Merck & Co., Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed February 28, 2012. The filing is an annual report, not a standalone fourth-quarter filing. Fourth-quarter results are included in the supplementary data. Merck is a global health care company spanning prescription medicines, vaccines, animal health and consumer care. Pharmaceutical is its sole reportable segment. Comparisons with 2009 are affected by the November 2009 Schering-Plough merger; 2010 is the more comparable year.
Financial performance and liquidity
| Metric | 2011 | 2010 |
|---|---|---|
| Worldwide sales | $48.047 billion | $45.987 billion |
| Net income attributable to Merck | $6.272 billion | $861 million |
| Diluted EPS | $2.02 | $0.28 |
| Non-GAAP diluted EPS | $3.77 | $3.42 |
| Gross margin | 64.9% | 60.0% |
| Cash from operating activities | $12.383 billion | $10.822 billion |
| Capital expenditures | $1.723 billion | $1.678 billion |
| Working capital at year-end | $16.936 billion | $13.423 billion |
| Long-term debt at year-end | $15.525 billion | $15.482 billion |
- Sales grew 4%; foreign exchange contributed 2%. U.S. sales rose 1% and foreign sales 7%. Pharmaceutical segment sales increased to $41.289 billion from $39.267 billion.
- Key growth drivers included Januvia and Janumet, Singulair, Isentress and Gardasil; Victrelis launched during 2011. Cozaar/Hyzaar, Vytorin, Temodar and certain vaccines were among the products with lower sales.
- Gross margin improved with product mix, manufacturing efficiencies and foreign exchange, but remained affected by acquisition-related amortization and restructuring charges. GAAP results also reflect substantial unusual and acquisition-related items; 2011 non-GAAP EPS excludes specified costs and gains and is not a GAAP measure.
- Operating cash flow increased year over year. Cash and cash equivalents were $13.531 billion and short-term investments $1.441 billion at year-end. Total debt including current maturities was approximately $17.515 billion. Merck reported $18.4 billion of worldwide cash and investments, with most held by foreign subsidiaries and potentially subject to significant tax on repatriation.
- Fourth-quarter 2011 sales were $12.294 billion, net income attributable to Merck was $1.512 billion and diluted EPS was $0.49. In fourth-quarter 2010, sales were $12.094 billion, attributable net loss was $531 million and diluted loss per share was $0.17.
Material changes and unusual items
- Merck paid J&J $500 million and changed Remicade and Simponi distribution rights: from July 2011, Merck relinquished rights in specified territories, retained Europe, Russia and Turkey, and split profits in those territories equally with J&J.
- Research and development expense was $8.467 billion, including $587 million of in-process R&D impairment charges, versus $11.111 billion and $2.4 billion of such charges in 2010. The 2011 GAAP result also included $1.306 billion of restructuring costs and a favorable approximately $700 million tax benefit related to settlement of a federal tax audit.
- The merger restructuring program had generated approximately $2.9 billion in annual net savings since the merger by year-end 2011. Merck estimated cumulative pretax program costs of $5.8–$6.6 billion and annual savings of $3.5–$4.0 billion by the end of 2013, rising to $4.0–$4.6 billion upon completion.
- Merck sold its J&J-Merck Consumer Pharmaceuticals joint venture interest, recording a $136 million gain, and sold manufacturing assets, recording a $127 million gain. It acquired Inspire Pharmaceuticals for approximately $420 million.
- The quarterly dividend was increased from $0.38 to $0.42 per share for the first quarter of 2012. The 2011 dividend paid was $1.52 per share.
Outlook, risks and contingencies
- Management anticipated mid-single-digit pricing pressure across Europe in 2012 and further impact from Japan’s biennial price reductions. The filing provides no specific consolidated 2012 revenue or EPS guidance.
- Patent expirations are a major near-term risk: U.S. Singulair exclusivity was due to expire in August 2012, with Merck expecting to lose substantially all U.S. sales within two years; Maxalt U.S. exclusivity was due to expire in December 2012. Generic competition and pricing pressure could offset pipeline and emerging-market growth.
- U.S. health care reform reduced 2011 revenue through approximately $150 million of Medicare Part D coverage-gap discounts and $179 million of higher Medicaid rebates; Merck also recorded $162 million for the annual health care reform fee.
- The filing describes manufacturing constraints affecting certain vaccines and women’s health products, as well as delayed collection and credit risk in Europe. Receivables in Greece, Italy, Spain and Portugal totaled approximately $1.6 billion at year-end; about $400 million of total receivables was more than one year outstanding.
- Vioxx government resolution remained subject to court approval: Merck had agreed to civil payments of roughly two-thirds of its $950 million reserve and a fine of roughly one-third, alongside a misdemeanor plea. Remaining Vioxx litigation was not reasonably estimable by management. Other material areas to monitor include Fosamax, NuvaRing and Vytorin/Zetia litigation and patent disputes.
- Pipeline outcomes are uncertain. Vorapaxar’s TRA-2P trial showed reduced cardiovascular events but increased bleeding, including intracranial hemorrhage; the TRACER trial did not meet its primary endpoint. Pfizer patent litigation could delay approval of Merck’s ezetimibe/atorvastatin candidate.
Important facts for investors to verify
- Whether sales growth and operating cash generation can offset the expected Singulair and Maxalt generic erosion and continuing international price cuts.
- Whether planned restructuring savings are achieved on schedule and net of remaining cash costs.
- Progress and safety results for late-stage pipeline candidates, especially vorapaxar, suvorexant, Bridion, V503 and odanacatib, and the resolution of regulatory or patent hurdles.
- Final court approval and payment terms for the Vioxx government resolution, plus developments in other significant litigation and product-liability matters.
- Collections on European public-sector receivables, vaccine and women’s health manufacturing recovery, and the effect of foreign-held cash on usable liquidity.
- How much of reported GAAP earnings reflects recurring operations versus tax benefits, acquisition accounting, restructuring and other excluded items.