Merck & Co., Inc. (MRK)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Development Transactions

Below is a summary of significant business development activity thus far in 2026.

In July 2026, Merck acquired TARGAN, a privately held company developing and commercializing biodevice solutions to improve performance outcomes for the poultry industry, for approximately $650 million. The acquisition is expected to broaden Merck Animal Health’s portfolio in commercial poultry operations with WingScan, an automated solution that uses vision technology for gender identification. This acquisition also brings the capability for a high-speed precision ocular spray technology, which administers respiratory and coccidiosis vaccines, among others, to day-old chicks. In addition, TARGAN has the potential to develop additional biodevices within poultry and other livestock species. Merck recorded an unrealized gain of $71 million to Other (income) expense, net in the second quarter and first six months of 2026 related to an existing investment that Merck held in TARGAN. The Company expects to account for the transaction as a business combination. There are no future contingent payments associated with the acquisition.

In May 2026, Merck acquired Terns Pharmaceuticals, Inc. (Terns), a clinical-stage oncology company, for $6.8 billion (including $606 million of payments to settle share-based equity awards of which $433 million related to unvested equity awards). Through this acquisition, Merck acquired Terns’ lead candidate, MK-4208 (formerly TERN-701), a novel investigational oral allosteric BCR::ABL1 tyrosine kinase inhibitor (TKI) currently being evaluated in a Phase 1/2 trial for patients with Philadelphia chromosome-positive, chronic phase chronic myeloid leukemia previously treated with at least one prior TKI and who experienced treatment failure, suboptimal response or treatment intolerance. The transaction was accounted for as an asset acquisition because MK-4208 accounted for substantially all of the fair value of the gross assets acquired (excluding cash and deferred income taxes). Merck recorded a charge of $5.7 billion to Research and development expenses (which primarily represented acquired in-process research and development [IPR&D] with no alternative future use), or $2.31 per share, in the second quarter and first six months of 2026, as well as net assets of $1.1 billion, including cash of $505 million, investments of $487 million, deferred tax assets of $190 million, and other net liabilities of $105 million. There are no future contingent payments associated with the acquisition.

In January 2026, Merck acquired Cidara Therapeutics, Inc. (Cidara), a biotechnology company developing drug-Fc conjugate (DFC) therapeutics, for $9.2 billion (including $570 million of payments to settle share-based equity awards of which $406 million related to unvested equity awards). Cidara’s lead DFC candidate, MK-1406 (formerly CD388), is a long-acting antiviral designed to prevent seasonal and pandemic influenza. MK-1406 is currently being evaluated in a Phase 3 trial among adult and adolescent participants who are at higher risk of developing complications from influenza. The transaction was accounted for as an asset acquisition because MK-1406 accounted for substantially all of the fair value of the gross assets acquired (excluding cash and deferred income taxes). Merck recorded a charge of $9.0 billion to Research and development expenses (which primarily represented acquired IPR&D with no alternative future use), or $3.62 per share, in the first six months of 2026, as well as net assets of $332 million. Under a previous license agreement between Cidara and J&J Innovative Medicine (a Johnson & Johnson company, previously Janssen Pharmaceuticals, Inc.), which was assumed by Merck, J&J Innovative Medicine is eligible to receive regulatory and sales-based milestones related to MK-1406.

Pricing

Global efforts toward health care cost containment continue to exert pressure on product pricing and market access worldwide. Changes to the U.S. health care system as part of health care reform, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, have contributed to pricing pressure.

In 2021, the U.S. Congress passed the American Rescue Plan Act, which included a provision that eliminated the statutory cap on rebates drug manufacturers pay to Medicaid beginning in January 2024.

In 2022, the U.S. Congress passed the Inflation Reduction Act (IRA), which made significant changes to how drugs are covered and paid for under the Medicare program, including the creation of financial penalties for drugs whose prices rise faster than the rate of inflation, redesign of the Medicare Part D program to require manufacturers to bear more of the liability for certain drug benefits (which went into effect in 2025), and government price-setting for certain Medicare Part D drugs (which went into effect in 2026) and Medicare Part B drugs (starting in 2028). The U.S. Department of Health and Human Services (HHS), through the Centers for Medicare & Medicaid Services (CMS), selected Januvia (sitagliptin) in 2023 for the first year of the IRA’s “Drug Price Negotiation Program” (Program), and selected Janumet (sitagliptin and metformin HCl) and Janumet XR (sitagliptin and metformin HCl extended release) in 2025 for the second year of the IRA’s Program. Pursuant to the IRA’s Program, the government set a price for Januvia, which became effective on January 1, 2026, and set a price for Janumet and Janumet XR, which will become effective on January 1, 2027. In addition, in January 2026, HHS announced that Lenvima (lenvatinib) has been selected for government price setting, the set price for which will become effective on January 1, 2028. Furthermore, the Company expects that Keytruda (pembrolizumab) will be selected in 2027 for government price setting, which would become effective on January 1, 2029; a pending CMS proposed rule may subject Keytruda Qlex (pembrolizumab and berahyaluronidase alfa) to price setting at the same time. Government price setting may also impact pricing in the private market negatively affecting the Company’s performance. The Company has sued the U.S. government regarding the IRA’s Program.

Additionally, increased utilization of the 340B Federal Drug Discount Program and restrictions on the Company’s ability to identify inappropriate discounts are having a negative impact on Company performance. Furthermore, the Executive Branch and Congress continue to discuss legislation designed to control health care costs, including the cost of drugs.

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In several international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, the Company’s sales performance in the first six months of 2026 was negatively affected by other cost-reduction measures taken by governments and other third parties to lower health care costs. In July 2026, the German parliament approved the Statutory Health Insurance Contribution Rate Stabilization Act (GKV-BStabG), a comprehensive health care reform law designed to reduce health insurance expenditures. The legislation introduces significant cost-containment measures that directly impact the pharmaceutical industry, with the majority of the provisions taking effect on January 1, 2027. The Company is currently evaluating the implications of the GKV-BStabG on its business; however, the provisions of this law will exert significant downward pressure on sales in Germany.

The Company anticipates all of these actions and additional actions in the future will continue to negatively affect sales and profits.

In May 2025, the U.S. presidential administration issued an executive order intended to encourage or impose the use of “most-favored-nation” pricing to tie U.S. prescription drug prices to prices in selected comparably developed nations. In July 2025, the Company and other pharmaceutical companies received letters from the U.S. presidential administration with a request to agree to the administration’s “most-favored-nation” drug pricing goals by September 29, 2025. Further to the letter received from the administration, in December 2025, the Company announced that it had entered into a three-year agreement (MFN Agreement) with the U.S government that addressed the four policy goals of the administration’s July letter. The Company is providing Januvia, Janumet and Janumet XR through a direct-to-patient program at affordable prices for eligible patients in the U.S., and will be expanding the program in the future to include Lipfendra (enlicitide). The Company also agreed to offer its existing medicines at discounted prices to Medicaid (excluding certain products) and in June 2026 signed an agreement with CMS to participate in the GENErating cost Reductions fOr U.S. Medicaid (GENEROUS) Model, a voluntary program through which participating state Medicaid agencies receive pricing for certain medications aligned to prices paid in select countries. Additionally, the Company agreed that products launched during the term of the MFN Agreement (with certain exceptions) will be subject to “most-favored-nation” pricing in reference to prices for such products in a specified group of countries (MFN Countries). Finally, the Company agreed to repatriate and share with the Federal government a portion of foreign revenue received by the Company as a result of the government’s successful trade policy efforts. Additionally, the Company reached an agreement with the U.S. Department of Commerce to delay Section 232 tariffs for three years, enabling the Company to make investments in the U.S. to reshore manufacturing for American patients.

Operating Results

Sales

U.S. plus international may not equal due to rounding.

Worldwide sales were $16.6 billion and $32.9 billion in the second quarter and first six months of 2026, respectively, representing increases of 5% compared with the same periods of 2025, reflecting growth in oncology, cardiometabolic and respiratory, and animal health, partially offset by declines in diabetes and infectious diseases. Lower sales in vaccines also partially offset revenue growth in the year-to-date period.

Growth in the oncology franchise in the second quarter and first six months of 2026 was largely due to the performance of Keytruda/Keytruda Qlex and Welireg (belzutifan). Higher alliance revenue from Koselugo (selumetinib) resulting from an amendment to the collaboration agreement also contributed to oncology sales growth in the year-to-date period. Sales growth in the cardiometabolic and respiratory franchise was largely attributable to the continued uptake of Winrevair (sotatercept-csrk), as well as the inclusion of sales of Ohtuvayre (ensifentrine) (which was obtained as part of the October 2025 acquisition of Verona Pharma plc [Verona Pharma]). Animal health sales growth was due to the performance of both livestock and companion animal products. The decline in diabetes was primarily due to lower sales of Januvia and Janumet, and the decline in infectious diseases was largely due to lower sales of Lagevrio (molnupiravir) and Dificid (fidaxom

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Overview

Financial Highlights

* 100%

(1) Non-GAAP net income and non-GAAP earnings per share (EPS) exclude acquisition- and divestiture-related costs, restructuring costs, income and losses from investments in equity securities, and certain other items from Merck’s results prepared in accordance with generally accepted accounting principles in the U.S. (GAAP). For further discussion and a reconciliation of GAAP to non-GAAP net income and EPS, see “Non-GAAP Income and Non-GAAP EPS” below.

Executive Summary

In 2025, Merck successfully advanced its science-led strategy through new product approvals and launches, strong clinical execution, important data readouts, and the addition of novel innovation through business development efforts. The Company also continued to return capital to shareholders, primarily through dividends.

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Worldwide sales were $65.0 billion in 2025, an increase of 1% compared with 2024, or 2% excluding the unfavorable effect of foreign exchange. The sales increase was primarily due to growth in oncology, cardiometabolic and respiratory, diabetes, and animal health, largely offset by declines in vaccines, immunology (as Merck’s marketing rights to these products ended in 2024), and virology (driven largely by lower sales of COVID-19 medication Lagevrio).

Merck continues to execute science-led business development transactions to augment its robust internal pipeline and portfolio with compelling external science focused on delivering innovation to patients, long-term growth, and value creation to shareholders. Highlights of 2025 activity include the following:

•Entered into an agreement to acquire Cidara Therapeutics, Inc. (Cidara), a biotechnology company developing drug-Fc conjugate therapeutics, including a long-acting antiviral designed to prevent seasonal and pandemic influenza; this transaction closed in January 2026.

•Acquired Verona Pharma plc (Verona Pharma), a biopharmaceutical company focused on respiratory diseases, through which Merck obtained Ohtuvayre, a product approved for the maintenance treatment of chronic obstructive pulmonary disease (COPD).

•Closed an exclusive license agreement for MK-7262 (HRS-5346), an investigational oral small molecule Lipoprotein(a) inhibitor from Jiangsu Hengrui Pharmaceuticals Co., Ltd. (Hengrui Pharma).

•Closed an agreement with Dr. Falk Pharma GmbH (Falk) to acquire sole global rights to MK-8690, an investigational anti-CD30 ligand monoclonal antibody.

During 2025, Merck continued its efforts to address unmet medical needs by launching Enflonsia in the U.S. for the prevention of respiratory syncytial virus (RSV) lower respiratory tract disease in neonates (newborns) and infants born during or entering their first RSV season. Also in 2025, the Company launched Keytruda Qlex, which was approved by the U.S. Food and Drug Administration (FDA) for subcutaneous administration across all solid tumor indications for Keytruda in the U.S., and the European Commission (EC) approved a new subcutaneous (SC) route of administration and a new pharmaceutical form (solution for injection) of Keytruda (to be marketed as Keytruda SC) for use across all Keytruda indications for adult patients in Europe. Additionally, in pulmonary arterial hypertension (PAH), the Company launched an expanded indication for Winrevair in the U.S. based on the results of the ZENITH trial.

The Company also received numerous other approvals in oncology. Keytruda received approvals for additional indications in certain markets, including in combination with chemotherapy in the therapeutic areas of gastric or gastroesophageal junction (GEJ) adenocarcinoma and malignant pleural mesothelioma, in combination with Padcev (enfortumab vedotin) for locally advanced or metastatic urothelial carcinoma and for cisplatin-ineligible muscle-invasive bladder cancer (MIBC), as well as in combination with radiotherapy with or without chemotherapy for head and neck squamous cell carcinoma (HNSCC). Additionally, in 2025, Welireg was approved in the European Union (EU) and Japan for the treatment of adult patients with certain von Hippel-Lindau (VHL) disease-associated tumors and certain adult patients with renal cell carcinoma (RCC), as well as in the U.S. for certain adult and pediatric patients with pheochromocytoma and paraganglioma.

In addition to the regulatory approvals discussed above, the Company advanced its late-stage pipeline with several regulatory submissions.

•MK-8591A, doravirine/islatravir, is an investigational, once-daily, oral two-drug regimen for adults with HIV-1 infection that is virologically suppressed on antiretroviral therapy under review by the FDA. MK-8591A is also under review in Japan.

•MK-1654, Enflonsia, a prophylactic long-acting monoclonal antibody designed to protect infants from RSV disease during their first RSV season, is under review in the EU and Japan.

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•MK-7962, Winrevair, an activin signaling inhibitor for the treatment of adults with PAH (World Health Organization [WHO] Group 1 pulmonary hypertension), is under review by the FDA in connection with a proposed update to the U.S. product label based on the results of the HYPERION trial.

•MK-3475, Keytruda (pembrolizumab), is an anti-PD-1 (programmed death receptor-1) therapy available for intravenous administration. MK-3475A, Keytruda Qlex, combines pembrolizumab with berahyaluronidase alfa to enhance dispersion and permeability to enable subcutaneous administration. Keytruda and Keytruda Qlex each are approved for the treatment of many cancers and continue to be studied in additional Phase 3 trials.

◦Keytruda is under review in the EU and Japan in combination with chemotherapy with or without bevacizumab for the treatment of certain patients with platinum-resistant recurrent ovarian cancer.

◦Keytruda is also under review in the EU and Japan in combination with Pfizer, Inc.’s (Pfizer) and Astellas’ Padcev as neoadjuvant treatment, then continued after radical cystectomy as adjuvant treatment, for patients with MIBC who are ineligible for cisplatin-based chemotherapy.

◦Keytruda and Keytruda Qlex are under review by the FDA in combination with Gilead Sciences Inc.’s (Gilead) sacituzumab govitecan (Trodelvy) for the first-line treatment of certain patients with unresectable locally advanced or metastatic triple-negative breast cancer (TNBC) whose tumors express programmed death-ligand 1 (PD‑L1).

•MK-6482, Welireg, is Merck’s first-in-class oral hypoxia-inducible factor-2 alpha (HIF-2α) inhibitor.

◦Welireg, in combination with Keytruda or Keytruda Qlex, is under priority review by the FDA for the adjuvant treatment of certain patients with clear cell RCC following nephrectomy.

◦Welireg, in combination with MK-7902, Lenvima, an orally available multiple receptor tyrosine kinase inhibitor (TKI), is under review by the FDA for the treatment of certain patients with advanced RCC following previous treatment with a PD-1 or PD-L1 inhibitor. Lenvima is being developed as part of a collaboration with Eisai Co., Ltd. (Eisai).

In 2025, the Company announced positive late-stage results from 18 Phase 3 trials and initiated 21 new Phase 3 trials spanning cardiometabolic and respiratory, immunology, infectious diseases, oncology and ophthalmology. The Company now has approximately 80 Phase 3 studies underway. The Company is diversifying its oncology portfolio and executing on its strategy which is broadly based on three strategic pillars: immuno-oncology, precision molecular targeting and tissue targeting. Merck has numerous Phase 3 oncology programs within these pillars.

Immuno-oncology

•V940 (mRNA-4157), intismeran autogene, is an investigational individualized neoantigen therapy being evaluated in combination with Keytruda for the adjuvant portion of treatment in patients with certain types of melanoma and non-small cell lung cancer (NSCLC). Intismeran autogene is being developed as part of a collaboration with Moderna, Inc. (Moderna).

•MK-1308A is the coformulation of quavonlimab, Merck’s novel investigational anti-cytotoxic T-lymphocyte associated protein 4 (CTLA-4) antibody, in combination with pembrolizumab, being evaluated for the treatment of RCC.

Precision molecular targeting

•MK-1026, nemtabrutinib, is an investigational oral, reversible, non-covalent Bruton’s tyrosine kinase (BTK) inhibitor, being evaluated for the treatment of hematological malignancies, including chronic lymphocytic leukemia and small lymphocytic lymphoma.

•MK-1084, calderasib, is an investigational oral selective KRAS G12C inhibitor being evaluated with or without Keytruda or Keytruda Qlex for the treatment of certain patients with colorectal and non-small cell lung cancers. Calderasib is being developed as part of a collaboration with Taiho Pharmaceutical Co. Ltd. and Astex Pharmaceuticals (UK), a wholly owned subsidiary of Otsuka Pharmaceutical Co., Ltd.

•MK-3543, bomedemstat, is an investigational orally available lysine-specific demethylase 1 inhibitor being evaluated for the treatment of certain patients with essential thrombocythemia.

•MK-5684, opevesostat, is an investigational cytochrome P450 11A1 (CYP11A1) inhibitor being evaluated for the treatment of certain patients with metastatic castration-resistant prostate cancer.

•MK-6482, Welireg, is being developed for expanded indications in RCC in combination with Keytruda and Lenvima, and in other combinations.

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•MK-7339, Lynparza, is an oral poly (ADP-ribose) polymerase (PARP) inhibitor being evaluated in combination with Keytruda for expanded indications in the therapeutic areas of non-small cell lung and small cell lung cancers. Lynparza is being developed as part of a collaboration with AstraZeneca PLC (AstraZeneca).

Tissue targeting

•MK-1022, patritumab deruxtecan, is an investigational human epidermal growth factor receptor 3 (HER3) directed antibody drug conjugate (ADC) being evaluated in certain patients with breast cancer. Patritumab deruxtecan is being developed as part of a collaboration with Daiichi Sankyo.

•MK-2140, zilovertamab vedotin, is an investigational ADC targeting receptor tyrosine kinase-like orphan receptor 1 (ROR1) being evaluated for the treatment of hematological malignancies, including diffuse large B cell lymphoma.

•MK-2400, ifinatamab deruxtecan, is an investigational B7-H3 directed ADC being evaluated in certain patients with esophageal, prostate, and small cell lung cancers. Ifinatamab deruxtecan is being developed as part of a collaboration with Daiichi Sankyo.

•MK-2870, sacituzumab tirumotecan, is an investigational trophoblast cell-surface antigen 2 (TROP2)-directed ADC being evaluated for certain patients with breast, cervical, endometrial, gastric, non-small cell lung, and ovarian cancers. Sacituzumab tirumotecan is being developed as part of a collaboration with Kelun-Biotech.

•MK-5909, raludotatug deruxtecan, is an investigational CDH6 targeting ADC being evaluated in patients with platinum resistant ovarian cancer. Raludotatug deruxtecan is being developed a

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