Merck & Co., Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited results; comparisons are with Q1 2021 unless stated otherwise. Merck’s 2021 Organon spin-off is reported as discontinued operations, so continuing-operations figures provide the principal operating comparison.
Financial performance and position
| Metric | Q1 2022 | Comparison / detail |
|---|---|---|
| Sales | $15.901 billion | Up 50% reported and 52% excluding foreign exchange |
| Net income from continuing operations attributable to Merck | $4.310 billion | Up from $2.745 billion |
| Diluted EPS from continuing operations | $1.70 | Up from $1.08 |
| Non-GAAP diluted EPS from continuing operations | $2.14 | Versus $1.16; excludes specified items |
| Gross margin | 66.2% | Down from 69.9% |
| Operating cash flow, continuing operations | $4.761 billion | Versus $1.240 billion |
| Capital expenditures | $984 million | Versus $1.082 billion |
| Cash and investments | $9.244 billion | At March 31, 2022 |
| Total debt | $31.794 billion | Loans payable/current debt plus long-term debt; $33.102 billion at December 31, 2021 |
| Working capital | $8.868 billion | Versus $6.394 billion at year-end 2021 |
Operating cash flow less capital expenditures was approximately $3.777 billion. The company paid $1.745 billion in dividends. Its $6.0 billion credit facility, maturing in 2026, was undrawn. Total debt was 29.8% of total liabilities and equity, compared with 31.3% at year-end 2021.
Material changes and drivers
- Sales growth was led by $3.247 billion in Lagevrio (molnupiravir) sales, compared with none in Q1 2021, and by Keytruda sales growth of 23% to $4.809 billion. Gardasil/Gardasil 9 sales rose 59%; alliance revenue from Lenvima rose 75%.
- Pharmaceutical segment sales reached $14.107 billion, up from $9.238 billion; Animal Health sales were $1.482 billion, up from $1.418 billion. Januvia/Janumet sales declined 5% to $1.233 billion, and Isentress/Isentress HD sales declined 24% to $158 million.
- Gross margin declined, reflecting Lagevrio’s lower margin and profit-sharing arrangement with Ridgeback, higher manufacturing costs and increased intangible amortization. Q1 2022 cost of sales included $250 million of cumulative catch-up amortization related to the AstraZeneca Lynparza collaboration.
- Other expense, net was $708 million, compared with $455 million of income in Q1 2021, primarily reflecting investment losses in 2022 versus gains in 2021. Management estimated a further approximately $300 million of losses from investment funds in Q2 2022.
- Q1 2021 continuing results included a $208 million net tax benefit from settlement of federal tax matters; the effective tax rate was 8.0% then and 11.4% in Q1 2022. Q1 2021 total net income also included $434 million from discontinued operations.
- Operating cash flow benefited from stronger operating performance and Lagevrio sales; the related Ridgeback profit-sharing payment was expected in Q2. Q1 2022 operating cash flow also included $1.2 billion of collaboration milestone payments.
Outlook, risks and unusual items
- Merck expects Lagevrio sales in each remaining quarter of 2022 to be below Q1 and anticipates full-year 2022 sales of $5.0 billion to $5.5 billion.
- The company expects approximately $400 million of restructuring charges in 2022, with the program substantially completed by the end of 2023. It anticipates annual net savings of approximately $900 million by the end of 2023.
- Management expects U.S. taxes paid to rise significantly in 2022 because of required capitalization of research and development costs for tax purposes.
- Risks include evolving effects of the Russia-Ukraine war and sanctions on operations, supply chains and trials; health-care pricing pressure; and COVID-related supply-chain volatility. The war’s Q1 financial impact was immaterial, but future effects were uncertain. Russia and Ukraine together represented approximately 1% of 2021 sales.
- Januvia and Janumet face expected loss of exclusivity in China in July 2022, Europe in September 2022 and the U.S. in January 2023; Merck anticipates substantial sales declines in those markets after exclusivity ends. Isentress also faces continuing competitive pressure.
- Gefapixant received an FDA Complete Response Letter requesting additional efficacy-measurement information. Merck discontinued the Phase 3 Keytruda-Lynparza prostate cancer trial after it failed to demonstrate benefit on overall survival and radiographic progression-free survival.
- Merck reported significant ongoing product-liability, antitrust and patent matters. It said resolution of ordinary claims is unlikely to be material, but stated it could not estimate possible losses for certain litigation. Legal defense reserves were approximately $235 million at quarter-end.
- Other notable items: Merck accrued a $600 million Lynparza sales-based milestone and recorded $250 million of related catch-up amortization; it made $400 million of previously accrued AstraZeneca milestone payments and $300 million of previously accrued Eisai payments. It also paid Bayer the final $400 million sales milestone under their collaboration.
Important facts for investors to verify
- Whether Lagevrio demand and full-year sales meet management’s $5.0–$5.5 billion outlook, and how its profit-sharing affects margins and cash flow.
- How much of reported earnings and cash generation reflects recurring product performance versus investment-market movements, milestone accounting and timing of collaboration payments.
- The pace of Keytruda, Gardasil and other growth-product sales, alongside Januvia/Janumet and Isentress declines and upcoming exclusivity expirations.
- Progress and realized savings from restructuring, plus the effects of higher U.S. tax payments and pricing pressure.
- Developments in litigation, patent challenges and the Russia-Ukraine conflict, including any material changes to exposures or operations.