What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-03 compared with 2023-11-03 · 267 added, 382 removed, 284 unchanged (70% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Developments

Business Development Transactions

Below is a summary of significant business development activity thus far in 2024.

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.

In March 2024, Merck acquired Harpoon Therapeutics, Inc.

(Harpoon), a clinical-stage immunotherapy company developing a novel class of T-cell engagers designed to harness the power of the body’s immune system to treat patients suffering from cancer and other diseases, for $765 million and also incurred $56 million of transaction costs.

Harpoon’s lead candidate, MK-6070 (formerly HPN328), is a T-cell engager targeting delta-like ligand 3 (DLL3), an inhibitory canonical Notch ligand that is expressed at high levels in small-cell lung cancer (SCLC) and neuroendocrine tumors.

MK-6070 is currently being evaluated as monotherapy in a Phase 1/2 clinical trial in certain patients with advanced cancers associated with expression of DLL3.

The study is also evaluating MK-6070 in combination with atezolizumab in certain patients with SCLC.

The transaction was accounted for as an asset acquisition.

Merck recorded net assets of $165 million, as well as a charge of $656 million, or $0.26 per share, to Research and development expenses in the first quarter of 2024 related to the transaction.

There are no future contingent payments associated with the acquisition.

In February 2024, Merck entered into a definitive agreement to acquire the aqua business of Elanco Animal Health Incorporated (Elanco) for $1.3 billion in cash.

The Elanco aqua business to be acquired consists of an innovative portfolio of medicines and vaccines, nutritionals and supplements for aquatic species;

two related aqua manufacturing facilities in Canada and Vietnam;

as well as a research facility in Chile.

Upon closing, the acquisition will broaden Animal Health’s aqua portfolio with products, such as Clynav, a new generation DNA-based vaccine that protects Atlantic salmon against pancreas disease, and Imvixa, an anti-parasitic sea lice treatment.

This acquisition also brings a portfolio of water treatment products for warm water production, complementing Animal Health’s warm water vaccine portfolio.

In addition to these products, the DNA-based vaccine technology that is a part of the business has the potential to accelerate the development of novel vaccines to address the unmet needs of the aqua industry.

The acquisition is expected to be completed by mid-2024, subject to approvals from regulatory authorities and other customary closing conditions.

The transaction will be accounted for as a business combination.

Global efforts toward health care cost containment continue to exert pressure on product pricing and market access worldwide.

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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 2021, the U.S.

Congress passed the American Rescue Plan Act, which included a provision that eliminates the statutory cap on rebates drug manufacturers pay to Medicaid beginning in January 2024.

Accordingly, manufacturers may have to pay state Medicaid programs more in rebates than they receive on sales of particular products.

As a result of this provision, the Company has recognized increased discounts for Januvia (sitagliptin) and Janumet (sitagliptin and metformin HCl) in the first three months of 2024.

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.

Department of Health and Human Services (HHS), through the Centers for Medicare & Medicaid Services (CMS), announced that Januvia would 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 occurred in 2023 and will continue in 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

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

government regarding the IRA’s Program.

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

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 three months of 2024 was negatively affected by other cost-reduction measures taken by governments and other third parties to lower health care costs.

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

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Three Months Ended

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March 31, % Change

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United States $ 7,478 $ 6,659 12 % 12 %

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Total $ 15,775 $ 14,487 9 % 12 %

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.

Worldwide sales were $15.8 billion in the first quarter of 2024, an increase of 9% compared with the first quarter of 2023, or 12% excluding the unfavorable effect of foreign exchange.

Approximately 2 percentage points of the negative impact of foreign exchange was due to the devaluation of the Argentine peso, which was largely offset by inflation-related price increases consistent with practice in that market.

Global sales growth in the first quarter of 2024 was primarily due to higher sales in the

oncology franchise, largely due to strong growth of Keytruda (pembrolizumab) and Welireg (belzutifan).

Higher sales in the vaccines franchise also contributed to revenue growth in the first quarter, primarily attributable to increased combined sales of Gardasil (Human Papillomavirus Quadrivalent [Types 6, 11, 16 and 18] Vaccine, Recombinant) /Gardasil 9 (Human Papillomavirus 9-valent Vaccine, Recombinant) and the ongoing launch of Vaxneuvance (Pneumococcal 15-valent Conjugate Vaccine) for pediatric use, partially offset by lower sales of RotaTeq (Rotavirus Vaccine, Live Oral, Pentavalent) and Pneumovax 23 (pneumococcal vaccine polyvalent).

Revenue growth in the first quarter of 2024 was partially offset by lower sales in the diabetes franchise attributable to Januvia and Janumet .

See Note 14 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.

All product or service marks appearing in type form different from that of the surrounding text are trademarks or service marks owned, licensed to, promoted or distributed by Merck, its subsidiaries or affiliates, except as noted.

All other trademarks or services marks are those of their respective owners.

Pharmaceutical Segment

Three Months Ended

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Keytruda $ 6,947 $ 5,795 20 % 24 %

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71 43 66 % 66 %

(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

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.

(1) Alliance revenue for Lynparza and Lenvima 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 for Reblozyl represents royalties (see Note 3 to the condensed consolidated financial statements).

Keytruda is an anti-PD-1 (programmed death receptor-1) therapy that has been approved in over 35 indications in the U.S., including 17 tumor types and 2 tumor-agnostic indications, and has similarly been approved in markets worldwide for many of these indications.

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.

Global sales of Keytruda grew 20% in the first quarter of 2024, or 24% excluding the unfavorable effect of foreign exchange.

Substantially all of the 4% negative impact of foreign exchange was due to the devaluation of the Argentine peso, which was largely offset by inflation-related price increases consistent with practice in that market.

Keytruda sales growth in the first quarter 2024 was primarily driven by higher demand reflecting the launch of multiple new indications globally coupled with continued uptake in existing indications.

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.

reflects increased uptake across earlier-stage indications including in certain types of non-small-cell lung cancer (NSCLC), high-risk early-stage triple-negative breast cancer (TNBC), as well as certain types of renal cell carcinoma (RCC), and higher demand across the multiple approved metastatic indications, in particular for the treatment of certain types of urothelial, endometrial, microsatellite instability-high (MSI-H) and renal cell cancers, as well as higher pricing.

Keytruda sales growth in international markets reflects higher demand predominately for the TNBC and RCC earlier-stage indications, as well as uptake in head and neck squamous cell carcinoma and RCC metastatic indications, particularly in Europe and Latin America.

Keytruda received the following regulatory approvals thus far in 2024.

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January 2024 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.

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.

Food and Drug Administration (FDA) approval in combination with chemoradiotherapy for the treatment of patients with FIGO (International Federation of Gynecology and Obstetrics) 2014 Stage III-IVA cervical cancer, based on the KEYNOTE-A18 trial.

January 2024 FDA full approval for the treatment of patients with hepatocellular carcinoma (HCC) secondary to hepatitis B who have received prior systemic therapy other than a PD-1/PD-L1 containing regimen.

The conversion from an accelerated to full (regular) approval is based on the KEYNOTE-394 trial.

February 2024 China’s National Medical Products Administration approval in combination with gemcitabine and cisplatin for the first-line treatment of patients with locally advanced or metastatic biliary tract carcinoma, based on the KEYNOTE-966 trial.

European Commission (EC) approval in combination with platinum-containing chemotherapy as neoadjuvant treatment, then continued as monotherapy as adjuvant treatment, for resectable NSCLC at high risk of recurrence in adults, based on the KEYNOTE-671 trial.

The Company is a party to certain third-party license agreements pursuant to which the Company pays royalties on sales of Keytruda .

Under the terms of the more significant of these agreements, Merck paid a royalty of 6.5% on worldwide sales of Keytruda through December 2023 to one third party;

this royalty declined to 2.5% in 2024 and will continue through 2026, terminating thereafter.

The Company pays an additional 2% royalty on worldwide sales of Keytruda to another third party, the

termination date of which varies by country;

this royalty will expire in the U.S.

in September 2024 and on varying dates in major European markets in the second half of 2025.

The royalty expenses are included in Cost of sales .

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.

Alliance revenue related to Lynparza increased 6% in the first quarter of 2024 primarily driven by higher demand in certain international markets, particularly in Latin America.

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 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

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.

Alliance revenue related to Lenvima grew 10% in the first quarter of 2024 primarily reflecting higher demand in the U.S.

Sales of Welireg , for the treatment of adult patients with certain von Hippel-Lindau (VHL) disease-associated tumors and certain adult patients with previously treated advanced RCC, more than doubled in the first quarter of 2024 due to higher demand in the U.S.

for the treatment of VHL disease-associated tumors and uptake in a supplemental indication approved by the FDA in December 2023 for previously treated advanced RCC.

Welireg is under review in the European Union (EU) for the treatment of previously treated advanced RCC based on the LITESPARK-005 clinical trial and for the treatment of VHL disease based on the LITESPARK-004 clinical trial.

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.

Alliance revenue related to this collaboration (consisting of royalties) increased 66% in the first quarter of 2024 due to strong underlying sales performance.

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Gardasil/Gardasil 9

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Varivax 262 236 11 % 11 %

RotaTeq 156 256 (39) % (39) % 584 644 (9) % (8) %

Vaxneuvance 219 106 * *

RotaTeq 216 297 (27) % (27) %

Pneumovax 23 61 96 (36) % (33) %

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.

Combined worldwide sales of Gardasil and Gardasil 9, vaccines to help prevent certain cancers and other diseases caused by certain types of human papillomavirus (HPV), grew 14% in the first quarter of 2024 primarily due to strong demand, particularly in China, which also benefited from the timing of shipments, as well as public sector buying patterns in the U.S., and higher pricing.

The Company is a party to certain third-party license agreements pursuant to which the Company pays royalties on sales of Gardasil/Gardasil 9.

Under the terms of the more significant of these agreements, Merck pays a 7% royalty on sales of Gardasil/Gardasil 9 in the U.S.

to one third party (this royalty expires in December 2028);

Merck paid an additional 7% royalty on worldwide sales of Gardasil/Gardasil 9 to another third party, which expired in December 2023.

The royalty expenses are included in Cost of sales .

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, grew 8% in the first quarter of 2024 primarily reflecting higher pricing in the U.S.

and higher demand in certain ex-U.S.

Worldwide sales of M-M-R II (Measles, Mumps and Rubella Virus Vaccine Live), a vaccine to help prevent measles, mumps and rubella, were nearly flat in the first quarter of 2024.

Global sales of Varivax (Varicella Virus Vaccine Live), a vaccine to help prevent chickenpox (varicella), increased 11% in the first quarter of 2024 primarily attributable to higher pricing in the U.S.

and higher sales in Latin America due in part to the timing of government tenders.

Worldwide sales of Vaxneuvance , a vaccine to help protect against invasive pneumococcal disease, more than doubled in the first quarter of 2024 primarily reflecting continued uptake in the pediatric indication in the U.S.

and Europe, as well as new market launches.

Sales growth in the U.S.

also reflects the beneficial impact of public sector buying patterns.

Global sales of RotaTeq , a vaccine to help protect against rotavirus gastroenteritis in infants and children, declined 27% in the first quarter of 2024 primarily due to lower sales in China reflecting first quarter 2023 inventory stocking, as well as lower sales in the U.S.

due to public sector buying patterns.

Worldwide sales of Pneumovax 23, a vaccine to help prevent pneumococcal disease, declined 36% in the first quarter of 2024 largely due to lower demand in the U.S.

as the market has shifted 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.

Hospital Acute Care

Three Months Ended

September 30, % Change

Exchange Nine Months Ended

September 30, % Change

($ in millions) 2023 2022 % Change 2023 2022 % Change

March 31, % Change

($ in millions) 2024 2023 % Change

Bridion $ 440 $ 487 (10) % (8) %

Prevymis 174 129 35 % 39 %

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.

Worldwide sales of Bridion (sugammadex), for the reversal of two types of neuromuscular blocking agents used during surgery, declined 10% in the first quarter of 2024 driven by lower demand in certain ex-U.S.

markets due to generic competition, particularly in the EU, partially offset by higher demand in the U.S.

The patent that provided market exclusivity for Bridion in the 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.

The patent that provided market exclusivity for Bridion in Japan expired in January 2024;

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

Worldwide sales of Prevymis (letermovir), a medicine for prophylaxis (prevention) of cytomegalovirus (CMV) infection and disease in certain high risk adult recipients of an allogenic hematopoietic stem cell transplant and for prophylaxis of CMV disease in certain high risk adult recipients of a kidney transplant, grew 35% in the first quarter of 2024 largely due to higher global demand, particularly in the U.S.

Cardiovascular

Three Months Ended

September 30, % Change

Exchange Nine Months Ended

September 30, % Change

($ in millions) 2023 2022 % Change 2023 2022 % Change

Alliance Revenue - Adempas/

March 31, % Change

($ in millions) 2024 2023 % Change

Alliance Revenue - Adempas/Verquvo (1)

$ 98 $ 99 (1) % (1) %

2 unchanged sentences

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.

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

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.

Alliance revenue from the collaboration in the first quarter of 2024 was nearly flat compared with the corresponding prior year period.

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.

Sales of Adempas in Merck’s marketing territories grew 18% in the first quarter of 2024 primarily due to higher demand.

In March 2024, the FDA approved Winrevair (sotatercept-csrk) for the treatment of adults with PAH (World Health Organization [WHO] Group 1) to increase exercise capacity, improve WHO functional class, and reduce the risk of clinical worsening events.

The approval is based on the STELLAR trial.

Winrevair is the subject of a licensing agreement with Bristol-Myers Squibb Company (BMS) and Merck will pay 22% royalties on sales of Winrevair in the PH field to BMS.

Three Months Ended

September 30, % Change

Exchange Nine Months Ended

September 30, % Change

($ in millions) 2023 2022 % Change 2023 2022 % Change

March 31, % Change

($ in millions) 2024 2023 % Change

Lagevrio $ 350 $ 392 (11) % (5) %

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

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.

Sales of Lagevrio declined 11% in the first quarter of 2024 primarily due to lower demand in certain markets in the Asia Pacific region, partially offset by sales in the U.S.

and higher demand in Japan.

Three Months Ended

September 30, % Change

Exchange Nine Months Ended

September 30, % Change

($ in millions) 2023 2022 % Change 2023 2022 % Change

March 31, % Change

($ in millions) 2024 2023 % Change

$ 184 $ 180 2 % 1 %

39 51 (24) % (21) %

Simponi (golimumab) and Remicade (infliximab) are treatments for certain inflammatory diseases that the Company markets in Europe, Russia and Türkiye.

The Company’s marketing rights with respect to these products will revert to Johnson & Johnson Innovative Medicine on October 1, 2024.

Three Months Ended

March 31, % Change

($ in millions) 2024 2023 % Change

Januvia/Janumet $ 670 $ 880 (24) % (21) %

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.

Worldwide combined sales of Januvia and Janumet , medicines that help lower blood sugar levels in adults with type 2 diabetes, declined 24% in the first quarter of 2024 primarily due to lower sales in the U.S., largely reflecting lower pricing and lower demand due to competitive pressures, as well as the ongoing impact of the loss of exclusivity in most markets in Europe and the Asia Pacific region, as well as in Canada.

The American Rescue Plan Act enacted in the U.S.

in 2021 included a provision that eliminated the statutory c ap on rebates drug manufacturers pay to Medicaid beginning in January 2024.

Accordingly, manufacturers may have to pay state Medicaid programs more in rebates than they receive on sales of particular products.

As a result of this provision, the Company has recognized increased discounts for Januvia and Janumet in the first quarter of 2024.

In A ugust 2023, the U.S.

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

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

The Company has sued the U.S.

government regarding the IRA’s Program.

While the key U.S.

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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 anticipates pricing and volume declines for Januvia and Janumet in the U.S.

for the remainder of 2024.

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

1 unchanged sentence

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.

Generic equivalents of Januvia and Janumet have also launched in China.

Animal Health Segment

Three Months Ended

September 30, % Change

Exchange Nine Months Ended

September 30, % Change

($ in millions) 2023 2022 % Change 2023 2022 % Change

March 31, % Change

($ in millions) 2024 2023 % Change

Livestock $ 850 $ 849 — % 4 %

Companion Animal 661 642 3 % 4 %

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.

$ 1,511 $ 1,491 1 % 4 %

Animal Health sales grew 1% in the first quarter of 2024, or 4% excluding the unfavorable impact of foreign exchange.

Approximately 3 percentage points of the negative impact of foreign exchange was due to the devaluation of the Argentine peso, which was largely offset by inflation-related price increases consistent with practice in that market.

Sales of livestock products were nearly flat in the first quarter of 2024 primarily due to higher pricing, as well as increased demand for swine and poultry products, partially offset by lower demand for ruminant products.

Sales of companion animal products grew 3% in the first quarter of 2024 due to higher pricing.

Sales of Bravecto (fluralaner), a line of oral and topical parasitic control products, were $332 million for the first quarter of 2024, representing growth of 6% compared with the corresponding prior year period, or 7% excluding the unfavorable effect of foreign exchange.

In February 2024, Merck entered into a definitive agreement to acquire the aqua business of Elanco for $1.3 billion in cash.

See “Business Development Transactions” above for additional information related to this transaction.

Costs, Expenses and Other

Three Months Ended

September 30, Nine Months Ended

September 30,

($ in millions) 2023 2022 % Change 2023 2022 % Change

($ in millions) 2024 2023 % Change

Cost of sales $ 3,540 $ 3,926 (10) %

5 unchanged sentences

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.

Cost of sales declined 10% in the first quarter of 2024.

Cost of sales includes the amortization of intangible assets recorded in connection with acquisitions, collaborations, and licensing arrangements, which totaled $462 million and $532 million in the first quarter of 2024 and 2023, respectively.

Amortization expense in the first quarter of 2023 includes $72 million of cumulative catch-up amortization related to Merck’s collaboration with Eisai.

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.

Also included in cost of sales are expenses associated with restructuring activities, which amounted to $116 million and $29 million in the first quarter of 2024 and 2023, respectively, primarily reflecting 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.

Gross margin was 77.6% in the first quarter of 2024 compared with 72.9% in the first quarter of 2023.

The gross margin improvement was primarily due to the favorable effects of product mix (including lower royalty rates related to Keytruda and Gardasil/Gardasil 9 sales), foreign exchange and lower amortization of intangible assets, partially offset by higher restructuring costs and inventory write-offs.

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.

Selling, general and administrative (SG&A) expenses were nearly flat in the first quarter of 2024 primarily due to higher administrative costs, largely offset by lower promotional spending, reflecting the prioritization of spending on key growth products, 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.

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.

Research and development (R&D) expenses declined 7% in the first quarter of 2024 primarily due to lower charges for business development transactions, which included a $656 million charge for the acquisition of Harpoon in the first quarter of 2024, compared with charges of $1.2 billion for the acquisition of Imago and $175 million for a license and collaboration agreement with Kelun-Biotech in the first quarter of 2023.

The decline was partially offset by higher compensation and benefit costs, increased clinical development spending, and higher investments in discovery research and early drug development in the first quarter of 2024.

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 $2.4 billion and $2.1 billion for the first quarter of 2024 and 2023, respectively.

Also included in R&D expenses are Animal Health research costs, upfront payments for collaboration and licensing agreements, charges for transactions accounted for as asset acquisitions (including the charges for the Harpoon and Imago acquisitions as noted above), 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 $1.6 billion and $2.2 billion for the first quarter of 2024 and 2023, respectively.

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.

In January 2024, the Company approved a new restructuring program (2024 Restructuring Program) intended to continue the optimization of the Company’s Human Health global manufacturing network as the future pipeline shifts to new modalities and also optimize the Animal Health global manufacturing network to improve supply reliability and increase efficiency.

The actions contemplated under the 2024 Restructuring Program are expected to be substantially completed by the end of 2031, 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.

Approximately 60% of the cumulative pretax costs will be non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested.

The remainder of the costs will result in cash outlays, relating primarily to facility shut-down costs.

The Company expects to record charges of approximately $800 million in 2024 related to the 2024 Restructuring Program.

The Company anticipates the actions under the 2024 Restructuring Program will result in cumulative annual net cost savings of approximately $750 million by the end of 2031.

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.

In 2019, Merck approved a global restructuring program (2019 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

The actions under the 2019 Restructuring Program were substantially complete at the end of 2023 and, as of January 1, 2024, any remaining activities are now being accounted for as part of the 2024 Restructuring Program.

Restructuring costs, primarily representing separation and other costs associated with these restructuring activities, were $123 million and $67 million for the first quarter of 2024 and 2023, 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.

Other expenses in Restructuring costs include 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).

The Company recorded aggregate pretax costs of $246 million and $97 million in the first quarter of 2024 and 2023, respectively, related to restructuring program activities (see Note 4 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).

Other (income) expense, net, was $33 million of income in the first quarter of 2024 compared with $89 million of expense in the first quarter of 2023.

The favorability was primarily due to a $572.5 million charge in 2023 related to settlements with certain plaintiffs in the Zetia antitrust litigation (see Note 7 to the condensed consolidated financial statements), partially offset by lower income from investments in equity securities and higher interest expense in 2024.

For details on the components of Other (income) expense, net, see Note 10 to the condensed consolidated financial statements.

1 unchanged sentence

Three Months Ended

September 30, Nine Months Ended

September 30,

($ in millions) 2024 2023

5 unchanged sentences

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

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.

1 unchanged sentence

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.

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.

Pharmaceutical segment profits grew 19% in the first quarter of 2024 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 2% in the first quarter of 2024 reflecting higher production costs, increased administrative and promotional costs, as well as the unfavorable effect of foreign exchange.

Taxes on Income

The effective income tax rate of 15.9% for the first quarter of 2024 reflects a 1.6 percentage point unfavorable discrete impact of a charge for the acquisition of Harpoon for which no tax benefit was recognized.

The effective income tax rate of 22.6% for the first quarter of 2023 reflects a 5.5 percentage point unfavorable discrete impact of a charge for the acquisition of Imago for which no tax benefit was recognized.

While many jurisdictions in which Merck operates have adopted the global minimum tax provision of the Organisation for Economic Co-operation and Development (OECD) Pillar 2, effective for tax years beginning in January 2024, the Company anticipates there will be a reduced impact to its 2024 tax rate due to the accounting for the tax effects of intercompany transactions.

The Company expects the impact of the global minimum tax will increase its tax rate to a greater extent in 2025 and thereafter.

Also, in the event that the provision of the Tax Cuts and Jobs Act of 2017 requiring capitalization and amortization of R&D expenses for tax purposes is repealed along the lines recently proposed in the Tax Relief for American Families and

Workers Act of 2024, the Company will again be able to realize the benefit of U.S.

R&D expenses as incurred but expects no material impact to its effective income tax rate.

Non-GAAP Income and Non-GAAP EPS

6 unchanged sentences

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.

In addition, annual employee compensation, including senior management’s 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.

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Three Months Ended

September 30, Nine Months Ended

September 30,

($ in millions except per share amounts) 2024 2023

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Restructuring costs 246 97

Loss (income) from investments in equity securities, net 17 350 (218) 1,268

Income from investments in equity securities, net (116) (429)

Charge for Zetia antitrust litigation settlements — 573

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Estimated tax benefit on excluded items (1)

89 414 350 965

Non-GAAP income tax provision 1,012 913

Non-GAAP net income

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

Net income attributable to noncontrolling interests as reported under GAAP 5 4

7 unchanged sentences

(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.

(2) GAAP and non-GAAP EPS were negatively affected in the first quarter of 2024 and 2023 by $0.26 per share and $0.52 per share, respectively, of charges for certain upfront 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 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.

These amounts include the amortization of intangible assets, 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.

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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.

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

6 unchanged sentences

Research and Development Update

The Company currently has candidates under regulatory review in the U.S.

The Company currently has several 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.

MK-1022, patritumab deruxtecan, a potential first-in-class HER3 directed DXd antibody drug conjugate (ADC), is under priority review by the FDA for the treatment of adult patients with locally advanced or metastatic EGFR-mutated NSCLC previously treated with two or more systemic therapies.

The Biologics License Application (BLA) is based on the primary results from the HERTHENA-Lung01 pivotal Phase 2 trial and data results presented at the IASLC 2023 World Conference on Lung Cancer, which were simultaneously published in the Journal of Clinical Oncology.

The FDA set a Prescription Drug User Fee Act (PDUFA), or target action, date of June 26, 2024 for the BLA.

The priority review follows receipt of Breakthrough Therapy designation granted by the FDA in December 2021.

The BLA is being reviewed under the Real-Time Oncology Review program.

Patritumab deruxtecan (HER3-DXd) was discovered by Daiichi Sankyo and is being jointly developed by Daiichi Sankyo and Merck.

V116, the Company’s investigational 21-valent pneumococcal conjugate vaccine designed to help prevent invasive pneumococcal disease and pneumococcal pneumonia in adults, is under priority review by the FDA.

The BLA for V116 is supported by results from multiple Phase 3 clinical studies evaluating V116 in both vaccine-naïve and vaccine-experienced adult patient populations, including STRIDE-3, STRIDE-4, STRIDE-5 and STRIDE-6.

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

V116 was granted Breakthrough Therapy designation from the FDA for the prevention of invasive pneumococcal disease and pneumococcal pneumonia caused by Streptococcus pneumoniae serotypes 3, 6A/C, 7F, 8, 9N, 10A, 11A, 12F, 15A, 15B/C, 16F, 17F, 19A, 20, 22F, 23A, 23B, 24F, 31, 33F, 35B in adults 18 years of age and older.

V116 is also under review in the EU.

MK-7962, Winrevair (sotatercept-csrk), Merck’s novel activin signaling inhibitor, is under review in the EU for the treatment of adult patients with PAH (WHO Group 1).

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

Winrevair was granted Priority Medicines (PRIME) scheme and Orphan Drug designation by the European Medicines Agency for the treatment of PAH.

MK-7264, gefapixant, is a non-narcotic, oral selective P2X3 receptor antagonist for the treatment of refractory or unexplained chronic cough in adults.

In December 2023, the FDA issued a second Complete Response Letter (CRL) regarding the resubmission of Merck’s New Drug Application for gefapixant.

In the CRL, the FDA concluded that Merck’s application did not meet substantial evidence of effectiveness for treating refractory chronic cough and unexplained chronic cough.

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).

Merck is reviewing the FDA’s feedback to determine next steps.

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:

These studies encompass 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.

Keytruda is under priority review by the FDA in combination with chemotherapy (carboplatin and paclitaxel), followed by Keytruda as a single agent for the treatment of patients with primary advanced or recurrent endometrial carcinoma, based on the KEYNOTE-868 trial.

The FDA set a PDUFA date of June 21, 2024 for the supplemental BLA.

KEYNOTE-868 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.

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.

In addition, Keytruda is under review in the EU and Japan in combination with Padcev (enfortumab vedotin-ejfv), an ADC, for the treatment of adult patients with locally advanced or metastatic urothelial carcinoma, based on the KEYNOTE-A39 trial that was conducted in collaboration with Seagen (now Pfizer Inc.) and Astellas.

Keytruda is also under review in the EU and Japan in combination with chemoradiotherapy for the treatment of patients with high-risk locally advanced cervical cancer, based on the KEYNOTE-A18 trial.

Keytruda is under review in Japan as part of a perioperative treatment regimen for certain 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

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.

Additionally, Keytruda is under review in Japan in combination with fluoropyrimidine- and platinum-containing chemotherapy for the first-line treatment of patients with locally advanced unresectable or metastatic gastric or gastroesophageal junction adenocarcinoma, based on the KEYNOTE-859 trial.

Keytruda is also under review in 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 the KEYNOTE-966 trial.

Welireg is under review in the EU for the treatment of previously treated advanced RCC based on the LITEPARK-005 clinical trial and for the treatment of VHL disease based on the LITESPARK-004 clinical trial.

In March 2024, Merck announced that in the Phase 3 KEYLYNK-006 trial, Keytruda in combination with chemotherapy followed by Keytruda plus maintenance Lynparza did not meet the study’s pre-specified statistical criteria for overall survival or progression-free survival compared to Keytruda in combination with chemotherapy (pemetrexed plus carboplatin or cisplatin) followed by Keytruda plus maintenance chemotherapy (pemetrexed).

A full evaluation of the data from this study is ongoing.

Merck will work with investigators to share the results with the scientific community.

Also, the Company has discontinued development of MK-5475 in PAH but continues to study MK-5475 in PH associated with chronic obstructive pulmonary disease.

The chart below reflects the Company’s research pipeline as of May 1, 2024.

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.

MK-1022 (patritumab deruxtecan) (1)

MK-1308 (quavonlimab) (2)

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MK-1308A (quavonlimab+pembrolizumab)

Small-Cell Lung

MK-2140 (zilovertamab vedotin)

Hematological Malignancies

Non-Small-Cell Lung

MK-2400 (ifinatamab deruxtecan) (1)

Small-Cell Lung

MK-2870 (1)(3)

MK-2870 (sacituzumab tirumotecan) (1)(3)

Neoplasm Malignant

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Cutaneous Squamous Cell

MK-3543 (bomedemstat)

Myeloproliferative Disorders

MK-4280 (favezelimab) (2)

2 unchanged sentences

Cutaneous Squamous Cell

Small-Cell Lung

Non-Small-Cell Lung

Small-Cell Lung

MK-5890 (boserolimab) (2)

Non-Small-Cell Lung

Small-Cell Lung

Neoplasm Malignant

MK-5909 (raludotatug deruxtecan) (1)

MK-6482 Welireg (3)

Hepatocellular

Von Hippel-Lindau Disease-Associated Tumors (EU)

MK-7119 Tukysa (1)

Advanced Solid Tumors

Non-Small-Cell Lung

MK-7339 Lynparza (1)(3)

3 unchanged sentences

Hepatocellular

Cutaneous Squamous Cell

MK-7902 Lenvima (1)(2)

Head and Neck

Small-Cell Lung

Dengue Fever Virus Vaccine

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

HIV-1 Prevention

Nonalcoholic Steatohepatitis (NASH)

MK-6024 (efinopegdutide)

Pulmonary Arterial Hypertension

Pulmonary Hypertension-Chronic Obstructive Pulmonary Disease

Pulmonary Hypertension Due To Left Heart Disease

MK-7962 (sotatercept)

MK-7962 Winrevair

Schizophrenia

3 unchanged sentences

MK-1022 (patritumab deruxtecan) (1)

Non-Small-Cell Lung (May 2022)

Non-Small-Cell Lung (May 2022) (EU)

MK-1026 (nemtabrutinib)

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Renal Cell (April 2021)

MK-2870 (sacituzumab tirumotecan) (1)(3)

Breast (April 2024)

Endometrial (December 2023)

Non-Small-Cell Lung (November 2023)

MK-3475 Keytruda

6 unchanged sentences

Non-Small-Cell Lung (February 2023)

MK-3543 (bomedemstat)

Myeloproliferative Disorders (December 2023)

MK-4280A (favezelimab+pembrolizumab)

1 unchanged sentence

Hematological Malignancies (October 2022)

MK-6482 Welireg (3)

Renal Cell (EU) (February 2020)

MK-7119 Tukysa (1)

Breast (October 2019)

Colorectal (August 2022)

MK-5684 (opevesostat) (1)

Prostate (December 2023)

MK-7339 Lynparza (1)(2)

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Melanoma (July 2023)

Non-Small-Cell Lung (December 2023)

HIV-1 Infection

2 unchanged sentences

MK-0616 (August 2023)

Pneumococcal Vaccine Adult

V116 (July 2022)

Pulmonary Arterial Hypertension

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

Respiratory Syncytial Virus

1 unchanged sentence

Ulcerative Colitis

MK-7240 (October 2023)

MK-7240 (tulisokibart) (October 2023)

New Molecular Entities

MK-1022 (patritumab deruxtecan) (1)

Non-Small-Cell Lung (U.S.)

MK-6482 Welireg

Von Hippel-Lindau (VHL) Disease (EU)

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

Pneumococcal Vaccine Adult

V116 (U.S.) (EU)

Pulmonary Arterial Hypertension

MK-7962 (sotatercept) U.S.

MK-7962 Winrevair (EU)

Certain Supplemental Filings

MK-3475 Keytruda

• Second-Line Hepatocellular Carcinoma

(KEYNOTE-394) (U.S.)

• Primary Advanced or Recurrent Endometrial Carcinoma

(KEYNOTE-868) (U.S.) (EU) (JPN)

• First-Line Locally Advanced or Metastatic Urothelial Cancer

(KEYNOTE-A39) (EU) (JPN)

• High-Risk Locally Advanced Cervical Cancer

(KEYNOTE-A18) (U.S.)

(KEYNOTE-A18) (EU) (JPN)

• Resectable Stage II, IIIA or IIIB NSCLC

(KEYNOTE-671) (JPN)

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

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

(KEYNOTE-859) (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)

(KEYNOTE-966) (JPN)

MK-6482 Welireg

• Previously Treated Advanced Renal Cell Carcinoma

(LIGHTSPARK-005) (U.S.)

(LITESPARK-005) (EU)

(1) Being developed in a collaboration.

6 unchanged sentences

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.

(8) In December 2023, the FDA issued a CRL for the NDA for gefapixant.

Merck is reviewing the FDA’s feedback to determine next steps.

Analysis of Liquidity and Capital Resources

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

($ in millions) March 31, 2024 December 31, 2023

Cash and investments $ 5,899 $ 7,345

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Total debt to total liabilities and equity 32.3 % 32.9 %

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 was $3.1 billion in the first three months of 2024 compared with $1.3 billion in the first three months of 2023 reflecting stronger operating performance.

Cash provided by operating activities was reduced by milestone and option payments related to certain collaborations of $245 million and $115 million in the first three months of 2024 and 2023, 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.

Cash used in investing activities was $1.4 billion in the first three months of 2024 compared with $2.4 billion in the first three months of 2023.

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

Cash used in financing activities was $2.8 billion in the first three months of 2024 compared with $2.1 billion in the first three months of 2023.

The higher use of cash in financing activities was primarily due to higher payments on debt and higher dividends paid to shareholders, partially offset by higher proceeds from the exercise of stock options and lower purchases of treasury stock.

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 Company factored $2.7 billion and $3.0 billion of accounts receivable at March 31, 2024 and December 31, 2023, 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.

1 unchanged sentence

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 March 2024, the Company’s $750 million, 2.90% notes matured in accordance with their terms and were repaid.

Dividends paid to stockholders were $2.0 billion and $1.9 billion for the first three months of 2024 and 2023, respectively.

In November 2023, Merck’s Board of Directors declared a quarterly dividend of $0.77 per share on the Company’s outstanding common stock for the first quarter of 2024 that was paid in January 2024.

In January 2024, the Board of Directors declared a quarterly dividend of $0.77 per share on the Company’s outstanding common stock for the second quarter that was paid in April 2024.

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.

During the first three months of 2024, the Company purchased $122 million (1 million shares) of its common stock for its treasury under this program.

As of March 31, 2024, the Company’s remaining share repurchase authorization was $3.6 billion.

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

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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, 2023 included in Merck’s Form 10‑K filed on February 26, 2024.

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.

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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