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| FOR IMMEDIATE RELEASE |
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Merck Announces Third-Quarter 2019 Financial Results
KENILWORTH, N.J., Oct. 29, 2019 - Merck (NYSE: MRK), known as MSD outside the United States and Canada, today announced financial results for the third quarter of 2019.
"We achieved another quarter of strong revenue and earnings growth as we continue to realize the benefits of our sustained investment in research and development and our focus on commercial execution," said Kenneth C. Frazier, chairman and chief executive officer, Merck. "We are confident that the investments we are making now will allow us to convert cutting-edge science into medicines and vaccines of great benefit to patients and value to shareholders."
Financial Summary
| Third Quarter | ||||||||||||||||
| $ in millions, except EPS amounts | 2019 | 2018 | Change | Change Ex-Exchange | ||||||||||||
| Sales | $ | 12,397 | $ | 10,794 | 15 | % | 16 | % | ||||||||
| GAAP net income 1 | 1,901 | 1,950 | -3 | % | -3 | % | ||||||||||
| Non-GAAP net income that excludes certain items 1,2* | 3,873 | 3,178 | 22 | % | 22 | % | ||||||||||
| GAAP EPS | 0.74 | 0.73 | 1 | % | 1 | % | ||||||||||
| Non-GAAP EPS that excludes certain items 2* | 1.51 | 1.19 | 27 | % | 27 | % |
*Refer to table on page 9
GAAP (generally accepted accounting principles) earnings per share assuming dilution (EPS) were $0.74 for the third quarter of 2019. Non-GAAP EPS of $1.51 for the third quarter of 2019 excludes a $982 million charge for the acquisition of Peloton Therapeutics, Inc. (Peloton), a $612 million pretax intangible asset impairment charge, other acquisition- and divestiture-related costs, restructuring costs and certain other items. Year-to-date results can be found in the attached tables.
Pipeline Highlights
Merck continued to advance the development programs for KEYTRUDA (pembrolizumab), the company's anti-PD-1 therapy; Lynparza (olaparib), a PARP inhibitor being co-developed and co-commercialized with AstraZeneca; and Lenvima (lenvatinib mesylate), an orally available tyrosine kinase inhibitor being co-developed and co-commercialized with Eisai Co., Ltd. (Eisai).
Other Pipeline Highlights
Third-Quarter Revenue Performance
The following table reflects sales of the company's top pharmaceutical products, as well as sales of animal health products.
| Third Quarter | ||||||||||||||||
| $ in millions | 2019 | 2018 | Change | Change Ex-Exchange | ||||||||||||
| Total Sales | $ | 12,397 | $ | 10,794 | 15 | % | 16 | % | ||||||||
| Pharmaceutical | 11,095 | 9,658 | 15 | % | 16 | % | ||||||||||
| KEYTRUDA | 3,070 | 1,889 | 62 | % | 64 | % | ||||||||||
| GARDASIL / GARDASIL 9 | 1,320 | 1,048 | 26 | % | 27 | % | ||||||||||
| JANUVIA / JANUMET | 1,311 | 1,490 | -12 | % | -11 | % | ||||||||||
| PROQUAD, M-M-R II and VARIVAX | 623 | 525 | 19 | % | 19 | % | ||||||||||
| BRIDION | 284 | 217 | 31 | % | 32 | % | ||||||||||
| ISENTRESS / ISENTRESS HD | 250 | 275 | -9 | % | -6 | % | ||||||||||
| NUVARING | 241 | 234 | 3 | % | 4 | % | ||||||||||
| PNEUMOVAX 23 | 237 | 214 | 11 | % | 11 | % | ||||||||||
| SIMPONI | 203 | 210 | -3 | % | 1 | % | ||||||||||
| IMPLANON / NEXPLANON | 199 | 186 | 7 | % | 8 | % | ||||||||||
| Animal Health | 1,122 | 1,021 | 10 | % | 12 | % | ||||||||||
| Livestock | 726 | 660 | 10 | % | 12 | % | ||||||||||
| Companion Animals | 396 | 361 | 10 | % | 12 | % | ||||||||||
| Other Revenues | 180 | 115 | 59 | % | -18 | % |
Pharmaceutical Revenue
Third-quarter pharmaceutical sales were $11.1 billion, an increase of 15% compared with the third quarter of 2018; excluding the unfavorable effect of foreign exchange, sales grew 16% in the third quarter. The increase was driven primarily by growth in oncology and vaccines, partially offset by the ongoing impacts of the loss of market exclusivity for several products as well as lower sales of JANUVIA (sitagliptin) and JANUMET (sitagliptin and metformin HCI). International pharmaceutical sales represented 54% of total sales in the quarter. Performance in international markets was led by China, which had pharmaceutical sales of $898 million representing growth of 84% compared with the third quarter of 2018, driven by vaccines, primarily GARDASIL [Human Papillomavirus Quadrivalent (Types 6, 11, 16 and 18) Vaccine, Recombinant] and GARDASIL 9 (Human Papillomavirus 9-valent Vaccine, Recombinant), and oncology. Excluding the unfavorable effect of foreign exchange, pharmaceutical sales in China grew by 90%.
Growth in oncology was largely driven by a $1.2 billion increase in sales for KEYTRUDA to $3.1 billion, reflecting strong momentum from the NSCLC indications as well as continued uptake in other indications, including the recently launched RCC and adjuvant melanoma indications, along with growth from Lynparza and Lenvima.
Growth in vaccines reflects higher sales of GARDASIL and GARDASIL 9, vaccines to prevent certain cancers and other diseases caused by HPV, primarily due to higher demand in Asia Pacific, particularly in China. Also contributing to sales growth was higher demand in Europe, driven primarily by increased vaccination rates for both boys and girls, as well as higher pricing and demand in the United States, partially offset by public sector buying patterns.
In October 2019, the company borrowed doses of GARDASIL 9 from the U.S. Centers for Disease and Control and Prevention's (CDC) Pediatric Vaccine Stockpile, which will reduce GARDASIL 9 sales in the fourth quarter of 2019 by approximately $120 million. These doses will be allocated to support routine vaccination in the United States and will allow the company to manufacture doses for other parts of the world, including regions where some of the most vulnerable populations live.
Growth in pediatric vaccines was driven by VARIVAX (Varicella Virus Vaccine Live), a vaccine to help prevent chickenpox, and PROQUAD (Measles, Mumps, Rubella and Varicella Virus Vaccine Live), a combination vaccine to help protect against measles, mumps, rubella and varicella, reflecting higher demand and pricing in the United States and higher demand in Europe and Latin America.
Performance in hospital acute care reflects higher demand globally, particularly in the United States, for BRIDION (sugammadex) Injection 100 mg/mL, a medicine for the reversal of neuromuscular blockade induced by rocuronium bromide or vecuronium bromide in adults undergoing surgery; and the ongoing launch of PREVYMIS (letermovir), a medicine for prophylaxis (prevention) of cytomegalovirus (CMV) infection and disease in adult CMV-seropositive recipients of an allogeneic hematopoietic stem cell transplant.
Pharmaceutical sales growth for the quarter was partially offset by the ongoing impacts from the loss of market exclusivity for INVANZ (ertapenem sodium), ZETIA (ezetimibe) and VYTORIN (ezetimibe/simvastatin), CUBICIN (daptomycin) and REMICADE (infliximab). In addition, the decline in sales of JANUVIA and JANUMET reflects continued pricing pressure in the United States, which more than offset higher demand globally.
Animal Health Revenue
Animal Health sales totaled $1.1 billion for the third quarter of 2019, an increase of 10% compared with the third quarter of 2018. Excluding the unfavorable effect from foreign exchange, Animal Health sales grew 12%. Growth in the third quarter was primarily driven by livestock, due to products acquired in the Antelliq acquisition, along with growth from companion animal products, driven largely by higher sales of the BRAVECTO (fluralaner) line of products for parasitic control.
Animal Health segment profits were $423 million in the third quarter of 2019, an increase of 4% compared with $409 million in the third quarter of 2018. 3
Third-Quarter Expense, EPS and Related Information
The tables below present selected expense information.
| $ in millions | GAAP | Acquisition- and Divestiture- Related Costs 4 | Restructuring Costs | Certain Other Items | Non-GAAP 2 | |||||||||||||||
| Third-Quarter 2019 | ||||||||||||||||||||
| Cost of sales | $ | 3,990 | $ | 941 | $ | 62 | $ | - | $ | 2,987 | ||||||||||
| Selling, general and administrative | 2,589 | 22 | 1 | - | 2,566 | |||||||||||||||
| Research and development | 3,204 | 6 | 1 | 982 | 2,215 | |||||||||||||||
| Restructuring costs | 232 | - | 232 | - | - | |||||||||||||||
| Other (income) expense, net | 35 | 6 | - | - | 29 | |||||||||||||||
| Third-Quarter 2018 | ||||||||||||||||||||
| Cost of sales | $ | 3,619 | $ | 680 | $ | 2 | $ | 420 | $ | 2,517 | ||||||||||
| Selling, general and administrative | 2,443 | 2 | - | - | 2,441 | |||||||||||||||
| Research and development | 2,068 | 5 | (4 | ) | - | 2,067 | ||||||||||||||
| Restructuring costs | 171 | - | 171 | - | - | |||||||||||||||
| Other (income) expense, net | (172 | ) | (10 | ) | - | - | (162 | ) |
GAAP Expense, EPS and Related Information
Gross margin was 67.8% for the third quarter of 2019 compared to 66.5% for the third quarter of 2018. The increase in gross margin for the third quarter of 2019 reflects the favorable impacts of a charge in 2018 related to the termination of a collaboration agreement with Samsung Bioepis Co., Ltd. and product mix, partially offset by higher acquisition- and divestiture-related costs, including the impact of a 2019 intangible asset impairment charge, higher amortization of unfavorable manufacturing variances, higher amortization of intangible assets related to collaborations, higher restructuring costs, as well as manufacturing facilities startup costs.
3 Animal Health segment profits are comprised of segment sales, less all cost of sales, as well as selling, general and administrative expenses and research and development costs directly incurred by the segment. For internal management reporting, Merck does not allocate general and administrative expenses not directly incurred by the segment, 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.
4 Includes expenses for the amortization of intangible assets and purchase accounting adjustments to inventories recognized as a result of acquisitions, intangible asset impairment charges, and expense or income related to changes in the estimated fair value measurement of liabilities for contingent consideration. Also includes integration, transaction and certain other costs related to business acquisitions and divestitures.
Selling, general and administrative expenses were $2.6 billion in the third quarter of 2019, a 6% increase compared to the third quarter of 2018. The increase primarily reflects higher promotion and administrative costs primarily in support of strategic brands, and higher acquisition- and divestiture-related costs, partially offset by the favorable effects of foreign exchange.
Research and development (R&D) expenses were $3.2 billion in the third quarter of 2019, an increase of 55% compared with the third quarter of 2018. The increase was driven primarily by a $982 million charge recorded in the third quarter of 2019 for the acquisition of Peloton coupled with higher expenses related to clinical development and increased investment in discovery research and early drug development.
Other (income) expense, net, was $35 million of expense in the third quarter of 2019 compared to $172 million of income in the third quarter of 2018 primarily reflecting lower income from investments in equity securities and higher net interest expense.
The effective income tax rate of 18.7% for the third quarter of 2019 includes the unfavorable impact of the charge for the acquisition of Peloton for which no tax benefit was recognized and the favorable impact of product mix.
GAAP EPS was $0.74 for the third quarter of 2019 compared with $0.73 for the third quarter of 2018.
Non-GAAP Expense, EPS and Related Information
The non-GAAP gross margin was 75.9% for the third quarter of 2019 compared to 76.7% for the third quarter of 2018. The decrease in non-GAAP gross margin primarily reflects higher amortization of unfavorable manufacturing variances, higher amortization of intangible assets related to collaborations, as well as manufacturing facilities startup costs.
Non-GAAP selling, general and administrative expenses were $2.6 billion in the third quarter of 2019, a 5% increase compared to the third quarter of 2018. The increase reflects higher promotion and administrative costs primarily in support of strategic brands, partially offset by the favorable effects of foreign exchange.
Non-GAAP R&D expenses were $2.2 billion in the third quarter of 2019, a 7% increase compared to the third quarter of 2018. The increase primarily reflects higher expenses related to clinical development and increased investment in discovery research and early drug development.
Non-GAAP other (income) expense, net, was $29 million of expense in the third quarter of 2019 compared to $162 million of income in the third quarter of 2018 primarily reflecting lower income from investments in equity securities and higher net interest expense.
The non-GAAP effective income tax rate of 15.7% for the third quarter of 2019 reflects the favorable impact of product mix.
Non-GAAP EPS was $1.51 for the third quarter of 2019 compared with $1.19 for the third quarter of 2018.
A reconciliation of GAAP to non-GAAP net income and EPS is provided in the table that follows.
| Third Quarter | ||||||||
| $ in millions, except EPS amounts | 2019 | 2018 | ||||||
| EPS | ||||||||
| GAAP EPS | $ | 0.74 | $ | 0.73 | ||||
| Difference 5 | 0.77 | 0.46 | ||||||
| Non-GAAP EPS that excludes items listed below 2 | $ | 1.51 | $ | 1.19 | ||||
| Net Income | ||||||||
| GAAP net income 1 | $ | 1,901 | $ | 1,950 | ||||
| Difference | 1,972 | 1,228 | ||||||
| Non-GAAP net income that excludes items listed below 1,2 | $ | 3,873 | $ | 3,178 | ||||
| Decrease (Increase) in Net Income Due to Excluded Items: | ||||||||
| Acquisition- and divestiture-related costs 4 | $ | 975 | $ | 677 | ||||
| Restructuring costs | 296 | 169 | ||||||
| Charge for the acquisition of Peloton | 982 | - | ||||||
| Charge related to the termination of a collaboration agreement with Samsung | - | 420 | ||||||
| Net decrease (increase) in income before taxes | 2,253 | 1,266 | ||||||
| Estimated income tax (benefit) expense | (281 | ) | (38 | ) | ||||
| Decrease (increase) in net income | $ | 1,972 | $ | 1,228 |
Financial Outlook
Merck narrowed and raised its full-year 2019 revenue range to be between $46.5 billion and $47.0 billion, including both the impact of the GARDASIL 9 stockpile borrowing noted above and a negative impact from foreign exchange of approximately 2% at mid-October exchange rates.
Merck reduced its expected full-year GAAP effective tax rate to approximately 16.5% and its expected full-year non-GAAP effective tax rate to approximately 17.5%. These reductions are primarily attributable to favorable product mix.
5 Represents the difference between calculated GAAP EPS and calculated non-GAAP EPS, which may be different than the amount calculated by dividing the impact of the excluded items by the weighted-average shares for the period.
Merck narrowed and reduced its full-year 2019 GAAP EPS range to be between $3.75 and $3.80. The change in the GAAP EPS range primarily reflects the impact of the intangible asset impairment charge noted above. Merck narrowed and raised its full-year 2019 non-GAAP EPS range to be between $5.12 and $5.17, including a negative impact from foreign exchange of approximately 1% at mid-October exchange rates. The non-GAAP range excludes acquisition- and divestiture-related costs, costs related to restructuring programs, a net benefit from the settlement of certain federal income tax matters, the charge for the acquisition of Peloton and certain other items.
The following table summarizes the company's full-year 2019 financial guidance.
| GAAP | Non-GAAP 2 | |||
| Revenue | $46.5 to $47.0 billion | $46.5 to $47.0 billion* | ||
| Operating expenses | Higher than 2018 by a low-single digit rate | Higher than 2018 by a mid-single digit rate | ||
| Effective tax rate | Approximately 16.5% | Approximately 17.5% | ||
| EPS** | $3.75 to $3.80 | $5.12 to $5.17 |
*The company does not have any non-GAAP adjustments to revenue.
**EPS guidance for 2019 assumes a share count (assuming dilution) of approximately 2.6 billion shares.
A reconciliation of anticipated 2019 GAAP EPS to non-GAAP EPS and the items excluded from non-GAAP EPS are provided in the table below.
| $ in millions, except EPS amounts | Full-Year 2019 | |||
| GAAP EPS | $3.75 to $3.80 | |||
| Difference 5 | 1.37 | |||
| Non-GAAP EPS that excludes items listed below 2 | $5.12 to $5.17 | |||
| Acquisition- and divestiture-related costs 4 | $ | 2,700 | ||
| Restructuring costs Charge for the acquisition of Peloton | 750 982 | |||
| Net decrease (increase) in income before taxes | 4,432 | |||
| Income tax (benefit) expense 6 | (900 | ) | ||
| Decrease (increase) in net income | $ | 3,532 |
The expected full-year GAAP effective tax rate of 16.5% reflects a net favorable impact of approximately one percentage point from the above items.
Earnings Conference Call
Investors, journalists and the general public may access a live audio webcast of the call today at 8:00 a.m. EDT on Merck's website at http://investors.merck.com/events-and-presentations/default.aspx. Institutional investors and analysts can participate in the call by dialing (706) 758-9927 or (877) 381-5782 and using ID code number 5635157. Members of the media are invited to monitor the call by dialing (706) 758-9928 or (800) 399-7917 and using ID code number 5635157. Journalists who wish to ask questions are requested to contact a member of Merck's Media Relations team at the conclusion of the call.
6 Includes the estimated tax impact on the reconciling items. In addition, includes a $360 million net tax benefit related to the settlement of certain federal income tax matters and a $67 million tax charge related to the finalization of treasury regulations for the Tax Cuts and Jobs Act of 2017.
For more than a century, Merck, a leading global biopharmaceutical company known as MSD outside of the United States and Canada, has been inventing for life, bringing forward medicines and vaccines for many of the world's most challenging diseases. Through our prescription medicines, vaccines, biologic therapies and animal health products, we work with customers and operate in more than 140 countries to deliver innovative health solutions. We also demonstrate our commitment to increasing access to health care through far-reaching policies, programs and partnerships. Today, Merck continues to be at the forefront of research to advance the prevention and treatment of diseases that threaten people and communities around the world - including cancer, cardio-metabolic diseases, emerging animal diseases, Alzheimer's disease and infectious diseases including HIV and Ebola. For more information,
visit www.merck.com and connect with us on Twitter , Facebook , Instagram , YouTube and LinkedIn.
Forward-Looking Statement of Merck & Co., Inc., Kenilworth, N.J., USA
This news release of Merck & Co., Inc., Kenilworth, N.J., USA (the "company") includes "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements are based upon the current beliefs and expectations of the company's management and are subject to significant risks and uncertainties. There can be no guarantees with respect to pipeline products that the products will receive the necessary regulatory approvals or that they will prove to be commercially successful. If underlying assumptions prove inaccurate or risks or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements.
Risks and uncertainties include but are not limited to, general industry conditions and competition; general economic factors, including interest rate and currency exchange rate fluctuations; the impact of pharmaceutical industry regulation and health care legislation in the United States and internationally; global trends toward health care cost containment; technological advances, new products and patents attained by competitors; challenges inherent in new product development, including obtaining regulatory approval; the company's ability to accurately predict future market conditions; manufacturing difficulties or delays; financial instability of international economies and sovereign risk; dependence on the effectiveness of the company's patents and other protections for innovative products; and the exposure to litigation, including patent litigation, and/or regulatory actions.
The company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise. Additional factors that could cause results to differ materially from those described in the forward-looking statements can be found in the company's 2018 Annual Report on Form 10-K and the company's other filings with the Securities and Exchange Commission (SEC) available at the SEC's Internet site ( www.sec.gov ).
MERCK & CO., INC.
CONSOLIDATED STATEMENT OF INCOME - GAAP
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE FIGURES)
| GAAP | % Change | GAAP | % Change | |||||||||||||||||||||
| 3Q19 | 3Q18 | Sep YTD 2019 | Sep YTD 2018 | |||||||||||||||||||||
| Sales | $ | 12,397 | $ | 10,794 | 15 | % | $ | 34,972 | $ | 31,296 | 12 | % | ||||||||||||
| Costs, Expenses and Other | ||||||||||||||||||||||||
| Cost of sales (1) | 3,990 | 3,619 | 10 | % | 10,443 | 10,220 | 2 | % | ||||||||||||||||
| Selling, general and administrative (1) | 2,589 | 2,443 | 6 | % | 7,726 | 7,459 | 4 | % | ||||||||||||||||
| Research and development (1)(2) | 3,204 | 2,068 | 55 | % | 7,324 | 7,538 | -3 | % | ||||||||||||||||
| Restructuring costs (3) | 232 | 171 | 36 | % | 444 | 494 | -10 | % | ||||||||||||||||
| Other (income) expense, net (1) | 35 | (172 | ) | * | 362 | (512 | ) | * | ||||||||||||||||
| Income Before Taxes | 2,347 | 2,665 | -12 | % | 8,673 | 6,097 | 42 | % | ||||||||||||||||
| Taxes on Income (1) | 440 | 707 | 1,259 | 1,682 | ||||||||||||||||||||
| Net Income | 1,907 | 1,958 | -3 | % | 7,414 | 4,415 | 68 | % | ||||||||||||||||
| Less: Net Income (Loss) Attributable to Noncontrolling Interests (1) | 6 | 8 | (73 | ) | 22 | |||||||||||||||||||
| Net Income Attributable to Merck & Co., Inc. | $ | 1,901 | $ | 1,950 | -3 | % | $ | 7,487 | $ | 4,393 | 70 | % | ||||||||||||
| Earnings per Common Share Assuming Dilution | $ | 0.74 | $ | 0.73 | 1 | % | $ | 2.89 | $ | 1.63 | 77 | % | ||||||||||||
| Average Shares Outstanding Assuming Dilution | 2,572 | 2,678 | 2,587 | 2,694 | ||||||||||||||||||||
| Tax Rate (4) | 18.7 | % | 26.5 | % | 14.5 | % | 27.6 | % |
* 100% or greater
(1) Amounts include the impact of acquisition and divestiture-related costs, restructuring costs and certain other items. See accompanying tables for details.
(2) Research and development expenses for the third quarter and first nine months of 2019 include a $982 million charge for the acquisition of Peloton Therapeutics (Peloton). Research and development expenses in the first nine months of 2018 include a $344 million charge for the acquisition of Viralytics Limited. Research and development expenses in the first nine months of 2018 also include a $1.4 billion charge related to the formation of a collaboration with Eisai Co., Ltd. (Eisai).
(3) Represents separation and other related costs associated with restructuring activities under the company's formal restructuring programs.
(4) The effective income tax rates for the third quarter and the first nine months of 2019 include the unfavorable impact of a charge for the acquisition of Peloton for which no tax benefit was recognized and the favorable impact of product mix. The effective income tax rate for the first nine months of 2019 reflects a net tax benefit of $360 million related to the settlement of certain federal income tax matters. The effective income tax rates for the third quarter and first nine months of 2018 include the unfavorable impact of a charge related to the termination of a collaboration agreement with Samsung for which no tax benefit was recognized. The effective income tax rate for the first nine months of 2018 reflects the unfavorable impact of a charge related to the formation of a collaboration with Eisai for which no tax benefit was recognized.
MERCK & CO., INC.
GAAP TO NON-GAAP RECONCILIATION
THIRD QUARTER 2019