Merck's Q4: The Beat Was Priced In, The Guidance Wasn't

The setup for Merck's fourth-quarter report was a classic case of expectations being baked in. The whisper number, as captured by the Zacks Earnings ESP, suggested only a modest surprise was in the cards, with a positive reading of +0.33% indicating a slight beat was already anticipated. In reality, the numbers were a clean match for the consensus. The company posted adjusted earnings of $2.04 per share, exactly where analysts had landed. Revenue came in slightly stronger at $16.4 billion, topping the $16.18 billion expectation. For a moment, it looked like the market had been right all along.

Yet the stock fell premarket. This is the textbook "sell the news" dynamic. The beat was priced in; the real move was driven by the guidance reset. The forward view from management missed the Street's mark on both key metrics. For 2026, Merck projected earnings of $5.00 to $5.15 per share, well below the $5.63 analysts were expecting. Revenue guidance of $65.5 billion to $67.0 billion also came in under the consensus of $67.58 billion. The gap between the solid quarter just reported and the weaker outlook for the year ahead created the expectation gap that moved the stock lower.

The bottom line is that investors were looking past the present. The Q4 results met the whisper number, but the 2026 guidance reset the trajectory. When the future outlook disappoints, even a perfect present can trigger a sell-off.

What Was Priced In: The Drivers Behind the Beat

The Q4 beat was not a surprise; it was the baseline. The market had already priced in the strength of Merck's core franchises. The specific drivers were clear: Keytruda sales rose 7% to $8.37 billion and animal health sales jumped 8% to $1.51 billion. This operational reality was the whisper number the Street was expecting. The beat was a sandbagging result-management delivered exactly what was anticipated, leaving no room for a positive reaction.

New product launches added meaningful volume, but their scale was not yet a major priced-in driver. WINREVAIR and CAPVAXIVE contributed $1.4 billion and $759 million, respectively in the quarter. While these figures show a ramp-up, they are still small relative to the company's overall portfolio. The market's focus was on the established engines: Keytruda's steady growth and the animal health segment's expansion. These were the known quantities.

The bottom line is that the beat was expected. The market had already discounted the strength in oncology and animal health. The real story for investors was the guidance reset, which introduced new uncertainty about the future. The solid quarter just reported was the past; the priced-in future was now looking weaker.

The Guidance Reset: What Wasn't Priced In

The true expectation gap wasn't in the quarter's results. It was in the forward view. The market had priced in a smooth transition, but management's 2026 outlook revealed a more complex reality. The reset was driven by a specific set of headwinds that were not fully discounted.

First, the patent cliffs are coming into focus. The company is preparing for the loss of patent protection for several drugs later this year, including the diabetes treatments Januvia and Janumet and the surgical drug Bridion. While these aren't Keytruda-level products, their combined lower sales will pressure the top line. More critically, the guidance includes the looming patent expiration of Keytruda in 2028, which is already being factored into the strategic pivot.

Second, a major product is facing a sharp sales decline. Gardasil sales plunged 34% to $1.03 billion in the quarter, a direct result of halted shipments to China. This ongoing challenge is a tangible drag on revenue that the Street had perhaps underestimated.

The numbers show the scale of the reset. Merck's projected adjusted earnings for 2026 are between $5.00 and $5.15 per share, a range that falls well short of analyst expectations of $5.27 to $5.63. Revenue guidance of $65.5 billion to $67.0 billion also comes in under the consensus. This is a meaningful downward revision that introduces new uncertainty.

Management's response is a direct acknowledgment of this reset. The company is slashing $3 billion in costs by the end of 2027 as a strategic pivot to offset these patent-related revenue losses. This plan is already priced in as a necessary reaction, but it underscores that the future trajectory is now being shaped by these specific headwinds, not just by the strength of Keytruda and animal health. The expectation gap is now about managing a more difficult path ahead.

Valuation and Forward Scenarios

The investment case now hinges on a clear trade-off. The market has reset its expectations for near-term growth, pricing in a period of slower expansion and higher cost pressures. The full-year 2025 sales of $65.0 billion represented just a 1% increase, and the 2026 sales range of $65.5 billion to $67.0 billion implies a similarly sluggish trajectory. This is a meaningful downgrade from the prior consensus, forcing a reassessment of the long-term growth narrative.

The key uncertainty is whether Merck's portfolio transformation can offset these patent-related headwinds faster than the market now expects. The company is betting on new product launches and strategic acquisitions to build momentum. Yet, the guidance reset shows these new engines are not yet large enough to fully compensate for the coming patent losses. The market is now pricing in a period of transition where growth is being squeezed from both sides: patent cliffs on one end and the ramp-up of new products on the other.

The bottom line is that the valuation now reflects a more challenging path. The stock's reaction to the guidance miss signals that investors are discounting the near-term slowdown. The long-term story depends on execution, but the expectation gap has widened. The market is no longer assuming a smooth glide path; it is pricing in a period of deliberate, costly restructuring to navigate the patent cliffs ahead.

Catalysts and What to Watch

The market has reset its expectations for Merck. The stock's reaction to the guidance miss shows that near-term growth is now priced in as a challenge. The path forward will be determined by a few critical catalysts that will reveal whether the current valuation reflects a sustainable transition or an overreaction to near-term headwinds.

First, monitor the pace of new product contributions. The company's portfolio transformation is underway, but the scale of new launches like WINREVAIR and CAPVAXIVE is still small relative to the portfolio. Their combined contribution of $1.4 billion and $759 million in the quarter is meaningful for momentum, but it needs to accelerate to meaningfully offset the coming patent cliffs. The success of recent acquisitions, such as Verona Pharma, will be a key indicator of whether the company can rapidly integrate and scale new assets to fill the pipeline gap.

Second, watch for any updates on the China supply situation for Gardasil and the timeline for generic competition. The 34% plunge in Gardasil sales to $1.03 billion last quarter is a tangible drag that management must work to resolve. More broadly, the patent expirations for Januvia and Janumet and Bridion later this year, and the looming expiration of Keytruda in 2028, are the core headwinds. Any clarity on the speed and severity of these generic entries will directly impact the company's ability to hit its sales range.

Finally, the next earnings call will be critical. Management must articulate a credible bridge from the current guidance to the long-term $3 billion cost savings target. The company is slashing $3 billion in costs by the end of 2027 as a strategic pivot, but that plan needs to be tied to a clear timeline for new product ramp-ups and acquisition integration. The market will be watching for any signs that the company's execution plan is on track to close the expectation gap.

The bottom line is that the investment thesis has shifted from growth to transition. The valuation now reflects a period of slower expansion, but it will be validated only if Merck can demonstrate that its new products and cost savings are progressing faster than the patent-related revenue losses. The next few quarters will provide the evidence to determine if the current price is a buying opportunity or a warning sign.