Merck & Co., Inc. — Q2 2013 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2013; filed August 7, 2013. Merck reports pharmaceutical, animal health, consumer care and alliance operations. Amounts below are in U.S. dollars; financial statements are unaudited.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Sales | $11.01B | $12.31B | $21.68B | $24.04B |
| Net income attributable to Merck | $906M | $1.79B | $2.50B | $3.53B |
| Diluted EPS | $0.30 | $0.58 | $0.82 | $1.15 |
| Gross margin | 61.1% | 66.6% | 62.0% | 66.1% |
| Dividends declared per share | $0.43 | $0.42 | $0.86 | $0.84 |
For the first six months, operating cash flow was $4.68B, capital expenditures $764M, cash used in investing $2.29B and cash used in financing $451M. Cash and cash equivalents were $15.09B at June 30. Cash and investments totaled $26.65B, including $8.56B of long-term investments. Working capital was $18.59B.
Debt carrying value, including current maturities, was approximately $28.11B ($5.58B current and $22.53B long-term), versus $20.57B at year-end 2012. The company issued $6.5B of senior unsecured notes in May. Its $4B credit facility, maturing in 2017, was undrawn. The company reported total debt to total liabilities and equity of 26.3%, up from 19.4% at December 31, 2012.
Material changes versus the prior comparable period
- Sales fell 11% in Q2 and 10% for the first six months. The principal driver was Singulair, whose U.S. exclusivity expired in August 2012 and whose exclusivity in major European markets expired in February 2013. Q2 Singulair sales declined 80% to $281M.
- Other notable sales declines included Maxalt, Cozaar/Hyzaar, Clarinex, Fosamax, Vytorin, PegIntron and Propecia. Growth in Gardasil, Janumet and Simponi partly offset declines.
- Pharmaceutical segment profits declined 18% in both the quarter and first half. Gross margin was pressured by lost exclusivity, generic competition and higher impairment charges, partly offset by manufacturing efficiencies.
- GAAP net income and diluted EPS declined substantially. Management’s non-GAAP diluted EPS was $0.84 for Q2 versus $1.05 and $1.69 for the first half versus $2.04; these measures exclude specified acquisition-related, restructuring and other items and are not GAAP measures.
- Operating cash flow declined to $4.68B from $5.07B for the first half, reflecting, among other factors, a $480M payment into the ENHANCE litigation settlement fund and slower collection of certain receivables.
Outlook, management commentary, risks and unusual items
- Management expected health-care cost containment and government pricing measures to continue weighing on revenue for the remainder of 2013. Foreign exchange reduced global sales by 3% in Q2 and 2% in the first half.
- No clear full-year revenue or earnings guidance is provided in the filing text. Merck expected 2013 restructuring costs of $500M–$700M. It projected Merger Restructuring Program annual savings of $3.5B–$4.0B by year-end 2013 and $4.0B–$4.6B upon completion; manufacturing-related actions were expected to continue beyond 2013.
- Q2 included a $330M impairment of the Saphris/Sycrest intangible asset. First-half research and development included $264M of in-process R&D impairments, including a $181M write-off after Merck discontinued preladenant development. The company cautioned that future impairments could be material.
- First-half results included an approximately $160M tax benefit from resolution of a legacy tax issue and approximately $140M of Venezuela-related exchange losses. The unusually low first-half effective tax rate of 8.7% also reflected other tax items described in the filing.
- Merck authorized up to $15B of additional share repurchases and entered a $5B accelerated repurchase agreement; final settlement was expected in Q4 2013. First-half treasury-stock purchases totaled $6.1B. The company said 80%–90% of cash and investments were held by foreign subsidiaries and could incur significant tax if repatriated as dividends.
- Pipeline and regulatory developments included FDA review of vorapaxar and two allergy immunotherapy applications; the FDA’s Breakthrough Therapy designation for investigational MK-3475; a Complete Response Letter for suvorexant, with a response planned for the first half of 2014; and an unresolved FDA review delay for sugammadex.
- Material legal exposures include Vioxx litigation, for which the company said it could not reasonably estimate possible loss or a range; Fosamax, NuvaRing, Januvia/Janumet and other product-liability claims; and patent, antitrust and environmental matters. A proposed Vioxx consumer settlement of up to $23M was subject to court approval. The filing says adverse Vioxx outcomes could materially affect financial position, liquidity or results.
Important facts for investors to verify
- Whether continued generic erosion of Singulair and other products is offset by growth in newer products and vaccines.
- Progress and outcomes of key FDA reviews, clinical programs and the planned suvorexant response.
- Cash generation, debt increase, offshore cash availability and the ultimate cost and share impact of the repurchase program.
- Final restructuring costs and realized savings, and whether further impairment charges arise.
- Developments in Vioxx and other litigation, including settlement approvals and any changes to reserves or insurance recoveries.