How MRK (Merck & Co.) Makes Money in 2026: A Deep-Dive With Income Statement

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Understanding how a pharmaceutical giant like Merck makes money is essential for investors and anyone interested in the business of healthcare. In this post, we break down Merck's quarterly income statement (Q4 2025) using a Sankey chart to visualize the financial flows — what comes in, where it goes, and what's left as profit.

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Quick Merck Overview

Merck operates as a leading global healthcare company focused on discovering, developing, manufacturing, and marketing innovative medicines and vaccines. Revenue comes primarily from pharmaceutical products and animal health solutions. The company operates through two main segments: Pharmaceutical, which drives the majority of sales via blockbuster drugs like KEYTRUDA, and Animal Health, providing veterinary pharmaceuticals and vaccines.

Revenue Breakdown

• Total Revenue (Q4 2025): $16.4B (+5.0% YoY)
  • Pharmaceutical Revenue: $14.8B (90.5% of total)
  • Animal Health Revenue: $1.5B (9.2% of total)
  • Other Revenue by Product: $0.05B (0.3% of total)
  • Growth is powered by strong demand for oncology drugs like KEYTRUDA and expansion in animal health.

Gross Profit and Margins

• Gross Profit: $15.2B (92.7% gross margin)
  • Cost of Revenue: $1.2B (+29.4% YoY)
  • Merck maintains robust margins due to high-value branded pharmaceuticals, economies of scale in manufacturing, and a favorable product mix dominated by high-margin drugs.
• Most costs come from manufacturing and distribution of pharmaceutical products, raw materials, and supply chain logistics.

Operating Income and Expenses

• Operating Income: $8.7B (+28.1% YoY, 53.3% margin)
• Operating Expenses: $6.5B (-17.9% YoY)
  • R&D: $3.7B (-19.5% YoY, 22.5% of revenue) — focused on oncology, vaccines, and pipeline expansion including next-generation cancer immunotherapies
  • SG&A: $2.8B (-15.8% YoY, 16.9% of revenue) — covering sales force activities, marketing for key drugs, and general administrative functions
  • Merck continues to prioritize innovation while maintaining efficiency through cost controls and streamlined operations.

Net Income

• Pre-Tax Income: $3.4B (-18.0% YoY, 20.9% margin)
• Income Tax: $0.5B (13.4% effective tax rate)
• Net Income: $3.0B (-20.8% YoY, 18.1% net margin)
• Merck converts a significant portion of sales into profit due to scalability of its drug portfolio, pricing power on patented medicines, and operational efficiencies.

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What Drives Merck's Money Machine?

• Pharmaceutical Revenue: 90.5%+ of revenue / led by oncology drugs like KEYTRUDA, which continues to be a blockbuster driving sustained growth
• KEYTRUDA Sales: Key metric with multi-billion quarterly contributions, supporting overall revenue stability
• R&D Investments: Heavy focus on pipeline development in immuno-oncology and vaccines to sustain long-term revenue
• Future growth areas: Animal Health expansion and new drug launches, though some early-stage pipeline investments remain unprofitable

Visualizing Merck's Financial Flows

The Sankey chart below visualizes how each dollar flows from gross revenue, through costs and expenses, down to net income. This helps investors spot where value is created, what areas weigh on profits, and how efficiently the company operates.

• Most revenue flows into gross profit, with operating expenses (especially R&D) taking the largest chunk.
• Even after significant R&D investments, 18.1% of revenue drops to the bottom line.

Key Takeaways

• Merck's money comes overwhelmingly from pharmaceutical sales
• High gross and net margins illustrate the power of Merck's patent-protected drug portfolio
• Heavy investment in R&D, balanced by efficiency in operating costs
• Ongoing growth is driven by blockbuster drugs and animal health expansion

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FAQ About Merck's Income Statement

1. What is the main source of Merck's revenue in 2025?

Merck generates over 90.5% of its revenue from Pharmaceutical Revenue. Animal Health contributes 9.2%, with minor other product revenue.

2. How profitable is Merck in Q4 2025?

Merck reported net income of $3.0B in Q4 2025, with a net margin of approximately 18.1%, reflecting strong profitability driven by high gross margins and disciplined expense management.

3. What are the largest expense categories for Merck?

The biggest expenses on Merck's income statement are operating expenses, particularly Research & Development (R&D) and Sales, General & Administrative (SG&A) costs. R&D investment reached $3.7B in Q4 2025, as Merck prioritizes oncology and vaccine development.

4. Why does Other Revenue by Product operate at a loss?

Other Revenue by Product, despite generating $52M in revenue, posted challenges reflected in overall flows in Q4 2025. This is because Merck aggressively invests in diversification efforts, believing these will drive long-term growth—even if the category shows volatility today.

5. How does Merck's effective tax rate compare to previous years?

Merck's effective tax rate in Q4 2025 was 13.4%, consistent with previous years. This moderate rate is primarily due to tax benefits from international operations and R&D credits.