Merck & Co., Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed February 26, 2016. The filing also provides fourth-quarter results. Merck is a global health care company focused on prescription medicines, vaccines, biologic therapies and animal health products. Pharmaceutical is its only reportable segment.
Key financial results
| Metric | 2015 | 2014 |
|---|---|---|
| Sales | $39.498 billion | $42.237 billion |
| Income before taxes | $5.401 billion | $17.283 billion |
| Net income attributable to Merck | $4.442 billion | $11.920 billion |
| Diluted EPS | $1.56 | $4.07 |
| Non-GAAP diluted EPS | $3.59 | $3.49 |
| Gross margin | 62.2% | 60.3% |
| Cash from operating activities | $12.421 billion | $7.860 billion |
| Capital expenditures | $1.283 billion | $1.317 billion |
| Working capital | $10.561 billion | $14.208 billion |
| Long-term debt | $23.929 billion | $18.699 billion |
Sales fell 6%; foreign exchange was an unfavorable 6% factor, while acquisitions, divestitures and the end of the AstraZeneca LP relationship had a net unfavorable sales impact of about 3%. U.S. sales rose 3% to $17.5 billion; international sales fell 13% to $22.0 billion, including an 11% adverse currency effect. Cash and investments totaled $26.5 billion at year-end, including $13.4 billion of cash, cash equivalents and short-term investments. Approximately 80%–90% of cash and investments were held by foreign subsidiaries and could incur significant tax if repatriated.
Cash flow from operations improved from 2014, when it included approximately $5.0 billion of taxes paid on the Consumer Care divestiture. Total debt, including current debt, was approximately $26.5 billion at year-end, versus $21.4 billion in 2014. The company reported a $6.0 billion undrawn revolving credit facility. The filing does not provide a consolidated operating-margin figure.
Fourth-quarter results
Fourth-quarter 2015 sales were $10.215 billion versus $10.482 billion in fourth-quarter 2014. Diluted EPS was $0.35 versus $2.54. The comparison is heavily affected by 2014’s $11.2 billion Consumer Care divestiture gain; fourth-quarter 2015 also included the Vioxx shareholder settlement charge and Venezuela currency losses.
Material changes and business developments
- Pharmaceutical segment sales were $34.782 billion, down from $36.042 billion. Growth in Keytruda, Gardasil/Gardasil 9, diabetes products and some hospital products was offset by currency, patent/generic erosion and declines in several established products.
- Keytruda sales reached $566 million from $55 million in 2014, supported by expanded U.S. indications and launches. Gardasil/Gardasil 9 sales rose 10% to $1.908 billion. Januvia and Janumet combined sales were approximately $6.0 billion and essentially flat.
- Remicade sales fell 24% to $1.794 billion after losing European exclusivity; management expected the decline to accelerate in 2016. Cubicin contributed $1.127 billion after Merck acquired Cubist in January 2015; its U.S. composition patent expires in June 2016, and significant sales losses were expected thereafter.
- Merck acquired Cubist for total consideration of $8.3 billion, issued $8.0 billion of senior notes during 2015, and redeemed $1.9 billion of Cubist debt. It also acquired cCAM and entered a multi-year NGM research collaboration. The Consumer Care business had been sold in October 2014.
- Merck returned $9.3 billion to shareholders in 2015 through dividends and share repurchases, including $4.2 billion of repurchases. The quarterly dividend was raised to $0.46 per share beginning with the January 2016 payment.
Outlook, commentary, risks and unusual items
- Management emphasized pipeline advancement, external collaborations and disciplined cost management. Merck said it achieved its projected annual net savings of $2.0 billion from the 2013 restructuring program and $2.5 billion from the combined restructuring programs versus 2012 expense levels.
- No specific consolidated 2016 revenue or EPS guidance is provided in the supplied filing text. Management expected international austerity and pricing actions, including Japan’s 2016 biennial price reductions, to continue weighing on revenue. It anticipated Venezuela sales would be de minimis in 2016 after changing to the SIMADI exchange rate.
- Merck expected approximately $1.5 billion of additional pretax restructuring costs, primarily for facility rationalization, with actions expected to finish by the end of 2017.
- Notable 2015 items included an $876 million Venezuela foreign-exchange charge; a $680 million net pretax Vioxx shareholder class-action settlement charge, subject to final court approval; and gains on divestitures and the sale of migraine program rights. The 2014 comparison included the $11.2 billion Consumer Care divestiture gain and other transaction gains, while 2015 GAAP earnings also included acquisition-related amortization and restructuring costs.
- Key risks include patent expirations and generic or biosimilar competition, pricing and reimbursement pressure, currency volatility, product safety or regulatory setbacks, clinical-development failures, manufacturing and supply constraints, litigation, tax uncertainty, and cyber/privacy risks. Merck reported about 4,675 pending Fosamax product-liability cases and ongoing litigation and government inquiries; it stated that many legal outcomes could not yet be reasonably estimated.
- Odanacatib’s development program had observed numerical imbalances in stroke, atrial fibrillation and mortality; Merck planned further analyses before regulatory submissions. The FDA issued a Complete Response Letter for the V419 vaccine application. Merck also discontinued surotomycin following unfavorable efficacy data.
Most important facts for investors to verify
- Reconcile GAAP and non-GAAP earnings, including the 2014 divestiture gains and 2015 Venezuela and Vioxx charges.
- Assess the size and timing of revenue declines from Cubicin, Remicade, Zetia and other products facing patent loss or competition, against growth from Keytruda and newer launches.
- Review 2016 currency, pricing and international-market assumptions, including the expected effect of Venezuela’s exchange-rate change.
- Confirm the Vioxx settlement’s final approval, payment and insurance recoveries, and track other material litigation and tax contingencies.
- Evaluate debt maturities, cash location and repatriation costs, and the company’s ability to sustain dividends, buybacks and planned restructuring spending.
- Monitor pipeline trial outcomes, regulatory decisions and the assumptions underlying acquired intangible assets and potential impairment charges.
PwC issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting; management also concluded that disclosure controls and internal controls were effective as of year-end.