Merck's Guidance Reset: A Market Consensus Error on the 2026 Outlook

Merck's stock drop was a textbook case of "sell the news." The company delivered a quarter that met Wall Street's expectations, but the market's focus was on what was priced in for next year. The result was a classic guidance reset that shattered the consensus view.

The fourth quarter itself was solid. Merck reported adjusted earnings of $2.04 per share, matching analyst forecasts. Revenue of $16.4 billion also slightly beat the $16.02 billion Street estimate. This beat was powered by strength in oncology and animal health, with the flagship drug KEYTRUDA contributing $8.37 billion in sales. In isolation, this was a good report.

Yet the stock fell because the market was looking ahead. The company's 2026 EPS guidance of $5.00 to $5.15 per share landed far below the $5.27 analyst consensus. Revenue guidance for next year, between $65.5 billion and $67.0 billion, also came in below the $67.6 billion average estimate. This gap between the whisper number and the print was the primary catalyst.

The guidance reset was driven by tangible headwinds that had been underappreciated. CEO Rob Davis pointed directly to the disconnect, citing the loss of patent exclusivity on diabetes drugs Januvia and Janumet and the impact of the Inflation Reduction Act's Medicare price setting. These legacy product declines, combined with a fading COVID-19 treatment, were expected to pressure the top and bottom lines more than the Street had modeled. The company's own cost-cutting plan of $3 billion by 2027 underscores the need to offset these losses.

The bottom line is that the market had priced in a smoother 2026. The solid Q4 beat was already in the price. What wasn't priced in was the magnitude of the near-term headwinds. When the guidance reset confirmed those pressures, the stock's premarket decline was a market consensus error in real time.

The Guidance Reset: What Was Priced In vs. What's New

The lowered 2026 outlook wasn't a surprise in its broad strokes, but the specific drivers revealed a gap between what was known and what was fully priced in. The market consensus had baked in a smoother transition, but Merck's guidance reset confirmed that near-term headwinds are sharper and more concentrated than expected.

First, the guidance includes a significant one-time charge that directly contributed to the EPS shortfall. The company's projection of $5.00 to $5.15 per share includes a one-time charge of roughly $9 billion, or around $3.65 per share, related to the acquisition of Cidara Therapeutics. This is a known accounting item, but its magnitude-nearly $4 per share-was a material drag that analysts had to now explicitly factor into their models, adding to the overall guidance reset.

More critical were the tangible pressures from legacy products losing patent protection. CEO Rob Davis pointed directly to the disconnect, citing the loss of exclusivity on diabetes drugs Januvia and related medicines Janumet and Janumet XR, as well as the surgical drug Bridion. While analysts expected sales declines from these products, the company's guidance suggests the impact will be "harder than analysts are projecting." This is the core of the expectation gap: the market had modeled a gradual fade, but the new outlook implies a steeper near-term revenue pressure from these legacy franchises.

Finally, there is the known but now explicitly priced risk of Keytruda itself. The company has long dreaded 2028 for the U.S. patent expiration, but the guidance confirms a new, near-term catalyst. Merck expects the U.S. government to select Keytruda for the Inflation Reduction Act's "government price setting" process in 2026, with negotiated prices taking effect in January 2028. The company's own SEC filing states "U.S. sales of Keytruda will decline after that time." This dual threat-a patent cliff and mandated price cuts-was a known structural risk, but the guidance reset explicitly priced it into the 2026 outlook, confirming it will start to bite sooner than some may have anticipated.

The bottom line is that the guidance reset clarified the timeline and severity of known headwinds. The one-time charge was a new, discrete hit. The legacy product declines were a sharper-than-expected drag. And the Keytruda pressure was a known risk now being explicitly factored in for 2026. Together, they created a new, lower baseline that the market consensus had not yet accepted.

Strategic Response: What's Already Priced In?

Merck's proactive measures are now the central question for investors. The market has already priced in the headwinds, but the credibility and timing of the company's strategic response will determine whether the current low expectations are too pessimistic.

The most visible move is the "product hop" to Keytruda Qlex. The company has already launched this subcutaneous formulation, which is protected by newer patents. The goal is to shift patients to this newer, patent-protected version before IV biosimilars arrive. Industry analysts see this as a strategic move to help cushion the impact of Keytruda's anticipated patent expiration in 2028. The plan is to lock in market share for the injectable version, potentially stabilizing combined Keytruda sales post-2028. This is a direct, known response to a known threat, and it is now part of the narrative.

However, the market's view on this strategy is mixed. Some see it as a legitimate effort to extend the drug's lifecycle, while others, like Bloomberg Law, label it a brazen abuse of the patent system that delays affordable biosimilars. The sheer scale of Merck's patent thicket-nearly 300 filings and over 100 granted patents on Keytruda-suggests the company is building a formidable barrier. The market must now weigh the likelihood of this strategy succeeding against the risk of regulatory pushback or a slower-than-expected uptake of the new formulation.

Beyond the product hop, CEO Rob Davis is signaling a broader toolkit. He stated the company is "on the lookout for deals," a clear signal that M&A will be a tool to offset losses and drive future growth. This aligns with the company's recent acquisitions of Verona Pharma and Cidara Therapeutics, which are already contributing to the portfolio transformation. The market will scrutinize whether these deals are merely defensive (to fill gaps) or truly transformative (to create new growth engines).

The bottom line is that Merck's strategic response is now priced in, but its effectiveness remains uncertain. The product hop is a known, tangible plan to manage the 2028 cliff. M&A is a stated option for growth. Yet, the company's own guidance reset confirms that these efforts are needed to offset significant near-term losses. The market's current low expectations may be a rational assessment of the headwinds, but they also leave little room for error in executing this multi-pronged strategy.

Forward Scenarios: Where Expectations May Be Misaligned

The current market setup presents a clear expectation gap that could set up a reversal. The stock price appears to be pricing in a significant guidance miss, potentially overreacting to the 2026 outlook while underestimating the 2028 mitigation plan. The near-term pain from legacy product losses and the IRA is now in the price. The question for the coming months is whether the market is pricing in too much pessimism about the company's ability to manage the transition.

The first key catalyst is the 2026 IRA price-setting decision for Keytruda. The company expects the U.S. government to select the drug for the Inflation Reduction Act's "government price setting" process this year, with negotiated prices taking effect in January 2028. This decision, expected in the coming months, will provide a much clearer view of the near-term pricing pressure. The market consensus had not fully priced in this specific, near-term catalyst. A decision that confirms the company's own warning of a "harder than analysts are projecting" impact would validate the 2026 guidance reset. Conversely, any delay or less severe outcome could be a positive surprise, though the structural pressure remains.

The market's focus should now shift from the 2026 guidance gap to the execution of the product hop and the success of new launches. The strategy to shift patients to the subcutaneous formulation Keytruda Qlex is a known plan to cushion the 2028 patent cliff. Its success will be a critical watchpoint. Simultaneously, the increasing contributions from new launches in cardiometabolic and respiratory, as highlighted by CEO Rob Davis, need to ramp up quickly to offset the fading legacy portfolio. The market has priced in the headwinds; it must now price in the efficacy of the response.

The bottom line is that the expectation gap is now a forward-looking one. The stock's decline priced in the 2026 reset. The path to recovery depends on two things: the clarity provided by the IRA decision and the tangible execution of the strategic plan. If the product hop gains traction and new launches meet or exceed expectations, the market's current low view of 2026 could prove too pessimistic, setting the stage for a re-rating. For now, the setup is one of overreaction to near-term noise, with the real story still unfolding.