains heavily dependent on its blockbuster PD-L1 inhibitor, Keytruda. Importantly, the restructuring will be completed by the end of 2027, a year before Keytruda loses patent exclusivity in the United States.Keytruda alone accounts for around 50% of MRK’s pharmaceutical sales. The drug generated sales worth $7.96 billion in the second quarter of 2025, up 9% year over year.Merck is also seeing a decline in sales of Gardasil, its second-largest product, a vaccine designed to prevent certain cancers caused by human papillomavirus (HPV). Gardasil sales plunged 55% in the second quarter of 2025 to $1.13 billion, mainly due to lower demand in China as well as the timing of public-sector purchases in certain international markets.To counter the ongoing challenges and the upcoming patent loss for Keytruda, Merck is also actively seeking mergers and acquisitions (M&A) deals in recent times. Merck’s phase III pipeline has almost tripled since 2021, supported by in-house pipeline progress as well as the addition of candidates through M&A deals. The company is now positioned to launch around 20 new vaccines and drugs over the next few years, with many having blockbuster potential.MRK Pins Hopes on Recent M&A Deals & New Drug ApprovalsIn early July, Merck announced a definitive agreement to acquire Verona Pharma VRNA for approximately $10 billion. The transaction is expected to be closed in the fourth quarter of 2025.The deal will add Verona’s Ohtuvayre, approved for the maintenance treatment of chronic obstructive pulmonary disease, to MRK’s portfolio. The addition of VRNA’s Ohtuvayre is likely to strengthen Merck’s cardio-pulmonary pipeline and portfolio as the drug’s differentiated profile provides a significant edge over its competitors.Merck also struck several multi-billion-dollar deals with Chinese biotechs such as Hansoh Pharma, LaNova Medicines and Hengrui Pharma in late 2024 to diversify its business and build a product portfolio across multiple therapeutic areas.Merck is also pinning hopes on its new 21-valent pneumococcal conjugate vaccine, Capvaxive, and pulmonary arterial hypertension (PAH) drug, Winrevair, to boost its top line and drive long-term growth, especially after Keytruda loses exclusivity.Capvaxive generated sales worth $129 million in the second quarter of 2025, up 20.6% on a sequential basis, while Winrevair generated sales of $336 million, up 20% sequentially. Per management, cumulative net sales of Winrevair have already reached the $1 billion mark since its approval, reflecting strong uptake already.Given Merck’s robust pipeline and promising product portfolio, bolstered by recent M&A deals, it remains to be seen whether the cost-cutting initiative will support a sustainable turnaround or merely serve as a short-term fix.We note that Merck is not the only company to undertake a significant cost-cutting effort in recent times.Earlier this year, drug giant Pfizer PFE undertook a cost-cutting measure and internal restructuring aimed at delivering savings of $7.7 billion by the end of 2027. PFE’s significant cost reduction and efforts to improve R&D productivity measures are likely to drive profit and long-term growth.Previously, Bristol Myers BMY undertook a strategic productivity initiative to drive around $1.5 billion in cost savings by the end of 2025 (a majority of which has already been achieved). In addition, BMY identified an additional $2 billion in savings (approximately $1 billion to be realized in 2025 and the remainder by the end of 2027).MRK's Price Performance, Valuation and EstimatesYear to date, shares of Merck have lost 16.9% against the industry’s increase of 1%.Image Source: Zacks Investment ResearchFrom a valuation standpoint, Merck appears attractive relative to the industry. Going by the price/earnings ratio, the company’s shares currently trade at 8.87 forward earnings, lower than 15.11 for the industry and its 5-year mean of 12.80.Image Source: Zacks Investment ResearchThe Zacks Consensus Estimate for 2025 earnings has declined from $8.93 per share to $8.87, while the same for 2026 has decreased from $9.74 to $9.64 over the past 60 days.Image Source: Zacks Investment ResearchMRK's Zacks RankMerck currently has a Zacks Rank #3 (Hold). 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(MRK): Free Stock Analysis Report Verona Pharma PLC American Depositary Share (VRNA): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks