Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Developments
Below is a summary of significant business development activity thus far in 2023. 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. (Prometheus), a clinical-stage biotechnology company pioneering a precision medicine approach for the discovery, development, and commercialization of novel therapeutic and companion diagnostic products for the treatment of immune-mediated diseases. Total consideration paid of $11.0 billion included $1.2 billion of costs to settle share-based equity awards (including $700 million to settle unvested equity awards). Prometheus’ lead candidate, MK-7240 (formerly PRA023), is a humanized monoclonal antibody directed to tumor necrosis factor-like ligand 1A, a target associated with both intestinal inflammation and fibrosis. MK-7240 is being developed for the treatment of immune-mediated diseases including ulcerative colitis, Crohn’s disease, and other autoimmune conditions. 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 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 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 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 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 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.
Pricing
Global efforts toward health care cost containment continue to exert pressure on product pricing and market access worldwide. Changes to the U.S. health care system enacted in prior years as part of health care reform, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, have contributed to pricing pressure. 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 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 Program (see Note 10 to the condensed consolidated financial statements). Furthermore, the Biden Administration and
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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.
Operating Results
Sales
Three Months Ended
September 30, % Change
Excluding
Foreign
Exchange Nine Months Ended
September 30, % Change
Excluding
Foreign
Exchange
($ in millions) 2023 2022 % Change 2023 2022 % Change
United States $ 7,715 $ 7,322 5 % 5 % $ 21,393 $ 20,927 2 % 2 %
International 8,247 7,637 8 % 12 % 24,092 24,526 (2) % 4 %
Total $ 15,962 $ 14,959 7 % 9 % $ 45,485 $ 45,453 — % 3 %
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. A discussion of performance for select products in the franchises follows.
Pharmaceutical Segment
Oncology
Three Months Ended
September 30, % Change
Excluding
Foreign
Exchange Nine Months Ended
September 30, % Change
Excluding
Foreign
Exchange
($ in millions) 2023 2022 % Change 2023 2022 % Change
Keytruda $ 6,338 $ 5,426 17 % 17 % $ 18,403 $ 15,487 19 % 21 %
Alliance Revenue - Lynparza (1)
299 284 5 % 6 % 884 825 7 % 10 %
Alliance Revenue - Lenvima (1)
260 202 29 % 30 % 734 660 11 % 13 %
Welireg 54 38 43 % 43 % 146 83 77 % 77 %
Alliance Revenue - Reblozyl (2)
52 39 35 % 35 % 142 124 14 % 14 %
(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 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. 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 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
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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 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, HNSCC, endometrial and bladder cancers, as well as higher pricing. 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.
Date Approval
January 2023 U.S. Food and Drug Administration (FDA) approval as a single agent for adjuvant treatment following surgical resection and platinum-based chemotherapy for adult patients with stage IB (T2a ≥4 cm), II, or IIIA NSCLC, based on the KEYNOTE-091 trial.
March 2023 FDA full approval for the treatment of adult and pediatric patients with unresectable or metastatic MSI-H or dMMR solid tumors that have progressed following prior treatment and who have no satisfactory alternative treatment options. The conversion from an accelerated to a full (regular) approval is based on the KEYNOTE-158, KEYNOTE-164 and KEYNOTE-051 trials.
April 2023 FDA accelerated approval in combination with enfortumab vedotin-ejfv for the treatment of adult patients with locally advanced or metastatic urothelial carcinoma who are not eligible for cisplatin-containing chemotherapy, based on the KEYNOTE-869 trial dose escalation cohort, Cohort A and Cohort K, which was conducted in collaboration with Seagen and Astellas.
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.
August 2023
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.
October 2023
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.
October 2023
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.
October 2023
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.
October 2023
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 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. (Eisai) (see Note 3 to the condensed consolidated financial statements). 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 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. In September 2023, the FDA accepted and granted priority review for a
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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 nine months of 2022, also includes the receipt of a regulatory approval milestone payment of $20 million. Alliance revenue increased 35% and 14% in the third quarter and first nine months of 2023, respectively, due to strong underlying sales performance. The increase in alliance revenue in the first nine months of 2023 was partially offset by the receipt of the regulatory approval milestone in 2022 as noted above.
Vaccines
Three Months Ended
September 30, % Change
Excluding
Foreign
Exchange Nine Months Ended
September 30, % Change
Excluding
Foreign
Exchange
($ in millions) 2023 2022 % Change 2023 2022 % Change
Gardasil/Gardasil 9
$ 2,585 $ 2,294 13 % 16 % $ 7,015 $ 5,428 29 % 34 %
ProQuad 267 264 1 % 1 % 678 640 6 % 6 %
M-M-R II
122 124 (2) % (4) % 329 330 — % (1) %
Varivax 325 280 16 % 15 % 816 746 9 % 10 %
RotaTeq 156 256 (39) % (39) % 584 644 (9) % (8) %
Vaxneuvance 214 16 * * 488 32 * *
Pneumovax 23 140 131 6 % 4 % 327 457 (28) % (27) %
* > 100%
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 $488 million in the third quarter and first nine months of 2023, respectively, primarily due to continued uptake in the pediatric indication in the U.S. and launches in European markets.
Worldwide sales of Pneumovax 23, a vaccine to help prevent pneumococcal disease, grew 6% in the third quarter of 2023 primarily reflecting higher demand in certain ex-U.S. markets that was largely offset by lower demand in the U.S. Global sales of Pneumovax 23 declined 28% in the first nine months of 2023 due to lower demand in the U.S., partially offset by higher demand in several ex-U.S. markets. Lower demand for Pneumovax 23 in the U.S. is being driven by the continued market shift toward newer adult pneumococcal conjugate vaccines following changes in the recommendations of the U.S. Centers for Disease Control and Prevention’s Advisory Committee on Immunization Practices in 2021. The Company expects the decline in U.S. sales of Pneumovax 23 to continue.
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Hospital Acute Care
Three Months Ended
September 30, % Change
Excluding
Foreign
Exchange Nine Months Ended
September 30, % Change
Excluding
Foreign
Exchange
($ in millions) 2023 2022 % Change 2023 2022 % Change
Bridion $ 424 $ 423 — % — % $ 1,413 $ 1,244 14 % 15 %
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, 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. 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
Three Months Ended
September 30, % Change
Excluding
Foreign
Exchange Nine Months Ended
September 30, % Change
Excluding
Foreign
Exchange
($ in millions) 2023 2022 % Change 2023 2022 % Change
Alliance Revenue - Adempas/
Verquvo (1)
$ 92 $ 88 5 % 5 % $ 259 $ 258 — % — %
Adempas 65 57 15 % 11 % 189 181 5 % 7 %
(1) Alliance revenue represents Merck’s share of profits from sales in Bayer’s marketing territories, which are product sales net of cost of sales and commercialization costs (see Note 3 to the condensed consolidated financial statements).
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 (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 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 grew 15% and 5% in the third quarter and first nine months of 2023, respectively, due to higher demand.
Virology
Three Months Ended
September 30, % Change
Excluding
Foreign
Exchange Nine Months Ended
September 30, % Change
Excluding
Foreign
Exchange
($ in millions) 2023 2022 % Change 2023 2022 % Change
Lagevrio $ 640 $ 436 47 % 51 % $ 1,236 $ 4,859 (75) % (73) %
Isentress/Isentress HD 119 161 (27) % (27) % 377 466 (19) % (17) %
Lagevrio is an investigational oral antiviral COVID-19 medicine being developed in a collaboration with Ridgeback Biotherapeutics LP (Ridgeback) (see Note 3 to the condensed consolidated financial statements). Following initial authorizations in certain markets in the fourth quarter of 2021, Lagevrio has since received multiple additional authorizations worldwide. 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 $1.3 billion. In April 2023, Japan’s MHLW granted full approval for Lagevrio . Lagevrio was previously granted Special Approval for Emergency in Japan in December 2021.
Global combined sales of Isentress/Isentress HD (raltegravir), an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection, declined 27% and 19% in the third quarter and first nine months of 2023, respectively, primarily due to competitive pressure in Europe and the U.S. The patent that provided market exclusivity for
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Isentress/Isentress HD in the EU expired in July 2023. Accordingly, the Company is experiencing sales declines of Isentress/Isentress HD in these markets and expects the declines to continue. The Company also expects competitive pressure for Isentress/Isentress HD in the U.S. to continue.
Diabetes
Three Months Ended
September 30, % Change
Excluding
Foreign
Exchange Nine Months Ended
September 30, % Change
Excluding
Foreign
Exchange
($ in millions) 2023 2022 % Change 2023 2022 % Change
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 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.
While the key U.S. patent for Januvia and Janumet claiming the sitagliptin compound expired in January 2023, as a result of favorable court rulings and settlement agreements related to a later expiring patent directed to the specific sitagliptin salt form of the products (see Note 10 to the condensed consolidated financial statements), the Company expects that Januvia and Janumet will not lose market exclusivity in the U.S. until May 2026 and Janumet XR will not lose market exclusivity in the U.S. 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. Although several generic equivalents of Janumet have been approved in China, none have launched, and the Company expects it is unlikely that any will launch prior to December 2023.
Combined sales of Januvia and Janumet in Europe, China and the U.S. 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. Nitrosamines are organic compounds found at trace levels in water and food. Nitrosamines can also result from chemical reactions and can form in drugs either due to the drug’s manufacturing process, chemical structure, or the conditions in which the drugs are stored or packaged. The Company detected a nitrosamine identified as Nitroso-STG-19 (NTTP) in some batches of its sitagliptin-containing medicines. The Company has engaged with major health authorities around the world and has implemented additional quality controls to ensure its portfolio of sitagliptin-containing products meet health authorities’ interim acceptable NTTP limits for continuing distribution of product to the market. The Company has made significant progress in reducing the level of nitrosamines in its sitagliptin-containing medicines and does not anticipate product shortages at this time, subject to regulatory approvals for submitted changes.
Animal Health Segment
Three Months Ended
September 30, % Change
Excluding
Foreign
Exchange Nine Months Ended
September 30, % Change
Excluding
Foreign
Exchange
($ in millions) 2023 2022 % Change 2023 2022 % Change
Livestock $ 874 $ 829 5 % 7 % $ 2,530 $ 2,486 2 % 6 %
Companion Animal 526 542 (3) % (4) % 1,817 1,834 (1) % — %
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 $875 million for the first nine months of 2023, representing growth of 1% compared with the corresponding prior year period, or 3% excluding the unfavorable effect of foreign exchange.
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Costs, Expenses and Other
Three Months Ended
September 30, Nine Months Ended
September 30,
($ in millions) 2023 2022 % Change 2023 2022 % Change
Cost of sales $ 4,264 $ 3,934 8 % $ 12,214 $ 13,530 (10) %
Selling, general and administrative 2,519 2,520 — % 7,700 7,355 5 %
Research and development 3,307 4,399 (25) % 20,904 9,773 *
Restructuring costs 126 94 34 % 344 288 19 %
Other (income) expense, net 126 429 (71) % 388 1,576 (75) %
$ 10,342 $ 11,376 (9) % $ 41,550 $ 32,522 28 %
* > 100%
Cost of Sales
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 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 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.
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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
In 2019, Merck approved a global restructuring program (Restructuring Program) as part of a worldwide initiative focused on optimizing the Company’s manufacturing and supply network, as well as reducing its global real estate footprint. The actions contemplated under the Restructuring Program are expected to be substantially completed by the end of 2023, with the cumulative pretax costs to be incurred by the Company to implement the program estimated to be approximately $4.0 billion. Merck expects to record charges of approximately $650 million for the full year of 2023 related to the Restructuring Program. 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 $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. Also included in restructuring costs are asset abandonment, facility shut-down and other related costs, as well as employee-related costs such as curtailment, settlement and termination charges associated with pension and other postretirement benefit plans and share-based compensation plan costs. For segment reporting, restructuring costs are unallocated expenses.
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 $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 $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 $572.5 million charge in 2023 related to settlements with certain plaintiffs in the Zetia antitrust litigation (see Note 10 to the condensed consolidated financial statements).
For details on the components of Other (income) expense, net, see Note 13 to the condensed consolidated financial statements.
Segment Profits
Three Months Ended
September 30, Nine Months Ended
September 30,
($ in millions) 2023 2022 2023 2022
Pharmaceutical segment profits $ 10,407 $ 9,590 $ 29,400 $ 28,263
Animal Health segment profits 421 515 1,453 1,672
Other (5,208) (6,522) (26,918) (17,004)
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. Animal Health segment profits are comprised of segment sales, less all cost of sales, as well as SG&A and R&D expenses directly incurred by the segment. For internal management reporting presented to the chief operating decision maker, Merck does not allocate the remaining cost of sales not included in segment profits as described above, R&D expenses incurred by MRL, or general and administrative expenses, nor the cost of financing these activities. 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
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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. These unallocated items are reflected in “Other” in the above table. 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 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.
Income Taxes
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 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. tax rate.
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 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. Management uses non-GAAP measures internally for planning and forecasting purposes and to measure the performance of the Company along with other metrics. In addition, senior management’s annual compensation is derived in part using a non-GAAP pretax income metric. 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. (GAAP).
A reconciliation between GAAP financial measures and non-GAAP financial measures is as follows:
Three Months Ended
September 30, Nine Months Ended
September 30,
($ in millions except per share amounts) 2023 2022 2023 2022
Income before taxes as reported under GAAP $ 5,620 $ 3,583 $ 3,935 $ 12,931
Increase (decrease) for excluded items:
Acquisition- and divestiture-related costs 555 1,344 1,643 2,512
Restructuring costs 199 175 532 559
Loss (income) from investments in equity securities, net 17 350 (218) 1,268
Other items:
Charge for Zetia antitrust litigation settlements — — 573 —
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
Estimated tax benefit on excluded items (1)
89 414 350 965
Non-GAAP income tax provision 959 744 2,682 2,388
Non-GAAP net income
5,432 4,708 3,783 14,882
Less: Net income attributable to noncontrolling interests as reported under GAAP 5 5 12 6
Non-GAAP net income attributable to Merck & Co., Inc.
$ 5,427 $ 4,703 $ 3,771 $ 14,876
EPS assuming dilution as reported under GAAP (2)
$ 1.86 $ 1.28 $ 0.62 $ 4.53
EPS difference 0.27 0.57 0.86 1.33
Non-GAAP EPS assuming dilution (2)
$ 2.13 $ 1.85 $ 1.48 $ 5.86
(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) 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.
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Acquisition- and Divestiture-Related Costs
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 income and non-GAAP EPS also exclude amortization of intangible assets related to collaborations and licensing arrangements.
Restructuring Costs
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. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the revised useful life of the asset, based upon the anticipated date the site will be closed or divested or the equipment disposed of, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. Restructuring costs also include asset abandonment, facility shut-down and other related costs, as well as employee-related costs such as curtailment, settlement and termination charges associated with pension and other postretirement benefit plans and share-based compensation costs.
Income and Losses from Investments in Equity Securities
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 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 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
The Company currently has candidates under regulatory review in the U.S. 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. 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 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. These approvals were the result of a broad clinical development program that currently encompasses more than 30 cancer types including: biliary, estrogen receptor positive breast cancer, cervical, colorectal, cutaneous squamous cell, endometrial, esophageal, gastric, glioblastoma, head and neck, hepatocellular, Hodgkin lymphoma, non-Hodgkin lymphoma, non-small-cell lung, small-cell lung, melanoma, mesothelioma, ovarian, prostate, renal, triple-negative breast, and urothelial, many of which are currently in Phase 3 clinical development. Further trials are being planned for other cancers.
Keytruda is under review by the FDA for the treatment of patients with previously treated advanced HCC. This submission is based on data from the Phase 3 KEYNOTE-394 trial along with supportive data from the KEYNOTE-240 and KEYNOTE-224 trials. 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.
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. The FDA set a PDUFA date of December 16, 2023. KEYNOTE-859 is also under review in the EU and Japan. 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.
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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).
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. Merck is developing Lagevrio in collaboration with Ridgeback. The FDA granted Emergency Use Authorization for Lagevrio in December 2021, which was last reissued in February 2023. Lagevrio is authorized for the treatment of adults with a current diagnosis of mild to moderate COVID-19, and who are at high risk for progression to severe COVID-19, including hospitalization or death, and for whom alternative COVID-19 treatment options approved or authorized by the FDA are not accessible or clinically appropriate. The authorization is based on the Phase 3 MOVe-OUT trial. Lagevrio is not approved for any use in the U.S. and is authorized only for the duration of the declaration that circumstances exist justifying the authorization of its emergency use under the Food, Drug and Cosmetic Act, unless the authorization is terminated or revoked sooner. In November 2021, the EMA issued a positive scientific opinion for Lagevrio , which was intended to support national decision-making on the possible use of Lagevrio prior to marketing authorization. In October 2021, the EMA initiated a rolling review for Lagevrio for the treatment of COVID-19 in adults. In February 2023, Merck and Ridgeback announced that the CHMP of the EMA recommended the refusal of the marketing authorization application (MAA) for Lagevrio . Merck and Ridgeback appealed the decision and requested a re-examination of the MAA. In June 2023, Merck and Ridgeback announced that they have withdrawn the EU application for marketing authorization of Lagevrio based on the CHMP’s view that the data submitted are not sufficient to satisfy EU regulatory requirements for marketing authorization of Lagevrio . Applications to other regulatory bodies are underway.
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 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
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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.
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. Candidates shown in Phase 2 include the most advanced compound with a specific mechanism or, if listed compounds have the same mechanism, they are each currently intended for commercialization in a given therapeutic area. Small molecules and biologics are given MK-number designations and vaccine candidates are given V-number designations. 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.
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Phase 2
Cancer
MK-1308 (quavonlimab) (2)
Non-Small-Cell Lung
MK-1308A (quavonlimab+pembrolizumab)
Colorectal
Small-Cell Lung
MK-2140 (zilovertamab vedotin)
Bladder
Breast
Gastric
Hematological Malignancies
Non-Small-Cell Lung
Ovarian
Pancreatic
MK-2400 (ifinatamab deruxtecan) (1)
Small-Cell Lung
MK-2870 (1)(3)
Neoplasm Malignant
MK-3475 Keytruda
Advanced Solid Tumors
Prostate
MK-3475A (pembrolizumab+hyaluronidase subcutaneous)
Cutaneous Squamous Cell
MK-3543 (bomedemstat)
Myeloproliferative Disorders
MK-4280 (favezelimab) (2)
Non-Small-Cell Lung
MK-4280A (favezelimab+pembrolizumab)
Bladder
Cutaneous Squamous Cell
Esophageal
Melanoma
Renal Cell
Small-Cell Lung
MK-4830 (2)
Colorectal
Esophageal
Melanoma
Non-Small-Cell Lung
Ovarian
Renal Cell
Small-Cell Lung
Cancer
MK-5684 (1)
Prostate
MK-5890 (boserolimab) (2)
Non-Small-Cell Lung
Small-Cell Lung
MK-6482 Welireg (3)
Biliary
Colorectal
Endometrial
Esophageal
Hepatocellular
Pancreatic
Rare cancers
Von Hippel-Lindau Disease-Associated Tumors (EU)
MK-7119 Tukysa (1)
Advanced Solid Tumors
Biliary
Bladder
Cervical
Endometrial
Gastric
Non-Small-Cell Lung
MK-7339 Lynparza (1)(3)
Advanced Solid Tumors
MK-7684A (vibostolimab+pembrolizumab)
Biliary
Bladder
Breast
Cervical
Colorectal
Endometrial
Esophageal
Gastric
Head and Neck
Hepatocellular
Ovarian
Prostate
Cancer
MK-7902 Lenvima (1)(2)
Biliary
Head and Neck
Pancreatic
Prostate
Small-Cell Lung
Dengue Fever Virus Vaccine
V181
HIV-1 Infection
MK-8591B (islatravir+MK-8507) (4)
MK-8591D (islatravir+lenacapavir) (1)(5)
Nonalcoholic Steatohepatitis (NASH)
MK-6024 (efinopegdutide)
Pulmonary Arterial Hypertension
MK-5475
Pulmonary Hypertension Due To Left Heart Disease
MK-7962 (sotatercept)
Schizophrenia
MK-8189 (6)
Thrombosis
MK-2060
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Phase 3 (Phase 3 entry date) Under Review
Antiviral COVID-19
MK-4482 Lagevrio (U.S.) (May 2021) (1)(7)
Cancer
MK-1022 (patritumab deruxtecan) (1)
Non-Small-Cell Lung (May 2022)
MK-1026 (nemtabrutinib)
Hematological Malignancies (March 2023)
MK-1308A (quavonlimab+pembrolizumab)
Renal Cell (April 2021)
MK-3475 Keytruda
Cutaneous Squamous Cell (August 2019) (EU)
Hepatocellular (May 2016) (EU)
Mesothelioma (May 2018)
Ovarian (December 2018)
Small-Cell Lung (May 2017)
MK-3475A (pembrolizumab+hyaluronidase subcutaneous)
Non-Small-Cell Lung (February 2023)
MK-4280A (favezelimab+pembrolizumab)
Colorectal (November 2021)
Hematological Malignancies (October 2022)
MK-6482 Welireg (3)
Renal Cell (EU) (February 2020)
MK-7119 Tukysa (1)
Breast (October 2019)
Colorectal (August 2022)
MK-7339 Lynparza (2)
Non-Small-Cell Lung (June 2019)
Small-Cell Lung (December 2020)
MK-7684A (vibostolimab+pembrolizumab)
Melanoma (January 2023)
Non-Small-Cell Lung (April 2021)
Small-Cell Lung (March 2022)
MK-7902 Lenvima (1)(2)
Esophageal (July 2021)
Gastric (December 2020)
V940 (1)(2)
Melanoma (July 2023)
HIV-1 Infection
MK-8591A (doravirine+islatravir) (February 2020) (5)
Hypercholesterolemia
MK-0616 (August 2023)
Pneumococcal Vaccine Adult
V116 (July 2022)
Pulmonary Arterial Hypertension
MK-7962 (sotatercept) (EU) (January 2021)
Respiratory Syncytial Virus
MK-1654 (clesrovimab) (November 2021)
Ulcerative Colitis
MK-7240 (October 2023)
New Molecular Entities
Cough
MK-7264 (gefapixant) (U.S.) (8)
Pulmonary Arterial Hypertension
MK-7962 (sotatercept) U.S.
Certain Supplemental Filings
Cancer
MK-3475 Keytruda
• Second-Line Hepatocellular Carcinoma
(KEYNOTE-394) (U.S.)
• 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) (EU) (JPN)
MK-6482 Welireg
• Previously Treated Advanced Renal Cell Carcinoma
(LIGHTSPARK-005) (U.S.)
Footnotes:
(1) Being developed in a collaboration.
(2) Being developed in combination with Keytruda .
(3) Being developed as monotherapy and/or in combination with Keytruda.
(4) On FDA clinical hold.
(5) On FDA partial clinical hold for higher doses than those used in current clinical trials.
(6) Phase 2b development costs are being co-funded.
(7) Available in the U.S. under Emergency Use Authorization.
(8) In July 2023, the FDA accepted Merck’s resubmission of the NDA for gefapixant following the Company’s response to the CRL received in January 2022.
Analysis of Liquidity and Capital Resources
($ in millions) September 30, 2023 December 31, 2022
Cash and investments $ 10,079 $ 14,207
Working capital 8,860 11,483
Total debt to total liabilities and equity 32.7 % 28.1 %
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 $14.1 billion in the first nine months of 2023 compared with $3.2 billion in the first nine 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, as well as lower capital expenditures.
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.
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The Company has accounts receivable factoring agreements with financial institutions in certain countries to sell 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. In certain of these factoring arrangements, for ease of administration, the Company will collect customer payments related to the factored receivables, which it then remits to the financial institutions. The net cash flows relating to these collections are reported as financing activities in the Condensed Consolidated Statement of Cash Flows.
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, 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. 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 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. The treasury stock purchase authorization has no time limit and will be made over time in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions. The Company has made and anticipates continuing to make modest share repurchases under this program in 2023. 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. The facility provides backup liquidity for the Company’s commercial paper borrowing facility and is to be used for general corporate purposes. The Company has not drawn funding from this facility.
Critical Accounting Estimates
The Company’s significant accounting policies, which include management’s best estimates and judgments, are included in Note 2 to the consolidated financial statements for the year ended December 31, 2022 included in Merck’s Form 10‑K filed on February 24, 2023. See Note 1 to the condensed consolidated financial statements for information on the adoption of new accounting standards during 2023. A discussion of accounting estimates considered critical because of the potential for a significant impact on the financial statements due to the inherent uncertainty in such estimates are disclosed in the Critical Accounting Estimates section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Merck’s Form 10-K. There have been no significant changes in the Company’s critical accounting estimates since December 31, 2022.
Recently Issued Accounting Standards
For a discussion of recently issued accounting standards, see Note 1 to the condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in market risk exposures that affect the disclosures presented in “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in the Company’s 2022 Form 10-K filed on February 24, 2023.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.