Merck & Co., Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Financial amounts are in U.S. dollars; figures below are rounded to billions unless stated otherwise.
Business context and results
Merck operates Pharmaceutical and Animal Health segments. Q3 growth was led by oncology, vaccines and Lagevrio; nine-month sales were essentially flat as growth in oncology and vaccines was offset mainly by lower Lagevrio and diabetes-product sales.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Sales | $15.962B | $14.959B | $45.485B | $45.453B |
| Net income attributable to Merck | $4.745B | $3.248B | $1.591B | $11.502B |
| Diluted GAAP EPS | $1.86 | $1.28 | $0.62 | $4.53 |
| Diluted non-GAAP EPS | $2.13 | $1.85 | $1.48 | $5.86 |
| Gross margin | 73.3% | 73.7% | 73.1% | 70.2% |
| Cash from operating activities | Not separately stated for the quarter | $12.760B | $14.665B |
Q3 sales increased 7% reported and 9% excluding foreign exchange; nine-month sales were flat reported and up 3% excluding foreign exchange. Keytruda sales rose 17% in Q3 and 19% year to date. Gardasil/Gardasil 9 sales increased 13% and 29%, respectively. Conversely, nine-month Lagevrio sales fell 75%, Januvia/Janumet fell 28%, and Animal Health segment profit declined 13%.
Cash, debt and liquidity
- Cash and cash equivalents were $8.605B at September 30, down from $12.694B at year-end 2022; cash and investments totaled $10.079B, versus $14.207B.
- Working capital was $8.860B, down from $11.483B. Current assets were $31.954B and current liabilities $23.094B.
- Long-term debt was $33.972B and current loans/debt were $0.887B, compared with $28.745B and $1.946B, respectively, at year-end. Debt to total liabilities and equity rose to 32.7% from 28.1%.
- Nine-month investing cash use was $14.136B, principally reflecting the Prometheus and Imago acquisitions. Financing cash use was $2.565B; Merck paid $5.593B in dividends and repurchased $953M of shares.
Material changes and unusual items
- Nine-month GAAP earnings were heavily affected by $10.217B of Prometheus and $1.192B of Imago acquisition-related R&D charges, for which no tax benefits were recognized. The effective tax rate was 59.3%, versus 11.0% in the prior-year period.
- Merck recorded a $572.5M Zetia antitrust settlement charge in the first nine months. The filing reports court approval of the indirect-purchaser settlement after quarter-end.
- May 2023 debt issuance generated $5.9B net proceeds, partly used to fund the Prometheus acquisition and repay debt. The filing reports total consideration of $11.0B for Prometheus and $1.35B for Imago.
- Q3 gross margin slipped year over year, reflecting foreign exchange, higher Lagevrio sales and intangible amortization. Nine-month gross margin improved, mainly with lower Lagevrio sales and manufacturing costs.
Outlook, management commentary and risks
- Management expects 2023 Lagevrio sales of approximately $1.3B. It expects about $650M of restructuring charges in 2023 and cumulative annual net savings of approximately $900M by year-end; the broader program is expected to cost approximately $4.0B pretax.
- An October 2023 Daiichi Sankyo collaboration, subsequent to quarter-end, involves $4.0B in upfront payments and $1.5B in continuation payments. Merck expects a $5.5B pretax Q4 R&D charge, approximately $1.70 per share, plus an estimated $0.25 per-share negative earnings impact in the first 12 months after closing. Further sales-based milestone payments may apply.
- Management anticipates that U.S. and international drug-pricing measures will negatively affect sales and profits. Januvia was selected for the IRA Medicare negotiation program, with government-set pricing effective January 1, 2026; Merck is challenging the program in court.
- Product and exclusivity pressures include continued Januvia/Janumet declines, expected U.S. Pneumovax 23 declines, and generic competition affecting Bridion and Isentress in certain markets. The filing identifies U.S. Januvia/Janumet exclusivity expectations through May 2026 and Janumet XR through July 2026, subject to stated qualifications.
- Clinical setbacks include closure of three Keytruda-plus-Lenvima Phase 3 studies after specified endpoints were not met. Lagevrio remains under U.S. emergency-use authorization, is not FDA-approved, and its EU marketing application was withdrawn after regulators found the submitted data insufficient.
- Other risks include pending litigation and product-liability claims (approximately 95 Gardasil/Gardasil 9 U.S. cases reported), possible patent challenges, and an IRS examination of 2017–2018 returns that could result in a significant tax liability. Merck says it has no insurance for most product liabilities.
Important facts for investors to verify
- How much of the year-to-date earnings decline reflects acquisition charges and other exclusions, and how non-GAAP results reconcile with GAAP results.
- Funding and earnings effects of the Daiichi Sankyo collaboration, including the Q4 charge, continuation-payment decisions and potential milestones.
- Whether Keytruda, Gardasil and other growth products can offset ongoing declines in diabetes, COVID-19 and products facing competition or patent expiry.
- Effects of IRA negotiations, broader pricing pressure, litigation outcomes and the IRS examination on future cash flows and earnings.
- Liquidity and leverage following acquisitions, dividends, share repurchases and increased debt.