Merck & Co., Inc. — 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020; filed February 25, 2021. This is an annual report, not a standalone fourth-quarter report. Amounts are in U.S. dollars unless noted.
Business context
Merck is a global health care company with two reportable segments: Pharmaceutical, including human medicines and vaccines, and Animal Health. It divested the remaining Healthcare Services businesses in the first quarter of 2020. Merck planned to spin off its women’s health, biosimilars and established brands businesses into Organon, with completion expected late in the second quarter of 2021, subject to conditions. The businesses planned for Organon generated $6.5 billion of 2020 sales.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change or context |
|---|---|---|---|
| Sales | $47.994 billion | $46.840 billion | Up 2% reported; up 4% excluding foreign exchange |
| Pharmaceutical sales | $43.021 billion | $41.751 billion | Principal source of company revenue |
| Animal Health sales | $4.703 billion | $4.393 billion | Up 7% reported |
| Gross margin | 67.7% | 69.9% | Down 2.2 percentage points |
| Income before taxes | $8.791 billion | $11.464 billion | Lower year over year |
| Net income attributable to Merck | $7.067 billion | $9.843 billion | Down 28% |
| Diluted GAAP EPS | $2.78 | $3.81 | Down 27% |
| Non-GAAP diluted EPS | $5.94 | $5.19 | Up 14%; excludes specified items |
| Operating cash flow | $10.253 billion | $13.440 billion | Declined, reflecting higher collaboration payments |
| Capital expenditures | $4.684 billion | $3.473 billion | Manufacturing capacity investment |
Research and development expense was $13.558 billion, up 37%, including acquisition and collaboration charges. Selling, general and administrative expense was $10.468 billion, down 1%. Cost of sales rose to $15.485 billion from $14.112 billion. Merck attributed the gross-margin decline principally to higher impairment charges, pricing pressure, COVID-19 vaccine program discontinuation costs and Zerbaxa inventory write-offs.
At year-end, cash and cash equivalents were $8.062 billion; current assets were $27.764 billion and current liabilities $27.327 billion, leaving working capital of $437 million versus $5.263 billion in 2019. Loans payable and current portion of long-term debt were $6.431 billion, and long-term debt was $25.360 billion. Merck reported a $6 billion undrawn credit facility maturing in 2024. Cash provided by operations was the company’s primary funding source.
Merck returned $7.5 billion to shareholders through dividends and share repurchases in 2020. It paid $6.215 billion in dividends and repurchased $1.281 billion of stock; repurchases were temporarily suspended in March 2020. The quarterly dividend was raised to $0.65 per share from $0.61.
Material changes and notable items
- Keytruda sales grew 30% to $14.380 billion, the main driver of sales growth. Alliance revenue from Lynparza rose 63% to $725 million and from Lenvima rose 44% to $580 million.
- Animal Health sales increased 7%, with growth in livestock and companion animals. The 2020 comparison also included an additional five months of Antelliq sales relative to 2019.
- Sales were pressured by COVID-19, generic competition, diabetes pricing pressure and virology competition. Januvia/Janumet sales declined 4%; NuvaRing sales declined 73%; Noxafil declined 50%; and Emend declined 63%.
- Merck estimated COVID-19 reduced 2020 sales by approximately $2.5 billion, including about $50 million in Animal Health. Lower promotional and other spending partly offset costs, benefiting 2020 operating expenses by approximately $600 million.
- Merck recorded a $1.6 billion impairment charge and $120 million of inventory write-offs related to Zerbaxa after a sterility issue led to a sales suspension and recall. The company did not expect the product to return to market before 2022.
- Major transactions included the $2.8 billion VelosBio acquisition, which generated a $2.7 billion R&D charge; the OncoImmune acquisition, with a $462 million R&D charge; and Seagen collaboration-related R&D charges of $826 million. Merck also invested $1 billion in Seagen shares.
Outlook, management commentary and risks
Merck assumed an approximately 2% adverse impact on 2021 revenue from COVID-19, entirely in Pharmaceutical, with residual effects expected particularly in the first half and on vaccines. It expected COVID-19-related antiviral development spending to create a net adverse impact on 2021 operating expenses. The filing text does not provide a clear full-year 2021 sales or EPS guidance figure.
The company expected its global restructuring program to be substantially complete by the end of 2023, with approximately $3.0 billion of cumulative pretax costs, about $700 million of charges in 2021 and approximately $900 million of annual net cost savings by the end of 2023. Merck planned to invest more than $20 billion in capital projects from 2020 through 2024.
Key risks include dependence on leading products and patent protection, generic and biosimilar competition, drug-pricing and reimbursement pressure, clinical and regulatory uncertainty, manufacturing and product-quality problems, foreign exchange exposure, cybersecurity, and the uncertain effects of the pandemic. Januvia and Janumet face U.S. loss of market exclusivity in 2023; the company anticipates substantial sales declines thereafter. A Medicare “most favored nation” pricing rule that included Keytruda was subject to litigation and preliminary injunction; Merck said it could not predict whether or when it would take effect.
The Organon spin-off could be delayed, fail to deliver expected benefits or be determined taxable, and could affect Merck’s stock price. The CEO transition was also announced: Kenneth Frazier planned to retire as CEO effective June 30, 2021, with Robert Davis elected to succeed him effective July 1, 2021.
Merck reported ongoing product-liability, antitrust, patent and governmental matters. It disclosed approximately 3,520 pending Fosamax cases and approximately 1,480 product users alleging Januvia/Janumet-related injuries. Merck stated that it could not reasonably estimate possible losses for certain litigation and that, in its view, resolution of the matters was unlikely to be material. It had no insurance for most product-liability risks. Environmental liabilities accrued were $67 million; management estimated reasonably possible additional expenditures would not exceed approximately $65 million in aggregate.
Most important facts for investors to verify
- Whether Keytruda and other growth products can sustain demand amid pricing pressure, competition and pandemic-related access effects.
- The underlying drivers of GAAP earnings and cash-flow declines, including acquisition charges, impairments, collaboration payments and working-capital changes; compare GAAP results with Merck’s non-GAAP measures.
- Debt maturities and liquidity needs, particularly $6.431 billion of current borrowings and debt due in 2021.
- Progress, costs, tax treatment and expected post-spin-off financial profile of Organon.
- Developments in the Zerbaxa recall, major litigation and government investigations, as well as the timing and financial effect of regulatory pricing actions.
- Execution of the restructuring plan and whether projected cost savings, pipeline progress and planned capital investment are achieved.