Merck’s $10 Billion Bet On Verona: Smart Strategic Pivot Or Costly Diversion From The Keytruda Cliff?

Merck (NYSE:MRK) has made headlines yet again with its $10 billion acquisition of Verona Pharma, a bold move aimed at cushioning the impending blow from the loss of exclusivity (LOE) on its blockbuster cancer drug Keytruda. Keytruda, which generated a staggering $29.5 billion in 2024—nearly half of Merck’s total revenue—is set to face biosimilar competition beginning in December 2028. Amid looming regulatory reforms such as Medicare drug price negotiations under the Inflation Reduction Act (IRA) and Most Favored Nation (MFN) pricing models, Merck has begun aggressively reshaping its pipeline and portfolio. Recent approvals like the RSV vaccine clesrovimab, data readouts for oral PCSK9 drug enlicitide, and the launch of pulmonary arterial hypertension therapy WINREVAIR mark a transformative phase in Merck’s strategy. The acquisition of Verona, maker of the newly launched COPD drug Ohtuvayre, is positioned as a strategic buffer against declining oncology revenue. Let us take a closer look and analyze the rationale behind this acquisition.

Navigating The Keytruda Patent Cliff With Immediate Revenue Potential

The most pressing issue for Merck is the 2028 LOE for Keytruda, the top-selling oncology drug globally. With biosimilars expected to hit the market by the end of that year, Merck faces a substantial revenue erosion, potentially losing $18 billion over five years. While the company projects $50 billion in non-risk-adjusted pipeline revenues by the mid-2030s, most of those assets are still in Phase III trials. Verona’s COPD drug Ohtuvayre, approved by the FDA and recently launched, offers Merck near-term revenue that begins to bridge the looming gap.

Analysts forecast peak sales for Ohtuvayre at up to $4 billion—a significant figure when scaled against the anticipated Keytruda decline. Furthermore, Ohtuvayre is the first novel inhaled therapy for COPD in over two decades and has already been touted by analysts as having “one of the strongest COPD launches in history.” The strategic timing of this acquisition offers Merck a revenue-generating product with an already established commercial trajectory. This reduces reliance on unproven Phase III assets and provides operational continuity as the oncology portfolio undergoes inevitable margin compression. CEO Rob Davis noted that Ohtuvayre aligns with Merck’s broader commercial strategy and has “multi-billion dollar potential.” While it may not replace Keytruda’s magnitude, Ohtuvayre’s contribution is expected to be meaningful in maintaining top-line stability during a transitional period.

Expanding Beyond Oncology Into Chronic Respiratory Markets

Merck has been historically viewed as oncology-centric due to the dominance of Keytruda. However, with this acquisition, the company is signaling a broader diversification strategy into non-oncology areas—particularly chronic diseases with underserved needs. Chronic Obstructive Pulmonary Disease (COPD) is a serious and progressive illness with few innovative treatments over the past two decades. Ohtuvayre, Verona’s lead asset, directly addresses this gap as the first novel inhaled COPD therapy approved in over 20 years. Its mechanism provides a differentiated approach to airflow obstruction, targeting the underlying pathophysiology in a way existing drugs do not.

COPD affects an estimated 16 million adults in the U.S. alone, and Merck projects that the total U.S. COPD market could grow from $17 billion to $27 billion by 2032. The therapeutic expansion into chronic respiratory conditions aligns with Merck’s stated goal of diversifying revenue across multiple modalities and therapeutic categories, including immunology, cardiometabolic, ophthalmology, and HIV. Moreover, this acquisition builds upon Merck’s growing respiratory portfolio, which includes clesrovimab, its RSV antibody recently approved for use in newborns. The Verona deal, therefore, is not a one-off transaction but part of a layered strategy to capture growth in adjacent non-oncology markets where Merck believes it can apply its commercial scale and R&D prowess. This diversification reduces reliance on the volatile oncology space and positions the company to address broader public health needs, albeit with the added complexity of penetrating new prescriber bases and reimbursement structures.

Strengthening Near-Term Launch Pipeline With De-Risked Assets

Merck has consistently emphasized its commitment to advancing its pipeline, with nearly 20 launches anticipated in the coming years. However, many of these assets remain in the early-to-mid development stages and are subject to clinical, regulatory, and commercial uncertainty. In contrast, Verona’s Ohtuvayre has already secured U.S. regulatory approval, launched commercially, and demonstrated early signs of robust uptake. Jefferies analysts have praised the launch trajectory, citing rapid physician adoption and favorable positioning in formularies. This makes Verona a “de-risked” acquisition—especially compared to early-stage biotech bets that come with a higher risk-reward profile.

With the transaction structured as a UK scheme of arrangement, Merck can swiftly integrate the asset without prolonged shareholder disputes, given the board’s support. Importantly, Verona is also studying its COPD drug for other respiratory illnesses, including chronic cough and asthma-related phenotypes, potentially expanding the addressable market. Moreover, Merck already has an existing respiratory commercial infrastructure, which can be immediately leveraged to accelerate Ohtuvayre’s rollout without incurring substantial incremental costs. In an era where pharmaceutical companies are constrained by pricing reforms, speed to revenue matters. A proven asset like Ohtuvayre enables Merck to hit the ground running and improve its revenue visibility over the next two to three fiscal years—an increasingly important consideration as investors seek predictability amid uncertainty around Medicare price negotiation and biosimilar dynamics.

Strategic Fit Amid Regulatory & Reimbursement Headwinds

The policy environment in the U.S. has become increasingly complex for pharmaceutical manufacturers. The IRA’s Medicare drug price negotiation and the Biden administration’s renewed focus on MFN pricing are placing downward pressure on high-margin products like Keytruda. Merck is particularly exposed, as the IRA explicitly targets top-spending Medicare drugs, and the recent CMS language suggests that subcutaneous formulations like subcu Keytruda will be treated as economically identical to their IV counterparts, limiting any pricing maneuverability. In this climate, acquiring Verona serves a strategic risk mitigation function.

Ohtuvayre is not currently exposed to IRA price negotiations, and the respiratory space has historically experienced less pricing scrutiny than oncology. In addition, Merck has repeatedly pointed out the inefficiencies of the U.S. pharmaceutical distribution chain—claiming that only 49% of drug spending reaches innovators, while middlemen capture the rest. A product like Ohtuvayre, which enters a less crowded therapeutic area with less entrenched pricing friction, offers a cleaner margin profile. Moreover, as payers increasingly seek real-world evidence and value-based contracts, Verona’s focused clinical development and narrow product indication make outcomes measurement easier and potentially more favorable. Lastly, acquiring a commercial-stage company that fits squarely into Merck’s existing sales ecosystem helps the company maintain its U.S.-centric strategy, avoiding complications from foreign price referencing or ex-U.S. regulatory delays that might impact other pipeline candidates. In short, Verona’s strategic insulation from some of the industry’s biggest reimbursement challenges makes it an appealing defensive addition.

Conclusion: A Tactical Diversification Move That Still Leaves Work To Be Done

Source: Yahoo Finance

Merck’s stock price has been on the downslide over the past year as concerns of Keytruda’s cliff remain despite the management’s acquisition-oriented approach. The $10 billion acquisition of Verona Pharma represents a calculated step in managing the financial fallout from the upcoming Keytruda LOE and broader regulatory reforms. The acquisition delivers a commercial-stage asset with peak sales potential, opens up expansion in the chronic respiratory market, provides a de-risked short-term launch, and mitigates exposure to the increasingly uncertain U.S. pricing landscape. However, Verona’s projected $4 billion peak sales form a very small replacement of the $29.5 billion revenue hole Keytruda will leave. Furthermore, the intensifying competition in COPD from players like Sanofi and GSK, and reimbursement complexities still pose challenges. While this acquisition is an important part of a multi-pronged mitigation strategy, we believe that it does not fully solve Merck’s long-term revenue dilemma. The company will need to continue aggressively executing on its internal pipeline, expanding in new therapeutic areas, and pursuing additional bolt-on deals to maintain its growth trajectory.