Merck(MRK) - 2023 Q4 - Annual Report

Regulatory Approvals and Product Developments - Keytruda received multiple FDA and international approvals in 2023, including full approval for MSI-H/dMMR solid tumors in March 2023 and accelerated approval for urothelial carcinoma in April 2023[16] - Keytruda gained EC approval in October 2023 for adjuvant treatment of NSCLC and in December 2023 for HER2-negative gastric or GEJ adenocarcinoma[17] - Lynparza received FDA approval in May 2023 for BRCA-mutated metastatic castration-resistant prostate cancer[17] - Prevymis received FDA approval in June 2023 for CMV prophylaxis in kidney transplant recipients[17] - Ervebo received expanded FDA approval in August 2023 for Ebola virus disease prevention in individuals 12 months and older[17] - Welireg received FDA approval in December 2023 for advanced RCC treatment[17] - Bravecto received EC approval in January 2024 for a 12-month injectable formulation for dogs[17] - MK-1022 (patritumab deruxtecan) is under priority review by the FDA with a PDUFA date of June 26, 2024, for the treatment of EGFR-mutated NSCLC[49] - MK-7962 (sotatercept) is under priority review by the FDA with a PDUFA date of March 26, 2024, for the treatment of pulmonary arterial hypertension[49] - V116, a 21-valent pneumococcal conjugate vaccine, is under priority review by the FDA with a PDUFA date of June 17, 2024[49] - MK-7264 (gefapixant) received a second Complete Response Letter (CRL) from the FDA in December 2023 due to insufficient evidence of effectiveness[49] - Keytruda (MK-3475) is under priority review by the FDA for expanded indications in combination with chemotherapy for the treatment of primary advanced or recurrent endometrial carcinoma[49] - Keytruda is under review in the EU and Japan as a perioperative treatment regimen for resectable stage II, IIIA, or IIIB NSCLC, with a CHMP positive opinion recommending approval in February 2024[50] - Keytruda is under review in the EU and Japan in combination with Padcev for locally advanced or metastatic urothelial carcinoma, based on the KEYNOTE-A39 trial[50] - Keytruda is under review in Japan for first-line treatment of locally advanced unresectable or metastatic gastric or GEJ adenocarcinoma, based on the KEYNOTE-859 trial[50] - Welireg is under review in the EU for advanced renal cell carcinoma and von Hippel-Lindau disease, based on the LIGHTSPARK-005 and LIGHTSPARK-004 trials[50] - MK-7339 (Lynparza) is being evaluated in combination with pembrolizumab for expanded indications in NSCLC and SCLC[51] - MK-1026 (nemtabrutinib) is being evaluated for hematological malignancies, including chronic lymphocytic leukemia and small lymphocytic lymphoma[52] - MK-2870, a TROP2-directed ADC, is being evaluated for NSCLC and previously treated endometrial carcinoma[53] - MK-0616, an oral PCSK9 inhibitor, is in Phase 3 development for hypercholesterolemia, with two registrational Phase 3 studies initiated in 2023[53] - MK-4482 (Lagevrio) is under review for mild to moderate COVID-19, with FDA Emergency Use Authorization last reissued in October 2023[55] - The Phase 3 KEYLYNK-008 trial evaluating Keytruda in combination with Lynparza for metastatic squamous NSCLC was discontinued in December 2023 due to lack of overall survival improvement[53] Pricing and Market Access Challenges - The company's gross U.S. sales were reduced by 37% in 2023 due to rebates, discounts, and returns[21] - The Inflation Reduction Act (IRA) introduces financial penalties for drugs with prices rising faster than inflation and government price-setting for certain Medicare drugs starting in 2026[22] - The American Rescue Plan Act eliminates the statutory cap on Medicaid rebates starting in 2024, potentially increasing manufacturer rebates beyond 100% of AMP[22] - The Company faces intense pricing pressure in the EU due to generic and biosimilar drugs, with reference pricing mechanisms leading to downward pressure on drug prices[25] - In China, new entries to the National Reimbursement Drug List (NRDL) averaged 60% price reductions, and mature products in the Volume-Based Procurement (VBP) program saw average price reductions of over 50%[27] - Japan will implement government-mandated price reductions for pharmaceutical products in April 2024[25] - The Company anticipates continued pricing pressures and market access challenges in emerging markets due to cost containment measures and intellectual property regulations[27] Data Protection and Privacy Regulations - The EU's GDPR imposes penalties of up to 4% of global revenue for non-compliance with data protection regulations[31] - China's Personal Information Protection Law (PIPL) became effective in November 2021, adding complexity to data processing and cross-border transfers[32] - The Company's global privacy program manages evolving data protection requirements and facilitates international data transfers[32] Sales and Distribution Channels - The Company's human health pharmaceutical products are primarily sold to wholesalers, retailers, hospitals, and government agencies[33] - The Company's animal health products are distributed to veterinarians, distributors, animal producers, and pet owners[33] Patent Expirations and Exclusivity - Keytruda's patent protection in the U.S. expires in 2028, in the EU in 2031, and in Japan between 2032-2033[40] - Gardasil 9's patent protection in the U.S. expires in 2028, in the EU in 2030, and in Japan in 2030[40] - MK-7962 (sotatercept) is eligible for 12 years of data exclusivity upon U.S. approval, with granted patents expiring in 2037[42] - V116 (pneumococcal vaccine) has a U.S. patent expiration date of 2038[42] - MK-8591A (doravirine + islatravir) has a U.S. patent expiration date of 2032, with a pending PTE for doravirine[44] - MK-3475A (pembrolizumab + hyaluronidase subcutaneous) has a U.S. patent expiration date of 2039[44] - Bravecto's patent protection in the U.S. expires in 2026 (with pending PTE), in the EU in 2029, and in Japan in 2029[40] - Januvia and Janumet's exclusivity extends through May 2026 and July 2026, respectively, due to settlement agreements[39] Research and Development - The company employs approximately 21,800 people in research activities as of December 31, 2023[46] - The company's clinical pipeline includes candidates in multiple disease areas such as cancer, cardiovascular diseases, metabolic diseases, infectious diseases, neurosciences, immunology, respiratory diseases, and vaccines[46] - The company's R&D model focuses on prioritizing resources on candidates with unambiguous advantages to patients and payers, and maximizing the value of approved medicines through new indications and formulations[46] - The company utilizes adaptive clinical trial designs, such as adaptive Phase 2a/2b and Phase 2/3 trials, to reduce timelines and improve efficiency[46] - The company's external sourcing strategy includes acquisitions, licensing, and alliances to supplement internal research and access new technologies[46] Workforce and Employee Benefits - The company had approximately 72,000 employees worldwide as of December 31, 2023, with 29,000 in the U.S. and 15,000 third-party contractors globally[58] - Women comprise 51% of the company's global workforce and 46% of the Board of Directors, while underrepresented ethnic groups make up 35% of the U.S. workforce[58][61] - The company's voluntary turnover rate was 5.6% in 2023, down from 8.5% in 2022[58] - In 2023, the company hired approximately 8,200 employees globally, with 53% being women and 47% from underrepresented ethnic groups in the U.S.[59][61] - The company provides a minimum of 12 weeks of paid parental leave globally and ranks in the top quartile of Fortune 100 companies for U.S. benefits[62] - The company's senior management team is 37% women, and 26% of senior management roles in the U.S. are held by members of underrepresented ethnic groups[61] - The company's talent management system supports performance management, leadership development, and succession planning, with annual performance reviews[66] - The company offers flexible work arrangements, including remote work, flextime, and part-time options, to support employee well-being[64] Environmental Sustainability - The company's environmental sustainability strategy focuses on operational efficiency, minimizing product environmental impact, and reducing value chain impacts[67] - The company's Environmental Health and Safety (EHS) Council oversees environmental sustainability efforts, with leadership representation from all business areas[67] - The company aims to reduce Scope 1 and 2 operational greenhouse gas emissions by 46% by 2030 (from a 2019 baseline) and achieve carbon neutrality for Scope 1 and 2 emissions by 2025[69] - The company plans to source 100% of its purchased electricity from renewable sources by 2025 and reduce Scope 3 greenhouse gas emissions by 30% by 2030 (from a 2019 baseline)[69] - The company has set a target to maintain global water use at or below 2015 levels by 2025[69] - The company's 2025 waste diversion goals include no more than 20% of global operational waste sent to landfills or incinerators and 50% of its sites sending zero waste to landfills[69] - Expenditures for environmental remediation and liabilities were $6 million in 2023 and are estimated to be $27 million for 2024 through 2028[71] Financial Performance - Sales outside the U.S. accounted for 53% of total company sales in 2023, compared to 54% in both 2022 and 2021[72] - Net income attributable to the company was $365 million in 2023, compared to $14,519 million in 2022 and $13,049 million in 2021[223] - Comprehensive loss attributable to the company was $28 million in 2023, compared to comprehensive income of $14,180 million in 2022 and $14,805 million in 2021[223] - Total current assets decreased to $32,168 million in 2023 from $35,722 million in 2022, a decline of 9.9%[225] - Cash and cash equivalents dropped to $6,841 million in 2023 from $12,694 million in 2022, a significant decrease of 46.1%[225] - Accounts receivable increased to $10,349 million in 2023 from $9,450 million in 2022, reflecting a growth of 9.5%[225] - Long-term debt rose to $33,683 million in 2023 from $28,745 million in 2022, an increase of 17.2%[225] - Retained earnings decreased to $53,895 million in 2023 from $61,081 million in 2022, a decline of 11.8%[225] - Net income attributable to Merck & Co., Inc. was $365 million in 2023, a sharp drop from $14,519 million in 2022[227] - Cash dividends declared on common stock increased to $2.96 per share in 2023 from $2.80 per share in 2022[227] - Treasury stock shares purchased amounted to $1,346 million in 2023, up from $840 million in 2021[227] - Accumulated other comprehensive loss increased to $5,161 million in 2023 from $4,768 million in 2022[225] - Total equity decreased to $37,635 million in 2023 from $46,058 million in 2022, a decline of 18.3%[225] - Net cash provided by operating activities of continuing operations decreased to $13,006 million in 2023 from $19,095 million in 2022, a decline of 31.9%[229] - The company incurred a charge of $10,217 million for the acquisition of Prometheus Biosciences, Inc. in 2023[229] - Capital expenditures decreased to $3,863 million in 2023 from $4,388 million in 2022, a reduction of 12%[229] - The acquisition of Prometheus Biosciences, Inc. resulted in a net cash outflow of $10,705 million in 2023[229] - Dividends paid to stockholders increased to $7,445 million in 2023 from $7,012 million in 2022, a rise of 6.2%[229] - Net cash used in investing activities of continuing operations increased to $14,083 million in 2023 from $4,960 million in 2022, a significant rise of 184%[229] - The company's cash, cash equivalents, and restricted cash at the end of 2023 stood at $12,773 million, compared to $8,167 million at the end of 2022[229] - Share-based compensation increased to $645 million in 2023 from $541 million in 2022, a growth of 19.2%[229] - The company's net income from continuing operations was $377 million in 2023, a sharp decline from $14,526 million in 2022[229] - The acquisition of Imago BioSciences, Inc. resulted in a net cash outflow of $1,327 million in 2023[229] Revenue Recognition and Expenses - Revenue recognition for product sales occurs when control of goods is transferred to the customer, with shipping not considered a separate performance obligation[238] - The U.S. provision for aggregate customer discounts (chargebacks and rebates) was $12.5 billion in 2023, $12.3 billion in 2022, and $12.3 billion in 2021[239] - Accrued balances for chargebacks and rebates were $188 million and $2.3 billion, respectively, at December 31, 2023, compared to $178 million and $2.7 billion at December 31, 2022[239] - Depreciation expense was $1.8 billion in 2023, consistent with 2022, and up from $1.6 billion in 2021[240] - Advertising and promotion expenses increased to $2.3 billion in 2023 from $2.2 billion in 2022 and $2.0 billion in 2021[242] - Capitalized software costs are amortized over periods ranging from 2 to 10 years, with longer lives associated with enterprise-wide projects[242] - The company maintains a returns policy allowing U.S. pharmaceutical customers to return products within a specified period before and after expiration[239] - Payment terms for U.S. pharmaceutical customers are typically 36 days, while Keytruda has extended payment terms of 90 days[239] - Research and development expenses include upfront and milestone payments related to asset acquisitions and licensing transactions involving clinical development programs[248] - The company evaluates tax positions to determine whether benefits are more likely than not of being sustained upon audit, recognizing only the amount greater than 50% likely of being realized[252] Acquisitions and Collaborations - Merck acquired the aqua business of Elanco Animal Health for $1.3 billion, expanding its portfolio with products like Clynav and Imvixa, and adding manufacturing and research facilities[258][260] - Merck agreed to acquire Harpoon Therapeutics for $23 per share, totaling approximately $680 million, with a lead candidate HPN328 in Phase 1/2 trials for cancer treatment[260] - Merck acquired Prometheus Biosciences for $11.0 billion, including $1.2 billion for share-based equity awards, with lead candidate tulisokibart in Phase 3 trials for immune-mediated diseases[261] - Merck entered into a global development and commercialization agreement with Daiichi Sankyo for three ADC candidates, with potential milestone payments and royalties[261] - Merck acquired Imago BioSciences for $1.35 billion, including payments for share-based equity awards, with lead candidate bomedemstat in Phase 3 trials for bone marrow diseases[263] - Merck and Kelun-Biotech expanded their collaboration with an upfront payment of $175 million and potential future payments up to $6.575 billion for ADC development[261] - Merck and Royalty Pharma entered into a funding arrangement for a Phase 2b trial of MK-8189, with Royalty Pharma eligible for royalties and milestone payments[264] - Merck and Moderna expanded their collaboration for the development of V940, an individualized neoantigen therapy[264] - Merck and Orna Therapeutics entered into a collaboration agreement with an upfront payment of $150 million and potential future payments up to $3.515 billion for RNA therapies[264] - Merck and Orion Corporation announced a co-development agreement for MK-5684, with an upfront payment of $290 million and potential milestone payments and royalties[264] - Merck acquired Acceleron Pharma Inc. for a total consideration of $11.5 billion, with $280 million in acquisition-related costs[266] - Acceleron's lead therapeutic candidate, sotatercept, is under priority review in the U.S. and EU for pulmonary arterial hypertension (PAH) treatment[266] - Merck retains worldwide exclusive rights to develop and commercialize sotatercept in the pulmonary hypertension (PH) field, paying 22% royalties to Bristol-Myers Squibb (BMS) on future sales[266] - The estimated fair value of assets acquired from Acceleron includes $6.38 billion for IPR&D - sotatercept and $3.83 billion for product rights - Reblozyl[267] - Merck acquired Pandion Therapeutics for $1.9 billion, with $147 million in costs primarily for share-based compensation[268] - Merck and Gilead Sciences entered into an agreement to jointly develop and commercialize long-acting HIV treatments, sharing development and commercialization costs 60% Gilead and 40% Merck[268] - Merck and AstraZeneca share profits equally from Lynparza and Koselugo product sales, with Merck recording $1.296 billion in total alliance revenue in 2023[271][272] - Merck made a $400 million sales-based milestone payment to AstraZeneca in 2022 and accrued a $600 million liability for future milestone payments[271] - Merck and Eisai share profits equally from Lenvima product sales, with Merck recording $960 million in alliance revenue in 2023[274] - Merck made sales-based milestone payments to Eisai aggregating