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

All right. Good morning. Day 3 of our London Healthcare Conference. It has been a blast to see everyone here. I really do appreciate it. Joining us -- my name is Akash Tewari. I'm a pharma and biotech analyst here at Jefferies. Joining me today is Merck, which is our topic in large-cap pharma. And joining us is Caroline Litchfield and Peter Dannenbaum, Head of IR. Caroline is CFO. Really, really appreciate the time. And Caroline told me she flew over just to hang out with all of us today. So really appreciate that. Maybe I can hand it to you for some brief introductory remarks, and then we can get into questions.

Yes. So first, can you hear me okay? First, thank you for having us, and thanks all for joining for this fireside chat. It's a really special time at Merck. As a company, we've got great momentum in our business. We're driving significant patient and customer impact across oncology, across vaccines, across animal health. And we expect that momentum to enable us to continue to drive growth and impact into 2024. We're progressing our pipeline really with our own internal assets as well as augmenting that pipeline with very financially disciplined, scientifically focused business development. So as we look at the future, we're confident in the long-term outlook for our company to drive patient impact, which in turn will drive revenue, which in turn will drive growth long into the future.

Understood.

So I will start with -- I think the question, and I'm sure you get this all the time, is you're a company with amazing growth over the next 5 years and then a potential patent clip with KEYTRUDA going off. And you kind of look into history, right? I still remember when -- you could argue AbbVie has been one of the few companies where they have actually been able to successfully navigate out of a very significant patent clip with HUMIRA. And there were 2 things that I think stood out about the AbbVie strategy, right? One was they put out guidance that no one believed. I still remember when they gave that initial guidance and people like, oh, wow, SKYRIZI isn't going to be that big, give me a break. And they really have been able to kind of execute. So giving that type of bold vision about growth was one thing that AbbVie did. And the other was they did a "big deal," right, to kind of smooth your revenue curves. When you look at what AbbVie did and the success they kind of had and you apply it to where you are with Merck and all the success you've had with KEYTRUDA, a, is there appetite to be maybe more clear about your growth profile post-2028 in KEYTRUDA, right, that kind of bold, believe us, we're going to be able to do this, in terms of adopting that type of communication? And then number two, do you feel like maybe there is room to do a large cap type of deal, a transaction where you're able to kind of give visibility on revenues in a way that maybe assures investors?

So our company is a science-led company. Our goal is to bring breakthrough medicines and vaccines to this world to really advance human and animal health and drive growth for our company. Executing that strategy, we have progressed our internal pipeline and augmented that pipeline with business development. And as we look out to the long term, we've given guidance around different areas of our business and the opportunity to drive significant revenue and growth for our company. That guidance included the expectation that our cardiovascular products that includes sotatercept, include the oral PCSK9, include other compounds, will have revenues of greater than $10 billion in the 2030s. And our confidence in that guidance is much higher today than it was when we gave the initial guidance. We've also stated that we will continue to invest and broaden the oncology offerings that we have. And we have many opportunities to drive significant patient benefit with our precision molecular products that we have as well as with the ADCs. And again, we indicated that we believed those small molecules and initial ADCs, in collaboration with Kelun, could drive $10 billion of revenue in the mid-2030s. And on top of that, we have the collaboration with Moderna for the individualized neoantigen therapy as well as the recently announced collaboration with Daiichi Sankyo with multibillion-dollar asset potential across 3 different ADCs. And on top of that, we have our immunology business with the acquisition of Prometheus and the TL1A candidate, which has multibillion-dollar potential in ulcerative colitis and multibillion-dollar potential in Crohn's disease. So our company has been giving guidance in different therapeutic areas to enable our investors to understand the growth opportunity for the future. And for our company to try and deliver growth, we aspire to deliver growth through the KEYTRUDA loss of exclusivity. At a minimum, we look to minimize any loss of revenue for the total company and quickly return to growth. Our strategy of doing that is to invest in R&D, and that will be both organically and inorganically. Our business development strategy is to seek the best science. But in our hands, we can drive value for patients, drive value for our shareholders. And where the science and the value align, we will transact, as you've seen us do. So we're confident in our future, and we will keep signposting for our investors the opportunities that are in front of us.

Understood. That's really interesting as well. I mean I think the way that most of The Street models Merck, it's -- you get to 2020, you get to amazing revenue base. There might be a bit of a decline, but then kind of flat on a go-forward basis. So you feel like this could actually be a consolidation year and then something that actually returns to growth long term. If you were to look at the way that The Street models some of your recent acquisitions, some of your pipeline, where do you feel like your internal team and your confidence differs versus what maybe analysts have? And are there any products in particular that you really want to highlight that we should be doing more work on?

So I think I've just laid out some of those longer-term areas. I should note, on top of the opportunities in oncology, in cardiovascular, in immunology, we also have a very strong vaccines business that we expect sustainable growth over the long term, and we have a strong animal health business that we expect strong growth over the longer term. As we look at the shorter term and where The Street analysts may not be fully valuing the opportunities in front of us, there's 2 assets that I would point to. First is sotatercept. Sotatercept is a significant product to help with pulmonary arterial hypertension. We will launch the product, subject to FDA approval, early next year in the United States. We've submitted the filing to the European agency and hope for launching the second half of 2024. Given the profound impact that sotatercept had in the STELLAR study, we expect a very strong launch and to support many patients with pulmonary arterial hypertension. Another area that we think has significant opportunity is our adult-focused pneumococcal vaccine, V116. This vaccine will provide protection and coverage for adults of 85% of the serotypes that impact adults with pneumococcal disease, much better than any other product out there today or any other product that is in development today. So we believe this will be a significant advancement and a driver of revenue for the company.

Understand. And by the way, you are definitely preaching to the choir. I suspect Acceleron may have gotten acquired at 1x peak sales, but that is just me. But to the point, this isn't -- you guys have been talking about the warehousing of patients, the uptick that you're going to see on sotatercept. The question my team and I kind of internally have, you have an 84% benefit on clinical worsening. That is well tied to mortality. If I was a doctor treating PAH patients, right, 50% of these women die within 5 years, 30% of them die within a year. How is this not a frontline induction therapy out of the gate, right? Like why wait for these patients to go to Class 2 to Class 3? Because you look at some of your PULSAR data sets, they -- it seems like sotatercept in particular has a benefit in these faster-progressing patients. So when you talk about the warehousing of patients that you're seeing right now, are these just Class 2, Class 3 patients? Or are these patients who are also earlier in the standard of care who really want to get an opportunity to get on sotatercept?

So the STELLAR study, which is what we're seeking for approval for sotatercept, focused on patients later in their journey with PAH. Indeed, the average time line that a patient had been dealing with the disease was, I think, 5 years in the study. So the approval we're expecting is as an add-on to the current therapies. And doctors are trying to help these patients at this stage. What they're doing is identifying those patients that they can quickly add on to sotatercept to have meaningful benefit and to stop the kind of mortality that you've just outlined. At the same time, our company is working on a number of other clinical programs, including a program to really demonstrate the morbidity and mortality. We've got another program that's looking at using sotatercept earlier on in that patient journey. And we have another study that's looking at sotatercept's application for pulmonary hypertension. So we're working hard to try and ensure that the full value of sotatercept can be proven and can, therefore, help patients beyond this later stage as you define.

Understood. Okay. So to me, it sounds like, no, it's not -- the warehousing of patients that you're seeing right now, they aren't earlier lines of setting. They are in what was kind of in the STELLAR data set. Understood. Any sense on how many of those patients really are waiting to get access to this treatment? And really the rate of adoption here, right, I mean, wouldn't everyone kind of get on this drug as soon as -- I know it never works that way, but this seems like one of those rare opportunities where uptake could be quite quick. Can we talk about what the cadence will be in that Class 2, Class 3 population?

So the scientific leaders have shared with us their excitement of the promise of sotatercept. They've shared with us that they've identified patients that they think can benefit from this innovation. And they've shared with us they're ready to put them on sotatercept as we get approval. So we are expecting a fast adoption. As a company, we're ensuring that we're ready for a fast adoption. That means we've been focused on our manufacturing to make sure we can supply whatever the market will need. We have commercial teams that are ready to ensure that we're educating our customers in the appropriate way. And we look forward to just helping as many patients as we can and seeing the revenue line follow thereafter.

Okay, understood. Makes sense. And maybe moving on to GARDASIL, another one of the products you mentioned could surprise versus Street expectations. And the contract you have in China certainly suggests that you're going to have very -- you may very well hit that $10 billion number that you've mentioned in the next year or 2. The question, I think, we get a lot, and you certainly see this in consensus models, there is this almost like straight-line method of how GARDASIL gets modeled as we go into the 2030s, right? Just -- and I think let's start maybe with China, which is becoming an increasingly important part of your business. You are having some of the domestic players where I don't think the data -- the clinical data will be quite as good as GARDASIL. I don't think that's the issue. But these are political issues as well, and there's also cost dynamics at play. When we think about your confidence that GARDASIL can grow as these kind of domestic HPV players enter the market in China, how should we think about the cadence for GARDASIL, '25 and beyond?

Let me start at a high level and then I'll go into China specifically. GARDASIL is a wonderful vaccine that helps prevent HPV-related cancers. And as such, we've seen significant demand to help protect people all around the world. We've seen demand increase in countries pretty much all around the world. And our company has been investing in capacity so that we can support the demand and protect as many lives as possible. That supply has been coming online progressively over the last few years as we've really driven productivity in our existing manufacturing capabilities while we bring on new manufacturing capabilities over '23, '24 and '25. So we're ready to supply the world, and we'll be fully unconstrained from 2025. As we think about the growth opportunity for GARDASIL, that growth opportunity is in protecting more people in the adolescent segment. Many countries around the world have adolescent vaccination programs. And vaccination rates are quite good for females. I could argue they could be better for a vaccine that actually prevents certain cancers. We have the opportunity to grow in the gender-neutral vaccination population, so that's males as well as females. We have a number of programs around the world. We need to extend them to other countries, but we need to see males be vaccinated at the same rate as females. We have the opportunity to impact the mid-adult segment. There's data that shows 50% of HPV occurs when you're over the age of 27. But many of those people haven't been vaccinated. So we need to encourage people in the age cohort 27 to 45 to go and get this vaccination. And in some countries, there aren't vaccination programs that do that. So we'll be trying to create a private market. That's going to take some work, some investment and some encouragement for people to go and get their vaccine. I encourage those in that group here who haven't been vaccinated, go and get vaccinated. And finally, as our supply increases, we will increasingly supply low- and middle-income markets around the world, which will obviously be at a lower price point. So the inflection of GARDASIL over time won't necessarily be linear. Volume may be linear, but you'll see a different kind of trajectory from a dollar perspective. Now in China. China, we saw an inflection in our revenue really at the end of 2022 when we had approval for GARDASIL 9 for the full age cohort of 9 through 45. Prior to that, GARDASIL was approved for the age group 16 to 26 as GARDASIL 9, and GARDASIL 4 was approved for 9 through 15 and 27 through 45. And as you rightly note, we have competition in China, a bivalent competitor. What we've seen is China really recognizes the innovation that we're bringing. The 9-valent is very different to the 2-valent and the 4-valent, and that's driving growth in the female segment. We're penetrating that segment, but there's more growth that will come from it. And at the same time, what we have is a male study underway in China. And indeed, the PMDA has accepted the regulatory filing for males. And as that gets approved, we look forward to protecting males in China and enabling further growth in the market.

Understood. So one of the things that I think -- first of all, really, really helpful, I mean, this idea that men should start getting a vaccination as well. And then there's also been emerging data on the reduction of rate of oral cancers with GARDASIL. So if you were to think, let's say, as we go into the 2030s about adoption in the male population, right, like what type of penetration rates do you think you could really achieve as people get more educated about the benefits here?

So let's start with the United States. In the United States, which has a pretty strong vaccination process, at least in the adolescent segment, when we've been launching GARDASIL and had the approval for GARDASIL in males, we have about a 73% vaccination coverage rate for males and I think we're at 78% for females. As I said earlier, I could argue that needs to be closer to 90% for a vaccine that does prevent cancers, so there's a way to go. But it gives you an indication of the opportunity in countries around the world to get up to that 70-plus percent level.

Okay. Understood. Yes?

And Akash, to be clear, we expect GARDASIL to exceed $11 billion by 2030. You mentioned $10 billion upfront.

Right, not just -- that's true. This is the thing I will say about Merck, most of the pharma companies, they give long-term guidance and I don't believe them. I wouldn't be surprised if cardiology hits $20 billion, and that's not an overstatement actually. But going on, I think a deal that I feel like investors still need to sink their teeth on, me included, is the Daiichi deal. I mean this is the largest upfront payment on a biotech deal in the history of therapeutics. I mean that is a big statement. That seems to me like it was also a very competitive process. $22 billion, $22 billion in milestone payments, I mean that is -- when you think about that, you're thinking, wow, these are in HER2-like opportunities. And to be fair, I mean, when you looked at how Daiichi analysts were looking at some of those ADCs, it was certainly not the crux of the story, and the confidence maybe wasn't necessarily there. I hate to ask like pick a favorite child, but when you think about how The Street views it in your investor discussions, where do you feel like we're just getting this completely wrong? And is it CDH6 in terms of expanding to colorectal? Is it the B7-H3? Where are we headed with these compounds given we have early data right now?

So let me start with the deal that we think has been a very smart and financially disciplined transaction that will bring significant patient benefit. The upfront is actually less than $2 billion for each of the 3 assets. We have access to HER3, a CDH6 and a B7-H3. The upfront, which comes in a variety of different payments, will be $5.5 billion, and we'll record that as a company in the fourth quarter this year. In addition, there's $15.5 billion of potential payments based on sales milestones, $5.5 billion for each of the 3 ADCs. And we hope we pay the full $15.5 billion because if we do, we have 3 extremely large products for this world. Now as we look at the 3 different ADCs, first, we believe ADCs will be really important in the treatment of cancer. We see them as the next wave of chemotherapy and an ability to really target specific populations, specific cancer types to get a better outcome, either in monotherapy or potentially in combination with other products. And we have a huge array of oncology products that we will be assessing in that regard. The HER3 compound is likely the first to launch, and we see that as having benefit in the eGFR-mutant non-small cell lung cancer population. We also see breast cancer as an opportunity and other cancer areas that we haven't yet divulged. Probably the largest opportunity as we sit here today is the B7-H3. We see that as a significant opportunity in small cell lung cancer, an opportunity maybe in monotherapy, maybe in combination with the PD-1. We also see a significant opportunity in prostate cancer, again, maybe in monotherapy, but also maybe with, for example, a PARP inhibitor or a CYP-11A1, and there are other cancer types there. The CDH6 is a little earlier in its development cycle, but we see that as potentially having significant impact in ovarian cancer. So we believe each one of these ADCs could have multibillion-dollar opportunity, and we'll be working in collaboration with Daiichi Sankyo to really advance the programs quite rapidly to bring benefit to patients and to bring revenues for our companies.

Understood. Now maybe kind of stepping back, and this was -- it was one of those things on Prometheus, a, it's always entering with the IPR&D charge and it affects EPS. But there is this also a question, just the significant amount of cash flow you're going to generate over the next 5 years and then how much of that gets allocated to share buybacks, right? And it is implicitly put into a lot of The Street models. I know when the Prometheus call happened, you said we're going to step back at least this year. There was definitely a sense of confusion of, well, what does that mean, right? Like how much share buybacks are we going to have? As we think about '24 and beyond and just the very strong financial position you guys are in, what's the right number or cadence of share buybacks we should be thinking about? Is this more historical from what we've seen with Merck? Or are we going to get to maybe another standard here?

So I'm going to elevate first to our capital allocation priorities as a company, and then I'll specifically answer you. Our company believes that we'll drive the best value for our shareholders by deploying our capital into our business to drive growth. So we'll be deploying capital into our business. We're committed to our dividend, and we'll be growing our dividend for our shareholders. We will be continuing to augment our pipeline with business development. And any excess capital, we will return to our shareholders by way of a share buyback. As we look at the opportunities in front of us today to invest in our business and to continue with business development, we expect the level of share buyback to be modest, about 1 billion share buyback has taken place through to the end of September this year. I'd anticipate a continued modest level of share buyback based on the opportunities to invest in Merck. That said, we will not have cash accumulate on our balance sheet. So to the extent we do see cash accumulate, we will be returning that in an appropriate way.

Okay. Got it. Now maybe just kind of the last question in terms of BD priorities. I feel like the lesson we've seen in pharma is that companies that have doubled down on what they did well and didn't pivot to something else and really leveraged their commercial infrastructure are the ones that have really outperformed for investors. When you think about, from a BD perspective, a bolt-on acquisition or something maybe even larger, what do you feel like your commercial infrastructure and your own kind of clinical expertise you feel like you could leverage the most, right? Is there certain areas -- let's say, ex oncology, right? I think everyone knows on oncology, but other areas where you feel like maybe Merck is underappreciated where you feel like you can build out capacity and gain more leverage.

So our BD philosophy has really been one of going and finding the best science and bringing that science into Merck. We've leveraged the strength that we had in immuno-oncology to then build out immunology. And we sought then the Prometheus and Pandion acquisition prior to that to enable us to then broaden the portfolio that we have. We've been a powerhouse in cardiovascular for many years. We've used that strength to go out and get further cardiovascular assets and bring them to the company. I think the strengths that Merck really bring are our global footprint, our excellence in clinical execution, and we will continue to leverage that as we look at all different therapeutic areas, areas we're in today, but maybe areas that we're not in today, to continue to broaden the offering that we have and bring benefit to this world and to our shareholders.

Understood. Maybe last question, if I can sneak it in. IRA clearly seems to emphasize rare disease in these orphan products. They get excluded entirely from negotiation. I mean you've seen some of the M&A, it's had a tilt there. What is Merck's appetite to look at rare disease? I mean it's not an area where you've had a lot of historical presence in. But could that be an opportunity that you would look to build out over time given the legislation?

We look at all therapeutic areas. We are in some rare diseases today as a company. So if the science is there and the unmet medical need is there, we will act because it's the right thing for patients, it will be the right thing our financials, it will be right for our shareholders.

Understood. Thank you so much. Really enjoyed the conversation. Thank you all for joining us.

Thank you all.