Merck & Co., Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed February 28, 2013. The filing also reports fourth-quarter results. Merck is a global health care company spanning prescription medicines, vaccines, animal health and consumer care; Pharmaceutical is its sole reportable segment.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Sales | $47.267 billion | $48.047 billion |
| Net income attributable to Merck | $6.168 billion | $6.272 billion |
| Diluted EPS | $2.00 | $2.02 |
| Non-GAAP diluted EPS | $3.82 | $3.77 |
| Cash from operations | $10.022 billion | $12.383 billion |
| Capital expenditures | $1.954 billion | $1.723 billion |
| Gross margin | 65.2% | 64.9% |
| Working capital | $16.509 billion | $16.936 billion |
| Long-term debt | $16.254 billion | $15.525 billion |
- Reported sales fell about 2%; foreign exchange reduced sales by 3%. Excluding currency effects, sales increased 1%. Pharmaceutical segment sales were $40.601 billion, down from $41.289 billion.
- Operating cash flow declined by $2.361 billion. Management cited $1.3 billion more in defined-benefit plan contributions than in 2011 and a $960 million payment, including interest, related to Vioxx litigation. Cash from operations less capital expenditures was approximately $8.1 billion, calculated from the reported figures.
- Year-end cash and cash equivalents were $13.451 billion; short-term investments were $2.690 billion and long-term investments $7.305 billion. Total debt, including current borrowings, was approximately $20.6 billion. The company also had an undrawn $4.0 billion revolving credit facility.
- Gross margin improved slightly as reported, but Merck said the underlying margin was pressured by Singulair’s U.S. patent expiry. 2012 included $8.168 billion of R&D expense and $664 million of restructuring costs.
- Fourth-quarter sales were $11.738 billion versus $12.294 billion a year earlier; net income attributable to Merck was $908 million versus $1.512 billion, and diluted EPS was $0.30 versus $0.49.
Material changes versus prior period
- Singulair lost U.S. market exclusivity in August 2012. U.S. fourth-quarter sales fell 97% year over year to $25 million; global annual sales declined 30% to $3.853 billion.
- Growth in Januvia ($4.086 billion, up 23%), Janumet ($1.659 billion, up 22%), Gardasil ($1.631 billion, up 35%) and Zostavax ($651 million) partly offset declines in mature or eroding products. Animal Health sales grew 4% and Consumer Care sales grew 6%.
- Remicade sales declined 22% to $2.076 billion, largely reflecting the 2011 change in marketing territories and profit-sharing terms with Johnson & Johnson. AZLP-related revenue fell to $915 million from $1.2 billion.
- Net income and diluted EPS were lower than 2011, despite higher non-GAAP EPS. The 2012 results included a $493 million net charge for the ENHANCE securities litigation settlement; 2011 included favorable tax-settlement benefits and a $500 million charge related to the J&J arbitration settlement.
- Merck reported $3.5 billion in annual net cost savings achieved since the Schering-Plough merger. It expects total pretax merger restructuring costs of $7.2–$7.5 billion, with annual savings of $3.5–$4.0 billion by the end of 2013 and $4.0–$4.6 billion upon completion.
Outlook, commentary and key risks
- No consolidated 2013 revenue or EPS guidance is stated in the supplied filing text. Management expects European austerity measures, pricing pressure and generic erosion to continue to weigh on revenue; it also anticipated further U.S. sales declines for products facing generic entry, including Singulair, Maxalt, Temodar and Propecia.
- The company had four candidates under regulatory review and 16 in Phase III; it anticipated several FDA filings in 2013. These are development plans, not assured approvals. Odanacatib filing was delayed to 2014 pending further safety and efficacy data. Tredaptive failed its primary outcomes endpoint, had increased serious adverse events, and Merck began suspending its availability outside the United States.
- In February 2013, Merck reached agreements in principle to resolve ENHANCE securities cases for $688 million gross, with $195 million of anticipated insurance recoveries. The settlements were subject to court approval; the filing anticipated payment in 2013.
- Remaining Vioxx litigation outcomes and potential losses could not be reasonably estimated; Merck said insurance would not cover all defense costs and losses. Fosamax, NuvaRing and other product-liability matters, as well as patent, antitrust and government investigations, also remain risks.
- Merck reported $1.1 billion of receivables in Greece, Italy, Spain and Portugal, including about $800 million from hospitals and the public sector; collection delays were affecting cash flows. Most cash and investments were held by foreign subsidiaries and could incur significant tax if repatriated.
- Management anticipated an approximately $150 million foreign-exchange loss in Q1 2013 following Venezuela’s currency devaluation. AstraZeneca had an option in 2014 to acquire Merck’s interest in KBI/AZLP; Merck said exercise was likely and would reduce future AZLP equity income and supply sales.
- Other notable exposures include upcoming patent expirations, product safety and efficacy uncertainty, manufacturing constraints (including women’s health products and prior vaccine supply issues), global pricing and currency risks, and restructuring execution. The filing reports effective internal control over financial reporting and an unqualified audit opinion.
Investor verification priorities
- Confirm the pace and financial impact of generic erosion, especially Singulair, and the expected effects of Maxalt, Temodar and Propecia competition.
- Track whether pipeline milestones and regulatory filings occur as planned, and review safety, efficacy and approval outcomes for major late-stage candidates.
- Check court approval, insurance recoveries and cash payments for the ENHANCE settlement, and updates to Vioxx and other material litigation.
- Assess operating cash generation, pension contributions, restructuring cash costs and delivery of the stated savings targets.
- Monitor European public-sector receivable collections, foreign-cash repatriation implications, currency exposure and the 2014 AZLP option.