Merck Announces Third-Quarter 2013 Financial Results

Merck (NYSE:MRK), known as MSD outside the United States and Canada, today announced financial results for the third quarter of 2013.

Non-GAAP (generally accepted accounting principles) earnings per share (EPS) for the third quarter of $0.92 exclude acquisition-related costs, restructuring costs and certain other items.

A reconciliation of GAAP to non-GAAP net income and EPS is provided in the tables that follow. Year-to-date results can be found in the attached tables.

“This quarter we delivered solid financial results, with strong contributions from our vaccine, immunology and HIV businesses, and effective cost management,” said Kenneth C. Frazier, chairman and chief executive officer, Merck. “We are improving productivity and focusing our R&D and commercial resources more precisely to enable our investments in the best opportunities for innovation and growth. We are encouraged that our combination hepatitis C regimen has joined our anti-PD-1 immunotherapy in being designated as a ‘breakthrough therapy’ by the FDA.”

Select Revenue Highlights

Worldwide sales were $11.0 billion for the third quarter of 2013, a decrease of 4 percent compared with the third quarter of 2012, including a 2 percent negative effect from foreign exchange.

The following table reflects sales of the company's top pharmaceutical products, as well as total sales of animal health and consumer care products.

Pharmaceutical Revenue Performance

Third-quarter pharmaceutical sales declined 4 percent to $9.5 billion, including a 2 percent negative impact due to foreign exchange. Declines of SINGULAIR (montelukast sodium), MAXALT (rizatriptan benzoate), TEMODAR(temozolomide) and COZAAR (losartan potassium)/HYZAAR (losartan potassium and hydrochlorothiazide) following loss of market exclusivity were partially offset by growth of REMICADE (infliximab), GARDASIL [Human Papillomavirus Quadrivalent (Types 6, 11, 16 and 18) Vaccine, Recombinant], SIMPONI (golimumab) and ISENTRESS (raltegravir).

Sales from emerging markets decreased 4 percent, including a 6 percent negative impact from foreign exchange. Emerging market sales accounted for approximately 20 percent of pharmaceutical sales in the third quarter of 2013 with strong growth in Brazil, Korea, Russia and Turkey, offset by declines in China and Mexico.

Worldwide sales of the combined diabetes franchise of JANUVIA (sitagliptin)/JANUMET (sitagliptin and metformin HCI) decreased 1 percent to $1.4 billion in the third quarter, including a 3 percent negative impact from foreign exchange. Sales decreases in the United States due to reduced customer inventory levels, and in Japan due to foreign exchange, were partially offset by growth in Europe and the emerging markets.

Sales of ZETIA (ezetimibe) and VYTORIN (ezetimibe/simvastatin), medicines for lowering LDL cholesterol, decreased 1 percent to $1.1 billion in the third quarter, including a 2 percent negative impact from foreign exchange. The decrease reflects lower sales of VYTORIN, partially offset by growth of ZETIA, mainly in the United States.

Combined sales of REMICADE and SIMPONI, treatments for inflammatory diseases, increased 22 percent, including a 6 percent positive impact from foreign exchange, to $700 million in the third quarter of 2013.

ISENTRESS, an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection, grew 7 percent to $427 million in the third quarter driven by growth in all regions.

Merck’s sales of GARDASIL, a vaccine to help prevent certain diseases caused by four types of human papillomavirus (HPV), were $665 million, an increase of 15 percent for the quarter. The increase was driven by higher sales in the United States, which reflects continued strong uptake of use in males, as well as higher public sector sales of approximately $60 million. The increase was partially offset by lower sales in Japan due to the government’s decision to suspend proactive recommendation of HPV vaccines in the country.

Worldwide sales of SINGULAIR, a once-a-day oral medicine for the chronic treatment of asthma and the relief of symptoms of allergic rhinitis, declined 53 percent to $280 million in the third quarter. The patents for SINGULAIR expired in the United States in August 2012 and expired in major European markets in February 2013. The company has experienced a significant and rapid reduction in sales in these markets.

Animal Health Revenue Performance

Animal Health sales totaled $800 million for the third quarter of 2013, a 2 percent decline compared with the third quarter of 2012, including a 2 percent negative impact due to foreign exchange. The quarter was negatively affected by the previously announced voluntary suspension of sales of ZILMAX (zilpaterol hydrochloride), the company’s feed supplement for cattle, in the United States and Canada. The negative impact was partially offset by higher sales of companion animal and swine products.

Consumer Care Revenue Performance

Third-quarter global sales of Consumer Care were $443 million, a decrease of 2 percent compared to the third quarter of 2012, including a 2 percent negative impact due to foreign exchange. Sales were positively affected by the launch of OXYTROL FOR WOMEN, the only over-the-counter medicine to treat overactive bladder, but were offset by lower sales in the DR. SCHOLL’S footcare line.

Other Revenue Performance

Other revenues – primarily comprising alliance revenue, miscellaneous corporate revenues and third-party manufacturing sales – decreased 9 percent to $315 million compared to the third quarter of 2012. The decrease was primarily driven by lower revenue from AstraZeneca LP (AZLP) recorded by Merck, which decreased 14 percent to $220 million as compared with the third quarter 2012.

Third-Quarter Expense and Other Information

The costs detailed below totaled $9.4 billion on a GAAP basis during the third quarter of 2013 and include $2.2 billion of acquisition-related costs and restructuring costs.

The gross margin was 62.8 percent for the third quarter of 2013 and 64.0 percent for the third quarter of 2012, reflecting 11.2 percentage points of unfavorable impact in both periods from the acquisition-related costs and restructuring costs noted above. The gross margin decline, on a non-GAAP basis, primarily reflects the impact of recent patent expiries.

Marketing and administrative expenses, on a non-GAAP basis, were $2.8 billion in the third quarter of 2013, a decrease from $3.0 billion in the third quarter of 2012 due to ongoing productivity improvements.

Research and development (R&D) expenses, on a non-GAAP basis, were $1.7 billion in the third quarter of 2013, a decrease from $1.9 billion in the third quarter of 2012 reflecting ongoing productivity improvements and timing of certain programs that will begin in the fourth quarter.

Equity income from affiliates was $102 million for the third quarter, primarily reflecting the performance of partnerships with AZLP and Sanofi Pasteur MSD.

Other (income) expense, net was $172 million of expense in the third quarter of 2013, compared to $200 million of expense in the third quarter of 2012.

The company noted the following developments:

• Announced a global, multi-year initiative to sharpen the company’s commercial and R&D focus, targeting a net reduction in annual operating expenses of approximately $2.5 billion by the end of 2015. These savings are off of the company’s full-year 2012 expense levels.
• Granted MK-5172/MK-8742 ‘Breakthrough Therapy’ designation by the U.S. Food and Drug Administration (FDA) for treatment of chronic hepatitis C virus infection. Interim data from an ongoing Phase IIB clinical trial evaluating this investigational oral combination regimen in genotype 1 infected patients (C-WORTHY Study) is scheduled to be presented at the 64^th American Association for the Study of Liver Diseases annual meeting in Washington, D.C., Nov. 1-5, 2013.
• Announced that V503, Merck’s investigational 9-valent HPV vaccine, has completed its pivotal Phase III clinical trial and has met all primary study endpoints. Merck will present results from the Phase III clinical program for V503 at the EUROGIN (EUropean Research Organisation on Genital Infection and Neoplasia) congress in early November. The company expects to submit a Biologics License Application (BLA) for V503 to the FDA in 2013.
• Presenting interim data from the Phase IB expansion study evaluating the efficacy and safety of the company’s anti-PD-1 immunotherapy (MK-3475) in patients with refractory non-small cell lung cancer tomorrow, Oct. 29, at 1:15 a.m. EDT, at the 15^th World Conference on Lung Cancer in Sydney, Australia.
• Informed by the FDA that the Allergenic Products Advisory Committee meeting to discuss the BLA for the investigational grass pollen allergy immunotherapy tablet (AIT) has been rescheduled to Dec. 12, 2013. The Advisory Committee meeting originally scheduled for Nov. 6 was temporarily postponed due to the recent U.S. government shutdown.
• Initiating Phase III clinical trials for ertugliflozin with its collaboration partner, Pfizer Inc. Ertugliflozin is an investigational oral sodium glucose cotransporter (SGLT2) inhibitor being evaluated for the treatment of type 2 diabetes.
• Announced the receipt of a Complete Response Letter from the FDA for the resubmission of the New Drug Application for sugammadex sodium injection, Merck’s investigational medicine for the reversal of neuromuscular blockade induced by rocuronium or vecuronium. To address the Complete Response Letter, the company intends to conduct a confirmatory hypersensitivity study as soon as practicable, following discussion about the study with FDA.
• Received approval from the FDA to manufacture bulk varicella at the company’s site in Durham, N.C., for use in Merck’s vaccines to protect against chickenpox and shingles. The approval will enable the site to produce bulk varicella supply for the United States and help boost Merck’s overall global supply capabilities.

Financial Targets

Merck has narrowed the range of full-year 2013 non-GAAP EPS to be between $3.48 and $3.52, and the 2013 GAAP EPS to be between $1.61 and $1.79. The 2013 non-GAAP range excludes acquisition-related costs, costs related to restructuring programs and certain other items.

At current exchange rates, Merck continues to anticipate full-year 2013 sales to be approximately 5 to 6 percent below prior year levels with foreign exchange accounting for approximately 2.5 percentage points of the decline.

In addition, the company continues to expect full-year 2013 non-GAAP R&D expense to be below 2012 levels. The company continues to anticipate its full-year 2013 non-GAAP tax rate to be in the range of 22 to 23 percent.

A reconciliation of anticipated 2013 EPS, as reported in accordance with GAAP to non-GAAP EPS that excludes certain items, is provided in the table below.

Total Employees

As of Sept. 30, 2013, Merck had approximately 80,000 employees worldwide. In addition, the company’s joint ventures in China and Brazil, which are included in the consolidated results of Merck, had about 1,300 employees.

Earnings Conference Call

Investors, journalists and the general public may access a live audio webcast of the call today at 8:00 a.m. EDT on Merck’s website at http://www.merck.com/investors/events-and-presentations/home.html. Institutional investors and analysts can participate in the call by dialing (706) 758-9927 or (877) 381-5782 and using ID code number 77194196. Members of the media are invited to monitor the call by dialing (706) 758-9928 or (800) 399-7917 and using ID code number 77194196. Journalists who wish to ask questions are requested to contact a member of Merck's Media Relations team at the conclusion of the call.

About Merck

Today's Merck is a global healthcare leader working to help the world be well. Merck is known as MSD outside the United States and Canada. Through our prescription medicines, vaccines, biologic therapies, and consumer care and animal health products, we work with customers and operate in more than 140 countries to deliver innovative health solutions. We also demonstrate our commitment to increasing access to healthcare through far-reaching policies, programs and partnerships. For more information, visit www.merck.com and connect with us on Twitter, Facebook and YouTube.

Forward-Looking Statement

This news release includes “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. These statements are based upon the current beliefs and expectations of Merck’s management and are subject to significant risks and uncertainties. There can be no guarantees with respect to pipeline products that the products will receive the necessary regulatory approvals or that they will prove to be commercially successful. If underlying assumptions prove inaccurate or risks or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements.

Risks and uncertainties include but are not limited to, general industry conditions and competition; general economic factors, including interest rate and currency exchange rate fluctuations; the impact of pharmaceutical industry regulation and health care legislation in the United States and internationally; global trends toward health care cost containment; technological advances, new products and patents attained by competitors; challenges inherent in new product development, including obtaining regulatory approval; Merck’s ability to accurately predict future market conditions; manufacturing difficulties or delays; financial instability of international economies and sovereign risk; dependence on the effectiveness of Merck’s patents and other protections for innovative products; and the exposure to litigation, including patent litigation, and/or regulatory actions.

Merck undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise. Additional factors that could cause results to differ materially from those described in the forward-looking statements can be found in Merck’s 2012 Annual Report on Form 10-K and the company’s other filings with the Securities and Exchange Commission (SEC) available at the SEC’s Internet site (www.sec.gov).

¹ Merck is providing certain 2013 and 2012 non-GAAP information that excludes certain items because of the nature of these items and the impact they have on the analysis of underlying business performance and trends. Management believes that providing this information enhances investors’ understanding of the company’s performance. This information should be considered in addition to, but not in lieu of, information prepared in accordance with GAAP. For description of the items, see Table 2a, including the related footnotes, attached to this release.

² Net income attributable to Merck & Co., Inc.

³ Represents the difference between calculated GAAP EPS and calculated non-GAAP EPS, which may be different than the amount calculated by dividing the impact of the excluded items by the weighted-average shares for the period.

⁴ Includes expenses for the amortization of intangible assets recognized as a result of mergers and acquisitions, as well as intangible asset impairment charges. Also includes integration and other costs associated with mergers and acquisitions.

⁵ Amounts primarily include employee separation costs and accelerated depreciation associated with facilities to be closed or divested related to actions under the company’s formal restructuring programs. Amount for 2013 includes approximately $545 million of costs related to actions under a global initiative announced by the company on October 1.

⁶ Includes the estimated tax impact on the reconciling items. In addition, amount for 2013 includes a net benefit of $165 million related to the settlements of certain federal income tax issues.

⁷ Includes the estimated tax impact on the reconciling items, as well as net benefits of approximately $325 million related to the settlements of certain federal income tax issues.

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