Merck & Co., Inc. Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 2, 2023

There are 12 speakers on the call.

Operator

Thank you, and good morning. Welcome to Merck's Q4 2022 conference call. Speaking on today's call will be Rob Davis, Chairman and Chief Executive Officer Caroline Litchfield, Chief Financial Officer and Doctor. Dean Lee, President of Merck Research Labs. Before we get started, I'd like to point out a few items.

Operator

You will see that we have items in our GAAP results such as acquisition related charges, restructuring costs and certain other items. You should note that we have excluded these from our non GAAP results provide a reconciliation in our press release. I would like to remind you that some of the statements that we make today may be considered forward looking statements within the meaning of the Safe Harbor provision of the U. S. Private to Curtiss Litigation Reform Act of 1995.

Operator

Such statements are made based on the current beliefs of Merck's management and are subject to significant risks and uncertainties. If our underlying assumptions prove inaccurate or uncertainties materialize, actual results may differ materially from those set forth in the forward looking statements. Our SEC filings, including Item 1A and the 2021 10 ks identify certain risk factors and cautionary statements that could cause the company's actual results to differ materially from those projected in any of our forward looking statements made this morning. Merck undertakes no obligation to publicly update any forward looking statements. During today's call, a slide presentation will accompany our speakers' prepared remarks.

Operator

The presentation, today's earnings release as well as our SEC filings are all posted to the Investor Relations section of Merck's website. With that, I'd like to turn the call over to Rob. Thanks, Peter. Good morning and thank you for joining today's call. 2022 was an exceptional year for Merck.

Operator

Our science led strategy is working and I couldn't be more proud of what our team has delivered scientifically, commercially and operationally. We're focusing on what matters and keeping the patient at the center of everything we do. We made significant progress in 2022 advancing our broad pipeline with important internal success complemented by a portfolio of strategic acquisitions, Collaborations and Partnerships. We've moved with speed and urgency to drive strong progress and we have provided increased transparency into Several of our long term opportunities, including for Gardasil, for our cardiovascular pipeline and more recently from newer assets that leverage our leadership position in oncology. We enter 2023 with even greater confidence that we're creating a sustainable engine that will bring forth innovation and generate value for both patients and shareholders over the long term.

Operator

Turning first to our results, the business is performing extremely well. The growth we've experienced in 2022 reflects the staying track record of fundamental strength from our derisk key growth pillars. We begin the year with confidence that we'll maintain the strong underlying growth after taking into account the significant impact that Gebrio had during the height of the pandemic last year and are pleased to reflect this in our 2023 initial guidance. Importantly, our pipeline is advancing with significant progress across several late stage programs. In oncology, we have expansive research efforts, including our ambition to move treatments into earlier stage settings where there is a higher potential for more favorable longer term outcomes for patients.

Operator

In December, along with our partner Moderna, We were pleased to announce highly encouraging Phase 2 results for our personalized mRNA therapeutic cancer vaccine in combination with KEYTRUDA in the treatment of adjuvant melanoma. We're excited by the potential that this combination may have for patients across a range of tumor types. And last week, we were pleased to receive FDA approval for KEYTRUDA for the treatment of certain patients with early stage non small cell lung cancer following Resection and platinum based chemotherapy, which Caroline and Dean will speak to. In cardiovascular, We're exploring candidates across a broad range of diseases and have made substantial progress from just 1 year ago. At the American College of Cardiology Conference, we will present data from the STELLAR trial evaluating sotatercept in pulmonary arterial hypertension and from the Phase II trial of MK-six sixteen, our oral PCSK9 inhibitor, and we will also host an investor event to discuss these programs.

Operator

In vaccines, Instituto Butonton in Brazil, with whom we are collaborating for vaccine development, reported very encouraging top line results for their candidate to the prevention of dengue. These data will inform future development of our dengue vaccine, V181, and our efforts to address this critical public health challenge. Finally, through our business development efforts, we brought in 4 programs which will have Phase III trial starts in 2023 and which have the opportunity to contribute meaningful growth during the latter half of this decade and into the next. We are following our disciplined approach to business development and will act when scientific opportunity and value align. We have more to do, but I feel very good about the We've made in 2022, and we believe that all of these efforts will lead to real benefits for patients and, in turn, for shareholders.

Operator

We enter 2023 with confidence in the innovation engine we are building and our ability to deliver sustainable value for patients well into the next decade. We will continue to execute on our de risked assets and act with urgency to advance and grow our pipeline. We are doing all of this with an approach to sustainability that is closely aligned to our overall business strategy. I'm very confident in the short and long term outlook of our company, and I look forward to providing future updates. With that, I'll turn the call over to Caroline.

Speaker 1

Thank you, Rob. Good morning. As Rob noted, 2022 was an exceptional year for our company. We delivered excellent top line growth of 22% driven by strength across our key pillars of oncology, vaccines and hospital, as well as a significant contribution from LedeVrio. Our Animal Health business delivered strong operational growth, which was offset by foreign exchange.

Speaker 1

These results are a testament To the profound impact our medicines and vaccines are having on patients globally, which are enabled by our dedicated teams who are executing with excellence to deliver these important innovations. We are confident in the health of our business and in our outlook for continued strong underlying growth. Now turning to our 4th quarter results. Total company revenues were $13,800,000,000 an increase of 2%. Excluding the impact from foreign exchange, the business delivered strong operational growth of 8%.

Speaker 1

The remainder of my revenue comments will be on an ex exchange basis. Our Human Health and Animal Health businesses Continued their strong growth, increasing 9% and 6%, respectively. Now turning to the Q4 performance of our key brands. In oncology, KEYTRUDA grew 26% to $5,500,000,000 driven by strong global demand for in line indications as well as continued global expansion from new approvals. In the U.

Speaker 1

S, KEYTRUDA grew across all key tumor types and continues to benefit from uptake in earlier stage cancers, including triple negative breast cancer as well as in certain types of renal cell carcinoma and melanoma. KEYTRUVA continues to have a profound impact on patients, including in earlier stage cancers, where there is greater potential for better outcomes. We are excited by the recent approval of KEYNOTE-ninety one, which represents KEYTRUDA's 7th indication in earlier stage cancers. Early lung cancer detection and screening Remaining an important unmet need. It is our ambition along with others to improve lung cancer screening rates to levels similar to other tumor types such as breast, where screening programs are more routine.

Speaker 1

While we are committed to addressing this unmet need, We anticipate a more gradual near term uptake from this indication. In the metastatic setting, KEYTRUDA maintains its leadership position in non small cell lung cancer, which gives us confidence that we are well positioned to positively impact patients in the earlier setting. Outside the U. S, KEYTRUDA growth continues to be driven by updating metastatic indications, including non small cell lung cancer, head and neck cancer and renal cell carcinoma, as well as recent launches in earlier stage cancers, including certain types of high risk early stage triple neck breast cancer and renal cell carcinoma. Lynparza maintains its leadership of the PARP inhibitor class.

Speaker 1

Alliance revenue grew 14%, primarily due to continued demand in certain patients with high risk early stage breast cancer. VENFEMA Alliance revenue grew 9%, driven by increased uptake in the treatment of certain patients with advanced renal cell Carcinoma and Advanced Endometrial Cancer in the U. S. Lastly, WeliRig is performing in line with our expectations And we are proud of the impact this is having on adult patients with certain DHL associated tumors. Our vaccine portfolio delivered growth with GARDASIL increasing 6% to $1,500,000,000 driven by strong demand in major ex U.

Speaker 1

S. Markets, particularly China. In the U. S, sales decreased primarily due to CDC purchasing patterns. Vaccine sales also benefited from the pediatric launch of and Vipass, which is off to an encouraging start with revenues also benefiting from inventory stocking.

Speaker 1

In our hospital acute care portfolio, BRIDION sales grew 7%, driven by an increase Market share among neuromuscular blockade reversalsages and an increase in surgical procedures. Hospital Acute Care sales also benefited from the resupply of XAVAXA, which started in the Q4 of 2021. Our Animal Health business delivered another solid quarter with sales increasing 6%, reflecting strategic price action Livestock sales grew 12%, driven by increased demand in ruminants and poultry products. Companion Animal sales were negatively impacted by supply challenges for certain vaccines and a reduction in vet visits in October, which improved during the quarter. I will now walk you through the remainder of our P and L and my comments will be on a non GAAP basis.

Speaker 1

Gross margin was 75.7%, an increase of 0.9 percentage points due to favorable product mix and foreign exchange. Operating expenses increased 8% to $5,700,000,000 reflecting increased Investments to support our portfolio and growing pipeline. Other income was $86,000,000 reflecting the return on pension plan assets and capitalized interest, which was largely offset by net interest expense. Our tax rate was 15.6%. Taken together, earnings per share were $1.62 Turning now to our 2023 non GAAP guidance.

Speaker 1

The strength across our key pillars is expected to continuing to this year. We project revenue to be between $57,200,000,000 $58,700,000,000 including approximately $1,000,000,000 from Lagevrio. Excluding the negative impact of Lagevrio and an approximate 2% negative impact from foreign exchange using the January rates, we expect strong underlying revenue growth of 7% to 10%. Our gross margin is expected to be approximately 77%. Operating expenses are assumed to be between $23,100,000,000 $24,100,000,000 which includes $1,400,000,000 of research and development expenses related to our acquisition of Imago and the expansion of our collaboration of Duluth Biotech.

Speaker 1

As a reminder, our guidance does not assume additional significant potential business development transactions. Other income is anticipated to be approximately $250,000,000 We assume a full year tax rate between 17% 18% and approximately 2 point 55,000,000,000 shares outstanding. Taken together, we expect EPS of $6.80 to $6.95 This range includes a negative impact from foreign exchange of approximately 4% using mid January rates. Our guidance reflects confidence and continued Strong growth across oncology, vaccines and Animal Health. As you consider your models, there are a few items to keep in mind.

Speaker 1

On revenues, we are confident in our ability to drive strong growth of Dardasil, particularly in international markets. Global immunization levels remain low, which creates a tremendous opportunity to benefit more patients. And we are improving supply, which positions us well to support the significant demand we are experiencing today and expect over the long term for this vaccine that prevents HPV related cancers. Other revenue is projected to decline significantly, primarily reflecting a smaller plan benefit from revenue hedges following the U. S.

Speaker 1

Dollar stress last year, which resulted in an approximate $800,000,000 benefit in 2022. Other revenue is also expected to be lower due to the discontinuation of third party manufacturing sales at Johnson and Johnson. On the rest of the P and L, we project the shift from other expense to other income, which is primarily attributable to an assumption that there will be no pension settlement costs as well as an expectation of lower net interest expense and Haier joint venture equity income. This benefit is more than offset by an increase in the estimated tax rate due to the unfavorable impact of the R and D capitalization provision as well as an approximate 1 percentage point impact related to Imago. Now shifting to capital allocation, where our priorities remain unchanged.

Speaker 1

We will continue to prioritize investments in our business to drive near and long term growth. We are Excited about the significant progress our team has made to advance and augment our pipeline in 2022. In 2023, we will continue to invest in opportunities that will address important unmet medical needs and drive the next wave of growth for our company, including the initiation of many late stage clinical trials across a broad set of novel candidates. We remain committed to our dividend with the goal of increasing it over time. We will continue to pursue the most compelling external science through value enhancing business development to augment our internal pipeline and will invest appropriately to maximize the potential of our R and D program.

Speaker 1

Given the strength of our business and balance sheet, We plan to resume share repurchases, while ensuring we maintain ample capacity to pursue additional business development, which is the higher priority. To conclude, we enter 2023 confident in our ability to execute on the important opportunities we have to deliver innovation to patients and sustain the strong underlying growth of our business well into the future. With that, I'd now like to turn the call over to Steve.

Speaker 2

Thank you, Caroline. Today, I will provide notable updates since our last earnings call. We continue to make significant advancements and achieve important regulatory milestones. The Q4 marks the end of a successful year with progress made across oncology, vaccines, Infectious Diseases and Cardiology. Let me start with oncology.

Speaker 2

We remain committed to transforming the landscape of cancer therapy with an ongoing focus on treating earlier stages of disease. We are pleased By the recent approval of KEYTRUDA for the adjuvant treatment of adult patients with Stage Ib, II or IIIA Non small cell lung cancer following resection and platinum based chemotherapy based on the results of KEYNOTE-ninety one. This approval provides for the very first time an adjuvant immunotherapy option for this patient population with Stage Ib disease and regardless of PD L1 status. Beyond KEYNOTE-ninety one, we have additional ongoing studies in earlier stages of non small cell lung cancer, including KEYNOTE-671, evaluating KEYTRUDA with platinum doublet chemotherapy as neoadjuvant followed by adjuvant therapy in receptor both stage of 2, 3a and 3b disease KEYNOTE-eight sixty seven evaluating KEYTRUDA in patients undergoing stereotactic body radiotherapy with unresected Stage 1 or 2 disease and HELINK-twelve studying KEYTRUDA in combination with LYNPARZA in Stage 3 disease. These trials are all part of our broader effort to treat earlier stages of cancer and further improve patient outcomes across of tumor types such as melanoma.

Speaker 2

Together with Moderna, we announced positive Phase 2 results for V940 mRNA-four thousand one hundred and fifty seven in combination with KEYTRUDA for the adjuvant treatment of Stage 3 and 4 melanoma in patients with high risk of recurrence following complete resection. The combination demonstrated a statistically significant and clinically meaningful improvement in recurrent free survival versus KEYTRUDA alone. Personalized neoantigen therapy utilizes mRNA technology and is specifically tailored to target the unique mutational signature of each patient's tumor. We plan to discuss the results with regulators and initiate Phase III trials in multiple tumors this year. Detailed results will be presented at an coming medical meeting.

Speaker 2

We also announced positive results from the Phase 3 KEYNOTE-nine sixty six trial evaluating KEYTRUDA in combination with chemotherapy. This trial demonstrated an improvement in overall survival for the first line treatment of patients with advanced for unresectable biliary tract cancer. In addition, we announced positive top line results from the Phase 3 KEYNOTE-eight 859 trial evaluating KEYTRUDA in combination with chemotherapy for the first line treatment of patients with HER2 negative locally advanced unresectable or metastatic gastric or gastroesophageal junction adenocarcinoma. In November, We announced the acquisition of Imago Biosciences, which closed last month. Imago's lead candidate, lomodamstat, is a potentially 1st in class orally available lysine specific B methylase 1 inhibitor.

Speaker 2

It is currently being evaluated in multiple Phase The combined team is now focused on continuing to advance the ongoing clinical development program. At the American Society of Hematology Annual Meeting, data were presented from multiple pipeline candidates, including tavazilumab, our anti LAG-three antibody vilivertamab vedotin, an antibody drug conjugate targeting LOR-one and nemtabrutinib, our oral reversible non covalent BTK inhibitor as well as KEYTRUDA. Updated Phase 2 data for bumademstat in essential thrombocythemia and advanced myelofibrosis were also presented. We continue to deliver on our regulatory strategy. In the European Union, along with our partner AstraZeneca, we announced the approval for Lynparza in combination with abiradino and prednisone for the treatment of certain patients with metastatic castration resistant of prostate cancer based on the results of the PROPEL trial.

Speaker 2

In China, based on the results of KEYNOTE-five twenty two and KEYNOTE-three ninety four, We received approvals for KEYTRUDA in neoadjuvant, adjuvant high risk early stage triple negative breast cancer and hepatocellular carcinoma, respectively. With our partners Astellas and Seagen, we announced the FDA has accepted supplemental biologic License application for KEYTRUDA with PACTIV, an antibody drug conjugate targeting Nekten-four for the first line treatment of certain patients with locally advanced or metastatic urothelial cancer, who are not eligible to receive cisplatin containing chemotherapy. The agency set a PDUFA date of April 21, 2023 for each application. Building on the clinical benefits observed with KEYTRUDA in combination with chemotherapy and antibody drug conjugates, We have focused on augmenting our tissue targeting candidates through business development. We announced the expansion of our agreement with Calhoun Biotech with the addition of up to 7 preclinical antibody drug conjugates.

Speaker 2

The collaboration leverages Technology with the potential to yield a new generation of candidates designed to precisely target and deliver potent anticancer agents to the tumor site. This follows previously disclosed agreement for 2 clinical stage candidates, including MK-two thousand eight hundred and seventy, an investigational TROPE-two targeting ADC we are planning to advance into Phase 3 trials this year. We also expanded our collaboration with Tepidrine to include the discovery and development of peptide drug conjugates. This technology potentially provides for improved permeability and drug selectivity in targeting tumor tissue. Next, to our vaccine portfolio.

Speaker 2

We were encouraged by the progress scientists and clinicians at the Instituto Lutantan in Brazil Made in developing a single dose dengue vaccine candidate for registration in Brazil. We are collaborating with the team there to conduct a detailed analysis of these positive top line Phase 3 results to determine next steps for our own dengue vaccine candidate V-one hundred and eighty one, currently in Phase 2 development. Merck's goal is to make VL1 hundred and eighty one available outside of Brazil for populations at risk for dengue. As Caroline noted, we are receiving positive feedback from the field regarding the recent launch of VaxNuVance in the pediatric setting and remain confident and our population specific strategy for the prevention of pneumococcal disease. Vaxnivans offers strong protection, Including in the 1st year of life, we have robust immunity across all shared and unique serotypes.

Speaker 2

This is important because the incidence of invasive pneumococcal disease is greatest in the 1st year of life for children. Also, we are on track and look forward to the Phase III results from our V114 program for the protection of adults this year. We, along with others in the industry, are making a real impact in our goal to help reduce cancer incidents. It was noteworthy that the American Cancer Society's recently published annual report on cancer facts and trends include the remarkable observation that there has been a 65% reduction in cervical cancer incidence in women 20 to 24 years old from 2012 through 2019. It is this type of finding that further reinforces Merck's commitment to bringing forward treatment and prevention options to help patients with this devastating disease.

Speaker 2

As part of this commitment, we are encouraged by the role GARDASIL continues to play in helping to prevent certain HBV related cervical cancers. Turning to the broader portfolio. With the continued impact of COVID-nineteen in China, treatment options are urgently needed to help reduce the incidence of disease and burden on healthcare system. We were pleased Lagevrio was granted conditional marketing authorization by China's National Medical Product Administration in December for use in adult patients with mild to moderate COVID-nineteen infection and a high risk of progressing to severe cases. I wish to reinforce something Rob mentioned.

Speaker 2

Please mark your calendars for March 6, where we will present detailed findings of the Phase 3 STELLAR trial evaluating sotatercept in patients with pulmonary arterial hypertension and the Phase 2 results for MK-six sixteen, our oral PCSK9 inhibitor and the American College of Cardiology in conjunction with the World Congress of Cardiology meeting in New Orleans. We will also host a live investor event to answer your questions. We look forward to bringing sotatercept as an important treatment option to patients and are currently working towards submission of the data from the STELLAR trial. We are in discussions with the FDA about submission of the data on a rolling basis, which is likely to result in a potential approval in early 2024. As we close out 2022, It is important to highlight that over the course of the year, we made strong progress across therapeutic areas, modalities, Stages of Development and Multiple Business Development Transactions.

Speaker 2

In oncology, we obtained several important regulatory approvals globally for KEYTRUDA and Lynparza as well as advanced a number of programs evaluating earlier stage cancer regimens. In vaccines, We received an important approval in pediatrics for Vax NuVent. In addition, we were granted expanded authorizations in China And active recommendations were reinstated in Japan for regard to cell. In HIV, we resumed clinical development program for eslosovere and finally, in cardiovascular disease, we made significant progress across our pulmonary arterial hypertension and hypercholesterolemia programs. Taken together, We continue to deliver on our strategy advancing promising candidates across multiple therapeutic areas.

Speaker 2

We have strong momentum across our pipeline and look forward to providing further updates on our progress in 2023. And now, I will turn the call back to Peter.

Operator

Thanks, Dean. Kelly, we're ready to take questions now. We intend to end the call at 9 sharp this morning, so request that analysts limit themselves to one question, please.

Speaker 3

Our first question is from Carter Gould from Barclays. Carter, your line is open.

Speaker 4

Hi. Thank you for taking the question. Maybe just you made some comments around sort of uptake in the adjuvant setting up after the most recent label update. Can you maybe just sort of set expectations there? And does that comment reflect any sort of assumptions around when we might see More mature data from the PERL study potentially this year.

Speaker 4

Thank you.

Speaker 2

Yes. So I believe you're speaking about KEYNOTE-ninety one. So I just want to take a broad view and then the today view and the Tomorrow view. So I would just count that the American Cancer Society 2023, it's really remarkable. They suggest That for between 1991 2023, there's a massive reduction in lung cancer of 58%, 36%, and KEYTRUDA has been Critical in that story.

Speaker 2

And now we're moving to early lung. The label is broad. It is regardless of PD L1 and it Reflects the clinical trial where we demonstrated a 27% reduction. We're pushing into these earlier lines with other Trials, but I think for what we need to set for is 2 things. We need to make it much more easier with scientific innovation, Other means to get Keytruda, and that's why we're very eager to push our subcu pembrolizumab with We're on the base into Phase III this year, but we also need to do a lot to improve adherence to established guidelines, which currently We only have 6% or so of individuals actually who should be screened being screened in the United States.

Speaker 2

So, I think with that, we have work to do in relationship to really taking this important advance and making it broadly available Two individuals who should be getting screened. So Carter, maybe

Operator

I can just add on a little bit about Commercial opportunity, as Dean said, this will be a slower ramp because we have to drive more people To get diagnosed early so that we can get them the care they need. But just to give you some sizing of this, if you look at 2020 3, there were about 230,000 people who were diagnosed with lung cancer in the U. S. And the majority of that group was not diagnosed until they were in the metastatic setting. So if you think about it From a minority perspective, we would estimate about 120,000 people in the early stage setting, of which only a quarter We'll have resection or have surgery and be in the stage Ib through IIIA, which is what our label indicates.

Operator

So you're looking at about 30,000 patients who would be the addressable population. And then obviously, of that group, historically, only about half of those patients have gone on to receive treatment in the form of chemotherapy or IO. So that's obviously something we hope to change As we go forward because we think the outcomes will show that if you are resected, you should pursue KEYTRUDA In that setting, and it's our goal over time not only to drive more patients in that segment, but obviously the more people we can get diagnosed early Pre metastatic, then actually we will expand the population over time. So we see this as a meaningful opportunity long term But it's going to take us time to ramp as we work to change the paradigm that's existed in the past. Thank you, Carter.

Operator

Next question please, Kelly.

Speaker 3

Our next question is going to come from Andrew Baum from Citi.

Speaker 5

Hi, thank you. Couple of questions. Could you please address the demand on Merck's business to Plug the hole associated with the KEYTRUDA LOE post-twenty 28, alternatively instead just build the exit growth rate And focus less on finding revenues to plug the hole as you think about your BD strategy. And perhaps quickly for Dean, could you just give us some guidance on the timing For the PFS analysis and the PD L1 high greater than 50 cohort from Keyvibe 3, should we expect it in the next 12 months? I know the total PFS read for the whole trial is somewhere 24, but it strikes me you may have a separate analysis for that greater than 50 subgroup.

Speaker 5

Thank you.

Operator

Great. Well, maybe, Andrea, I'll start off and if Caroline or Dean want to jump in. But to give you a Obviously, we haven't given specific guidance to the LOE period, but just to ground everyone into facts. KEYTRUDA, in our expectation, will lose Exclusivity in the United States in 2028 and in China in 2028. It loses it in Europe in 2,030 And in Japan in 2,032.

Operator

So obviously, by shorthand, we refer to 28, but the reality of it is over most of the markets And KEYTRUDA increasingly is becoming, obviously, as you know, a global product. It's spread out. But as we look at where we sit today, I would say we feel good about the progress we've made. We're confident that we're on a path to sustainable growth into the next decade. Obviously, we have more work to do, but I would just point you to a few proof points that I think support that.

Operator

First of all, as we talked about in the last 18 months, we Made meaningful progress in our cardiovascular pipeline. We have 8 potential approvals between 2025 and 2,030, obviously. The centerpiece of that is sotatercept and what we're seeing from the STELLAR data, which really was just quite phenomenal. If you look at that, we expect those products, that portfolio of opportunity on an unrisk adjusted basis to be in excess of $10,000,000,000 As you approach the mid-two thousand and thirty's, we recently discussed the fact that through the business development deals we've done, they've brought in new assets Apart from KEYTRUDA, apart from LYNPARZA, LENVIMA and WELUREG, that themselves, these new mechanisms, I would point you to things like Orion and Imago. Those products, along with what we see in the ABC space as a portfolio, we think themselves have the potential for $10,000,000,000 or more of revenue as you get into the early to mid-two 2030s.

Operator

So today, we sit there with the expectation that we are starting to make meaningful progress and that excludes all the work we're doing to bring incremental value to patients on KEYTRUDA. Obviously, as great as KEYTRUDA is, it still only has an overall response rate averaging around 30 We need to deepen and drive better response. We're looking to do that through combinations and through other means to find ways to improve on KEYTRUDA, we're looking to continue to expand into new tumor types as well and clearly move into earlier lines of therapy where we believe We can start to move to a point that we can actually give people an extension of life and hopefully someday To a point that we talk about cancer as a chronic disease and not a fatal disease. Obviously, we have more to do there. But that is the aspiration, And we have a lot of efforts underway to do that through what we're doing in IO, IO combinations, IO, ABC combinations with our subcutaneous offering.

Operator

And then obviously, we're very excited recently about the deal we did with Moderna for the personalized cancer vaccine, which is really a therapeutic that we think in combination with KEYTRUDA, while we're studying it first in melanoma, Obviously, we believe has the potential to move into broader tumors. So that in and of itself gives us a lot of confidence and we're doing similar activities with LYNPARZA, with And then obviously, well, the reg it's in its early days. So if you look at the total of that and I haven't even gotten into our vaccines portfolio and what we see as excitement there. We feel like we've made a lot of progress. We have more to do, but that's why you hear me talk more about how do we build the Sustainable engine to drive growth well into the next decade, and that really should be our focus point because I'm confident if we do that well, The LOE of KEYTRUDA will take care of itself.

Operator

So, Dean?

Speaker 2

Yes. So, there was a question on our TIGIT program, KEYTRUDA plus Tjeet, just to remind everyone, we have 9 ongoing trials. We have 5 Phase 3s. In fact, Just recently in December, we opened up Keyvibe 10, which is Phase 3 in early melanoma. In relationship to Keyvibe 3, which I think is the question, we added the TPS greater than 50% as an endpoint.

Speaker 2

These are event driven, and as the events drive to statistically and clinically meaningful data, we'll announce it appropriately.

Operator

Great. Thank you, Andrew. Next question please, Kelly.

Speaker 3

Our next question comes from Evan Seigerman from BMO. Evan, your line is open.

Operator

Hi, guys. Thank you so much for taking the question. I would love for you to talk To what might make MK-two thousand eight hundred and seventy a better approach to targeting ADC versus those that we've seen from Gilead and Asher and Daiichi? Also, do you still believe that it's too difficult to

Speaker 6

combine an ADC plus IO and a

Operator

fixed dose combination? Thank you.

Speaker 2

Yes. So let me just state, we'll be starting a whole series of Phase III trials this year. I really appreciate your question. For me, the critical thing is whether it be an ADC or whether it be a RAS inhibitor In solid tumors, especially as you want to advance in solid tumors where IO has been important, the combination benefit of the 2 becomes really important. So we're very excited to be pushing forward our folks to ADC.

Speaker 2

I can get into the details of the Pollution on the linkers and the payloads and the DARs, but really the better sort of thing is I believe that this year we will be presenting Our Phase 2 studies and at the end of the day that will be the most convincing data to provide to you as to why we think we have an important A play with our Trope 2 ADC, but it's also the play of that Trope 2 ADC in relationship to adding it to an IO agent. We think that is an important considerations when thinking about any Cancer killing mechanism in solid tumors.

Operator

Great. Thank you, Evan. Next question please, Kelly.

Speaker 3

Our next question comes from Louise Chen from Cantor. Louise, your line is open. Hi, thanks for taking my question here. So, wanted to know how you're thinking about your Phase III trial design for your oral PCSK9? And how will that design really highlight the competitive advantages of your product?

Speaker 3

Thank you.

Speaker 2

Thank you very much. So first, I don't want to get ahead too much of our March 6 investor meeting where we'll be showing The data that we have in relationship to the oral PCSK9 and sotatercept. I will just sort of emphasize what we're trying to accomplish. And what we're trying to accomplish is we are trying to accomplish the most potent LDL lowering oral pill

Operator

for lowering

Speaker 2

cholesterol. There should be no co chain. There should be very little need to interact with the healthcare system, which makes it reach very easy and very accessible, not just in the U. S, but globally. And we need to do it at a price point of what I would call a branded oral medicine would be, not in order to maximize the access.

Speaker 2

In relationship to Phase 3, there's a general set sort of view of how that is. One is, do you drive it because LDL lowering is Such a clean biomarker, so that's something. But one would also have to at the same time drive towards outcomes, Which is also going to be important. So our Phase III trial design is informed by What the history of the field has been and what the FDA's regulatory sort of outlines have been for others.

Operator

Great. Thank you, Louise. Next question please, Kelly.

Speaker 3

Our next question comes from Tim Anderson from Wolfe Research. Tim, your line is open.

Speaker 7

Thank you. If I could ask you a question on B940, the cancer vaccine, What tumor types outside of melanoma do you already have any positive human data in even if those are earlier stage? And if you don't have any human data in non melanoma tumor types, can you talk about animal data? Yes, I'm trying to obviously think about what Phase III trials you may be starting in 2023 with that product. Thank you.

Speaker 2

Thank you very much. So you're speaking about the wonderful partnership that we have with Moderna in the personalized of Cancer Vaccine. I just want to preface everything. What we've released is top line data in melanoma. That data will be presented sometime in the near term where we present the data that we have for melanoma.

Speaker 2

And we have work to do to move that into Phase 3. So we have a lot of work to do just in melanoma. I'm not going to speak ahead of what human data we have outside of that, but I would say 2 things that are really important. One is one can watch Which of the tumors have sensitivity to an immune approach? And one can watch about the clinical development with Keytruda to sort of map out where you would think about doing that.

Speaker 2

The second issue that I would emphasize is that when we're talking about an IO, IO Strategy, which often people speak about. I view this personalized neoantigen therapy as an IO strategy with KEYTRUDA. And the reason I want to emphasize that is there is a view that we are beginning to develop that IO, IO strategies may be especially useful in early cancer stages. And you see that in our interest in our combination projects related to checkpoint inhibitors, but also in relationship to personalized neoantigen therapies. And so we think that that's around that we are going to advance.

Speaker 2

And the critical component for us To be able to advance that is to advance KEYTRUDA as a monotherapy in those indications because That creates a base for us to actually do these clinical trials.

Operator

Great. Thank you, Tim. Next question please, Kelly.

Speaker 3

Our next Question comes from Jeff from Bank of America. Jeff, your line is open.

Operator

Great. Good morning, guys. Thanks for the question. Dean, on subcu KEYTRUDA, can you talk about the cadence of data this year and what you're ultimately looking for from a risk benefit perspective As you evaluate different technologies and Rob, I wasn't sure where this program ranks and kind of your strategic priorities across IO. Thank you.

Speaker 2

So, thank you very much for that question. I think it's on we'll be when we talk about starting 10 to Dean Phase 3 clinical trials just in oncology. This subcu program is a critical component to that And we will be starting those Phase 3s this year. What are we seeking to achieve? I've talked about the early cancer space.

Speaker 2

Early cancer space, I think, is really important just from a medical standpoint of where we can impact really the outcomes of patients. We can markedly improve that. If you're going to go in the early space, whether it's neoadjuvant or adjuvant, From my clinical training working with lung cancer doctors and oncologists, our ability to limit The need for individuals to constantly come to infusion centers is very important. And we need to have the scientific innovation to do that. In doing that, we have to think carefully about how do we give as much optionality Q3 weeks, Q6 weeks in that subcu regimen and that's what we're trying to drive to in our Phase III trials.

Speaker 2

Rob, did you want to answer anything else?

Operator

Well, I appreciate the question, Jeff. I think Dean covered it well. This is a very important part of our overall Strategy, as we think about moving into earlier lines of therapy and then to drive convenience and access for patients, which is very important. So it's meaningful and it's something we're going to pursue as fast as we can. Thanks, Jeff.

Operator

Next question please, Kelly.

Speaker 3

Next question comes from Mohit Bansal from Wells Fargo.

Speaker 6

Great. Thank you very much for taking my question. I think I have a big picture question regarding IO, IO Combinations and the development strategy there because the common criticism is that many of these big Phase III studies were started after less than robust Phase II data, and that's why they failed to show benefit in Phase III. I mean, looking at your data in Phase They are single arm data as well. So can you just help us understand what gives you confidence that this is the right strategy to move forward?

Speaker 6

And wouldn't it be better to do some kind of Phase II trial where you are you have Sam Roy, the control. Thank you.

Speaker 2

Yes. Thank you very much. I'll just emphasize that as a general rule, the way that I have begun to Develop my view of IO, IO strategies is that IO, IO strategies are very important to pursue. I think that IO, IO strategies plus other therapies that kill cancers may be especially important in the metastatic, But IO, IO strategies in the early stage could be quite impactful. And so as I've just said, We have advanced our IOI strategy.

Speaker 2

We've advanced it with TIGIT, CTLA-four and LAG-three, so another component part. That I would just say is, I don't know that there's one single addition to KEYTRUDA that will have as the breadth of KEYTRUDA. So we've been a little bit selective there. And I think the movement of IO, IO, not just in the metastatic space, but especially in the early space will become important. And the ability to do that Requires your first IO of that IO IO to be approved in the early space, and that is why we are so Excited about moving into early spaces with KEYTRUDA because that allows us to Execute in an aisle, aisle strategy in early stage cancers.

Operator

Thanks, Mohit. Next question please, Kelly.

Speaker 3

Our next question comes from Chris Schott from JPMorgan. Chris, your line is open.

Speaker 8

Great. Thanks very much. I think you mentioned that you're looking to review share repo and it does seem like maybe Rob some of your recent business development commentary has been skewed towards Smaller deals or collaborations. So can you just put into context what you view as an appropriate level of leverage for Merck? And should we be thinking about kind of cash generation beyond that level as maybe going towards repo going forward?

Speaker 8

And I think just flipping a really quick second one, Just help me on FX. I think you're talking about 2% headwind. Most of your peers aren't seeing much, given the recent weakening of the dollar. Just are there any currencies that stand out we should be keeping in mind there? Thanks so much.

Speaker 1

So Chris, this is Caroline. First to talk to share repurchase. As we've stated previously, It's our goal as a company to deploy our cash first and foremost behind the business opportunities we have within the company as well as augment that with business development. We have turned on the share repurchase Program given the strength of our business and our balance sheet, but we'll be ensuring we have ample capacity to pursue business development, which is the highest priority and is a better generator of growth and value creation. We have a portfolio CD that we are reviewing and we will continue to do so and hope to have news that we'll be sharing in the future.

Speaker 1

So priority remains speedy, invest in the business, but to the extent there is excess cash, we will return that to shareholders Through the share buybacks, we will maintain an appropriate leverage for our company. We are very comfortable operating at the credit rating we are at and would expect to sustain that kind of level as we go forward. From a foreign exchange perspective, in 2022, we were extremely successful as a company in blunting the impact of foreign exchange with our revenue hedging program. The underlying impact of foreign exchange to our business in 2022 was approximately 6% on the top line, 10% on the bottom line, but with our effective hedging program, which brought Revenue on the other revenue line of approximately $800,000,000 that blunted the impact to 4% on the top and 4% on the bottom. As you rightly note, as we look at 2023, we expect The underlying impact of foreign exchange will be around 1 percentage point on the top and the bottom line.

Speaker 1

What is impacting The guidance that we've given is we obviously don't expect as significant hedge gains in 2023, which means that the overall impact from foreign exchange year over year is expected 2% on the top and 4% on the bottom.

Operator

Great. Thank you, Chris. Next question please, Kelly.

Speaker 3

Our next question comes from Terence Flynn from Morgan Stanley. Terence, your line is open.

Speaker 9

Great. Thanks so much for taking the questions. I know you guys typically don't give product level guidance, Caroline, but I was wondering if you Speak at a high level about your vaccine franchise this year. Obviously, you have new capacity coming on for Gardasil, but you So talked about the pediatric opportunity for Vax NuVance. So just wondering how we should think about those this year?

Speaker 9

And then one follow-up for Dean on Tatercept, I know you're talking to the FDA now. Are you still confident that that single trial will be sufficient For approval or is there a possibility you could need data from the other ongoing studies? Thank you.

Speaker 1

Thank you for the question. So The guidance that we've provided for 2023 is underpinned by very strong revenue growth of 7% to 10% when you exclude the impact of Ligevrio and foreign exchange. The drivers of that growth are Patients we have in KEYTRUDA, LYNPARTHLEENVIMA. Vaccines, as you rightly note, driven by an acceleration In the growth of Dardasil as we have new supply coming online as well as an acceleration in our Vaxmovance performance, especially given the strong data we have for the pediatric setting. And we expect continued growth, strong growth in our Animal Health business.

Speaker 1

There's some headwinds against that that we've talked about with Lagevrio, with foreign exchange And with an increased level of pricing expected, especially in Europe, different changes to the VPAT scheme of Medt U. K. And Amlog in Germany. But overall, very confident in the underlying growth of our business anchored to oncology,

Speaker 2

Yes. So again, March 6, clinical trial data for sotatercept will be more fully discussed. I think it will be very impactful data and I have no indication at this point that we will need A readout from any other trial from a clinical standpoint to support our filing through the FDA for Thank you, Terence. Next question please, Kelly.

Speaker 3

Our next question comes from Colin Bristol of UBS. Colin, your line is open.

Speaker 10

I guess I'll piggyback on a couple of the others. On KIDJET, we've obviously seen some competitive The data recently, and then we have some Phase 3 competitor readout this year. Just what is your level of enthusiasm for this Glass currently and just what underpins that in terms of the data we've seen. And then just second on Gardasil, are you able to give any more Granularity on the timing and levels of additional supply that will be coming online with respect to the new manufacturing facility.

Speaker 2

Thank you. Yes. Well, thank you for that question. In relationship to TIGIT, I mean, we're very confident in our molecule. As I've said, we have 9 ongoing 5 Phase Three trials pushing the boundaries of what Tembro can do or PD-one can do with another IO agent Has been something that's very important for the field.

Speaker 2

And the way that I can simply answer your question about the confidence in the molecule is We just opened an additional KEYBIB study, a Phase 3 study in the earlier stages of cancer for this IO, IO combination.

Speaker 1

And for GARDASIL, we, as you know, have driven productivity in the existing manufacturing And we have 2 new facilities coming online over the course of 2023, 2024. So it will be a progressive ramp, but I'll reiterate we're expecting an acceleration in our growth during 2020 Great.

Operator

Great. Thank you, Colin. Next question please, Kelly.

Speaker 3

Our next question comes from Umer Raffat from Evercore. Your line is open.

Speaker 11

Hi, guys. Thanks for taking my question. There's a story in New York Times last week, which mentions Merck has a patent estate of 180 patents on KEYTRUDA. And I'm curious since your 10 ks only points to the earliest patent expiry date of 2028, can you speak to the types of patents Compass in this 180 patent estate. And is it reasonable to assume that your true patent estate on KEYTRUDA goes well past 2,035?

Speaker 11

Thank you.

Speaker 2

So I would just want to elevate the question a little bit. The focus of what we're trying to do is we're trying to Drive the concept of inhibition of checkpoint inhibitors Can really have a profound effect throughout cancers in all stages and all tumor types. We talk about expand into different tissue types and stages, deepen in combination and extend with roots of delivery, roots of administration and frequency. And these innovations are critically important To make sure that this life saving sort of treatment is available. And we are Confident in those innovations of providing benefit to patients, and we have filed

Operator

Thank you, Umer. Last question, please, Kelly.

Speaker 3

Our last question comes from Steve Scala from Cowen. Steve, your line is open.

Speaker 2

Thank you. Novartis said yesterday that it believes the treatment of cardiovascular disease is moving towards infrequently administered injectables As opposed to orals, citing very poor compliance with orals. They probably have a good point because the Merck PCSK9 could be associated with GI Issues and other issues which may make oral delivery a challenge. So I assume you disagree. Is that because indeed your oral PCSK9 is very well Tolerated and clean or do you disagree for other reasons?

Speaker 2

Thank you. We'll be talking about the detailed data from the PCSK9. Danae, we believe that it's very clean, but I'll just step back. As a cardiologist who trained in the late '80s 1990s, the ability to have an oral drug that lowered LDL cholesterol was impactful for the world. Yes, Every oral drug regardless of what therapy it is has a compliance So it's very important to maintain compliance.

Speaker 2

What we're trying to do is to create the most potent LDL cholesterol lowering pill ever made that does not require Constant interactions with the healthcare system, we think that that access is actually one that's very important, not just in the U. S, but also globally. And this is personally speaking as someone who Practiced as early as recently as 5 years ago. If I had an oral PCSK9 LDL lowering pill back then, I would be prescribing it with the other 3 to 4 oral pills that I'm prescribing an individual.

Operator

Thank you, Steve, and thank you everybody for your thoughtful questions. Please follow-up with, me and the IR team if you have anything additional, and we look forward to staying in touch. Take care.

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Earnings Conference Call
Merck & Co., Inc. Q4 2022
00:00 / 00:00