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Overview: Mixed Q1 Results Clouded by Trade Pressures

Merck & Co. (NYSE: MRK) reported a strong start to 2025 with better-than-expected earnings and revenue. However, the pharmaceutical giant simultaneously downgraded its full-year profit outlook, citing a $200 million hit from existing tariffs and a licensing deal-related charge. The financial squeeze largely stems from escalating trade tensions, especially with China, a key market for Merck’s operations and products.

This guidance adjustment highlights how geopolitical risks — especially tariff conflicts — are increasingly shaping the bottom lines of major U.S. corporations, even those in the critical healthcare sector.

Q1 2025: Strong Earnings but Pressures Mount

Merck posted a solid performance for the first quarter:

• Adjusted EPS: $2.22, beating the consensus estimate of $2.14
• Revenue: $15.53 billion, topping expectations of $15.31 billion
• Net Income: $5.08 billion, or $2.01 per share, up from $4.76 billion, or $1.87 per share in Q1 2024
• Overall revenue declined 2% year-over-year, with some segments, particularly vaccines, showing sharp weakness.

Merck's pharmaceutical division generated $13.64 billion, down 3% year-over-year. While flagship oncology drug Keytruda brought in $7.21 billion (a 4% increase), it missed Wall Street’s target of $7.43 billion due to international sales challenges.

Lowered Full-Year Forecast: Tariffs and Licensing Deal Bite

Merck revised its adjusted full-year EPS forecast to $8.82–$8.97, compared to its earlier range of $8.88–$9.03. This downward revision is attributed to two key factors:

• A $200 million estimated tariff charge, mainly tied to levies between the U.S. and China, and to a lesser extent, Canada and Mexico.
• A one-time charge of ~$0.06 per share related to a March licensing deal with China-based Hengrui Pharma.

Notably, the $200 million estimate does not include future tariffs proposed by former President Donald Trump, which could add further pressure on U.S.-imported pharmaceuticals. The uncertainty is already influencing manufacturing decisions, with Merck committing $12 billion to U.S. R&D and production, and planning another $9 billion in investments by 2028 to safeguard against foreign trade risks.

Gardasil Falters in China, Raising Red Flags

Merck's cancer-preventing vaccine Gardasil recorded a dramatic 41% drop in sales, totaling $1.33 billion, down from the same period in 2024 — and well below analyst expectations of $1.45 billion.

The setback is largely attributed to halted shipments into China, which began in February and will last through at least mid-2025. China represents the majority of Gardasil’s international revenue. Merck is hoping to regain momentum through the vaccine’s newly approved use in men aged 9 to 26 within China, but success remains uncertain amid geopolitical strain.

According to Reuters, China recently introduced tariffs of up to 125% on U.S. goods, adding further barriers to the distribution of Western pharmaceutical products and risking limited supply for Chinese patients.

Oncology, New Drugs, and Animal Health Show Promise

Despite concerns, Merck emphasized the growing momentum of its newer therapies:

• Winrevair, used for a rare and deadly lung disease, and
• Capvaxive, a vaccine protecting adults against pneumococcus infections,
  are both showing “increasingly meaningful” sales contributions.

These drugs are expected to play a critical role in offsetting the eventual revenue cliff from Keytruda, which loses exclusivity in 2028 — a major concern for long-term investors.

Meanwhile, Merck’s animal health division delivered a bright spot, pulling in $1.59 billion, a 5% increase year-over-year. Growth was driven by robust demand for livestock products and the successful integration of Elanco’s aqua business, acquired in 2024.

Looking Ahead: Can Innovation Outrun Geopolitics?

Merck reaffirmed its full-year revenue guidance of $64.1 to $65.6 billion, suggesting confidence in its pipeline despite rising headwinds. Still, with global trade dynamics in flux and patent cliffs approaching, the company faces a challenging road.

The pharma giant’s ongoing push to fortify U.S. manufacturing capacity and diversify its product base may help navigate these choppy waters — but investors will be watching closely, especially for updates on Gardasil in China and future tariff developments.

Bottom Line

While Merck's first-quarter results show resilience through strong performance in oncology and animal health, its downward profit forecast underscores growing exposure to geopolitical and trade-related risks. With tariffs taking a $200 million bite and more on the horizon, Merck’s future hinges on global diplomacy, domestic manufacturing bets, and the success of its next-generation treatments.

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