Merck & Co., Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited consolidated results; dollars are in millions unless noted. Merck reports Pharmaceutical and Animal Health segments. The 2021 comparison reflects Organon as discontinued operations through its June 2, 2021 spin-off, so prior-year total net income is not fully comparable.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Sales | $14,593 | $11,402 | $30,494 | $22,029 |
| Income from continuing operations attributable to Merck | $3,944 | $1,213 | $8,254 | $3,958 |
| Diluted EPS from continuing operations | $1.55 | $0.48 | $3.25 | $1.56 |
| Operating cash flow from continuing operations | — | $9,063 | $3,230 |
- Sales increased 28% in Q2 and 38% in the first half; growth excluding foreign exchange was 31% and 41%, respectively. Pharmaceutical segment sales were $12,756 in Q2 and $26,863 year to date; Animal Health sales were $1,467 and $2,949.
- Gross margin was 71.1% in Q2 versus 72.8%, and 68.5% in the first half versus 71.4%. Merck cited Lagevrio’s lower margin, higher inventory write-offs, manufacturing costs and intangible amortization.
- GAAP income before taxes was $4,487 in Q2 and $9,348 year to date. Effective tax rates were 12.0% and 11.7%, respectively.
- Non-GAAP diluted EPS was $1.87 for Q2 and $4.01 for the first half, compared with recast prior-year figures of $0.61 and $1.77. These company-defined measures exclude specified items and are not GAAP measures.
- Cash and investments totaled $10,366 at June 30, versus $8,466 at year-end; working capital was $8,948 versus $6,394. Total debt was approximately $31,663 ($2,979 current and $28,684 long-term), down from $33,102 at year-end. A $6 billion credit facility, maturing in 2026, remained undrawn.
- First-half capital expenditures were $2,113. Merck paid $3,515 in dividends; it made no share repurchases in the first half.
Material changes and drivers
- Lagevrio generated sales of $1,177 in Q2 and $4,424 in the first half, versus none in the comparable 2021 periods. Merck attributed additional growth to Keytruda, Gardasil/Gardasil 9, and higher alliance revenue from Lenvima and Lynparza. Januvia/Janumet and Isentress sales declined.
- Q2 continuing-operations income rose substantially from 2021, when results included a $1.7 billion Pandion acquisition charge in R&D. First-half 2022 R&D expense was also lower year over year for this reason, despite higher clinical development and other spending.
- Other expense was $438 in Q2 and $1,148 for the first half, versus income of $103 and $558 in 2021. The swing primarily reflected equity-investment losses in 2022 versus gains in 2021; first-half 2022 included $991 of net losses from equity investments.
- Operating cash flow improved to $9,063, partly reflecting stronger operating performance and Lagevrio, but included $1.7 billion of collaboration milestone payments. Investing used $2,250 and financing used $4,863 in the first half.
Outlook, risks and unusual items
- Management expects full-year 2022 Lagevrio sales of $5.0–$5.5 billion. It expects approximately $550 million of 2022 restructuring charges and estimates annual net cost savings of about $900 million by the end of 2023. No broader full-year revenue or earnings guidance is stated in the supplied filing text.
- Merck expects U.S. sales of Januvia and Janumet to decline substantially after loss of exclusivity in January 2023; EU exclusivity ends in September 2022, and China compound-patent exclusivity ended in July 2022. Isentress also faces continuing competition.
- Pricing and market-access pressure, supply-chain disruption and cost inflation, and uncertainty from the Russia-Ukraine war could weigh on results. The war’s financial impact was immaterial through June 30, 2022, but future effects are uncertain. Merck expects U.S. tax payments to increase significantly in 2022 due to required R&D tax capitalization rules.
- Clinical and regulatory outcomes remain uncertain. The FDA issued a Complete Response Letter for gefapixant, with further information expected in the first half of 2023. Several Phase 3 studies reported in the filing did not meet primary endpoints or were discontinued for futility, including KEYNOTE-412, KEYNOTE-921, KEYLYNK-010, LYNK-003 and LEAP-002.
- Legal matters include product-liability, antitrust, patent and 340B program litigation. Merck says it cannot estimate possible losses for certain litigation; it considers resolution of its broader routine claims unlikely to materially affect its financial condition, results or cash flows. Legal defense reserves were approximately $235 million.
- Other notable items include a $250 million cumulative amortization catch-up related to the Lynparza collaboration, a $101 million pension settlement charge, and $30 million of Q2 R&D expense for a Kelun-Biotech license. Subsequent to quarter-end, Merck disclosed $290 million and $35 million upfront payments for collaborations, expected to be recorded in Q3 R&D expense.
Key facts for investors to verify
- Whether Lagevrio demand and the $5.0–$5.5 billion sales outlook are sustained, and the effect of its profit-sharing economics on gross margin.
- The trajectory of Keytruda and vaccine growth, and potential Januvia/Janumet erosion following regional loss of exclusivity.
- Whether operating cash generation remains strong after collaboration milestone payments, higher U.S. taxes and planned investment spending.
- Progress and outcomes in the pipeline, including pending regulatory reviews and the impact of recent late-stage trial setbacks.
- Developments in pricing, supply-chain costs, Russia-Ukraine disruptions, 340B proceedings and other significant litigation.