Merck & Co., Inc. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019; filed February 26, 2020. The filing also reports fourth-quarter results. Unless noted, financial amounts are in U.S. dollars.
Business context
Merck is a global health care company focused on prescription medicines, vaccines, biologic therapies and animal health products. Pharmaceutical and Animal Health are its reportable segments. Oncology, led by Keytruda, was the principal growth driver; international markets represented 57% of sales.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Sales | $46.840 billion | $42.294 billion |
| Income before taxes | $11.464 billion | $8.701 billion |
| Net income attributable to Merck | $9.843 billion | $6.220 billion |
| Diluted EPS | $3.81 | $2.32 |
| Non-GAAP diluted EPS | $5.19 | $4.34 |
| Gross margin | 69.9% | 68.1% |
| Cash provided by operating activities | $13.440 billion | $10.922 billion |
| Capital expenditures | $3.473 billion | $2.615 billion |
| Cash and cash equivalents at year-end | $9.676 billion | $7.965 billion |
| Working capital at year-end | $5.263 billion | $3.669 billion |
| Long-term debt at year-end | $22.736 billion | $19.806 billion |
Sales increased 11% year over year, or 13% excluding a 2% unfavorable foreign-exchange effect. Pharmaceutical sales were $41.751 billion; Animal Health sales were $4.393 billion. Merck’s reported total debt-to-liabilities-and-equity ratio was 31.2%, and operating cash flow to total debt was 0.5:1.
In the fourth quarter, sales were $11.868 billion versus $10.998 billion a year earlier. Net income attributable to Merck was $2.357 billion versus $1.827 billion, and diluted EPS was $0.92 versus $0.69.
Material changes versus the prior year
- Keytruda sales rose 55% to $11.084 billion. Gardasil/Gardasil 9 sales grew 19% to $3.737 billion; Bridion grew 23% to $1.131 billion.
- Growth was partly offset by generic or biosimilar competition and pricing pressure. Januvia/Janumet sales fell 7% to $5.524 billion; Zetia/Vytorin fell 35% to $874 million; Isentress/Isentress HD fell 15% to $975 million.
- GAAP net income and EPS increased substantially, while the effective tax rate declined to 14.7% from 28.8%. The 2019 rate included a $364 million net tax benefit from federal tax matters and an $86 million benefit from reversal of certain tax reserves, among other items.
- Operating cash flow increased by $2.518 billion. Merck said stronger operating performance and increased accounts-receivable factoring contributed; it factored $2.7 billion of receivables in fourth-quarter 2019, compared with $1.1 billion in fourth-quarter 2018.
- Capital expenditures rose to $3.473 billion, primarily to expand manufacturing capacity. Merck also acquired Antelliq for total consideration of approximately $3.651 billion and acquired Peloton for an upfront $1.2 billion; the Peloton transaction resulted in a $993 million R&D charge.
Outlook, commentary, risks and unusual items
- Outlook: The filing does not provide a clear numerical 2020 sales or earnings guidance figure. Management cited continued pricing and market-access pressure. Merck planned to invest more than $19 billion in capital projects during 2019–2023.
- Restructuring: The global program is expected to cost approximately $2.5 billion pretax, with about 60% expected to be cash costs. Merck anticipated approximately $800 million of charges in 2020 and annual net savings of approximately $900 million by the end of 2023.
- Proposed spin-off: In February 2020, Merck announced plans to spin off women’s health, selected legacy brands and biosimilars into a separate company, expected in the first half of 2021, subject to conditions and approvals. Merck warned that timing, costs, expected benefits and tax-free treatment are uncertain.
- COVID-19: The filing said the outbreak was expected to negatively affect first-quarter 2020 results, but not materially at that time; the full-year effect was uncertain. It also noted limited supply-chain effects and disruption to certain clinical trials.
- Product and pricing risks: Generic competition had begun affecting products including Noxafil and NuvaRing; Merck anticipated substantial NuvaRing U.S. sales declines in 2020. Januvia/Janumet U.S. and EU patent protection was expected to expire in 2022, subject to possible extensions. Japan reduced Keytruda’s price 17.5% effective February 2020 and planned another significant reduction in April 2020.
- Other unusual items: 2019 included $705 million of marketed-product intangible impairment charges, including $612 million for Sivextro, and $172 million of in-process R&D impairment charges. GAAP and non-GAAP results differ materially; Merck’s non-GAAP measures exclude acquisition and divestiture costs, restructuring and selected other items.
- Contingencies and controls: Merck disclosed ongoing product-liability, patent, antitrust and governmental matters, including Fosamax and Januvia/Janumet litigation. It said outcomes or potential losses could not be estimated for certain matters. The auditor issued an unqualified opinion and found internal control over financial reporting effective.
Important facts for investors to verify
- Whether Keytruda and vaccine growth can continue to offset declines from competition, price reductions and mature products.
- How much of the 2019 cash-flow increase reflects recurring operating performance versus receivables factoring, and the sustainability of cash conversion.
- The timing, total costs, expected savings and execution risks of the restructuring program and proposed spin-off.
- The financial consequences of upcoming patent expirations, generic and biosimilar entry, and government pricing actions, particularly for Januvia/Janumet and Keytruda in Japan.
- Developments in COVID-19 effects, significant litigation and investigations, and the potential for further acquired-intangible or pipeline impairments.