Merck Announces First-Quarter 2013 Financial Results

 

"Our first quarter performance reflects the challenges of major patent expiries coupled with the impact of currency and other headwinds,"

WHITEHOUSE STATION, N.J.--(BUSINESS WIRE)--Merck (NYSE: MRK), known as MSD outside the United States and Canada, today announced financial results for the first quarter of 2013.

$ in millions, except EPS amounts		First Quarter 2013		First Quarter 2012
Sales		$10,671		$11,731
GAAP EPS		0.52		0.56
Non-GAAP EPS that excludes items listed below1		0.85		0.99
GAAP Net Income2		1,593		1,738
Non-GAAP Net Income that excludes items listed below1,2		2,585		3,044

Non-GAAP (generally accepted accounting principles) earnings per share (EPS) for the first quarter of $0.85 exclude acquisition-related costs, restructuring costs and certain other items. First quarter non-GAAP EPS included unanticipated net tax benefits of approximately $0.06 per share.

A reconciliation of GAAP to non-GAAP net income and EPS is provided in the tables that follow.

$ in millions, except EPS amounts		First Quarter
		2013		2012
EPS
GAAP EPS		$0.52		$0.56
Difference3		0.33		0.43
Non-GAAP EPS that excludes items listed below1		$0.85		$0.99
Net Income
GAAP net income2		$1,593		$1,738
Difference		992		1,306
Non-GAAP net income that excludes items listed below1,2		$2,585		$3,044
Decrease (Increase) in Net Income Due to Excluded Items:
Acquisition-related costs4		$1,237		$1,289
Restructuring costs		194		293
Net decrease (increase) in income before taxes		1,431		1,582
Income tax (benefit) expense5		(439)		(276)
Decrease (increase) in net income		$992		$1,306

"Our first quarter performance reflects the challenges of major patent expiries coupled with the impact of currency and other headwinds," said Kenneth C. Frazier, chairman and chief executive officer, Merck. "During the quarter, we took focused actions to reach our EPS target while at the same time advancing Merck's pipeline in our laboratories and through strategic deals and partnerships. I remain confident in the future opportunities for our strong and diverse business and committed to delivering long-term value to our shareholders."

Select Revenue Highlights

Worldwide sales were $10.7 billion for the first quarter of 2013, a decrease of 9 percent compared with the first 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.

$ in millions		First Quarter 2013		First Quarter 2012		Change			Change Ex-exchange
Total Sales		$10,671		$11,731		-9%			-7%
Pharmaceutical		8,891		10,082		-12%			-10%
JANUVIA		884		919		-4%			-1%
ZETIA		629		614		2%			4%
REMICADE		549		519		6%			5%
JANUMET		409		392		4%			4%
VYTORIN		394		444		-11%			-11%
GARDASIL		390		284		37%			39%
NASONEX		385		375		3%			7%
ISENTRESS		362		337		8%			8%
SINGULAIR		337		1,340		-75%			-73%
PROQUAD, M-M-R II and VARIVAX		272		255		7%			7%
Animal Health		840		821		2%			4%
Consumer Care		571		554		3%			4%
Other Revenues		369		274		34%			33%

Pharmaceutical Revenue Performance

First-quarter pharmaceutical sales declined 12 percent to $8.9 billion, including a 2 percent negative impact due to foreign exchange. Declines of SINGULAIR (montelukast sodium), MAXALT (rizatriptan benzoate) and CLARINEX (desloratadine) following loss of market exclusivity were partially offset by strong growth for GARDASIL [Human Papillomavirus Quadrivalent (Types 6, 11, 16 and 18) Vaccine, Recombinant], ZOSTAVAX (zoster vaccine live), REMICADE (infliximab), SIMPONI (golimumab) and ISENTRESS (raltegravir).

Sales from emerging markets grew 6 percent, including a 2 percent negative impact from foreign exchange. Emerging market sales accounted for approximately 21 percent of pharmaceutical sales in the first quarter of 2013. China continues to be a key driver of growth in the emerging markets with sales increasing 23 percent for the first quarter, including a 2 percent benefit from foreign exchange.

Worldwide sales of the combined diabetes franchise of JANUVIA (sitagliptin)/JANUMET (sitagliptin/metformin HCI) declined 1 percent to $1.3 billion in the first quarter, including a 2 percent negative impact from foreign exchange. The decline reflects lower sales in the United States of 5 percent, primarily driven by reduced customer inventory levels, which were partially offset by growth in the rest of the world.

Sales of ZETIA (ezetimibe) and VYTORIN (ezetimibe/simvastatin), medicines for lowering LDL cholesterol, declined 3 percent to $1.0 billion in the first quarter driven by lower sales of VYTORIN, partially offset by growth of ZETIA in the United States.

Combined sales of REMICADE and SIMPONI, treatments for inflammatory diseases, increased 11 percent to $657 million in the first quarter of 2013.

Merck's sales of GARDASIL, a vaccine to help prevent certain diseases caused by four types of human papillomavirus (HPV), were $390 million, an increase of 37 percent for the quarter. The increase was driven by higher sales in the United States, reflecting continued strong uptake in males and higher public sector purchases, as well as favorable performance in the emerging markets.

ISENTRESS, an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection, grew 8 percent to $362 million in the first quarter driven by strong growth in the emerging markets and Europe.

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 75 percent to $337 million in the first quarter. The patents for SINGULAIR expired in the United States in August 2012 and expired in major European markets in February 2013. The company experienced a significant and rapid reduction in sales in the United States and is now also experiencing a substantial decline in Europe.

Sales of VICTRELIS (boceprevir), the company's oral hepatitis C virus protease inhibitor, declined 1 percent in the first quarter to $110 million, including a 2 percent negative impact from foreign exchange. Lower sales in the United States were partially offset by continued growth in international markets.

Sales of ZOSTAVAX, a vaccine for the prevention of herpes zoster, were $168 million in the first quarter of 2013, up from $76 million in the first quarter of 2012, driven by strong demand in the United States.

Animal Health Revenue Performance

Animal Health sales totaled $840 million for the first quarter of 2013, a 2 percent increase compared with the first quarter of 2012, including a 2 percent negative impact due to foreign exchange. The increase was driven by strong performance in companion animal products, including sales of ACTIVYL, a new product for the treatment and prevention of fleas and ticks in dogs and cats, as well as continued growth in poultry products. Animal Health products include pharmaceutical and vaccine products for the prevention, treatment and control of disease in all major farm and companion animal species.

Consumer Care Revenue Performance

First-quarter global sales of Consumer Care were $571 million, an increase of 3 percent compared to the first quarter of 2012, including a 1 percent negative impact due to foreign exchange. The sales increase was primarily due to COPPERTONE suncare products and CLARITIN.

Other Revenue Performance

Other revenues – primarily comprising alliance revenue, miscellaneous corporate revenues and third-party manufacturing sales – increased 34 percent to $369 million compared to the first quarter of 2012. The increase was primarily driven by higher revenue from AstraZeneca LP (AZLP) recorded by Merck, which increased 41 percent to $262 million as compared with atypically lower first quarter 2012 AZLP revenues.

First-Quarter Expense and Other Information

The costs detailed below totaled $9.0 billion on a GAAP basis during the first quarter of 2013 and include $1.4 billion of acquisition-related costs and restructuring costs.

$ in millions		Included in expenses for the period
First Quarter 2013		GAAP		Acquisition- Related Costs4		Restructuring Costs		Non-GAAP1
Materials and production		$3,959		$1,184		$43		$2,732
Marketing and administrative		2,987		23		17		2,947
Research and development		1,907		30		15		1,862
Restructuring costs		119		–-		119		–-
First Quarter 2012
Materials and production		$4,037		$1,229		$5		$2,803
Marketing and administrative		3,074		51		24		2,999
Research and development		1,862		9		45		1,808
Restructuring costs		219		–-		219		–

The gross margin was 62.9 percent for the first quarter of 2013 and 65.6 percent for the first quarter of 2012, reflecting 11.5 and 10.5 percentage point unfavorable impacts, respectively, from the acquisition-related costs and restructuring costs noted above. The gross margin decline primarily reflects the impact of the SINGULAIR patent expiries.

Marketing and administrative expenses, on a non-GAAP basis, were $2.9 billion in the first quarter of 2013, a decrease from $3.0 billion in the first quarter of 2012.

Research and development (R&D) expenses, on a non-GAAP basis, were $1.9 billion in the first quarter of 2013, an increase from $1.8 billion in the first quarter of 2012.

Equity income from affiliates was $133 million for the first quarter, primarily reflecting the performance of partnerships with AZLP and Sanofi Pasteur MSD.

Other (income) expense, net was $282 million of expense in the first quarter of 2013, compared to $142 million of expense in the first quarter of 2012. The first quarter of 2013 includes approximately $140 million of exchange losses due to a Venezuelan currency devaluation.

The GAAP effective tax rate of (4.3)% for the first quarter of 2013 reflects the impact of acquisition-related costs and restructuring costs, as well as an out-of-period tax benefit of approximately $160 million associated with the resolution of a previously disclosed legacy Schering-Plough federal income tax issue. The non-GAAP effective tax rate, which excludes these items, was 12.5% for the quarter. Both the GAAP and non-GAAP first quarter effective tax rates reflect the favorable impact of tax legislation enacted in the first quarter of 2013. The first quarter 2013 tax rates also reflect the net favorable impact of other discrete items, primarily a reduction in tax reserves upon expiration of applicable statute of limitations, which resulted in unanticipated net tax benefits of approximately $0.06 per share as noted above.

Key Developments

The company noted the following developments:

• Announced a new share repurchase program of up to $15 billion of Merck's common stock for its treasury. The company expects to repurchase approximately $7.5 billion of common stock over the next 12 months, financed through a combination of debt issuance and operating cash flows, with the remainder to be repurchased over time with no time limit.
• Entered into a worldwide (except Japan) collaboration agreement with Pfizer Inc. (Pfizer) to develop and commercialize ertugliflozin, an investigational oral sodium glucose cotransporter (SGLT2) inhibitor being evaluated for the treatment of type 2 diabetes. Merck and Pfizer will collaborate on the clinical development and commercialization of ertugliflozin and ertugliflozin-containing fixed-dose combinations with metformin and JANUVIA.
• Announced that the U.S. Food and Drug Administration (FDA) has designated lambrolizumab (MK-3475), an investigational antibody therapy for advanced melanoma, as a "Breakthrough Therapy."
• Entered into an agreement with Bristol-Myers Squibb (BMS) to conduct a Phase II clinical trial to evaluate the safety and efficacy of a once-daily oral combination regimen consisting of BMS' investigational NS5A replication complex inhibitor and Merck's investigational NS3/4A protease inhibitor (MK-5172) for the treatment of genotype 1 hepatitis C virus infection.
• Increased investment in emerging markets with the opening of a new pharmaceutical manufacturing facility in Hangzhou, China. The site will package Merck medicines for China and the Asia Pacific region and become a critical part of the company's global supply chain.
• Announced FDA acceptance of a Biologics License Application (BLA) for an investigational Timothy grass pollen (Phleum pratense) allergy immunotherapy tablet (AIT) for review. The company also submitted a BLA to the FDA for its investigational ragweed pollen (Ambrosia artemisiifolia) AIT.
• Entered into an agreement with Samsung Bioepis Co., Ltd (Samsung) to develop and commercialize multiple biosimilar candidates. Under the agreement, Samsung will be responsible for preclinical and clinical development, process development and manufacturing, clinical trials and registration and Merck will be responsible for commercialization.

Financial Targets

Merck now expects full-year 2013 non-GAAP EPS to be between $3.45 and $3.55, and 2013 GAAP EPS to be between $1.92 and $2.16. The 2013 non-GAAP range excludes acquisition-related costs, costs related to restructuring programs and certain other items. The company updated its full-year guidance due to pressures on sales that are greater than previously anticipated, including foreign exchange, as well as new R&D programs and a revised tax rate.

At current exchange rates, Merck now expects full-year 2013 sales to be approximately 3 to 4 percent below prior year levels with foreign exchange accounting for more than 2 percentage points of the decline.

In addition, the company now expects full-year 2013 non-GAAP R&D expense to be slightly higher than 2012 levels. The company now expects 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.

$ in millions, except EPS amounts		Full Year 2013
GAAP EPS		$1.92 to $2.16
Difference3		1.53 to 1.39
Non-GAAP EPS that excludes items listed below		$3.45 to $3.55
Acquisition-related costs4		$5,125 to $4,800
Restructuring costs		700 to 500
Net decrease (increase) in income before taxes		5,825 to 5,300
Income tax (benefit) expense5		(1,180) to (1,070)
Decrease (increase) in net income		$4,645 to $4,230

Total Employees

As of March 31, 2013, Merck had approximately 82,000 employees worldwide.

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 22104203. Members of the media are invited to monitor the call by dialing (706) 758-9928 or (800) 399-7917 and using ID code number 22104203. 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 Includes the estimated tax impact on the reconciling items. In addition, amount for 2013 includes a benefit of approximately $160 million associated with the resolution of a previously disclosed legacy Schering-Plough federal income tax issue.

MERCK & CO., INC. CONSOLIDATED STATEMENT OF INCOME - GAAP (AMOUNTS IN MILLIONS, EXCEPT PER SHARE FIGURES) (UNAUDITED) Table 1
				GAAP									% Change
				1Q13				1Q12
Sales				$	10,671			$	11,731				-9%
Costs, Expenses and Other
Materials and production (1)					3,959				4,037				-2%
Marketing and administrative (1)					2,987				3,074				-3%
Research and development (1)					1,907				1,862				2%
Restructuring costs (2)					119				219				-46%
Equity income from affiliates (3)					(133	)			(110	)			21%
Other (income) expense, net (4)					282				142				99%
Income Before Taxes					1,550				2,507				-38%
Income Tax (Benefit) Provision					(66	)			740
Net Income					1,616				1,767				-9%
Less: Net Income Attributable to Noncontrolling Interests					23				29
Net Income Attributable to Merck & Co., Inc.				$	1,593			$	1,738				-8%
Earnings per Common Share Assuming Dilution				$	0.52			$	0.56				-7%
Average Shares Outstanding Assuming Dilution					3,053				3,074
Tax Rate (5)					-4.3	%			29.5	%

(1) Amounts include the impact of acquisition-related costs and restructuring costs. See accompanying tables for details.

(2) Represents separation and other related costs associated with restructuring activities under the company's formal restructuring programs.

(3) Primarily reflects equity income from the AstraZeneca LP and Sanofi Pasteur MSD partnerships.

(4) Other (income) expense, net in the first quarter of 2013 reflects approximately $140 million of losses due to exchange as a result of a Venezuelan currency devaluation.

(5) The GAAP effective tax rate for the first quarter of 2013 reflects the favorable impact of various discrete items, including the impact of tax legislation enacted in the first quarter of 2013, a reduction in tax reserves upon expiration of applicable statute of limitations, as well as a benefit of approximately $160 million associated with the resolution of a previously disclosed legacy Schering-Plough federal income tax issue.

 

MERCK & CO., INC. CONSOLIDATED STATEMENT OF INCOME GAAP TO NON-GAAP RECONCILIATION FIRST QUARTER 2013 (AMOUNTS IN MILLIONS, EXCEPT PER SHARE FIGURES) (UNAUDITED) Table 2a
				GAAP					Acquisition- Related Costs (1)				Restructuring Costs (2)				Adjustment Subtotal				Non-GAAP
Sales				$	10,671																$	10,671
Costs, Expenses and Other
Materials and production					3,959				1,184				43				1,227					2,732
Marketing and administrative					2,987				23				17				40					2,947
Research and development					1,907				30				15				45					1,862
Restructuring costs					119								119				119					-
Equity income from affiliates					(133	)																(133	)
Other (income) expense, net					282																	282
Income Before Taxes					1,550				(1,237	)			(194	)			(1,431	)				2,981
Taxes on Income					(66	)											(439	)	(3)			373
Net Income					1,616												(992	)				2,608
Less: Net Income Attributable to Noncontrolling Interests					23																	23
Net Income Attributable to Merck & Co., Inc.				$	1,593												(992	)			$	2,585
Earnings per Common Share Assuming Dilution				$	0.52																$	0.85
Average Shares Outstanding Assuming Dilution					3,053																	3,053
Tax Rate					-4.3	%																12.5	%

Merck is providing 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.
(1) Amounts included in materials and production costs reflect expenses for the amortization of intangible assets recognized as a result of mergers and acquisitions. Amounts included in marketing and administrative expenses reflect merger integration costs. Amounts included in research and development expenses represent in-process research and development ("IPR&D") impairment charges.
(2) 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.
(3) Represents the estimated tax impact on the reconciling items, as well as a benefit of approximately $160 million associated with the resolution of a previously disclosed legacy Schering-Plough federal income tax issue.

 

MERCK & CO., INC. FRANCHISE / KEY PRODUCT SALES (AMOUNTS IN MILLIONS) (UNAUDITED) Table 3
		2013		2012										% Change
		1Q		1Q		2Q		3Q		4Q		Full Year
														1Q
TOTAL SALES (1)		$10,671		$11,731		$12,311		$11,488		$11,738		$47,267		-9
PHARMACEUTICAL		8,891		10,082		10,560		9,875		10,085		40,601		-12
Primary Care and Women's Health
Cardiovascular
Zetia		629		614		632		645		676		2,567		2
Vytorin		394		444		445		423		435		1,747		-11
Diabetes & Obesity
Januvia		884		919		1,058		975		1,134		4,086		-4
Janumet		409		392		411		405		452		1,659		4
Respiratory
Nasonex		385		375		293		292		308		1,268		3
Singulair		337		1,340		1,431		602		480		3,853		-75
Dulera		68		39		50		52		67		207		76
Asmanex		40		48		51		42		44		185		-16
Women's Health & Endocrine
NuvaRing		151		146		157		156		164		623		4
Fosamax		137		184		186		152		154		676		-26
Follistim AQ		122		116		125		111		116		468		5
Implanon		84		76		85		93		94		348		12
Cerazette		61		67		72		64		68		271		-9
Other
Arcoxia		121		112		117		109		115		453		8
Avelox		36		73		44		30		55		201		-51
Hospital and Specialty
Immunology
Remicade		549		519		518		490		549		2,076		6
Simponi		108		74		76		86		95		331		46
Infectious Disease
Isentress		362		337		398		399		381		1,515		8
Cancidas		162		145		166		163		145		619		12
PegIntron		126		162		183		165		143		653		-23
Victrelis		110		111		126		149		115		502		-1
Invanz		110		101		110		118		116		445		9
Noxafil		65		59		66		66		68		258		11
Oncology
Temodar		216		237		225		227		229		917		-9
Emend		116		102		145		111		131		489		14
Other
Cosopt / Trusopt		105		124		105		102		113		444		-15
Bridion		63		58		60		68		75		261		8
Integrilin		47		53		60		48		51		211		-11
Diversified Brands
Cozaar / Hyzaar		267		336		337		295		315		1,284		-21
Primaxin		84		88		104		109		83		384		-5
Zocor		82		103		96		86		98		383		-20
Claritin Rx		76		87		48		47		63		244		-13
Propecia		68		108		100		104		112		424		-37
Clarinex		61		134		140		64		56		393		-55
Remeron		52		57		66		52		57		232		-8
Maxalt		40		156		154		166		162		638		-74
Proscar		39		51		55		55		56		217		-23
Vaccines
Gardasil		390		284		324		581		442		1,631		37
ProQuad, M-M-R II and Varivax		272		255		316		396		306		1,273		7
Zostavax		168		76		148		202		225		651		*
RotaTeq		162		142		142		150		168		601		14
Pneumovax 23		111		112		101		160		208		580		-1
Other Pharmaceutical (2)		1,022		1,066		1,034		1,065		1,161		4,333		-4
ANIMAL HEALTH		840		821		865		815		898		3,399		2
CONSUMER CARE		571		554		552		451		395		1,952		3
Claritin OTC		177		169		145		118		100		532		5
Other Revenues (3)		369		274		333		347		360		1,315		34
Astra		262		186		223		255		251		915		41

* 100% or greater
Sum of quarterly amounts may not equal year-to-date amounts due to rounding.
(1) Only select products are shown.
(2) Includes Pharmaceutical products not individually shown above. Other Vaccines sales included in Other Pharmaceutical were $53 million for the first quarter of 2013. Other Vaccines sales included in Other Pharmaceutical were $60 million, $75 million, $116 million, and $69 million for the first, second, third, and fourth quarters of 2012, respectively.
(3) Other revenues are primarily comprised of alliance revenue, miscellaneous corporate revenues and third party manufacturing sales.