10-QPeriod: Q2 FY2016

Merck & Co., Inc. Quarterly Report for Q2 Ended Jun 30, 2016

Filed August 8, 2016For Securities:MRK

Summary

Merck & Co., Inc. reported strong financial results for the six months ended June 30, 2016, driven by significant growth in key therapeutic areas and strategic acquisitions. Net income attributable to Merck & Co., Inc. increased to $2.33 billion from $1.64 billion in the prior year period, with diluted earnings per share rising to $0.83 from $0.57. This improvement was fueled by robust sales of Keytruda in oncology and Zepatier for hepatitis, alongside steady performance from established products like Januvia and Zetia. The company also advanced its strategic growth initiatives through acquisitions such as Afferent Pharmaceuticals and The StayWell Company, and a collaboration with Moderna Therapeutics, signaling a commitment to expanding its pipeline and therapeutic reach. Operationally, Merck demonstrated resilience despite ongoing global healthcare cost containment pressures. The company's diversified portfolio, coupled with strategic divestitures like the sale of U.S. marketing rights to certain products, contributed to overall sales stability. While some established products experienced declines due to patent expirations and generic competition, the growth in newer and strategically important areas more than compensated. Management's focus on innovation and strategic alliances positions Merck for continued long-term value creation.

Financial Highlights

52 data points
Beta

Revenue

$9.84B

63.7% Gross Margin

Net Income

$1.21B

12.2% Net Margin

EPS (Diluted)

$0.43

Total Assets

$96.47B

Cash & Equivalents

$6.61B

Free Cash Flow

$1.60B

Financial Statements
Beta
Revenue$9.84B
Cost of Revenue$3.58B
Gross Profit$6.27B
R&D Expenses$2.15B
SG&A Expenses$2.46B
Interest Expense$171.00M
Net Income$1.21B
EPS (Basic)$0.44
EPS (Diluted)$0.43
Shares Outstanding (Basic)2.77B
Shares Outstanding (Diluted)2.79B

Key Highlights

  • 1Net income attributable to Merck & Co., Inc. for the six months ended June 30, 2016, increased to $2.33 billion, up from $1.64 billion in the same period of 2015.
  • 2Diluted earnings per share (EPS) increased to $0.83 for the six months ended June 30, 2016, from $0.57 in the prior year period.
  • 3Keytruda sales showed significant growth, reaching $563 million for the first six months of 2016, up from $192 million in the prior year.
  • 4Zepatier, a treatment for Hepatitis C, generated $161 million in sales for the first six months of 2016, marking its initial contribution.
  • 5The company completed several strategic acquisitions in July 2016, including Afferent Pharmaceuticals and The StayWell Company, and announced an agreement to acquire a controlling interest in Vallée S.A. (Animal Health).
  • 6The company entered into a significant collaboration with Moderna Therapeutics to develop novel mRNA-based personalized cancer vaccines.
  • 7Worldwide sales for the six months ended June 30, 2016, were $19.16 billion, essentially flat compared to the prior year period, reflecting a mix of growth in key products and declines in others, as well as foreign exchange headwinds.

Frequently Asked Questions

Sales growth was primarily driven by strong performance in Keytruda (oncology), Zepatier (hepatitis), Zetia (cardiovascular), Cubicin (antibiotic), and various vaccines. Growth was also supported by the inclusion of sales from recent acquisitions and strategic collaborations. However, this growth was partially offset by declines in established products like Remicade, Nasonex, and Cozaar/Hyzaar due to biosimilar or generic competition and patent expirations.

Research and development expenses increased by 12% to $3.8 billion for the first six months of 2016 compared to the same period in 2015. This increase was mainly due to higher clinical development spending, increased in-process R&D (IPR&D) impairment charges, and higher licensing costs, including expenses related to the Moderna collaboration. This suggests a continued significant investment in pipeline development and strategic partnerships to drive future growth.

Merck resolved the Vioxx securities class action litigation, creating a settlement fund of $830 million and agreeing to pay up to $232 million for attorneys' fees and expenses. The company's net cash payment after insurance proceeds was approximately $680 million. This settlement, while significant, is manageable within Merck's overall financial resources. The company also continues to address product liability lawsuits related to Vioxx and other products like Fosamax, Januvia, and Propecia, with reserves in place for estimated losses.

Merck faces challenges in international markets due to healthcare cost containment pressures and austerity measures, particularly noting a significant sales decline in Venezuela due to reduced operations. Foreign exchange movements unfavorably impacted global sales performance by approximately 3% for the first six months of 2016. The company utilizes foreign currency hedging strategies to mitigate some of this risk, but the overall impact on reported sales can be material.