Merck & Co., Inc. — 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009; filed March 1, 2010. Although the request refers to 2009 Q4, this is an annual filing with unaudited quarterly data. Merck completed its Schering-Plough merger on November 3, 2009. For accounting, legacy Merck was the acquirer, so 2009 includes Schering-Plough only after the merger date; year-over-year comparisons are therefore not like-for-like.
Business context and financial highlights
The combined company sells prescription medicines, vaccines, animal-health and consumer-health products. Its sole reportable segment is Pharmaceutical. The merger broadened its portfolio and geographic reach and brought the Merck/Schering-Plough cholesterol partnership under full ownership.
| Metric | 2009 | 2008 |
|---|---|---|
| Sales | $27.43 billion | $23.85 billion |
| Income before taxes | $15.29 billion | $9.93 billion |
| Net income attributable to Merck | $12.90 billion | $7.81 billion |
| Diluted EPS | $5.65 | $3.63 |
| Gross margin | 67.1% | 76.6% |
| Cash from operating activities | $3.39 billion | $6.57 billion |
Sales rose 15%, largely reflecting the post-merger inclusion of Schering-Plough products and the consolidation of Zetia and Vytorin sales. Foreign exchange reduced sales growth by 2%. Growth in Januvia, Janumet and Isentress, among other products, was partly offset by declines in Fosamax, Gardasil, Cosopt/Trusopt and RotaTeq. The gross-margin decline largely reflected merger-related inventory and intangible-asset amortization and restructuring charges.
Fourth quarter: Sales were $10.09 billion versus $6.03 billion in Q4 2008; diluted EPS was $2.35 versus $0.78. Q4 2009 included a $1.49 billion merger-restructuring charge and a large noncash gain from remeasuring the previously held interest in the cholesterol partnership. The quarter’s sharp reported growth is not a clean measure of underlying operating performance.
Cash flow, debt and liquidity
- Operating cash flow fell to $3.39 billion from $6.57 billion, reflecting, among other items, $4.1 billion of Vioxx settlement payments and a $660 million Canadian tax-settlement payment.
- Cash and cash equivalents were $9.31 billion; short-term investments were $293 million and long-term investments $432 million. The company reported total worldwide cash and investments of about $10.0 billion, with $290 million restricted as collateral.
- Working capital was $12.68 billion, up from $4.79 billion. Current assets were $28.43 billion and current liabilities $15.75 billion.
- Long-term debt was $16.07 billion; loans payable and current portion of long-term debt were $1.38 billion. Merger-related financing contributed to the increase in debt. The company issued $4.25 billion of senior unsecured notes in 2009.
- Capital expenditures were $1.46 billion, compared with $1.30 billion in 2008. Cash dividends paid to stockholders were $3.22 billion; the common dividend remained $1.52 per share for the year.
Material changes, unusual items and outlook
- Merger and reported earnings: The $49.6 billion merger materially changed the balance sheet and earnings. 2009 included a $7.5 billion gain from remeasurement of Merck’s prior partnership interest and a $3.2 billion gain on the $4 billion sale of its Merial interest. These gains substantially lifted GAAP income; management reported diluted non-GAAP EPS of $3.25, down from $3.42 in 2008. Non-GAAP measures exclude significant items and are not GAAP measures.
- Integration and savings: The first phase of the merger restructuring program is expected to cost $2.6–$3.3 billion pretax through 2012 and produce annual savings of approximately $2.6–$3.0 billion in 2012. The company expects workforce reductions of about 15% by the end of 2012 and plans to eliminate 2,500 vacant positions. These are management estimates, not assured outcomes.
- Pipeline: Merck reported 19 candidates in Phase III and several products under regulatory review. It expected to complete broader pipeline prioritization in the first half of 2010 and warned that cancellations could trigger material noncash impairment charges to GAAP earnings.
- Patent exposure: U.S. exclusivity for Cozaar and Hyzaar was due to expire in April 2010; Singulair’s U.S. patent was due to expire in August 2012. Management expected significant sales declines after these expirations. Temodar’s patent was held unenforceable by a court in January 2010; Merck was appealing.
- Product and operating risks: Manufacturing constraints affected varicella-containing vaccines and other products. The company also disclosed a planned 2010 implementation of a U.S. enterprise resource planning system, with implementation risks.
- Major contingencies: Vioxx litigation and investigations continued; Merck said it could not estimate potential losses outside the settlement program. It also faced Fosamax, Vytorin/Zetia, NuvaRing and other litigation, as well as an arbitration that could threaten its rights to distribute Remicade and Simponi. A Centocor arbitration hearing was scheduled for September 2010.
- Clinical and regulatory uncertainty: ENHANCE found no significant difference on its primary imaging endpoint for Vytorin versus simvastatin alone; incremental cardiovascular-outcome benefit had not been established. SEAS did not meet its primary endpoint. FDA review concluded that cancer-related death from Vytorin or Zetia was unlikely based on available information, while outcomes trials remained ongoing. Telcagepant development required an additional safety study after liver-enzyme elevations in a prevention study.
- Other exposures: The filing identifies global pricing and reimbursement pressure, generic competition, currency and interest-rate risk, tax uncertainty and Venezuelan currency devaluation. The company reported $161.8 million in accrued environmental liabilities.
PricewaterhouseCoopers issued an unqualified audit opinion on the financial statements and concluded that internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- Separate merger-driven revenue additions and accounting gains from recurring sales and earnings; assess the value of pro forma results, which the filing says are not indicative of actual or future results.
- Track delivery of the $2.6–$3.0 billion 2012 savings target against restructuring costs, workforce reductions and later integration charges.
- Review debt maturities, interest costs and liquidity after merger financing, alongside the unusually low 2009 operating cash flow and major settlement and tax payments.
- Assess the commercial impact of Cozaar/Hyzaar and Singulair patent expirations, and the status of Temodar and other significant patent disputes.
- Monitor Remicade/Simponi distribution arbitration, Vioxx and Fosamax proceedings, and Vytorin/Zetia clinical outcomes and related investigations.
- Validate pipeline milestones and impairment risk, vaccine supply recovery, and management’s assumptions underlying acquisition-related intangible-asset values and amortization.