Merck & Co., Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2010; filed February 28, 2011. This is an annual report, not a standalone fourth-quarter filing. Merck is a global health care company spanning prescription medicines, vaccines, biologics, animal health and consumer care. Its 2009 merger with Schering-Plough makes year-over-year comparisons difficult: 2010 includes a full year of Schering-Plough operations, while 2009 includes them only after the November 3 merger closing.
Key financial metrics
| Metric | 2010 | 2009 | Context |
|---|---|---|---|
| Sales | $45.987 billion | $27.428 billion | Reported growth largely reflects merger-related scope and consolidation changes. Unaudited pro forma 2009 sales, assuming the merger occurred at the start of that year, were $45.964 billion. |
| Net income attributable to Merck | $861 million | $12.899 billion | 2010 included substantial purchase-accounting amortization, impairment and legal charges; 2009 included large merger-related gains. |
| Diluted EPS | $0.28 | $5.65 | Non-GAAP diluted EPS was $3.42 in 2010 and $3.25 in 2009; these exclude specified items and are not GAAP measures. |
| Gross margin | 60.0% | 67.1% | Merger-related intangible amortization, inventory step-up and restructuring charges reduced 2010 margin. |
| R&D expense | $10.991 billion | $5.845 billion | 2010 included $2.441 billion of in-process R&D impairment charges. |
| Cash from operating activities | $10.822 billion | $3.392 billion | 2010 benefited from a full year of acquired operations and comparison with significant 2009 payments, including Vioxx settlement funding. |
| Cash, cash equivalents and short-term investments | $12.201 billion | Not stated here as a comparable total | Including $2.175 billion of long-term investments, total cash and investments were $14.4 billion at year-end. |
| Debt | $17.882 billion | $17.474 billion | 2010 includes $2.400 billion of loans payable/current debt and $15.482 billion of long-term debt. |
| Working capital | $13.423 billion | $12.791 billion | Management said working capital was more than adequate for operating needs. |
| Capital expenditures | $1.678 billion | $1.461 billion | Company estimated 2011 capital expenditures of approximately $1.9 billion. |
Material changes versus the prior comparable period
- Sales rose sharply on a reported basis, principally because 2010 captured a full year of Schering-Plough and MSP Partnership products. Growth in Januvia, Janumet, Isentress and Singulair also contributed; foreign exchange increased reported sales by 1%.
- Product and partnership changes drove a mixed portfolio picture: Cozaar/Hyzaar sales fell 41% to $2.104 billion following patent expirations; Fosamax sales declined to $926 million; Gardasil fell 12% to $988 million. Januvia sales increased to $2.385 billion and Isentress to $1.090 billion.
- GAAP earnings fell substantially from 2009, which included a $7.5 billion gain from remeasuring Merck’s prior MSP Partnership interest and a $3.2 billion Merial divestiture gain. The 2010 result was burdened by merger-related amortization, impairments, restructuring and the Vioxx reserve.
- Operating cash flow increased to $10.822 billion from $3.392 billion, while cash used in investing was $3.497 billion and cash used in financing was $5.441 billion. Financing outflows included $4.734 billion of dividends and $1.593 billion of share repurchases.
- The fourth quarter recorded a $531 million net loss attributable to Merck, or diluted loss per share of $0.17, on sales of $12.094 billion. Fourth-quarter R&D expense was $4.517 billion and included impairment charges.
Outlook, management commentary, risks and unusual items
- Management reported more than $2.0 billion in net cost savings during 2010 from integration and other cost-reduction measures. The merger restructuring program is expected to generate annual savings of approximately $2.7 billion to $3.1 billion in 2012. Estimated cumulative pretax program costs are $3.8 billion to $4.6 billion, with actions substantially complete by the end of 2012 except certain manufacturing actions.
- Merck did not provide a formal full-year 2011 revenue or EPS forecast in the supplied filing text. It expected European austerity measures to continue weighing on revenue in 2011. U.S. health-care reform provisions were expected to reduce revenue and increase costs; 2010 revenue was reduced by approximately $170 million from implemented provisions.
- Patent losses are a major near-term exposure. Singulair’s U.S. patent expires in August 2012; Merck expects to lose substantially all U.S. sales within two years after expiry, with most declines in the first full year. Maxalt also faces U.S. patent expiry in 2012. Cozaar/Hyzaar and Fosamax were already experiencing generic-related declines.
- Centocor’s arbitration seeks to terminate Merck’s marketing rights to Remicade and Simponi. Their 2010 sales were approximately $2.8 billion combined. The hearing had concluded, but the decision was pending; an adverse outcome could materially affect results, liquidity and financial position.
- Merck recorded a $950 million reserve related to the anticipated resolution of the U.S. Department of Justice Vioxx investigation. Discussions remained ongoing, and the company could not estimate additional potential losses from other Vioxx litigation and investigations.
- Merck recorded a $1.7 billion impairment of the vorapaxar intangible asset, reducing its estimated fair value to $350 million, after clinical-trial safety developments. The safety board identified increased intracranial hemorrhage risk among patients with a history of stroke. Other 2010 in-process R&D impairments totaled $763 million.
- Pipeline opportunities include boceprevir, accepted for expedited regulatory review in the U.S. and EU, and 19 Phase III candidates. Management anticipated selected 2011 filings, including ridaforolimus, tafluprost, ezetimibe/atorvastatin and telcagepant, subject to data, safety and regulatory outcomes; these are expectations, not assured approvals.
- Manufacturing constraints affected varicella-zoster vaccines, including ProQuad, Varivax and Zostavax, and certain women’s health products. PegIntron RediPen was subject to a voluntary recall in 2010, with an estimated $20 million revenue reduction and approximately $40 million inventory-related charge.
- Merck expected its animal-health joint venture with sanofi-aventis to close in the third quarter of 2011, subject to approvals and other conditions. The company expected the transaction to dilute earnings during its first 12 months.
- The company reported $1.4 billion of receivables in Greece, Italy, Spain and Portugal at year-end, with approximately $340 million outstanding more than one year. It also recorded $200 million of exchange losses related to Venezuelan currency devaluations.
Most important facts for investors to verify
- Separate underlying performance from merger accounting: review the unaudited pro forma comparison and the effects of consolidation, purchase-accounting amortization and inventory step-up.
- Track the Remicade/Simponi arbitration outcome and any changes to the associated distribution agreement.
- Assess the resolution and potential cash impact of the Vioxx DOJ investigation, other Vioxx proceedings, and the adequacy of the $950 million liability reserve.
- Monitor Singulair and Maxalt patent-expiry exposure, generic entry, and the pace at which pipeline launches may offset declines.
- Follow vorapaxar trial data and remaining asset value, as well as regulatory and safety progress for other late-stage candidates.
- Check whether cost savings, restructuring timing and costs, European pricing pressure, health-care reform impacts and manufacturing supply constraints develop as management anticipated.
- Review debt maturities and liquidity: year-end debt was $17.882 billion, and contractual obligations totaled $32.223 billion, including debt, interest, purchase obligations and leases.
PricewaterhouseCoopers issued an unqualified opinion on the financial statements and concluded that internal control over financial reporting was effective as of December 31, 2010.