Merck posts mixed fourth-quarter results

Merck posts mixed fourth-quarter results

Merck posts mixed fourth-quarter results

The FINANCIAL -- Merck known as MSD outside the United States and Canada, on February 2 announced financial results for the fourth quarter and full year of 2017.

“Our 2017 results reflect the underlying strength of our business and our ability to grow, despite significant headwinds,” said Kenneth C. Frazier, chairman and chief executive officer, Merck. “We enter 2018 with strong operating momentum, based on our key pillars of growth that will enable us to deliver on our mission of improving patients’ lives.”

Worldwide sales were $10.4 billion for the fourth quarter of 2017, an increase of 3 percent compared with the fourth quarter of 2016, including a 1 percent positive impact from foreign exchange. Full-year 2017 worldwide sales were $40.1 billion, an increase of 1 percent compared with the full year of 2016.

Sales in the fourth quarter and full year of 2017 reflect incremental sales of approximately $140 million and $400 million, respectively, due to the recording of vaccine sales from 19 European countries that were part of the Sanofi Pasteur MSD (SPMSD) vaccines joint venture, which was terminated on Dec. 31, 2016.

In addition, sales in the fourth quarter of 2017 include approximately $115 million for the partial replenishment of doses of GARDASIL 9 (Human Papillomavirus 9-valent Vaccine, Recombinant), a vaccine to prevent certain cancers and other diseases caused by HPV, that were borrowed from the U.S. Centers for Disease Control and Prevention (CDC) Pediatric Vaccine Stockpile in the third quarter. The effect of the borrowing and subsequent partial replenishment resulted in a net reduction in sales of $125 million for the full year of 2017, according to Merck.

Sales in the fourth quarter of 2017 compared with the fourth quarter of 2016 also reflect a favorable impact of approximately $150 million due to the timing of shipments in Japan in the prior year.

As expected, revenue in the fourth quarter and full year of 2017 was unfavorably affected by approximately $125 million and $260 million, respectively, from lost sales in certain markets related to the cyber-attack that occurred in June.

GAAP (generally accepted accounting principles) earnings (loss) per share assuming dilution (EPS) were $(0.32) for the fourth quarter and $0.93 for the full year of 2017, which reflect the impact of recently enacted U.S. tax legislation and for the full year also reflect a charge related to the formation of a strategic oncology collaboration with AstraZeneca. Non-GAAP EPS of $0.98 for the fourth quarter and $3.98 for the full year of 2017 excludes acquisition- and divestiture-related costs, restructuring costs, a $2.6 billion provisional charge related to the U.S. tax legislation and certain other items. Non-GAAP EPS for the full year of 2017 also excludes a $2.35 billion aggregate charge related to the formation of the collaboration with AstraZeneca.

Pipeline Highlights

Merck expanded its focus in oncology by further advancing the development program for KEYTRUDA (pembrolizumab), an anti-PD-1 therapy, and Lynparza (olaparib), a PARP inhibitor co-developed and co-commercialized with AstraZeneca, and receiving key regulatory approvals.

Merck announced the pivotal Phase 3 KEYNOTE-189 trial investigating KEYTRUDA in combination with pemetrexed (Alimta) and cisplatin or carboplatin, for the first-line treatment of patients with metastatic non-squamous non-small cell lung cancer (NSCLC), met its dual primary endpoints of overall survival (OS) and progression-free survival (PFS). Based on an interim analysis conducted by the independent Data Monitoring Committee, treatment with KEYTRUDA in combination with pemetrexed plus platinum chemotherapy resulted in significantly longer OS and PFS than pemetrexed plus platinum chemotherapy alone. Results from the trial will be presented at an upcoming medical meeting and submitted to regulatory authorities. KEYTRUDA, in combination with pemetrexed and platinum chemotherapy, is the first immuno-oncology combination to show improved OS for the first-line treatment of patients with metastatic non-squamous NSCLC.

The Japanese Ministry of Health, Labour and Welfare approved KEYTRUDA for the treatment of patients with radically unresectable urothelial carcinoma who progressed after cancer chemotherapy.

The company announced the pivotal Phase 3 KEYNOTE-061 trial investigating KEYTRUDA as a second-line treatment for patients with advanced gastric or gastroesophageal junction adenocarcinoma did not meet its primary endpoint of overall survival in patients whose tumors expressed PD-L1.

The company and The European Organisation for Research and Treatment of Cancer (EORTC) announced the Phase 3 EORTC1325/KEYNOTE-054 trial investigating KEYTRUDA as monotherapy for surgically resected high-risk melanoma met the primary endpoint of recurrence-free survival and, based on an interim analysis and following review by the Independent Data Monitoring Committee, resulted in significantly longer recurrence-free survival than placebo.

The U.S. Food and Drug Administration (FDA) accepted for review the supplemental Biologics License Application (sBLA) for KEYTRUDA for the treatment of adult and pediatric patients with refractory primary mediastinal B-cell lymphoma, or who have relapsed after two or more prior lines of therapy. The FDA granted Priority Review status with a PDUFA date of April 3, 2018, and previously granted Breakthrough Therapy Designation to KEYTRUDA in January 2017 for this indication.

The FDA granted Breakthrough Therapy Designation for KEYTRUDA in combination with Eisai's multiple receptor tyrosine kinase inhibitor Lenvima (lenvatinib) for the potential treatment of patients with advanced and/or metastatic renal cell carcinoma, which is being jointly developed as part of a collaboration between Merck and Esai. This marks the 12th Breakthrough Therapy Designation granted to KEYTRUDA.

The FDA approved Lynparza for use in patients with germline BRCA-mutated, HER2-negative metastatic breast cancer who have been previously treated with chemotherapy either in the neoadjuvant, adjuvant or metastatic settings. Lynparza is the first PARP inhibitor approved for breast cancer. A supplemental New Drug Application (NDA) was submitted to Japan’s Pharmaceuticals and Medical Devices Agency for the same use.

The Japanese Ministry of Health, Labour and Welfare approved Lynparza for use as a maintenance therapy for patients with platinum-sensitive relapsed ovarian cancer, regardless of their BRCA mutation status, who responded to their last platinum-based chemotherapy. Lynparza is the first PARP inhibitor approved in Japan.

Merck and Pfizer announced that the FDA approved STEGLATRO (ertugliflozin) tablets, an oral sodium-glucose cotransporter 2 (SGLT2) inhibitor, the fixed-dose combination STEGLUJAN (ertugliflozin and sitagliptin) and the fixed-dose combination SEGLUROMET (ertugliflozin and metformin hydrochloride) to help improve glycemic control in adults with type 2 diabetes. Additionally, the Committee for Medicinal Products for Human Use of the European Medicines Agency adopted a positive opinion for these medicines.

The FDA and European Commission approved PREVYMIS (letermovir), once-daily tablets for oral use and injection for intravenous infusion, indicated for prevention of cytomegalovirus (CMV) infection and disease in adult CMV-seropositive recipients of an allogeneic hematopoietic stem cell transplant.

The FDA accepted for review two NDAs for doravirine, the company’s investigational non-nucleoside reverse transcriptase inhibitor, for the treatment of HIV-1 infection in adults. The NDAs include data for doravirine as a once-daily tablet for use in combination with other antiretroviral agents and for use of doravirine with lamivudine and tenofovir disoproxil fumarate in a once-daily fixed-dose combination single tablet as a complete regimen. The PDUFA date for both applications is Oct. 23, 2018.

The FDA approved ISENTRESS (raltegravir), the company’s integrase inhibitor, for use in combination with other antiretroviral agents for the treatment of HIV-1 in newborn patients from birth to four weeks of age weighing at least 2 kg.

Pharmaceutical Revenue

Fourth-quarter pharmaceutical sales increased 4 percent to $9.3 billion, including a 1 percent positive impact from foreign exchange. The increase was driven primarily by significant growth of KEYTRUDA, reflecting the company’s continued launches with new indications globally. Strong momentum for the treatment of patients with NSCLC contributed significantly to KEYTRUDA’s overall growth, as it is the only anti-PD-1 approved in the first-line setting.

Sales of GARDASIL [Human Papillomavirus Quadrivalent (Types 6, 11, 16 and 18) Vaccine, Recombinant] and GARDASIL 9, vaccines to prevent certain cancers and other diseases caused by HPV, increased in the fourth quarter driven primarily by the commercial launch in China and growth in Europe due to the termination of the SPMSD joint venture noted above, partially offset by lower sales in the United States. The decline in U.S. sales reflects the timing of public sector purchasing that was largely offset by the partial replenishment of borrowed doses into the CDC stockpile noted above.

The ongoing launch of 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, also contributed to growth in the quarter driven by strong global demand.

Pharmaceutical sales also reflect higher sales of ZEPATIER (elbasvir and grazoprevir), a medicine for the treatment of chronic hepatitis C virus genotypes 1 or 4 infection, due to ongoing launches across Europe and Asia Pacific. The company anticipates that future sales of ZEPATIER will be unfavorably affected by increasing competition and declining patient volumes.

Performance of JANUVIA (sitagliptin) and JANUMET (sitagliptin and metformin HCI), medicines that help lower blood sugar in adults with type 2 diabetes, reflects pricing pressure offset by continued volume growth globally.

Sales growth for the quarter was partially offset by impacts from the loss of U.S. market exclusivity for ZETIA (ezetimibe) in late 2016 and VYTORIN (ezetimibe/simvastatin) in April 2017, medicines for lowering LDL cholesterol; biosimilar competition for REMICADE (infliximab), a treatment for inflammatory diseases, in the company’s marketing territories in Europe; and the 2017 loss of exclusivity for CANCIDAS (caspofungin acetate for injection), an antifungal, in Europe. In the aggregate, sales of these products declined approximately $500 million during the fourth quarter of 2017 compared to the fourth quarter of 2016.

Sales of ZOSTAVAX (zoster vaccine live), a vaccine for the prevention of herpes zoster, declined significantly in the quarter, primarily due to the approval of a competitor product that received a preferential recommendation from the U.S. Advisory Committee on Immunization Practices on Oct. 25, 2017. The company anticipates that future sales of ZOSTAVAX will be unfavorably affected by this competition.

Full-year 2017 pharmaceutical sales increased 1 percent to $35.4 billion. Growth was driven by the ongoing global launches of KEYTRUDA, ZEPATIER and BRIDION. In the aggregate, sales of these products increased $3.7 billion in 2017 compared to 2016. These increases were mostly offset by sales declines of the products affected by loss of exclusivity as described above for the quarter, as well as CUBICIN (daptomycin for injection), an I.V. antibiotic, SINGULAIR (montelukast sodium), a once-a-day oral medicine for the chronic treatment of asthma and the relief of symptoms of allergic rhinitis, NASONEX (mometasone furoate monohydrate), an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms, and other products which together totaled $3.3 billion. Additionally, sales growth was offset by declines in the diabetes franchise due to pricing pressure partially offset by continued volume growth globally.

Animal Health Revenue

Animal Health sales totaled $981 million for the fourth quarter of 2017, an increase of 11 percent compared with the fourth quarter of 2016, including a 3 percent positive impact from foreign exchange. Worldwide sales for the full year of 2017 were $3.9 billion, also an increase of 11 percent. Growth in both periods was driven by sales increases in companion animal products, primarily the BRAVECTO (fluralaner) line of products that kill fleas and ticks in dogs and cats for up to 12 weeks, and companion animal vaccines. Additionally, higher sales of ruminants products, swine products and poultry products all contributed to growth.

GAAP Expense, EPS and Related Information

Gross margin was 67.4 percent for the fourth quarter of 2017 compared to 67.1 percent for the fourth quarter of 2016. The gross margin was 68.2 percent for the full year of 2017 compared to 65.1 percent for the full year of 2016. The increase in gross margin for the full year of 2017 was primarily driven by lower acquisition- and divestiture-related costs and restructuring costs which negatively affected gross margin by 8.2 percentage points in the full year of 2017 compared with 10.6 percentage points for the full year of 2016. In addition, gross margin was impacted by the favorable effects of product mix partially offset by costs related to the cyber-attack.

Marketing and administrative expenses were $2.6 billion in the fourth quarter of 2017, a 1 percent decrease compared to the fourth quarter of 2016. The decrease primarily reflects lower acquisition- and divestiture-related costs. Full-year 2017 marketing and administrative expenses were $9.8 billion, a 1 percent increase compared to the full year of 2016. The increase reflects higher administrative costs, including costs associated with the company now operating its European vaccines business in the countries that were previously part of the SPMSD vaccines joint venture, remediation costs related to the cyber-attack and higher promotion expenses related to product launches, partially offset by lower restructuring costs and acquisition- and divestiture-related costs.

Research and development (R&D) expenses were $2.1 billion in the fourth quarter of 2017 compared with $4.7 billion in the fourth quarter of 2016. The decline was driven primarily by lower in-process research and development (IPR&D) impairment charges, partially offset by higher expenses related to business development transactions, clinical development spending and investment in early drug development. R&D expenses were $10.0 billion for the full year of 2017, a 1 percent decrease compared to the full year of 2016. The decline reflects lower IPR&D impairment charges and restructuring costs. These were offset by a $2.35 billion aggregate charge recorded in 2017 related to the formation of the collaboration with AstraZeneca, as well as a reduction in prior year expenses related to a decrease in the estimated fair value measurement of liabilities for contingent consideration and higher clinical development spending.

Other (income) expense, net, was $19 million of income in the fourth quarter of 2017 compared to $631 million of expense in the fourth quarter of 2016 and was $12 million of expense for the full year of 2017 compared to $720 million of expense for the full year of 2016. Other (income) expense, net, in 2017 reflects the favorable impacts of foreign exchange and gains on sales of securities, partially offset by a loss on the extinguishment of debt. Other (income) expense, net, for the fourth quarter and full year of 2016 includes a $625 million charge to settle worldwide KEYTRUDA patent litigation.

The effective income tax rates of 141.0 percent for the fourth quarter and 61.6 percent for full year of 2017 include the unfavorable impact of a $2.6 billion provisional charge related to U.S. tax legislation. The provisional tax charge includes a one-time repatriation transition tax of approximately $5.0 billion, which will be paid over eight years. The transition tax was partially offset by adjustments to deferred tax liabilities, including taxes previously provided on foreign earnings and remeasurement of net U.S. deferred tax liabilities. The provisional tax charge may change in 2018 based on further analysis and regulatory guidance. In addition, the effective income tax rate for the full year of 2017 reflects the unfavorable impact of a $2.35 billion aggregate charge related to the formation of the collaboration with AstraZeneca for which no tax benefit has been recognized, partially offset by the favorable impact of a net tax benefit of $234 million related to the settlement of certain federal income tax issues.

GAAP EPS was $(0.32) for the fourth quarter of 2017 compared with $(0.22) for the fourth quarter of 2016. GAAP EPS was $0.93 for the full year of 2017 compared with $1.41 for the full year of 2016.

Non-GAAP Expense, EPS and Related Information

The non-GAAP gross margin was 74.6 percent for the fourth quarter of 2017, compared to 74.8 percent for the fourth quarter of 2016. The non-GAAP gross margin was 76.4 percent for the full year of 2017 compared to 75.7 percent for the full year of 2016. The increase in non-GAAP gross margin for the full year of 2017 reflects the favorable effects of product mix partially offset by costs related to the cyber-attack.

Non-GAAP marketing and administrative expenses were $2.6 billion in the fourth quarter of 2017, comparable to the fourth quarter of 2016. Non-GAAP marketing and administrative expenses were $9.8 billion for the full year of 2017, a 2 percent increase compared to the full year of 2016. The increase reflects higher administrative costs, including costs associated with the company now operating its European vaccines business in the countries that were previously part of the SPMSD vaccines joint venture, higher promotion costs related to product launches and remediation costs related to the cyber-attack.

Non-GAAP R&D expenses were $2.1 billion in the fourth quarter of 2017, an 18 percent increase compared to the fourth quarter of 2016. The increase reflects higher expenses related to business development transactions, clinical development spending and investment in early drug development. Non-GAAP R&D expenses were $7.3 billion for the full year of 2017, a 7 percent increase compared to the full year of 2016, reflecting increased clinical development spending.

Non-GAAP other (income) expense, net, was $13 million of income in the fourth quarter of 2017 compared to $32 million of expense in the fourth quarter of 2016. Non-GAAP other (income) expense, net, for the full year of 2017 was $9 million of expense compared to $115 million of expense for the full year of 2016. Non-GAAP other (income) expense, net, in 2017 reflects the favorable impact of foreign exchange and realized gains on sales of equity securities, partially offset by a loss on extinguishment of debt.

The non-GAAP effective income tax rate for the fourth quarter of 2017 was 15.3 percent compared with 23.3 percent for the fourth quarter of 2016 and was 19.1 percent for the full year of 2017 compared with 22.3 percent for the full year of 2016.

Non-GAAP EPS was $0.98 for the fourth quarter of 2017 compared with $0.89 for the fourth quarter of 2016. Non-GAAP EPS was $3.98 for the full year of 2017 compared with $3.78 for the full year of 2016.

Financial Outlook

At mid-January 2018 exchange rates, Merck anticipates full-year 2018 revenue to be between $41.2 billion and $42.7 billion, including an approximately 1 percent positive impact from foreign exchange.

Merck expects its full-year 2018 GAAP EPS to be between $2.97 and $3.12. Merck expects its full-year 2018 non-GAAP EPS to be between $4.08 and $4.23, including an approximately 1 percent negative impact from foreign exchange. The non-GAAP range excludes acquisition- and divestiture-related costs and costs related to restructuring programs.