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

All right. We're going to get started here. Thanks so much for joining us. I'm Terence Flynn, Morgan Stanley's U.S. biopharma analyst. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. I'm very pleased to be hosting Merck this afternoon. Joining us from the company, we have Rob Davis, the company's Chairman and CEO; and Dean Li, who's Executive Vice President and President of Merck Research Labs. Thank you both so much for taking time on your day to join us. Really appreciate it.

Great. Well, thank you for having us. Appreciate it.

I thought first, I'd turn it over to you, Rob, just to frame the discussion for us, and then we'll launch into Q&A.

Yes. No, I appreciate it, and happy to do it, and good afternoon, everyone. I mean, obviously, already, 2026 has been a very eventful year for us. I would say, and I think it will frame the discussion we'll get into. Our transformation is underway whether it's the product launches we have going, which are all the first waves that are coming all going well. But equally, if not more importantly, the fact that we're getting and seeing continued important data readouts that have all pretty much turned over positive and many at a pace much faster than we expected just gives us a lot of confidence in where we are. We have more to come. Importantly, while those catalysts have been important, we have more catalysts yet to see this year, both in terms of other data readouts as well as potential filings. So as you look in the near term, a lot of continued excitement and what is ahead of us. And then on top of that business development, what we've done recently with the Terns deal, we'll get into, I'm sure, at some point. Animal Health. Our Animal Health business is performing at best in industry levels. We continue to have strong confidence in that business that can more than double in the next 10 years on the back of a product portfolio growth, very much in line with what you're seeing on our human health business. And we have the capital -- the resources and the capability to add more. So whether you look at it as launches, as clinical readouts, as business development, I think we're really hitting on all cylinders. So I feel very good about where we are. More to do. You never say you're done, but I feel very good about where we're standing at the moment. So maybe with that, I'll turn it over if you want to jump in on any of those areas.

Yes, absolutely. I think we'll get through a lot of that. The first I want to start on is just on the policy front. Obviously, you guys are very plugged into D.C., you have the midterms coming up here. But just anything that's on your radar here that we need to be cognizant of?

Yes. Obviously, it's going to be interesting to see how this plays out and what happens in both the House. And interestingly now, the Senate probably is going to be more interesting to watch and even the House. But whether it's Democratic or Republican, however you want to look at it, as an industry group and as Merck, where we're focused, is continuing on what we see as the 2 biggest challenges we continue to have. How do we make drugs more affordable for patients at the pharmacy counter and how do we ensure access to all of these new meds in a world where we have an ecosystem that continues to reward for the innovation we're bringing. And if you look at those assets -- those aspects of affordability and access. Clearly, we continue to believe the challenge is the fact that the innovator, the manufacturer still only gets $0.50 of every dollar. We have to address what happens with all of the $0.50 in the middle. That really is about PBM reform. That's about 340B reform. And I'm happy to say that there's growing momentum. You've seen a lot of movement with legislation in the PBM front. We continue to think there's more to do there. But importantly, you're seeing movement on the 340B front as well. So we're going to continue in the industry and as Merck to push that. But really with an added emphasis on this notion of access, the fact that you're seeing insurers and PBMs use utilization management to either delay or deny access to new medicines, whether it's through formularies, how they do formulary management through step editing or through prior authorizations. We think that, that is another element of this broader system that needs to be addressed, and we've spent a lot of time with the members of Congress and the administration trying to bring greater focus on that.

Okay. Great. Maybe the other one on the policy side is just 340B. It's been, I think, front and center for a lot of folks here after second quarter results. So as you think about that going into 2027, how are you thinking about the impact to your business?

Yes. So if you look at 340B, we're very supportive. I think it's important a couple of points. One, as Merck, we very much support the initial and original intentions of what 340B was about, which is how do you support the most vulnerable members of society to ensure they have access to good health care and good hospitals and clinics. The program has been perverted away from that and has grown and morphed in directions that were not in the initial intent, and we need to get back to that original intention. And so as we think about '27, you are seeing momentum, as I mentioned. There is some bipartisan legislation now moving both in the House and the Senate. There's actually, I think, a bill in the House called the Access Act, but maybe also not only from what the legislation's happening from a congressional perspective, you're seeing the administration themselves starting to make movements. I'd just highlight the fact that we have HRSA running a demonstration project with the Rebate model, which we think is very important. So we're very supportive of all those moves. As we look at our own business, those will create potential tailwinds if they evolve, but they're not material to us, frankly. It's more of how do we set the right policy environment to get out some of these more fundamental issues that we have in our system.

Okay. Great. The other one you mentioned in your remarks, Rob, is that you guys have had a lot of success on some of the BD deals translating through to positive pipeline wins here. And so I think now you can say like, all right, a lot of these have been ROI positive for the company. And so maybe just what worked? Like what was it that you guys changed when you came into CEO that you think has given you the ability to generate ROI on some of these BD deals. So I think there's this historical perception, again, probably rightly so, where a lot of the legacy deals that maybe you, your peers have done, were being more challenged on the ROI side. So what was it about some of the changes that you guys made on the BD side?

Well, I give all credit to Dean, frankly. My superpower was just listening to Dean. So that -- I think my mom raised me well in that regard. But in seriousness, what we have done is really a lot of people talk about it. I think we've actually tried to both live it and institutionalize it in the way we operate, is treat the pipeline as 1 pipeline, whether it's internal or external, and make sure that we always are trying to look for the best science. We always start with the science. I've never gone to Dean and to our business development folks and said, "Get me an asset in a space." I think that's dangerous because they'll give you the best asset, but that might not be the best asset that's out there. You don't limit them in that way. You can't limit the science, the science has to dictate. So we always start with the science. But then once we do that, we're willing to look at whether it's an internal asset or an external asset, we evaluate them always the same. We use the same financial measures. We use the same operational rigor. The teams that do the due diligence are our scientists. So it's not like a separate group. When we go into due diligence, it's our scientists on the ground with them. We leverage our statisticians to be able to make sure that we're understanding the probabilized risks and returns. So it's that model we followed and one of the things we did to organizationally align that is when I became CEO, we moved business development underneath. So all corporate development now sits underneath Dean. And I think that has also allowed for that ecosystem to thrive. The other thing we do is we have with each of our discovery centers, BD is embedded. So all of our search is done in side-by-side with our scientists. So I think it's that culture, combined with now institutionalizing processes around it that has allowed us to do well. And as I said, it's credit to our scientists. They've made scientific bets based on their expertise. And I think the fact that we have depth of expertise has allowed them to make the right bets.

Okay. Great. Maybe the first one of those I want to talk about is obviously the INT program, which is partnered with Moderna, some recent data there on the Phase III side. So congratulations. Very exciting. I guess, Dean, maybe just help us think about framing what we're hoping to see. I know you can't say ESMO, but again, a conference this fall. And what it would mean for other tumor types because I think that's the question we're all trying to get our head around is not necessarily if the melanoma data is good, not good. We know it's good because it hit at an interim, but what does it mean for other tumor types that you and Moderna are exploring. So can this be a platform, I guess, is the question.

So the first thing is, I think one of the most important pieces of data actually didn't come out in August. They came out in -- during ASCO where we together presented the 5 years from the Phase II. The big concern that I had about this -- I mean the Phase II that was run was robust. But as many people know, there's been a concern that RNA-based, sort of, trying to use that to immunize can be short-lived. And what was really interesting in that data is that we demonstrated that the people who responded who were cancer-free at 1 year remain largely so at 3 years, were largely so at 5 years. So when people see that data when it comes out at the conference, I think people will immediately see the Phase III and extrapolate to 5, 7, 9 years, and that's a really important point. The second issue is in that data, there's a small sample size, there's always some imbalance, but what you're hoping in your Phase III is to be in the ballpark of that. And if you are in that ballpark of that, I think it will increase your likelihood of being successful in adjacencies. And what do I mean by adjacencies. We have a relatively conservative plan right now in relationship to INT. We prioritize those tumors that have a high TMB and/or where IO or checkpoint inhibitors have worked and/or where KEYTRUDA itself has laid out in early stage. So I think the louder the signal comes in for melanoma, I think it will somewhat derisk that relatively conservative plan. What we have not done is we haven't gone in metastatic. We haven't gone in tumors that are not IO sensitive or where a PD-1 works or it doesn't work. And the reason we haven't done it isn't that we think it's a silly idea. We're very glad that other people are doing it. But if that should hit, we will change and expand our program dramatically if that should happen. The issue for me is to hit and hit fast because this is unlike a T cell engager, unlike a small molecule, unlike an antibody. I think the first-mover advantage here in being able to commercialize in melanoma will teach you -- give you all the repetition that you need, and that in itself will create a lot of information for both Moderna and Merck and give us an advantage. So that's why "we" have a relatively conservative plan scientifically, but the concept is to move fast and to move -- can move fast.

Yes. And so as you think about maybe the next couple of readouts you've got, muscle invasive bladder cancer and RCC, how to think about likelihood of success in those tumor types, where those fall in the spectrum of...

Yes. So they fall in around that conservative plan. You would say that for MIBC or for bladder cancer, the tumor mutation load is higher. But you also have to look at RCC, where RCC, the tumor mutation burden is not that different than MSS CRC. But in RCC, how many immuno-oncology agents work? I mean how many checkpoint inhibitor cytokines work? So I think both of them are good examples but they will give us a general sense of bookends in relationship to our conservative plan, and we will act accordingly as we see that. And we will open other trials depending on what the, sort of -- if MIBC hits it or something like this, we'll start thinking IO, higher tumor mutations; if it's RCC, it's I/O-sensitive, checkpoint sensitive, but a lower TMB.

Okay. Maybe, Rob, one for you. I know you guys had guided to over $70 billion in recent launches pipeline by mid-2030s, and you had a number of different buckets in here, oncology was one of those, looks like over $25 billion. I think from what I remember, INT was fairly minimal in that. And so number one, I guess, am I remembering that correctly? And number two, is it fair to assume that there could be upside now as a result of this new data that we got on a top line basis?

Well, maybe speaking broadly to the $70 billion, and we unpack the comments. But I think, yes, you should assume we see upside to the $70 billion, and I'll give some reasons why. It is specific to how did INT fit. So if you recall, we had $70 billion made up from 20 assets. 10 of those assets, we said, would make up 70% of the $70 billion, and those are the ones that we thought would have readouts really in the next couple of years. We initially expected INT just based on primary completion date, which is what we use as our -- the way we guide was beyond that. It was in 2029. So obviously, pulling it forward to the interim. It was not in the initial 10. It was in the 20. So it is in there. But if you look at more broadly, what do we see as far as this opportunity. The other thing is not in that $70 billion. The Terns acquisition, the asset -- the TKI, we brought in with that, which we see itself as a multibillion-dollar opportunity. That was not in the $70 billion. Importantly, and this will come up, I'm sure in a moment, MK-2010, which is our PD-1 VEGF, was not in the $70 billion. And as you know, we are starting multiple studies with MK-2010. So those 2 assets alone are new, they're upsides. And then on top of that, I would say, while we did have INT in there, just given now the fact that we -- if you assume technical regulatory success because that's what we always assume. But then you look at what is the commercial opportunity. I do think it's safe to say that the broad commercial opportunity probably could be bigger now given what we've learned and what we'll continue to see as the data flows out. So all of those things are why we have a lot of confidence that you're going to see us raise that number. We just have to decide when is the right time to do that.

Okay. Is that a this-year event or a next-year event?

Raising the number. To be determined in the near term, I mean, it's coming. Last year, we laid it out at the beginning of the year. We'll think about whether or not probably that would be the timing we think about it.

Okay. Fair enough. Just in the interest of time, I want to keep going here a lot going on. But sac-TMT, another more recent derisking pipeline asset for you guys.

Also it came much earlier than expected.

Okay. Another driver of upside to the $70 billion? What -- but I guess the question is just the one thing that I think we've been getting some questions on is differentiation still versus the competitive landscape. And so I know you guys have a strong view on this. We're going to get some data from AstraZeneca for data from their AVANZAR study, which we haven't seen yet. There were some data for Trodelvy or another TROP2 over the weekend at World Lung. So maybe just level set us on kind of where you see differentiation versus those other TROP-2s given some data over the weekend, but also in the event of the AVANZAR data and what that means for sac-TMT?

Yes. Maybe I'll make some high-level comments, and then Dean can get into the specifics. If you just recall, we have 17 Phase IIIs we're running, 13 of those are in tumor types where we think we'll be first in class. So -- and most of those, they're outside of lung and they're outside of breast. But they are meaningful tumor types. So it's important that and alone, the fact that we can be first-in-class is fairly important. As you look at the more competitive spaces, especially around lung cancer, Dean can get into why we think we have a unique asset. But the one thing I would add to that, that I think is not appreciated is going forward, the number of potential additional combination studies we could think to with sac-TMT, whether it's in combination with MK-2010, which is, as you've seen, is now on clinicaltrials.gov. Other assets we have is unique because we have such a broad portfolio, we have a lot of different combination assets we can bring. A lot of those studies aren't reflected yet in their studies. We're still -- some are spooling now and more we're continuing to look at. So that in and of itself is something that's underappreciated. And then I think your specific question is, well, what about what differentiates us in the more competitive spaces, and I'll let Dean take that.

Yes. So as Rob said, the linchpin of the whole thing is that we felt the molecule when we looked at the molecule, was different than the previous two. And because it was differentiated, we decided to do 2 things. One is to race the indications where the other 2 weren't trying. We were actually surprised that they didn't move it forward. And you see with the endometrial data, there is a chance that we can be first in lots of these indications that are outside lung and breast and we intend to do that. The other thing that's important about that data is that we had gotten signals in China and when we got signals in China, there's always this question of would you get that signal in a global study. And the endometrial study derisks that to us to some degree. In relationship to lung and breast, we've already had one that's not going to make it into first line -- one of the competitors. We'll have to see where the second one ends up, but we feel very good based on the Chinese data that this is an important ADC. We intend -- initially, we were very thoughtful of trying to be differentiated. But with the data that we've done with Kelun and with other data, we're extremely confident across PD-L1 that we could play with sac-TMT. The question is when do you play with it with KEYTRUDA and when do you play with it with 2010?

Yes. And when will you guys make that decision? Like what the pieces are you waiting for to make that decision?