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

Kick off our next session. Thanks for joining us for this meeting. I'm Tim Anderson, the U.S. large cap pharma and biotech analyst at Bank of America. We have the pleasure of speaking with Merck today. Three folks on stage. Jannie Oosthuizen -- did I take it right -- who's President, U.S. Human Health. He's held this role since 2022. He joined Merck in 2014 serving in various roles internationally as well. Most recently led global marketing for oncology. And prior to Merck, you were at Lilly for a long time, I think, 20 years?

Yes.

We have Dr. Marjorie Green, Senior Vice President, Head of Oncology Clinical Development at Merck. She joined the company in 2023 from Seagen. And then, of course, we have Peter Dannenbaum, Investor Relations, who many of you will have known. And Peter, you joined Merck when -- what year was that?

2017.

Okay. 2017. So we're going to start off with some policy questions, and same questions you've heard me ask many others. And I know some of these will be difficult to answer.

Lots of headlines on lots of different things, MFN being the most recent topic. How much time is that taking internally from you, let's say?

It's taking a fair amount of time. I think right now, it's a question of not just what are you hearing and seeing, but what are you potentially missing, right? So I think we definitely do spend a lot of time. We've got a small team set up across the enterprise to really catch as much as possible, start to think about what are implications, how do we need to think about it, does it become part of long-term planning, right, et cetera, and just things we need to react to. But it does take a lot of time, yes.

Marjorie, how much time is it taking for you? There's FDA disruption in the mix as well, right? So maybe one of the questions for you is, folks that you've interacted with at the agency with, some of those folks gone, we asked this question of Regeneron yesterday. They admitted, yes, some of the long-standing ophthalmology relationships are no longer there.

I think we have so many interactions because of our broad portfolio with the FDA, that we've got good relationships with the depth of the different divisions. And so yes, some senior people are gone and have moved on, but there's still a lot of continuity across the FDA for the interactions that we're having.

Let's start off with most favored nation, which obviously broke in full force on Monday, your thoughts? Super high-level question.

Yes. So at this point in time, we probably have more questions than answers, right? It's kind of, in a way, it's a bit of a round 2 given the current President wanted to do this in his first term as well. So we'll definitely learn more over the next few weeks as CMS probably start to engage on the topic and the list of to-dos that they have. There's the obvious questions like, how is this going to work? What's going to be possible to implement under an executive order versus potential legislation? Will it have to go through Congress? What elements will have to go through Congress? So all of those are just questions in terms of how this is really going to shape up and how is it going to feature from an implementation perspective. Is it just a means to get in negotiation with the industry going, right? So I think we have a lot of questions in terms of what is the end-goal and what is the real objective. Within that, I think there's some positive things, right? I think we've all struggled with foreign governments and countries outside the U.S. not paying a fair share for innovation and reflecting the value of what we're bringing to those markets. It's been difficult from an industry only standpoint. So I think having the U.S. government engage on the topic, hopefully, is positive and useful. And then some acknowledgment of the role that middleman PBMs are playing in the market, right, and how much is being absorbed into the buckets of others within the system. And is there a way in which we can pull some of that back and really get it to patients ultimately?

So to achieve this equalization in price, at least a couple of companies yesterday did throw out, if it's possible, maybe it's government to government, and maybe that's what you're suggesting as well, it's certainly hard to see drug companies being able to influence that directly. But one question I've been asking companies is, this isn't specific to Merck's book of business, but just your long-standing perception, I don't know, in the last 5 years of the delta between net U.S. drug prices and, let's call it, developed Europe prices. You see numbers all over the place.

Yes. And it's also a matter of where are you in the life cycle, right? Because we all -- we usually start much, much closer. And then in the United States, we have an ability to increase price, whether it's inflation increases, or some would go beyond that. But in the rest of the world, there's pretty much no price increase and more often continuous price decreases, right? So you have a divergence that really gets increasingly bad over time. So it's also a question of how recent was the launch. And then in the HDA markets, right, it's really -- it's not a negotiation. Governments take a very firm position on what they believe is cost effective or what they're going to pay, and it's a kind of take-it-or-leave-it equation. But the deltas could be 2x to 10x, right, across the industry.

Okay. So yesterday, I published a simplistic scenario where I looked at all my covered companies and I said, no, we're going to assume a certain level of price cut across Medicare and Medicaid and flow through the numbers and what the earnings impact would be. And immediately, we got feedback. "Well, you're not taking into account commercial spillover." And so that's the question I have for you, and you're well qualified to answer that. And we've asked this of other companies. The company just before this felt there really wouldn't be commercial spillover if MFN is applied just to government channels. That has been my view too just because I think Medicaid shows there is precedent for government channel to get steeply discounted prices. As much as commercial payers would love access to that price, they can't get it. So why would it be different if MFN was applied to Medicare?

Yes. And a lot of it depends on the reimbursement mechanism as well. If it's rebates, et cetera, like instead of Medicaid, you can kind of ring-fence at this -- earlier, the conversation was, if you do something in Medicaid, it could bleed into 340B, right, which then becomes a much broader exposure beyond just Medicaid itself. So can you ring-fence some of these? I think on the medical benefit products, when your product is ASP-based in terms of reimbursement, the ASP does bleed into other segments in the market. And I think that's where companies are saying that you might well see the price in Medicare ultimately impacting your ASP, and that ASP affects your commercial business because the reimbursement is ASP-based. So it might take a bit of time, but ultimately, the ASP is going to catch up across all your segments.

Okay. Let's move to oncology. There's a lot to cover here, and you're both quite versed in this area from different perspectives. And this actually ties into some of this policy stuff, if you think about it, from some of the IRA news yesterday. So KEYTRUDA, biggest product, $32 billion this year, at least in our model, nearly 50% of total company revenues. It's been doing absolutely fantastic. And it's growing 20% per year on average for the last 5 years. Q1 was soft, but there was some explanation behind that. If you kind of strip that out, those onetime effects, I think the underlying growth was more like 11%. But as we think about this brand going through '25, into '26, into '27, won't that very strong growth trajectory likely continue as you continue to penetrate other indications, roll out in more geographies? Q1 looked like a slow number, but is there really any sort of slowdown?

Yes, you're right. I mean, Q1, there was some Q4 to Q1 inventory -- channel inventory movements that bring down the absolute Q1 growth. But we still see good growth on KEYTRUDA. We will continue to see it. We continue to see indications coming forward. What we're seeing right now is a lot of our launches from about 12, 18 months ago are starting to mature in terms of market penetration and share. So we do need more catalysts to come in. So more launches this year and beyond will continue to be the catalyst for growth in KEYTRUDA. So we will continue to see growth in KEYTRUDA. Some of these are smaller indications. It's a big base. right? So we need to take that into account. But we will definitely continue to see growth. And then we also have subcutaneous, which would be another -- it's not necessarily growth driver, but I think it continues to build positive momentum around the use and, hopefully, compliance as well.

Will subcu help actually grow Merck's overall share within that? Or will subcu just most likely switch just from IV?

Yes. We believe that based on the broad clinical benefit in this class for products, physicians first make a brand decision in terms of: are they going to use KEYTRUDA. And then subsequently, they will decide, is it going to be IV, is it going to be subcutaneous, right? So from that perspective, we don't see subcu to be a significant share contributor. But having said that, if it does help with broader access for patients and better compliance, we could well see some volume benefit if you could keep a patient to complete all their cycles, right, that is needed, for instance, in an adjuvant setting.

Yes. Okay. So the question I asked about growth, as you noticed, was up to 2027 or through '27. So to '28, IRA kicks in, most likely at the start of the year. There was news on this front yesterday now that, in the proposed regulations, that they will treat subcu KEYTRUDA and products like that, that combine an active ingredient and an inactive ingredient, as just the same as the parent molecule, suggesting that the subcu would get subjected to IRA negotiation as well in that window. And the stock went down on that and Bristol went down and J&J went down as well. Your views of that? Did it come as a surprise? Out of the blue? Or did you see the writing of the wall?

We didn't really speculate in the past. We looked at the previous rule from CMS, which suggested that 2 active molecules will define a different product. And therefore, the product will not necessarily be negotiated. And that was our assumption for subcutaneous not being negotiated with IV. This rule, to your point, might well change that, and it could be subject to negotiation. Having said that, our objective with subcu has always been to bring it in, in a way that physicians can use it, patients have broad access. So we were always going to price subcutaneous in a way to really maximize accessibility and reimbursement for subcu use so that we can get the level of adoption that we think is needed in the market. So what I'm saying is that effectively a negotiation of subcu will not really change the financials for subcutaneous moving forward. We would have liked to have more discretion on how we price and have our own flexibility on what we do from a pricing perspective. This might be more of a given in terms of how we need to do it. But financially, it's not going to be much of a difference to us.

Okay. So the next event past that implementation of IRA is LOE, which I believe starts in December '28, so at the very tail end of the year. So functionally, from '29 onwards. How do you manage that as an organization? As I mentioned at the outset, this is a product that's 50% of revenues, high-margin, high-priced product. So when we look at benchmarks for erosion of drugs like this, both U.S. and Europe, that are injectable cancer drugs, we've got several of those, it looks like it's been running 30%, 35%, 40% per year erosion. That's a big loss. So what is the organization going to do? That's what's weighing on the stock, as you know, and that is fully in focus.

That's right. And you've heard Rob speak about this, our CEO, speak about this quite often, right? I mean that has been a big focus in terms of how we continue to develop our pipeline. That's been a big focus in terms of how we've executed on business development. And that's what we continue to do, right? I mean if you look at our Phase III pipeline now, the assets in Phase III has almost tripled from 2021 until now. So in the last 3 to 4 years, we've seen a threefold increase in our Phase III assets. And if you take our Phase III pipeline, by the mid-2030s, on a non-risk-adjusted basis, that is close to $50 billion in revenue that would come from this, right? With $25 billion from oncology, about $15 billion in cardio-metabolic, $5 billion in immunology and $5 billion in HIV, right? So we really have strength in our pipeline sitting in Phase III already that's going to start to come through. In this phase of LOE, what I would say is that we've never seen any product go LOE post an IRA, right? So there's going to be different price points even for biosimilars to contend with. So we will have to see if the old analogs hold in terms of erosion. But having said that, it is obviously a big step-down in terms of IRA negotiation and then additional volume loss. And we continue to focus on what we're launching today. So the contribution that WINREVAIR is making, the contribution that CAPVAXIVE is making is already significant. And I think how we execute on our launches in the short, medium term is going to be critical in terms of starting to offset and getting beyond the LOE for KEYTRUDA. As Rob has said, that cliff is now more of a hill. It's still a hill we need to climb and we're going to do more to get through that LOE fast and get back to growth, but I think everything is -- the whole company is focused on solving for that LOE on our KEYTRUDA.

Yes. So Rob has described it, as you mentioned, a hill, not a cliff. And that is, in fact, what our model shows. And I go back in my model frequently and I figure out, are we making a math mistake? Because it's not a cliff, it actually looks like a hill. But there's the perception that it's a cliff, and that's the difficult thing to change. Okay. So I mentioned LOE starts December of '28. There's an asterisk there, possibly. You guys have a lot of patents on KEYTRUDA. This is a subject that you guys don't proactively bring up. But there's certainly plenty of precedent for biosimilars to get delayed, start with Humira, we've seen it with Stelara. Sanofi talks about it possibly happening with Dupixent. You saw Regeneron take companies to court on Eylea. Why won't this be something that possibly pushes out the entry of biosimilars?

Yes. I mean for now, and Peter can comment on that as well, for now, we are -- for planning purposes, we assume the compound patent in 2028 as the date when biosimilars will come in. There are 2 patents that probably could be extended through 2029, I think it's May and November, that is related to some of the original patents that were filed and where the Patent Office took some time. There were some delays, so could we benefit from the timing aspect that it extends beyond the 2028 into '29? So we could see some of that. But for our planning purposes, we assume that biosimilars will enter around the expiry of the compound patent.

Yes. Just to be clear on that, so our 10-K back in March disclosed 2 additional patents that the Patent Office granted us. One was manufacturing, one was a formulation process patent that extend into, I think, it's May and November 2029. They will likely be challenged so they may or may not hold up. Our expectation and our planning is all under the assumption that biosimilars enter in December of 2028.

Yes. Okay. I neglected to ask one question I wanted to ask on the subcu KEYTRUDA, which is really in the ex U.S. markets. You guys have given guidance for the rate of conversion in the U.S., but how should we think about the conversion from IV to subcu in international markets?

Yes. I mean we see it pretty much in that same range. We talked about 30% to 40%. Some markets could probably be a little bit lower, some higher. But the 30% to 40% is really around where we see the indications of KEYTRUDA in terms of monotherapy KEYTRUDA, which obviously could easily be a place where you would use subcu. And that could be in metastatic disease, it could be in early stage, especially in the adjuvant phase. It could be in combination with orals, right, where there's no other product being infused. But then, and Marjorie made the point earlier today, even in the metastatic setting, it could still save the practices time to have a 2-minute injection of the subcu and still give the patient the other infusion, right? So I think there's potential for a lot of efficiency in terms of how practices are running their business too. But we kind of see the conversion of the adoption at similar rates.

Okay. I want to shift to a different oncology topic and want Marjorie -- you'll probably be the one that answers this. PD-1 VEGF bispecific, so that is a category suddenly on the map in a big way and viewed as a concern for Merck as possible competition to KEYTRUDA because there is a head-to-head trial, one or more going on at the moment, by Akeso and Summit. And everyone is waiting with bated breath to see these next data updates on that approach. So there's that product, ivonescimab, is in the lead. There's others behind it. And you guys, in fact, picked up a molecule in this space as well. So what I've seen Merck do sometimes in the past, I feel like, is take out insurance policies. So CTLA-4 is a good example where I felt that the company was always kind of denigrating CTLA-4, yet it had one in development, possibly as a hedge. Is that what this is for you guys? Or is this something that you fundamentally believe in as an approach? And if it's the latter, then it's a potential concern because others are ahead of you.

There's a lot to unwrap in that question. So I think from a scientific standpoint, there are reasons to believe in the bispecific. If you think about preclinically what you're doing is we know that VEGF is immunosuppressant and you can get T regulatory cells that get up-regulated in the presence of VEGF, you can see problems with the tumor microenvironment. There are dendritic cell effects of VEGF. And so this is why anti-PD-1 or PD-L1 in VEGFs have been studied so broadly, including the studies that we've done at Merck. And by combining these into a bispecific, there are potential advantages of the VEGF being able to do more to the immunosuppressant activity as well as providing local anti-VEGF activity against blood vessels, and improving the tissue microenvironment with less of the systemic issues of free-range VEGF drug, and also potentially enhancing the PD1 or PD-L1 depending on the bispecific and what you do. And so preclinically, it's a very interesting biology. Our portfolio is compromised of -- compromised -- is composed. That's the word. It's not compromised. It's composed of multiple drugs that have single-agent activity that are combinable. And we want to be able to follow science and go, okay, we want to be able -- we know that KEYTRUDA is foundational. PD-1 therapy, PD-L1s are foundational, KEYTRUDA in particular, in multiple tumor types. And we have drugs that could go across multiple tumor types. So if there is something that scientifically makes sense, we want to be able to combine with our assets to be able to buy the greatest benefits for patients. So it gives us optionality in our portfolio and how we develop our drugs. If it turns out that these drugs are fulfilling the promise of some of the initial PFS data that's been seen out of China, we've shown that we can come from what we perceive as behind-the-development-plan multiple times, definitely with KEYTRUDA, but also if you look at our sac-TMT portfolio. We came third to market; there are 2 that are on the market. But we have a very robust development plan and are differentiated through how we develop our drugs. So I think we're in a really good position because of the molecule we picked, our understanding of the biology of PD-1 therapy in VEGFs, and really can make a difference. So if this does work, preclinically it does, the initial data is very encouraging, that both Akeso, Summit and BioNTech have generated, we're in a really good position.

So the big question, of course, is this very nice-looking PFS benefit going to translate into a survival benefit? And if you just look at the history of anti-VEGFs in lung cancer, it's a mixed bag on that front. You have some trials that have shown a survival benefit, others that haven't. Dean has flagged this before as a big question mark. So do you want to put forth a guess? Are we going to see the survival benefit translate? Do you think it's high risk that it doesn't? Do you think it's likely that it does? How are you thinking about it?

This is different, I think, from what we've seen with both Avastin as well as the VEGF TKIs because of that fundamental structure and biology and the preclinical benefits. So I think it's an open question. I'm not really a gambler per se, even though we are in Las Vegas. But thinking about what you're seeing is when you look at all of the data generated to date, the efficacy that's being produced is more robust than historically was seen with previous generations of drugs, which does give you some hope. I think people -- there was a big reaction to the HARMONi-2, the label data that got stuck in, that 39% information fraction. I think that analysts, who do a wonderful modeling, had predicted the hazard ratio for us to be somewhere between 0.7 and 0.8, and that's where it was. And then there was a huge negative reaction. So I think it's too early to tell. We don't know what the curves look like. Are they going to come together? But some of the worry in the past with VEGF inhibitors have been the toxicity associated with it. Is that contributing to the OS? And again, because of these structures and the way that these are dosed, you may not have that same issue. So I think it's an open question still.

One of the things that strikes me about this is who's leading the charge here? So it's Akeso and Summit, it's BioNTech. You guys have a compound. Where is the other majors in the space? We don't see a lot of other big, established oncology players with compounds in this class yet? Which begs that question, is this more of just an insurance policy for you guys or do you really believe it?

I want to be able to maximize benefit to patients with our portfolio. And so this gives us the option to do that.

Okay. Let's shift to another possible threat to KEYTRUDA which comes up, which is the AVANZAR trial from AstraZeneca. So head-to-head with their TROP2 versus KEYTRUDA frontline lung. That data comes out maybe around end of the year. Should we be nervous about that?

Look, we have a TROP2 ADC that we're developing, I think, in a different way than both Gilead and AstraZeneca. Daiichi have been developing their drugs. And I'm very confident in our ability to find clinical value for patients and, therefore, for the health care systems, payers and company with our development strategy. There is still unmet need in the frontline non-small cell lung cancer space. So as an oncologist, I want to do better. I think we all want to do better. So I look at this as an opportunity. Antibody-drug conjugates do have a cytotoxic payload. They're not sort of kind and gentle medications necessarily. When you add platinum-based therapy on top of it, there is the potential to have compromise in your dosing and your ability to stay on regimens. And so I think that our frontline strategy, both combining with pembrolizumab and using the knowledge we have from our extensive pembrolizumab studies and how we've designed our studies and designed our inclusion criteria, helps us. In addition, we have a maintenance strategy approach, which really is designed to keep that benefit going long term for patients get additional responses. Those people have stable disease. So I think that we're in a really good position. And I look at this as a great time for patients ultimately because of the innovation that's happening with antibody-drug conjugates.

Great. Okay. Let's move to a couple of other disease areas in the remaining time, which is not a lot. Just vaccine, GARDASIL, of course, has been a focused product because of the slowdown in China. And I know you're responsible for the U.S. market at the moment. But you have some perspective probably on what the latest is in China? The guidance has been expected to be slow going forward in China for the time being. Is that still the current thinking?

Yes. I mean we assume no further shipments into China for the remainder of this year, right? So I think we derisked the GARDASIL number. It's less than 1% of our total revenue now sitting in GARDASIL. What I would say, Tim, is outside of China, as we see also in the first quarter, I mean, we still had like 16% growth of GARDASIL. And then the rest of the world, including the United States, we grew GARDASIL 10% in the first quarter. So that makes it rest of the world outside of China greater than 16% of growth. There still is a lot of opportunity, right? I mean we've been, I would say, saved lives for the last 10 years with HPV vaccination. And we're still sitting at only about 10%, 15% of patients being covered with this vaccine. So there still is a tremendous opportunity. And we obviously continue to work, whether it's low, middle income countries, whether it's the adult segment in Europe where there's still room for, whether it's in the United States still completing the series, as well as further penetration beyond the 75%, 80% that we see today, there's still a lot of opportunity for GARDASIL.

ACIP in the U.S. is going to be discussing the idea of only getting 1 shot of GARDASIL. And there is data out there, I think it was WHO study recently, that showed that you get pretty much the same efficacy with 1 shot versus giving 2 or 3, which is current standard and that's current label in the U.S. So if that were to happen, I mean, is the competitive response just to double the price of GARDASIL?

Well, we'll -- we're going to take a measured approach, right? We will see where ACIP land. There's been about 10 different scenarios being discussed by the working group. The recommendation could be gender-specific. It could be different across different age cohorts. It could be shared clinical decision-making at the end of the day. We have a bit of a different view in terms of the dataset being used. The FDA, I think, has a different view as well. The evidence being put forward for ACIP is not evidence that FDA would, for instance, accept to change the label, right? So I think there are some big question marks in terms of the bar that is required to make this change. This is a vaccine that works exceptionally well. But there are real differences between males, females, between ovarian versus -- or cervical versus head and neck cancers. So we continue to engage on this, and we'll see where this lands.

I have about 10 really important questions, but we're out of time. So we're going to call it there. So I want to thank you, Jannie and Marjorie and Peter, for presenting at our conference.

Thank you very much. Thank you.

Thank you all.