Merck & Co., Inc. (MRK) Earnings Call Transcript & Summary

Yes.

That's right, globally, of the indicated age cohorts. And David, just to correct something in your question, our capacity expansion will double our overall GARDASIL capacity in 2023, not triple.

Got it. Okay. And turning to M&A. Why don't we start with the very encouraging transaction that you announced yesterday, wasn't a merger or an acquisition, but instead a partnership with Seattle Genetics. If you could provide some comments on that and then I wanted to ask another question more broadly about M&A.

So let me start, and then Roger can fill in the details because it obviously was his colleagues who found this as the best scientific opportunity that we could acquire. But stepping back, I think the way to think about this is it certainly demonstrates our continuing focus on finding new innovative medicines, including in oncology. We're very committed, in particular, to finding early-stage assets. And we think that, that's how you can create much more value as to find those early-stage assets. And this helps obviously broaden our oncology portfolio by adding breadth and depth to the pipeline, which is key to us. And from my perspective, one of the challenges that we face in business development, and you saw that with respect to at least another transaction yesterday, is that the prices for acquisitions right now are rather sky high. And we have to ask ourselves how we can acquire useful assets, medically important assets but acquire them in a way where, in our hands, they create value for our shareholders. And we have found that these kinds of partnerships like we have with Seattle Genetics, like we have with AstraZeneca and Eisai and others are one way of doing it in a fairly derisked manner. Roger, do you want to make any more comments about that?

Yes. I mean, if I could, I would just say, with respect to Seattle Genetics and the broader field of antibody drug conjugates, this is a field that we have followed for some time. The underlying logic is straightforward, is to improve the benefit/risk of active drugs by targeting them more specifically to the areas where they can do the most good, finding the right way of doing that, both in terms of which drug warhead to use, how to couple it to an antibody that would bring it to the right place and how to link the 2 together so that there's maximum effect, has taken a long time. And Seattle Genetics has clearly been a leader in that area over the past couple of decades. We had the opportunity to work with them on PADCEV with -- also with the vedotin warhead and demonstrated a dramatic improvement in outcomes in terms of response rate and urothelial malignancy when you combine that antibody with a conjugate, with KEYTRUDA. And it has driven, in our thinking and also in the thinking of Seattle Genetics, a view about immunogenic cell death, that the death of tumors that is provoked by cytotoxic therapy targeted using antibody-drug conjugates is pro-inflammatory and can be amplified still further with the presence of KEYTRUDA. And so we have collaborated with them on the further elaboration of that with PADCEV. But as we looked at the opportunity with LV, we will use that shorthand as easily. We saw this was a place where, at an early point, we could work together to rapidly expand the exploration of that compound, both by itself and in combination with KEYTRUDA in breast cancer [indiscernible], starting in triple-negative breast cancer. Their Phase Ib studies are already going on in that setting, but as well in non-small cell lung cancer, small cell lung cancer, esophageal cancer, gastroesophageal malignancy, where signal finding studies already give us reason to hope that a combination of LV plus KEYTRUDA would be effective. So it represents a further amplification of our ability to harness the power of immune manipulation to improve outcomes in patients with malignant disease.

That's very helpful. And just to follow on, Roger, do you see other opportunities to pursue additional external ADC candidates? And then could you speak more broadly about Merck's focus on M&A in the near term?

Yes. I'll take both of them, but Ken should also speak to the M&A -- the breadth of M&A question. First of all, with respect to ADCs, the field is rapidly advancing. I don't think anyone believes that we have fully -- that we, the scientific community, have fully identified the best possible warheads or the best way to deliver those warheads to tumors. And that includes targeting immune manipulation as well. And so when you think about that, you think about using different oncolytic viral warheads, as an example, to broaden the spectrum as well as redirected lysis, something which I was involved in years ago. So all of those things, I think, with the background of better immune manipulation, provide hope that we can gain further benefit in treating patients with cancer. So that looks very promising. If we now elevate just a little bit and ask, "Well what does that mean in terms of the M&A landscape?" I'd just say, first of all, that I think that Merck prospers moats, does the best thing for the world, for the patients whom we serve and of course, for those who invest in us as well when we get in early in these opportunities because we can use our considerable scientific strength as well as our ability to [ execute ] clinical trials around the world to rapidly identify and capture major therapeutic insights. And so we're usually trying to look fairly early on. I think that for us, the idea of going in and purchasing already registered drugs that are generating revenue, while we may be able to promote those more effectively because of the reach of our commercial organization, we have less leverage there. So we tend to want to work at the vanguard. That's generally how we think about M&A. And if you look at what we've done with our acquisition of Peloton, for example, in the HIF-2 alpha program, which is moving along extremely effectively, or what we've been able to do with noncovalent BTK inhibitor from ArQule, which we call MK-1026, it gives you a feel for the kinds of what would be called bolt-on acquisitions that we can perform that -- where our scientific strength and our ability to impose clinical discipline on a development program really gives us an opportunity to make a big difference for the patients whom we serve. Ken, you might want to add to that.

So I would just add to that, that, as you know, this is an environment where assets go, are richly valued, in my opinion. Biotech has outperformed the general market, both last year and so far this year. And so when you're thinking about buying targets, you know that you're buying into a very rich environment. Now we are willing to pay full valuation. And I think if you just look at Peloton as an example, that shows that we're willing to pay full valuation. But we have to believe that we're acquiring an asset, as Roger just said, that we can -- with our own scientific ability, we can create value with that asset in our hands over and above what the market has already valued it. So we want the best science because we understand, in the long term, the value of the company really comes down to the value of its pipeline more than anything else. But at the same time, while we have a strong balance sheet and the ability to look across the full spectrum of opportunities, we still believe it's important to remain disciplined and to acquire assets that will create sustainable value for our shareholders consistent with our overall strategy.

Very good. Well I wanted to say that we're going to extend the time to speak for another 5 minutes simply because we got started a little bit late. I did want to cover pipeline opportunities. So I thought it would be appropriate to discuss MK-4482, the Ridgeback oral antiviral. Just a couple of questions, please, Roger. First, when should we expect the Phase II data? I'm assuming that you'll want to publish that to be able to ensure rapid enrollment once you kick off Phase III. And then second, I noticed that there were some ClinicalTrials.gov changes just in the last few days. I believe that one study took out the high dose. Any color that you can provide to help us understand where you are and how you'd like to characterize that product opportunity?

Yes. David, thank you. So I'm very enthusiastic about MK-4482. I think in the near term, we all recognize that if there were potent antiviral drugs directed against SARS-CoV-2, COVID-19 after all is a viral-mediated disease. To get rid of the virus, early enough anyway, you get rid of the disease. So that offers great promise provided you can get in early enough with something that people can take. I think that the challenge thus far with, for example, remdesivir, is, okay, the drug has to be given intravenously. Obviously, that's in a hospitalized setting. It tends to be given late. We know from prior experience that, and just from first principles, that if you're going to treat a viral-mediated disease, you'd like to get in from the earliest moment of infection. Or indeed, from a prophylactic point of view, even that would be better. 4482 is an analog of ribonucleotide. It is incorporated into the RNA that is produced by the unique viral enzyme, the RNA-dependent RNA polymerase. And that is part of the replication of the virus that enables the virus to make more of itself. When it is incorporated, it, as a result, causes errors in the genetic code of the virus. And those errors accumulate, and the phenomenon is called error catastrophe. It's not the first drug that works by this mechanism, but it's a very powerful mechanism because there's -- with appropriate drug levels, it's just more and more misincorporation. And you fairly rapidly see viral copies disappear because they're not functional anymore. They don't encode the virus as it's supposed to be. And that's effective when you look in cell lines, and it's effective when you look in animals. And our Phase I studies, which were, of course, initiated by Ridgeback, and we then acquired our interest in this, our Phase I studies have demonstrated that the compound can be administered in a 5-day course. It is well tolerated, and we achieved levels of drug that should be associated with inhibition of the replication of the virus through this mechanism. There are ongoing Phase II studies in the eastern seaboard of the United States and also in the U.K. And those studies are -- were small studies, again, designed by Ridgeback to take doses based on Phase I and see, both in the outpatient and inpatient setting, whether you could block viral replication. So those studies are going on. Data are being accrued. They're measuring viral production by repeated swabs and looking at the actual nucleic acid sequence of the virus. So we'll learn something from that. But the big Phase II studies and Phase III studies are just beginning. So very soon, you'll see posted the large Phase II and then Phase III programs, which we will be initiating globally, and that will be happening within the next few weeks. I expect enrollment will be fairly rapid because, unfortunately, COVID-19 is very widespread. And so they'll be both in the inpatient and outpatient settings. Individuals with symptoms are eligible for treatment. We believe we have some understanding of where we need to be with respect to the dose. It is a 5-day course of treatment. And the key question will be, number one, do you knock down the virus so that there's less of it? Number two, is that associated with clinical benefit? That should be visible fairly quickly. We have been in discussions with regulatory agencies, particularly with the FDA on the design of these studies. We've agreed on how they will work and how Phase II leads to Phase III. The initial studies will enroll on the order of 2,000 or more subjects. So we'll get a lot of data, and the data will be extremely informative. And in the meantime, because we have a lot of confidence in the mechanism, we've secured manufacturing capability to produce tens of millions of doses by the end of the year. So that's -- we're in a position to do a lot of good. I think it stands to reason that if we can say to the world that we can reduce the likelihood -- if you were infected, we can reduce the likelihood that you would be hospitalized or certainly end up in an intensive care unit. That would have a big effect on the psyche of the world, certainly in the United States but elsewhere as well. We've had a devastating experience here in the United States and for a whole variety of reasons. And we're eager to make inroads into the process, whereby we regain control of our health by preventing people from getting desperately ill from SARS-CoV-2 infection. 4482 is one part of that, so we're enthusiastic about it. We hope those studies are very effective.

Excellent. Let me just ask one final question on the pipeline, and I'm sorry that we are running out of time here. But obviously, Merck is very enthusiastic about its HIV candidate, 8591, given its potential for monthly oral dosing. But true transformation will require co-administration. And could you talk about your level of confidence that you can develop a combination agent that can also be once monthly?

Well I have high confidence that we can. But I think we first have to distinguish between the 2 [indiscernible] active HIV infection with islatravir as opposed to the prophylaxis indication, right? So I think that the -- we have already begun our combination studies for once-daily treatment with doravirine. We believe that we can go to much longer intervals -- treatment intervals in the treatment setting, and there are other candidates that we can use for those longer intervals. In the prophylaxis setting, once monthly oral, we think, is easy to achieve as a monotherapy in prophylaxis. And long-duration oral, as we've demonstrated with our implantable, including up to once yearly, is also possible. Islatravir has very special properties. And I should mention that we do have internal candidates that we believe we can combine, but we're also willing to combine with long-acting drugs from others. All of that is being explored, and I think there's a great opportunity there.

Excellent. Wonderful. Well we should wrap it up there. Thank you very much, Ken and Roger. Really appreciate you joining us today, and we look forward to your continued good progress and updates. Thank you again. You can close out the call.

No, David, thank you. Thank you.