Business context and reporting period
Merck & Co., Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. Its reportable businesses are Pharmaceutical and Animal Health. On June 2, Merck spun off its women’s health, biosimilars and established brands businesses as Organon; those businesses’ results are presented as discontinued operations through the spin-off date, and prior periods were recast. Merck’s existing research pipeline remained with Merck.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Sales | $11.402B | $9.353B | $22.029B | $19.641B |
| Continuing-operations income | $1.214B | $2.345B | $3.963B | $4.811B |
| Net income attributable to Merck, including discontinued operations | $1.545B | $3.002B | $4.724B | $6.221B |
| Diluted EPS, continuing operations | $0.48 | $0.92 | $1.56 | $1.89 |
| Non-GAAP diluted EPS, continuing operations | $1.31 | $1.02 | $2.47 | $2.17 |
- Sales rose 22% in Q2 and 12% in the first half; excluding foreign exchange, growth was 19% and 10%, respectively. Keytruda, vaccines, hospital acute-care products and Animal Health contributed. Growth also benefited from recovery from pandemic-related disruption in 2020.
- Gross margin was 72.8% in Q2 versus 70.6%; first-half gross margin was 71.4% versus 71.6%. Q2 benefited from lower intangible amortization and product mix; first-half margin reflected COVID-program costs, pricing and foreign exchange headwinds.
- Research and development expense increased to $4.321B in Q2 and $6.732B in the first half, including a $1.7B charge for the Pandion acquisition. The Q2 effective tax rate was 29.3%, affected by the Pandion charge, for which no tax benefit was recognized. First-half results included a $207M continuing-operations tax benefit from settlement of federal tax matters.
- Continuing-operations operating cash flow was $3.230B in the first half, versus $2.625B. Capital expenditures were $2.068B. Cash and cash equivalents were $8.575B at June 30; cash and investments totaled $8.986B. Working capital was $6.759B, compared with $437M at year-end 2020.
- Loans payable and current debt plus long-term debt totaled $26.521B at June 30, versus $31.791B at December 31, 2020. Total debt was 29.2% of total liabilities and equity, down from 34.7%. The period-end debt balance reflects, among other factors, the Organon spin-off and debt repayments.
Material changes, outlook and commentary
- The Organon spin-off generated a $9.0B cash distribution to Merck. Organon assumed $9.5B principal amount of debt issued in connection with the transaction; Merck stated it is no longer the obligor on Organon debt. Merck and Organon entered into transition, manufacturing, supply and other agreements.
- Management estimated COVID-19 reduced Pharmaceutical sales by about $400M in Q2 and $1.0B in the first half; Animal Health sales were not affected in 2021. Merck assumed a full-year 2021 net adverse sales impact of less than 3%, all in Pharmaceutical, and a negligible operating-expense impact. The filing does not provide a clear full-year sales or EPS forecast.
- Merck expected about $700M of 2021 restructuring charges, within an estimated $3.0B cumulative pretax program cost; actions were expected to be substantially completed by end-2023, with approximately $900M in annual net savings expected by then.
- Molnupiravir remained investigational. Under a U.S. procurement agreement, Merck would receive approximately $1.2B for about 1.7 million treatment courses if the FDA authorized or approved it. Merck expected capacity for more than 10 million courses by year-end 2021. These amounts and plans are conditional on development and regulatory outcomes.
- Merck discontinued development of COVID-19 candidate MK-7110 after FDA feedback indicated additional data would be needed; it recorded $207M in first-half charges related to discontinued COVID-19 programs. The Phase 3 trial of molnupiravir in hospitalized patients was not proceeding after interim results indicated it was unlikely to show clinical benefit.
- Key business risks include continued pricing pressure, generic and biosimilar competition, product patent challenges and reliance on successful clinical development and regulatory approvals. Merck cited expected significant Januvia/Janumet sales declines after U.S. exclusivity loss in January 2023, and continued sales pressure on products including Isentress and Noxafil. Zerbaxa sales were suspended following sterility issues; Merck did not expect a return to market before 2022.
- Litigation includes Fosamax, Januvia/Janumet and Zetia matters. The company stated that it could not reasonably estimate possible losses for certain litigation; its legal-defense reserves were approximately $230M. Organon is required to indemnify Merck for Fosamax Litigation liabilities.
Important facts for investors to verify
- How much reported sales growth reflects underlying demand, foreign exchange, pandemic recovery and the changed portfolio after the Organon spin-off.
- The effect of the $1.7B Pandion charge and other excluded items on GAAP versus non-GAAP earnings; non-GAAP measures exclude significant items and are not GAAP measures.
- Whether Merck achieves its conditional molnupiravir development, supply and procurement plans, and how COVID-related disruption and pricing pressures evolve.
- Progress and potential costs of restructuring, including the expected 2021 charges and projected savings.
- Developments in product litigation, patent challenges, Januvia/Janumet exclusivity and Zerbaxa’s expected return to market.