10-QPeriod: Q1 FY2019

Merck & Co., Inc. Quarterly Report for Q1 Ended Mar 31, 2019

Filed May 8, 2019For Securities:MRK

Summary

Merck & Co., Inc. reported strong financial results for the first quarter of 2019, with worldwide sales increasing by 8% year-over-year to $10.8 billion, driven by robust growth in its oncology franchise, particularly Keytruda, and a significant rise in vaccine sales. Net income attributable to Merck & Co., Inc. surged to $2.9 billion ($1.12 per diluted share) from $736 million ($0.27 per diluted share) in the prior year's quarter. This substantial increase in profitability was bolstered by a significant reduction in R&D expenses compared to the previous year, largely due to a one-time charge related to a prior-period collaboration, and a favorable tax adjustment from the settlement of federal income tax matters. Strategic acquisitions in animal health and immunotherapy were completed in April 2019, indicating continued investment in growth areas. The company also announced a new global restructuring program aimed at optimizing its manufacturing and supply network, which is expected to incur costs but ultimately lead to significant annual cost savings. Despite pricing pressures in some markets, Merck demonstrated strong operational execution and continued investment in its pipeline, particularly with Keytruda, which received several new approvals and expanded indications during the quarter.

Financial Highlights

52 data points
Beta

Revenue

$10.82B

71.8% Gross Margin

Net Income

$2.92B

27.0% Net Margin

EPS (Diluted)

$1.12

Total Assets

$82.35B

Cash & Equivalents

$8.08B

Free Cash Flow

$1.34B

Financial Statements
Beta
Revenue$10.82B
Cost of Revenue$3.05B
Gross Profit$7.76B
R&D Expenses$1.93B
SG&A Expenses$2.42B
Interest Expense$209.00M
Net Income$2.92B
EPS (Basic)$1.13
EPS (Diluted)$1.12
Shares Outstanding (Basic)2.58B
Shares Outstanding (Diluted)2.60B

Key Highlights

  • 1Worldwide sales grew 8% to $10.8 billion, driven by Keytruda (oncology) and vaccines.
  • 2Net income attributable to Merck & Co., Inc. increased significantly to $2.9 billion, or $1.12 per diluted share, from $736 million, or $0.27 per diluted share, in Q1 2018.
  • 3Research and Development expenses decreased substantially to $1.9 billion from $3.2 billion, primarily due to a large one-time charge in Q1 2018 for an Eisai collaboration.
  • 4Keytruda sales reached $2.3 billion, up from $1.5 billion in the prior year, fueled by new indications and global launches.
  • 5Acquisitions of Antelliq ($2.3 billion + debt repayment) and Immune Design ($301 million) were completed in April 2019.
  • 6A new global restructuring program was announced, with estimated pretax costs of $800 million to $1.2 billion by 2023, aiming for annual net cost savings of $500 million.
  • 7Effective income tax rate improved significantly to 6.7% from 44.9%, aided by a $360 million net tax benefit from settling federal income tax matters.

Frequently Asked Questions

Sales growth was primarily driven by strong performance in the oncology franchise, particularly Keytruda, and increased alliance revenue from Lynparza and Lenvima. Additionally, higher sales of vaccines, including Gardasil/Gardasil 9 and pediatric vaccines, contributed significantly to the revenue increase.

The significant increase in net income and EPS was due to a combination of factors. Key drivers include robust sales growth, a substantial decrease in Research and Development expenses (largely due to a one-time collaboration charge in Q1 2018), and a favorable $360 million net tax benefit from the settlement of federal income tax matters. These factors more than offset headwinds such as pricing pressures and generic competition in certain product lines.

Merck completed two significant acquisitions in April 2019: Antelliq in animal health for $2.3 billion plus debt, and Immune Design, an immunotherapy company, for $301 million. They also announced a new global restructuring program targeting operational efficiencies and cost savings. Furthermore, the company continues to expand indications and global reach for its flagship oncology drug, Keytruda.

Merck acknowledges ongoing pricing pressure globally, especially in the U.S. due to healthcare reform and increased purchasing power of payers. They are also facing generic and biosimilar competition for several established products like Zetia, Vytorin, Invanz, Cancidas, Simponi, and Remicade. The company is mitigating these pressures through strong growth in newer, innovative products like Keytruda and through strategic alliances and new product launches in areas like vaccines and animal health. They also highlighted anticipated sales declines for products nearing patent expiry.