Merck & Co., Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Unaudited consolidated results; comparisons are with Q1 2023 unless otherwise noted. Merck operates Pharmaceutical and Animal Health segments.
Financial results and position
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Sales | $15.775 billion | $14.487 billion; up 9% reported and 12% excluding foreign exchange |
| Gross margin | 77.6% | 72.9% |
| Income before taxes | $5.670 billion | $3.650 billion |
| Net income attributable to Merck | $4.762 billion | $2.821 billion |
| Diluted GAAP EPS | $1.87 | $1.11 |
| Diluted non-GAAP EPS | $2.07 | $1.40 |
| Operating cash flow | $3.090 billion | $1.339 billion |
| Capital expenditures | $861 million | $1.007 billion |
| Cash and investments | $5.899 billion at March 31 | $7.345 billion at December 31, 2023 |
| Total debt | $34.219 billion | $35.055 billion at December 31, 2023 |
| Working capital | $6.346 billion | $6.474 billion at December 31, 2023 |
Operating cash flow less capital expenditures was approximately $2.229 billion, compared with $332 million in Q1 2023. Cash, cash equivalents and restricted cash ended the quarter at $5.671 billion. Merck paid $1.950 billion in dividends and repaid $751 million of debt during the quarter. The balance sheet reports a 32.3% total-debt-to-total-liabilities-and-equity ratio. The company had an undrawn $6.0 billion credit facility maturing in May 2028.
Pharmaceutical segment sales were $14.006 billion, up from $12.721 billion; segment profits rose 19% to $10.904 billion. Animal Health sales were $1.511 billion, up from $1.491 billion, while segment profits declined 2% to $555 million.
Material changes and drivers
- Keytruda sales rose 20% to $6.947 billion, supported by demand and uptake in existing and new indications. Gardasil/Gardasil 9 sales increased 14% to $2.249 billion.
- Growth was partly offset by Januvia/Janumet sales declining 24% to $670 million, Bridion declining 10% to $440 million, and Lagevrio declining 11% to $350 million. RotaTeq and Pneumovax 23 sales also fell materially.
- Net income benefited from higher sales and the absence of the $572.5 million Zetia antitrust settlement charge recorded in Q1 2023. Q1 2024 included a $656 million Harpoon acquisition charge in R&D; Q1 2023 included a $1.2 billion Imago acquisition charge and a $175 million Kelun-Biotech payment.
- Cost of sales fell 10%, and gross margin improved, primarily reflecting product mix, foreign exchange and lower intangible amortization; higher restructuring costs and inventory write-offs partially offset the improvement. R&D expense declined 7% overall, although Merck Research Laboratories spending increased to $2.4 billion from $2.1 billion.
- The effective tax rate was 15.9%, versus 22.6% a year earlier; both periods were affected by acquisition charges for which no tax benefit was recognized.
Outlook, risks and unusual items
- The filing text does not provide a clear full-year revenue or EPS guidance figure. Management expects government and other healthcare cost-containment measures, including U.S. pricing and rebate pressures, to negatively affect sales and profits. Januvia is included in the first year of the U.S. Inflation Reduction Act drug price negotiation program, with government-set pricing effective in 2026; Merck has sued the U.S. government over the program.
- A new restructuring program is expected to cost approximately $4.0 billion pretax through 2031, with about 60% non-cash. Merck expects approximately $800 million of charges in 2024 and estimates cumulative annual net savings of about $750 million by the end of 2031. Q1 program costs were $246 million.
- Merck acquired Harpoon for $765 million and incurred $56 million in transaction costs; the acquisition produced a $656 million Q1 R&D charge. Merck also agreed to acquire Elanco’s aqua business for $1.3 billion in cash, expected to close by mid-2024 subject to approvals and customary conditions.
- Key pipeline and regulatory milestones include FDA action dates in June 2024 for patritumab deruxtecan and V116. Winrevair received U.S. approval in March and remained under EU review. In March, the KEYLYNK-006 trial did not meet its prespecified statistical criteria for overall or progression-free survival.
- Significant business risks include product competition and loss of exclusivity, pricing and reimbursement pressure, foreign exchange, clinical and regulatory outcomes, and litigation. Bridion faces generic competition in some markets; Januvia/Janumet face ongoing declines and expected U.S. pricing and volume pressure. Merck disclosed product-liability and patent matters, including Gardasil-related cases and pending appeals or proceedings; it says possible losses for certain litigation cannot yet be reasonably estimated.
- The IRS is examining Merck’s 2017 and 2018 returns, including its transition-tax position; an adverse resolution could result in a significant tax liability. Management stated disclosure controls were effective as of March 31, 2024, with no material change in internal control reported for the quarter.
Important facts for investors to verify
- Whether Keytruda and vaccine growth can offset continued declines in diabetes products and other products facing competition or patent expiry.
- How U.S. drug-pricing policy, Medicaid rebates and the Januvia negotiation process affect future net prices and margins.
- Progress, regulatory decisions and commercial prospects for the company’s major pipeline candidates, including the June 2024 FDA action dates cited in the filing.
- Timing, total cash requirements and realized savings from the restructuring program and the Elanco aqua acquisition.
- Future cash generation, debt repayment needs and the sustainability of dividends and share repurchases, given the quarter’s cash decline and $34.2 billion of debt.
- Developments in material litigation, patent challenges and the IRS examination; Merck states that some potential losses cannot currently be estimated.