Merck & Co., Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unless otherwise noted, amounts are U.S. dollars. Comparisons are with Q1 2020; balance-sheet comparisons are with December 31, 2020.
Financial performance
- Sales: $12.08 billion, essentially unchanged from $12.06 billion. Pharmaceutical segment sales were $10.68 billion, up slightly; Animal Health sales were $1.42 billion, up 17%.
- Profit and EPS: Net income attributable to Merck was $3.18 billion versus $3.22 billion. Diluted EPS was $1.25 versus $1.26. GAAP income before taxes fell to $3.46 billion from $3.84 billion.
- Margins and costs: Gross margin declined to 69.6% from 72.5%. Cost of sales rose 11% to $3.67 billion; R&D rose 12% to $2.47 billion; SG&A rose 3% to $2.63 billion. Restructuring costs were $298 million versus $72 million.
- Other income and taxes: Other income, net, was $448 million versus $71 million of expense, primarily reflecting equity-investment gains, including the Preventice transaction. The effective tax rate was 8.0% versus 16.1%; Q1 2021 included a $237 million net tax benefit from resolution of federal tax matters.
- Cash flow: Operating cash flow was $1.79 billion, up from $707 million. Investing activities used $738 million; financing activities used $2.10 billion. Capital expenditures were $1.13 billion, and dividends paid were $1.65 billion.
- Liquidity and debt: Cash and cash equivalents were $6.98 billion; cash and investments totaled $7.53 billion. Working capital was $548 million. Current liabilities were $26.36 billion and current assets $26.91 billion. Total debt, including current maturities, was approximately $31.25 billion, down from $31.79 billion at year-end. The company also reported an undrawn $6.0 billion credit facility maturing in 2024.
Changes and business drivers
- Keytruda sales increased 19% to $3.90 billion; Lynparza alliance revenue increased 57% to $228 million. These gains were offset by declines in several vaccines, including Gardasil/Gardasil 9, Pneumovax 23, RotaTeq and Vaqta, as well as pressure from generic and biosimilar competition.
- COVID-19 disruptions reduced Q1 Pharmaceutical sales by an estimated $600 million; the impact on Animal Health was immaterial. The company cited reduced healthcare-provider access and fewer visits, particularly affecting physician-administered products and vaccines.
- Foreign-exchange movements contributed to reported international results; sales excluding foreign exchange declined 1% worldwide.
- Merck continued its planned spin-off of women’s health, biosimilars and established brands into Organon, then expected on June 2, 2021, subject to conditions. After the spin-off, those historical results were expected to be reported as discontinued operations.
Outlook, commentary and notable items
- For full-year 2021, Merck assumed a net unfavorable COVID-19 sales impact of approximately 3%, all in Pharmaceuticals, and expected a negligible net effect on operating expenses. Management expected pandemic-related effects to persist, particularly in the first half of 2021.
- The restructuring program was expected to generate approximately $900 million of annual net cost savings by the end of 2023. Merck estimated approximately $700 million of 2021 charges and approximately $3.0 billion of cumulative pretax program costs, with substantial completion expected by year-end 2023.
- Merck discontinued development of COVID-19 candidate MK-7110 and recorded a $170 million Q1 cost-of-sales charge for write-offs and purchase commitments. Development of molnupiravir was to proceed to Phase 3 in outpatients, but not hospitalized patients.
- Organon-related costs included $208 million of Q1 SG&A expense. Subsequent to quarter-end, Organon-related financing was announced; the filing described expected proceeds and debt assumption in connection with the planned spin-off, not as quarter-end Merck liquidity.
- Material development and regulatory uncertainties included an FDA complete response letter for Keytruda in high-risk early-stage triple-negative breast cancer, pending product reviews and confirmatory trials, and litigation over product liability, patents and Zetia antitrust claims. Merck said it could not reasonably estimate possible losses for certain litigation matters.
- Other notable events included the April 2021 acquisition of Pandion for approximately $1.85 billion and the March collaboration with Gilead on investigational long-acting HIV treatments. These occurred or were announced after the reporting date as described in the filing.
Most important facts for investors to verify
- Whether the Organon spin-off completed as planned and how its separation affects Merck’s continuing sales, earnings, debt and cash flows.
- Whether COVID-19 access and vaccine-demand effects tracked management’s approximately 3% full-year sales-impact assumption.
- Keytruda growth, vaccine recovery, and the pace of generic or biosimilar erosion, including Januvia/Janumet exclusivity risks.
- Whether restructuring charges, timing and projected savings remain consistent with management’s estimates.
- The sustainability of reported earnings given the Q1 equity-investment gains and tax benefit, and the effect of acquired-intangible amortization and discontinued COVID-19 programs.
- Developments in significant litigation, regulatory reviews and clinical trials, including any resulting costs, approval delays or changes to product expectations.