Merck & Co., Inc. (NYSE:MRK) closed at $145.45 on October 12. The stock has returned 21% during the last six months, compared to a 21.25% return for the Insider Monkey Billionaire Index and 14% for State Street SPDR S&P 500 ETF Trust.
A company that keeps three-quarters of its revenue as gross profit does not lose money at the operating line by selling medicine. Merck is spending its way out of a problem that arrives later this decade, when its largest product loses protection. The income statement is the cost of that attempt, booked all at once.
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Two Charges Explain Both Figures:
Merck booked an acquired research charge of roughly $9.00 billion against the Cidara acquisition in the first quarter, and a further charge for Terns in the second. Accounting rules send that straight through research and development expense rather than onto the balance sheet. Neither charge carried a tax benefit, which is why the damage reaches the bottom line undiluted and why an operating margin reads below zero.
The cash statement shows what actually happened. An acquired research charge is a purchase price written off at once rather than money walking out the door each quarter, and free cash flow came in at several times reported net income. That also explains the payout ratio, because the dividend costs 266.67% of earnings and a small fraction of the cash. A charge that never cost a dollar is exactly the distortion that makes reported payout ratios useless across the pharmaceutical dividend payers we ranked for 2026, where the name we put first is up 13% since.
The underlying business did not shrink while this happened. Revenue grew 5.10% in the most recent quarter.
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What Ten Billion Dollars Actually Bought:
Stripping out the charges is correct arithmetic, and it is not the end of the argument. Merck spent well over ten billion dollars on pipeline that has produced nothing yet.
Acquired research is written off immediately precisely because it has no alternative future use. The accounting treatment is an admission that these assets may never generate revenue, and in pharmaceutical development most of them do not.
The reason for the spending is the real issue. Merck faces the loss of exclusivity on its largest product later this decade, and these acquisitions are meant to replace that revenue. Meanwhile, the existing medicines are growing at 5.10%, which is not fast enough to fill the gap on its own, and debt stands at $53.91 billion.
So the bull and bear cases are the same fact viewed from different ends. The charges are not a problem, and what they were spent on is an open question that resolves over years. Every large drugmaker is racing its own patent calendar, and decades of uninterrupted increases are the only real proof a payout survives a research bill this size. That record is what defines the aristocrats that have raised payouts for decades.
The Valuation Case:
On earnings, the stock trades at 15.62 times forward, on analyst consensus estimates, against a trailing figure above a hundred that the charges rendered meaningless. The verdict is that Merck looks fairly valued rather than cheap, and the forward multiple assumes two things at once. It assumes the charges do not repeat, and it assumes the pipeline they bought eventually replaces the revenue coming off patent. The first assumption is reasonable. The second is the actual investment question, and no multiple answers it, which is why income buyers tend to stay with the blue chip dividend stocks hedge funds own in size. The most widely held of them is up 23% since.
Conclusion:
Two charges explain the entire income statement, and neither cost a dollar of cash. They went through research expense untaxed and produced the negative operating margin, while free cash flow arrived at several times reported net income and revenue still grew. However, the company paid an enormous sum for pipeline that has produced nothing yet. The debt load is heavy, and the forward multiple assumes that the pipeline eventually replaces revenue coming off patent. The medicines already on the shelf have to carry this company until the pipeline arrives, which makes revenue growth the figure that matters.
Market Sentiment:
Merck & Co., Inc. was held by 101 hedge funds with a combined stake value of about $9.42 billion at the end of Q2 2026 in the Insider Monkey database. This is up from 98 hedge fund holders with a cumulative investment value of around $8.45 billion in the previous quarter.
While we acknowledge the risk and potential of MRK as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than MRK and that has 10,000% upside potential, check out our report about this cheapest AI stock.
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This article is originally published at Insider Monkey.
