The FINANCIAL — Merck, known as MSD outside the United States and Canada, on October 27 announced financial results for the third quarter of 2017.
“Our performance in the third quarter demonstrates the strength of our underlying business, with growth from key product launches, good global demand for vaccines, as well as strength from our Animal Health business,” said Kenneth C. Frazier, chairman and chief executive officer, Merck. “We will continue augmenting our pipeline through value-creating business development like our oncology collaboration with AstraZeneca to address unmet medical need and drive future growth.”
Worldwide sales were $10.3 billion for the third quarter of 2017, a decrease of 2 percent compared with the third quarter of 2016, including a 1 percent positive impact from foreign exchange.
Sales in the third quarter of 2017 were reduced by approximately $240 million due to a borrowing from the U.S. Centers for Disease Control and Prevention Pediatric Vaccine Stockpile of GARDASIL 9 (Human Papillomavirus 9-valent Vaccine, Recombinant), a vaccine to prevent certain cancers and other diseases caused by HPV, driven in part by the temporary production shutdown resulting from the cyber-attack, as well as overall higher demand than originally planned.
Additionally, as expected, revenue was unfavorably impacted by approximately $135 million from lost sales in certain markets related to the cyber-attack. Sales in the third quarter of 2017 compared with the third quarter of 2016 were also unfavorably impacted by approximately $150 million of additional sales in Japan in the third quarter of 2016 resulting from the timing of shipments. Sales in the third quarter of 2017 reflect incremental sales of approximately $130 million 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, according to Merck.
GAAP (generally accepted accounting principles) earnings (loss) per share assuming dilution (EPS) were $(0.02) for the third quarter of 2017, which reflects a $2.35 billion aggregate charge related to the formation of a strategic oncology collaboration with AstraZeneca. Non-GAAP EPS of $1.11 for the third quarter of 2017 excludes acquisition- and divestiture-related costs, restructuring costs, the charge related to the AstraZeneca collaboration referenced above and certain other items.
Pipeline Highlights
Merck expanded its focus in oncology by further advancing the development program for KEYTRUDA (pembrolizumab), an anti-PD-1 therapy, receiving key regulatory approvals and through business development transactions.
The U.S. Food and Drug Administration (FDA) approved KEYTRUDA under its Accelerated Approval program for the treatment of patients with recurrent locally advanced or metastatic gastric or gastroesophageal junction adenocarcinoma whose tumors express PD-L1 and who have already received two or more lines of chemotherapy.
The European Commission approved KEYTRUDA for the treatment of certain patients with locally advanced or metastatic urothelial carcinoma.
At the European Society for Medical Oncology 2017 Congress, data were presented from studies evaluating the use of KEYTRUDA as a monotherapy and combination therapy in 12 cancers.
Merck is amending the KEYNOTE-189 study to include overall survival as a co-primary endpoint. The updated completion date is Feb. 2019 and there will be opportunities for the company to conduct interim analyses. KEYNOTE-189 is a Phase 3 study of platinum-pemetrexed chemotherapy with or without KEYTRUDA in patients with first line metastatic non-squamous non-small cell lung cancer (NSCLC).
Merck entered into an oncology collaboration with AstraZeneca to co-develop and co-commercialize AstraZeneca’s Lynparza (olaparib), a PARP inhibitor, and investigational medicine selumetinib, a MEK inhibitor, as monotherapy and in combination treatments for multiple cancer types.
The FDA approved Lynparza for new and additional uses in ovarian cancer, including as a maintenance treatment for recurrent epithelial ovarian, fallopian tube or primary peritoneal adult cancer patients who are in response to platinum-based chemotherapy, regardless of BRCA status, and in tablets for the use in patients with deleterious or suspected deleterious germline BRCA-mutated advanced ovarian cancer, who have been treated with three or more prior lines of chemotherapy.
The FDA accepted for review the supplemental New Drug Application (NDA) for the use of Lynparza tablets 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. The FDA granted Priority Review with a PDUFA action date in the first quarter of 2018. A NDA was also submitted to Japan’s Pharmaceuticals and Medical Devices Agency.
Merck acquired Rigontec, a pioneer in accessing the retinoic acid-inducible gene I (RIG-I) pathway, part of the innate immune system, as a novel and distinct approach in cancer immunotherapy to induce both immediate and long-term anti-tumor immunity. Rigontec’s lead candidate, RGT100, is currently in Phase I development evaluating treatment in patients with various tumors. The acquisition closed in October.
Merck presented results at the European Research Organization on Genital Infection and Neoplasia Congress from the final analyses of the pivotal Phase 3 efficacy, immunogenicity and safety clinical trial for GARDASIL 9 showing sustained efficacy for up to six years in the per protocol population.
Merck presented data at ID Week 2017 from the pivotal Phase 3 clinical study of letermovir, an investigational antiviral medicine for prophylaxis of cytomegalovirus (CMV) infection or disease in adult CMV-seropositive recipients of an allogeneic hematopoietic stem cell transplant. Data were also presented from the Phase 1 trial for V160, an investigational vaccine for human CMV, evaluating safety, tolerability and immunogenicity in healthy adults.
Merck announced it will not submit applications for regulatory approval for anacetrapib, the investigational cholesteryl ester transfer protein inhibitor, following a thorough review of the clinical profile of anacetrapib, including discussions with external experts.
Merck announced the strategic decision to discontinue the development of the investigational combination regimens MK-3682B (grazoprevir/ruzasvir/uprifosbuvir) and MK-3682C (ruzasvir/uprifosbuvir) for the treatment of chronic hepatitis C virus (HCV) infection. This decision was made based on a review of available Phase 2 efficacy data and in consideration of the evolving marketplace and the growing number of treatment options available for patients with chronic HCV infection, including ZEPATIER (elbasvir and grazoprevir).
Pharmaceutical Revenue
Third-quarter pharmaceutical sales decreased 3 percent to $9.2 billion, including a 1 percent positive impact from foreign exchange. In addition to the factors mentioned in the Financial Summary above, sales in the third quarter of 2017 reflect the loss of market exclusivity for several products, as well as lower sales of JANUVIA (sitagliptin) and JANUMET (sitagliptin and metformin HCl), medicines that help lower blood sugar in adults with type 2 diabetes. These declines were partially offset by significant growth in KEYTRUDA and from other product launches, as well as from growth in certain in-line brands.
The pharmaceutical sales decline was largely driven by 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, and the ongoing impacts of generic competition for CUBICIN (daptomycin for injection), an I.V. antibiotic, and biosimilar competition for REMICADE (infliximab), a treatment for inflammatory diseases, in the company’s marketing territories in Europe. In the aggregate, sales of these products declined approximately $800 million during the third quarter of 2017 compared to the third quarter of 2016.
Additionally, the decline reflects lower 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, largely attributable to lower sales in the United States as described previously, partially offset by growth in Europe due to the termination of the SPMSD vaccines joint venture noted above, and growth in Asia Pacific reflecting strong demand.
The decrease in the diabetes franchise of JANUVIA and JANUMET was primarily due to pricing pressure partially offset by continued volume growth globally.
Higher sales of KEYTRUDA reflect the company’s continued launch with new indications globally. Strong momentum from the treatment of patients with NSCLC contributed significantly to KEYTRUDA’s overall growth, as KEYTRUDA is the only anti-PD-1 approved in the first-line setting.
Growth in ZEPATIER is due to ongoing launches globally. The company anticipates that future sales of ZEPATIER will be unfavorably affected by increasing competition and declining patient volumes.
Additionally, 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, generated sales of $185 million in the quarter driven largely by strong growth in the United States.
Growth in PNEUMOVAX 23 (pneumococcal vaccine polyvalent), a vaccine to help prevent pneumococcal disease, was largely due to higher demand and pricing in the United States.
Animal Health Revenue
Animal Health sales totaled $1.0 billion for the third quarter of 2017, an increase of 16 percent compared with the third quarter of 2016, including a 2 percent positive impact from foreign exchange. Growth 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, including the positive impact of the Vallée S.A. acquisition which closed in March, swine products and poultry products all contributed to growth.
GAAP Expense, EPS and Related Information
On a GAAP basis, the gross margin was 68.3 percent for the third quarter of 2017 compared to 67.6 percent for the third quarter of 2016. The increase in gross margin for the third quarter of 2017 was primarily driven by the favorable effects of product mix partially offset by costs related to the cyber-attack.
Marketing and administrative expenses were $2.4 billion in the third quarter of 2017, essentially flat as compared to the third quarter of 2016. Lower acquisition- and divestiture-related costs were offset by 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 expenses related to product launches and remediation costs related to the cyber-attack.
Research and development (R&D) expenses were $4.4 billion in the third quarter of 2017 compared with $1.7 billion in the third quarter of 2016. The increase primarily reflects a $2.35 billion aggregate charge related to the formation of the collaboration with AstraZeneca, higher in-process research and development (IPR&D) impairment charges driven by a $240 million charge resulting from the decision to discontinue the development of investigational HCV combination regimens MK-3682B and MK-3682C noted above, and increased investment in early drug development.
The GAAP effective income tax rate of 125.5 percent for the third quarter of 2017 reflects the unfavorable impact of a $2.35 billion aggregate charge related to the formation of the AstraZeneca collaboration 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 $(0.02) for the third quarter of 2017 compared with $0.78 for the third quarter of 2016.
Non-GAAP Expense, EPS and Related Information
The non-GAAP gross margin was 76.0 percent for the third quarter of 2017 compared to 75.3 percent for the third quarter of 2016. The increase in non-GAAP gross margin was largely driven by the favorable effects of product mix partially offset by costs related to the cyber-attack.
Non-GAAP marketing and administrative expenses were $2.4 billion in the third quarter of 2017, an increase of 1 percent compared to the third quarter of 2016. The increase in non-GAAP marketing and administrative expenses was driven primarily by 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 expenses related to product launches and remediation costs related to the cyber-attack.
Non-GAAP R&D expenses were $1.8 billion in the third quarter of 2017, an 8 percent increase compared to the third quarter of 2016. The increase reflects increased investment in early drug development.
The non-GAAP effective income tax rate was 18.7 percent compared to 23.8 percent in the third quarter of 2016.
Non-GAAP EPS was $1.11 for the third quarter of 2017 compared with $1.07 for the third quarter of 2016.
Financial Outlook
Merck has narrowed and raised its full-year 2017 GAAP EPS range to be between $1.78 and $1.84. Merck narrowed and raised its full-year 2017 non-GAAP EPS range to be between $3.91 and $3.97, including a less than 1 percent negative impact from foreign exchange at current exchange rates. The non-GAAP range excludes acquisition- and divestiture-related costs, costs related to restructuring programs, a charge related to the formation of the collaboration with AstraZeneca and certain other items.
Merck has narrowed and raised its full-year 2017 revenue range to be between $40.0 billion and $40.5 billion, including a less than 1 percent negative impact from foreign exchange at current exchange rates.
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