OREANDA-NEWS. Merck (NYSE:MRK), known as MSD outside the United States and Canada, today announced financial results for the first quarter of 2016.

“Our first quarter’s performance sets us on a good course for the year,” said Kenneth C. Frazier, chairman and chief executive officer, Merck. “We remain focused on advancing our pipeline and driving the commercial success of our key launches and inline medicines and vaccines.”

Financial Summary

    First Quarter  
$ in millions, except EPS amounts   2016   2015  
Sales   $9,312   $9,425  

GAAP EPS

   0.40   0.33  

Non-GAAP EPS that excludes items listed below1

   0.89   0.85  

GAAP net income2

   1,125   953  

Non-GAAP net income that excludes items listed below1,2

   2,492   2,426  

Non-GAAP (generally accepted accounting principles) earnings per share (EPS) of $0.89 for the first quarter exclude acquisition- and divestiture-related costs and restructuring costs.

A reconciliation of GAAP to non-GAAP net income and EPS is provided in the tables that follow.

       
$ in millions, except EPS amounts   First Quarter  
    2016   2015  
EPS          
GAAP EPS   $0.40   $0.33  

Difference3

   0.49   0.52  

Non-GAAP EPS that excludes items listed below1

   $0.89   $0.85  
           
Net Income          
GAAP net income2   $1,125   $953  
Difference   1,367   1,473  
Non-GAAP net income that excludes items listed below1,2   $2,492   $2,426  
           
Decrease (Increase) in Net Income Due to Excluded Items:          

Acquisition- and divestiture-related costs4

   $1,423   $1,526  
Restructuring costs   196   225  
Net decrease (increase) in income before taxes   1,619   1,751  
Estimated income tax (benefit) expense   (252)   (278)  
Decrease (increase) in net income   $1,367   $1,473  
           

Additional Executive Commentary

“Business development is a top priority, and we are actively pursuing the best external science through licensing or bolt-on acquisitions to bolster our pipeline and grow our company,” said Frazier.

“The Global Human Health business performed well in the first quarter. The JANUVIA franchise demonstrated strong growth, and we remain pleased with the ongoing launch of KEYTRUDA in markets around the world,” said Adam Schechter, president, Global Human Health. “Additionally, we are already seeing positive signs in the launch of ZEPATIER in the United States.”

“Merck Research Laboratories advanced several clinical development programs in the first quarter of 2016. We continued to accelerate the development of KEYTRUDA with an additional supplemental filing in head and neck cancer, and by securing a fourth Breakthrough Therapy Designation in classical Hodgkin lymphoma,” said Dr. Roger M. Perlmutter, president, Merck Research Laboratories.

“We demonstrated strong performance with a leveraged P&L, growing sales and EPS, excluding the impact of foreign exchange. We benefited from the contribution of new product launches, while continuing to sustain growth in our key franchises and driving operational improvements across the company,” said Robert Davis, chief financial officer.

Select Business Highlights

Worldwide sales were $9.3 billion for the first quarter of 2016, a decrease of 1 percent compared with the first quarter of 2015, including a 4 percent negative impact from foreign exchange.

The following table reflects sales of the company’s top pharmaceutical products, as well as total sales of Animal Health products.

               
$ in millions   First Quarter   Change   Change

Ex-Exchange

  
    2016   2015      
Total Sales   $9,312   $9,425   -1%   3%  
Pharmaceutical   8,104   8,266   -2%   2%  
JANUVIA / JANUMET   1,412   1,393   1%   4%  
ZETIA / VYTORIN   889   887   0%   4%  
GARDASIL / GARDASIL 9   378   359   5%   7%  

PROQUAD, M-M-R II and VARIVAX

   357   348   3%   4%  
REMICADE   349   501   -30%   -26%  
ISENTRESS   340   385   -12%   -8%  
CUBICIN   292   187*   56%*   57%*  
KEYTRUDA   249   83   **   **  
SINGULAIR   237   245   -3%   -1%  
NASONEX   229   289   -21%   -19%  
Animal Health   829   829   0%   9%  
Other Revenues   379   330   15%   23%  

*First quarter of 2015 reflects approximately two months of sales following the acquisition of Cubist Pharmaceuticals, Inc. (Cubist) by Merck on Jan. 21, 2015. Percentages reflect comparison to full quarter of sales in 2016.
**? 100%

Commercial and Pipeline Highlights

During the first quarter of 2016, the company continued to focus on advancing its pipeline, and achieved regulatory and clinical milestones for multiple products in its portfolio.

  • Merck advanced its development program for KEYTRUDA (pembrolizumab), an anti-PD-1 therapy for the treatment of metastatic non-small cell lung cancer (NSCLC) in previously treated patients whose tumors express PD-L1, as well as advanced melanoma.
    • The U.S. Food and Drug Administration (FDA) accepted for review a supplemental Biologics License Application (sBLA) for KEYTRUDA for the treatment of patients with recurrent or metastatic head and neck squamous cell carcinoma with disease progression on or after platinum-containing chemotherapy. The FDA granted Priority Review with a PDUFA action date of Aug. 9, 2016; the sBLA will be reviewed under the FDA’s Accelerated Approval program.
    • KEYTRUDA received Breakthrough Therapy Designation from the FDA for the treatment of patients with relapsed or refractory classical Hodgkin lymphoma. It is the fourth Breakthrough Therapy Designation granted for KEYTRUDA.
    • The FDA also accepted for review a sBLA for KEYTRUDA to include data from the pivotal KEYNOTE-010 study in which KEYTRUDA showed superior overall survival compared to chemotherapy in patients with previously treated advanced NSCLC whose tumors express PD-L1. In accordance with the accelerated approval process, the data from KEYNOTE-010 was intended to serve as the confirmatory trial for receiving full approval, establishing the clinical benefit by demonstrating improved survival over standard chemotherapy.
    • The KEYTRUDA clinical development program includes patients with more than 30 tumor types in more than 250 clinical trials, including more than 100 trials that combine KEYTRUDA with other cancer treatments. Registration-enabling trials of KEYTRUDA are currently enrolling patients with melanoma, NSCLC, head and neck cancer, bladder cancer, gastric cancer, colorectal cancer, esophageal cancer, breast cancer, ovarian cancer, Hodgkin lymphoma, non-Hodgkin lymphoma, multiple myeloma, nasopharyngeal cancer, and other tumors, with further trials in planning for other cancers.
  • The FDA approved ZEPATIER (elbasvir and grazoprevir), a once-daily, fixed-dose combination tablet for the treatment of adult patients with chronic hepatitis C virus genotype (GT) 1 or GT4 infection, with or without ribavirin.
  • The FDA accepted for review the Biologics License Application (BLA) for MK-8237, the company’s investigational house dust mite sublingual allergy immunotherapy tablet.
  • The Antimicrobial Drugs Advisory Committee of the FDA has scheduled a meeting on June 9, 2016 to discuss the BLA for ZINPLAVA (bezlotoxumab), an investigational antitoxin for the prevention of Clostridium difficile (C. difficile) infection recurrence, which was accepted by the FDA for Priority Review with a PDUFA action date of July 23, 2016.

Pharmaceutical Revenue Performance

First-quarter pharmaceutical sales declined 2 percent to $8.1 billion, including a 4 percent negative impact from foreign exchange. Excluding the impact of exchange, growth reflects higher sales in oncology, hospital acute care and diabetes. Growth in oncology was driven by higher sales of KEYTRUDA as the company continues to launch the product with new indications and in new markets. Growth in hospital acute care was driven by sales of the Cubist portfolio and sales growth of certain inline brands. Pharmaceutical sales also reflect an increase in the diabetes franchise of JANUVIA (sitagliptin) and JANUMET (sitagliptin and metformin HCl), medicines that help lower blood sugar in adults with type 2 diabetes, driven by strong growth in the United States and Europe, partially offset by lower sales in emerging markets.

First-quarter pharmaceutical sales reflect a decrease in REMICADE (infliximab), a treatment for inflammatory diseases, due to the accelerating impact of biosimilar competition in the company’s marketing territories in Europe. Pharmaceutical sales also reflect declines in NASONEX (mometasone furoate monohydrate), an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms, and ZOSTAVAX (zoster vaccine live), a vaccine for the prevention of herpes zoster. Pharmaceutical sales were unfavorably affected in the first quarter of 2016 by the company’s reduced operations in Venezuela.

A generic version of NASONEX became available in the United States in March 2016; as a result, the company anticipates significant losses of future NASONEX sales. Additionally, in June 2016 the company will lose U.S. patent protection for CUBICIN (daptomycin for injection), an I.V. antibiotic, and significant losses of CUBICIN sales are expected to occur thereafter.

Animal Health Revenue Performance

Animal Health sales, which totaled $829 million for the first quarter of 2016, were in line with sales from the first quarter of 2015. Excluding the impact of foreign exchange, Animal Health sales grew 9 percent, primarily driven by BRAVECTO (fluralaner), a chewable tablet that kills fleas and ticks in dogs for up to 12 weeks.

First-Quarter 2016 Expense and Other Information

The tables that follow present selected expense information.

       
$ in millions   Included in expenses for the period  
        Acquisition-          
        and          
First Quarter       Divestiture-   Restructuring      
2016   GAAP  

Related Costs4

   Costs  

Non-GAAP1

  
Materials and production   $3,572   $1,386   $47   $2,139  
Marketing and administrative   2,318   2   3   2,313  
Research and development   1,659   35   55   1,569  
Restructuring costs   91   –   91   –  
First Quarter

2015

                  
Materials and production   $3,569   $1,250   $105   $2,214  
Marketing and administrative   2,601   227   36   2,338  
Research and development   1,737   63   2   1,672  
Restructuring costs   82   –   82   –  
                   

The gross margin was 61.6 percent for the first quarter of 2016 compared to 62.1 percent for the first quarter of 2015, reflecting 15.4 and 14.4 unfavorable percentage point impacts, respectively, from the acquisition- and divestiture-related costs and restructuring costs noted above.

Research and development (R&D) expenses, on a non-GAAP basis, were $1.6 billion in the first quarter of 2016, a 6 percent decrease compared to the first quarter of 2015, primarily driven by lower licensing expenses.

Financial Outlook

Merck continues to expect its full-year 2016 GAAP EPS to be between $1.96 and $2.23. The company has narrowed and raised its full-year 2016 non-GAAP EPS to be between $3.65 and $3.77, including an approximately 2 percent negative impact from foreign exchange at mid-April exchange rates. The non-GAAP range excludes acquisition- and divestiture-related costs and costs related to restructuring programs. The change in the non-GAAP EPS range reflects recent favorability in foreign exchange rates, partially offset by the earlier than expected entry of a generic version of NASONEX in the United States.

At mid-April exchange rates, Merck now anticipates full-year 2016 revenues to be between $39.0 billion and $40.2 billion, including an approximately 2 percent negative impact from foreign exchange.

In addition, the company continues to expect full-year 2016 non-GAAP marketing and administrative expenses to be below 2015 levels and R&D expenses to be modestly above 2015 levels.

The company continues to anticipate its full-year 2016 non-GAAP tax rate will be in the range of 21.5 to 22.5 percent, including a 2016 R&D tax credit.

A reconciliation of anticipated 2016 EPS, as reported in accordance with GAAP to non-GAAP EPS that excludes certain items, is provided in the table below.

     
    Full Year
$ in millions, except EPS amounts   2016
GAAP EPS   $1.96 to $2.23
Difference3   1.69 to 1.54
Non-GAAP EPS that excludes items listed below   $3.65 to $3.77
     
Acquisition- and divestiture-related costs   $4,700 to $4,400
Restructuring costs   900 to 700
Net decrease (increase) in income before taxes   5,600 to 5,100
Estimated income tax (benefit) expense   (900) to (805)
Decrease (increase) in net income   $4,700 to $4,295

Total Employees

As of March 31, 2016, Merck had approximately 68,000 employees worldwide.

 

About Merck

For 125 years, Merck has been a global health care leader working to help the world be well. Merck is known as MSD outside the United States and Canada. Through our prescription medicines, vaccines, biologic therapies, and animal health products, we work with customers and operate in more than 140 countries to deliver innovative health solutions. We also demonstrate our commitment to increasing access to health care through far-reaching policies, programs and partnerships.

             
MERCK & CO., INC.
CONSOLIDATED STATEMENT OF INCOME - GAAP
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE FIGURES)
(UNAUDITED)
Table 1
             
    GAAP  

 

  
    1Q16   1Q15  

% Change
             
             
Sales   $ 9,312     $ 9,425     -1%
             
Costs, Expenses and Other            
Materials and production (1)     3,572       3,569     --
Marketing and administrative (1)     2,318       2,601     -11%
Research and development (1)     1,659       1,737     -4%
Restructuring costs (2)     91       82     11%
Other (income) expense, net (1)     48       55     -13%
Income Before Taxes     1,624       1,381     18%
Income Tax Provision     494       423      
Net Income     1,130       958     18%
Less: Net Income Attributable to Noncontrolling Interests     5       5      
Net Income Attributable to Merck & Co., Inc.   $ 1,125     $ 953     18%
Earnings per Common Share Assuming Dilution   $ 0.40     $ 0.33     21%
             
Average Shares Outstanding Assuming Dilution     2,795       2,865      
Tax Rate     30.4 %     30.6 %    

(1) Amounts include the impact of acquisition and divestiture-related costs, restructuring costs and certain other items. See accompanying tables for details.

(2) Represents separation and other related costs associated with restructuring activities under the company's formal restructuring programs.

                       
MERCK & CO., INC.
CONSOLIDATED STATEMENT OF INCOME
GAAP TO NON-GAAP RECONCILIATION
FIRST QUARTER 2016
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE FIGURES)
(UNAUDITED)
Table 2a
                       
        Acquisition and              
    GAAP   Divestiture-   Restructuring   Adjustment     Non-GAAP
       

Related Costs(1)

  

Costs (2)

   Subtotal      
                       
Sales   $ 9,312                   $ 9,312  
                       
Costs, Expenses and Other                      
Materials and production     3,572     1,386     47     1,433         2,139  
Marketing and administrative     2,318     2     3     5         2,313  
Research and development     1,659     35     55     90         1,569  
Restructuring costs     91         91     91         -  
Other (income) expense, net     48                     48  
Income Before Taxes     1,624     (1,423 )   (196 )   (1,619 )       3,243  
Income Tax Provision     494             (252 )

(3)

     746  
Net Income     1,130             (1,367 )       2,497  
Less: Net Income Attributable to Noncontrolling Interests     5                     5  
Net Income Attributable to Merck & Co., Inc.   $ 1,125             (1,367 )     $ 2,492  
Earnings per Common Share Assuming Dilution   $ 0.40                   $ 0.89  
                       
Average Shares Outstanding Assuming Dilution     2,795                     2,795  
Tax Rate     30.4 %                   23.0 %

Merck is providing non-GAAP information that excludes certain items because of the nature of these items and the impact they have on the analysis of underlying business performance and trends. Management believes that providing this information enhances investors' understanding of the company's performance. This information should be considered in addition to, but not in lieu of, information prepared in accordance with GAAP.

(1) Amounts included in materials and production costs reflect $1.1 billion of expenses for the amortization of intangible assets recognized as a result of acquisitions, as well as $24 million of amortization of purchase accounting adjustments to inventories as a result of the prior year acquisition of Cubist Pharmaceuticals, Inc., and $252 million of impairment charges on product intangibles. Amounts included in marketing and administrative expenses reflect integration, transaction and certain other costs related to business acquisitions, including severance costs which are not part of the company's formal restructuring programs, as well as transaction and certain other costs related to divestitures. Amounts included in research and development expenses primarily reflect in-process research and development ("IPR&D") impairment charges.

(2) Amounts primarily include employee separation costs and accelerated depreciation associated with facilities to be closed or divested related to activities under the company's formal restructuring programs.

(3) Represents the estimated tax impact on the reconciling items.

   
MERCK & CO., INC.  
FRANCHISE / KEY PRODUCT SALES  
(AMOUNTS IN MILLIONS)  
Table 3  
                               
               
    2016   2015   % Change  
    1Q   1Q   2Q   3Q   4Q   FY   1Q  
TOTAL SALES(1)   $ 9,312   $ 9,425   $ 9,785   $ 10,073   $ 10,215   $ 39,498   -1  
PHARMACEUTICAL     8,104     8,266     8,564     8,925     9,027     34,782   -2  
Primary Care and Women's Health                              
Cardiovascular                              
Zetia     612     568     635     633     691     2,526   8  
Vytorin     277     320     320     302     308     1,251   -13  
Diabetes                              
Januvia     906     884     1,044     1,014     921     3,863   2  
Janumet     506     509     554     562     526     2,151   -1  
General Medicine & Women's Health                              
NuvaRing     175     166     182     190     193     732   6  
Implanon / Nexplanon     134     137     124     176     151     588   -2  
Dulera     113     130     120     133     153     536   -13  
Follistim AQ     94     82     111     95     95     383   16  
Hospital and Specialty                              
Hepatitis                              
Zepatier     50     0     0     0     0     0   *  
HIV                              
Isentress     340     385     375     377     374     1,511   -12  
Hospital Acute Care                              
Cubicin(2)     292     187     293     325     322     1,127   56  
Noxafil     145     111     117     132     128     487   31  
Cancidas     133     163     134     139     137     573   -19  
Invanz     114     132     139     153     144     569   -14  
Bridion     90     85     87     89     92     353   6  
Primaxin     73     65     88     75     86     313   13  
Immunology                              
Remicade     349     501     455     442     396     1,794   -30  
Simponi     188     158     169     178     185     690   19  
Oncology                              
Keytruda     249     83     110     159     214     566   *  
Emend     126     122     134     141     139     535   3  
Temodar     66     74     80     83     75     312   -12  
Diversified Brands                              
Respiratory                              
Singulair     237     245     212     201     273     931   -3  
Nasonex     229     289     215     121     231     858   -21  
Other                              
Cozaar / Hyzaar     126     185     189     150     143     667   -32  
Arcoxia     111     123     115     123     110     471   -10  
Fosamax     75     94     96     86     82     359   -20  
Zocor     46     49     63     56     49     217   -7  
Vaccines                              
Gardasil / Gardasil 9     378     359     427     625     497     1,908   5  
ProQuad, M-M-R II and Varivax     357     348     358     390     409     1,505   3  
RotaTeq     188     192     89     160     169     610   -2  
Zostavax     125     175     149     179     246     749   -28  
Pneumovax 23     107     110     106     138     188     542   -3  
Other Pharmaceutical(3)     1,093     1,235     1,274     1,298     1,300     5,105   -12  
                               
ANIMAL HEALTH     829     829     840     825     830     3,324   0  
                               
Other Revenues(4)     379     330     381     323     358     1,392   15  

* 100% or greater

Sum of quarterly amounts may not equal year-to-date amounts due to rounding.

(1) Only select products are shown.

(2) First quarter of 2015 reflects approximately two months of sales following the acquisition of Cubist Pharmaceuticals, Inc. by Merck on Jan. 21, 2015. Percentage reflects comparison to full quarter of sales in 2016.

(3) Includes Pharmaceutical products not individually shown above. Other Vaccines sales included in Other Pharmaceutical were $103 million in the first quarter of 2016 and $78 million, $76 million, $99 million and $148 million for the first, second, third and fourth quarters of 2015, respectively.

(4) Other revenues are comprised primarily of alliance revenue, third-party manufacturing sales and miscellaneous corporate revenues, including revenue hedging activities.