Merck & Co., Inc. — Q3 2019 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Merck’s principal reportable businesses are Pharmaceutical and Animal Health.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Sales | $12.397B | $10.794B | $34.972B | $31.296B |
| Gross margin | 67.8% | 66.5% | 70.1% | 67.3% |
| Net income attributable to Merck | $1.901B | $1.950B | $7.487B | $4.393B |
| Diluted GAAP EPS | $0.74 | $0.73 | $2.89 | $1.63 |
| Diluted non-GAAP EPS | $1.51 | $1.19 | $4.02 | $3.29 |
| Operating cash flow | Not presented by quarter | $8.646B | $7.330B | |
| Capital expenditures | Not presented by quarter | $2.336B | $1.686B |
Q3 sales increased 15% year over year, including a 1% unfavorable foreign-exchange effect; nine-month sales rose 12%, including a 2% unfavorable effect. Keytruda sales grew 62% in Q3 and 59% year to date. Q3 GAAP net income was slightly lower despite revenue growth; the filing cites, among other items, the Peloton acquisition charge and Sivextro impairment. The nine-month GAAP earnings comparison also reflects a $360 million tax benefit in 2019 and significant collaboration and acquisition charges in 2018.
Balance sheet and liquidity
- At September 30, 2019, cash and cash equivalents were $7.869B; cash and investments totaled $10.129B, down from $15.097B at year-end 2018.
- Working capital was $5.458B, compared with $3.669B at December 31, 2018. Current assets were $26.142B and current liabilities were $20.684B.
- Loans payable and current debt were $3.411B; long-term debt was $22.677B, for total debt of approximately $26.1B, up from $25.1B at year-end. Debt was 31.3% of total liabilities and equity, versus 30.4%.
- Merck generated $8.646B of operating cash flow and used $1.866B in investing activities and $6.850B in financing activities during the first nine months. Financing included $4.290B of dividends and $3.730B of treasury-stock purchases.
Material changes and notable items
- Pharmaceutical segment sales rose to $31.218B for the first nine months from $27.859B; Animal Health sales increased to $3.271B from $3.176B. Keytruda, vaccines, alliance revenue from Lynparza and Lenvima, and the Antelliq acquisition contributed to growth.
- Sales faced generic or biosimilar competition, including for Zetia, Vytorin, Invanz and Remicade; Januvia and Janumet also declined amid U.S. pricing pressure.
- Merck acquired Antelliq, Immune Design and Peloton in 2019. The Peloton asset acquisition resulted in a $982M R&D charge. Merck issued $5.0B of senior notes in March.
- Q3 cost of sales included a $612M impairment charge for Sivextro after Merck decided to cease U.S. promotion by year-end. Nine-month costs also included $162M of goodwill impairment in Healthcare Services.
- Merck recorded $642M of restructuring costs across income-statement lines in the first nine months. Its new global program is expected to cost $800M–$1.2B pretax, with approximately $750M of charges expected in 2019.
Outlook, risks and contingencies
- The restructuring program is expected to be substantially completed by the end of 2023; Merck anticipates approximately $500M in annual net cost savings by then. The filing does not provide clear consolidated sales or EPS guidance in the supplied text.
- Management expects pricing and cost-containment pressures to continue to weigh on revenue. It also flagged expected significant sales declines for products facing patent expiry or competition, including Emend for Injection and Noxafil.
- Merck identified ongoing product-liability, antitrust and patent litigation, including Fosamax, Januvia/Janumet, Zetia and RotaTeq matters. The company said it could not reasonably estimate possible losses for certain litigation. It reported approximately $260M in legal-defense reserves and no insurance for most product liabilities.
- Key risks include clinical and regulatory outcomes, product competition and patent protection, pricing, foreign exchange, acquisition integration, and possible future intangible-asset impairments. Forward-looking statements are subject to risks and are not guaranteed.
Most important facts for investors to verify
- Whether Keytruda and other growth products sustain momentum against pricing pressure and competition.
- Cash generation, acquisition-related spending, capital investment, and the increase in total debt.
- Actual restructuring charges, timing, and delivery of the projected $500M annual savings.
- Potential effects of litigation and patent challenges; the filing does not quantify possible losses for certain cases.
- Impairment risk for acquired and marketed-product intangibles, including the remaining $175M Sivextro asset balance at quarter-end.
- How much reported nine-month earnings growth reflects recurring operations versus the $360M tax benefit and other unusual items.