Merck & Co., Inc. — Q2 2023 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and six months ended June 30, 2023. Merck reports Pharmaceutical and Animal Health segments. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Sales | $15.035B | $14.593B | $29.522B | $30.494B |
| Net income (loss) attributable to Merck | ($5.975B) | $3.944B | ($3.154B) | $8.254B |
| Diluted EPS | ($2.35) | $1.55 | ($1.24) | $3.25 |
| Gross margin | 73.2% | 71.1% | 73.1% | 68.5% |
| Operating cash flow | Not presented separately | Not presented separately | $5.043B | $9.063B |
- Q2 sales rose 3% reported and 7% excluding foreign exchange; first-half sales fell 3% reported and were flat excluding foreign exchange.
- GAAP R&D expense was $13.321B in Q2 and $17.597B in the first half, driven principally by the $10.2B Prometheus acquisition charge. First-half R&D also included a $1.2B Imago acquisition charge.
- First-half non-GAAP diluted EPS was a loss of $0.65, compared with income of $4.01 in 2022. Non-GAAP results exclude, among other items, acquisition-related costs, restructuring, investment gains or losses, and the Zetia settlement charge.
- Cash and investments were $7.592B at June 30, down from $14.207B at year-end 2022. Working capital was $6.583B, versus $11.483B. Total debt was approximately $36.9B, including $2.839B of current debt; debt represented 35.3% of total liabilities and equity, up from 28.1% at year-end.
- First-half investing cash outflow was $13.802B, including $10.705B for Prometheus and $1.327B for Imago. Financing cash inflow was $1.704B, including proceeds from debt issuance; dividends paid were $3.738B.
Material changes and business developments
- Prometheus was acquired in June for total consideration of $11.0B. The asset acquisition added the investigational immune-disease candidate MK-7240; the $10.2B charge was expensed in R&D. Merck reported no future contingent payments for this acquisition.
- Merck acquired Imago in January for $1.35B, plus approximately $60M of transaction costs. Its lead candidate, bomedemstat, is in Phase 2 development.
- Keytruda sales increased 19% in Q2 to $6.271B and 20% in the first half to $12.065B. Gardasil/Gardasil 9 sales rose 47% in Q2 and 41% in the first half.
- Lagevrio sales fell to $203M in Q2 from $1.177B and to $595M in the first half from $4.424B. Januvia/Janumet combined sales declined 30% in Q2 and 29% in the first half.
Outlook, commentary, and risks
- Management expects full-year 2023 Lagevrio sales of approximately $1.0B. It expects Gardasil/Gardasil 9 growth to moderate in the second half, partly due to the timing of China shipments, and expects continued Pneumovax 23 declines.
- The restructuring program is expected to be substantially completed by year-end 2023. Merck expects approximately $550M of 2023 charges and approximately $900M of cumulative annual net cost savings by year-end; remaining cash outlays are expected largely by the end of 2025.
- Management cautions that global pricing and access pressures, competition, foreign exchange, and government cost-containment actions may weigh on sales and profits. Merck expects actions under the Inflation Reduction Act and potential future healthcare-cost measures to negatively affect results; it has challenged the Medicare drug-price negotiation program in court.
- Keytruda and other pipeline programs have multiple regulatory reviews underway. The filing gives product- and application-specific milestones, but does not provide overall company revenue or earnings guidance in the text provided.
- Notable contingencies include Gardasil-related product-liability cases; the Zetia antitrust settlements totaling $572.5M, recorded in Q1; and pending litigation and government inquiries. Merck says it cannot reasonably estimate possible losses for certain matters. The IRS is examining 2017–2018 tax returns, including the transition tax position.
- Merck detected nitrosamine NTTP in some sitagliptin product batches and says it has added quality controls and does not currently anticipate shortages, subject to regulatory approvals for submitted changes.
Most important facts for investors to verify
- How much of the reported GAAP loss reflects the Prometheus and Imago charges, and how non-GAAP adjustments affect comparisons and trends.
- Whether Keytruda and vaccine growth can offset continued declines in Lagevrio, Januvia/Janumet, and other products facing competition or loss of exclusivity.
- Cash generation, acquisition-related spending, debt levels, and the cost and maturity profile of the 2023 debt issuance.
- Progress and commercial prospects for MK-7240, bomedemstat, and other pipeline candidates, including regulatory outcomes and timing.
- Developments in IRA litigation, product and patent cases, the Zetia settlement approval process, tax examinations, and sitagliptin quality-control matters.