On October 26, 2023 Merck (NYSE: MRK), known as MSD outside the United States and Canada, reported financial results for the third quarter of 2023 (Press release, Merck & Co, OCT 26, 2023, View Source [SID1234636378]).
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"Our strong results this quarter reflect our talented team’s commitment to bringing forward important innovation and pursuing breakthroughs for all those who count on us," said Robert M. Davis, chairman and chief executive officer, Merck. "We continue to push the boundaries of science, making disciplined investments to augment our diverse pipeline and applying our expertise to accelerate potentially transformative treatments to address patient needs – including through our recently announced collaboration with Daiichi Sankyo. I am proud of our progress as we continue to execute at the highest level and work to generate strong and sustainable value, today and well into the future."
Financial Summary
$ in millions, except EPS amounts
Third Quarter
2023
2022
Change
Change Ex-
Exchange
Sales
$15,962
$14,959
7%
9%
GAAP net income1
4,745
3,248
46%
56%
Non-GAAP net income that excludes certain items1,2*
5,427
4,703
15%
22%
GAAP EPS
1.86
1.28
45%
55%
Non-GAAP EPS that excludes certain items2*
2.13
1.85
15%
22%
*Refer to table on page 6.
Generally Accepted Accounting Principles (GAAP) earnings per share (EPS) assuming dilution was $1.86 for the third quarter of 2023. Non-GAAP EPS was $2.13 for the third quarter of 2023. The increases in GAAP and non-GAAP EPS in the third quarter versus the prior year were primarily due to operational strength in the business, as well as $0.22 of charges recorded in 2022 related to collaboration and licensing agreements with Moderna, Inc. (Moderna), Orna Therapeutics (Orna) and Orion Corporation (Orion). The increase in GAAP EPS in the third quarter of 2023 was also driven by the impacts of intangible asset impairment charges recorded in 2022, compared with no such charges recorded in 2023, and lower losses from investments in equity securities in 2023. The increases in both GAAP and non-GAAP EPS in the third quarter were partially offset by the unfavorable impact of foreign exchange.
Non-GAAP EPS excludes acquisition- and divestiture-related costs, costs related to restructuring programs, as well as income and losses from investments in equity securities.
Year-to-date results can be found in the attached tables.
Third-Quarter Sales Performance
The following table reflects sales of the company’s top products and significant performance drivers.
Third Quarter
$ in millions
2023
2022
Change
Change Ex-Exchange
Commentary
Total Sales
$15,962
$14,959
7%
9%
Pharmaceutical
14,263
12,963
10%
11%
Increase driven by growth in oncology, vaccines, and virology due to sales of LAGEVRIO, partially offset by diabetes. Excluding LAGEVRIO, growth of 9%. Excluding LAGEVRIO and unfavorable impact of foreign exchange, growth of 10%.
KEYTRUDA
6,338
5,426
17%
17%
Growth driven by increased global uptake in earlier-stage indications, including triple-negative breast cancer (TNBC) and renal cell carcinoma (RCC), and continued strong global demand from metastatic indications.
GARDASIL / GARDASIL 9
2,585
2,294
13%
16%
Growth due to strong demand, particularly in China, and higher pricing in the U.S., partially offset by public-sector buying patterns in the U.S.
JANUVIA / JANUMET
835
1,133
-26%
-25%
Decline primarily due to generic competition in several international markets, particularly in Europe, and lower demand in the U.S.
PROQUAD, M-M-R II and VARIVAX
713
668
7%
6%
Growth largely due to higher pricing in the U.S.
LAGEVRIO
640
436
47%
51%
Growth largely attributable to higher demand in Japan, partially offset by lower demand in Australia and nonrecurrence of sales in the U.K.
BRIDION
424
423
0%
0%
Relatively flat compared with prior year due to higher demand in the U.S., offset by generic competition primarily in Europe.
Lynparza*
299
284
5%
6%
Growth driven primarily by higher pricing in the U.S. and increased demand in Latin America.
Lenvima*
260
202
29%
30%
Growth primarily due to higher demand in the U.S. and certain international markets, and timing of shipments in China.
VAXNEUVANCE
214
16
***N/M
N/M
Growth driven largely by continued uptake in pediatric indication in the U.S. and launches in Europe.
Animal Health
1,400
1,371
2%
2%
Growth primarily driven by higher pricing in both Livestock and Companion Animal product portfolios.
Livestock
874
829
5%
7%
Growth primarily due to higher pricing across product portfolio, as well as higher demand for ruminant, poultry and swine products.
Companion Animal
526
542
-3%
-4%
Decline primarily due to lower vet visits in the U.S., partially offset by higher pricing. Sales of BRAVECTO were $235 million and $241 million in the current and prior-year quarters, respectively, which represented a decline of 3%.
Other Revenues**
299
625
-52%
-18%
Decline primarily due to impact of revenue hedging. Excluding unfavorable impact of foreign exchange, decline due to lower revenue from third-party manufacturing arrangements.
*Alliance revenue for this product represents Merck’s share of profits, which are product sales net of cost of sales and commercialization costs.
**Other revenues are comprised primarily of revenues from third-party manufacturing arrangements and miscellaneous corporate revenues, including revenue-hedging activities.
***Not meaningful
Third-Quarter Expense, EPS and Related Information
The table below presents selected expense information.
$ in millions
GAAP
Acquisition-
and
Divestiture-
Related Costs3
Restructuring
Costs
(Income)
Loss From
Investments
in Equity
Securities
Non-
GAAP2
Third Quarter 2023
Cost of sales
$4,264
$552
$33
$-
$3,679
Selling, general and administrative
2,519
17
40
–
2,462
Research and development
3,307
10
–
–
3,297
Restructuring costs
126
–
126
–
–
Other (income) expense, net
126
(24)
–
17
133
Third Quarter 2022
Cost of sales
$3,934
$446
$54
$-
$3,434
Selling, general and administrative
2,520
22
26
–
2,472
Research and development
4,399
902
1
–
3,496
Restructuring costs
94
–
94
–
–
Other (income) expense, net
429
(26)
–
350
105
GAAP Expense, EPS and Related Information
Gross margin was 73.3% for the third quarter of 2023 compared with 73.7% for the third quarter of 2022. The decrease was primarily due to the unfavorable impact of foreign exchange, higher LAGEVRIO sales, which have a low gross margin, and higher acquisition- and divestiture-related costs. The gross margin decline was partially offset by lower revenue from third-party manufacturing arrangements, lower manufacturing-related costs and the favorable impact of product mix.
Selling, general and administrative (SG&A) expenses were $2.5 billion in both the third quarters of 2023 and 2022, primarily reflecting increased promotional spending, offset by lower administrative costs.
Research and development (R&D) expenses were $3.3 billion in the third quarter of 2023 compared with $4.4 billion in the third quarter of 2022. The decrease was primarily due to charges recorded in 2022 of $887 million for intangible asset impairments, largely related to nemtabrutinib, and $690 million for collaboration and licensing agreements with Moderna, Orna and Orion. The decrease in R&D expenses was partially offset by higher compensation and benefit costs in 2023, reflecting in part increased headcount, higher investments in discovery research and early drug development and higher clinical development spending.
Other (income) expense, net, was $126 million of expense in the third quarter of 2023 compared with $429 million of expense in the third quarter of 2022, primarily due to lower net losses from investments in equity securities.
The effective tax rate was 15.5% for the third quarter of 2023 compared with 9.2% in the third quarter of 2022.
GAAP EPS was $1.86 for the third quarter of 2023 compared with $1.28 for the third quarter of 2022.
Non-GAAP Expense, EPS and Related Information
Non-GAAP gross margin was 77.0% for both the third quarters of 2023 and 2022, due to the unfavorable impact of foreign exchange, and higher LAGEVRIO sales, which have a low gross margin, offset by lower revenue from third-party manufacturing arrangements, lower manufacturing-related costs and the favorable impact of product mix.
Non-GAAP SG&A expenses were $2.5 billion in both the third quarters of 2023 and 2022, primarily reflecting increased promotional spending, offset by lower administrative costs.
Non-GAAP R&D expenses were $3.3 billion in the third quarter of 2023 compared with $3.5 billion in the third quarter of 2022. The decrease was primarily due to charges of $690 million in 2022 related to collaboration and licensing agreements with Moderna, Orna and Orion. The decrease in R&D expenses was partially offset by higher compensation and benefit costs in 2023, reflecting in part increased headcount, higher investments in discovery research and early drug development and higher clinical development spending.
Non-GAAP other (income) expense, net, was $133 million of expense in the third quarter of 2023 compared with $105 million of expense in the third quarter of 2022.
The non-GAAP effective tax rate was 15.0% for the third quarter of 2023 compared with 13.6% in the third quarter of 2022.
Non-GAAP EPS was $2.13 for the third quarter of 2023 compared with $1.85 for the third quarter of 2022.
A reconciliation of GAAP to non-GAAP net income and EPS is provided in the table that follows.
Third Quarter
$ in millions, except EPS amounts
2023
2022
EPS
GAAP EPS
$1.86
$1.28
Difference
0.27
0.57
Non-GAAP EPS that excludes items listed below2
$2.13
$1.85
Net Income
GAAP net income1
$4,745
$3,248
Difference
682
1,455
Non-GAAP net income that excludes items listed below1,2
$5,427
$4,703
Excluded Items:
Acquisition- and divestiture-related costs3
$555
$1,344
Restructuring costs
199
175
Loss from investments in equity securities
17
350
Net decrease (increase) in income before taxes
771
1,869
Estimated income tax (benefit) expense
(89)
(414)
Decrease (increase) in net income
$682
$1,455
Pipeline and Portfolio Highlights
Merck continued to achieve regulatory and clinical milestones across its expansive pipeline and portfolio. The company is initiating Phase 3 trials in 2023 in multiple therapeutic areas, including oncology, cardiometabolic and immunology, and in new modalities. These include investigational individualized neoantigen therapy V940 in combination with KEYTRUDA, antibody-drug conjugate (ADC) MK-2870 and lysine-specific demethylase-1 inhibitor MK-3543 in oncology, oral PCSK9 inhibitor candidate MK-0616 in cardiovascular, and humanized monoclonal antibody MK-7240 in immunology.
In oncology, the company received U.S. Food and Drug Administration (FDA) approval of KEYTRUDA for the treatment of certain patients with resectable non-small cell lung cancer (NSCLC) as a neoadjuvant/adjuvant treatment, the company’s eighth approval of KEYTRUDA in earlier-stage cancer. The FDA also granted priority review to two supplemental New Drug Applications (sNDAs): for WELIREG in certain previously treated patients with advanced RCC, and for KEYTRUDA in cervical cancer. Notably, Merck presented compelling new data at the European Society for Medical Oncology (ESMO) (Free ESMO Whitepaper) Congress 2023 that showcased the company’s progress in earlier stages of cancers, its foundational position in metastatic disease and continued momentum in its diverse oncology pipeline.
In cardiovascular disease, Merck received priority review from the FDA for a new Biologics License Application (BLA) for sotatercept, the company’s novel investigational activin signaling inhibitor for the treatment of adults with pulmonary arterial hypertension (PAH) (World Health Organization Group 1), based on clinically meaningful results from the Phase 3 STELLAR trial. The FDA set a Prescription Drug User Fee Act (PDUFA), or target action, date of March 26, 2024. If approved, sotatercept would be the first in its class, bringing a novel approach to address a rare and progressive disease of the pulmonary arteries. Merck’s submission for sotatercept to the Committee for Medicinal Products for Human Use (CHMP) in the European Union (EU) has also been completed.
Additionally, Merck entered into a collaboration agreement with Daiichi Sankyo for three potentially first-in-class clinical-stage DXd ADCs for the treatment of multiple solid tumors, both as monotherapy and/or in combination with other treatments. This collaboration with Daiichi Sankyo will further augment and diversify Merck’s oncology pipeline.
Notable recent news releases on Merck’s pipeline and portfolio are provided in the table that follows.
Oncology
FDA Approved KEYTRUDA for Treatment of Patients With Resectable (T≥4 cm or N+) NSCLC in Combination With Chemotherapy as Neoadjuvant Treatment, Then Continued as Single Agent as Adjuvant Treatment After Surgery, Based on Results From Phase 3 KEYNOTE-671 Trial
(Read Announcement)
FDA Granted Priority Review to Merck’s Application for KEYTRUDA Plus Concurrent Chemoradiotherapy as Treatment for Patients With Newly Diagnosed High-Risk Locally Advanced Cervical Cancer, Based on Results From Phase 3 KEYNOTE-A18 Trial; FDA Set PDUFA Date of Jan. 20, 2024
(Read Announcement)
FDA Accepted for Priority Review Merck’s sNDA for WELIREG in Certain Previously Treated Patients With Advanced RCC, Based on Results From Phase 3 LITESPARK-005 Trial; FDA Set PDUFA Date of Jan. 17, 2024
(Read Announcement)
European Commission (EC) Approved KEYTRUDA as Adjuvant Treatment for Adults With NSCLC at High Risk of Recurrence Following Complete Resection and Platinum-Based Chemotherapy, Based on Results From Phase 3 KEYNOTE-091 Trial
(Read Announcement)
EC Approved KEYTRUDA Plus Trastuzumab and Chemotherapy as First-Line Treatment for HER2-Positive Advanced Gastric or Gastroesophageal Junction (GEJ) Adenocarcinoma Expressing PD-L1 (CPS ≥1), Based on Results From Phase 3 KEYNOTE-811 Trial
(Read Announcement)
EU Granted Positive CHMP Opinion for KEYTRUDA Plus Chemotherapy as First-Line Treatment for HER2-Negative Advanced Gastric or GEJ Adenocarcinoma Expressing PD-L1 (CPS ≥1), Based on Results From Phase 3 KEYNOTE-859 Trial
(Read Announcement)
Japan Ministry of Health, Labor and Welfare Approved Lynparza Plus Abiraterone and Prednisolone for Treatment of BRCA-Mutated Metastatic Castration-Resistant Prostate Cancer, Based on Results From Phase 3 PROpel Trial
(Read Announcement)
KEYTRUDA Plus Chemotherapy Before Surgery and Continued as Single Agent After Surgery Reduced Risk of Death by 28% Versus Pre-Operative Chemotherapy in Resectable Stage II, IIIA or IIIB NSCLC, Based on Results From Phase 3 KEYNOTE-671 Trial
(Read Announcement)
KEYTRUDA Plus Padcev Reduced Risk of Death by More Than Half Versus Chemotherapy in Patients With Previously Untreated Locally Advanced or Metastatic Urothelial Cancer, Based on Results From Phase 3 KEYNOTE-A39/EV-302 Trial
(Read Announcement)
KEYTRUDA Plus Concurrent Chemoradiotherapy Significantly Improved Progression-Free Survival (PFS) Versus Concurrent Chemoradiotherapy Alone in Newly Diagnosed, High-Risk Locally Advanced Cervical Cancer, Based on Results From Phase 3 KEYNOTE-A18 Trial
(Read Announcement)
WELIREG Significantly Improved PFS and Objective Response Rates Versus Everolimus in Certain Previously Treated Patients With Advanced RCC, Based on Results From Phase 3 LITESPARK-005 Trial
(Read Announcement)
KEYTRUDA Plus Chemotherapy Showed Statistically Significant Improvement in Pathological Complete Response Rate as Neoadjuvant Therapy Versus Chemotherapy in High-Risk, Early-Stage ER+/HER2- Breast Cancer, Based on Results From Phase 3 KEYNOTE-756 Trial
(Read Announcement)
KEYTRUDA Plus Trastuzumab and Chemotherapy Significantly Improved PFS Versus Trastuzumab and Chemotherapy in First-Line HER2-Positive Advanced Gastric or GEJ Adenocarcinoma, Based on Results From Phase 3 KEYNOTE-811 Trial
(Read Announcement)
KEYTRUDA Significantly Improved Disease-Free Survival in Certain Patients With Muscle-Invasive Urothelial Carcinoma After Surgery, Based on Results From Phase 3 KEYNOTE-123 Trial
(Read Announcement)
Cardiovascular
FDA Accepted for Priority Review a New BLA for Sotatercept, an Activin Signaling Inhibitor to Treat Adults With PAH, Based on Results From Phase 3 STELLAR Trial; FDA Set PDUFA Date of March 26, 2024
(Read Announcement)
Merck Presented New Analyses Supporting the Promising Potential of Sotatercept, Its Investigational Medicine for Adults With PAH, Based on Results From Phase 3 STELLAR and SOTERIA Trials
(Read Announcement)
Merck Initiated Phase 3 Clinical Program for Oral PCSK9 Inhibitor Candidate MK-0616
(Read Announcement)
Vaccines
Long-Term Follow-up Data on Sustained Immunogenicity and Safety for GARDASIL Published in Pediatrics
(Read Announcement)
Hospital Acute Care
Merck Received Positive EU CHMP Opinion for PREVYMIS for Prevention of CMV Disease in High-Risk Adult Kidney Transplant Recipients and Extended 200-Day Dosing in Adult Hematopoietic Stem Cell Transplant Recipients at Risk for Late CMV Infection and Disease, Based on Results From Phase 3 P002 and P040 Trials
(Read Announcement)
Sustainability Highlights
Merck issued its 2022/2023 Impact Report highlighting the company’s performance across its sustainability efforts, reflecting strong progress toward its commitments to advance access to health and operate responsibly. The report noted how the company reached more than 500 million people around the world with its innovations in 2022 and expanded two of its 2025 Access to Health goals.
Full-Year 2023 Financial Outlook
The following table summarizes the company’s full-year financial outlook.
Full Year 2023
Updated
Prior
Sales*
$59.7 to $60.2 billion
$58.6 to $59.6 billion
Non-GAAP Gross margin2
Approximately 77%
Approximately 77%
Non-GAAP Operating expenses2**
$39.8 to $40.4 billion
$34.0 to $34.6 billion
Non-GAAP Other (income) expense, net2
Approximately $200 million
Approximately $100 million
Non-GAAP Effective tax rate2***
39.0% to 40.0%
30.5% to 31.5%
Non-GAAP EPS2****
$1.33 to $1.38
$2.95 to $3.05
Share count (assuming dilution)
2.55 billion
2.55 billion
*Includes approximately $1.3 billion of LAGEVRIO sales. The company does not have any non-GAAP adjustments to sales.
**Includes an aggregate $17.1 billion of R&D expenses related to the Prometheus Biosciences, Inc. (Prometheus) and Imago BioSciences, Inc. (Imago) acquisitions, and upfront payments for the license and collaboration agreement with Kelun-Biotech (a holding subsidiary of Sichuan Kelun Pharmaceutical Co., Ltd) and collaboration agreement with Daiichi Sankyo. Outlook does not assume any additional significant potential business development transactions.
***Includes an approximate 24.5 percentage point negative impact related to business development (Imago, Prometheus and Daiichi Sankyo).
****Includes $6.22 of one-time charges related to the Prometheus and Imago acquisitions and upfront payments to Kelun-Biotech and Daiichi Sankyo.
Merck has not provided a reconciliation of forward-looking non-GAAP gross margin, non-GAAP operating expenses, non-GAAP other (income) expense, net, non-GAAP effective tax rate and non-GAAP EPS to the most directly comparable GAAP measures, given it cannot predict with reasonable certainty the amounts necessary for such a reconciliation, including intangible asset impairment charges, legal settlements, and income and losses from investments in equity securities either owned directly or through ownership interests in investment funds, without unreasonable effort. These items are inherently difficult to forecast and could have a significant impact on the company’s future GAAP results.
Merck continues to experience strong sustained demand for key growth products, particularly in oncology and vaccines. As a result, Merck is raising and narrowing its full-year sales outlook. Merck now expects full-year sales to be between $59.7 billion and $60.2 billion, including a negative impact of foreign exchange of approximately 2 percentage points, at mid-October 2023 exchange rates. This full-year outlook includes approximately $1.3 billion of LAGEVRIO sales.
Merck’s full-year non-GAAP effective income tax rate is expected to be between 39.0% and 40.0%, which includes an approximate 24.5 percentage point negative impact related to business development activity.
Merck now expects its full-year non-GAAP EPS to be between $1.33 and $1.38, including a negative impact of foreign exchange of approximately 6 percentage points, at mid-October 2023 exchange rates. This revised non-GAAP EPS range reflects the following, which were not previously included in the outlook:
Additional strength in the business of approximately $0.15 per share.
A pretax charge of $5.5 billion, or $1.70 per share, for the collaboration agreement with Daiichi Sankyo.
Estimated expense in the fourth quarter of 2023 of approximately $0.04 per share to advance the ADC assets and finance the transaction with Daiichi Sankyo.
A 1%, or approximately $0.05 per share, incremental negative impact of foreign exchange.
The non-GAAP EPS range excludes acquisition- and divestiture-related costs, costs related to restructuring programs, income and losses from investments in equity securities, and a previously disclosed charge related to settlements with certain plaintiffs in the Zetia antitrust litigation.
Earnings Conference Call
Investors, journalists and the general public may access a live audio webcast of the earnings conference call on Thursday, Oct. 26, at 9 a.m. ET via this weblink. A replay of the webcast, along with the sales and earnings news release, supplemental financial disclosures, prepared remarks and slides highlighting the results, will be available at www.merck.com.
All participants may join the call by dialing (888) 769-8514 (U.S. and Canada Toll-Free) or (517) 308-9208 and using the access code 8206435.