Merck & Co., Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; filed February 26, 2024. This is an annual filing, not a standalone fourth-quarter report, and the supplied filing text does not provide clear Q4-only financial results. Merck operates in Pharmaceutical and Animal Health.
Financial performance and liquidity
| Metric | FY2023 | FY2022 |
|---|---|---|
| Sales | $60.115 billion | $59.283 billion |
| Income from continuing operations attributable to Merck (GAAP) | $365 million | $14.519 billion |
| Diluted EPS from continuing operations (GAAP) | $0.14 | $5.71 |
| Non-GAAP net income attributable to Merck | $3.837 billion | $19.005 billion |
| Non-GAAP diluted EPS | $1.51 | $7.48 |
| Cash from continuing operating activities | $13.006 billion | $19.095 billion |
| Capital expenditures | $3.863 billion | $4.388 billion |
| Gross margin | 73.2% | 70.6% |
| Cash and cash equivalents | $6.841 billion | $12.694 billion |
| Short-term investments | $252 million | $498 million |
| Total debt (current and long-term) | $35.055 billion | $30.691 billion |
| Working capital | $6.474 billion | $11.483 billion |
Sales increased 1% as reported and 4% excluding foreign exchange. Pharmaceutical sales were $53.583 billion, up 3%; Animal Health sales were $5.625 billion, up 1%. Keytruda sales rose 19% to $25.011 billion and Gardasil/Gardasil 9 rose 29% to $8.886 billion. Together, these products represented 56% of total sales. Lagevrio sales fell 75% to $1.428 billion; Januvia/Janumet fell 25% to $3.366 billion.
Operating cash flow declined by $6.089 billion year over year. The company attributed the reduction in part to $4.2 billion of collaboration-related upfront, milestone and option payments and a $572.5 million Zetia antitrust settlement payment. Investing activities used $14.083 billion, including the Prometheus and Imago acquisitions. Merck issued $6.0 billion of senior unsecured notes in 2023. Its $6.0 billion revolving credit facility, maturing in 2028, was undrawn. Working capital fell partly because cash and investments funded business development.
Material changes and unusual items
- GAAP earnings fell sharply, primarily reflecting substantial 2023 research and development charges: $10.2 billion for Prometheus, $5.5 billion for the Daiichi Sankyo collaboration and $1.2 billion for Imago. R&D expense totaled $30.531 billion, versus $13.548 billion in 2022.
- The effective tax rate was 80.0%, compared with 11.7% in 2022. Merck said acquisition and collaboration charges, for which it recognized no tax benefits, were a major factor.
- Non-GAAP results also declined significantly. Merck’s non-GAAP measures exclude, among other items, acquisition-related and restructuring costs, investment gains and losses, and certain other items; the company cautions they are not substitutes for GAAP results.
- Merck recorded a $779 million impairment charge for gefapixant after the FDA issued a second Complete Response Letter. The FDA concluded the application did not establish substantial evidence of effectiveness; the letter was not related to safety.
- Other notable items included a $572.5 million Zetia litigation settlement charge and $599 million of restructuring costs. Gross margin improved from 70.6% to 73.2%, mainly due to product mix and lower manufacturing-related costs.
Outlook, risks and contingencies
- The filing provides no general company revenue or earnings guidance. Merck expects Lagevrio sales to decline in 2024 as government purchasing and pandemic-related demand wane.
- In January 2024, Merck approved a restructuring program expected to cost approximately $4.0 billion through 2031, with about 60% non-cash costs. It expects approximately $750 million of charges in 2024 and cumulative annual net savings of approximately $750 million by the end of 2031.
- Management highlighted pricing and market-access pressure, generic competition, patent challenges, regulatory uncertainty, manufacturing and supply risks, currency exposure, cyber threats, and dependence on a concentrated portfolio of leading products. Keytruda’s U.S. patent protection is listed through 2028; the company anticipates substantial sales declines after U.S. loss of exclusivity.
- Januvia was selected for the first Medicare drug price-negotiation cycle under the Inflation Reduction Act, with government-set pricing scheduled to take effect January 1, 2026. Merck is challenging the program in court and anticipates Keytruda could be selected in a later cycle, potentially effective in early 2028.
- Merck reported multiple pending legal matters, including Gardasil product-liability cases, RotaTeq and Bravecto litigation, 340B proceedings, and patent disputes. The company stated it generally cannot estimate possible losses for certain matters; it self-insures substantially all product-liability risk. Environmental liabilities accrued were $42 million at year-end.
- Pipeline and execution uncertainties include pending regulatory reviews for sotatercept, V116 and patritumab deruxtecan; stopped oncology trials that did not meet specified endpoints; and clinical holds affecting certain islatravir regimens. Merck’s auditor issued an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Reconcile the severe GAAP earnings decline with the acquisition and collaboration charges, tax effects, and the company’s non-GAAP reconciliation.
- Assess whether Keytruda and Gardasil growth can offset Lagevrio and diabetes-product declines, and the risks associated with product concentration and upcoming patent expirations.
- Review cash conversion, acquisition and collaboration commitments, debt maturities, and the assumptions behind the planned $4.0 billion restructuring and expected savings.
- Track the Medicare negotiation litigation and potential pricing impacts for Januvia and, if selected, Keytruda.
- Monitor regulatory decisions and trial outcomes for major pipeline candidates, as well as significant litigation developments and the $2.3 billion U.S. rebate accrual identified in the audit discussion.