Merck & Co., Inc. — 2021 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2021; filed February 25, 2022. The filing reports full-year results and selected fourth-quarter data. Merck operates Pharmaceutical and Animal Health segments. Its June 2, 2021 spin-off of Organon is reflected as discontinued operations through the spin-off date; prior-period continuing operations were recast.
Financial performance
| Metric | 2021 | 2020 | Change / context |
|---|---|---|---|
| Sales | $48.704 billion | $41.518 billion | Up 17% reported, 16% excluding foreign exchange |
| GAAP net income from continuing operations attributable to Merck | $12.345 billion | $4.519 billion | Substantial increase |
| GAAP diluted EPS from continuing operations | $4.86 | $1.78 | Up from prior year |
| Non-GAAP net income attributable to Merck | $15.282 billion | $11.506 billion | Up 33% |
| Non-GAAP diluted EPS | $6.02 | $4.53 | Up 33% |
| Gross margin | 72.0% | 67.2% | Improved, reflecting lower impairments and amortization, favorable mix and lower inventory write-offs |
| Cash from continuing operating activities | $13.122 billion | $7.617 billion | Higher, primarily reflecting stronger operating performance |
| Capital expenditures | $4.448 billion | $4.429 billion | Approximately unchanged |
| Cash and cash equivalents | $8.096 billion | $8.050 billion | At year-end |
| Debt | $33.102 billion | $31.791 billion | Loans payable/current debt plus long-term debt at year-end |
| Working capital | $6.394 billion | $0.437 billion | Increase primarily related to lower short-term debt |
Calculated free cash flow, defined here as continuing operating cash flow less capital expenditures, was approximately $8.674 billion in 2021. Total GAAP net income attributable to Merck, including discontinued operations, was $13.049 billion, or $5.14 diluted EPS; 2020 was $7.067 billion, or $2.78. The 2021 effective tax rate on continuing operations was 11.0%, versus 22.9% in 2020, benefiting from income mix, foreign tax credits and tax settlements.
Fourth-quarter 2021 sales were $13.521 billion, compared with $10.948 billion in fourth-quarter 2020. Continuing-operations net income attributable to Merck was $3.820 billion, versus a $2.617 billion loss a year earlier; diluted continuing-operations EPS was $1.51, versus a loss of $1.03.
Business drivers and changes versus prior year
- Pharmaceutical sales were $42.754 billion, up from $36.610 billion; Animal Health sales were $5.568 billion, up from $4.703 billion.
- Keytruda sales rose 20% to $17.186 billion. Gardasil/Gardasil 9 sales rose 44% to $5.673 billion; Bridion rose 28% to $1.532 billion. Animal Health growth was led by companion-animal products and livestock products.
- Molnupiravir contributed $952 million in sales after emergency or conditional authorizations in several markets. It was not FDA-approved; U.S. availability was under EUA.
- Januvia/Janumet sales were nearly flat at $5.288 billion. Pneumovax 23 sales fell 18% to $893 million, and Isentress/Isentress HD sales fell 10% to $769 million.
- COVID-19 disruptions were estimated to reduce 2021 Pharmaceutical sales by approximately $1.3 billion, compared with an estimated $2.0 billion Pharmaceutical and $50 million Animal Health impact in 2020. Reduced disruption versus 2020 supported year-over-year growth.
- GAAP results were affected by significant items. Other income, including equity investment gains, was $1.341 billion in 2021; 2020 included $1.718 billion of intangible-asset impairment charges in cost of sales. The 2021 R&D expense included a $1.7 billion Pandion acquisition charge; cost of sales included a $207 million charge related to discontinued MK-7110 development. Merck also recorded a $275 million impairment of the nemtabrutinib in-process R&D asset.
Liquidity, capital allocation and outlook
- Merck issued $8.0 billion of senior unsecured notes in December 2021, with maturities from 2027 to 2061. A $6.0 billion revolving credit facility, maturing in June 2026, was undrawn. Management stated that cash, operating cash flow and borrowing capacity should meet foreseeable liquidity needs.
- Merck received a $9.0 billion cash distribution from Organon in connection with the spin-off. It returned $7.5 billion to shareholders in 2021 through dividends and share repurchases, including $840 million of repurchases. The quarterly dividend was raised to $0.69 per share.
- The company planned approximately $20 billion in capital projects for 2021–2025, including manufacturing capacity expansion. Its restructuring program was expected to be substantially complete by end-2023; management estimated approximately $400 million of 2022 charges and approximately $900 million of annual net savings by end-2023.
- The filing does not provide a clear numerical 2022 sales or earnings guidance figure in the supplied text. Management cited strong underlying global demand but expects continuing pricing and market-access pressure.
Risks, contingencies and notable developments
- Patent expirations and generic or biosimilar competition are important risks. Merck expects substantial Januvia/Janumet sales declines following loss of market exclusivity in the EU in 2022, China in 2022 and the U.S. in 2023; patent challenges and settlements may affect the timing and extent of competition.
- Keytruda is a major source of growth and cash generation, increasing the effect of competitive, safety, reimbursement, manufacturing or patent developments affecting that product. The company also faces drug-pricing initiatives, government cost controls, and concentrated payer and wholesaler bargaining power.
- Molnupiravir’s authorization is emergency-use or conditional rather than full FDA approval. The FDA placed clinical holds on islatravir programs after observations of decreases in lymphocyte and CD4+ T-cell counts. The FDA issued a January 2022 Complete Response Letter for gefapixant, requesting additional efficacy-measurement information.
- Merck and Eisai received a Complete Response Letter for a proposed first-line hepatocellular carcinoma indication for Keytruda plus Lenvima; the companies planned further clinical work. Two other Lenvima/Keytruda studies were stopped or closed to enrollment after monitoring committee assessments.
- Legal matters include Fosamax, Januvia/Janumet, Zetia, RotaTeq and Bravecto litigation, as well as government investigations. Merck said it could not reasonably estimate possible losses for certain matters. It reported approximately $230 million in legal-defense reserves. It self-insures substantially all product-liability risk.
- Other material exposures include COVID-19 and supply-chain disruption, foreign exchange and interest rates, manufacturing and product-quality issues, evolving regulation and privacy rules, and climate-related operational and supply-chain risks. Management reported environmental liabilities of $40 million and estimated no more than approximately $40 million of reasonably possible additional expenditures.
Investor verification priorities
- Check the reconciliation and composition of GAAP versus non-GAAP earnings, including investment gains, acquisition charges, impairments and the unusually low 2021 tax rate.
- Assess the sustainability of Keytruda-led growth and the extent to which 2021 sales benefited from molnupiravir and reduced COVID-19 disruption.
- Verify the timing and financial impact of Januvia/Janumet exclusivity losses, patent litigation and generic-entry settlements.
- Review debt maturities, acquisition-related commitments, restructuring cash costs, and the assumptions behind the stated savings and capital-investment plans.
- Monitor clinical and regulatory outcomes for molnupiravir, islatravir, gefapixant and key oncology programs, alongside material litigation and pricing-policy developments.