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

Okay. Welcome to the second day of the BofA Healthcare Conference. My name is Geoffrey Meacham. I'm the senior biopharma analyst. We're thrilled today to have Merck with us. and Caroline Litchfield, CFO, is with me on stage. Welcome, Caroline.

Thank you. Great to be here.

Good to see you. So maybe just talk about following the first quarter give us kind of how you see growth over the balance of the year, and then we'll get into some questions on some of the products and BD, et cetera, et cetera.

So let me start with -- it's great to be here. It's amazing that 1 year has flown, and I thank all of you for your interest and support of our company and for being here today. As we start 2023, we've started really strong. There is momentum in our business. Now if I take a step back, we're really proud of the progress that we've made as a company. We're progressing with the portfolio facets that we have today, we're progressing our pipeline and we're augmenting that pipeline with meaningful scientifically driven and disciplined business development. So that gives us a lot of confidence in how we're performing and the future prospects for the company. Specific to the first quarter, we had revenue growth excluding LAGEVRIO and foreign exchange of 15% in the quarter. That enabled us to raise and narrow our guidance. We're expecting between 8% and 10% growth for the full year this year, excluding LAGEVRIO and foreign exchange. And that growth will be as a result of the continued demand that we have for our innovative portfolio across oncology, across vaccines as well as Animal Health. We're progressing our pipeline. I'm sure we'll talk about that with some exciting progress in oncology, in cardiovascular, and we're obviously pleased to progress that pipeline with business development and immunology with the proposed acquisition of Prometheus. So we're feeling good about where we are as a company, we feel good about the momentum in our business, there's always still more to do, but we think we've got a great foundation to continue to drive growth for our company.

Perfect. And that's a good background. So Caroline, when you think about the drivers of top line, so KEYTRUDA obviously is the big. It's the big one. So talk about like over the cadence of this year and maybe looking into next, like what are some of the newer line extensions that we should expect that could inflect and is there a bias like U.S. versus OU.S.?

So focusing just on KEYTRUDA at this stage, and I guess we'll go through the others. So KEYTRUDA is a phenomenal product, first and foremost, the impact it's having on patients all around the world. And we've been seeing exceptional revenue growth from the product. As we go forward this year, we expect continued strong growth from KEYTRUDA. And that growth will largely come from moving increasingly into the earliest stage cancer setting. So what we're expecting is strong growth in triple-negative breast cancer, renal cell carcinoma, melanoma, and we're moving into early stage lung. So we'll see that come through in the United States, albeit we will lap some of the launches that we've had, specifically triple-negative breast. So we'll expect that growth to moderate over the course of the year. As we look at outside of the United States, we've got great opportunities with the continued introduction of new indications, especially moving into the earlier-stage indications. We've just started that journey for triple-negative breast ex U.S. Now one thing we did point out in the first quarter sales and earnings call is as we do launch those new indications in Europe, we will see some pricing pressure. This is something we've had throughout KEYTRUDA's journey. As you introduce new indications, you then speak with the reimbursement body to talk about the incremental patients that you'll be able to serve and what that new price point will be. So we'll expect some pricing pressure on KEYTRUDA, but extremely strong volume growth as we introduce those new indications and therefore remain very confident in our ability to drive strong growth for KEYTRUDA and great patient impact.

And when you take that growth and you invest back in the business, so combinations with KEYTRUDA have been a pretty standard strategy for you guys and you have PCV combos coming up and there's lots of I/O -- I/O combos going forward. So maybe talk about the -- how you're investing back in the business and how do you think about the sort of the cadence of the end of the decade sort of dynamic with respect to the impact from all these combinations with KEYTRUDA?

So focusing first on oncology because we're investing in R&D in many different areas. In oncology, we're investing in continuing with KEYTRUDA and moving to earlier stage cancer treatment. And we've stated in the past, we expect 50%, 5-0 percent, of the growth of KEYTRUDA in the period of '21 through '25 to come from that earlier stage cancer setting. And it will grow thereafter. And we've also stated representing 25% of the global business in the year '25. So clearly, that's part of our investment to drive earlier stage cancer treatment and, therefore, improved prognosis. We are also investing, as Geoff noted, on combinations with KEYTRUDA. And those combinations are IO-IO, where we have programs in TIGIT, in CTLA-4, in LAG-3. We're also investing now in what we were calling a personalized cancer vaccine, we now term it as an individualized neoantigen therapy with Moderna, where we're really excited at the prospect of this treatment alongside KEYTRUDA to improve outcomes for patients. We also have a platform of ADCs that we are developing, given how great KEYTRUDA is with chemotherapy, ADC is being that next generation of chemotherapy, we see real possibility to link with the ADCs that we have, where we have TROP2, we have another that we haven't disclosed what its mechanism is, and we have seven preclinical candidates with our collaboration with Kelun. So we have a lot going on, and we have many other assets in oncology with our ORION partnerships there, hoping to do something in prostate cancer and obviously, still LYNPARZA and LENVIMA. So as we look out over this decade, we are confident in our ability to drive growth in KEYTRUDA. We have a subcutaneous formulation that we hope will enable us to continue to benefit patients, especially in the earlier stage cancer setting, and we have many new novel agents that we're working on to try and continue the progress that we're making in cancer care.

Right. And so Caroline, while we're talking about KEYTRUDA and sort of the intermediate to long-term growth, help us with kind of the policy impact of that, right? So looking at the end of the decade with respect to the IRA and how Merck is thinking about managing that?

Yes. So starting with the philosophy of our company has always been to invest in innovation and bring that innovation to countries around the world and price our products responsibly based on the value that those products can bring. So that's the headline of the Merck here. We now have the backdrop, though, of the Inflation Reduction Act, which brought some good things with it to cap out-of-pocket costs for patients, but also areas of, quite frankly, significant concern, which is the price setting or what's term price negotiation for products. In Europe, there's also potential changes with the regulatory framework there that was recently announced. Some of it's good as they look to simplify the regulations and enable, hopefully, swifter access to innovation. But at the same time, there's a shortening of the time line of regulatory data exclusivity, while there's some conditions that allow you to increase it. But what we're seeing around the world is pressure on the time line the pharmaceutical industry has to generate returns on the significant investments that we make. So what that means for us is we are looking at each of our investments in research. And the hurdle rates got higher for what our expectations are so that we can generate returns for our company, for our shareholders. As it pertains specifically to KEYTRUDA, the time line around the IRA negotiation is pretty much in line with the time line of the LOE of KEYTRUDA. And as we look at combinations, co-formulations, what the government has announced is to active agents will not be required to be negotiated. So we are working on trying to bring forward innovation, looking at active agents that can together do more for patients and we'll continue to progress in that way.

And is that part of the life cycle management here if you have, say, a subcu or a fixed-dose combination? Obviously, monotherapy KEYTRUDA at the end of the decade, maybe that is subject to biosimilar launches, but like your combinations so I think, give you a little bit more just help us through that.

Yes. Yes. So exactly that. So the subcutaneous formulation is a formulation that we're working on, looking at the activating of hyaluronidase with pembrolizumab to try and bring benefit to patients and having them not to go into an infusion center and spend many hours visiting the hospital to get the treatment. As we increasingly move into earlier stage cancer treatment, the patient profile changes. It's often a younger patient, a patient who's working each day and caring for what's important in their lives. And so we see a real opportunity to help the patient to help the health care system in having a different route of administration for that patient. And what we've stated at this stage is we think that approximately 50% of the patients on KEYTRUDA are likely to be in the earlier stage cancer setting or potentially on monotherapy or in combination with an oral agent. That means this could be a really beneficial profile of KEYTRUDA for those patients to be taking. So we're working on that to bring that benefit. Similarly, the other co-formulations would be new products. in their own right with the different active ingredients that are coming forward.

That's helpful. Yes. so let's go back to where we started on the first quarter. So GARDASIL is an asset that a lot of investors have been concerned about concentration risk. But if you look at what's today in Merck's portfolio that's growing, that's not KEYTRUDA, it's a major asset, right? So we're talking about 35% growth in the first quarter. Help us with kind of how we think about this over the cadence of this year? And then with respect to supply looking next year and beyond, like how do you envision that?

So GARDASIL is an amazing vaccine. It's helping prevent HPV-related cancers in both females and males. And quite frankly, we're still only at the start of the journey, 14 years in to this vaccine being available because we've only helped protect the lives of around 10% of the world's eligible population. Now there's work to do to create the demand side of an equation meaning people making sure they're going and getting their adolescent vaccinated. People are in the age cohort 27 to 45 where 50% of HPV issues occur going and getting vaccinated, having governments approve vaccinations for boys and men as well as for girls. So there's work to do to activate the full cohort, which we are focused on as a team. At the same time, we're building supply. Over the last few years, we've been effective at driving productivity within the current supply chain of our company and adding to that supply chain at the drug product levels of the formulation and filling level of GARDASIL. We are also bringing onboard two bulk manufacturing facilities. And those facilities will come online progressively during '23, '24 and '25. And so by '26, we'll be unconstrained. So I'd expect us to have a gradual ramp-up in the level of supply that we will have to the marketplace to support the protection of lives around the world. Now as we think about the growth, we had an amazing 2022 with the growth of GARDASIL. I think we posted 27% growth, excluding the impact of foreign exchange. And we've guided that we think the growth in 2023 will be an acceleration on that growth we achieved a higher than 27%. As Geoff noted, we achieved 35% in the first quarter, 43% excluding the impact of foreign exchange, and that did include some shipment timing benefit as we did pull forward some shipments into the China market specifically to enable us to have enough vaccines on the ground as the China regulatory authorities have widened the age cohort for GARDASIL 9 from 16 to 26 now to 9 to 45 years old. So we've seen some benefit of that. As we look for the full year, we expect the first half growth of GARDASIL to be stronger than the second half, full year to be extremely strong and acceleration versus 2022.

And Caroline, put this in the context of the overall top line at Merck. So when you look at non-KEYTRUDA sort of franchises, so vaccines, including GARDASIL, are really important. But how strategically do you think about it from an investment perspective from BD, internal versus external?

So we're in a position in our company where we actually have a rich pipeline to invest in. And that rich pipeline is in oncology. It's in vaccines, including PCV, pneumococcal vaccine, dengue, RSV. We're investing in cardiovascular quite significantly and with some impact, and we will be investing in immunology. So in terms of the investment posture of our company, we are investing in R&D. We're investing in that R&D both internally and augmenting that with the best science that we can find externally that is driving for solutions for unmet medical need, and we will continue that R&D investment with the focus of driving growth in the next decade.

So there's not an intention, though, per se, outside of oncology, but it just happens to be that you -- there are opportunities in that...

There are, yes. And there's plenty of opportunities. So with Acceleron, that was a significant opportunity for us outside of our company to look in an area of significant unmet medical need, an area of great advancement in science and potential impact for patients and therefore, we acted. Internally, we're investing in our oral PCSK9 program, which has significant opportunity to help the many patients around this world who are on statins who don't get to goal. So we have a lot of investments going in many different areas.

And so the proposed Prometheus deal, let's talk about that. So in the context of what Merck could have done, like this is, obviously, investors like the deal. But if you think about like the appetite for additional, how much of a priority is BD on top of what you guys have done with Prometheus and then, obviously, historically with Acceleron?