Buying the Next PipelineNarrow moat

Merck & Co. (MRK) — moat facet

Merck is buying its way past Keytruda, and charges most of the price to earnings the day it pays.

Merck's answer to the Keytruda cliff is to buy science, and its accounting makes the buying unusually visible. When it acquires a company for its research programmes, most of the price is charged immediately to research and development. In 2023 that meant $10.2 billion for Prometheus and $5.5 billion for Daiichi Sankyo1; in 2026 it meant $9.0 billion for Cidara and $5.7 billion for Terns23.

Acquisition charges to research ($bn)10.2Prometheus 20235.5Daiichi Sankyo 20239.0Cidara 20265.7Terns 2026Merck Form 10-K FY2023, Form 10-Q Q2 2026 and Q2 2026 release
Two years of large purchases.

When Merck buys a launched product, the price goes on the balance sheet instead. Acceleron cost $11.5 billion in 20214 and produced Winrevair, which sold $1,443 million in 20255; Verona cost $10.4 billion in 20256 and brought Ohtuvayre with a $12.1 billion intangible7.

The capacity to do this is the moat. Merck generated operating cash flow of $16,472 million in 20258, and returned $13.3 billion to shareholders through dividends and buybacks9, while still financing multi-billion-dollar acquisitions. Few companies can buy a $10 billion pipeline twice in one year and keep raising the dividend.

The cost is visible in the balance sheet. Net debt rose from about $34.8 billion at the end of 2025 to about $46.8 billion at 30 June 202610, and stockholders' equity fell from $52,606 million to $41,933 million1112. Research expense in the second quarter was $9,741 million13.

The cash flow statement shows how much of the price is expensed. Charges for certain research and development asset acquisitions, added back as non-cash, were $11,409 million in 2023 and $3,456 million in 202414. In 2023 alone Merck paid $10,705 million in cash for Prometheus and $1,327 million for Imago15.

This is a narrow moat: the ability to pay, not the ability to invent. Research spending by quarter is the number to watch; a year in which it stays near the 2025 level of about $4 billion a quarter would mean Merck has stopped buying and is betting on what it already owns.

Moat trajectory: Holding steady

Acceleron worked; Prometheus, Cidara and Terns are still bets.

The number that tests this moat
Reported
Research and development expense, latest quarter
$9,741M (Q2 2026), against $4,048M

Buying research through the income statement; a return to about $4bn a quarter would mean the buying has stopped.

Source: Merck Q2 2026 results release ↗
Aspects of the moat
DIG DEEPER 01
Acceleron to Winrevair: $11.5 Billion Paying Off
Merck paid $11.5 billion for Acceleron, and Winrevair already sells at a rate above $2 billion a year with exclusivity to 2036.
DIG DEEPER 02
Prometheus and Daiichi Sankyo: $15.7 Billion in One Year
Merck spent $15.7 billion of 2023's research budget on two deals, cutting that year's profit to $365 million.
DIG DEEPER 03
Verona and Ohtuvayre: $10.4 Billion for a Launched Drug
Merck paid $10.4 billion for Verona and booked a $12.1 billion asset for Ohtuvayre, which now sells about $0.8 billion a year.
DIG DEEPER 04
Cidara and Terns: $14.7 Billion Charged in Two Quarters
Merck charged $14.7 billion of acquired research in the first half of 2026 and reported a loss, as it did in 2023.
⚠ Threats to the moat
⚠ THREAT 01
Net Debt Up $12 Billion in Six Months
Merck's net debt rose by about $12 billion in six months as it paid cash for Cidara and Terns.
⚠ THREAT 02
Research Charged, Not Capitalised
Merck's reported profit swings from $365 million to $17 billion on its deal calendar, so no single year tells you what it earns.
References
  1. ReportedIn 2023 that meant $10.2 billion for Prometheus and $5.5 billion for Daiichi Sankyo; in 2026 it meant $9.0 billion for Cidara and $5.7 billion for Terns.
    Merck & Co. Form 10-K for fiscal 2023 - product sales for 2021-2023, the Prometheus, Daiichi Sankyo and Imago charges, impairments, receivables concentration and the Zhifei distribution arrangement in China. — FY2023 · publ. February 2024 · source ↗
  2. ReportedIn 2023 that meant $10.2 billion for Prometheus and $5.5 billion for Daiichi Sankyo; in 2026 it meant $9.0 billion for Cidara and $5.7 billion for Terns.
    Merck & Co. Form 10-Q for the quarter ended 30 June 2026 - segment profits on the recast basis, the Cidara and Terns acquisitions, the Halozyme litigation, China shipments, loss of exclusivity events and the balance sheet. — Q2 2026 · publ. 7 August 2026 · source ↗
  3. ReportedIn 2023 that meant $10.2 billion for Prometheus and $5.5 billion for Daiichi Sankyo; in 2026 it meant $9.0 billion for Cidara and $5.7 billion for Terns.
    Merck second-quarter 2026 results release, Form 8-K exhibit 99.1 - earnings, charges and 2026 guidance. — Q2 2026 · publ. 4 August 2026 · source ↗
  4. ReportedAcceleron cost $11.5 billion in 2021 and produced Winrevair, which sold $1,443 million in 2025; Verona cost $10.4 billion in 2025 and brought Ohtuvayre with a $12.1 billion intangible.
    Merck & Co. Form 10-K for fiscal 2021 - the Organon spin-off, the Acceleron acquisition and 2019-2020 sales restated to continuing operations. — FY2021 · publ. February 2022 · source ↗
  5. ReportedAcceleron cost $11.5 billion in 2021 and produced Winrevair, which sold $1,443 million in 2025; Verona cost $10.4 billion in 2025 and brought Ohtuvayre with a $12.1 billion intangible.
    Merck & Co. Form 10-K for fiscal 2025 - financial statements and notes: earnings, cash flow, balance sheet, acquisitions, research and segment profit. — FY2025 · publ. 24 February 2026 · source ↗
  6. ReportedAcceleron cost $11.5 billion in 2021 and produced Winrevair, which sold $1,443 million in 2025; Verona cost $10.4 billion in 2025 and brought Ohtuvayre with a $12.1 billion intangible.
    Merck & Co. Form 10-K for fiscal 2025 - financial statements and notes: earnings, cash flow, balance sheet, acquisitions, research and segment profit. — FY2025 · publ. 24 February 2026 · source ↗
  7. ReportedAcceleron cost $11.5 billion in 2021 and produced Winrevair, which sold $1,443 million in 2025; Verona cost $10.4 billion in 2025 and brought Ohtuvayre with a $12.1 billion intangible.
    Merck & Co. Form 10-K for fiscal 2025 - financial statements and notes: earnings, cash flow, balance sheet, acquisitions, research and segment profit. — FY2025 · publ. 24 February 2026 · source ↗
  8. ReportedMerck generated operating cash flow of $16,472 million in 2025, and returned $13.3 billion to shareholders through dividends and buybacks, while still financing multi-billion-dollar acquisitions.
    Merck & Co. Form 10-K for fiscal 2025 - financial statements and notes: earnings, cash flow, balance sheet, acquisitions, research and segment profit. — FY2025 · publ. 24 February 2026 · source ↗
  9. ReportedMerck generated operating cash flow of $16,472 million in 2025, and returned $13.3 billion to shareholders through dividends and buybacks, while still financing multi-billion-dollar acquisitions.
    Merck & Co. Form 10-K for fiscal 2025 - financial statements and notes: earnings, cash flow, balance sheet, acquisitions, research and segment profit. — FY2025 · publ. 24 February 2026 · source ↗
  10. Moat Explorer calcNet debt rose from about $34.8 billion at the end of 2025 to about $46.8 billion at 30 June 2026, and stockholders' equity fell from $52,606 million to $41,933 million.
    Moat Explorer calculation from Merck's reported sales, segment and financial statement figures ($ millions unless stated). Lines 2025: Keytruda 31,641 + Keytruda Qlex 40 = 31,681; other pharmaceutical 58,142 - 31,681 - 5,233 = 21,228; Animal Health 6,354; other revenue 515; total 31,681 + 5,233 + 21,228 + 6,354 + 515 = 65,011. 2024: 29,482; 57,400 - 29,482 - 8,583 = 19,335. 2023: 53,583 - 25,011 - 8,886 = 19,686. 2022: 52,005 - 20,937 - 6,897 = 24,171. 2021: 42,754 - 17,186 - 5,673 = 19,895. Everything else 2025: 65,011 - 31,681 = 33,330. Keytruda share of sales: 11,084 / 39,121 = 28.3% (2019, continuing basis); 17,186 / 48,704 = 35.3% (2021); 25,011 / 60,115 = 41.6% (2023); 31,681 / 65,011 = 48.7% (2025); Q2 2026 8,366 / 16,607 = 50.4%. Keytruda and Gardasil Q2 2026 (8,366 + 1,169) / 16,607 = 9,535 / 16,607 = 57.4%. Qlex 463 / 8,366 = 5.5%. Keytruda growth: 31,641 / 29,482 - 1 = 7.3% (2025); 29,482 / 25,011 - 1 = 17.9% (2024); 31,641 / 17,186 = 1.84, compound (1.84)^(1/4) - 1 = 16.5% a year; 31,641 / 11,084 = 2.85 (2019-2025). US share of Keytruda 18,829 / 31,641 = 59.5%. International Keytruda 12,812 / 11,610 - 1 = 10.4%; US Keytruda 18,829 / 17,872 - 1 = 5.4%. US Keytruda share of total sales 18,829 / 65,011 = 29.0%. Royalty: 2.5% x 31,681 = 792; 6.5% x 31,681 = 2,059. Gardasil US royalty 7% x 2,641 = 185. Winrevair royalty 22% x 1,443 = 317; 22% x 419 = 92; Winrevair Q2 2026 588 x 4 = 2,352, 22% x 2,352 = 517. Segment margins: Pharmaceutical 45,754 / 58,142 = 78.7% (2025); Q2 2026 11,612 / 14,760 = 78.7% (recast basis). Animal Health 2,131 / 6,354 = 33.5% (2025); 1,938 / 5,877 = 33.0% (2024); 1,737 / 5,625 = 30.9% (2023); 1,963 / 5,550 = 35.4% (2022); 1,950 / 5,568 = 35.0% (2021); Q2 2026 636 / 1,775 = 35.8%. Unallocated research 14,987 / 58,142 = 25.8%; Animal Health research 448 / 6,354 = 7.1%. Animal Health segment profit 2,131 / 45,754 = 4.7% of Pharmaceutical. Gardasil: international 2,592 / 6,158 - 1 = -57.9%; US 2,641 / 2,083 - 1 = 26.8%; share 5,233 / 65,011 = 8.0%; share of sales 2021 5,673 / 48,704 = 11.6%, 2022 6,897 / 59,283 = 11.6%, 2023 8,886 / 60,115 = 14.8%, 2024 8,583 / 64,168 = 13.4%; Q2 2026 1,169 x 4 = 4,676. Vaccines H1 2026 2,314 + 2,361 = 4,675; H1 2025 2,607 + 2,370 = 4,977; 4,675 / 4,977 - 1 = -6.1%. Childhood vaccines growth 2,368 / 2,241 - 1 = 5.7%; 2,485 / 2,368 - 1 = 4.9%; 2,451 / 2,485 - 1 = -1.4%. Pneumococcal: Pneumovax 166 / 893 - 1 = -81%; 825 + 759 + 166 = 1,750; 1,750 / 893 = 2.0; (825 + 759) / 166 = 9.5; Capvaxive + Vaxneuvance 759 + 825 = 1,584; 1,584 / 6,494 = 24.4% of Prevnar. Animal Health: livestock 3,896 / 6,354 = 61.3%; livestock growth 3,300 / 3,295 - 1 = 0.2%, 3,337 / 3,300 - 1 = 1.1%, 3,462 / 3,337 - 1 = 3.7%, 3,896 / 3,462 - 1 = 12.5%; companion 2,458 / 2,415 - 1 = 1.8%, 2,458 / 2,273 - 1 = 8.1%; companion excluding Bravecto 2,458 - 1,100 = 1,358; rest of Animal Health 6,354 - 1,100 = 5,254; Bravecto 359 / 335 - 1 = 7%. Segment 6,354 / 5,877 - 1 = 8.1%; 5,625 / 5,568 - 1 = 1.0%; Q2 2026 1,775 / 1,646 - 1 = 7.8%; compound (6,354 / 5,568)^(1/4) - 1 = 3.4% a year; share 6,354 / 65,011 = 9.8%; 6,354 / 31,681 = 0.20 of Keytruda; 6,354 / 9,467 = 67% of Zoetis; Zoetis 9,467 / 9,256 - 1 = 2.3%. Competitors: Keytruda 31,641 / Opdivo 10,049 = 3.1. Geography: US 36,510 / 65,011 = 56.2%; China 1,939 / 6,802 - 1 = -71%; China share 4,378 / 48,704 = 9.0% (2021), 6,802 / 60,115 = 11.3% (2023), 5,494 / 64,168 = 8.6% (2024), 1,939 / 65,011 = 3.0% (2025); other regions 65,011 - 36,510 - 14,580 - 2,711 - 1,939 = 9,271. Wholesaler receivables 22% + 21% + 13% = 56% (2025); 21 + 21 + 13 = 55 (2024); 21 + 20 + 14 = 55 (2023). Januvia and Janumet: 3,324 + 1,964 = 5,288 (2021); 2,189 + 1,177 = 3,366 (2023); 1,334 + 935 = 2,269 (2024); 1,604 + 940 = 2,544 (2025). Newer products Q2 2026: 588 + 271 + 204 + 184 = 1,247; 1,247 / 8,366 = 14.9%. Bridion 1,841 / 4 = 460 a quarter. Other pharmaceutical Q2 2026 14,760 - 8,366 - 1,169 = 5,225; Q2 2025 14,050 - 7,956 - 1,126 = 4,968; 5,225 / 4,968 - 1 = 5.2%; 2025 share 21,228 / 65,011 = 32.7%. Research: 30,531 / 60,115 = 50.8% of sales (2023). Charges 2026 9.0 + 5.7 = 14.7 bn; per share 3.62 + 2.31 = 5.93. Ohtuvayre 204 x 4 = 816; 12,100 / 816 = 14.8. Tax guidance midpoints (23.5 + 24.5) / 2 = 24.0; (35.0 + 36.0) / 2 = 35.5. Balance sheet: net debt end-2025 2,589 + 46,750 - 14,565 = 34,774; end-2024 2,649 + 34,462 - 13,242 - 447 = 23,422; end-2023 1,372 + 33,683 - 6,841 - 252 = 27,962; 30 June 2026 2,825 + 51,081 - 6,849 - 292 = 46,765, cash and short-term investments 6,849 + 292 = 7,141; net debt to equity 34,774 / 52,606 = 0.66; 46,765 / 41,933 = 1.1. Net income 2023-2025 365 + 17,117 + 18,254 = 35,736. Valuation: year-end 2025 market value 261.26 bn / net income 18.254 bn = 14.3; free cash flow 2025 16,472 - 4,112 = 12,360; 12,360 / 365,090 = 3.4%. Trailing twelve months to June 2026: sales 65,011 - 31,335 + 32,893 = 66,569; net income 18,254 - 9,506 - 5,575 = 3,173. EPS guidance midpoints (5.00 + 5.15) / 2 = 5.075; (5.04 + 5.16) / 2 = 5.10; (2.66 + 2.76) / 2 = 2.71. Protection from 2026: 2043 - 2026 = 17 years; 2028 - 2026 = 2 years. Year-end P/E = market value / net income: 147.55 / 4.442 = 33.2 (2015); 162.31 / 3.920 = 41.4 (2016); 153.30 / 2.394 = 64.0 (2017); 198.69 / 6.220 = 31.9 (2018); 231.56 / 9.843 = 23.5 (2019); 206.96 / 7.067 = 29.3 (2020); 193.59 / 13.049 = 14.8 (2021); 281.30 / 14.519 = 19.4 (2022); 276.26 / 0.365 = 757 (2023); 251.65 / 17.117 = 14.7 (2024); 261.26 / 18.254 = 14.3 (2025); 365.09 / 3.173 = 115.1 (TTM). Return on average equity 2025: 18,254 / ((52,606 + 46,313) / 2) = 18,254 / 49,460 = 36.9%. Gross profit 2025 65,011 - 16,382 = 48,629; 48,629 / 65,011 = 74.8%; royalty 792 / 16,382 = 4.8% of cost of sales. Keytruda increase 2021-2025 31,681 - 17,186 = 14,495; sales increase 65,011 - 48,704 = 16,307. US sales 36,510 / 28,480 - 1 = 28%. Pharmaceutical margin 2021 30,977 / 42,754 = 72.5%. Livestock less companion 3,295 - 2,273 = 1,022 (2021); 3,896 - 2,458 = 1,438 (2025). Prevnar 6,494 / Vaxneuvance 825 = 7.9. Animal Health 2025 6,354 against Keytruda franchise Q2 2026 8,366 - balance sheet, cash flow and valuation. — 2015-2026 · publ. September 2026 · source ↗
    Method: Arithmetic on figures reported in Merck's Forms 10-K and 10-Q, results releases, the Bristol Myers Squibb, Pfizer and Zoetis 10-Ks and market data; operands shown in the source line.
  11. ReportedNet debt rose from about $34.8 billion at the end of 2025 to about $46.8 billion at 30 June 2026, and stockholders' equity fell from $52,606 million to $41,933 million.
    Merck & Co. Form 10-K for fiscal 2025 - financial statements and notes: earnings, cash flow, balance sheet, acquisitions, research and segment profit. — FY2025 · publ. 24 February 2026 · source ↗
  12. ReportedNet debt rose from about $34.8 billion at the end of 2025 to about $46.8 billion at 30 June 2026, and stockholders' equity fell from $52,606 million to $41,933 million.
    Merck & Co. Form 10-Q for the quarter ended 30 June 2026 - segment profits on the recast basis, the Cidara and Terns acquisitions, the Halozyme litigation, China shipments, loss of exclusivity events and the balance sheet. — Q2 2026 · publ. 7 August 2026 · source ↗
  13. ReportedResearch expense in the second quarter was $9,741 million.
    Merck second-quarter 2026 results release, Form 8-K exhibit 99.1 - sales by product and pipeline highlights. — Q2 2026 · publ. 4 August 2026 · source ↗
  14. ReportedCharges for certain research and development asset acquisitions, added back as non-cash, were $11,409 million in 2023 and $3,456 million in 2024.
    Merck & Co. Form 10-K for fiscal 2025 - financial statements and notes: earnings, cash flow, balance sheet, acquisitions, research and segment profit. — FY2025 · publ. 24 February 2026 · source ↗
  15. ReportedIn 2023 alone Merck paid $10,705 million in cash for Prometheus and $1,327 million for Imago.
    Merck & Co. Form 10-K for fiscal 2025 - Item 1 business: products, customers, segments and people. — FY2025 · publ. 24 February 2026 · source ↗
Sources
Generated September 25, 2026