Merck & Co., Inc. — Q3 2022 Form 10-Q
Business context and period. This unaudited report covers the quarter and nine months ended September 30, 2022. Merck operates Pharmaceutical and Animal Health segments. Comparisons with 2021 are affected by the June 2021 Organon spin-off; its results are reported as discontinued operations through the spin-off date.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Sales | $14.959B | $13.154B | $45.453B | $35.183B |
| Net income attributable to Merck | $3.248B | $4.567B | $11.502B | $9.291B |
| Diluted EPS | $1.28 | $1.80 | $4.53 | $3.66 |
| Income from continuing operations before taxes | $3.583B | $5.266B | $12.931B | $9.970B |
| Gross margin | 73.7% | 73.8% | 70.2% | 72.3% |
| Cash from continuing operating activities | Not provided for quarter | $14.665B | $8.027B |
Sales increased 14% in Q3 and 29% year to date; excluding foreign exchange, growth was 18% and 32%, respectively. Keytruda, Gardasil/Gardasil 9, Lagevrio and alliance revenues contributed to growth. Q3 GAAP net income and diluted EPS declined, while nine-month net income rose; the prior-year nine-month total included $766 million of discontinued-operations income.
Non-GAAP diluted EPS was $1.85 in Q3 2022 versus $1.78 in Q3 2021, and $5.86 for the first nine months versus $3.56. Merck’s non-GAAP measure excludes specified items and is not a substitute for GAAP results.
Liquidity, debt and cash flow
- At September 30, cash and investments were $12.232B, versus $8.466B at December 31, 2021; working capital was $10.563B, versus $6.394B.
- Loans payable and current debt plus long-term debt totaled $30.418B, down from $33.102B at year-end 2021. Total debt was 28.4% of total liabilities and equity, versus 31.3%.
- Nine-month operating cash flow from continuing operations was $14.665B. Investing activities used $3.212B and financing activities used $7.565B. Capital expenditures were $3.239B and dividends paid were $5.262B.
- Merck repaid $2.25B of debt during the period and made no share repurchases. It had $5.0B remaining under its share-repurchase authorization and an undrawn $6.0B credit facility maturing in 2026.
Material changes and notable items
- Q3 R&D expense rose to $4.399B from $2.445B, including $887M of impairment charges related to ArQule assets, principally nemtabrutinib. The remaining nemtabrutinib IPR&D asset was $1.2B; further impairment could be material if development or projected cash flows weaken.
- Other expense was $429M in Q3, compared with $450M of other income a year earlier. For the first nine months, other expense was $1.576B versus $1.007B of income, primarily reflecting investment-security losses compared with prior-year gains.
- Gross margin eased, principally due to a greater contribution from lower-margin Lagevrio and third-party manufacturing sales, and higher intangible-asset amortization.
- Lagevrio generated $436M of Q3 sales and $4.859B year to date. Merck expected full-year 2022 Lagevrio sales of $5.2B–$5.4B.
- Merck recorded $559M of restructuring-program costs in the first nine months. It expected about $600M of charges for full-year 2022, with the program substantially complete by end-2023 and annual net savings of about $900M by then.
Outlook, commentary and risks
The filing provides a specific full-year sales range for Lagevrio and restructuring expectations, but no clear overall revenue or EPS guidance. Management cited pricing and market-access pressure, supply-chain volatility and the potential effects of the Russia–Ukraine war and related sanctions. The war’s reported financial impact was immaterial through Q3, but future effects were uncertain. Merck said COVID-19 disruptions continued to affect sales, although less than in the comparable 2021 periods.
Clinical and regulatory outcomes remain significant uncertainties. The FDA issued a Complete Response Letter for gefapixant, with additional information expected in the first half of 2023. Several Phase 3 studies did not meet primary or dual primary endpoints, including studies of Keytruda in certain head-and-neck and prostate cancer settings and Keytruda plus Lenvima in first-line liver cancer. Merck also discontinued certain studies after interim analyses indicated lack of benefit or futility. Lagevrio’s preliminary UK PANORAMIC study analysis did not show a reduction in hospitalization or death, though the study reported faster self-reported recovery.
Legal matters include product-liability, antitrust and patent proceedings. Merck reported approximately 3,450 pending Fosamax cases and stated it could not estimate possible losses for certain litigation. It is challenging an HRSA position concerning its 340B program integrity initiative. Patent disputes and settlements may affect the timing of generic entry for products including Bridion and Januvia/Janumet. The company also disclosed an arbitration with Johnson & Johnson over COVID-19 vaccine manufacturing agreements, which it did not expect to materially affect results.
Important facts for investors to verify
- Whether Keytruda, Gardasil and other growth drivers can offset declining Januvia/Janumet, Pneumovax 23 and Isentress sales, and how the Lagevrio outlook develops.
- Progress and assumptions behind nemtabrutinib’s revised development timeline and impairment valuation.
- Whether pipeline setbacks, clinical-trial holds and regulatory reviews alter future commercialization prospects.
- Effects of pricing measures, patent expirations, litigation and generic competition on sales and margins.
- Future cash generation, collaboration milestone commitments, restructuring spending and delivery of the stated savings target.