Merck Announces Second-Quarter 2023 Financial Results

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Aug 01, 2023

Merck (NYSE: MRK), known as MSD outside the United States and Canada, today announced financial results for the second quarter of 2023.

"We continue to make great progress as we advance our broad and deep pipeline, raise the bar of innovation, and bring forward leading-edge science to save and improve lives around the world," said Robert M. Davis, chairman and chief executive officer, Merck. "We delivered robust underlying growth during the second quarter and are well positioned to achieve strong full-year results. I am proud of our talented, diverse and dedicated global team that continues to focus on creating value for patients and all our stakeholders now and well into the future.‚ÄĚ

Financial Summary

$ in millions, except EPS amounts

Second Quarter

2023

2022

Change

Change Ex-
Exchange

Sales

$15,035

$14,593

3%

7%

GAAP net (loss) income1

(5,975)

3,944

**N/M

N/M

Non-GAAP net (loss) income that excludes certain items1,2*

(5,220)

4,743

N/M

N/M

GAAP EPS

(2.35)

1.55

N/M

N/M

Non-GAAP EPS that excludes certain items2*

(2.06)

1.87

N/M

N/M

*Refer to table on page 6.

**Not meaningful

Generally Accepted Accounting Principles (GAAP) loss / earnings per share (EPS) assuming dilution was a loss per share of $2.35 for the second quarter of 2023. Non-GAAP loss per share was $2.06 for the second quarter of 2023. Both GAAP and non-GAAP loss per share were due to a charge for the acquisition of Prometheus Biosciences, Inc. (Prometheus) of $4.02 per share. Additionally, both GAAP and non-GAAP loss per share in the second quarter of 2023 were unfavorably affected by lower sales of LAGEVRIO and the impact of foreign exchange compared with the second quarter of 2022.

Non-GAAP EPS excludes acquisition- and divestiture-related costs and 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.

Second-Quarter Sales Performance

The following table reflects sales of the company’s top products and significant performance drivers.

Second Quarter

$ in millions

2023

2022

Change

Change Ex-
Exchange

Commentary

Total Sales

$15,035

$14,593

3%

7%

Pharmaceutical

13,457

12,756

6%

8%

Increase driven by growth in oncology, vaccines and hospital acute care, partially offset by lower sales in virology due to LAGEVRIO, and in diabetes. Excluding LAGEVRIO, growth of 14%. Excluding LAGEVRIO and unfavorable impact of foreign exchange, growth of 17%.

KEYTRUDA

6,271

5,252

19%

21%

Growth from continued strong global momentum in metastatic indications, including certain types of non-small cell lung cancer (NSCLC), renal cell carcinoma (RCC), head and neck squamous cell carcinoma and triple-negative breast cancer (TNBC), and increased uptake across earlier-stage indications, including certain types of neoadjuvant/adjuvant TNBC in the U.S.

GARDASIL / GARDASIL 9

2,458

1,674

47%

53%

Growth largely due to strong global demand, particularly in China.

JANUVIA / JANUMET

864

1,233

-30%

-28%

Decline primarily due to generic competition in several international markets, particularly in Europe, and lower demand and pricing in the U.S.

PROQUAD, M-M-R II and VARIVAX

582

578

1%

1%

Relatively flat compared with prior year.

BRIDION

502

426

18%

19%

Growth primarily due to increased demand, particularly in the U.S., reflecting an increase in market share among neuromuscular blockade reversal agents.

Lynparza*

310

275

13%

15%

Growth driven primarily by increased demand in certain international markets.

Lenvima*

242

231

5%

6%

Growth primarily due to higher demand in the U.S., partially offset by lower demand in China.

LAGEVRIO

203

1,177

-83%

-82%

Decrease largely attributable to lower sales in Japan and nonrecurrence of sales in the U.K.

SIMPONI

180

181

-1%

-1%

Relatively flat compared with prior year.

VAXNEUVANCE

168

12

***N/M

N/M

Growth driven largely by continued uptake in pediatric indication following launch in the U.S.

Animal Health

1,456

1,467

-1%

2%

Excluding unfavorable impact of foreign exchange, growth primarily driven by higher pricing in both Livestock and Companion Animal product portfolios.

Livestock

807

826

-2%

2%

Excluding unfavorable impact of foreign exchange, growth due to higher pricing, as well as higher demand for swine and poultry products, partially offset by lower demand for ruminant products, due in part to reduced herd sizes.

Companion Animal

649

641

1%

2%

Growth driven by higher pricing, including for the BRAVECTO line of products, partially offset by supply challenges for certain companion animal vaccines. Sales of BRAVECTO were $326 million and $309 million in the current and prior quarters, respectively, which represented growth of 5% or 7% excluding unfavorable impact of foreign exchange.

Other Revenues**

122

370

-67%

-19%

Decline primarily due to impact of revenue hedging. Excluding unfavorable impact of foreign exchange, decline due to lower royalties and milestone payments received for out-licensing 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

Second-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

Second Quarter 2023

Cost of sales

$4,024

$467

$32

$-

$3,525

Selling, general and administrative

2,702

25

52

-

2,625

Research and development

13,321

9

1

-

13,311

Restructuring costs

151

-

151

-

-

Other (income) expense, net

172

(3)

-

194

(19)

Second Quarter 2022

Cost of sales

$4,216

$451

$67

$-

$3,698

Selling, general and administrative

2,512

65

27

-

2,420

Research and development

2,798

12

22

-

2,764

Restructuring costs

142

-

142

-

-

Other (income) expense, net

438

2

-

234

202

GAAP Expense, EPS and Related Information

Gross margin was 73.2% for the second quarter of 2023 compared with 71.1% for the second quarter of 2022. The increase was primarily due to lower LAGEVRIO sales, which have a low gross margin, as well as the favorable impact of product mix. The gross margin increase was partially offset by the unfavorable impact of foreign exchange.

Selling, general and administrative (SG&A) expenses were $2.7 billion in the second quarter of 2023, an increase of 8% compared with the second quarter of 2022. The increase was primarily due to higher administrative costs, including higher compensation and benefit costs, and higher promotional spending, partially offset by lower acquisition- and divestiture- related costs and the favorable impact of foreign exchange.

Research and development (R&D) expenses were $13.3 billion in the second quarter of 2023 compared with $2.8 billion in the second quarter of 2022. The increase was primarily due to a $10.2 billion charge for the acquisition of Prometheus. The remaining increase was driven by higher compensation and benefit costs, reflecting in part increased headcount, higher investments in discovery research and early drug development, and higher clinical development spending.

Other (income) expense, net, was $172 million of expense in the second quarter of 2023 compared with $438 million of expense in the second quarter of 2022, primarily due to lower net losses from investments in equity securities and lower pension settlement costs.

The income tax provision for the second quarter of 2023 was $637 million on a pretax loss of $5.3 billion, resulting in an effective tax rate of (11.9)%. This effective tax rate includes a 25.1 percentage point unfavorable impact of the charge for the acquisition of Prometheus, for which no tax benefit was recorded.

GAAP loss per share was $2.35 for the second quarter of 2023 compared with earnings per share of $1.55 for the second quarter of 2022.

Non-GAAP Expense, EPS and Related Information

Non-GAAP gross margin was 76.6% for the second quarter of 2023 compared with 74.7% for the second quarter of 2022. The increase was primarily due to lower LAGEVRIO sales, which have a low gross margin, as well as the favorable impact of product mix. The gross margin increase was partially offset by the unfavorable impact of foreign exchange.

Non-GAAP SG&A expenses were $2.6 billion in the second quarter of 2023, an increase of 8% compared with the second quarter of 2022. The increase was primarily due to higher administrative costs, including higher compensation and benefit costs, and higher promotional spending, partially offset by the favorable impact of foreign exchange.

Non-GAAP R&D expenses were $13.3 billion in the second quarter of 2023 compared with $2.8 billion in the second quarter of 2022. The increase was primarily due to a $10.2 billion charge for the acquisition of Prometheus. The remaining increase was driven by higher compensation and benefit costs, 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 $19 million of income in the second quarter of 2023 compared with $202 million of expense in the second quarter of 2022, primarily due to lower pension settlement costs.

The non-GAAP income tax provision for the second quarter of 2023 was $810 million on a pretax loss of $4.4 billion, resulting in a non-GAAP effective tax rate of (18.4)%. This effective tax rate includes a 32.5 percentage point unfavorable impact of the charge for the acquisition of Prometheus, for which no tax benefit was recorded.

Non-GAAP loss per share was $2.06 for the second quarter of 2023 compared with earnings per share of $1.87 for the second quarter of 2022.

A reconciliation of GAAP to non-GAAP net (loss) income and EPS is provided in the table that follows.

Second Quarter

$ in millions, except EPS amounts

2023

2022

EPS

GAAP EPS

$(2.35)

$1.55

Difference

0.29

0.32

Non-GAAP EPS that excludes items listed below2

$(2.06)

$1.87

Net (Loss) Income

GAAP net (loss) income1

$(5,975)

$3,944

Difference

755

799

Non-GAAP net (loss) income that excludes items listed below1,2

$(5,220)

$4,743

Excluded Items:

Acquisition- and divestiture-related costs3

$498

$530

Restructuring costs

236

258

Loss from investments in equity securities

194

234

Increase to net loss / decrease to net income before taxes

928

1,022

Estimated income tax (benefit) expense

(173)

(223)

Increase to net loss / decrease to net income

$755

$799

Pipeline and Portfolio Highlights

Merck’s expansive research efforts resulted in continued progress across its broad pipeline and portfolio. In oncology, the company reached regulatory milestones across different stages of cancer and shared positive results from a range of clinical trials. Notably, Merck presented data on four approved medicines and two pipeline candidates in more than 25 types of cancer at the 2023 American Society of Clinical Oncology (ASCO) Annual Meeting, including investigational data for KEYTRUDA that demonstrates its progress in earlier stages of disease.

Further, in vaccines, Merck announced positive topline results demonstrating that V116, an investigational 21-valent pneumococcal conjugate vaccine specifically designed for adults, met key immunogenicity and safety endpoints in two Phase 3 trials. In cardiovascular, Merck submitted a Biologics License Application to the U.S. Food and Drug Administration (FDA) for sotatercept, Merck’s novel investigational activin signaling inhibitor for the treatment of adults with pulmonary arterial hypertension (World Health Organization Group 1). In chronic cough, Merck received an acceptance from the FDA for the resubmission of the New Drug Application for gefapixant and assigned a target action date of Dec. 27, 2023.

Merck also completed the acquisition of Prometheus, which will accelerate the company’s growing presence in immunology and add diversity to its pipeline. Prometheus’ leading clinical candidate, MK-7240, formerly known as PRA-023, creates an opportunity for Merck to transform the treatment of immune-mediated diseases.

Notable recent news releases on Merck’s pipeline and portfolio are provided in the table that follows.

Oncology

FDA Approved Lynparza Plus Abiraterone and Prednisone or Prednisolone for Treatment of Adult Patients With BRCA-Mutated Metastatic Castration-Resistant Prostate Cancer

(Read Announcement)

FDA Accepted Application for Merck’s KEYTRUDA Plus Chemotherapy as Treatment for Advanced or Unresectable Biliary Tract Cancer

(Read Announcement)

Merck’s KEYTRUDA Plus Chemotherapy Before Surgery and Continued as a Single Agent After Surgery Reduced the Risk of Event-Free Survival Events by 42% Versus Pre-Operative Chemotherapy in Resectable Stage II, IIIA or IIIB NSCLC

(Read Announcement)

Merck and Moderna Initiated Phase 3 Study Evaluating V940 (mRNA-4157) In Combination With KEYTRUDA for Adjuvant Treatment of Patients With Resected High-Risk (Stage IIB-IV) Melanoma

(Read Announcement)

Merck and Moderna Announced mRNA-4157 (V940) in Combination With KEYTRUDA Demonstrated a Statistically Significant and Clinically Meaningful Improvement in Distant Metastasis-Free Survival in Patients With High-Risk Stage III/IV Melanoma Following Complete Resection Versus KEYTRUDA

(Read Announcement)

KEYTRUDA Plus Chemotherapy Significantly Improved Overall Survival Versus Chemotherapy Alone as First-Line Treatment for Unresectable Advanced Pleural Mesothelioma

(Read Announcement)

KEYTRUDA Plus Lenvima Demonstrated Long-Term, Durable Survival Benefit Versus Sunitinib as First-Line Treatment for Patients With Advanced RCC

(Read Announcement)

Merck Announced Phase 3 KEYNOTE-A18 Trial Met Primary Endpoint of Progression-Free Survival (PFS) in Patients With Newly Diagnosed High-Risk Locally Advanced Cervical Cancer

(Read Announcement)

KEYTRUDA Plus Trastuzumab and Chemotherapy Met Primary Endpoint of PFS as First-Line Treatment in Patients With HER2-Positive Advanced Gastric or Gastroesophageal Junction Adenocarcinoma

(Read Announcement)

Vaccines

Merck Announced V116, an Investigational, 21-Valent Pneumococcal Conjugate Vaccine Specifically Designed for Adults, Met Key Immunogenicity and Safety Endpoints in Two Phase 3 Trials

(Read Announcement)

Other Pipeline Updates

FDA Approved New Indication for Merck’s PREVYMIS for Prevention of Cytomegalovirus Disease in High-Risk Adult Kidney Transplant Recipients

(Read Announcement)

Merck Presented Phase 2a Data for Efinopegdutide (MK-6024), an Investigational GLP-1/Glucagon Receptor Co-agonist, in Patients With Nonalcoholic Fatty Liver Disease, at EASL 2023; Additionally, Efinopegdutide Was Granted Fast Track Designation by the FDA for the Treatment of Nonalcoholic Steatohepatitis (NASH)

(Read Announcement)

Merck Received Positive European Union Committee for Medicinal Products for Human Use (CHMP) Opinion for Gefapixant

(Read Announcement)

Full-Year 2023 Financial Outlook

The following table summarizes the company’s full-year financial outlook.

Sales*

$58.6 to $59.6 billion

Non-GAAP Gross margin2

Approximately 77%

Non-GAAPOperating expenses2**

$34.0 to $34.6 billion

Non-GAAPOther (income) expense, net2

Approximately $100 million

Non-GAAPEffective tax rate2***

30.5% to 31.5%

Non-GAAPEPS2****

$2.95 to $3.05

Share count (assuming dilution)

2.55 billion

*Includes approximately $1.0 billion of LAGEVRIO sales. The company does not have any non-GAAP adjustments to sales.

**Includes an aggregate $11.6 billion of R&D expenses related to the Prometheus and Imago BioSciences, Inc. (Imago) acquisitions and upfront payment for the license and collaboration agreement with Kelun-Biotech (a holding subsidiary of Sichuan Kelun Pharmaceutical Co., Ltd). Outlook does not assume any additional significant potential business development transactions.

***Includes a negative impact of 15 percentage points from the one-time charge for the acquisition of Prometheus.

****Includes $4.53 of one-time charges related to the Prometheus and Imago acquisitions and upfront payment to Kelun-Biotech.

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 gains 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 global 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 $58.6 billion and $59.6 billion, including a negative impact of foreign exchange of approximately 2 percentage points, at mid-July 2023 exchange rates. This full-year outlook continues to include approximately $1.0 billion of LAGEVRIO sales.

Merck’s full-year non-GAAP effective income tax rate is expected to be between 30.5% and 31.5%, including an unfavorable impact of approximately 15 percentage points from the non-tax deductible one-time charge for the acquisition of Prometheus.

Merck now expects its full-year non-GAAP EPS to be between $2.95 and $3.05, including a negative impact of foreign exchange of approximately 5 percentage points, at mid-July 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 $0.24 per share.
  • A charge of $10.2 billion, or $4.02 per share, for the acquisition of Prometheus.
  • Estimated 2023 expense of approximately $0.14 per share to be incurred to finance the Prometheus acquisition and to advance the acquired assets.
  • A less than 1%, or approximately $0.02 per share, incremental negative impact of foreign exchange.

The non-GAAP EPS range excludes acquisition- and divestiture-related costs and costs related to restructuring programs, as well as income and losses from investments in equity securities,