Merck & Co., Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Dollar amounts are in U.S. dollars. Merck completed the spin-off of Organon on June 2, 2021; the contributed businesses are reported as discontinued operations through the spin-off date, so comparisons of total net income and historical business mix require care.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Sales | $13.154B | $10.929B | $35.183B | $30.570B |
| Income from continuing operations attributable to Merck | $4.567B | $2.324B | $8.525B | $7.136B |
| Diluted EPS from continuing operations | $1.80 | $0.92 | $3.36 | $2.81 |
| Operating cash flow from continuing operations | Not reported separately for quarter | Not reported separately for quarter | $8.027B | $4.207B |
- Q3 sales rose 20% year over year (19% excluding foreign exchange); nine-month sales rose 15% (13% excluding foreign exchange). Reported sales growth reflected higher demand and, in part, a less adverse pandemic impact than in 2020.
- Keytruda sales grew 22% in Q3 to $4.534B and 21% for nine months to $12.609B. Gardasil/Gardasil 9 sales grew 68% in Q3 and 41% year to date. Animal Health sales rose 16% in Q3 and 22% year to date.
- Q3 gross margin was 73.8%, versus 72.4%; nine-month gross margin was 72.3%, versus 71.9%. Merck cited lower intangible amortization and favorable product mix, partly offset by manufacturing costs and other pressures.
- GAAP diluted EPS from continuing operations increased to $1.80 in Q3 and $3.36 year to date. Non-GAAP diluted EPS from continuing operations was $1.75 and $4.22, respectively; Merck’s non-GAAP measure excludes specified items and is not a GAAP measure.
- Other income, net, was $450M in Q3 and $1.007B for nine months, driven substantially by equity-investment gains. The filing estimates about $540M of investment-fund gains will be recorded in Q4, subject to uncertainty.
Liquidity, debt and capital allocation
- At September 30, cash and cash equivalents were $10.016B; cash and investments totaled $10.451B. Working capital was $7.330B, compared with $437M at December 31, 2020.
- Current and long-term debt totaled approximately $26.4B at September 30, down from approximately $31.8B at year-end 2020. The company reported debt at 28.3% of total liabilities and equity, versus 34.7% at year-end.
- Nine-month continuing operating cash flow of $8.027B was up from $4.207B. Capital expenditures were $3.240B. Merck paid $4.967B in dividends and repurchased $822M of stock; $5.066B remained under the share-repurchase authorization.
- Organon distributed $9.0B in cash to Merck in connection with the spin-off. Merck also reported a $6.0B undrawn credit facility maturing in 2026.
Material changes, outlook and risks
- The Organon spin-off reshaped Merck’s portfolio and reporting: women’s health, biosimilars and established brands were classified as discontinued operations through June 2. Merck retained its existing research pipeline.
- Merck estimated COVID-19 reduced sales by about $350M in Q3 and $1.3B in the first nine months of 2021. Its full-year assumption was a net adverse sales impact of less than 3%, all in Pharmaceuticals; management said the trend in pandemic effects was improving but negative impacts would persist.
- The 2019 restructuring program had incurred about $2.4B of cumulative pretax costs through September. Merck expected approximately $700M of 2021 charges, program completion substantially by end-2023, and annual net savings of about $900M by end-2023.
- Merck agreed to acquire Acceleron for approximately $11.5B in cash, subject to tender-offer conditions and regulatory approvals; closing was expected in Q4 2021. The filing disclosed a potential $650M–$750M reverse termination fee in specified antitrust-related circumstances.
- Molnupiravir was under regulatory review, not yet approved in the U.S. at the filing date. Merck reported a U.K. authorization after quarter-end and an FDA EUA application; it expected to produce 10 million courses by end-2021 and at least 20 million more in 2022, contingent on regulatory and other developments.
- Notable unusual items included a $1.7B Pandion acquisition-related R&D charge, $207M of charges following discontinuation of the MK-7110 COVID-19 program, and $630M of restructuring-program costs in the first nine months. Merck also recorded a $207M continuing-operations tax benefit from settlement of certain federal tax matters.
- Risks include drug-pricing pressure, COVID-19 disruption, regulatory and clinical uncertainty, competition and upcoming loss of exclusivity (including Januvia/Janumet in the U.S. in 2023), and ongoing litigation. Merck reported about 3,470 pending Fosamax cases and approximately 730 Januvia/Janumet product-user claims as of September 30; it said it could not estimate possible losses for certain litigation. It stated other normal-course matters were not expected to be material.
Most important facts for investors to verify
- How much reported growth reflects continuing-business demand versus foreign exchange, pandemic comparisons, product mix and out-licensed-product milestone revenue.
- The sustainability and cash realization of equity-investment gains and the effect of excluded items on GAAP versus non-GAAP results.
- Acceleron transaction completion, financing and integration implications, and molnupiravir regulatory status, production and commercial economics.
- Progress against restructuring costs and savings targets, as well as the timing and impact of product patent expirations and competitive pressure.
- Developments in material litigation and the potential effects of pricing policy, COVID-19 disruption, and clinical or regulatory setbacks.