What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-03 compared with 2023-08-07 · 292 added, 215 removed, 374 unchanged (58% of the section changed)

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See Note 2 to the condensed consolidated financial statements for additional information.

In October 2023, Merck and Daiichi Sankyo entered into a global development and commercialization agreement for three of Daiichi Sankyo’s deruxtecan (DXd) antibody drug conjugate (ADC) candidates:

patritumab deruxtecan (HER3-DXd) (MK-1022), ifinatamab deruxtecan (I-DXd) (MK-2400) and raludotatug deruxtecan (R-DXd) (MK-5909).

All three potentially first-in-class DXd ADCs are in various stages of clinical development for the treatment of multiple solid tumors both as monotherapy and/or in combination with other treatments.

The companies will jointly develop and potentially commercialize these ADC candidates worldwide, except in Japan where Daiichi Sankyo will maintain exclusive rights.

Daiichi Sankyo will be solely responsible for manufacturing and supply.

Under the terms of the agreement, Merck made upfront payments of $4.0 billion and will make continuation payments of $1.5 billion to Daiichi Sankyo and Daiichi Sankyo is eligible to receive future contingent sales-based milestone payments.

In conjunction with this transaction, Merck will record an aggregate pretax charge of $5.5 billion to Research and development expenses, or approximately $1.70 per share, in the fourth quarter of 2023.

In addition, Merck will invest in the pipeline assets and incur costs to finance the transaction, resulting in a negative impact to earnings per share (EPS) of approximately $0.25 in the first 12 months following the close of the transaction.

In June 2023, Merck acquired Prometheus Biosciences, Inc.

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The transaction was accounted for as an acquisition of an asset.

Merck recorded net assets of $877 million, including cash of $368 million, investments of $296 million, deferred tax assets of $218 million and other net liabilities of $5 million, as well as Research and development expenses of $10.2 billion in the second quarter and first six months of 2023 related to the transaction or $4.02 per share.

Merck recorded net assets of $877 million, including cash of $368 million, investments of $296 million, deferred tax assets of $218 million and other net liabilities of $5 million, as well as a charge of $10.2 billion to Research and development expenses, or $4.00 per share, in the first nine months of 2023 related to the transaction.

There are no future contingent payments associated with the acquisition.

In February 2023, Merck and Kelun-Biotech (a holding subsidiary of Sichuan Kelun Pharmaceutical Co., Ltd.) closed a license and collaboration agreement expanding their relationship in which Merck gained exclusive rights for the research, development, manufacture and commercialization of up to seven investigational preclinical antibody drug conjugates (ADCs) for the treatment of cancer.

Kelun-Biotech retained the right to research, develop, manufacture and commercialize certain licensed and option ADCs for Chinese mainland, Hong Kong and Macau.

Merck made an upfront payment of $175 million, which was recorded in Research and development expenses in the first six months of 2023.

In addition, Kelun-Biotech is eligible to receive future contingent milestone payments and tiered royalties on future net sales for any commercialized ADC product.

Also, in connection with the agreement, Merck invested $100 million in Kelun-Biotech’s Series B preferred shares in January 2023.

Merck made an upfront payment of $175 million, which was recorded in Research and development expenses in the first nine months of 2023.

In October 2023, Merck notified Kelun-Biotech it was terminating two of the seven candidates under the agreement.

Kelun-Biotech remains eligible to receive future contingent milestone payments and tiered royalties on future net sales for any commercialized ADC product.

Also, in connection with the agreement, Merck invested $100 million in Kelun-Biotech’s shares in January 2023.

In January 2023, Merck acquired Imago BioSciences, Inc.

(Imago), a clinical stage biopharmaceutical company developing new medicines for the treatment of myeloproliferative neoplasms and other bone marrow diseases, for $1.35 billion (including payments to settle share-based equity awards) and also incurred approximately $60 million of transaction costs.

Imago’s lead candidate bomedemstat, MK-3543 (formerly IMG-7289), is an investigational orally available lysine-specific demethylase 1 inhibitor currently being evaluated in multiple Phase 2 clinical trials for the treatment of essential thrombocythemia, myelofibrosis, and polycythemia vera, in addition to other indications.

Imago’s lead candidate bomedemstat, MK-3543 (formerly IMG-7289), is an investigational orally available lysine-specific demethylase 1 inhibitor currently being evaluated for the treatment of essential thrombocythemia, myelofibrosis, and polycythemia vera, in addition to other indications.

The transaction was accounted for as an acquisition of an asset.

Merck recorded net assets of $219 million, as well as Research and development expenses of $1.2 billion in the first six months of 2023 related to the transaction.

Merck recorded net assets of $219 million, as well as a charge of $1.2 billion to Research and development expenses in the first nine months of 2023 related to the transaction.

There are no future contingent payments associated with the acquisition.

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In several international markets, government-mandated pricing actions have reduced prices of generic and patented drugs.

In addition, the Company’s sales performance in the first six months of 2023 was negatively affected by other cost-reduction measures taken by governments and other third parties to lower health care costs.

In addition, the Company’s sales performance in the first nine months of 2023 was negatively affected by other cost-reduction measures taken by governments and other third parties to lower health care costs.

In 2022, the U.S.

Congress passed the Inflation Reduction Act (IRA), which makes significant changes to how drugs are covered and paid for under the Medicare program, including the creation of financial penalties for drugs whose prices rise faster than the rate of inflation, redesign of the Medicare Part D program to require manufacturers to bear more of the liability for certain drug benefits, and government price-setting for certain Medicare Part D drugs (starting in 2026) and Medicare Part B drugs (starting in 2028).

In August 2023, the U.S.

Department of Health and Human Services (HHS), through the Centers for Medicare & Medicaid Services (CMS), announced that Januvia (sitagliptin) will be included in the first year of the IRA’s “Drug Price Negotiation Program” (Program).

Pursuant to the IRA’s Program, discussions with the government will occur in 2023 and 2024, with government price-setting becoming effective on January 1, 2026.

The Company has sued the U.S.

government regarding the IRA’s “Drug Price Negotiation Program” for Medicare (see Note 9 to the condensed consolidated financial statements).

Furthermore, the Biden Administration and Congress continue to discuss legislation designed to control health care costs, including the cost of drugs.

government regarding the IRA’s Program (see Note 10 to the condensed consolidated financial statements).

Furthermore, the Biden Administration and

Congress continue to discuss legislation designed to control health care costs, including the cost of drugs.

The Company anticipates all of these actions and additional actions in the future will negatively affect sales and profits.

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Total $ 15,962 $ 14,959 7 % 9 % $ 45,485 $ 45,453 — % 3 %

plus international may not equal total due to rounding.

Worldwide sales grew 3% to $15.0 billion in the second quarter of 2023 primarily due to higher sales in the oncology franchise, largely driven by strong growth of Keytruda (pembrolizumab), and higher sales in the vaccines franchise, primarily attributable to growth of Gardasil 9 (Human Papillomavirus 9-valent Vaccine, Recombinant) and the ongoing launch of Vaxneuvance (Pneumococcal 15-valent Conjugate Vaccine) for pediatric use.

Also contributing to revenue growth in the second quarter were higher sales of hospital acute care products, including Bridion (sugammadex) Injection and Prevymis (letermovir).

Sales growth in the second quarter of 2023 was partially offset by lower sales in the virology franchise largely due to Lagevrio (molnupiravir) which had sales of $203 million in the second quarter of 2023 compared with $1.2 billion in the second quarter of 2022.

Lower sales in the diabetes franchise attributable to Januvia (sitagliptin) and Janumet (sitagliptin and metformin HCl), as well as lower sales of Pneumovax 23 (pneumococcal vaccine polyvalent) also partially offset revenue growth in the second quarter of 2023.

Worldwide sales declined 3% to $29.5 billion in the first six months of 2023 primarily due to lower sales in the virology franchise, largely attributable to Lagevrio , which had sales of $595 million in the first six months of 2023 compared with $4.4 billion in the first six months of 2022.

Also contributing to the revenue decline in the first six months of 2023 were lower sales in the diabetes franchise due to Januvia and Janumet , as well as lower sales of Pneumovax 23.

The sales decline in the first six months of 2023 was largely offset by higher sales in the oncology franchise, primarily driven by strong growth of Keytruda , higher sales in the vaccines franchise, primarily attributable to growth of Gardasil 9 and the ongoing launch of Vaxneuvance for pediatric use, as well as higher sales of hospital acute care products, including Bridion and Prevymis .

Worldwide sales grew 7% to $16.0 billion in the third quarter of 2023 primarily due to higher sales in the oncology franchise, largely driven by strong growth of Keytruda (pembrolizumab), and higher sales in the vaccines franchise, primarily attributable to growth of Gardasil 9 (Human Papillomavirus 9-valent Vaccine, Recombinant) and the ongoing launch of Vaxneuvance (Pneumococcal 15-valent Conjugate Vaccine) for pediatric use.

Also contributing to revenue growth in the third quarter were higher sales in the virology franchise largely due to Lagevrio (molnupiravir).

Revenue growth in the third quarter of 2023 was partially offset by lower sales in the diabetes franchise attributable to Januvia and Janumet (sitagliptin and metformin HCl), lower sales of RotaTeq (Rotavirus Vaccine, Live Oral, Pentavalent) and lower revenue from third-party manufacturing arrangements.

Worldwide sales were nearly flat in the first nine months of 2023 compared with the corresponding prior year period.

Sales performance reflects higher sales in the oncology franchise, largely driven by strong growth of Keytruda , higher sales in the vaccines franchise, primarily attributable to growth of Gardasil 9 and the ongoing launch of Vaxneuvance for pediatric use, as well as higher sales of hospital acute care products, including Bridion (sugammadex) and Prevymis (letermovir).

These increases were offset by lower sales in the virology franchise, largely attributable to Lagevrio , as well as lower sales in the diabetes franchise due to Januvia and Janumet , lower sales of Pneumovax 23 (pneumococcal vaccine polyvalent), and lower revenue from third-party manufacturing arrangements.

See Note 17 to the condensed consolidated financial statements for details on sales of the Company’s products.

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(1) Alliance revenue represents Merck’s share of profits, which are product sales net of cost of sales and commercialization costs (see Note 3 to the condensed consolidated financial statements).

(2) Alliance revenue represents royalties and, for the first six months 2022, also includes a payment received related to the achievement of a regulatory approval milestone (see Note 3 to the condensed consolidated financial statements).

(2) Alliance revenue represents royalties and, for the first nine months 2022, also includes a payment received related to the achievement of a regulatory approval milestone (see Note 3 to the condensed consolidated financial statements).

Keytruda is an anti-PD-1 (programmed death receptor-1) therapy that has been approved as monotherapy for the treatment of certain patients with cervical cancer, classical Hodgkin lymphoma, cutaneous squamous cell carcinoma, esophageal or gastroesophageal junction (GEJ) carcinoma, head and neck squamous cell carcinoma (HNSCC), hepatocellular carcinoma (HCC), melanoma, Merkel cell carcinoma, microsatellite instability-high (MSI-H) or mismatch repair deficient (dMMR) solid tumors (including MSI-H/dMMR colorectal cancer and endometrial carcinoma), non-small-cell lung cancer (NSCLC), primary mediastinal large B-cell lymphoma (PMBCL), tumor mutational burden-high (TMB-H) solid tumors, and urothelial carcinoma including non-muscle invasive bladder cancer.

Additionally, Keytruda is approved as monotherapy for the adjuvant treatment of certain patients with melanoma, and for certain patients with renal cell carcinoma (RCC) post-surgery.

Keytruda is also approved as monotherapy for the adjuvant treatment of certain patients with melanoma, and for certain patients with renal cell carcinoma (RCC) post-surgery.

Keytruda is approved for adjuvant treatment following resection and platinum-based chemotherapy for certain patients with NSCLC.

Additionally, Keytruda is approved for patients with certain types of resectable NSCLC in combination with chemotherapy as neoadjuvant treatment, and then continued as a single agent as adjuvant treatment after surgery.

Keytruda is also approved for patients with high-risk early-stage triple-negative breast cancer (TNBC) in combination with chemotherapy as neoadjuvant treatment, and then continued as a single agent as adjuvant treatment after surgery.

In addition, Keytruda is approved in combination with chemotherapy for the treatment of certain patients with advanced NSCLC, in combination with chemotherapy with or without bevacizumab for advanced cervical cancer, in combination with chemotherapy for advanced esophageal cancer, in combination with trastuzumab and chemotherapy for certain patients with advanced gastric or GEJ adenocarcinoma, in combination with chemotherapy for HNSCC, in combination with chemotherapy for advanced TNBC, in combination with axitinib for advanced RCC, in combination with Lenvima for patients with advanced RCC or certain types of

advanced endometrial carcinoma, and in combination with enfortumab vedotin for certain cisplatin-ineligible patients with locally advanced or metastatic urothelial carcinoma.

In addition, Keytruda is approved in combination with chemotherapy for the treatment of certain patients with advanced NSCLC, in combination with chemotherapy for certain types of advanced biliary tract cancer, in combination with chemotherapy with or without bevacizumab for advanced cervical cancer, in combination with chemotherapy for advanced esophageal cancer, in combination with trastuzumab and chemotherapy for certain patients with advanced gastric or GEJ adenocarcinoma, in combination with chemotherapy for HNSCC, in combination with chemotherapy for

advanced TNBC, in combination with axitinib for advanced RCC, in combination with Lenvima for patients with advanced RCC or certain types of advanced endometrial carcinoma, and in combination with enfortumab vedotin for certain cisplatin-ineligible patients with locally advanced or metastatic urothelial carcinoma.

The Keytruda clinical development program includes studies across a broad range of cancer types.

See “Research and Development Update” below.

Global sales of Keytruda grew 19% and 20% in the second quarter and first six months of 2023, respectively.

Global sales of Keytruda grew 17% and 19% in the third quarter and first nine months of 2023, respectively.

Sales growth in both periods was primarily driven by higher demand as the Company continues to launch Keytruda with multiple new indications globally.

Sales growth in the U.S.

reflects increased uptake across earlier-stage indications including in high-risk early stage TNBC, as well as certain types of RCC and melanoma, and higher demand across the multiple approved metastatic indications, in particular for the treatment of certain types of RCC, NSCLC, TNBC, and HNSCC cancers.

Keytruda sales growth in international markets reflects higher demand for the HNSCC and RCC metastatic indications, as well as uptake in earlier-stage indications, particularly in Europe, Latin America and Japan.

Keytruda sales growth in international markets reflects higher demand for the HNSCC and RCC metastatic indications, as well as uptake in TNBC and RCC earlier-stage indications, particularly in Europe, Latin America and Japan.

Keytruda received the following regulatory approvals thus far in 2023.

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June 2023 Japan’s Ministry of Health, Labor and Welfare (MHLW) approval for the treatment of patients with relapsed or refractory PMBCL, based on the KEYNOTE-170 and the KEYNOTE-A33 studies.

European Commission (EC) approval in combination with trastuzumab, fluoropyrimidine- and platinum-containing chemotherapy, for the first-line treatment of locally advanced unresectable or metastatic human epidermal growth factor receptor 2 (HER2)-positive gastric or GEJ adenocarcinoma in adults whose tumors express PD-L1, based on the KEYNOTE-811 trial.

EC approval as a monotherapy for the adjuvant treatment of adults with NSCLC who are at high risk of recurrence following complete resection and platinum-based chemotherapy, based on the KEYNOTE-091 trial.

FDA approval for the treatment of patients with resectable (tumors >=4cm or node positive) NSCLC in combination with platinum-containing chemotherapy as neoadjuvant treatment, and then continued as a single agent as adjuvant treatment after surgery, based on the KEYNOTE-671 trial.

FDA full approval for the treatment of adult and pediatric patients with recurrent locally advanced or metastatic Merkel cell carcinoma.

The conversion from an accelerated to a full (regular) approval is based on the KEYNOTE-913 and KEYNOTE-017 trials.

FDA approval in combination with gemcitabine and cisplatin for the treatment of patients with locally advanced unresectable or metastatic biliary tract cancer, based on the KEYNOTE-966 trial.

Lynparza (olaparib) is an oral poly (ADP-ribose) polymerase (PARP) inhibitor being developed as part of a collaboration with AstraZeneca PLC (AstraZeneca) (see Note 3 to the condensed consolidated financial statements).

Lynparza is approved for the treatment of certain types of advanced or recurrent ovarian, early or metastatic breast, metastatic pancreatic and metastatic castration-resistant prostate cancers.

Alliance revenue related to Lynparza increased 13% and 8% in the second quarter and first six months of 2023, respectively, primarily driven by higher demand in certain international markets, particularly in Europe for certain patients with ovarian, early breast and prostate cancers, and in Japan in certain patients with ovarian and early breast cancers.

Alliance revenue related to Lynparza increased 5% in the third quarter of 2023 primarily driven by higher pricing in the U.S.

and higher demand in Latin America.

Alliance revenue related to Lynparza grew 7% in the first nine months of 2023 primarily driven by higher pricing and demand in the U.S., as well as higher demand in several international markets.

In May 2023, the FDA approved Lynparza in combination with abiraterone and prednisone or prednisolone for the treatment of certain adult patients with deleterious or suspected deleterious BRCA -mutated ( BRCA m) metastatic castration-resistant prostate cancer (mCRPC), based on the PROpel trial.

In August 2023, Japan’s MHLW approved Lynparza in combination with abiraterone and prednisolone for treatment of adult patients with BRCA m mCRPC with distant metastasis, based on the PROpel trial.

Lenvima (lenvatinib) is an oral receptor tyrosine kinase inhibitor being developed as part of a collaboration with Eisai Co., Ltd.

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Lenvima is approved for the treatment of certain types of thyroid cancer, RCC, HCC, in combination with everolimus for certain patients with advanced RCC, and in combination with Keytruda for certain patients with advanced endometrial carcinoma or advanced RCC.

Alliance revenue related to Lenvima grew 5% and 3% in the second quarter and first six months of 2023, respectively, largely reflecting uptake in the advanced RCC and endometrial indications in the U.S., partially offset by lower demand in China.

Sales of Welireg (belzutifan), for the treatment of adult patients with certain von Hippel-Lindau disease-associated tumors, were $50 million and $27 million in the second quarter of 2023 and 2022, respectively, and were $92 million and $45 million in the first six months of 2023 and 2022, respectively.

The sales increase in both periods is due to continued uptake in the U.S.

Alliance revenue related to Lenvima grew 29% in the third quarter of 2023 largely reflecting higher demand in the U.S.

and certain international markets, as well as the timing of purchases in China.

Alliance revenue related to Lenvima grew 11% in the first nine months of 2023 largely reflecting higher demand in the U.S.

and Europe, partially offset by lower demand in China.

Sales of Welireg (belzutifan), for the treatment of adult patients with certain von Hippel-Lindau disease-associated tumors, grew 43% and 77% in the third quarter and first nine months of 2023, respectively.

Sales growth in both periods is due to continued uptake in the U.S.

following launch in 2021.

Reblozyl (luspatercept-aamt) is a first-in-class erythroid maturation recombinant fusion protein that is being commercialized through a global collaboration with Bristol-Myers Squibb Company (see Note 3 to the condensed consolidated financial statements).

In September 2023, the FDA accepted and granted priority review for a

supplemental new drug application (NDA) seeking approval for Welireg for the treatment of adult patients with advanced RCC following immune checkpoint and anti-angiogenic therapies.

The supplemental NDA is based on data from the LITESPARK-005 trial.

The FDA set a Prescription Drug User Fee Act (PDUFA), or target action, date of January 17, 2024.

Reblozyl (luspatercept-aamt) is a first-in-class erythroid maturation recombinant fusion protein that is being commercialized through a global collaboration with Bristol-Myers Squibb Company (BMS) (see Note 3 to the condensed consolidated financial statements).

Reblozyl is approved for the treatment of anemia in certain rare blood disorders.

Alliance revenue related to this collaboration consists of royalties and, for the first six months of 2022, also includes the receipt of a regulatory approval milestone payment of $20 million.

Alliance revenue increased 41% and 4% in the second quarter and first six months of 2023, respectively, due to strong underlying sales performance.

The increase in alliance revenue in the first six months of 2023 was partially offset by the receipt of the regulatory approval milestone in 2022 as noted above.

Alliance revenue related to this collaboration consists of royalties and, for the first nine months of 2022, also includes the receipt of a regulatory approval milestone payment of $20 million.

Alliance revenue increased 35% and 14% in the third quarter and first nine months of 2023, respectively, due to strong underlying sales performance.

The increase in alliance revenue in the first nine months of 2023 was partially offset by the receipt of the regulatory approval milestone in 2022 as noted above.

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Pneumovax 23 140 131 6 % 4 % 327 457 (28) % (27) %

Combined worldwide sales of Gardasil (Human Papillomavirus Quadrivalent [Types 6, 11, 16 and 18] Vaccine, Recombinant) and Gardasil 9, vaccines to help prevent certain cancers and other diseases caused by certain types of human papillomavirus (HPV), grew 47% and 41% in the second quarter and first six months of 2023, respectively, driven primarily by higher global demand, particularly in China due in part to continued uptake of the expanded indication of Gardasil 9 for girls and women 9 to 45 years of age.

The Company anticipates the growth rate of combined Gardasil/Gardasil 9 sales will moderate in the second half of 2023 due in part to the timing of shipments in China.

Global sales of ProQuad (Measles, Mumps, Rubella and Varicella Virus Vaccine Live), a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella, increased 4% and 10% in the second quarter and first six months of 2023, respectively, primarily reflecting higher pricing in the U.S.

and the timing of shipments in certain ex-U.S.

Worldwide sales of M-M-R II (Measles, Mumps and Rubella Virus Vaccine Live), a vaccine to help protect against measles, mumps and rubella, were nearly flat in both the second quarter and first six months of 2023 compared with the corresponding prior year periods.

Global sales of Varivax (Varicella Virus Vaccine Live), a vaccine to help prevent chickenpox (varicella), declined 2% in the second quarter of 2023 primarily attributable to lower sales in Latin America reflecting both lower demand and the timing of shipments, partially offset by higher pricing in the U.S.

Global sales of Varivax grew 5% in the first six months of 2023 largely due to higher pricing and demand in the U.S., partially offset by lower sales in Latin America reflecting both lower demand and the timing of shipments.

Global sales of RotaTeq (Rotavirus Vaccine, Live Oral, Pentavalent), a vaccine to help protect against rotavirus gastroenteritis in infants and children, declined 25% in the second quarter of 2023 and increased 10% in first six months of 2023 primarily due to first quarter 2023 inventory stocking in China that was partially bought out in the second quarter of 2023.

Worldwide sales of Vaxneuvance , a vaccine to help prevent invasive pneumococcal disease, increased to $168 million and $274 million in the second quarter and first six months of 2023, respectively, primarily due to continued uptake in the pediatric indication in the U.S.

following launch in 2022.

Worldwide sales of Pneumovax 23, a vaccine to help prevent pneumococcal disease, declined 40% and 42% in the second quarter and first six months of 2023, respectively, primarily reflecting lower demand in the U.S.

as the market continues to shift toward newer adult pneumococcal conjugate vaccines following changes in the recommendations of the U.S.

Combined worldwide sales of Gardasil (Human Papillomavirus Quadrivalent [Types 6, 11, 16 and 18] Vaccine, Recombinant) and Gardasil 9, vaccines to help prevent certain cancers and other diseases caused by certain types of human papillomavirus (HPV), grew 13% and 29% in the third quarter and first nine months of 2023, respectively, driven primarily by strong demand outside of the U.S., particularly in China due in part to continued uptake of the expanded indication of Gardasil 9 for girls and women 9 to 45 years of age.

Sales growth in both periods was partially offset by lower sales in the U.S.

due to public sector buying patterns, partially offset by higher pricing and demand.

Global sales of ProQuad (Measles, Mumps, Rubella and Varicella Virus Vaccine Live), a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella, were nearly flat in the third quarter of 2023 compared with the third quarter of 2022.

Worldwide sales of ProQuad increased 6% in the first nine months of 2023 primarily reflecting higher pricing in the U.S.

Worldwide sales of M-M-R II (Measles, Mumps and Rubella Virus Vaccine Live), a vaccine to help protect against measles, mumps and rubella, were nearly flat in both the third quarter and first nine months of 2023 compared with the corresponding prior year periods.

Global sales of Varivax (Varicella Virus Vaccine Live), a vaccine to help prevent chickenpox (varicella), increased 16% in the third quarter of 2023 primarily attributable to higher pricing and demand in the U.S., as well as higher demand in Latin America.

Global sales of Varivax grew 9% in the first nine months of 2023 largely due to higher pricing and demand in the U.S., as well as higher demand in the Asia Pacific region, partially offset by lower demand in Latin America.

Global sales of RotaTeq , a vaccine to help protect against rotavirus gastroenteritis in infants and children, declined 39% in the third quarter of 2023 and decreased 9% in first nine months of 2023 primarily due to public sector buying patterns in the U.S., as well as lower sales in China reflecting the continued buy-out of first quarter 2023 inventory stocking.

Worldwide sales of Vaxneuvance , a vaccine to help prevent invasive pneumococcal disease, increased to $214 million and $488 million in the third quarter and first nine months of 2023, respectively, primarily due to continued uptake in the pediatric indication in the U.S.

and launches in European markets.

Worldwide sales of Pneumovax 23, a vaccine to help prevent pneumococcal disease, grew 6% in the third quarter of 2023 primarily reflecting higher demand in certain ex-U.S.

markets that was largely offset by lower demand in the U.S.

Global sales of Pneumovax 23 declined 28% in the first nine months of 2023 due to lower demand in the U.S., partially offset by higher demand in several ex-U.S.

Lower demand for Pneumovax 23 in the U.S.

is being driven by the continued market shift toward newer adult pneumococcal conjugate vaccines following changes in the recommendations of the U.S.

Centers for Disease Control and Prevention’s Advisory Committee on Immunization Practices in 2021.

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Prevymis 157 114 38 % 38 % 430 310 39 % 41 %

Worldwide sales of Bridion , for the reversal of two types of neuromuscular blocking agents used during surgery, grew 18% and 21% in the second quarter and first six months of 2023, respectively, primarily due to higher demand, particularly in the U.S., reflecting Bridion ’s growing market share among neuromuscular blockade reversal agents.

Worldwide sales of Bridion , for the reversal of two types of neuromuscular blocking agents used during surgery, were essentially flat in the third quarter of 2023 reflecting higher demand in the U.S., due in part to Bridion ’s growing market share among neuromuscular blockade reversal agents, offset by lower demand in ex-U.S.

markets due to generic competition, particularly in Europe.

The patent that provided market exclusivity for Bridion in the European Union (EU) expired in July 2023.

the Company anticipates sales of Bridion in these markets will decline in future periods.

Worldwide sales of Prevymis , a medicine for prophylaxis (prevention) of cytomegalovirus (CMV) infection and disease in adult CMV-seropositive recipients of an allogenic hematopoietic stem cell transplant, grew 39% in both the second quarter and first six months of 2023 largely due to higher demand in the U.S.

and Europe, as well as continued uptake from the 2022 launch

Accordingly, the Company is experiencing sales declines of Bridion in these markets and expects the declines to continue.

Global sales of Bridion grew 14% in the first nine months of 2023 primarily due to higher demand and pricing in the U.S.

Worldwide sales of Prevymis , a medicine for prophylaxis (prevention) of cytomegalovirus (CMV) infection and disease in adult CMV-seropositive recipients of an allogenic hematopoietic stem cell transplant, grew 38% and 39% in the third quarter and first nine months of 2023, respectively, largely due to higher demand in the U.S.

and Europe, as well as continued uptake from the 2022 launch in China.

In June 2023, the FDA approved a new indication for Prevymis for prophylaxis of CMV disease in adult kidney transplant recipients at high risk (Donor CMV-seropositive/Recipient CMV-seronegative [D+/R-]) following a priority review.

In October 2023, the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) recommended approval of Prevymis for this new indication.

The CHMP’s recommendation will be reviewed by the EC for marketing authorization in the EU and a final decision is expected later in 2023.

Cardiovascular

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Adempas (riociguat) and Verquvo (vericiguat) are part of a worldwide collaboration with Bayer AG (Bayer) to market and develop soluble guanylate cyclase (sGC) modulators (see Note 3 to the condensed consolidated financial statements).

Adempas is approved for the treatment of certain types of pulmonary arterial hypertension and chronic pulmonary hypertension.

Adempas is approved for the treatment of certain types of pulmonary arterial hypertension (PAH) and chronic pulmonary hypertension.

Verquvo is approved to reduce the risk of cardiovascular death and heart failure hospitalization following a hospitalization for heart failure or need for outpatient intravenous diuretics in adults with symptomatic chronic heart failure and reduced ejection fraction.

Verquvo was approved in the U.S., the EU and Japan in 2021 and has since been approved in several other markets.

Alliance revenue from the collaboration declined 31% and 2% in the second quarter and first six months of 2023, respectively, primarily due to lower profit sharing, which reflects decreased demand in Bayer’s marketing territories.

Alliance revenue from the collaboration in the third quarter and first nine months of 2023 was relatively consistent compared with the corresponding prior year periods.

Revenue also includes sales of Adempas and Verquvo in Merck’s marketing territories.

Sales of Adempas in Merck’s marketing territories were nearly flat in both the second quarter and first six months of 2023 compared with the same prior year periods.

Sales of Adempas in Merck’s marketing territories grew 15% and 5% in the third quarter and first nine months of 2023, respectively, due to higher demand.

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Following initial authorizations in certain markets in the fourth quarter of 2021, Lagevrio has since received multiple additional authorizations worldwide.

Sales of Lagevrio declined 83% and 87% in the second quarter and first six months of 2023, respectively, primarily due to lower demand in Japan and the Asia Pacific region.

Additionally, the Company had sales of Lagevrio in the UK in the second quarter and first six months of 2022 and in the U.S.

in the first six months of 2022 that did not recur in the corresponding periods of 2023, which also contributed to the sales declines.

Sales of Lagevrio grew 47% in the third quarter of 2023 primarily due to higher demand in Japan, partially offset by lower demand in Australia and the nonrecurrence of sales in the UK.

Sales of Lagevrio declined 75% in the first nine months of 2023 primarily due to sales of Lagevrio in the U.S.

and the UK in the first nine months of 2022 that did not recur in 2023, coupled with lower demand in Japan and Australia.

The Company expects full-year 2023 Lagevrio sales to be approximately $1.3 billion.

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Lagevrio was previously granted Special Approval for Emergency in Japan in December 2021.

Global combined sales of Isentress/Isentress HD (raltegravir), an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection, declined 7% and 15% in the second quarter and first six months of 2023, respectively, primarily due to competitive pressure in Europe and the U.S.

The Company expects competitive pressure for Isentress/Isentress HD to continue.

The patent that provided market exclusivity for Isentress/Isentress HD in the EU expired in July 2023;

the Company anticipates sales declines of Isentress/Isentress HD in these markets will accelerate in future periods.

Global combined sales of Isentress/Isentress HD (raltegravir), an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection, declined 27% and 19% in the third quarter and first nine months of 2023, respectively, primarily due to competitive pressure in Europe and the U.S.

The patent that provided market exclusivity for

Isentress/Isentress HD in the EU expired in July 2023.

Accordingly, the Company is experiencing sales declines of Isentress/Isentress HD in these markets and expects the declines to continue.

The Company also expects competitive pressure for Isentress/Isentress HD in the U.S.

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Januvia/Janumet $ 835 $ 1,133 (26) % (25) % $ 2,579 $ 3,599 (28) % (26) %

Worldwide combined sales of Januvia and Janumet , medicines that help lower blood sugar levels in adults with type 2 diabetes, declined 30% and 29% in the second quarter and first six months of 2023, respectively, primarily reflecting the ongoing impact of the loss of exclusivity in most markets in Europe and the Asia Pacific region, as well as in Canada, coupled with lower demand and pricing in the U.S.

Worldwide combined sales of Januvia and Janumet , medicines that help lower blood sugar levels in adults with type 2 diabetes, declined 26% and 28% in the third quarter and first nine months of 2023, respectively, primarily reflecting the ongoing impact of the loss of exclusivity in most markets in Europe and the Asia Pacific region, as well as in Canada, coupled with lower demand and, for the year-to-date period, lower pricing in the U.S.

due to competitive pressures.

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until May 2026 and Janumet XR will not lose market exclusivity in the U.S.

until July 2026, although another non-automatically substitutable form of sitagliptin could be available prior to 2026 .

until July 2026, although a non-automatically substitutable form of sitagliptin that differs from the form in the Company’s sitagliptin products has been approved by the FDA .

As a result of competitive pressures, the Company anticipates pricing and volume declines for Januvia and Janumet in the U.S.

for the remainder of 2023 and thereafter.

In August 2023, the U.S.

Department of HHS, through the CMS, announced that Januvia will be included in the first year of the IRA’s Program.

Pursuant to the IRA’s Program, discussions with the government will occur in 2023 and 2024, with government price-setting becoming effective on January 1, 2026.

The Company has sued the U.S.

government regarding the IRA’s Program (see Note 10 to the condensed consolidated financial statements).

The Company lost market exclusivity for Januvia in all of the EU and for Janumet in some European countries in September 2022.

Exclusivity for Janumet was lost in other European countries in April 2023.

Accordingly, the Company is experiencing sales declines in these markets and expects the declines to continue.

While the Company lost market exclusivity for Januvia in China in 2022 with the launch of a generic equivalent product and an additional generic equivalent product was launched in the second quarter of 2023, the impact on sales for full-year 2023 is expected to be modest.

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Combined sales of Januvia and Janumet in Europe, China and the U.S.

represented 11%, 14% and 37%, respectively, of total combined Januvia and Janumet sales for the first six months of 2023.

represented 10%, 14% and 40%, respectively, of total combined Januvia and Janumet sales for the first nine months of 2023.

In response to a request from a regulatory authority in 2022, Merck evaluated its sitagliptin-containing products for the presence of nitrosamines.

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Companion Animal 526 542 (3) % (4) % 1,817 1,834 (1) % — %

Sales of livestock products declined 2% in the second quarter of 2023 and were essentially flat in the first six months of 2023 compared with the corresponding period of 2022.

Excluding the unfavorable effect of foreign exchange, livestock sales performance in both periods primarily reflects higher pricing, as well as higher demand for poultry and swine products, partially offset by lower demand for ruminant products, due in part to reduced herd sizes.

Sales of companion animal products grew 1% in the second quarter of 2023 and were flat in the first six months of 2023 compared with the corresponding periods of 2022.

Excluding the unfavorable effect of foreign exchange, companion animal sales performance in both periods primarily reflects higher pricing, including for the Bravecto (fluralaner) parasiticide line of products, partially offset by supply challenges for certain companion animal vaccines.

Sales of Bravecto products were $326 million and $640 million for the second quarter and first six months of 2023, respectively, representing growth of 5% and 3%, respectively, compared with the corresponding prior year periods, or 7% and 5%, respectively, excluding the unfavorable effect of foreign exchange.

Sales of livestock products grew 5% and 2% in the third quarter and first nine months of 2023, respectively.

Sales growth in both periods was primarily due to higher pricing, as well as higher demand for poultry, swine and ruminant products.

Sales of companion animal products declined 3% and 1% in the third quarter and first nine months of 2023, respectively, primarily due to fewer vet visits in the U.S., partially offset by higher pricing.

Sales of the Bravecto (fluralaner) parasiticide line of products were $235 million for the third quarter of 2023, representing a decline of 3% compared with the third quarter of 2022.

Sales of Bravecto products were $875 million for the first nine months of 2023, representing growth of 1% compared with the corresponding prior year period, or 3% excluding the unfavorable effect of foreign exchange.

Costs, Expenses and Other

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Cost of Sales

Cost of sales decreased 5% and 17% in the second quarter and first six months of 2023, respectively.

Cost of sales includes $193 million and $615 million in the second quarter of 2023 and 2022, respectively, and $414 million and $2.3 billion in the first six months of 2023 and 2022, respectively, related to sales of Lagevrio , which is being developed in a collaboration with Ridgeback (see Note 3 to the condensed consolidated financial statements).

Cost of sales also includes the amortization of intangible assets recorded in connection with acquisitions, collaborations, and licensing arrangements, which totaled $468 million and $447 million in the second quarter of 2023 and 2022, respectively, and $1.0 billion and $1.1 billion in the first six months of 2023 and 2022, respectively.

Amortization expense in the first six months of 2023 and 2022 includes $72 million and $250 million, respectively, of cumulative catch-up amortization related to Merck’s collaborations with Eisai and AstraZeneca, respectively (see Note 3 to the condensed consolidated financial statements).

Also included in cost of sales are expenses associated with restructuring activities, which amounted to $32 million and $67 million in the second quarter of 2023 and 2022, respectively, and $61 million and $113 million in the first six months of 2023 and 2022, respectively, including accelerated depreciation and asset write-offs related to the planned sale or closure of manufacturing facilities.

Separation costs associated

with manufacturing-related headcount reductions have been incurred and are reflected in Restructuring costs as discussed below.

Gross margin was 73.2% in the second quarter of 2023 compared with 71.1% in the second quarter of 2022.

Gross margin was 73.1% in the first six months of 2023 compared with 68.5% in the first six months of 2022.

The gross margin improvement in both periods primarily reflects the favorable impacts of lower Lagevrio sales (which have a low gross margin) and product mix, partially offset by the unfavorable impact of foreign exchange and increased restructuring costs.

Higher amortization of intangible assets also partially offset the gross margin improvement in the first six months of 2023.

Cost of sales increased 8% in the third quarter of 2023 and declined 10% in the first nine months of 2023 compared with the corresponding prior year periods.

Cost of sales includes $348 million and $244 million in the third quarter of 2023 and 2022, respectively, and $762 million and $2.6 billion in the first nine months of 2023 and 2022, respectively, related to sales of Lagevrio , which is being developed in a collaboration with Ridgeback.

Cost of sales also includes the amortization of intangible assets recorded in connection with acquisitions, collaborations, and licensing arrangements, which totaled $552 million and $445 million in the third quarter of 2023 and 2022, respectively, and $1.6 billion in both the first nine months of 2023 and 2022.

Amortization expense in the third quarter of 2023 includes $81 million of cumulative catch-up amortization related to Merck’s collaboration with Eisai.

Amortization expense in the first nine months of 2023 and 2022 includes $154 million and $250 million, respectively, of cumulative catch-up amortization related to Merck’s collaborations with Eisai and AstraZeneca, respectively.

See Note 3 to the condensed consolidated financial statements for more information on Merck’s collaborative arrangements.

Also included in cost of sales are expenses associated with restructuring activities, which amounted to $33 million and $54 million in the third quarter of 2023 and 2022, respectively, and $94 million and $167 million in the first nine months of 2023 and 2022, respectively, including accelerated depreciation and asset write-offs related to the planned sale or closure of manufacturing facilities.

Separation costs associated with manufacturing-related headcount reductions have been incurred and are reflected in Restructuring costs as discussed below.

Gross margin was 73.3% in the third quarter of 2023 compared with 73.7% in the third quarter of 2022.

The gross margin decline was primarily due to the unfavorable impacts of foreign exchange, higher Lagevrio sales (which have a low gross margin) and higher amortization of intangible assets, partially offset by lower revenue from third-party manufacturing arrangements (which have a low gross margin), lower manufacturing-related costs and the favorable effect of product mix.

Gross margin was 73.1% in the first nine months of 2023 compared with 70.2% in the first nine months of 2022.

The gross margin improvement primarily reflects the favorable impacts of lower Lagevrio sales, lower revenue from third-party manufacturing arrangements, lower manufacturing-related costs and product mix, partially offset by the unfavorable impact of foreign exchange.

Selling, General and Administrative

Selling, general and administrative (SG&A) expenses increased 8% in the second quarter of 2023 and rose 7% in the first six months of 2023 primarily due to higher administrative costs, including higher compensation and benefit costs, as well as increased promotional spending and higher selling costs, partially offset by the favorable effect of foreign exchange and lower acquisition-related costs.

Selling, general and administrative (SG&A) expenses were flat in the third quarter of 2023 compared with the third quarter of 2022 reflecting higher promotional spending that was offset by lower administrative costs.

SG&A expenses rose 5% in the first nine months of 2023 primarily due to higher administrative costs, including compensation and benefit costs, as well as increased promotional spending and higher selling costs, partially offset by lower acquisition-related costs and the favorable effect of foreign exchange.

Research and Development

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 and were $17.6 billion in the first six months of 2023 compared with $5.4 billion in the first six months of 2022.

The increase in both periods was primarily due to a $10.2 billion charge for the acquisition of Prometheus.

Also contributing to the increase in R&D expenses in both periods were higher compensation and benefit costs, reflecting in part increased headcount, higher investments in discovery research and early drug development, as well as increased clinical development spending.

The increase in R&D expenses in the first six months of 2023 was also attributable to a $1.2 billion charge for the acquisition of Imago and higher upfront charges related to collaborations and licensing arrangements.

The increase in R&D expenses in both periods was partially offset by the favorable effect of foreign exchange.

R&D expenses are comprised of the costs directly incurred by Merck Research Laboratories (MRL), the Company’s research and development division that focuses on human health-related activities, which were $2.3 billion and $1.9 billion for the second quarter of 2023 and 2022, respectively, and $4.3 billion and $3.7 billion for the first six months of 2023 and 2022, respectively.

Also included in R&D expenses are Animal Health research costs, licensing costs, charges for transactions accounted for as asset acquisitions, and costs incurred by other divisions in support of R&D activities, including depreciation, production and general and administrative, which in the aggregate were approximately $11.1 billion and $880 million for the second quarter of 2023 and 2022, respectively, and $13.3 billion and $1.6 billion for the first six months of 2023 and 2022, respectively.

The increase in these expenses in the second quarter and first six months of 2023 was largely attributable to the $10.2 billion charge for the acquisition of Prometheus (as noted above).

The increase in these expenses for the first six months of 2023 was also due in part to a $1.2 billion charge for the acquisition of Imago (as noted above) and a $175 million charge for a license and collaboration agreement with Kelun-Biotech.

Research and development (R&D) expenses declined 25% in the third quarter of 2023 primarily due to charges recorded in 2022 for intangible asset impairments coupled with lower upfront and option payments in 2023 for collaborations and licensing agreements.

The decline 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, as well as higher clinical development spending.

R&D expenses were $20.9 billion in the first nine months of 2023 compared with $9.8 billion in the first nine months of 2022.

The increase was primarily due to a $10.2 billion charge for the acquisition of Prometheus, a $1.2 billion charge for the acquisition of Imago, higher compensation and benefit costs, higher investments in discovery research and early drug development, as well as increased clinical development spending.

The increase in R&D expenses in the first nine months of 2023 was partially offset by charges recorded in 2022 for intangible asset impairments, as well as lower upfront and option payments in 2023 related to collaborations and licensing arrangements.

R&D expenses are comprised of the costs directly incurred by Merck Research Laboratories (MRL), the Company’s research and development division that focuses on human health-related activities, which were $2.3 billion and $2.0 billion for the third quarter of 2023 and 2022, respectively, and $6.6 billion and $5.6 billion for the first nine months of 2023 and 2022, respectively.

Also included in R&D expenses are Animal Health research costs, licensing costs, charges for transactions accounted for as asset acquisitions, and costs incurred by other divisions in support of R&D activities, including depreciation, production and general and administrative, which in the aggregate were approximately $1.0 billion and $1.5 billion for the third quarter of 2023 and 2022, respectively, and $14.3 billion and $3.2 billion for the first nine months of 2023 and 2022, respectively.

The decline in these non-MRL R&D expenses in the third quarter of 2023 largely reflects $690 million of upfront and option payments in the aggregate made in 2022 for collaborations and licensing agreements with Orion Corporation (Orion), Moderna, Inc.

(Moderna) and Orna Therapeutics (Orna).

The increase in these non-MRL R&D expenses in the first nine months of 2023 was largely attributable to a $10.2 billion charge for the acquisition of Prometheus (as noted above), a $1.2 billion charge for the acquisition of Imago (as noted above) and a $175 million charge for a license and collaboration agreement with Kelun-Biotech, partially offset by the $690 million of charges in 2022 for the transactions with Orion, Moderna and Orna.

See Note 2 to the condensed consolidated financial statements for additional information related to business development activity.

Additionally, R&D expenses in the third quarter and first nine months of 2022 include $887 million of intangible asset impairment charges largely related to nemtabrutinib.

See Note 8 to the condensed consolidated financial statements for more information on the intangible asset impairment charges.

Restructuring Costs

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The Company anticipates the actions under the Restructuring Program will result in cumulative annual net cost savings of approximately $900 million by the end of 2023.

Restructuring costs, primarily representing separation and other related costs associated with these restructuring activities, were $151 million and $142 million for the second quarter of 2023 and 2022, respectively, and $218 million and $194 million for the first six months of 2023 and 2022, respectively.

Restructuring costs, primarily representing separation and other related costs associated with these restructuring activities, were $126 million and $94 million for the third quarter of 2023 and 2022, respectively, and $344 million and $288 million for the first nine months of 2023 and 2022, respectively.

Separation costs incurred were associated with actual headcount reductions, as well as estimated expenses under existing severance programs for involuntary headcount reductions that were probable and could be reasonably estimated.

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Additional costs associated with the Company’s restructuring activities are included in Cost of sales , Selling, general and administrative expenses and Research and development costs.

The Company recorded aggregate pretax costs of $236 million and $258 million in the second quarter of 2023 and 2022, respectively, and $333 million and $384 million for the first six months of 2023 and 2022, respectively, related to restructuring program activities (see Note 5 to the condensed consolidated financial statements).

The Company recorded aggregate pretax costs of $199 million and $175 million in the third quarter of 2023 and 2022, respectively, and $532 million and $559 million for the first nine months of 2023 and 2022, respectively, related to restructuring program activities (see Note 5 to the condensed consolidated financial statements).

Other (Income) Expense, Net

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 losses from investments in equity securities and lower pension settlement costs.

Other (income) expense, net, was $259 million of expense for the first six months of 2023 compared with $1.1 billion of expense for the first six months of 2022 primarily due to net unrealized gains from investments in equity securities recorded in 2023 compared with net unrealized losses recorded in 2022, and lower pension settlement costs, partially offset by a $572.5 million charge in 2023 related to settlements with certain plaintiffs in the Zetia antitrust litigation (see Note 9 to the condensed consolidated financial statements).

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 losses from investments in equity securities.

Other (income) expense, net, was $388 million of expense for the first nine months of 2023 compared with $1.6 billion of expense for the first nine months of 2022, primarily due to net unrealized gains from investments in equity securities recorded in 2023 compared with net unrealized losses recorded in 2022, and lower pension settlement costs, partially offset by a $572.5 million charge in 2023 related to settlements with certain plaintiffs in the Zetia antitrust litigation (see Note 10 to the condensed consolidated financial statements).

For details on the components of Other (income) expense, net, see Note 13 to the condensed consolidated financial statements.

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Three Months Ended

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September 30, Nine Months Ended

September 30,

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Other (5,208) (6,522) (26,918) (17,004)

(Loss) Income Before Taxes $ (5,335) $ 4,487 $ (1,685) $ 9,348

Income Before Taxes $ 5,620 $ 3,583 $ 3,935 $ 12,931

Pharmaceutical segment profits are comprised of segment sales less standard costs, as well as SG&A expenses directly incurred by the segment.

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Separate divisions maintain responsibility for monitoring and managing these costs, including depreciation related to fixed assets utilized by these divisions and, therefore, they are not included in segment profits.

Also excluded from the determination of segment profits are costs related to restructuring activities and acquisition- and divestiture-related costs, including the amortization of intangible assets and amortization of purchase accounting adjustments, intangible asset impairment charges, and expense or income related to changes in the estimated fair value measurement of liabilities for contingent consideration.

related to changes in the estimated fair value measurement of liabilities for contingent consideration.

Additionally, segment profits do not reflect other expenses from corporate and manufacturing cost centers and other miscellaneous income or expense.

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Also included in “Other” are miscellaneous corporate profits (losses), as well as operating profits (losses) related to third-party manufacturing arrangements.

Pharmaceutical segment profits grew 7% and 2% in the second quarter and first six months of 2023, respectively, reflecting higher sales, partially offset by higher administrative and promotional costs, as well as the unfavorable effect of foreign exchange.

Animal Health segment profits declined 18% and 11% in the second quarter and first six months of 2023, respectively, reflecting higher administrative and promotional costs, increased research and development expenses, as well as the unfavorable effect of foreign exchange.

The income tax provision of $637 million and $1.5 billion for the second quarter and first six months of 2023, respectively, on pretax losses of $5.3 billion and $1.7 billion, respectively, resulted in effective income tax rates of (11.9)% and (86.8)%, respectively.

The second quarter 2023 effective tax rate includes the impact of a charge for the acquisition of Prometheus for which no tax benefit was recognized, which unfavorably affected the tax rate by 25.1 percentage points, as well as the favorable impact of net unrealized losses from investments in equity securities, which were taxed at the U.S.

The effective income tax rate for the first six months of 2023 includes a 101.9 percentage point combined unfavorable impact of charges for the acquisitions of Prometheus and Imago for which no tax benefits were recognized, as well as higher foreign taxes, the impact of the R&D capitalization provision of the Tax Cuts and Jobs Act of 2017 on the Company’s U.S.

Pharmaceutical segment profits grew 9% and 4% in the third quarter and first nine months of 2023, respectively, primarily due to higher sales, partially offset by higher administrative and promotional costs, as well as the unfavorable effect of foreign exchange.

Animal Health segment profits declined 18% and 13% in the third quarter and first nine months of 2023, respectively, reflecting higher manufacturing costs, higher inventory write-offs, increased administrative and promotional costs, as well as the unfavorable effect of foreign exchange.

The effective income tax rate of 15.5% for the third quarter of 2023 reflects the favorable mix of income and expense.

The effective income tax rate of 59.3% for the first nine months of 2023 includes a 44.0 percentage point combined unfavorable impact of charges for the acquisitions of Prometheus and Imago for which no tax benefits were recognized, as well as higher foreign taxes, the impact of the R&D capitalization provision of the Tax Cuts and Jobs Act of 2017 on the Company’s U.S.

global intangible low-taxed income inclusion, and net unrealized gains from investments in equity securities, which were taxed at the U.S.

tax rate, partially offset by higher foreign tax credits.

The effective income tax rates of 12.0% for the second quarter of 2022 and 11.7% for the first six months of 2022 reflect the favorable impact of net unrealized losses from investments in equity securities, which were taxed at the U.S.

Non-GAAP (Loss) Income and Non-GAAP EPS

Non-GAAP (loss) income and non-GAAP (loss) earnings per share (EPS) are alternative views of the Company’s performance that Merck is providing because management believes this information enhances investors’ understanding of the Company’s results since management uses non-GAAP measures to assess performance.

Non-GAAP (loss) income and non-GAAP EPS exclude certain items because of the nature of these items and the impact that they have on the analysis of underlying business performance and trends.

The effective income tax rates of 9.2% for the third quarter of 2022 and 11.0% for the first nine months of 2022 reflect the favorable mix of income and expense, as well as the favorable impact of net unrealized losses from investments in equity securities and intangible asset impairment charges, which were taxed at the U.S.

Non-GAAP Income and Non-GAAP EPS

Non-GAAP income and non-GAAP EPS are alternative views of the Company’s performance that Merck is providing because management believes this information enhances investors’ understanding of the Company’s results since management uses non-GAAP measures to assess performance.

Non-GAAP income and non-GAAP EPS exclude certain items because of the nature of these items and the impact that they have on the analysis of underlying business performance and trends.

The excluded items (which should not be considered non-recurring) consist of acquisition- and divestiture-related costs, restructuring costs, income and losses from investments in equity securities, and certain other items.

These excluded items are significant components in understanding and assessing financial performance.

Non-GAAP (loss) income and non-GAAP EPS are important internal measures for the Company.

Non-GAAP income and non-GAAP EPS are important internal measures for the Company.

Senior management receives a monthly analysis of operating results that includes a non-GAAP EPS metric.

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In addition, senior management’s annual compensation is derived in part using a non-GAAP pretax income metric.

Since non-GAAP (loss) income and non-GAAP EPS are not measures determined in accordance with GAAP, they have no standardized meaning prescribed by GAAP and, therefore, may not be comparable to the calculation of similar measures of other companies.

The information on non-GAAP income and non-GAAP EPS should be considered in addition to, but not as a substitute for or superior to, net (loss) income and EPS prepared in accordance with generally accepted accounting principles in the U.S.

Since non-GAAP income and non-GAAP EPS are not measures determined in accordance with GAAP, they have no standardized meaning prescribed by GAAP and, therefore, may not be comparable to the calculation of similar measures of other companies.

The information on non-GAAP income and non-GAAP EPS should be considered in addition to, but not as a substitute for or superior to, net income and EPS prepared in accordance with generally accepted accounting principles in the U.S.

A reconciliation between GAAP financial measures and non-GAAP financial measures is as follows:

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

($ in millions except per share amounts) 2023 2022 2023 2022

(Loss) income before taxes as reported under GAAP $ (5,335) $ 4,487 $ (1,685) $ 9,348

Income before taxes as reported under GAAP $ 5,620 $ 3,583 $ 3,935 $ 12,931

Increase (decrease) for excluded items:

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Charge for Zetia antitrust litigation settlements — — 573 —

Non-GAAP (loss) income before taxes (4,407) 5,509 74 11,818

Non-GAAP income before taxes 6,391 5,452 6,465 17,270

Income tax provision as reported under GAAP 870 330 2,332 1,423

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Non-GAAP income tax provision 959 744 2,682 2,388

Non-GAAP net (loss) income (5,217) 4,748 (1,649) 10,174

Non-GAAP net income

5,432 4,708 3,783 14,882

Net income attributable to noncontrolling interests as reported under GAAP 5 5 12 6

Non-GAAP net (loss) income attributable to Merck & Co., Inc.

Non-GAAP net income attributable to Merck & Co., Inc.

$ 5,427 $ 4,703 $ 3,771 $ 14,876

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(1) The estimated tax impact on the excluded items is determined by applying the statutory rate of the originating territory of the non-GAAP adjustments.

(2) The Company recorded a net loss on both a GAAP and non-GAAP basis for the three and six months ended June 30, 2023;

therefore, no potential dilutive common shares were used in the computations of loss per common share assuming dilution because the effects would have been antidilutive.

(2) GAAP and non-GAAP EPS were negatively affected in the first nine months of 2023 by $4.52, and in both the third quarter and first nine months of 2022 by $0.22, of charges for certain upfront and pre-approval milestone payments related to collaborations and licensing agreements, as well as charges related to pre-approval assets obtained in transactions accounted for as asset acquisitions.

Acquisition- and Divestiture-Related Costs

Non-GAAP (loss) income and non-GAAP EPS exclude the impact of certain amounts recorded in connection with acquisitions and divestitures of businesses.

Non-GAAP income and non-GAAP EPS exclude the impact of certain amounts recorded in connection with acquisitions and divestitures of businesses.

These amounts include the amortization of intangible assets and amortization of purchase accounting adjustments to inventories, as well as intangible asset impairment charges, and expense or income related to changes in the estimated fair value measurement of liabilities for contingent consideration.

Also excluded are integration, transaction, and certain other costs associated with acquisitions and divestitures.

Non-GAAP (loss) income and non-GAAP EPS also exclude amortization of intangible assets related to collaborations and licensing arrangements.

Non-GAAP income and non-GAAP EPS also exclude amortization of intangible assets related to collaborations and licensing arrangements.

Restructuring Costs

Non-GAAP (loss) income and non-GAAP EPS exclude costs related to restructuring actions (see Note 5 to the condensed consolidated financial statements).

Non-GAAP income and non-GAAP EPS exclude costs related to restructuring actions (see Note 5 to the condensed consolidated financial statements).

These amounts include employee separation costs and accelerated depreciation associated with facilities to be closed or divested.

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Income and Losses from Investments in Equity Securities

Non-GAAP (loss) income and non-GAAP EPS exclude realized and unrealized gains and losses from investments in equity securities either owned directly or through ownership interests in investment funds.

Non-GAAP income and non-GAAP EPS exclude realized and unrealized gains and losses from investments in equity securities either owned directly or through ownership interests in investment funds.

Certain Other Items

Non-GAAP (loss) income and non-GAAP EPS exclude certain other items.

Non-GAAP income and non-GAAP EPS exclude certain other items.

These items are adjusted for after evaluating them on an individual basis, considering their quantitative and qualitative aspects.

Typically, these consist of items that are unusual in nature, significant to the results of a particular period or not indicative of future operating results.

Excluded from non-GAAP (loss) income and non-GAAP EPS in 2023 is a charge related to settlements with certain plaintiffs in the Zetia antitrust litigation (see Note 9 to the condensed consolidated financial statements).

Excluded from non-GAAP income and non-GAAP EPS in 2023 is a charge related to settlements with certain plaintiffs in the Zetia antitrust litigation (see Note 10 to the condensed consolidated financial statements).

Research and Development Update

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and internationally.

MK-7264, gefapixant, is an investigational, non-narcotic, orally selective P2X3 receptor antagonist, for the treatment of adults with refractory or unexplained chronic cough under review by the FDA and the European Medicines Agency (EMA).

The marketing applications for gefapixant are based on results from the COUGH-1 and COUGH-2 clinical trials.

In July 2023, the FDA accepted Merck’s resubmission of the New Drug Application (NDA) for gefapixant and assigned a Prescription Drug User Fee Act (PDUFA), or target action, date of December 27, 2023.

Merck submitted additional analyses to the FDA in June 2023 in response to the Complete Response Letter (CRL) that was received in January 2022 regarding Merck’s NDA for gefapixant.

MK-7264, gefapixant, is an investigational, non-narcotic, orally selective P2X3 receptor antagonist for the treatment of adults with refractory or unexplained chronic cough under review by the FDA.

The marketing application for gefapixant is based on results from the COUGH-1 and COUGH-2 clinical trials.

In September 2023, the FDA announced it will hold a Pulmonary-Allergy Drugs Advisory Committee meeting on November 17, 2023 to discuss gefapixant.

In January 2022, Merck received a Complete Response Letter (CRL) for the original NDA for gefapixant.

In the CRL, the FDA requested additional information related to the cough counting system that was used to assess efficacy.

The CRL was not related to the safety of gefapixant.

In July 2023, the Committee for Medicinal Products for Human Use (CHMP) of the EMA recommended the approval of gefapixant.

The CHMP’s recommendation will now be reviewed by the European Commission (EC) for marketing authorization in the EU and a final decision is expected later in 2023.

In July 2023, the FDA accepted Merck’s resubmission of the NDA for gefapixant and assigned a PDUFA date of December 27, 2023.

In September 2023, the EC approved Lyfnua (gefapixant).

MK-3475, Keytruda , is an anti-PD-1 therapy approved for the treatment of many cancers that is in clinical development for expanded indications.

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This submission is to convert the accelerated approval to full (regular) approval.

Keytruda is also under review by the FDA for the treatment of adult and pediatric patients with recurrent locally advanced or metastatic Merkel cell carcinoma.

This submission is based on data from the Phase 3 KEYNOTE-913 trial.

Keytruda is approved for this indication in the U.S.

under the FDA’s accelerated approval process.

This submission is to convert the accelerated approval to full (regular) approval.

Additionally, Keytruda is under review by the FDA in combination with standard of care chemotherapy (gemcitabine and cisplatin) for the treatment of patients with locally advanced unresectable or metastatic biliary tract cancer.

The submission is based on data from the KEYNOTE-966 trial.

The FDA set a PDUFA date of February 7, 2024.

KEYNOTE-966 is also under review in the EU and Japan.

Keytruda is also under review by the FDA in combination with fluoropyrimidine- and platinum-containing chemotherapy for the first-line treatment of patients with locally advanced unresectable or metastatic gastric or GEJ adenocarcinoma.

Keytruda is also under priority review by the FDA in combination with external beam radiotherapy plus concurrent chemotherapy, followed by brachytherapy (also known as concurrent chemoradiotherapy) as treatment with definitive intent for newly diagnosed patients with high-risk locally advanced cervical cancer.

The submission is based on the KEYNOTE-A18 trial.

The FDA set a PDUFA date of January 20, 2024.

Additionally, Keytruda is under review by the FDA in combination with fluoropyrimidine- and platinum-containing chemotherapy for the first-line treatment of patients with locally advanced unresectable or metastatic gastric or GEJ adenocarcinoma.

The submission is based on data from the KEYNOTE-859 trial.

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KEYNOTE-859 is also under review in the EU and Japan.

In addition, Keytruda is under review by the FDA as a perioperative treatment regimen for patients with resectable stage II, IIIA or IIIB NSCLC based on the KEYNOTE-671 study.

In October 2023, the CHMP of the EMA adopted a positive opinion recommending approval of Keytruda in combination with chemotherapy, for the first-line treatment of locally advanced unresectable or metastatic HER2-negative gastric or GEJ adenocarcinoma in adults whose tumors express PD-L1.

The CHMP’s recommendation will now be reviewed by the EC for marketing authorization in the EU, and a final decision is expected in the fourth quarter of 2023.

Keytruda is under review in the EU and Japan in combination with standard of care chemotherapy (gemcitabine and cisplatin) for the treatment of patients with locally advanced unresectable or metastatic biliary tract cancer, based on data from the KEYNOTE-966 trial.

Keytruda is also under review in the EU and Japan as a perioperative treatment regimen for patients with resectable stage II, IIIA or IIIB NSCLC based on the KEYNOTE-671 study.

A perioperative treatment regimen includes treatment before surgery (neoadjuvant) and continued after surgery (adjuvant).

The FDA set a PDUFA date of October 16, 2023.

KEYNOTE-671 is also under review in the EU.

Keytruda is under review in the EU for the adjuvant treatment of patients with stage IB (≥4 cm), II or IIIA NSCLC following complete surgical resection.

The submission is based on data from the pivotal Phase 3 KEYNOTE-091 trial, also known as EORTC-1416-LCG/ETOP-8-15 – PEARLS.

Keytruda is also under review in the EU in combination with trastuzumab, fluoropyrimidine- and platinum-containing chemotherapy, for the first-line treatment of locally advanced unresectable or metastatic human epidermal growth factor 2 (HER2)-positive gastric or GEJ adenocarcinoma in adults whose tumors express PD-L1.

In July 2023, the CHMP adopted a positive opinion recommending approval of Keytruda for this indication based on interim results from the Phase 3 KEYNOTE-811 trial.

The CHMP’s recommendation will now be reviewed by the EC for marketing authorization in the EU, and a final decision is expected in the third quarter of 2023.

This indication was approved by the FDA under accelerated approval based on objective response rate data from KEYNOTE-811, and continued approval for this indication may be contingent upon verification and description of clinical benefit in the confirmatory trials.

Merck is working with the FDA to update this indication to patients whose tumors are PD-L1 positive.

MK-7339, Lynparza, is an oral PARP inhibitor currently approved for the treatment of several cancers being co-developed for additional cancer types as part of a collaboration with AstraZeneca (see Note 3 to the condensed consolidated financial statements).

Lynparza is under review in Japan for the treatment of certain patients with mCRPC based on the PROpel trial.

In July 2023, Merck submitted a Biologics License Application to the FDA for sotatercept (MK-7962), Merck’s novel investigational activin signaling inhibitor for the treatment of adults with pulmonary arterial hypertension (World Health Organization Group 1).

Also in July 2023, Merck and Moderna, Inc.

announced the initiation of the pivotal Phase 3 randomized V940-001 clinical trial evaluating V940 (mRNA-4157), an investigational individualized neoantigen therapy, in combination with Keytruda , as an adjuvant treatment in patients with resected high-risk (Stage IIB-IV) melanoma.

The FDA and EMA granted Breakthrough Therapy Designation and the Priority Medicines (PRIME) scheme, respectively, for V940 (mRNA-4157) in combination with Keytruda for the adjuvant treatment of patients with high-risk melanoma based on data from the Phase 2b KEYNOTE-942/mRNA-4157-P201 study.

KEYNOTE-A86, a study evaluating pembrolizumab subcutaneous versus pembrolizumab intravenous administered with platinum doublet chemotherapy in patients with metastatic squamous or nonsquamous NSCLC, met its dual primary endpoints and Merck anticipates disclosing details in the future.

In September 2023, the FDA accepted and granted priority review for a supplemental NDA seeking approval for Welireg for the treatment of adult patients with advanced RCC following immune checkpoint and anti-angiogenic therapies.

The supplemental NDA is based on data from the LITESPARK-005 trial.

The FDA set a PDUFA date of January 17, 2024.

Also in September 2023, the FDA accepted for priority review a Biologics License Application for sotatercept (MK-7962), Merck’s novel investigational activin signaling inhibitor for the treatment of adult patients with PAH (World Health Organization Group 1).

The application is based on the results from the Phase 3 STELLAR trial.

The FDA set a PDUFA date of March 26, 2024.

Merck has also submitted a marketing authorization application to the EMA.

Sotatercept was granted Breakthrough Therapy Designation and Orphan Drug designation by the FDA, as well as Priority Medicines (PRIME) scheme and Orphan Drug designation by the EMA for the treatment of PAH.

Sotatercept is the subject of a licensing agreement with BMS.

MK-4482, Lagevrio , is an investigational oral antiviral medicine for the treatment of mild to moderate COVID-19 in adults who are at risk for progressing to severe disease.

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Applications to other regulatory bodies are underway.

In July 2023, Merck and Moderna, Inc.

The FDA and EMA granted Breakthrough Therapy Designation and PRIME scheme, respectively, for V940 (mRNA-4157) in combination with Keytruda for the adjuvant treatment of patients with high-risk melanoma based on data from the Phase 2b KEYNOTE-942/mRNA-4157-P201 study.

In August 2023, Merck announced the initiation of the Phase 3 clinical program, CORALreef, for MK-0616, an investigational, oral proprotein convertase subtilisin/kexin type 9 (PCSK9) inhibitor, being evaluated for the treatment of adults with hypercholesterolemia.

This is the first Phase 3 clinical program for an oral PCSK9 inhibitor.

The first participants have enrolled in two registrational Phase 3 studies evaluating low-density lipoprotein (LDL) cholesterol reduction and a Phase 3 cardiovascular outcomes study.

In October 2023, Merck initiated a Phase 3 clinical trial for MK-7240 for the treatment of ulcerative colitis.

MK-7240 is a humanized monoclonal antibody directed to tumor necrosis factor-like ligand 1A, a target associated with both intestinal inflammation and fibrosis.

MK-7240, which was obtained as part of Merck’s acquisition of Prometheus in June 2023, is being developed for the treatment of immune-mediated diseases including ulcerative colitis, Crohn’s disease, and other autoimmune conditions.

Also in October 2023, Merck and Daiichi Sankyo entered into a global development and commercialization agreement for three of Daiichi Sankyo’s DXd ADC candidates:

patritumab deruxtecan (HER3-DXd) (MK-1022), ifinatamab deruxtecan (I-DXd) (MK-2400) and raludotatug deruxtecan (R-DXd) (MK-5909).

The companies will jointly develop and potentially commercialize these ADC candidates worldwide, except in Japan where Daiichi Sankyo will maintain exclusive rights.

All three potentially first-in-class DXd ADCs are in various stages of clinical development for the treatment of multiple solid tumors both as monotherapy and/or in combination with other treatments.

Patritumab deruxtecan was granted Breakthrough Therapy Designation by the FDA in December 2021 for the treatment of patients with epidermal growth factor receptor (EGFR) -mutated locally advanced or metastatic NSCLC with disease progression on or after treatment with a third-generation tyrosine kinase inhibitor and platinum-based therapies.

The submission of a BLA in the U.S.

is planned by the end of March 2024 for patritumab deruxtecan, which is based on data from the HERTHENA-Lung01 Phase 2 trial.

Ifinatamab deruxtecan is currently being evaluated as monotherapy in IDeate-01, a Phase 2 clinical trial in patients with previously treated extensive-stage small-cell lung cancer (SCLC).

Raludotatug deruxtecan is currently being evaluated in a first-in-human Phase 1 clinical trial.

Designed using Daiichi Sankyo’s proprietary DXd ADC technology to target and deliver a cytotoxic payload inside cancer cells that express a specific cell surface antigen, each ADC consists of a monoclonal antibody attached to a number of topoisomerase I inhibitor

payloads (an exatecan derivative, DXd) via tetrapeptide-based cleavable linkers.

See Note 3 to the condensed consolidated financial statements for additional information related to this collaboration.

The Company is in the process of discontinuing development of ladiratuzumab vedotin, an ADC targeting LIV-1, which was being developed in collaboration with Seagen Inc.

The charts below reflect the Company’s research pipeline as of August 2, 2023.

In August 2023, Merck and Eisai provided an update on the Phase 3 LEAP-010 trial evaluating Keytruda plus Lenvima as a first-line treatment for patients with recurrent or metastatic HNSCC whose tumors express PD-L1.

Two planned interim analyses were conducted by an independent Data Monitoring Committee.

In the first analysis, Keytruda plus Lenvima showed a statistically significant improvement in progression-free survival and objective response rate versus Keytruda plus placebo.

At the second analysis, Keytruda plus Lenvima did not demonstrate an improvement in overall survival compared to Keytruda plus placebo.

Accordingly, the study will be closed, and the companies informed investigators of this decision.

A full evaluation of the data from this study, including pre-planned subgroup analyses, is ongoing.

The companies will work with investigators to share the results with the scientific community.

In September 2023, Merck and Eisai provided updates on two Phase 3 trials, LEAP-006 and LEAP-008, evaluating Keytruda plus Lenvima in patients with certain types of metastatic NSCLC.

The LEAP-006 trial evaluating Keytruda plus Lenvima in combination with pemetrexed and platinum-containing chemotherapy versus Keytruda with pemetrexed and platinum-containing chemotherapy as a first-line treatment for adult patients with metastatic, nonsquamous NSCLC who have confirmation that EGFR-, anaplastic lymphoma kinase (ALK)- or c-ros oncogene 1 (ROS1) -directed therapies are not indicated, did not meet its dual primary endpoints of overall survival and progression free survival.

The LEAP-008 trial evaluating Keytruda plus Lenvima versus docetaxel, a current second line standard of care option, as a treatment for patients with metastatic NSCLC who progressed on or after platinum-containing chemotherapy and one prior anti-PD-1/-L1 immunotherapy, and have confirmation that EGFR-, ALK- or ROS1 -directed therapies are not indicated, did not meet its dual primary endpoints of overall survival and progression free survival.

The companies are working with investigators to share the results of both trials with the scientific community.

The charts below reflect the Company’s research pipeline as of November 1, 2023.

Candidates shown in Phase 3 include the date such candidate entered into Phase 3 development.

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Except as otherwise noted, candidates in Phase 1, additional indications in the same therapeutic area (other than with respect to cancer) and additional claims, line extensions or formulations for in-line products are not shown.

Non-Small-Cell Lung

MK-1308 (quavonlimab) (2)

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MK-1308A (quavonlimab+pembrolizumab)

Hepatocellular

Small-Cell Lung

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Non-Small-Cell Lung

MK-2400 (ifinatamab deruxtecan) (1)

Small-Cell Lung

MK-2870 (1)(3)

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Advanced Solid Tumors

MK-3475A (pembrolizumab+hyaluronidase subcutaneous)

Cutaneous Squamous Cell

MK-3543 (bomedemstat)

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MK-4280A (favezelimab+pembrolizumab)

Cutaneous Squamous Cell

Small-Cell Lung

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Head and Neck

Hematological Malignancies

Hepatocellular

MK-7902 Lenvima (1)(2)

Head and Neck

Small-Cell Lung

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MK-8591D (islatravir+lenacapavir) (1)(5)

Hypercholesterolemia

Nonalcoholic Steatohepatitis (NASH)

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Schizophrenia

Treatment Resistant Depression

Ulcerative Colitis

Phase 3 (Phase 3 entry date) Under Review

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MK-4482 Lagevrio (U.S.) (May 2021) (1)(7)

MK-1022 (patritumab deruxtecan) (1)

Non-Small-Cell Lung (May 2022)

MK-1026 (nemtabrutinib)

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MK-6482 Welireg (3)

Renal Cell (February 2020)

Renal Cell (EU) (February 2020)

MK-7119 Tukysa (1)

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Gastric (December 2020)

Head and Neck (February 2020)

Non-Small-Cell Lung (March 2019)

Melanoma (July 2023)

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MK-8591A (doravirine+islatravir) (February 2020) (5)

Hypercholesterolemia

MK-0616 (August 2023)

Pneumococcal Vaccine Adult

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Pulmonary Arterial Hypertension

MK-7962 (sotatercept) (January 2021)

MK-7962 (sotatercept) (EU) (January 2021)

Respiratory Syncytial Virus

MK-1654 (clesrovimab) (November 2021)

Ulcerative Colitis

MK-7240 (October 2023)

New Molecular Entities

MK-7264 (gefapixant) (U.S.) (8) (EU)

MK-7264 (gefapixant) (U.S.) (8)

Pulmonary Arterial Hypertension

MK-7962 (sotatercept) U.S.

Certain Supplemental Filings

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(KEYNOTE-394) (U.S.)

• Locally Advanced or Metastatic Merkel Cell Carcinoma

(KEYNOTE-913) (U.S.)

• First-Line Advanced or Unresectable Biliary Tract Cancer

(KEYNOTE-966) (U.S.) (EU) (JPN)

• High-Risk Locally Advanced Cervical Cancer

(KEYNOTE-A18) (U.S.)

• First-Line HER2 Negative Locally Advanced Unresectable or Metastatic Gastric Cancer

(KEYNOTE-859) (U.S.) (EU) (JPN)

• First-Line Locally Advanced Unresectable or Metastatic Biliary Tract Cancer

(KEYNOTE-966) (EU) (JPN)

• Resectable Stage II, IIIA or IIIB NSCLC

(KEYNOTE-671) (U.S.) (EU)

• Adjuvant Non-Small-Cell Lung Cancer

(KEYNOTE-091) (EU)

• Metastatic HER2+ Gastric Cancer

(KEYNOTE-811) (EU)

MK-7339 Lynparza (1)

• First-Line Metastatic Prostate Cancer

(PROpel) (JPN)

(KEYNOTE-671) (EU) (JPN)

MK-6482 Welireg

• Previously Treated Advanced Renal Cell Carcinoma

(LIGHTSPARK-005) (U.S.)

(1) Being developed in a collaboration.

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Analysis of Liquidity and Capital Resources

($ in millions) June 30, 2023 December 31, 2022

($ in millions) September 30, 2023 December 31, 2022

Cash and investments $ 10,079 $ 14,207

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Total debt to total liabilities and equity 32.7 % 28.1 %

Cash provided by operating activities was $5.0 billion in the first six months of 2023 compared with $9.1 billion in the first six months of 2022 primarily reflecting the impact of lower Lagevrio sales.

Cash provided by operating activities was reduced by milestone payments related to certain collaborations of $240 million and $1.7 billion in the first six months of 2023 and 2022, respectively.

Cash provided by operating activities was $12.8 billion in the first nine months of 2023 compared with $14.7 billion in the first nine months of 2022.

Cash provided by operating activities in the first nine months of 2023 was reduced by payments of $567 million related to the previously disclosed Zetia antitrust settlement of $572.5 million.

Cash provided by operating activities was reduced by milestone and option payments related to certain collaborations of $240 million and $2.0 billion in the first nine months of 2023 and 2022, respectively.

Cash provided by operating activities continues to be the Company’s primary source of funds to finance operating needs, with excess cash generally serving as the primary source of funds to finance business development transactions, capital expenditures, dividends paid to shareholders and treasury stock purchases.

Cash used in investing activities was $13.8 billion in the first six months of 2023 compared with $2.3 billion in the first six months of 2022.

The higher use of cash in investing activities was primarily due to the acquisitions of Prometheus and Imago, partially offset by higher proceeds from sales of securities and other investments, lower purchases of securities and other investments, and lower capital expenditures.

Cash provided by financing activities was $1.7 billion in the first six months of 2023 compared with a use of cash in financing activities of $4.9 billion in the first six months of 2022.

The change was primarily due to proceeds from the issuance of debt (see below) and an increase in short-term borrowings, partially offset by higher payments on long-term debt (see below), treasury stock purchases and higher dividends paid to shareholders.

Cash used in investing activities was $14.1 billion in the first nine months of 2023 compared with $3.2 billion in the first nine months of 2022.

Cash used in financing activities was $2.6 billion in the first nine months of 2023 compared with $7.6 billion in the first nine months of 2022.

The change was primarily due to proceeds from the issuance of debt (see below) and lower payments on long-term debt (see below), partially offset by treasury stock purchases and higher dividends paid to shareholders.

The Company has accounts receivable factoring agreements with financial institutions in certain countries to sell accounts receivable.

The Company factored $2.9 billion and $2.5 billion of accounts receivable at June 30, 2023 and December 31, 2022, respectively, under these factoring arrangements, which reduced outstanding accounts receivable.

The Company factored $3.5 billion and $2.5 billion of accounts receivable at September 30, 2023 and December 31, 2022, respectively, under these factoring arrangements, which reduced outstanding accounts receivable.

The cash received from the financial institutions is reported within operating activities in the Condensed Consolidated Statement of Cash Flows.

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In May 2023, the Company issued $6.0 billion principal amount of senior unsecured notes consisting of $500 million of 4.05% notes due 2028, $750 million of 4.30% notes due 2030, $1.5 billion of 4.50% notes due 2033, $750 million of 4.90% notes due 2044, $1.5 billion of 5.00% notes due 2053, and $1.0 billion of 5.15% notes due 2063.

The Company used a portion of the $5.9 billion net proceeds from this offering to fund a portion of the cash consideration paid for the acquisition of Prometheus and related fees and expenses, and used the remaining net proceeds for general corporate purposes including to repay commercial paper borrowings and other indebtedness with upcoming maturities.

The Company used a portion of the $5.9 billion net proceeds from this offering to fund a portion of the cash consideration paid for the acquisition of Prometheus, including related fees and expenses, and used the remaining net proceeds for general corporate purposes including to repay commercial paper borrowings and other indebtedness with upcoming maturities.

In May 2023, the Company’s $1.75 billion, 2.80% notes matured in accordance with their terms and were repaid.

In February 2022, the Company’s $1.25 billion, 2.35% notes matured in accordance with their terms and were repaid.

Dividends paid to stockholders were $3.7 billion and $3.5 billion for the first six months of 2023 and 2022, respectively.

In September 2022, the Company’s $1.0 billion, 2.40% notes matured in accordance with their terms and were repaid.

Dividends paid to stockholders were $5.6 billion and $5.3 billion for the first nine months of 2023 and 2022, respectively.

In May 2023, the Board of Directors declared a quarterly dividend of $0.73 per share on the Company’s outstanding common stock for the second quarter that was paid in July 2023.

In July 2023, the Board of Directors declared a quarterly dividend of $0.73 per share on the Company’s outstanding common stock for the third quarter that will be paid in October 2023.

In July 2023, the Board of Directors declared a quarterly dividend of $0.73 per share on the Company’s outstanding common stock for the third quarter that was paid in October 2023.

In 2018, Merck’s Board of Directors authorized purchases of up to $10 billion of Merck’s common stock for its treasury.

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The Company has made and anticipates continuing to make modest share repurchases under this program in 2023.

During the first six months of 2023, the Company purchased $487 million (4 million shares) of its common stock for its treasury under this program.

As of June 30, 2023, the Company’s remaining share repurchase authorization was $4.6 billion.

During the first nine months of 2023, the Company purchased $953 million (9 million shares) of its common stock for its treasury under this program.

As of September 30, 2023, the Company’s remaining share repurchase authorization was $4.1 billion.

The Company has a $6.0 billion credit facility that matures in May 2028.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis