Merck's Keytruda Biosimilar Threat Materializes as Formycon and Zydus Partner for U.S./Canada Launch

What happened

Formycon AG and Zydus Lifesciences have entered a strategic partnership to develop and supply FYB206, a biosimilar to Merck's blockbuster cancer drug Keytruda, targeting the lucrative U.S. and Canadian markets. This move directly challenges Merck's core oncology franchise, which derived 46% of its 2024 revenue from Keytruda alone, as highlighted in the DeepValue report. The report already flags Keytruda's patent cliff around 2028 and IRA pricing pressures from 2029 as critical risks, with biosimilar competition anticipated to erode sales. While this partnership is an early step and not an immediate launch, it signals that competitive threats are actively mobilizing, potentially accelerating the timeline for market share and pricing erosion. Investors must now reassess whether Merck's late-stage pipeline and new launches can mitigate this looming pressure more urgently than previously modeled.

Implication

The Formycon-Zydus deal underscores that biosimilar developers are aggressively targeting Keytruda's key markets, likely compressing the window for Merck to sustain its dominant oncology cash flows. Given Keytruda's outsized contribution to Merck's earnings, even modest market share losses could materially impact financials, exacerbating the concentration risk flagged in the DeepValue report. Pricing pressure from biosimilars, combined with IRA-mandated discounts, may intensify margin compression in Merck's pharmaceutical segment, threatening the company's robust free cash flow generation. This development heightens the criticality of Merck's pipeline assets like mRNA-4157 and Winrevair gaining commercial traction, as well as the success of BD deals to backfill revenue gaps. Investors should monitor this and similar initiatives closely, as they will directly influence Merck's valuation and risk-reward balance, potentially prompting earlier-than-expected market discounts.

Thesis delta

The partnership does not fundamentally alter the DeepValue thesis, which already anticipates biosimilar competition around 2028 and emphasizes Merck's need to offset Keytruda's decline. However, it introduces a tangible near-term catalyst that validates those risks, potentially accelerating investor concerns and highlighting the urgency of pipeline execution. While no immediate shift from 'POTENTIAL BUY' is warranted, the risk profile has incrementally increased, demanding closer scrutiny of Merck's mitigation strategies.