Merck & Co., Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017; filed February 27, 2018. The filing also provides unaudited fourth-quarter results. Merck is a global health care company focused on prescription medicines, vaccines, biologic therapies and animal health products. Pharmaceutical is its sole reportable segment.
Key financial results
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $40.122 billion | $39.807 billion |
| Income before taxes | $6.521 billion | $4.659 billion |
| Net income attributable to Merck | $2.394 billion | $3.920 billion |
| Diluted GAAP EPS | $0.87 | $1.41 |
| Diluted non-GAAP EPS | $3.98 | $3.78 |
| Gross margin | 68.2% | 65.1% |
| Cash provided by operating activities | $6.447 billion | $10.376 billion |
| Cash and cash equivalents | $6.092 billion | $6.515 billion |
| Working capital | $6.152 billion | $13.410 billion |
| Long-term debt | $21.353 billion | $24.274 billion |
At year-end, Merck reported $20.6 billion of cash and investments, including $8.5 billion of cash, cash equivalents and short-term investments. Current assets were $24.766 billion and current liabilities were $18.614 billion. Long-term debt plus loans payable and current maturities totaled approximately $24.4 billion.
Research and development expense was $10.208 billion, including a $2.35 billion charge related to the AstraZeneca oncology collaboration. Capital expenditures were $1.888 billion. Merck returned $9.2 billion to shareholders through dividends and share repurchases; dividends declared were $1.89 per share.
Fourth quarter: Revenue was $10.433 billion versus $10.115 billion in Q4 2016. Merck reported a net loss attributable to the company of $1.046 billion, or diluted loss per share of $0.39, compared with a $594 million loss, or $0.22 per diluted share, in Q4 2016. The 2017 quarter included the provisional tax charge related to U.S. tax legislation.
Material changes and business drivers
- Revenue grew 1% year over year. Keytruda sales more than doubled to $3.809 billion from $1.402 billion; Zepatier rose to $1.660 billion from $555 million. Animal Health sales increased 11% to $3.875 billion.
- Growth was offset by approximately $3.3 billion in aggregate declines from products affected by generic or biosimilar competition. Zetia sales fell to $1.344 billion from $2.560 billion, Vytorin to $751 million from $1.141 billion, and Remicade to $837 million from $1.268 billion.
- U.S. sales declined 6% to $17.4 billion, while international sales increased 6% to $22.7 billion. Merck began recording vaccine sales in European markets previously served through the terminated Sanofi Pasteur MSD joint venture, contributing about $400 million of incremental 2017 sales.
- Gross margin improved, reflecting product mix and lower amortization, impairment and restructuring impacts. Cash from operations fell to $6.4 billion from $10.4 billion, primarily reflecting tax and legal settlement payments and AstraZeneca collaboration payments.
- GAAP net income and EPS declined despite higher pretax income, mainly because of the 2017 tax impact and collaboration charge. The effective tax rate was 62.9%, including a provisional $2.6 billion net charge related to the Tax Cuts and Jobs Act (TCJA); non-GAAP EPS increased to $3.98.
Outlook, commentary and significant risks
- The filing does not provide a clear consolidated revenue or EPS forecast for 2018. Management expects continued pricing pressure and anticipates materially unfavorable effects on Zepatier from competition and declining patient volumes, and on Zostavax from a competing vaccine. U.S. NuvaRing sales are expected to decline significantly after patent exclusivity expires in April 2018.
- Merck estimated the 2017 cyberattack reduced sales by approximately $260 million and resulted in $285 million of manufacturing and remediation costs, net of about $45 million in insurance recoveries. It expects an additional approximately $200 million adverse sales impact in 2018 from residual order backlogs; insurance coverage disputes remain possible.
- The cyberattack and temporary production disruption contributed to a $125 million 2017 sales reduction related to borrowing Gardasil 9 doses from the CDC stockpile. Merck expected to replenish the remaining borrowed doses in the second half of 2018. Hurricane Maria had an immaterial sales impact in 2017, with an immaterial impact expected in 2018.
- The TCJA created a provisional net transition-tax payment estimate of $5.1 billion, payable over eight years. Merck noted that the calculation and certain tax-law interpretations remained subject to finalization.
- Merck expects approximately $500 million of additional pretax restructuring costs in 2018. Its stated five-year capital investment plan was approximately $12 billion.
- Pipeline progress included multiple Keytruda approvals and a positive interim result in the KEYNOTE-189 trial reported in January 2018. Conversely, FDA clinical holds on three Keytruda multiple-myeloma combination studies followed more deaths in Keytruda arms; Merck also reported failures in certain gastric-cancer and head-and-neck trials. Several development programs were discontinued or impaired, including verubecestat and uprifosbuvir-related assets.
- Principal risks include patent expirations and litigation, generic and biosimilar competition, pricing and reimbursement pressure, drug safety and regulatory outcomes, R&D failure, manufacturing disruptions, cyber risk, foreign exchange and global political or economic conditions. The company also faces product-liability, antitrust, patent and governmental proceedings; outcomes and possible losses for certain matters could not be reasonably estimated in the filing.
Important facts for investors to verify
- Whether Keytruda’s growth and broader oncology pipeline can offset continued patent-driven erosion and competitive pressure across established products.
- The timing and actual sales impact of 2018 patent losses, pricing actions, Zepatier and Zostavax competition, and the NuvaRing exclusivity expiration.
- Recovery from the cyberattack, completion of Gardasil 9 stockpile replenishment, and the amount and collectability of related insurance recoveries.
- The final TCJA tax liability and payment schedule, along with the effect of tax changes on future cash taxes and earnings.
- Cash generation, liquidity and debt maturities, including the substantial 2018 debt maturities and the sustainability of dividends and share repurchases.
- Developments in material litigation and regulatory investigations, and any resulting liabilities, restrictions or changes to product commercialization.