Merck Splits Off Cancer Business Ahead of Keytruda Patent Expiry

What happened

Merck announced it is splitting its Human Health business to create a separate cancer unit, as reported by Barron's, aiming to sharpen its focus before Keytruda's patent protection expires in 2028. The DeepValue report underscores that Keytruda accounts for 46% of Merck's sales, driving a two-step revenue reset starting with IRA pricing in January 2028 and loss of exclusivity in December 2028, making this move a critical part of lifecycle management. However, the report emphasizes that proof of a credible bridge to 2028 is still pending, with key de-risking events like the CD388 Phase 3 interim analysis in 1Q26 and evidence of subcutaneous Keytruda (Qlex) adoption being essential. While management portrays this restructuring as a strategic step, the DeepValue analysis is critical, noting that such organizational changes do not address immediate risks like Gardasil's decline in China or legacy LOEs in 2026, which could pressure earnings before the Keytruda cliff. The stock's rise reflects market optimism, but investors should remain cautious, as the DeepValue thesis hinges on tangible progress from upcoming catalysts rather than corporate reshuffles.

Implication

Organizationally, separating the cancer business could improve operational focus and resource allocation for Merck's dominant oncology segment, potentially enhancing long-term competitiveness. Financially, however, this move does not immediately mitigate risks highlighted in the DeepValue report, such as the 2026 legacy LOEs from products like Januvia or Gardasil's weakness in China, which require cost savings and restructuring to offset. Strategically, the split aligns with Merck's need to diversify beyond Keytruda, but the DeepValue analysis stresses that success depends on upcoming milestones, including CD388 trial results and Keytruda Qlex uptake, which are not accelerated by this reorganization. From an investment perspective, this reinforces the 'WAIT' rating in the DeepValue report, as the split adds no new de-risking elements and the stock's current price already factors in manageable near-term challenges. Therefore, investors should monitor quarterly updates for evidence of pipeline traction and cost savings realization before considering entry, as the fundamental thesis remains unchanged.

Thesis delta

This announcement reinforces Merck's proactive management of the Keytruda patent cliff, aligning with the DeepValue thesis that anticipates strategic moves to bridge the pre-2028 period. However, it does not shift the core investment thesis, which remains dependent on validation from key catalysts like CD388 interim analysis and Keytruda Qlex adoption, as organizational changes alone do not de-risk earnings durability. Thus, the recommendation to wait for these data points before reassessing the call is unchanged, with no material alteration to the risk-reward profile.