Merck's $10B Bet on Respiratory Growth: Navigating Tariffs and Patent Cliffs

Merck's acquisition of Verona Pharma for $10 billion marks a bold pivot toward respiratory therapies, aiming to insulate its revenue stream from the looming patent cliff of its cancer blockbuster, Keytruda. But as President Trump's proposed 200% tariffs on imported drugs loom, the deal also underscores a race to fortify supply chains and global market access. Here's why investors should pay close attention to Merck's dual strategy—and the risks still ahead.

The Acquisition: A Critical Hedge Against Keytruda's Decline

The acquisition of Verona Pharma, driven by its COPD drug Ohtuvayre® (ensifentrine), is a textbook example of portfolio diversification. Keytruda, Merck's $30 billion-a-year cash cow, faces patent expirations starting in 2028, threatening a revenue drop-off of 20–30%. Ohtuvayre, by contrast, is a first-in-class therapy combining bronchodilation and anti-inflammatory effects—a mechanism not seen in COPD treatments for two decades.

Financially, Ohtuvayre is already proving its worth: it generated $42.3 million in 2024 and $71 million in Q1 2025, with peak sales projected at $3–4 billion by the 2030s. For Merck, this represents a critical near-term revenue driver while offering long-term growth potential. The deal also strengthens its cardio-pulmonary portfolio, which includes existing COPD treatments like Winrevair and Enflonsia, creating a moat against competitors like GlaxoSmithKline and AstraZeneca.

The Tariff Threat: A Double-Edged Sword for Merck

While the Verona acquisition bolsters Merck's therapeutic pipeline, its manufacturing footprint faces existential risks from Trump's proposed tariffs. The 200% levy on imported drugs, aimed at forcing companies to shift production to the U.S., could disrupt Merck's reliance on Ireland—a critical hub for 20% of U.S. pharmaceutical imports. Ireland's $50 billion in annual drug exports to the U.S., including APIs and finished products, could trigger a cost spike if repatriated.

Merck is already moving: it has invested in U.S. facilities to localize production, but the timeline is tight. The proposed “grace period” of 18–24 months may not be enough to retool supply chains, especially for complex molecules like Keytruda or Ohtuvayre. Delays could force Merck to absorb tariffs or raise prices—a move that might backfire in a market already grappling with U.S. drug-cost inflation.

The Balance: Growth vs. Protectionism

Merck's strategy hinges on two bets:
1. Ohtuvayre's Global Appeal: COPD affects 384 million people globally, with high unmet need in regions like Asia and Europe. Ohtuvayre's novel mechanism positions it as a premium-priced asset, even in price-sensitive markets. Its pipeline extensions into bronchiectasis and asthma could further expand its reach.
2. Resilience Through Diversification: By reducing reliance on Keytruda and building a respiratory franchise, Merck reduces its exposure to patent losses. However, tariffs could negate these gains if production costs rise or supply chains fracture.

Investors should weigh these factors:
- Upside: Ohtuvayre's sales trajectory and Merck's manufacturing agility could drive a re-rating of its stock.
- Downside: A 200% tariff on Irish imports could add 10–15% to Merck's costs, squeezing margins unless prices rise further—a politically risky move.

Investment Takeaway: A Play on Resilience, with Caveats

Merck's acquisition of Verona Pharma is a compelling move to offset Keytruda's decline and capitalize on a large, underserved market. Ohtuvayre's science and sales momentum justify its premium valuation. However, the tariff threat remains a wildcard.

Recommendation:
- Buy: For investors seeking exposure to respiratory therapies with global demand, Merck's diversified pipeline and early tariff preparations make it a safer bet than rivals.
- Wait: Until clarity emerges on tariff implementation and Merck's ability to localize production cost-effectively.

In sum, Merck has positioned itself to thrive in a post-Keytruda world—but only if it can navigate the storm clouds of protectionism.

Final Note: Monitor Merck's Q3 2025 earnings for updates on Ohtuvayre's sales and tariff-related costs, as well as regulatory progress on its COPD pipeline.