Merck & Co., Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Figures are unaudited and in U.S. dollars; financial amounts are in millions unless noted.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Sales | $14,487 | $15,901 | (9%) |
| Income before taxes | $3,650 | $4,861 | (25%) |
| Net income attributable to Merck | $2,821 | $4,310 | (35%) |
| Diluted EPS | $1.11 | $1.70 | (35%) |
| Non-GAAP diluted EPS | $1.40 | $2.14 | (35%) |
| Operating cash flow | $1,339 | $4,761 | (72%) |
| Capital expenditures | $1,007 | $984 | +$23 |
Gross margin improved to 72.9% from 66.2%, largely due to lower Lagevrio sales, product mix and lower intangible amortization. GAAP net margin was approximately 19.5%, compared with 27.1% a year earlier. Cash flow from operations less capital expenditures was approximately $332 million.
At March 31, cash and investments totaled $11,677, working capital was $10,271, and debt was approximately $30,746, including current maturities. Total debt to total liabilities and equity was 28.5%. Cash and cash equivalents were $9,707, down from $12,694 at year-end 2022.
Material changes and business drivers
- Worldwide sales declined 9%; excluding foreign exchange, they fell 5%. Lagevrio sales dropped to $392 from $3,247, reflecting pandemic-related demand and shipment patterns.
- Keytruda sales rose 20% to $5,795. Gardasil/Gardasil 9 rose 35% to $1,972, while diabetes franchise sales of Januvia and Janumet fell 29% to $880.
- Research and development expense increased 66% to $4,276, including a $1,192 charge for the Imago acquisition and a $175 upfront Kelun-Biotech licensing payment.
- GAAP results included a $572.5 charge for Zetia antitrust settlements. Other income/expense also benefited from net gains on equity investments, versus net losses in Q1 2022.
- The effective tax rate rose to 22.6% from 11.4%, including the tax effect of the Imago charge, for which no tax benefit was recognized.
Outlook, commentary and risks
- Management expects 2023 Lagevrio sales of approximately $1.0 billion. It expects continued U.S. pricing and volume declines for Januvia and Janumet, and ongoing competitive pressure for Isentress.
- For the restructuring program, Merck expects approximately $400 million of 2023 charges and approximately $900 million of cumulative annual net savings by year-end 2023. Remaining cash outlays are expected to be largely completed by the end of 2025.
- Merck agreed in April 2023 to acquire Prometheus Biosciences for approximately $10.8 billion, subject to approval and customary conditions, with closing expected in Q3 2023. Merck anticipates a roughly $10.3 billion R&D charge if completed and approximately $0.25 per-share negative EPS impact during the first 12 months after closing.
- Management cited global drug-pricing and reimbursement pressure, U.S. health-care policy changes, and supply-chain disruption and cost-inflation risks.
- Key uncertainties include clinical and regulatory outcomes: the EU recommended refusing Lagevrio’s marketing application, which Merck and Ridgeback appealed; gefapixant received an FDA Complete Response Letter; and certain Keytruda, Lenvima and other study results did not meet key endpoints or were discontinued.
- Legal matters include product-liability and patent disputes, among others. The company recorded the Zetia settlement charge; it stated it could not reasonably estimate possible losses for certain litigation. Merck also disclosed nitrosamine findings in some sitagliptin-product batches; difficulties reducing levels or securing timely approvals could cause shortages.
Investor facts to verify
- Whether Keytruda growth and vaccine demand can offset Lagevrio declines and Januvia/Janumet erosion.
- The expected closing, financing and accounting effects of the Prometheus acquisition, including the anticipated charge and EPS impact.
- Regulatory progress and commercial prospects for Lagevrio, gefapixant and major pipeline candidates, alongside the implications of discontinued or unsuccessful trials.
- Developments in Zetia and other litigation, and the potential for additional costs or liabilities.
- Cash generation, spending needs and balance-sheet capacity in light of acquisitions, dividends, capital expenditures and approximately $30.7 billion of debt.