On July 28, 2015 Merck (NYSE:MRK), known as MSD outside the United States and Canada, reported financial results for the second quarter of 2015 (Press release, Merck & Co, JUL 28, 2015, View Source [SID:1234506724]).
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Commentary from Chairman and Chief Executive Officer Kenneth C. Frazier
"We’re investing resources to grow our strongest brands and to support the most promising assets in our pipeline, while at the same time lowering our cost base and delivering operating leverage."
"We’ve made significant progress this quarter in two of our most important assets, the KEYTRUDA and hepatitis C programs, and will be fully prepared to take advantage of these potentially breakthrough opportunities."
"We’re witnessing the introduction of breakthrough therapies for some of the most difficult-to-treat diseases. Merck’s late-stage pipeline and ongoing launches reflect scientific and therapeutic progress with the potential to provide significant value to patients and society."
Select Business Highlights
Worldwide sales were $9.8 billion for the second quarter of 2015, a decrease of 11 percent compared with the second quarter of 2014, including a 7 percent negative impact from foreign exchange and a 7 percent net unfavorable impact resulting from the divestiture of the Consumer Care business and select products, partially offset by the acquisition of Cubist Pharmaceuticals, Inc. (Cubist).
The following table reflects sales of the company’s top pharmaceutical products, as well as total sales of Animal Health and Consumer Care products.
Commercial and Pipeline Highlights
During the second quarter of 2015, Merck continued to advance its pipeline while also focusing on the ongoing launches of KEYTRUDA (pembrolizumab), its anti-PD-1 therapy, for the treatment of advanced melanoma in patients whose disease has progressed after other therapies; BELSOMRA (suvorexant) for the treatment of insomnia; and ZERBAXA (ceftolozane and tazobactam), a combination product for the treatment of certain serious bacterial infections in adults.
The company accelerated its KEYTRUDA clinical development program.
The European Commission approved KEYTRUDA last week at a dose of 2 mg/kg every three weeks for the treatment of advanced (unresectable or metastatic) melanoma in adults, allowing marketing of KEYTRUDA in all 28 European Union member states.
The U.S. Food and Drug Administration (FDA) accepted for review the supplemental Biologics License Application (sBLA) for KEYTRUDA for the treatment of patients with advanced non-small cell lung cancer whose disease has progressed on or after platinum-containing chemotherapy and an FDA-approved therapy for EGFR or ALK genomic tumor aberrations, if present. The FDA granted Priority Review with a PDUFA action date of Oct. 2, 2015; the sBLA will be reviewed under the FDA’s Accelerated Approval program.
At the 51st Annual Meeting of the American Society of Clinical Oncology (ASCO) (Free ASCO Whitepaper) in June, data sets were presented investigating the use of KEYTRUDA in advanced head and neck cancer (KEYNOTE-012) and in multiple difficult-to-treat cancers, including advanced small cell lung cancer, esophageal cancer and ovarian cancer (KEYNOTE-028). Additionally, data were presented and simultaneously published in The New England Journal of Medicine suggesting that the presence of DNA repair mutations in colorectal cancer cells is associated with favorable responses to KEYTRUDA.
The clinical development program for the treatment of chronic hepatitis C virus (HCV) infection made substantial progress in the second quarter of 2015.
As announced earlier today, the FDA has accepted for review the New Drug Application (NDA) for grazoprevir/elbasvir, an investigational once-daily, single tablet combination therapy for the treatment of adult patients infected with chronic HCV genotypes (GT) 1, 4 or 6. The FDA granted Priority Review with a PDUFA action date of Jan. 28, 2016.
Last week the European Medicines Agency (EMA) accepted for review the company’s marketing authorization application (MAA) for grazoprevir/elbasvir for the treatment of adult patients infected with chronic HCV GT 1, 3, 4 or 6. The EMA said it will initiate a review of the MAA under accelerated assessment timelines.
Results from the Trial Evaluating Cardiovascular Outcomes with Sitagliptin (TECOS) of JANUVIA (sitagliptin), a medicine that helps lower blood sugar levels in adults with type 2 diabetes, were presented in June at the 75th Scientific Sessions of the American Diabetes Association and simultaneously published online in The New England Journal of Medicine. The study found that, added to usual care, treatment with JANUVIA did not increase the risk of major adverse cardiovascular events in the primary composite endpoint, or hospitalization for heart failure, compared to placebo.
The FDA has accepted the resubmission of the NDA for sugammadex injection, an investigational medicine for the reversal of neuromuscular blockade induced by rocuronium or vecuronium, with a PDUFA action date of Dec. 19, 2015. Sugammadex injection is marketed as BRIDION in more than 60 countries.
The FDA has extended its planned review timeline of the Biologics License Application for V419, the investigational pediatric hexavalent combination vaccine, DTaP5-IPV-Hib-HepB, which is being developed and, if approved, will be commercialized through a partnership of Merck and Sanofi Pasteur. The FDA has not requested additional clinical studies for licensure.
Pharmaceutical Revenue Performance
Second-quarter pharmaceutical sales declined 6 percent to $8.6 billion, including a 9 percent negative impact from foreign exchange. Excluding the impact of exchange, growth was driven by sales in the core therapeutic areas of hospital acute care, oncology and diabetes. The increase in hospital acute care was driven by the addition of the Cubist portfolio and sales growth of inline brands. Growth in oncology reflects sales of $110 million for KEYTRUDA. Growth in diabetes primarily reflects higher sales in the United States, Europe and emerging markets.
Second-quarter pharmaceutical sales reflect declines in the cardiovascular portfolio of ZETIA (ezetimibe) and VYTORIN (ezetimibe/simvastatin), medicines for lowering LDL cholesterol, primarily due to loss of exclusivity of ZETIA in Canada (where it is marketed as EZETROL) and volume declines of both products in the United States, as well as lower sales of REMICADE (infliximab), a treatment for inflammatory diseases, due to loss of exclusivity in Europe. Pharmaceutical sales also reflect declines in the HCV portfolio of VICTRELIS (boceprevir) and PEGINTRON (peginterferon alfa-2b), as well as for ISENTRESS (raltegravir), an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection. The decline for ISENTRESS was due to timing of tender purchases in the emerging markets and volume declines in the United States.
Animal Health Revenue Performance
Animal Health sales totaled $840 million for the second quarter of 2015, a decrease of 4 percent compared with the second quarter of 2014, including a 14 percent negative impact from foreign exchange. Excluding the impact of exchange, growth was primarily driven by an increase in sales of companion animal and swine products, including continued strong growth from BRAVECTO (fluralaner), a chewable tablet that kills fleas and ticks in dogs for up to 12 weeks.
Other Revenue Performance
Other revenues – primarily comprising alliance revenue, miscellaneous corporate revenues and third-party manufacturing sales – decreased 3 percent to $381 million compared to the second quarter of 2014. The decrease was driven primarily by the loss of revenue from AstraZeneca recorded by Merck, which was $316 million in the second quarter of 2014, partially offset by higher third-party manufacturing sales.
Second-Quarter 2015 Expense and Other Information
The costs detailed below totaled $8.2 billion on a GAAP basis during the second quarter of 2015 and include $1.8 billion of acquisition- and divestiture-related costs and restructuring costs.
The gross margin was 61.6 percent for the second quarter of 2015 compared to 55.2 percent for the second quarter of 2014, reflecting 13.8 and 17.4 unfavorable percentage point impacts, respectively, from the acquisition- and divestiture-related costs and restructuring costs noted above. The increase in non-GAAP gross margin was driven by lower inventory write-offs and foreign exchange.
Marketing and administrative expenses, on a non-GAAP basis, were $2.5 billion in the second quarter of 2015, a decrease from $2.9 billion in the same period of 2014, which was primarily driven by the sale of the Consumer Care business, the favorable impact of foreign exchange and declines in direct selling costs.
Research and development (R&D) expenses, on a non-GAAP basis, were $1.6 billion in the second quarter of 2015, a 2 percent decrease compared to the second quarter of 2014.
Other (income) expense, net, was $739 million of expense in the second quarter of 2015 compared to $650 million of income in the second quarter of 2014. The second quarter of 2015 includes foreign exchange losses of $715 million related to the revaluation of the company’s net monetary assets in Venezuela. The second quarter of 2014 includes a $741 million gain recorded in connection with AstraZeneca’s option exercise.
The GAAP effective tax rate of 14.7 percent for the second quarter of 2015 reflects the impacts of acquisition- and divestiture-related costs and restructuring costs, as well as the favorable impact of a net benefit of $370 million related to the settlement of certain federal income tax issues and the unfavorable impact of foreign exchange losses related to Venezuela for which no tax benefit was recorded. The non-GAAP effective tax rate, which excludes these items, was 26.0 percent for the second quarter of 2015.
Financial Outlook
Merck has narrowed and raised its full-year 2015 non-GAAP EPS range to be between $3.45 and $3.55, including a negative impact from foreign exchange. The range excludes acquisition- and divestiture-related costs, costs related to restructuring programs and certain other items. The company has lowered its full-year 2015 GAAP EPS range to be between $1.52 and $1.71. The change in the GAAP EPS range reflects the incorporation of foreign exchange losses related to Venezuela, as well as the anticipated gain on the previously announced sale of certain migraine clinical development programs.
At current exchange rates, the company now anticipates full-year 2015 revenues to be between $38.6 billion and $39.8 billion, including a negative impact from foreign exchange and approximately $1 billion of net lost sales from acquisitions and divestitures.
In addition, the company continues to expect full-year 2015 non-GAAP marketing and administrative expenses to be below 2014 levels and R&D expenses to be modestly above 2014 levels. The company anticipates total operating expenses in the second half of 2015 to be approximately $200 million lower than in the second half of 2014.
The company now anticipates its full-year 2015 non-GAAP tax rate will be in the range of 23 to 24 percent, not including a 2015 R&D tax credit.
A reconciliation of anticipated 2015 EPS, as reported in accordance with GAAP to non-GAAP EPS that excludes certain items, is provided in the table below.