Merck has announced financial results for the second quarter of 2016.
“Our results this quarter reflect our strategic focus on key launches, including KEYTRUDA and ZEPATIER, as well as our priority inline programs,” said Kenneth C. Frazier, chairman and chief executive officer, Merck. “We remain committed to advancing our pipeline, delivering a balanced and differentiated portfolio, and achieving long-term, sustainable growth.”
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Financial Summary
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$ in millions, except EPS amounts
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Second Quarter
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2016
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2015
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Sales
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$9,844
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$9,785
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GAAP EPS
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0.43
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0.24
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Non-GAAP EPS that excludes items listed below1
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0.93
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0.86
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GAAP net income2
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1,205
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687
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Non-GAAP net income that excludes items listed below1,2
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2,587
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2,441
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Worldwide sales were $9.8 billion for the second quarter of 2016, an increase of 1 percent compared with the second quarter of 2015, including a 2 percent negative impact from foreign exchange.
GAAP (generally accepted accounting principles) earnings per share (EPS) were $0.43 for the second quarter. Non-GAAP EPS of $0.93 for the second quarter excludes acquisition- and divestiture-related costs and restructuring costs.
Pipeline Highlights
In the second quarter of 2016, the company advanced its late-stage pipeline in multiple priority areas and executed on key launches, including KEYTRUDA (pembrolizumab), an anti-PD-1 therapy for the treatment of metastatic NSCLC in previously treated patients whose tumors express PD-L1, as well as advanced melanoma; and ZEPATIER (elbasvir and grazoprevir), a once-daily, fixed-dose combination tablet for the treatment of adult patients with chronic hepatitis C virus (HCV) genotype (GT) 1 or GT4 infection, with or without ribavirin.
- The company advanced its clinical development program for KEYTRUDA.
- The company announced topline results from the KEYNOTE-024 trial investigating the use of KEYTRUDA in patients with previously untreated advanced NSCLC whose tumors expressed high levels of PD-L1 (tumor proportion score of 50 percent or more).
- In this study, KEYTRUDA was superior compared to chemotherapy for the primary endpoint of progression-free survival and the secondary endpoint of overall survival.
- Based on these results, an independent Data Monitoring Committee recommended that the trial be stopped and that patients receiving chemotherapy in KEYNOTE-024 be offered the opportunity to receive KEYTRUDA.
- The U.S. Food and Drug Administration (FDA) accepted for review a supplemental Biologics License Application for KEYTRUDA for the treatment of patients with recurrent or metastatic head and neck squamous cell carcinoma with disease progression on or after platinum-containing chemotherapy. The FDA granted Priority Review with a PDUFA action date of Aug. 9, 2016.
- The Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA)adopted a positive opinion recommending approval of KEYTRUDA for the treatment of locally advanced or metastatic NSCLC in adults whose tumors express PD-L1 and who have received at least one prior chemotherapy regimen.
- At the 52nd Annual Meeting of the American Society of Clinical Oncology in June, data were presentedevaluating the use of KEYTRUDA as a monotherapy and in combination with other therapies in more than 15 different cancers, including melanoma, NSCLC, head and neck cancer, classical Hodgkin lymphoma, multiple myeloma, colorectal cancer and esophageal cancer. Data evaluating KEYTRUDA in new tumor types were presented for the first time in cervical, endometrial, pancreatic, salivary and thyroid cancers.
- The KEYTRUDA research program includes more than 300 clinical trials evaluating KEYTRUDA across more than 30 tumor types. To date, clinical activity has been shown in more than 20 tumor types.
- Last week, the European Commission approved ZEPATIER for the treatment of chronic HCV in adult patients, allowing marketing of ZEPATIER in all 28 European Union (EU) member states. The company continues to work to supply the EU market, with product launches estimated to begin between the fourth quarter of 2016 and the first quarter of 2017. Product launches are expected to continue across the EU through 2017.
- At the 76th Scientific Sessions of the American Diabetes Association in June, Merck and Pfizer announced that two pivotal Phase 3 studies of ertugliflozin, an investigational oral SGLT-2 inhibitor for the treatment of patients with type 2 diabetes, met their primary endpoints, showing significant reductions in A1C (a measure of average blood glucose). The companies continue to expect to submit New Drug Applications to the FDA for ertugliflozin as a monotherapy and two fixed-dose combination tablets (ertugliflozin plus JANUVIA [sitagliptin], and ertugliflozin plus metformin) by the end of 2016.
Business Development Highlights
Business development remains a critical component of Merck’s strategy, and the company is actively engaged in seeking external opportunities to complement and strengthen its pipeline and portfolio. The company recently engaged in the following scientific collaborations and acquisitions:
- Earlier this week, the company completed its acquisition of Afferent Pharmaceuticals, a leader in the development of investigational therapeutic candidates for the treatment of common, poorly managed, neurogenic conditions, such as chronic cough.
- The company announced a new collaboration with Moderna Therapeutics to develop and commercialize personalized cancer vaccines, combining KEYTRUDA and Moderna’s messenger-RNA technology.
- Merck Animal Health announced it will acquire a controlling interest in Vallée S.A., a privately held producer of animal health products in Brazil with a portfolio of more than 100 products for livestock, horses and companion animals.
Second-Quarter Revenue Performance
The following table reflects sales of the company’s top pharmaceutical products, as well as total sales of Animal Health products.
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$ in millions
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Second Quarter
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Change
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Change
Ex-Exchange
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2016
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2015
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Total Sales
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$9,844
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$9,785
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1%
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3%
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Pharmaceutical
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8,700
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8,564
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2%
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2%
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JANUVIA / JANUMET
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1,634
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1,598
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2%
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2%
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ZETIA / VYTORIN
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994
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955
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4%
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4%
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GARDASIL / GARDASIL 9
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393
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427
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-8%
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-7%
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PROQUAD / M-M-R II / VARIVAX
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383
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358
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7%
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10%
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CUBICIN
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357
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293
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22%
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22%
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REMICADE
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339
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455
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-26%
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-26%
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ISENTRESS
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338
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375
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-10%
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-9%
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KEYTRUDA
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314
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110
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*
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*
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Animal Health
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898
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840
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7%
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10%
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Other Revenues
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246
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381
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-36%
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-2%
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* >100%
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Pharmaceutical Revenue
Second-quarter pharmaceutical sales increased 2 percent to $8.7 billion, reflecting higher sales in oncology, hospital acute care, the cardiovascular franchise and vaccines.
Growth in oncology was driven by higher sales of KEYTRUDA as the company continues to launch the product with new indications globally.
Growth in hospital acute care reflects higher sales of CUBICIN (daptomycin for injection), an I.V. antibiotic, partially due to price increases in the United States, and the U.S. launch of BRIDION (sugammadex) Injection 100 mg/mL, an agent for the reversal of neuromuscular blockade induced by rocuronium bromide or vecuronium bromide in adults undergoing surgery. In June 2016, the company lost U.S. patent protection for CUBICIN, and, going forward, the company anticipates a significant decline in CUBICIN sales.
Higher sales in the cardiovascular portfolio were primarily driven by an increase in sales of ZETIA (ezetimibe), a medicine for lowering LDL cholesterol, largely due to price increases in the United States, and ADEMPAS (riociguat), a medicine for treating pulmonary arterial hypertension and chronic thromboembolic pulmonary hypertension, which the company is now promoting and distributing in Europe.
Growth in vaccines resulted largely from higher sales of pediatric vaccines, partially offset by lower sales in the franchise of GARDASIL 9 (Human Papillomavirus 9-valent Vaccine, Recombinant) and GARDASIL [Human Papillomavirus Quadrivalent (Types 6, 11, 16, and 18) Vaccine, Recombinant], vaccines to prevent cancers and other diseases caused by HPV, due to the timing of public sector purchases.
Pharmaceutical sales growth also reflects the launch of ZEPATIER, which had sales of $112 million in the quarter.
Second-quarter pharmaceutical sales reflect a decline in REMICADE (infliximab), a treatment for inflammatory diseases, due to the impact of biosimilar competition in the company’s marketing territories in Europe. Pharmaceutical sales also reflect a decrease in sales of NASONEX (mometasone furoate monohydrate), an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms, due to loss of exclusivity in the United States.
Animal Health Revenue
Animal Health sales totaled $898 million for the second quarter of 2016, an increase of 7 percent compared with the second quarter of 2015, including a 3 percent negative impact from foreign exchange. Excluding the impact of exchange, sales across all species grew, particularly in products for companion animals, led by BRAVECTO (fluralaner), a chewable tablet that kills fleas and ticks in dogs for up to 12 weeks.
In the second quarter, the company received marketing approval from the EMA for BRAVECTO Spot-On Solution for cats and dogs; last week, the company received approval in the United States to market the product under the tradename BRAVECTO Topical (fluralaner topical solution) for cats and dogs.
Second-Quarter Expense, EPS and Related Information
The tables below present selected expense information.
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$ in millions
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GAAP
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Acquisition-
and Divestiture-
Related Costs3
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Restructuring
Costs
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Non-GAAP1
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Second-Quarter 2016
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Materials and production
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$3,578
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$1,120
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$66
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$2,392
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Marketing and administrative
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2,458
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18
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87
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2,353
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Research and development
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2,151
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207
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64
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1,880
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Restructuring costs
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134
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–
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134
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–
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Second-Quarter 2015
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Materials and production
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$3,754
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$1,241
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$105
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$2,408
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Marketing and administrative
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2,624
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136
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17
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2,471
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Research and development
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1,670
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71
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15
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1,584
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Restructuring costs
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191
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–
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191
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–
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GAAP Expense, EPS and Related Information
On a GAAP basis, the gross margin was 63.7 percent for the second quarter of 2016 compared to 61.6 percent for the second quarter of 2015. The increase for the second quarter of 2016 reflects the favorable impacts of foreign exchange; product mix; lower acquisition- and divestiture-related costs; and lower restructuring costs. Acquisition- and divestiture-related costs and restructuring costs negatively affected gross margin by 12.0 and 13.8 percentage points for the second quarters of 2016 and 2015, respectively.
Marketing and administrative expenses were $2.5 billion in the second quarter of 2016, a 6 percent decrease compared to the second quarter of 2015. The decline reflects lower acquisition- and divestiture-related costs, as well as lower administrative costs, such as legal defense reserves, partially offset by higher restructuring costs.
Research and development (R&D) expenses were $2.2 billion in the second quarter of 2016, a 29 percent increase compared to the second quarter of 2015. The increase primarily reflects higher licensing costs, increased clinical development spending and intangible asset impairment charges.
Other (income) expense, net, was $19 million of expense in the second quarter of 2016 compared to $739 million of expense in the second quarter of 2015. The second quarter of 2015 includes foreign exchange losses of $715 million related to the devaluation of the company’s net monetary assets in Venezuela.
GAAP EPS was $0.43 for the second quarter of 2016 compared with $0.24 for the second quarter of 2015.
Non-GAAP Expense, EPS and Related Information
The non-GAAP gross margin was 75.7 percent for the second quarter of 2016 compared to 75.4 percent for the second quarter of 2015. The increase for the second quarter of 2016 reflects the favorable impacts of foreign exchange and product mix.
Non-GAAP marketing and administrative expenses were $2.4 billion in the second quarter of 2016, a 5 percent decline compared to the second quarter of 2015. The decline reflects lower administrative costs, such as legal defense reserves.
Non-GAAP R&D expenses were $1.9 billion in the second quarter of 2016, a 19 percent increase compared to the second quarter of 2015. The increase primarily reflects higher licensing costs and increased clinical development spending.
Non-GAAP EPS was $0.93 for the second quarter of 2016 compared with $0.86 for the second quarter of 2015.
A reconciliation of GAAP to non-GAAP net income and EPS is provided in the table that follows. Year-to-date results can be found in the attached tables.
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$ in millions, except EPS amounts
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Second Quarter
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2016
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2015
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EPS
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GAAP EPS
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$0.43
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$0.24
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Difference4
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0.50
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0.62
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Non-GAAP EPS that excludes items listed below1
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$0.93
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$0.86
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Net Income
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GAAP net income2
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$1,205
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$687
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Difference
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1,382
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1,754
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Non-GAAP net income that excludes items listed below1,2
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$2,587
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$2,441
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Decrease (Increase) in Net Income Due to Excluded Items:
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Acquisition- and divestiture-related costs3
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$ 1,345
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$1,448
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Restructuring costs
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351
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328
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Foreign exchange losses related to Venezuela
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–
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715
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Net decrease (increase) in income before taxes
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1,696
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2,491
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Income tax (benefit) expense5
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(314)
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(737)
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Decrease (increase) in net income
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$ 1,382
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$1,754
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Financial Outlook
Merck has lowered its full-year 2016 GAAP EPS range to be between $1.98 and $2.08, reflecting the impact of intangible asset impairment charges and higher restructuring costs incurred in the second quarter of 2016. The company has raised the bottom end of its full-year 2016 non-GAAP EPS range and is now targeting a range of $3.67 to $3.77, including an approximately 1 percent negative impact from foreign exchange at current exchange rates. The non-GAAP range excludes acquisition- and divestiture-related costs and costs related to restructuring programs.
Merck has narrowed its full-year 2016 revenue range to be between $39.1 billion and $40.1 billion, including an approximately 2 percent negative impact from foreign exchange at current exchange rates.
The following table summarizes the company’s 2016 financial guidance.
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GAAP
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Non-GAAP1
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Revenue
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$39.1 to $40.1 billion
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$39.1 to $40.1 billion**
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Marketing and administrative expenses
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Lower than 2015
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Lower than 2015
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R&D expenses
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Higher than 2015
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Higher than 2015
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Effective tax rate
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26.0% to 27.0%
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21.5% to 22.5%
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EPS
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$1.98 to $2.08
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$3.67 to $3.77
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** The company does not have any non-GAAP adjustments to revenue.
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A reconciliation of anticipated 2016 GAAP EPS to non-GAAP EPS and the items excluded from non-GAAP EPS are provided in the table below.
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$ in millions, except EPS amounts
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Full-Year 2016
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GAAP EPS
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$1.98 to $2.08
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Difference4
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1.69
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Non-GAAP EPS that excludes items listed below1
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$3.67 to $3.77
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Acquisition- and divestiture-related costs
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$4,750
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Restructuring costs
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900
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Net decrease (increase) in income before taxes
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5,650
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Estimated income tax (benefit) expense
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(955)
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Decrease (increase) in net income
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$4,695
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The expected full-year 2016 GAAP effective tax rate of 26.0 to 27.0 percent reflects an unfavorable impact of approximately 4.5 percentage points from the above items.
Total Employees
As of June 30, 2016, Merck had approximately 68,000 employees worldwide.