Merck's $10 Billion Gamble: Diversifying Beyond Keytruda's Patent Cliff with Verona Pharma's COPD Breakthrough

Pharmaceutical giant Merck (NYSE: MRK) is doubling down on diversification as it edges closer to acquiring Verona Pharma (NASDAQ: VRNA) for a reported $10 billion. The move underscores Merck's urgency to mitigate the looming risk of its star drug, Keytruda, losing patent protection in 2028—a cliff that threatens to erode nearly 40% of its current revenue. By acquiring Verona's COPD drug Ohtuvayre, Merck aims to anchor itself in a $23 billion respiratory therapeutics market, leveraging synergies in underserved patient populations and strategic valuations that analysts argue are undervalued.

Why the Acquisition Matters: Diversification Beyond Keytruda

Keytruda, a blockbuster immunotherapy for cancer, generated $14.3 billion in sales in 2024—nearly half of Merck's total pharma revenue. When its patent expires in 2028, biosimilars are expected to slash sales by 30–50%, creating a fiscal black hole. Merck's acquisition of Verona is a direct countermove: Ohtuvayre, a first-in-class inhaled dual inhibitor for COPD, targets a chronic disease affecting over 384 million people globally. With U.S. FDA approval in 2024 and a 76% reduction in severe exacerbations in clinical trials, Ohtuvayre's peak sales potential could exceed $5 billion—directly offsetting Keytruda's decline.

Valuation: A Premium Payoff for Strategic Synergy

The $10 billion price tag—valuing Verona at $107 per share, a 23% premium over its June 2025 closing price—raises questions about overvaluation. However, Merck's rationale hinges on three factors:
1. Pipeline Synergy: Merck's existing respiratory portfolio includes inhalers for asthma and chronic bronchitis, but Ohtuvayre's dual mechanism (blocking both phosphodiesterase and S1P receptors) offers a novel therapy in a crowded space.
2. Market Expansion: Verona's global regulatory submissions (EMA and UK in 2025) align with Merck's push into Europe, where Keytruda's sales are concentrated.
3. Undervalued Pipeline: Verona's trailing P/S ratio of 47x may seem high, but its forward P/S of 16x (based on $700 million 2026 sales estimates) is competitive with recent biotech deals. For context, Merck's $3 billion offer for MoonLake Immunotherapeutics (NASDAQ: MLTH) valued that company at 11x its then-market cap, despite MoonLake's lack of revenue.

The Case for Merck's Undervalued Stock

Merck's stock has lagged in 2025, down 18% year-to-date as investors brace for Keytruda's cliff. Yet the company's broader strategy—bolstered by Ohtuvayre and other acquisitions—suggests undervaluation:
- Pipeline Upside: Merck's 20 “blockbuster” candidates, including the subcutaneous Keytruda formulation, could generate $50 billion in peak sales. Analysts project 2028 revenue of $72.6 billion, just 3% below 2027 levels.
- Financial Flexibility: With $9 billion in cash and a manageable debt-to-equity ratio (72%), Merck can absorb the Verona deal while maintaining shareholder returns (4% dividend yield).
- Analyst Optimism: The $10 billion offer implies Merck sees Verona's growth potential as undervalued by the market. Verona's $7.4 billion market cap at the time of the deal announcement suggests the stock is trading at 60% of its acquisition value.

Risks and Investment Takeaways

The acquisition carries risks: regulatory delays for Ohtuvayre's global approvals, competition from rival COPD therapies like GlaxoSmithKline's Breo, and execution hurdles in Merck's sprawling pipeline. However, the strategic alignment is clear: diversifying revenue streams before Keytruda's decline and capitalizing on Merck's R&D prowess.

Investment Advice:
- Merck (MRK): A “buy” for investors seeking exposure to a diversified pharma leader. The $10 billion Verona deal and robust pipeline position MRK to outperform post-2028. Target price: $110 (40% upside from June 2025 levels).
- Verona (VRNA): A “strong buy” ahead of the deal's closure, with upside to the $107 offer price. Analysts' $112.56 target suggests further appreciation.

Conclusion: Betting on Sustainable Growth

Merck's acquisition of Verona is less about today's revenue and more about securing tomorrow's. With Ohtuvayre's COPD franchise and a pipeline rich in cardiovascular and immuno-oncology therapies, Merck is rewriting its story from a single-drug juggernaut to a diversified healthcare leader. Investors who act now—before the patent cliff reshapes valuations—could profit from a shift to sustainable growth.

The clock is ticking. Merck's $10 billion bet isn't just about COPD—it's about proving that diversification can outlast any patent cliff.