MERCK & CO., INC. Planned Spin-Off ofWomen's Health , Legacy Brands and Biosimilars intoNew Company InFebruary 2020 ,Merck announced its intention to spin-off products from its women's health, legacy brands and biosimilars businesses into a new, independent, publicly traded company namedOrganon & Co. (Organon) through a distribution of Organon's publicly traded stock to Company shareholders. The distribution is expected to qualify as tax-free to the Company and its shareholders forU.S. federal income tax purposes. The legacy brands included in the transaction consist of dermatology, non-opioid pain, respiratory, and select cardiovascular products including Zetia (ezetimibe) and Vytorin (ezetimibe and simvastatin), as well as the rest ofMerck 's diversified brands franchise.Merck 's existing research pipeline programs will continue to be owned and developed withinMerck as planned. Organon will have development capabilities initially focused on late-stage development and life-cycle management and is expected over time to develop research capabilities in selected therapeutic areas. The spin-off is expected to be completed in the first half of 2021, subject to market and certain other conditions. Subsequent to the spin-off, the historical results of the women's health, legacy brands and biosimilars businesses will be reflected as discontinued operations in the Company's consolidated financial statements. Recent Developments Business Developments Below is a summary of significant business development activity in the first six months of 2020. See Note 2 to the condensed consolidated financial statements for additional information. InJuly 2020 ,Merck acquired theU.S. rights to Sentinel Flavor Tabs and Sentinel Spectrum Chews fromVirbac Corporation for approximately$400 million . Sentinel products provide protection against common parasites in dogs. Also, inJuly 2020 ,Merck andRidgeback Biotherapeutics LP (Ridgeback Bio), a closely held biotechnology company, closed a collaboration agreement to develop MK-4482 (formerly known as EIDD-2801), an orally available antiviral candidate currently in clinical development for the treatment of patients with COVID-19.Merck gained exclusive worldwide rights to develop and commercialize MK-4482 and related molecules. Under the terms of the agreement, Ridgeback Bio received an upfront payment and also is eligible to receive future contingent payments dependent upon the achievement of certain developmental and regulatory approval milestones, as well as a share of the net profits of MK-4482 and related molecules, if approved. InJune 2020 ,Merck acquired privately heldThemis Bioscience GmbH (Themis), a company focused on vaccines and immune-modulation therapies for infectious diseases and cancer for$366 million in cash.Merck may make additional contingent payments dependent upon the achievement of certain developmental, regulatory approval and commercial milestones. The acquisition builds upon an ongoing collaboration between the two companies to develop vaccine candidates using the measles virus vector platform and is expected to accelerate the development of Themis' COVID-19 vaccine candidate (V591). InMay 2020 ,Merck and theInternational AIDS Vaccine Initiative, Inc. (IAVI), a nonprofit scientific research organization dedicated to addressing urgent, unmet global health challenges, announced a new collaboration to develop V590, an investigational vaccine against SARS-CoV-2 being studied for the prevention of COVID-19. Under the terms of the agreement,Merck made an upfront payment of$6.5 million and may make additional contingent payments dependent upon the achievement of certain sales-based milestones, as well as royalties. InJanuary 2020 ,Merck acquired ArQule, Inc. (ArQule), a publicly traded biopharmaceutical company focused on kinase inhibitor discovery and development for the treatment of patients with cancer and other diseases, for$2.7 billion . ArQule's lead investigational candidate, MK-1026 (formerly known as ARQ 531), is a novel, oral Bruton's tyrosine kinase (BTK) inhibitor currently being evaluated for the treatment of B-cell malignancies. Coronavirus Disease 2019 (COVID-19) Update Overall, in response to the COVID-19 pandemic,Merck is focused on protecting the safety of its employees, ensuring that its supply of medicines and vaccines reaches its patients, contributing its scientific expertise to the development of vaccine and antiviral approaches, and supporting health care providers andMerck 's communities. Although COVID-19-related disruptions to patients' ability to access health care providers negatively affected second quarter results,Merck remains confident in the fundamental underlying demand for its products and its prospects for long-term growth. In the second quarter of 2020, the negative impact of the COVID-19 pandemic toMerck 's sales was estimated to be$1.6 billion , including approximately$1.5 billion for Pharmaceutical revenue and approximately$100 million forAnimal Health revenue. The impact to sales in the first quarter of 2020 was immaterial. For the full-year 2020,Merck expects an unfavorable impact to sales of approximately$1.95 billion (excluding the impact of foreign exchange) due to the COVID-19 pandemic, comprised of approximately$1.8 billion for Pharmaceutical revenue and approximately$150 million forAnimal Health revenue. These estimates include the impacts for the first half of the year. - 31 - -------------------------------------------------------------------------------- Roughly two-thirds ofMerck 's Pharmaceutical revenue is comprised of physician-administered products, which, despite strong underlying demand, were affected by social distancing measures, fewer well visits and delays in elective surgeries due to the COVID-19 pandemic. These impacts, as well as the prioritization of COVID-19 patients at health care providers, have resulted in reduced administration of many of the Company's human health products, in particular for its vaccines as well as for Keytruda (pembrolizumab) and Implanon/Nexplanon (etonogestrel implant). The Company anticipates reduced demand for its physician-administered products while pandemic-related access measures remain in place. In addition, declines in medical visits and elective surgeries also negatively affected the demand for certain products, including Bridion (sugammadex) Injection. InMerck 'sAnimal Health business, reduced veterinary visits and lower demand for protein and milk due to restaurant and school closures have negatively affected sales. While the Company expects to rely on governmental authorities to determine when operations can return to normal, and is cognizant that the duration, spread and severity of the outbreak will be critical determinants for the purposes of the full-year estimates provided above,Merck has assumed that the majority of the negative impact occurred in the second quarter of 2020, with a gradual recovery having commenced in the second quarter and extending through the third quarter, with a return to normal operating levels in the fourth quarter of 2020. Operating expenses were positively affected in the second quarter and first six months of 2020 by approximately$325 million and$425 million , respectively, primarily driven by lower promotional and selling costs, as well as lower research and development expenses due to the COVID-19 pandemic. For the full-year 2020,Merck continues to expect a net favorable impact to operating expenses of approximately$400 million including both the favorable impact of lower spending, largely reflected in the first half of 2020, partially offset by anticipated spending on recently initiated COVID-19-related vaccine and antiviral research programs. Pricing Global efforts toward health care cost containment continue to exert pressure on product pricing and market access worldwide. Inthe United States , pricing pressure continues on many of the Company's products. Changes to theU.S. health care system as part of health care reform, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, have contributed to pricing pressure. In several international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, the Company's revenue performance in the first six months of 2020 was negatively affected by other cost-reduction measures taken by governments and other third-parties to lower health care costs. The Company anticipates all of these actions and additional actions in the future will continue to negatively affect revenue performance. Operating Results Sales % Change % Change Three Months Ended Excluding Six Months Ended Excluding June 30, Foreign June 30, Foreign ($ in millions) 2020 2019 % Change Exchange 2020 2019 % Change Exchange United States$ 4,634 $ 5,193 (11 )% (11 )%$ 9,771 $ 9,748 - % - % International 6,238 6,567 (5 )% - % 13,158 12,828 3 % 6 % Total$ 10,872 $ 11,760 (8 )% (5 )%$ 22,929 $ 22,575 2 % 4 %
Worldwide sales were$10.9 billion for the second quarter of 2020, a decline of 8% compared with the second quarter of 2019, reflecting an unfavorable impact from the COVID-19 pandemic as discussed above. The sales decline reflects lower sales of vaccines, including human papillomavirus (HPV) vaccines Gardasil (Human Papillomavirus Quadrivalent [Types 6,11,16 and 18] Vaccine, Recombinant)/Gardasil 9 (Human Papillomavirus 9-valent Vaccine, Recombinant) and lower sales of pediatric vaccines ProQuad (Measles, Mumps, Rubella and Varicella Virus Vaccine Live), M-M-R II (Measles, Mumps and Rubella Virus Vaccine Live) and Varivax (Varicella Virus Vaccine Live). The sales decline was also attributable to the ongoing effects of generic competition for women's health product NuvaRing (etonogestrel/ethinyl estradiol vaginal ring), hospital acute care products Noxafil (posaconazole) and Cubicin (daptomycin for injection), oncology products Emend (aprepitant)/Emend (fosaprepitant dimeglumine) for Injection, cardiovascular products Zetia (ezetimibe) and Vytorin (ezetimibe/simvastatin), as well as products within the diversified brands franchise. The diversified brands franchise includes certain products that are approaching the expiration of their marketing exclusivity or that are no longer protected by patents in developed markets. Lower sales of diabetes products Januvia (sitagliptin) and Janumet (sitagliptin/metformin HCl) and virology product Zepatier (elbasvir and grazoprevir) also contributed to the revenue decline in the quarter. The sales decline was partially offset by higher sales in the oncology franchise reflecting strong growth of Keytruda, as well as increased alliance revenue from Lynparza (olaparib) and Lenvima (lenvatinib). - 32 - -------------------------------------------------------------------------------- Global sales were$22.9 billion for the first six months of 2020, growth of 2% compared with the same period of 2019. Sales growth was largely due to higher sales in the oncology franchise and higher sales of animal health products, partially offset by ongoing generic competition for certain brands, and an unfavorable impact from the COVID-19 pandemic that resulted in lower demand for certain products. See Note 16 to the condensed consolidated financial statements for details on sales of the Company's products. A discussion of performance for select products in the franchises follows. Pharmaceutical Segment Oncology % Change % Change Three Months Ended Excluding Six Months Ended Excluding June 30, Foreign June 30, Foreign ($ in millions) 2020 2019 % Change Exchange 2020 2019 % Change Exchange Keytruda$ 3,388 $ 2,634 29 % 31 %$ 6,672 $ 4,903 36 % 38 % Alliance Revenue - Lynparza (1) 178 111 61 % 62 % 323 190 70 % 72 % Alliance Revenue - Lenvima (1) 151 97 57 % 57 % 279 171 63 % 64 % Emend 33 121 (72 )% (71 )% 76 237 (68 )% (67 )% (1) Alliance revenue representsMerck 's share of profits, which are product sales net of cost of sales and commercialization costs (see Note 3 to the condensed consolidated financial statements). Keytruda is an anti-PD-1 (programmed death receptor-1) therapy that has been approved as monotherapy for the treatment of certain patients with cervical cancer, classical Hodgkin lymphoma (cHL), cutaneous squamous cell carcinoma (cSCC), esophageal cancer, gastric or gastroesophageal junction adenocarcinoma, head and neck squamous cell carcinoma (HNSCC), hepatocellular carcinoma (HCC), non-small-cell lung cancer (NSCLC), small-cell lung cancer (SCLC), melanoma, Merkel cell carcinoma, microsatellite instability-high (MSI-H) or mismatch repair deficient cancer, primary mediastinal large B-cell lymphoma (PMBCL), and urothelial carcinoma. Keytruda is also approved for the treatment of certain patients in combination with chemotherapy for metastatic squamous and nonsquamous NSCLC, in combination with chemotherapy for HNSCC, in combination with axitinib for renal cell carcinoma (RCC), and in combination with Lenvima for endometrial carcinoma. The Keytruda clinical development program includes studies across a broad range of cancer types (see "Research and Development" below). InJanuary 2020 , theU.S. Food and Drug Administration (FDA) approved Keytruda as monotherapy for the treatment of certain patients with Bacillus Calmette-Guerin (BCG)-unresponsive, high-risk, non-muscle invasive bladder cancer (NMIBC) based on the results of the KEYNOTE-057 trial. InApril 2020 , the FDA granted accelerated approval for an additional recommended dosage of 400 mg every six weeks (Q6W) for Keytruda across all adult indications, including monotherapy and combination therapy. This new dosage option will be available in addition to the current dose of 200 mg every three weeks (Q3W). InJune 2020 , the FDA granted accelerated approval for Keytruda as monotherapy for the treatment of adult and pediatric patients with unresectable or metastatic tumor mutational burden-high (TMB-H) (?10 mutations/megabase) solid tumors, as determined by an FDA-approved test, that have progressed following prior treatment and who have no satisfactory alternative treatment options based in part on the results of the KEYNOTE-158 trial. Also inJune 2020 , the FDA approved Keytruda as monotherapy both for the treatment of patients with recurrent or metastatic cSCC that is not curable by surgery or radiation based on data from the Phase 2 KEYNOTE-629 trial and for the first-line treatment of patients with unresectable or metastatic MSI-H or mismatch repair deficient colorectal cancer based on results from the Phase 3 KEYNOTE-177 trial. In addition, inJune 2020 , Keytruda was approved by theNational Medical Products Administration (NMPA) inChina as monotherapy for the second-line treatment of patients with locally advanced or metastatic esophageal squamous cell carcinoma whose tumors express PD-L1 (Combined Positive Score [CPS] ?10). This indication was granted based on the Phase 3 KEYNOTE-181 trial, including data from an extension of the global study in Chinese patients. Global sales of Keytruda grew 29% and 36% in the second quarter and first six months of 2020, respectively. Sales growth in both periods was driven by higher demand as the Company continues to launch Keytruda with multiple new indications globally, although the COVID-19 pandemic had a dampening effect on growing demand. Sales inthe United States continue to build across the multiple approved indications, in particular for the treatment of NSCLC as monotherapy, and in combination with chemotherapy for both nonsquamous and squamous metastatic NSCLC, along with uptake in the adjuvant melanoma and RCC indications. Other indications contributing toU.S. sales growth include HNSCC, bladder cancer, melanoma, and MSI-H cancer. Keytruda sales growth in international markets was driven by continued uptake in approved indications, particularly in theEuropean Union (EU). - 33 - -------------------------------------------------------------------------------- Pursuant to a re-pricing rule, the Japanese government reduced the price of Keytruda by 17.5% effectiveFebruary 2020 . Additionally, Keytruda was subject to another price reduction of 20.9% inApril 2020 under a provision of the Japanese pricing rules. Lynparza, an oral poly (ADP-ribose) polymerase (PARP) inhibitor being developed as part of a collaboration with AstraZeneca PLC (AstraZeneca) (see Note 3 to the condensed consolidated financial statements), is approved for the treatment of certain types of advanced ovarian, breast, pancreatic and prostate cancers. Alliance revenue related to Lynparza increased 61% and 70% in the second quarter and first six months of 2020, respectively. Sales growth in both periods was largely driven by continued uptake across the multiple approved indications inthe United States and in the EU. InMay 2020 , the FDA approved Lynparza in combination with bevacizumab as a first-line maintenance treatment of certain adult patients with advanced epithelial ovarian, fallopian tube or primary peritoneal cancer who are in complete or partial response to first-line platinum-based chemotherapy based on the results from the Phase 3 PAOLA-1 trial. Also inMay 2020 , the FDA approved Lynparza for the treatment of adult patients with deleterious or suspected deleterious germline or somatic homologous recombination repair (HRR) gene-mutated metastatic castration-resistant prostate cancer (mCRPC) who have progressed following prior treatment with enzalutamide or abiraterone based on positive results from the Phase 3 PROfound trial. InJuly 2020 , Lynparza was approved in the EU as a monotherapy for the maintenance treatment of adult patients with germline BRCA1/2 mutations who have metastatic adenocarcinoma of the pancreas and have not progressed after a minimum of 16 weeks of platinum treatment within a first-line chemotherapy regimen based on the results from the Phase 3 POLO trial. Lenvima, an oral receptor tyrosine kinase inhibitor being developed as part of a collaboration with Eisai Co., Ltd. (Eisai) (see Note 3 to the condensed consolidated financial statements), is approved for the treatment of certain types of thyroid cancer, HCC, in combination with everolimus for certain patients with RCC, and in combination with Keytruda for the treatment of certain patients with endometrial carcinoma. Alliance revenue related to Lenvima grew 57% and 63% in the second quarter and first six months of 2020, respectively. Sales growth in both periods was primarily due to higher demand inthe United States , the EU andChina . Global sales of Emend, for the prevention of chemotherapy-induced nausea and vomiting, declined 72% and 68% in the second quarter and first six months of 2020, respectively. The sales declines were primarily driven by lower demand and pricing inthe United States due to generic competition, including recent generic competition for Emend for Injection followingU.S. patent expiry inSeptember 2019 . Also contributing to the sales declines in the second quarter and first six months of 2020 was lower demand in the EU as a result of generic competition for the oral formulation of Emend following loss of market exclusivity in May of 2019. U.S. market exclusivity for the oral formulation of Emend previously expired in 2015. Emend for Injection will lose market exclusivity in major European markets inAugust 2020 . The Company anticipates that sales of Emend for Injection in these markets will decline significantly thereafter. InApril 2020 , the FDA approved Koselugo (selumetinib) for the treatment of pediatric patients two years of age and older with neurofibromatosis type 1 (NF1) who have symptomatic, inoperable plexiform neurofibromas (PN). The FDA approval is based on positive results from theNational Cancer Institute (NCI) Cancer Therapy Evaluation Program (CTEP)-sponsored Phase 2 SPRINT Stratum 1 trial coordinated by theNCI's Center for Cancer Research , Pediatric Oncology Branch. This is the first regulatory approval of a medicine for the treatment of NF1 PN, a rare and debilitating genetic condition. Koselugo is being jointly developed and commercialized with AstraZeneca globally (see Note 3 to the condensed consolidated financial statements). Vaccines % Change % Change Three Months Ended Excluding Six Months Ended Excluding June 30, Foreign June 30, Foreign ($ in millions) 2020 2019 % Change Exchange
2020 2019 % Change Exchange
Gardasil/Gardasil 9 $ 656 $ 886 (26 )% (24 )% $ 1,753 $ 1,724 2 % 4 %
ProQuad 133 204 (35 )% (35 )% 290 356 (19 )% (18 )%
M-M-R II 72 199 (64 )% (64 )% 172 322 (47 )% (46 )%
Varivax 173 271 (36 )% (35 )% 352 492 (29 )% (28 )%
Pneumovax 23 117 170 (31 )% (29 )% 373 355 5 % 7 %
Worldwide sales of Gardasil/Gardasil 9, vaccines to help prevent certain cancers
and other diseases caused by certain types of HPV, declined 26% in the second
quarter of 2020 primarily due to lower demand in the United States and Hong
Kong , SAR, PRC attributable to the COVID-19 pandemic, partially offset by higher
demand in China . Worldwide sales of Gardasil/Gardasil 9 grew 2% in the first six
months of 2020 driven by higher demand in China and in the EU, partially offset
by the unfavorable effects of the COVID-19 pandemic, particularly in the United
States and Hong Kong , SAR, PRC.
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In June 2020 , the FDA approved an expanded indication for Gardasil 9 for the
prevention of oropharyngeal and other head and neck cancers caused by HPV Types
16, 18, 31, 33, 45, 52, and 58. The oropharyngeal and head and neck cancer
indication is approved under accelerated approval based on effectiveness in
preventing HPV-related anogenital disease.
In July 2020 , Silgard 9 aqueous suspension for intramuscular injection syringes
(recombinant adsorbed 9-valent Human Papillomavirus virus-like particles
vaccine) were approved for use in women and girls by the Ministry of Health,
Labor and Welfare in Japan .
Global sales of ProQuad, a pediatric combination vaccine to help protect against
measles, mumps, rubella and varicella, declined 35% and 19% in the second
quarter and first six months of 2020, respectively, primarily due to lower
demand in the United States resulting from the COVID-19 pandemic.
Worldwide sales of MMR II, a vaccine to help protect against measles, mumps
and rubella, declined 64% and 47% in the second quarter and first six months of
2020, respectively, primarily driven by lower demand in the United States
resulting from fewer measles outbreaks in 2020, coupled with the unfavorable
impact of the COVID-19 pandemic. Private sector buy-in during the second quarter
of 2019 also contributed to the U.S. M-M-R II sales declines in the second
quarter and first six months of 2020. Additionally, the sales decline in the
first six months of 2020 reflects lower demand in Brazil .
Global sales of Varivax, a vaccine to help prevent chickenpox (varicella),
declined 36% and 29% in the second quarter and first six months of 2020,
respectively. The sales declines reflect lower government tenders in Brazil , as
well as lower demand in the United States resulting from the COVID-19 pandemic.
Worldwide sales of Pneumovax 23 (pneumococcal vaccine polyvalent), a vaccine to
help prevent pneumococcal disease, declined 31% in the second quarter of 2020
primarily due to lower demand in the United States related to the COVID-19
pandemic, partially offset by higher volumes in the EU attributable in part to
increased demand for pneumococcal vaccination during the COVID-19 pandemic.
Global sales of Pneumovax 23 grew 5% in first six months of 2020 largely due to
higher demand in the EU, partially offset by lower demand in the United States
and the timing of shipments in China .
Hospital Acute Care
% Change % Change
Three Months Ended Excluding Six Months Ended Excluding
June 30, Foreign June 30, Foreign
($ in millions) 2020 2019 % Change Exchange 2020 2019 % Change Exchange
Bridion $ 224 $ 278 (19 )% (18 )% $ 524 $ 533 (2 )% - %
Noxafil 73 193 (62 )% (60 )% 168 383 (56 )% (55 )%
Prevymis 63 38 66 % 67 % 123 70 76 % 78 %
Cubicin 32 67 (53 )% (51 )% 78 155 (50 )% (48 )%
Worldwide sales of Bridion, for the reversal of two types of neuromuscular
blocking agents used during surgery, declined 19% in the second quarter of 2020
primarily attributable to lower demand resulting from fewer elective surgeries
due to the COVID-19 pandemic. Excluding the impact of foreign exchange, global
sales of Bridion in the first six months of 2020 were flat as higher demand in
the first quarter was offset by lower demand in the second quarter resulting
from the COVID-19 pandemic.
Global sales of Noxafil, for the prevention of invasive fungal infections,
declined 62% and 56% in the second quarter and first six months of 2020,
respectively, primarily due to generic competition in the United States and in
the EU. The patents that provided U.S. market exclusivity for certain forms of
Noxafil representing the majority of U.S. Noxafil sales expired in July 2019 .
Additionally, the patent for Noxafil expired in a number of major European
markets in December 2019 . Accordingly, the Company is experiencing volume and
pricing declines in Noxafil sales in these markets as a result of generic
competition and expects the declines to continue.
Worldwide sales of Prevymis (letermovir), a medicine for prophylaxis
(prevention) of cytomegalovirus (CMV) infection and disease in adult
CMV-seropositive recipients of an allogenic hematopoietic stem cell transplant,
grew 66% and 76% in the second quarter and first six months of 2020,
respectively, due to continued uptake since launch in the EU and in the United
States .
Global sales of Cubicin, an I.V. antibiotic for complicated skin and skin
structure infections or bacteremia when caused by designated susceptible
organisms, declined 53% and 50% in the second quarter and first six months of
2020, respectively, due in part to ongoing generic competition in the United
States and in the EU.
In June 2020 , the FDA approved a supplemental New Drug Application (sNDA) for
Recarbrio (imipenem, cilastatin, and relebactam) for the treatment of patients
18 years of age and older with hospital-acquired bacterial pneumonia and
ventilator-associated bacterial pneumonia (HABP/VABP), caused by certain
susceptible Gram-negative microorganisms.
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Immunology
% Change % Change
Three Months Ended Excluding Six Months Ended Excluding
June 30, Foreign June 30, Foreign
($ in millions) 2020 2019 % Change Exchange 2020 2019 % Change Exchange
Simponi $ 191 $ 214 (11 )% (8 )% $ 406 $ 422 (4 )% (1 )%
Remicade 73 98 (26 )% (25 )% 160 221 (28 )% (26 )%
Sales of Simponi (golimumab), a once-monthly subcutaneous treatment for certain
inflammatory diseases (marketed by the Company in Europe , Russia and Turkey ),
declined 11% and 4% in the second quarter and first six month of 2020,
respectively, primarily driven by lower demand in the EU due to the uptake of
biosimilars for a competing product. Higher volumes in Russia partially offset
the decline in the first six months of 2020.
Sales of Remicade (infliximab), a treatment for inflammatory diseases (marketed
by the Company in Europe , Russia and Turkey ), declined 26% and 28% in the second
quarter and first six months of 2020, respectively, driven by ongoing biosimilar
competition in the Company's marketing territories in Europe . The Company lost
market exclusivity for Remicade in major European markets in 2015 and no longer
has market exclusivity in any of its marketing territories. The Company is
experiencing pricing and volume declines in these markets as a result of
biosimilar competition and expects the declines to continue.
Virology
% Change % Change
Three Months Ended Excluding Six Months Ended Excluding
June 30, Foreign June 30, Foreign
($ in millions) 2020 2019 % Change Exchange 2020 2019 % Change Exchange
Isentress/Isentress HD $ 196 $ 247 (21 )% (17 )% $ 441 $ 502 (12 )% (9 )%
Zepatier 39 108 (63 )% (62 )% 94 221 (57 )% (56 )%
Global combined sales of Isentress/Isentress HD (raltegravir), an HIV integrase
inhibitor for use in combination with other antiretroviral agents for the
treatment of HIV-1 infection, declined 21% in the second quarter of 2020
primarily driven by competitive pressure in the United States and in the EU, as
well as the timing of shipments in Russia . Worldwide sales declined 12% in the
first six months of 2020 primarily due to lower sales in the United States and
in the EU, partially offset by higher volumes in Russia .
Global sales of Zepatier, a treatment for adult patients with chronic hepatitis
C virus genotype (GT) 1 or GT4 infection, declined 63% and 57% in the second
quarter and first six months of 2020, respectively, primarily driven by lower
demand in the EU, the United States , and the Asia Pacific region due to
competition and declining patient volumes, coupled with the impact of the
COVID-19 pandemic.
Cardiovascular
% Change % Change
Three Months Ended Excluding Six Months Ended Excluding
June 30, Foreign June 30, Foreign
($ in millions) 2020 2019 % Change Exchange 2020 2019 % Change Exchange
Zetia/Vytorin $ 175 $ 232 (24 )% (23 )% $ 374 $ 470 (20 )% (19 )%
Atozet 115 92 25 % 28 % 238 186 28 % 31 %
Rosuzet 31 52 (41 )% (40 )% 63 66 (5 )% (2 )%
Alliance Revenue -
Adempas (1) 79 51 54 % 54 % 133 94 41 % 41 %
Adempas 57 53 8 % 9 % 113 100 12 % 14 %
(1) Alliance revenue represents Merck 's share of profits from sales in Bayer's
marketing territories, which are product sales net of cost of sales and
commercialization costs (see Note 3 to the condensed consolidated financial
statements).
Combined global sales of Zetia (marketed in most countries outside the United
States as Ezetrol) and Vytorin (marketed outside the United States as Inegy),
medicines for lowering LDL cholesterol, declined 24% and 20% in the second
quarter and first six months of 2020, respectively, primarily due to generic
competition for Ezetrol and Inegy in the EU. The EU patents for Ezetrol and
Inegy expired in April 2018 and April 2019 , respectively. The Company expects
the sales declines in these markets to continue. The sales decline was also
attributable to loss of exclusivity in Australia . The patent that provided
market exclusivity for Ezetrol in Japan expired in September 2019 and generic
competition began in the second quarter of 2020. These declines were partially
offset by higher demand for Ezetrol in China .
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Sales of Atozet (ezetimibe and atorvastatin) (marketed outside of the United
States ), a medicine for lowering LDL cholesterol, grew 25% and 28% in the second
quarter and first six months of 2020, respectively, primarily due to higher
demand in most markets, particularly in the EU and in Japan .
Sales of Rosuzet (ezetimibe and rosuvastatin) (marketed outside of the United
States ), a medicine for lowering LDL cholesterol, declined 41% and 5% in the
second quarter and first six months of 2020, respectively, due to prior year
launch buy-in in Japan . In the first six months of 2020, the decline was
partially offset by higher demand in Korea .
Adempas (riociguat), a cardiovascular drug for the treatment of pulmonary
arterial hypertension, is part of a worldwide clinical development collaboration
with Bayer AG (Bayer) to market and develop soluble guanylate cyclase (sGC)
modulators including Adempas (see Note 3 to the condensed consolidated financial
statements). Revenue from Adempas includes Merck 's share of profits from the
sale of Adempas in Bayer's marketing territories, which grew 54% and 41% in the
second quarter and first six months of 2020, respectively, as well as sales in
Merck 's marketing territories, which grew 8% and 12% in the second quarter and
first six months of 2020, respectively.
Diabetes
% Change % Change
Three Months Ended Excluding Six Months Ended Excluding
June 30, Foreign June 30, Foreign($ in millions) 2020 2019 % Change Exchange 2020 2019 % Change Exchange Januvia/Janumet$ 1,344 $ 1,441 (7 )% (5 )%$ 2,621 $ 2,795 (6 )% (5 )% Worldwide combined sales of Januvia and Janumet, medicines that help lower blood sugar levels in adults with type 2 diabetes, declined 7% and 6% in the second quarter and first six months of 2020, respectively. The declines were primarily due to continued pricing pressure inthe United States and lower demand in certain markets resulting from the COVID-19 pandemic, partially offset by higher demand inChina . The Company expectsU.S. pricing pressure to continue. The patents that provide market exclusivity for Januvia and Janumet inthe United States expire inJuly 2022 (although six-month pediatric exclusivity may extend this date). The patent that provides market exclusivity for Januvia in the EU expires inJuly 2022 (although pediatric exclusivity has recently been granted which may extend this date toSeptember 2022 and the Company is applying in individual countries for the extensions). The supplementary patent certificate that provides market exclusivity for Janumet in the EU expires inApril 2023 . The Company anticipates sales of Januvia and Janumet in these markets will decline substantially after these patent expiries.Women's Health % Change % Change Three Months Ended Excluding Six Months Ended Excluding June 30, Foreign June 30, Foreign ($ in millions) 2020 2019 % Change Exchange 2020 2019 % Change Exchange Implanon/Nexplanon$ 132 $ 183 (28 )% (26 )%$ 326 $ 382 (15 )% (13 )% NuvaRing 63 240 (74 )% (73 )% 126 459 (73 )% (72 )% Global sales of Implanon/Nexplanon, a single-rod subdermal contraceptive implant, declined 28% and 15% in the second quarter and first six months of 2020, respectively, primarily due to lower demand inthe United States and in the EU resulting from the COVID-19 pandemic, partially offset by higher demand inLatin America . Worldwide sales of NuvaRing, a vaginal contraceptive product, declined 74% and 73% in the second quarter and first six months of 2020, respectively, due to generic competition inthe United States . The patent that provided U.S. market exclusivity for NuvaRing expired inApril 2018 and generic competition began inDecember 2019 . Accordingly, the Company is experiencing a rapid and substantial decline inU.S. NuvaRing sales and expects the decline to continue. Biosimilars % Change % Change Three Months Ended Excluding Six Months Ended Excluding June 30, Foreign June 30, Foreign ($ in millions) 2020 2019 % Change Exchange
2020 2019 % Change Exchange
Biosimilars $ 60 $ 78 (23 )% (21 )% $ 128 $ 121 6 % 7 %
Biosimilar products are marketed by the Company pursuant to an agreement with
Samsung Bioepis Co., Ltd. (Samsung) to develop and commercialize multiple
pre-specified biosimilar candidates. Currently, the Company markets Renflexis
(infliximab-abda), a biosimilar to Remicade (infliximab) for the treatment of
certain inflammatory diseases; Ontruzant (trastuzumab-dttb), a biosimilar to
Herceptin (trastuzumab) for the treatment of human epidermal growth factor
receptor 2 (HER2)-positive breast cancer and HER2 overexpressing gastric cancer;
and Brenzys (etanercept biosimilar), a biosimilar to Enbrel for the treatment of
certain
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inflammatory diseases. Merck 's commercialization territories under the agreement
vary by product. Sales of biosimilars declined 23% in the second quarter of 2020
primarily due to lower volumes for Brenzys in Brazil due in part to the timing
of shipments. Sales of biosimilars grew 6% in the first six months of 2020
driven by continued post-launch uptake of Renflexis in United States and Canada
and Ontruzant in the EU, partially offset by lower sales of Brenzys in Brazil .
In April 2020 , Merck announced the U.S. launch of Ontruzant, which was approved
by the FDA in January 2019 .
Animal Health Segment
% Change % Change
Three Months Ended Excluding Six Months Ended Excluding
June 30, Foreign June 30, Foreign
($ in millions) 2020 2019 % Change Exchange
2020 2019 % Change Exchange
Livestock $ 648 $ 671 (3 )% 3 % $ 1,386 $ 1,282 8 % 13 %
Companion Animal 453 453 - % 3 % 928 867 7 % 9 %
Sales of livestock products declined 3% in the second quarter of 2020 primarily
driven by lower demand attributable to the COVID-19 pandemic and the unfavorable
effect of foreign exchange, partially offset by an additional month of sales in
2020 related to the April 2019 acquisition of Antelliq Corporation (Antelliq)
(see Note 2 to the condensed consolidated financial statements). Sales of
livestock products grew 8% in the first six months of 2020 largely driven by the
Antelliq acquisition. Sales of companion animal products were flat in the second
quarter of 2020 as higher demand for the Bravecto (fluralaner) line of products
for parasitic control was offset by lower demand for companion animal vaccines
due to reduced veterinary access resulting from the COVID-19 pandemic. Companion
animal sales grew 7% in the first six months of 2020 primarily driven by higher
sales of the Bravecto line of products, partially offset by lower demand for
other companion animal products attributable to the COVID-19 pandemic.
Costs, Expenses and Other
Three Months Ended Six Months Ended
June 30, June 30,
($ in millions) 2020 2019 % Change 2020 2019 % Change
Cost of sales $ 3,159 $ 3,401 (7 )% $ 6,471 $ 6,453 - %
Selling, general and administrative 2,378 2,712 (12 )% 4,933 5,138 (4 )%
Research and development 2,123 2,189 (3 )% 4,331 4,119 5 %
Restructuring costs 83 59 41 % 155 212 (27 )%
Other (income) expense, net (390 ) 140 * (318 ) 327 *
$ 7,353 $ 8,501 (14 )% 15,572 16,249 (4 )%
* Greater than 100%.
Cost of Sales
Cost of sales declined 7% in the second quarter of 2020 and were essentially
flat in the first six months of 2020. Cost of sales includes the amortization of
intangible assets recorded in connection with business acquisitions, which
totaled $281 million and $371 million in the second quarter of 2020 and 2019,
respectively, and $573 million and $768 million in the first six months of 2020
and 2019, respectively. Cost of sales also includes the amortization of amounts
capitalized in connection with collaborations of $298 million and $124 million
in the second quarter of 2020 and 2019, respectively, and $388 million and $222
million in the first six months of 2020 and 2019, respectively. Additionally,
costs include intangible asset impairment charges of $69 million and $81 million
in the second quarter and first six months of 2019 related to marketed products
recorded in connection with business acquisitions. The Company may recognize
additional impairment charges in the future related to intangible assets that
were measured at fair value and capitalized in connection with business
acquisitions and such charges could be material. Also included in cost of sales
are expenses associated with restructuring activities which amounted to $25
million and $65 million in the second quarter of 2020 and 2019, respectively,
and $93 million and $99 million in the first six months of 2020 and 2019,
respectively, including accelerated depreciation and asset write-offs related to
the planned sale or closure of manufacturing facilities. Separation costs
associated with manufacturing-related headcount reductions have been incurred
and are reflected in Restructuring costs as discussed below.
Gross margin was 70.9% in the second quarter of 2020 compared with 71.1% in the
second quarter of 2019. The gross margin decline reflects higher amortization of
unfavorable manufacturing variances and intangible assets (noted above), largely
offset by the favorable effects of foreign exchange, product mix and lower
restructuring costs. Gross margin was 71.8% in the first six months of 2020
compared with 71.4% in the first six months of 2019. The gross margin
improvement was primarily driven by favorable product mix, partially offset by
the unfavorable effects of pricing pressure, manufacturing variances, royalties,
and inventory write-offs.
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Selling, General and Administrative
Selling, general and administrative (SG&A) expenses declined 12% and 4% in the
second quarter and first six months of 2020, respectively, primarily due to
lower promotional, selling, and administrative costs, including reduced travel
and fewer meetings, due in part to the COVID-19 pandemic, and the favorable
effect of foreign exchange, partially offset by costs related to the planned
spin-off of Organon. Transaction costs related to the acquisition of ArQule also
contributed to the increase in SG&A expenses in the first six months of 2020
(see Note 2 to the condensed consolidated financial statements).
Research and Development
Research and development (R&D) expenses declined 3% in the second quarter of
2020 reflecting a decrease in the estimated fair value measurement of
liabilities for contingent consideration, as well as lower laboratory supply
costs, reduced travel and fewer meetings due to the COVID-19 pandemic, partially
offset by higher expenses related to clinical development and increased
investment in discovery research and early drug development. R&D expenses
increased 5% in the first six months of 2020 primarily driven by higher clinical
development and discovery research spending, as well as higher licensing and
restructuring costs, partially offset by lower costs associated with the
COVID-19 pandemic and the favorable effect of foreign exchange.
R&D expenses are comprised of the costs directly incurred by Merck Research
Laboratories (MRL), the Company's research and development division that focuses
on human health-related activities, which were $1.5 billion in both the second
quarter of 2020 and 2019, and $3.0 billion and $2.9 billion in the first six
months of 2020 and 2019, respectively. Also included in R&D expenses are Animal
Health research costs, licensing costs and costs incurred by other divisions in
support of R&D activities, including depreciation, production and general and
administrative, which in the aggregate were approximately $645 million and $715
million for the second quarter of 2020 and 2019, respectively, and $1.3 billion
in both the first six months of 2020 and 2019. In addition, R&D expenses include
expense or income related to changes in the estimated fair value measurement of
liabilities for contingent consideration recorded in connection with business
acquisitions. The Company recorded a net reduction in expenses of $82 million in
the second quarter of 2020 and $49 million and $38 million in the first six
months of 2020 and 2019, respectively, related to the changes in these
estimates. R&D expenses also reflect $31 million and $48 million of accelerated
depreciation costs in connection with restructuring activities in the second
quarter and first six months of 2020, respectively.
Restructuring Costs
In early 2019, Merck approved a new global restructuring program (Restructuring
Program) as part of a worldwide initiative focused on further optimizing the
Company's manufacturing and supply network, as well as reducing its global real
estate footprint. This program is a continuation of the Company's plant
rationalization, builds on prior restructuring programs and does not include any
actions associated with the planned spin-off of Organon. As the Company
continues to evaluate its global footprint and overall operating model, it
subsequently identified additional actions under the Restructuring Program, and
could identify further actions over time. The actions currently contemplated
under the Restructuring Program are expected to be substantially completed by
the end of 2023, with the cumulative pretax costs to be incurred by the Company
to implement the program estimated to be approximately $2.5 billion . The Company
expects to record charges of approximately $800 million in 2020 related to the
Restructuring Program. The Company anticipates the actions under the
Restructuring Program to result in annual net cost savings of approximately $900
million by the end of 2023. Actions under previous global restructuring programs
have been substantially completed.
Restructuring costs, primarily representing separation and other related costs
associated with these restructuring activities, were $83 million and $59 million
for the second quarter of 2020 and 2019, respectively, and $155 million and $212
million in the first six months of 2020 and 2019, respectively. Separation costs
incurred were associated with actual headcount reductions, as well as estimated
expenses under existing severance programs for headcount reductions that were
probable and could be reasonably estimated. Also included in restructuring costs
are asset abandonment, facility shut-down and other related costs, as well as
employee-related costs such as curtailment, settlement and termination charges
associated with pension and other postretirement benefit plans and share-based
compensation plan costs. For segment reporting, restructuring costs are
unallocated expenses.
Additional costs associated with the Company's restructuring activities are
included in Cost of sales, Selling, general and administrative expenses and
Research and development costs. The Company recorded aggregate pretax costs of
$150 million and $159 million in the second quarter of 2020 and 2019,
respectively, and $318 million and $346 million in the first six months of 2020
and 2019, respectively, related to restructuring program activities (see Note 4
to the condensed consolidated financial statements).
Other (Income) Expense, Net
For details on the components of Other (income) expense, net see Note 12 to the
condensed consolidated financial statements.
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Segment Profits
Three Months Ended Six Months Ended
June 30, June 30,
($ in millions) 2020 2019 2020 2019
Pharmaceutical segment profits
$ 13,690 Animal Health segment profits 407 405 885
820
Other non-reportable segment profits - (2 ) 2 - Other (3,448 ) (4,259 ) (7,566 ) (8,184 ) Income before taxes$ 3,519 $ 3,259 $ 7,357 $ 6,326 Pharmaceutical segment profits are comprised of segment sales less standard costs, as well as SG&A expenses directly incurred by the segment.Animal Health segment profits are comprised of segment sales, less all cost of sales, as well as SG&A expenses and research and development costs directly incurred by the segment. For internal management reporting presented to the chief operating decision maker,Merck does not allocate the remaining cost of sales not included in segment profits as described above, research and development expenses incurred by MRL, or general and administrative expenses, nor the cost of financing these activities. Separate divisions maintain responsibility for monitoring and managing these costs, including depreciation related to fixed assets utilized by these divisions and, therefore, they are not included in segment profits. Also excluded from the determination of segment profits are costs related to restructuring activities and acquisition and divestiture-related costs, including the amortization of purchase accounting adjustments, intangible asset impairment charges, and changes in the estimated fair value measurement of liabilities for contingent consideration. Additionally, segment profits do not reflect other expenses from corporate and manufacturing cost centers and other miscellaneous income or expense. These unallocated items are reflected in "Other" in the above table. Also included in "Other" are miscellaneous corporate profits (losses), as well as operating profits (losses) related to third-party manufacturing sales. Pharmaceutical segment profits declined 8% in the second quarter of 2020 largely due to lower sales and the unfavorable effect of foreign exchange, partially offset by lower selling and promotional costs. Pharmaceutical segment profits grew 3% in the first six months of 2020 driven primarily by higher sales, as well as lower selling and promotional costs, partially offset by the unfavorable effect of foreign exchange.Animal Health segment profits grew 1% in the second quarter of 2020 reflecting lower selling and promotional costs, largely offset by lower sales and the unfavorable effect of foreign exchange.Animal Health segment profits grew 8% in the first six months of 2020 reflecting higher sales driven by the Antelliq acquisition, partially offset by higher research costs and the unfavorable effect of foreign exchange. Taxes on Income The effective income tax rates of 14.5% and 18.9% for the second quarter of 2020 and 2019, respectively, and 15.3% and 13.0% for the first six months of 2020 and 2019, respectively, reflect the impacts of acquisition and divestiture-related costs and restructuring costs, partially offset by the beneficial impact of foreign earnings. In addition, the effective income tax rate for the first six months of 2019 reflects the favorable impact of a$360 million net tax benefit related to the settlement of certain federal income tax matters. In the first quarter of 2019, the Internal Revenue Service (IRS) concluded its examinations ofMerck 's 2012-2014U.S. federal income tax returns. As a result, the Company was required to make a payment of$107 million . The Company's reserves for unrecognized tax benefits for the years under examination exceeded the adjustments relating to this examination period and therefore the Company recorded a$360 million net tax benefit in the first six months of 2019. This net benefit reflects reductions in reserves for unrecognized tax benefits for tax positions relating to the years that were under examination, partially offset by additional reserves for tax positions not previously reserved for. Net Loss Attributable to Noncontrolling Interests Net loss attributable to noncontrolling interests of$26 million for the second quarter of 2019 and$79 million for the first six months of 2019 includes the portion of goodwill impairment charges related to certain businesses in the Healthcare Services segment that are attributable to noncontrolling interests. Net Income and Earnings per Common Share Net income attributable toMerck & Co., Inc. was$3.0 billion for the second quarter of 2020 compared with$2.7 billion for the second quarter of 2019 and was$6.2 billion for the first six months of 2020 compared with$5.6 billion for the first six months of 2019. Earnings per common share assuming dilution attributable toMerck & Co., Inc. common shareholders (EPS) for the second quarter of 2020 were$1.18 compared with$1.03 in the second quarter of 2019 and were$2.45 for the first six months of 2020 compared with$2.15 for the first six months of 2019. - 40 - -------------------------------------------------------------------------------- Non-GAAP Income and Non-GAAP EPS Non-GAAP income and non-GAAP EPS are alternative views of the Company's performance thatMerck is providing because management believes this information enhances investors' understanding of the Company's results as it permits investors to understand how management assesses performance. Non-GAAP income and non-GAAP EPS exclude certain items because of the nature of these items and the impact that they have on the analysis of underlying business performance and trends. The excluded items (which should not be considered non-recurring) consist of acquisition and divestiture-related costs, restructuring costs and certain other items. These excluded items are significant components in understanding and assessing financial performance. Non-GAAP income and non-GAAP EPS are important internal measures for the Company. Senior management receives a monthly analysis of operating results that includes non-GAAP EPS. Management uses these measures internally for planning and forecasting purposes and to measure the performance of the Company along with other metrics. In addition, senior management's annual compensation is derived in part using non-GAAP pretax income. Since non-GAAP income and non-GAAP EPS are not measures determined in accordance with GAAP, they have no standardized meaning prescribed by GAAP and, therefore, may not be comparable to the calculation of similar measures of other companies. The information on non-GAAP income and non-GAAP EPS should be considered in addition to, but not as a substitute for or superior to, net income and EPS prepared in accordance with generally accepted accounting principles inthe United States (GAAP). A reconciliation between GAAP financial measures and non-GAAP financial measures is as follows: Three Months Ended Six Months Ended June 30, June 30, ($ in millions except per share amounts) 2020 2019 2020 2019 Income before taxes as reported under GAAP$ 3,519 $ 3,259 $ 7,357 $ 6,326 Increase (decrease) for excluded items: Acquisition and divestiture-related costs 443 660 1,043 1,208 Restructuring costs 150 159 318 346 Other (16 ) 48 (16 ) 48 Non-GAAP income before taxes 4,096 4,126 8,702 7,928 Taxes on income as reported under GAAP 509 615 1,128 820 Estimated tax benefit on excluded items (1) 95 145 260 274 Net tax benefit from the settlement of certain federal income tax matters - - - 360 Tax charge related to finalization of treasury regulations for the Tax Cuts and Job Act of 2017 - - - (67 ) Non-GAAP taxes on income 604 760 1,388 1,387 Non-GAAP net income 3,492 3,366 7,314 6,541 Less: Net income (loss) attributable to noncontrolling interests as reported under GAAP 8 (26 ) 8 (79 ) Acquisition and divestiture-related costs attributable to noncontrolling interests - 36 - 89
Non-GAAP net income attributable to noncontrolling interests
8 10 8 10
Non-GAAP net income attributable to Merck & Co., Inc. $ 3,484 $ 3,356 $ 7,306 $ 6,531
EPS assuming dilution as reported under GAAP $ 1.18 $ 1.03 $ 2.45 $ 2.15
EPS difference 0.19 0.27 0.42 0.37
Non-GAAP EPS assuming dilution $ 1.37 $
1.30
(1) The estimated tax impact on the excluded items is determined by applying the
statutory rate of the originating territory of the non-GAAP adjustments.
Acquisition and Divestiture-Related Costs
Non-GAAP income and non-GAAP EPS exclude the impact of certain amounts recorded
in connection with business acquisitions and divestitures. These amounts include
the amortization of intangible assets and amortization of purchase accounting
adjustments to inventories, as well as intangible asset impairment charges, and
expense or income related to changes in the estimated fair value measurement of
liabilities for contingent consideration. Also excluded are integration,
transaction, and certain other costs associated with business acquisitions and
divestitures.
Restructuring Costs
Non-GAAP income and non-GAAP EPS exclude costs related to restructuring actions
(see Note 4 to the condensed consolidated financial statements). These amounts
include employee separation costs and accelerated depreciation associated with
facilities to be closed or divested. Accelerated depreciation costs represent
the difference between the depreciation expense to be recognized over the
revised useful life of the asset, based upon the anticipated date the site will
be closed or divested or the equipment disposed of, and depreciation expense as
determined utilizing the useful life prior to the restructuring actions.
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Restructuring costs also include asset abandonment, facility shut-down and other
related costs, as well as employee-related costs such as curtailment, settlement
and termination charges associated with pension and other postretirement benefit
plans and share-based compensation costs.
Certain Other Items
Non-GAAP income and non-GAAP EPS exclude certain other items. These items are
adjusted for after evaluating them on an individual basis, considering their
quantitative and qualitative aspects. Typically, these consist of items that are
unusual in nature, significant to the results of a particular period or not
indicative of future operating results. Excluded from non-GAAP income and
non-GAAP EPS in 2019 is a net tax benefit related to the settlement of certain
federal income tax matters (see Note 13 to the condensed consolidated financial
statements) and a tax charge related to the finalization of U.S. treasury
regulations related to the Tax Cuts and Jobs Act of 2017.
Research and Development Update
In July 2020 , the FDA accepted for priority review the New Drug Application
(NDA) for vericiguat, an orally administered sGC stimulator, to reduce the risk
of cardiovascular death and heart failure hospitalization following a worsening
heart failure event in patients with symptomatic chronic heart failure with
reduced ejection fraction, in combination with other heart failure therapies.
The FDA set a Prescription Drug User Fee Act (PDUFA), or target action, date of
January 20, 2021 . Vericiguat is being jointly developed with Bayer (see Note 3
to the condensed consolidated financial statements). The application is based on
results from the Phase 3 VICTORIA trial, which is the first contemporary
outcomes study focused exclusively on a population with worsening chronic heart
failure who are at high risk for cardiovascular mortality and repeated heart
failure hospitalizations. Data from VICTORIA were presented at the virtual
American College of Cardiology's 69th Annual Scientific Session together with
World Congress of Cardiology and published in The New England Journal of
Medicine . Vericiguat is also under review in the EU and in Japan . Merck and
Bayer plan to share VICTORIA data with regulatory authorities worldwide.
Koselugo (selumetinib) is under review in the EU for the treatment of pediatric
patients two years of age and older with NF1 who have symptomatic, inoperable PN
based on positive results from the NCI CTEP-sponsored Phase 2 SPRINT Stratum 1
trial. Koselugo was approved by the FDA in April 2020 . Koselugo is being jointly
developed and commercialized with AstraZeneca globally (see Note 3 to the
condensed consolidated financial statements).
Keytruda is an anti-PD-1 therapy approved for the treatment of many cancers that
is in clinical development for expanded indications. These approvals were the
result of a broad clinical development program that currently consists of more
than 1,200 clinical trials, including more than 850 trials that combine Keytruda
with other cancer treatments. These studies encompass more than 30 cancer types
including: biliary tract, cervical, colorectal, cutaneous squamous cell,
endometrial, gastric, glioblastoma, head and neck, hepatocellular, Hodgkin
lymphoma, non-Hodgkin lymphoma, melanoma, mesothelioma, nasopharyngeal,
non-small-cell lung, ovarian, PMBCL, prostate, renal, small-cell lung,
triple-negative breast and urothelial, many of which are currently in Phase 3
clinical development. Further trials are being planned for other cancers.
In July 2020 , the FDA accepted and granted Priority Review for a supplemental
Biologics License Application (BLA) seeking accelerated approval for Keytruda in
combination with chemotherapy for the treatment of patients with locally
recurrent unresectable or metastatic triple-negative breast cancer (TNBC) whose
tumors express PD-L1 (CPS ?10). The application was based on data from the
KEYNOTE-355 trial in which Keytruda plus chemotherapy demonstrated a
statistically significant and clinically meaningful improvement in
progression-free survival (PFS) compared with chemotherapy alone in patients
whose tumors expressed PD-L1 at CPS ?10. In patients whose tumors expressed
PD-L1 with CPS ?1, Keytruda plus chemotherapy improved PFS versus chemotherapy
alone, however these results did not meet statistical significance. These data
were presented at the virtual scientific program of the 2020 American Society of
Clinical Oncology (ASCO) Annual Meeting. As previously announced, the trial will
continue without changes to evaluate the other dual primary endpoint of overall
survival (OS). The FDA set a PDUFA date of November 28, 2020 .
Also in July 2020 , the FDA accepted for standard review a supplemental BLA for
Keytruda for the treatment of patients with high-risk, early-stage TNBC, in
combination with chemotherapy as neoadjuvant treatment, and then as a single
agent as adjuvant treatment after surgery. The application was based on data
from the KEYNOTE-522 trial in which neoadjuvant Keytruda plus chemotherapy
resulted in a statistically significant increase in pathologic complete response
in patients with early-stage TNBC, regardless of PD-L1 expression. The Keytruda
regimen also demonstrated a favorable trend for the other dual primary endpoint
of event-free survival. An interim analysis for this study was conducted by the
Independent Data Monitoring Committee (DMC). Based on the recommendation of the
DMC, the study continues to evaluate event-free survival. Data from the
KEYNOTE-522 trial were presented at the European Society for Medical Oncology
2019 Congress . As previously announced, Keytruda plus chemotherapy was granted
Breakthrough Therapy designation by the FDA in September 2019 for the
neoadjuvant treatment of patients with high-risk, early-stage TNBC. The PDUFA
date for this application is March 29, 2021 .
Additionally in July 2020 , the FDA accepted and granted Priority Review for a
new supplemental BLA for Keytruda as monotherapy for the second-line treatment
of adult patients with relapsed or refractory cHL based on data from the pivotal
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Phase 3 KEYNOTE-204 trial, in which Keytruda demonstrated a significant
improvement in PFS compared to brentuximab vedotin (BV), a current standard of
care in this patient population. The FDA set a PDUFA date of October 30, 2020 .
KEYNOTE-204 also serves as the confirmatory trial for the Keytruda accelerated
approval hematology indications and as previously announced the Company plans to
submit these data to global regulatory authorities this year. The Committee for
Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA)
announced the start of a procedure to extend the currently approved therapeutic
indication for the treatment of relapsed or refractory cHL in adults to an
earlier line of therapy and to include pediatric patients based on KEYNOTE-204.
Data from KEYNOTE-204 were presented during the virtual scientific program of
the 2020 ASCO Annual Meeting.
Keytruda is under review in Japan as monotherapy for the second-line treatment
of advanced or metastatic esophageal or esophagogastric junction carcinoma based
on the results of the Phase 3 KEYNOTE-181 trial. The Keytruda review in Japan
for both monotherapy and in combination with chemotherapy for the first-line
treatment of advanced gastric or gastroesophageal junction adenocarcinoma based
on results from the pivotal Phase 3 KEYNOTE-062 trial was withdrawn in June
2020 .
Keytruda is also under review in the EU for the first-line treatment of patients
with MSI-H or mismatch repair deficient unresectable or metastatic colorectal
cancer based on the results from the Phase 3 KEYNOTE-177 trial. Keytruda was
approved for this indication by the FDA in June 2020 .
In addition to the Breakthrough Therapy designation from the FDA for the
combination of Keytruda with neoadjuvant chemotherapy for the treatment of
high-risk, early-stage TNBC noted above, Keytruda also received Breakthrough
Therapy designation from the FDA in February 2020 for the combination of
Keytruda with PADCEV (enfortumab vedotin-ejfv), in the first-line setting for
the treatment of patients with unresectable locally advanced or metastatic
urothelial cancer who are not eligible for cisplatin-containing chemotherapy.
The FDA's Breakthrough Therapy designation is intended to expedite the
development and review of a candidate that is planned for use, alone or in
combination, to treat a serious or life-threatening disease or condition when
preliminary clinical evidence indicates that the drug may demonstrate
substantial improvement over existing therapies on one or more clinically
significant endpoints.
In June 2020 , Merck announced that the Phase 3 KEYNOTE-361 trial evaluating
Keytruda in combination with chemotherapy for the first-line treatment of
patients with advanced or metastatic urothelial carcinoma (bladder cancer) did
not meet its pre-specified dual primary endpoints of OS or PFS, compared with
standard of care chemotherapy. In the final analysis of the study, there was an
improvement in OS and PFS for patients treated with Keytruda in combination with
chemotherapy compared to chemotherapy alone; however, these results did not meet
statistical significance per the pre-specified statistical plan. The monotherapy
arm of the study was not formally tested, since superiority was not reached for
OS or PFS in the Keytruda combination arm. Keytruda has three FDA-approved
bladder cancer indications across multiple stages of bladder cancer.
Additionally, Merck has an extensive clinical development program in bladder
cancer and is continuing to evaluate Keytruda as monotherapy and in combination
with other anti-cancer therapies across several disease settings (i.e.,
metastatic, muscle invasive bladder cancer, and non-muscle invasive bladder
cancer).
Additionally in May 2020 , Merck announced positive results from two studies from
the Company's lung cancer research program. Initial results from the Phase 2
KEYNOTE-799 trial evaluating Keytruda plus concurrent chemoradiation therapy
demonstrated an objective response rate (ORR) of 67.0% in Cohort A (squamous and
nonsquamous NSCLC patients who received paclitaxel plus carboplatin) and 56.6%
in Cohort B (nonsquamous NSCLC patients who received cisplatin plus pemetrexed)
in untreated patients with unresectable, locally advanced stage III NSCLC.
In May 2020 , Merck and Eisai presented data from analyses of two trials
evaluating Keytruda plus Lenvima at the 2020 ASCO Annual Meeting, in which the
Keytruda plus Lenvima combination demonstrated clinically meaningful ORR: the
KEYNOTE-524/Study 116 trial in patients with unresectable HCC with no prior
systemic therapy and the KEYNOTE-146/Study 111 trial in patients with metastatic
clear cell renal cell carcinoma (ccRCC) who progressed following immune
checkpoint inhibitor therapy.
In July 2020 , Merck and Eisai announced that the FDA issued a Complete Response
Letter (CRL) regarding Merck 's and Eisai's applications seeking accelerated
approval of Keytruda plus Lenvima for the first-line treatment of patients with
unresectable HCC based on data from the Phase 1b KEYNOTE-524/Study 116 trial,
which showed clinically meaningful efficacy in the single-arm setting. These
data supported a Breakthrough Therapy designation granted by the FDA in July
2019 . Ahead of the PDUFA action dates of Merck 's and Eisai's applications,
another combination therapy was approved based on a randomized, controlled trial
that demonstrated OS. Consequently, the CRL stated that Merck 's and Eisai's
applications do not provide evidence that Keytruda in combination with Lenvima
represents a meaningful advantage over available therapies for the treatment of
unresectable or metastatic HCC with no prior systemic therapy for advanced
disease. Since the applications for KEYNOTE-524/Study 116 no longer meet the
criteria for accelerated approval, both companies plan to work with the FDA to
take appropriate next steps, which include conducting a well-controlled clinical
trial that demonstrates substantial evidence of effectiveness and the clinical
benefit of the combination. As such, LEAP-002, the Phase 3 trial evaluating the
Keytruda plus Lenvima combination
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as a first-line treatment for advanced HCC, is currently underway and fully
enrolled. The CRL does not impact the current approved indications for Keytruda
or for Lenvima.
Lynparza is an oral PARP inhibitor currently approved for certain types of
advanced ovarian, breast, pancreatic and prostate cancers being co-developed for
multiple cancer types as part of a collaboration with AstraZeneca (see Note 3 to
the condensed consolidated financial statements).
Lynparza is under review in the EU in combination with bevacizumab for the
maintenance treatment of women with advanced ovarian cancer whose disease showed
a complete or partial response to first-line treatment with platinum-based
chemotherapy and bevacizumab based on the results from the pivotal Phase 3
PAOLA-1 trial. The FDA approved Lynparza for this indication in May 2020 .
Lynparza is also under review in the EU for the treatment of patients with mCRPC
and deleterious or suspected deleterious germline or somatic HRR gene mutations,
who have progressed following prior treatment with a new hormonal agent based on
positive results from the Phase 3 PROfound trial. This indication was approved
by the FDA in May 2020 and is under review in other jurisdictions. In April
2020 , Merck and AstraZeneca announced further positive results from the Phase 3
PROfound trial which showed a statistically significant and clinically
meaningful improvement in the key secondary endpoint of OS with Lynparza vs.
enzalutamide or abiraterone in men with mCRPC selected for BRCA1/2 or ATM gene
mutations, a subpopulation of HRR gene mutations.
In May 2020 , the results from the Phase 3 GY004 trial, led by NRG Oncology and
sponsored by the U.S. NCI, were presented at the 2020 ASCO Annual Meeting. This
follows the March 2020 , Merck and AstraZeneca announcement of the high-level
results from the Phase 3 GY004 trial that examined primarily the efficacy and
safety of investigational medicine cediranib in combination with Lynparza versus
platinum-based chemotherapy in patients with platinum-sensitive relapsed ovarian
cancer. The trial did not meet the primary endpoint in the intent-to-treat
population of a statistically significant improvement in PFS with cediranib in
combination with Lynparza vs. platinum-based chemotherapy.
In July 2020 , the FDA granted Breakthrough Therapy designation to the
hypoxia-inducible factor-2 alpha (HIF-2?) inhibitor MK-6482, a novel
investigational candidate for the treatment of patients with von Hippel-Lindau
(VHL) disease-associated RCC with nonmetastatic RCC tumors less than three
centimeters in size, unless immediate surgery is required. The FDA also granted
orphan drug designation to MK-6482 for VHL disease. These designations are based
on data from a Phase 2 trial evaluating MK-6482 in patients with VHL-associated
ccRCC, which were presented at the 2020 ASCO Annual Meeting.
In March 2020 , Merck announced top-line efficacy results from two ongoing
pivotal Phase 3 trials (COUGH-1 and COUGH-2) evaluating the efficacy and safety
of gefapixant (MK-7264), an investigational, orally administered, selective P2X3
receptor antagonist, for the treatment of refractory or unexplained chronic
cough. In these studies, the primary efficacy endpoints were met for the
gefapixant 45 mg twice daily treatment arms - demonstrating a statistically
significant decrease in 24-hour coughs per hour versus placebo. The gefapixant
15 mg twice daily treatment arms did not meet the primary efficacy endpoint in
either Phase 3 study. The detailed findings will be shared at an upcoming
medical meeting.
In July 2020 , Merck announced new analyses from the Phase 2b trial (NCT03272347)
evaluating the safety and efficacy of islatravir, the company's investigational
oral nucleoside reverse transcriptase translocation inhibitor (NRTTI), in
combination with Pifeltro (doravirine), in adults with HIV-1 infection who had
not previously received antiretroviral treatment. The first sub-analysis further
characterized the tolerability and safety profile of islatravir in combination
with doravirine (100 mg) through Week 48 across the three dose levels studied
(0.25, 0.75, 2.25 mg). The second sub-analysis demonstrated that participants
who initiated treatment with islatravir and doravirine in combination with 3TC
and switched to islatravir and doravirine maintained antiviral activity at Week
48 as measured by HIV-1 RNA <50 copies/mL similar to Delstrigo
(doravirine/lamivudine/tenofovir disoproxil fumarate), with low rates of
protocol defined virologic failure. These latest findings were made available
during the 2020 International AIDS Conference . The primary endpoints and full
study design of the Phase 2b Week 48 trial results were originally presented at
the 2019 International AIDS Society Conference on HIV Science .
In June 2020 , Merck announced results from two initial Phase 3 studies
evaluating the safety, tolerability and immunogenicity of V114, the Company's
investigational 15-valent pneumococcal conjugate vaccine. Results from the
PNEU-WAY (V114-018) study in adults 18 years of age or older living with HIV
showed that V114 elicited an immune response to all 15 serotypes included in the
vaccine, including serotypes 22F and 33F. Results from the PNEU-FLU (V114-021)
study in healthy adults 50 years of age or older showed that V114 can be given
concomitantly with the quadrivalent influenza vaccine. The V114 Phase 3 clinical
development program is comprised of 16 trials investigating the safety,
tolerability and immunogenicity of V114 in a variety of populations who are at
increased risk for pneumococcal disease including both healthy older adult and
healthy pediatric populations, as well as people who are immunocompromised or
have certain chronic conditions. The Company plans to continue to work with the
FDA and other regulatory authorities around the world on filing plans for
licensure of this vaccine as additional data from the Phase 3 program become
available. These data were announced and published in the International
Symposium on Pneumococci and Pneumococcal Diseases (ISPPD) digital library in
lieu of an in-person meeting.
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In May 2020 , Merck and Pfizer Inc. announced the presentation of results from
the Phase 3 VERTIS CV cardiovascular (CV) outcomes trial that evaluated
Steglatro (ertugliflozin), an oral sodium-glucose cotransporter 2 (SGLT2)
inhibitor, versus placebo, added to background standard of care treatment, in
patients with type 2 diabetes and atherosclerotic CV disease. The study met the
primary endpoint of non-inferiority on major adverse CV events (MACE), which is
composed of a composite of CV death, nonfatal myocardial infarction or nonfatal
stroke, compared to placebo. The key secondary endpoints of superiority for
Steglatro versus placebo for time to the first occurrence of the composite of CV
death or hospitalization for heart failure, time to CV death alone and time to
the first occurrence of the composite of renal death, dialysis/transplant or
doubling of serum creatinine from baseline were not met. While not a
pre-specified hypothesis for statistical testing, a reduction in hospitalization
for heart failure was observed with Steglatro.
The chart below reflects the Company's research pipeline as of July 31, 2020 .
Candidates shown in Phase 3 include specific products and the date such
candidate entered into Phase 3 development. Candidates shown in Phase 2 include
the most advanced compound with a specific mechanism or, if listed compounds
have the same mechanism, they are each currently intended for commercialization
in a given therapeutic area. Small molecules and biologics are given MK-number
designations and vaccine candidates are given V-number designations. Except as
otherwise noted, candidates in Phase 1, additional indications in the same
therapeutic area (other than with respect to cancer) and additional claims, line
extensions or formulations for in-line products are not shown.
Phase 3 (Phase 3 entry
Phase 2 date) Under Review
Cancer Cancer New Molecular Entities/Vaccines
MK-1026 MK-3475 Keytruda Heart Failure
Hematological Biliary Tract (September MK-1242 (vericiguat)(2) (U.S.)
Malignancies 2019) (EU) (JPN)
MK-1308(1) Breast (October 2015) (EU) Pediatric Neurofibromatosis Type
Melanoma Cervical (October 2018) 1
Non-Small-Cell Lung (EU) MK-5618 (selumetinib)(2) (EU)
MK-1454(1) Cutaneous Squamous Cell
Head and Neck (August 2019) (EU)
MK-3475 Keytruda Endometrial (August 2019) Certain Supplemental Filings
Advanced Solid Tumors (EU) Cancer
MK-4280(1) Esophageal (December 2015) MK-3475 Keytruda
Hematological (EU) • Metastatic Triple-Negative
Malignancies Gastric (May 2015) (EU) Breast Cancer
Non-Small-Cell Hepatocellular (May 2016) (KEYNOTE-355) (U.S.)
Lung (EU) • Early-Stage Triple-Negative
MK-5890(1) Mesothelioma (May 2018) Breast Cancer
Non-Small-Cell Nasopharyngeal (April (KEYNOTE-522) (U.S.)
Lung 2016) • Refractory Classical Hodgkin
MK-7339 Ovarian (December 2018) Lymphoma
Lynparza(2)(3) Prostate (May 2019) (KEYNOTE-204) (U.S.) (EU)
Advanced Solid Tumors Small-Cell Lung (May 2017 ) • Recurrent Locally Advanced or
MK-7684(1) (EU) Metastatic Esophageal
Melanoma MK-6482 Cancer
Non-Small-Cell Lung Renal Cell (February 2020) (KEYNOTE-180/KEYNOTE-181) (JPN)
MK-7902 Lenvima(1)(2) MK-7339 Lynparza(1)(2) • Unresectable or Metastatic
Advanced Solid Tumors Non-Small-Cell Lung (June MSI-H or dMMR Colorectal
V937 2019) Cancer (KEYNOTE-177) (EU)
Melanoma MK-7902 Lenvima(1)(2) MK-7339 Lynparza(2)
Chikungunya virus Bladder (May 2019) • First-Line Maintenance Newly
V184 Endometrial (June 2018) Diagnosed Advanced
Cytomegalovirus (EU) Ovarian Cancer (PAOLA) (EU)
V160 Head and Neck (February • Metastatic Prostate Cancer
HIV-1 Prevention 2020) (PROfound) (EU)
MK-8591 (islatravir) Hepatocellular (
Non-Small-Cell Lung (March Hepatocellular Carcinoma
Respiratory Syncytial 2019) (KEYNOTE-524)
(
Virus Cough • Thymic Carcinoma
MK-1654 MK-7264 (gefapixant) (NCCH1508/REMORA) (JPN)
SARS-CoV-2 Infection (March 2018) Footnotes:
MK-4482(2) HIV-1 Infection (1) Being developed in
Schizophrenia MK-8591A combination with Keytruda.
MK-8189 (doravirine/islatravir) (2) Being developed in a
(February 2020) collaboration.
Pneumoconjugate Vaccine (3) Being developed as
V114 (June 2018) monotherapy and in combination
with Keytruda.
(4) In July 2020, the FDA issued
a CRL for Merck's and Eisai's
applications. Merck and Eisai
are reviewing the letter and
will submit data to the FDA.
Liquidity and Capital Resources
($ in millions) June 30, 2020 December 31, 2019
Cash and investments $ 12,354 $ 11,919
Working capital 7,165 5,263
Total debt to total liabilities and equity 34.1 % 31.2 %
Cash provided by operating activities was$4.1 billion in the first six months of 2020 compared with$4.4 billion in the first six months of 2019. Cash provided by operating activities in the first six months of 2020 includes$1.1 billion of payments - 45 - -------------------------------------------------------------------------------- related to collaborations with AstraZeneca and Eisai compared with$385 million in the first six months of 2019 (see Note 3 to the condensed consolidated financial statements). Cash provided by operating activities continues to be the Company's primary source of funds to finance operating needs, capital expenditures, treasury stock purchases and dividends paid to shareholders. Cash used in investing activities was$2.5 billion in the first six months of 2020 compared with$2.1 billion in the first six months of 2019. The increase was driven primarily by lower proceeds from sales of securities and other investments and higher capital expenditures, partially offset by lower purchases of securities and other investments and lower use of cash for acquisitions. Cash used in financing activities was$353 million in the first six months of 2020 compared with$3.7 billion in the first six months of 2019. The lower use of cash in financing activities was driven primarily by a net increase in short-term borrowings in 2020 compared with a net decrease in short-term borrowing in 2019, as well as lower purchases of treasury stock, partially offset by higher payments on debt (see below), lower proceeds from the issuance of debt (see below), higher dividends paid to shareholders, and lower proceeds from the exercise of stock options. Capital expenditures totaled$1.7 billion and$1.4 billion for the first six months of 2020 and 2019, respectively. The increased capital expenditures reflect investment in new capital projects focused primarily on increasing manufacturing capacity forMerck 's key products. The Company has accounts receivable factoring agreements with financial institutions in certain countries to sell accounts receivable. The Company factored$1.9 billion and$2.7 billion of accounts receivable in the second quarter of 2020 and the fourth quarter of 2019, respectively, under these factoring arrangements, which reduced outstanding accounts receivable. The cash received from the financial institutions is reported within operating activities in the Condensed Consolidated Statement of Cash Flows. In certain of these factoring arrangements, for ease of administration, the Company will collect customer payments related to the factored receivables, which it then remits to the financial institutions. The net cash flows relating to these collections are reported as financing activities in the Condensed Consolidated Statement of Cash Flows. Dividends paid to stockholders were$3.1 billion and$2.9 billion for the first six months of 2020 and 2019, respectively. InMay 2020 , the Board of Directors declared a quarterly dividend of$0.61 per share on the Company's common stock for the third quarter that was paid inJuly 2020 . InJuly 2020 , the Board of Directors declared a quarterly dividend of$0.61 per share on the Company's common stock for the fourth quarter that will be paid inOctober 2020 . InFebruary 2020 , the Company's$1.25 billion , 1.85% notes and$700 million floating-rate notes matured in accordance with their terms and were repaid. InJune 2020 , the Company issued$4.5 billion principal amount of senior unsecured notes consisting of$1.0 billion of 0.75% notes due 2026,$1.25 billion of 1.45% notes due 2030,$1.0 billion of 2.35% notes due 2040 and$1.25 billion of 2.45% notes due 2050.Merck intends to use the net proceeds from the offering for general corporate purposes, including without limitation the repayment of outstanding commercial paper borrowings and other indebtedness with upcoming maturities. InMarch 2019 , the Company issued$5.0 billion principal amount of senior unsecured notes consisting of$750 million of 2.90% notes due 2024,$1.75 billion of 3.40% notes due 2029,$1.0 billion of 3.90% notes due 2039, and$1.5 billion of 4.00% notes due 2049. The Company used the net proceeds from the offering of$5.0 billion for general corporate purposes, including the repayment of outstanding commercial paper borrowings. In 2018,Merck 's Board of Directors authorized purchases of up to$10 billion ofMerck 's common stock for its treasury. The treasury stock purchase authorization has no time limit and will be made over time in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions. During the first six months of 2020, the Company purchased$1.3 billion (16 million shares) of its common stock for its treasury under this share repurchase program. As ofJune 30, 2020 , the Company's remaining share repurchase authorization was$5.9 billion . InMarch 2020 , the Company temporarily suspended its share repurchase program. The Company has a$6.0 billion credit facility that matures inJune 2024 . The facility provides backup liquidity for the Company's commercial paper borrowing facility and is to be used for general corporate purposes. The Company has not drawn funding from this facility. Critical Accounting Policies The Company's significant accounting policies, which include management's best estimates and judgments, are included in Note 2 to the consolidated financial statements for the year endedDecember 31, 2019 included inMerck 's Form 10K filed onFebruary 26, 2020 . Certain of these accounting policies are considered critical as disclosed in the Critical Accounting Policies section of Management's Discussion and Analysis of Financial Condition and Results of Operations included inMerck 's Form 10-K because of the potential for a significant impact on the financial statements due to the inherent uncertainty in such estimates. There have been no significant changes in the Company's critical accounting policies sinceDecember 31, 2019 . See - 46 -
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Note 1 to the condensed consolidated financial statements for information on the adoption of new accounting standards during 2020. Recently Issued Accounting Standards For a discussion of recently issued accounting standards, see Note 1 to the condensed consolidated financial statements.
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