Business Developments
Below is a summary of significant business development activity thus far in 2022. See Note 3 to the condensed consolidated financial statements for additional information.
InJuly 2022 ,Merck and Orion Corporation (Orion) announced a global co-development and co-commercialization agreement for Orion's investigational candidate ODM-208 (MK-5684) and other drugs targeting cytochrome P450 11A1 (CYP11A1), an enzyme important in steroid production. ODM-208 is an oral, non-steroidal inhibitor of CYP11A1 currently being evaluated in a Phase 2 clinical trial for the treatment of patients with metastatic castration-resistant prostate cancer.Merck made an upfront payment to Orion of$290 million , which will be recorded in Research and development expenses in the third quarter of 2022. Also inJuly 2022 ,Merck andSichuan Kelun-Biotech Biopharmaceutical Co., Ltd. (Kelun-Biotech) closed a license and collaboration agreement in whichMerck gained exclusive worldwide rights for the development, manufacture and commercialization of an investigational antibody drug conjugate (ADC) (MK-1200) for the treatment of solid tumors. Under the terms of the agreement,Merck and Kelun-Biotech will collaborate on the early clinical development of the investigational ADC.Merck will make an upfront payment of$35 million , which will be recorded in Research and development expenses in the third quarter of 2022. Kelun-Biotech is also eligible to receive future contingent milestone payments and tiered royalties on future net sales. InMay 2022 , in connection with an existing arrangement,Merck exercised its option to obtain an exclusive license outside ofChina for the development, manufacture and commercialization of Kelun-Biotech's trophoblast antigen 2 (TROP2)-targeting ADC programs, including its lead compound, SKB-264 (MK-2870). SKB-264 is currently being evaluated in Phase 2 trials for non-small-cell lung cancer (NSCLC) and advanced solid tumors. Under the terms of the agreement,Merck and Kelun-Biotech will collaborate on certain early clinical development plans, including evaluating the potential of SKB-264 as a monotherapy and in combination with Keytruda (pembrolizumab) for advanced solid tumors. Upon option exercise,Merck made a payment of$30 million , which was recorded in Research and development expenses in the second quarter of 2022, and agreed to make additional payments upon completion of specified project activities, technology transfer, as well as payments to fund Kelun-Biotech's ongoing research and development activities. In addition, Kelun-Biotech is eligible to receive future contingent milestone payments and royalties on future net sales.
Spin-Off of Organon & Co.
OnJune 2, 2021 ,Merck completed the spin-off of products from its women's health, biosimilars and established brands businesses into a new, independent, publicly traded company named Organon & Co. (Organon) through a distribution of Organon's publicly traded stock to Company shareholders. The distribution is expected to qualify and has been treated as tax-free to the Company and its shareholders forU.S. federal income tax purposes. The established brands included in the transaction consisted of dermatology, non-opioid pain management, respiratory, select cardiovascular products, as well as the rest ofMerck 's diversified brands franchise.Merck 's existing research pipeline programs continue to be owned and developed withinMerck as planned. The historical results of the businesses that were contributed to Organon in the spin-off have been reflected as discontinued operations in the Company's consolidated financial statements through the date of the spin-off (see Note 2 to the condensed consolidated financial statements).
Other Developments
War in
InFebruary 2022 ,Russia invadedUkraine . The Company's primary concerns are the safety and well-being of its employees and ensuring patients and customers have continued access to medicines and vaccines needed for patient and public health. The Company is working cross-functionally across the globe to monitor and mitigate interruptions to business continuity resulting from the war, including its impact onMerck 's supply chain, operations and clinical trials. For humanitarian reasons, the Company is continuing to supply essential medicines and vaccines inRussia while working to maintain compliance with evolving international sanctions.Merck plans to donate profits resulting from its operations inRussia to humanitarian causes. The Company does not have research or manufacturing facilities inRussia , currently does not plan to make further investments inRussia , and has suspended screening and enrollment in ongoing clinical trials as well as planning for new studies inRussia , although the Company continues to treat patients already enrolled in existing clinical trials and collect data from these studies. The Company is also using its resources to help alleviate the humanitarian crisis inUkraine , including through donations of funds and products. The financial impacts of the war were immaterial to the Company's consolidated financial statements for the second quarter and first six months of 2022. Combined sales toRussia andUkraine were approximately 1% of totalMerck consolidated sales for the full year of 2021. - 34 - --------------------------------------------------------------------------------
The combination of
COVID-19
Although COVID-19-related disruptions had some negative effects on sales for the second quarter and first six months of 2022,Merck continues to believe that global health systems and patients have largely adapted to the impacts of the COVID-19 pandemic.Merck 's sales of Lagevrio (molnupiravir), an investigational oral antiviral COVID-19 medicine, were$1.2 billion and$4.4 billion in the second quarter and first six months of 2022, respectively. In the second quarter and first six months of 2021, COVID-19-related disruptions resulted in an estimated negative impact to Pharmaceutical segment sales of approximately$400 million and$1.0 billion , respectively, because a substantial portion ofMerck 's Pharmaceutical segment revenue is comprised of physician-administered products, which were unfavorably affected by social distancing measures and fewer well visits. InApril 2021 ,Merck announced it was discontinuing the development of MK-7110 for the treatment of hospitalized patients with COVID-19, which was obtained as part ofMerck 's acquisition of OncoImmune (see Note 3 to the condensed consolidated financial statements). This decision resulted in charges of$37 million and$207 million to Cost of sales in the second quarter and first six months of 2021, respectively. InMarch 2021 ,Merck announced it had entered into multiple agreements to support efforts to expand manufacturing capacity and supply of SARS-CoV-2/COVID-19 medicines and vaccines. TheBiomedical Advanced Research and Development Authority (BARDA), a division of theOffice of the Assistant Secretary for Preparedness and Response within theU.S. Department of Health and Human Services , providedMerck with$102 million of funding in the first quarter of 2022 to adapt and make available a number of existing manufacturing facilities for the production of SARS-CoV-2/COVID-19 vaccines and medicines. The funding is being recognized as a reduction to Cost of sales over the production period, offsetting the depreciation expense related to the amounts that were capitalized in connection with the modification of the manufacturing facilities. InMay 2022 , Johnson & Johnson terminated a previously executed agreement withMerck supporting the manufacturing and supply of Johnson & Johnson's SARS-CoV-2/COVID-19 vaccine.Merck continues to use one of its facilities in theU.S. to produce drug substance for Johnson & Johnson's vaccine under a separate agreement. Pricing Global efforts toward health care cost containment continue to exert pressure on product pricing and market access worldwide. Changes to theU.S. health care system enacted in prior years 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 sales performance in the first six months of 2022 was negatively affected by other cost-reduction measures taken by governments and other third parties to lower health care costs. In theU.S. , theBiden Administration andCongress continue to discuss legislation designed to control health care costs, including the cost of drugs. The Company anticipates all of these actions and additional actions in the future will continue to negatively affect sales performance.
Supply Chain
As a result of global macroeconomic conditions, the Company is experiencing some disruption and volatility in its global supply chain network, and the Company may in the future experience disruptions in availability and delays in shipments of raw materials and packaging, as well as related cost inflation. Operating Results Sales % Change % Change Three Months Ended Excluding Six Months Ended Excluding June 30, Foreign June 30, Foreign ($ in millions) 2022 2021 % Change Exchange 2022 2021 % Change Exchange United States$ 6,238 $ 5,100 22 % 22 %$ 13,577 $ 9,890 37 % 37 % International 8,355 6,301 33 % 38 % 16,917 12,139 39 % 45 % Total$ 14,593 $ 11,402 28 % 31 %$ 30,494 $ 22,029 38 % 41 %
Worldwide sales grew 28% to$14.6 billion in the second quarter of 2022 and rose 38% to$30.5 billion in the first six months of 2022. Revenue performance in both periods was attributable in part to higher sales in the virology franchise driven by Lagevrio (molnupiravir) sales of$1.2 billion and$4.4 billion in the second quarter and first six months of 2022, - 35 - -------------------------------------------------------------------------------- respectively. Also contributing to revenue growth in both periods were higher sales in the oncology franchise largely driven by strong growth of Keytruda (pembrolizumab) and increased alliance revenue from Lenvima (lenvatinib) and Lynparza (olaparib), as well as higher sales in the vaccines franchise, primarily attributable to growth of Gardasil (Human Papillomavirus Quadrivalent [Types 6, 11, 16 and 18] Vaccine, Recombinant) and Gardasil 9 (Human Papillomavirus 9-valent Vaccine, Recombinant). Higher sales of hospital acute care products, including Bridion (sugammadex) Injection, and higher third-party manufacturing sales also drove revenue growth in the second quarter and first six months of 2022. Revenue growth in the year-to-date period also reflects higher sales ofAnimal Health products. As discussed above, COVID-19-related disruptions had some negative effects on sales in the second quarter and first six months of 2022, but to a lesser extent than in the same periods of 2021 which benefited year-over-year sales growth. Revenue growth in the second quarter and first six months of 2022 was partially offset by lower sales of virology products Isentress/Isentress HD (raltegravir) and lower combined sales of diabetes products Januvia (sitagliptin) and Janumet (sitagliptin and metformin HCl). See Note 15 to the condensed consolidated financial statements for details on sales of the Company's products. A discussion of performance for select products in the franchises follows. Pharmaceutical Segment Oncology % Change % Change Three Months Ended Excluding Six Months Ended Excluding June 30, Foreign June 30, Foreign ($ in millions) 2022 2021 % Change Exchange 2022 2021
% Change Exchange Keytruda$ 5,252 $ 4,176 26 % 30 %$ 10,061 $ 8,076 25 % 29 % Alliance Revenue - Lynparza (1) 275 248 11 % 17 % 541 475 14 % 18 % Alliance Revenue - Lenvima (1) 231 181 28 % 33 % 459 310 48 % 51 %
(1) Alliance revenue represents
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, cutaneous squamous cell carcinoma, endometrial carcinoma, esophageal or gastroesophageal junction (GEJ) carcinoma, head and neck squamous cell carcinoma (HNSCC), hepatocellular carcinoma (HCC), NSCLC, melanoma, Merkel cell carcinoma, microsatellite instability-high (MSI-H) or mismatch repair deficient (dMMR) cancer (solid tumors) including MSI-H/dMMR colorectal cancer, primary mediastinal large B-cell lymphoma, tumor mutational burden-high (TMB-H) cancer (solid tumors), and urothelial carcinoma including non-muscle invasive bladder cancer. Additionally, Keytruda is approved as monotherapy for the adjuvant treatment of certain patients with renal cell carcinoma (RCC) or stage IIB, IIC or III melanoma. Keytruda is also approved for certain patients with high-risk early-stage TNBC in combination with chemotherapy as neoadjuvant treatment, and then continued as a single agent as adjuvant treatment after surgery. In addition, Keytruda is approved for the treatment of certain patients in combination with chemotherapy for metastatic squamous and nonsquamous NSCLC, in combination with chemotherapy, with or without bevacizumab for cervical cancer, in combination with chemotherapy for esophageal cancer, in combination with trastuzumab, fluoropyrimidine- and platinum-containing chemotherapy for human epidermal growth factor 2 (HER-2)-positive gastric or GEJ adenocarcinoma, in combination with chemotherapy for HNSCC, in combination with chemotherapy for TNBC, in combination with axitinib for advanced RCC, and in combination with Lenvima for both endometrial carcinoma and RCC. The Keytruda clinical development program includes studies across a broad range of cancer types. See "Research and Development Update" below. Global sales of Keytruda grew 26% and 25% in the second quarter and first six months of 2022, respectively. Sales growth was primarily driven by higher demand as the Company continues to launch Keytruda with multiple new indications globally. Sales in theU.S. continue to build across the multiple approved metastatic indications, in particular for the treatment of certain types of RCC, HNSCC, and MSI-H cancers. Keytruda sales growth in theU.S. also benefited from increased uptake across recent earlier-stage launches including certain types of neoadjuvant/adjuvant TNBC, as well as certain types of RCC and melanoma. Keytruda sales growth in international markets reflects continued uptake predominately for the NSCLC, HNSCC and RCC indications, particularly inEurope . - 36 - --------------------------------------------------------------------------------
Keytruda received the following regulatory approvals thus far in 2022.
Date ApprovalEuropean Commission (EC) approval as monotherapy for the
adjuvant treatment of
nephrectomy and resection of metastatic lesions based on
the KEYNOTE-564 trial.
Japan Ministry of Health, Labour and Welfare approval of
the combination of
CLEAR (Study 307)/KEYNOTE-581 trial. JapanPharmaceuticals and Medical Devices Agency approval
for the treatment of
after chemotherapy (limited to use when difficult to treat
with standard of care)
based on the KEYNOTE-158 trial.U.S. Food and Drug Administration (FDA) approval as a
single agent for the
treatment of patients with advanced endometrial carcinoma
that is MSI-H or dMMR who
not candidates for curative surgery or radiation based on
the KEYNOTE-158 trial
(Cohorts D & K). EC approval in combination with chemotherapy, with or
without bevacizumab, for the
whose tumors express PD-L1 based on the KEYNOTE-826 trial. EC approval as monotherapy for the treatment of certain
adult patients with
biliary cancer, as well as advanced or recurrent
MSI-H/dMMR endometrial cancer
based on data from the KEYNOTE-164 and KEYNOTE-158 trials. EC approval in combination with chemotherapy as
neoadjuvant treatment, and then
locally advanced or early-stage TNBC at high risk of
recurrence based on the
KEYNOTE-522 trial. EC approval as monotherapy for the adjuvant treatment of
adults and adolescents
aged 12 years and older with stage IIB or IIC melanoma and
who have undergone
expanding the indications in advanced (unresectable or
metastatic) melanoma and
stage III melanoma with lymph node involvement (as
adjuvant treatment following
complete resection) to include adolescent patients aged 12
years and older.
Lynparza is an oral poly (ADP-ribose) polymerase (PARP) inhibitor being developed as part of a collaboration with AstraZeneca PLC (AstraZeneca) (see Note 4 to the condensed consolidated financial statements). Lynparza is approved for the treatment of certain types of advanced ovarian, breast, pancreatic and prostate cancers. Alliance revenue related to Lynparza increased 11% and 14% in the second quarter and first six months of 2022, respectively, largely driven by higher demand globally across the multiple approved indications, particularly in theU.S. largely attributable to uptake in the earlier-stage breast cancer indication following recent approval by the FDA. InMarch 2022 , Lynparza was approved by the FDA for the adjuvant treatment of adult patients with deleterious or suspected deleterious germline BRCA-mutated (gBRCAm), HER2-negative high-risk early breast cancer who have been treated with neoadjuvant or adjuvant chemotherapy based on theOlympiA trial. InAugust 2022 , the EC approved Lynparza as monotherapy or in combination with endocrine therapy for the adjuvant treatment of adult patients with gBRCAm who have HER2-negative high-risk early breast cancer previously treated with neoadjuvant or adjuvant chemotherapy based on theOlympiA trial. Lenvima is an oral receptor tyrosine kinase inhibitor being developed as part of a collaboration with Eisai Co., Ltd. (Eisai) (see Note 4 to the condensed consolidated financial statements). Lenvima is approved for the treatment of certain types of thyroid cancer, RCC, HCC, in combination with everolimus for certain patients with RCC, and in combination with Keytruda for both endometrial carcinoma and RCC. Alliance revenue related to Lenvima grew 28% and 48% in the second quarter and first six months of 2022, respectively, reflecting uptake in the advanced RCC and advanced endometrial cancer indications, particularly in theU.S. Vaccines % Change % Change Three Months Ended Excluding Six Months Ended Excluding June 30, Foreign June 30, Foreign ($ in millions) 2022 2021 % Change Exchange 2022 2021 % Change Exchange Gardasil/Gardasil 9$ 1,674 $ 1,234 36 % 40 %$ 3,133 $ 2,151 46 % 48 % ProQuad 214 189 13 % 15 % 376 354 6 % 8 % M-M-R II 103 87 17 % 19 % 206 167 23 % 25 % Varivax 261 240 9 % 10 % 465 444 5 % 6 % RotaTeq 173 208 (17) % (14) % 389 366 6 % 8 % Pneumovax 23 153 152 1 % 4 % 325 323 1 % 3 % - 37 -
-------------------------------------------------------------------------------- Combined worldwide sales of Gardasil and Gardasil 9, vaccines to help prevent certain cancers and other diseases caused by certain types of human papillomavirus (HPV), grew 36% and 46% in the second quarter and first six months of 2022, respectively, driven primarily by strong demand outside of theU.S. , particularly inChina , which also benefited from increased supply. Combined sales of Gardasil and Gardasil 9 in theU.S. declined in the second quarter of 2022 and increased for the first six months of 2022 due to public sector buying patterns. Global sales of ProQuad (Measles, Mumps, Rubella and Varicella Virus Vaccine Live), a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella, increased 13% and 6% in the second quarter and first six months of 2022, respectively, largely due to higher pricing and demand in theU.S. Worldwide sales of MMR II (Measles, Mumps and Rubella Virus Vaccine Live), a vaccine to help protect against measles, mumps and rubella, grew 17% and 23% in the second quarter and first six months of 2022, respectively, primarily due to higher demand and pricing in theU.S. , as well as higher demand inLatin America . Global sales of Varivax (Varicella Virus Vaccine Live), a vaccine to help prevent chickenpox (varicella), grew 9% and 5% in the second quarter and first six months of 2022, respectively, primarily attributable to higher pricing and demand in theU.S. Global sales of RotaTeq (Rotavirus Vaccine, Live Oral, Pentavalent), a vaccine to help protect against rotavirus gastroenteritis in infants and children, declined 17% in the second quarter of 2022 primarily due to lower demand inChina and public sector buying patterns in theU.S. Global sales of RotaTeq grew 6% in the first six months of 2022 due to public sector buying patterns in theU.S. , partially offset by lower demand inChina .
Worldwide sales of Pneumovax 23 (pneumococcal vaccine polyvalent), a vaccine to
help prevent pneumococcal disease, grew 1% in the first six months of 2022
primarily reflecting higher demand in the
InJune 2022 , the FDA approved an expanded indication for Vaxneuvance (Pneumococcal 15-valent Conjugate Vaccine) to include use in infants and children. Vaxneuvance is now indicated for the prevention of invasive disease caused by Streptococcus pneumoniae serotypes 1, 3, 4, 5, 6A, 6B, 7F, 9V, 14, 18C, 19A, 19F, 22F, 23F and 33F in individuals 6 weeks of age and older. TheFDA's approval was based on data from seven randomized, double-blind clinical studies assessing safety, tolerability and immunogenicity of Vaxneuvance in infants and children. Vaxneuvance was previously approved by the FDA in 2021 for use in adults 18 years of age and older. Also inJune 2022 , theU.S. Centers for Disease Control and Prevention's (CDC 's)Advisory Committee on Immunization Practices (ACIP) unanimously voted to include Vaxneuvance as a recommended option for vaccination in infants and children, including routine use in children under 2 years of age. This provisional recommendation will be reviewed by the director of theCDC and theDepartment of Health and Human Services , and final recommendations will become official when published in theCDC 's Morbidity and Mortality Weekly Report (MMWR). The ACIP also unanimously voted to include Vaxneuvance in the Vaccines for Children program. Hospital Acute Care % Change % Change Three Months Ended Excluding Six Months Ended Excluding June 30, Foreign June 30, Foreign ($ in millions) 2022 2021 % Change Exchange 2022 2021
% Change Exchange Bridion$ 426 $ 387 10 % 15 %$ 821 $ 727 13 % 17 % Zerbaxa 46 (1) * * 76 (9) * * *Calculation not meaningful. Worldwide sales of Bridion, for the reversal of two types of neuromuscular blocking agents used during surgery, grew 10% and 13% in the second quarter and first six months of 2022, respectively, due to higher demand globally, particularly in theU.S. andEurope , largely attributable to Bridion's growing share among neuromuscular blockade reversal agents and an increase in surgical procedures. InDecember 2020 , the Company temporarily suspended sales of Zerbaxa (ceftolozane and tazobactam), a combination antibacterial and beta-lactamase inhibitor for the treatment of certain bacterial infections, and subsequently issued a product recall, following the identification of product sterility issues. A phased resupply for Zerbaxa was initiated in the fourth quarter of 2021 and is being expanded to additional markets during 2022. - 38 - --------------------------------------------------------------------------------
Cardiovascular % Change % Change Three Months Ended Excluding Six Months Ended Excluding June 30, Foreign June 30, Foreign ($ in millions) 2022 2021 % Change Exchange 2022 2021 % Change Exchange Alliance Revenue - Adempas/Verquvo (1)$ 98 $ 74 33 % 33 %$ 170 $ 149 14 % 15 % Adempas 63 74 (14) % (5) % 124 129 (4) % 6 %
(1) Alliance revenue represents
Adempas (riociguat) and Verquvo (vericiguat) are part of a worldwide collaboration with Bayer AG (Bayer) to market and develop soluble guanylate cyclase (sGC) modulators (see Note 4 to the condensed consolidated financial statements). Adempas is approved for the treatment of certain types of pulmonary arterial hypertension. Verquvo was approved in theU.S. inJanuary 2021 to reduce the risk of cardiovascular death and heart failure hospitalization following a hospitalization for heart failure or need for outpatient intravenous diuretics in adults with symptomatic chronic heart failure and reduced ejection fraction. Verquvo was also approved inJapan inJune 2021 and in the EU inJuly 2021 . Alliance revenue from the collaboration grew 33% and 14% in the second quarter and first six months of 2022, respectively. Revenue also includes sales of Adempas and Verquvo inMerck 's marketing territories. Virology % Change % Change Three Months Ended Excluding Six Months Ended Excluding June 30, Foreign June 30, Foreign ($ in millions) 2022 2021 % Change Exchange 2022 2021 % Change Exchange Lagevrio$ 1,177 $ - - -$ 4,424 $ - - - Isentress/Isentress HD 147 192 (24) % (19) % 305 401 (24) % (20) % Lagevrio is an investigational oral antiviral COVID-19 medicine being developed in a collaboration with Ridgeback (see Note 4 to the condensed consolidated financial statements). Lagevrio has received multiple authorizations or approvals worldwide. Sales of Lagevrio were$1.2 billion in the second quarter of 2022 primarily consisting of sales inJapan and theUnited Kingdom (UK ).Merck 's initial supply commitment of Lagevrio to theU.S. was fulfilled in the first quarter of 2022; therefore, there were no sales of Lagevrio in theU.S. in the second quarter of 2022. Sales of Lagevrio were$4.4 billion in the first six months of 2022 primarily consisting of sales in theU.S. , theUK ,Japan andAustralia .Merck has entered into advance purchase and supply agreements for Lagevrio in nearly 40 markets. The Company expects full-year 2022 Lagevrio sales to be between$5.0 billion to$5.5 billion . Global combined sales of Isentress/Isentress HD, an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection, declined 24% in both the second quarter and first six months of 2022 due to lower global demand, reflecting in part competitive pressure inEurope and theU.S. The Company expects competitive pressure for Isentress/Isentress HD to continue. Diabetes % Change % Change Three Months Ended Excluding Six Months Ended Excluding June 30, Foreign June 30, Foreign ($ in millions) 2022 2021 % Change Exchange 2022 2021 % Change Exchange Januvia/Janumet$ 1,233 $ 1,261 (2) % 3 %$ 2,466 $ 2,556 (4) % 1 % Worldwide combined sales of Januvia and Janumet, medicines that help lower blood sugar levels in adults with type 2 diabetes, declined 2% and 4% in the second quarter and first six months of 2022, respectively, primarily reflecting the unfavorable effect of foreign exchange, lower demand in theU.S. and lower pricing in certain international markets. The declines were partially offset by higher demand inChina andLatin America , as well as the impact of a prior year unfavorable adjustment to rebate reserves in theU.S. The Company anticipatesU.S. pricing pressure will unfavorably affect sales of Januvia and Janumet in future periods. Januvia and Janumet lost market exclusivity with respect to the compound patent inChina inJuly 2022 , although not with respect to the salt formulation patent, which extends untilJune 2024 . In addition, the Company will lose market exclusivity in the EU inSeptember 2022 and in theU.S. inJanuary 2023 . The Company anticipates sales of Januvia and Janumet in these markets will decline substantially following the loss of exclusivity. Combined sales of Januvia and Janumet inChina ,Europe and theU.S. represented 10%, 22% and 32%, respectively, of total combined Januvia and Janumet sales for the first six months of 2022. - 39 - --------------------------------------------------------------------------------
Animal Health Segment % Change % Change Three Months Ended Excluding Six Months Ended Excluding June 30, Foreign June 30, Foreign ($ in millions) 2022 2021 % Change Exchange 2022 2021
% Change Exchange Livestock$ 826 $ 821 1 % 6 %$ 1,658 $ 1,640 1 % 7 % Companion Animal 641 651 (2) % 3 % 1,291 1,250 3 % 7 % Sales of livestock products grew 1% in both the second quarter and first six months of 2022 primarily due to higher demand globally for ruminant and poultry products. Sales of companion animal products declined 2% in the second quarter of 2022 and grew 3% in first six months of 2022. Excluding the unfavorable effect of foreign exchange in both periods, companion animal sales performance primarily reflects higher demand for the Bravecto (fluralaner) line of products. Sales of the Bravecto line of products represented approximately 20% of animal health sales in the first six months of 2022.
Costs, Expenses and Other
Three Months Ended Six Months Ended June 30, June 30, ($ in millions) 2022 2021 % Change 2022 2021 % Change Cost of sales$ 4,216 $ 3,104 36 %$ 9,596 $ 6,303 52 % Selling, general and administrative 2,512 2,281 10 % 4,834 4,468 8 % Research and development 2,798 4,321 (35) % 5,374 6,732 (20) % Restructuring costs 142 82 73 % 194 380 (49) % Other (income) expense, net 438 (103) * 1,148 (558) *$ 10,106 $ 9,685 4 %$ 21,146 $ 17,325 22 % *Calculation not meaningful. Cost of Sales Cost of sales increased 36% and 52% in the second quarter and first six months of 2022, respectively. Cost of sales includes$622 million and$2.3 billion in the second quarter and first six months of 2022 related to the collaboration with Ridgeback for Lagevrio (see Note 4 to the condensed consolidated financial statements). Cost of sales also includes the amortization of intangible assets recorded in connection with acquisitions, collaborations and licensing arrangements, which totaled$447 million and$342 million in the second quarter of 2022 and 2021, respectively, and$1.1 billion and$837 million in the first six months of 2022 and 2021, respectively. Amortization expense in the first six months of 2022 and 2021 includes$250 million and$153 million , respectively, of cumulative catch-up amortization related toMerck 's collaborations with AstraZeneca and Bayer, respectively, (see Note 4 to the condensed consolidated financial statements). Additionally, costs in the second quarter and first six months of 2021 include charges of$37 million and$225 million , respectively, related to the discontinuation of COVID-19 development programs. Also included in cost of sales are expenses associated with restructuring activities which amounted to$67 million and$38 million in the second quarter of 2022 and 2021, respectively, and$113 million and$65 million in the first six months of 2022 and 2021, 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 71.1% in the second quarter of 2022 compared with 72.8% in the second quarter of 2021. Gross margin was 68.5% in the first six months of 2022 compared with 71.4% in the first six months of 2021. The gross margin declines reflect the impact of Lagevrio (which has a lower gross margin due to profit sharing with Ridgeback as discussed in Note 4 to the condensed consolidation financial statements), as well as higher inventory write-offs, manufacturing costs and amortization of intangible assets (noted above). The gross margin declines in 2022 were partially offset by the favorable effects of product mix, charges in 2021 related to the discontinuation of COVID-19 development programs and foreign exchange.
Selling, General and Administrative
Selling, general and administrative (SG&A) expenses increased 10% and 8% in the second quarter and first six months of 2022, respectively, primarily due to higher promotional, selling and administrative costs, including compensation and benefits, as well as higher acquisition-related costs and restructuring costs, partially offset by the favorable effect of foreign exchange. SG&A expenses in the second quarter and first six months of 2022 include restructuring costs of$27 million and$48 million , respectively, related primarily to accelerated depreciation for facilities to be closed or divested. - 40 - --------------------------------------------------------------------------------
Research and Development
Research and development (R&D) expenses decreased 35% and 20% in the second quarter and first six months of 2022, respectively, primarily due to a$1.7 billion charge in the prior year periods related to the acquisition ofPandion Therapeutics, Inc. (Pandion). The declines were partially offset by higher clinical development spending, higher compensation and benefit costs, as well as increased investments in technology in support of the digital enablement ofMerck 's research operations, partially offset by the favorable effect of foreign exchange. R&D expenses are comprised of the costs directly incurred byMerck Research Laboratories (MRL), the Company's research and development division that focuses on human health-related activities, which were$1.9 billion and$1.8 billion for the second quarter of 2022 and 2021, respectively, and were$3.7 billion and$3.5 billion for the first six months of 2022 and 2021, respectively. Also included in R&D expenses areAnimal 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$880 million and$750 million for the second quarter of 2022 and 2021, respectively, and$1.6 billion and$1.4 billion for the first six months of 2022 and 2021, respectively. Additionally, R&D expenses in the second quarter and first six months of 2021 include$1.8 billion of charges for acquisitions, including$1.7 billion for the acquisition of Pandion as noted above. Restructuring Costs In 2019,Merck approved a 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 and builds on prior restructuring programs. 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$3.5 billion .Merck expects to record charges of approximately$550 million for the full year of 2022 related to the Restructuring Program. The Company anticipates the actions under the Restructuring Program will result in annual net cost savings of approximately$900 million by the end of 2023. Restructuring costs, primarily representing separation and other related costs associated with these restructuring activities, were$142 million and$82 million for the second quarter of 2022 and 2021, respectively, and$194 million and$380 million for the first six months of 2022 and 2021, 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$258 million and$128 million in the second quarter of 2022 and 2021, respectively, and$384 million and$462 million for the first six months of 2022 and 2021, respectively, related to restructuring program activities (see Note 5 to the condensed consolidated financial statements).
Other (Income) Expense, Net
Other (income) expense, net, was$438 million of expense in the second quarter of 2022 compared with$103 million of income in the second quarter of 2021. Other (income) expense, net, was$1.1 billion of expense for the first six months of 2022 compared with$558 million of income for the first six months of 2021. The change in both periods is primarily due to net unrealized losses from investments in equity securities recorded in the second quarter and first six months of 2022 compared with net unrealized gains from investments in equity securities recorded in the second quarter and first six months of 2021. Other (income) expense, net, in the second quarter and first six months of 2022 also reflect higher pension settlement costs compared with the same periods of 2021.
For details on the components of Other (income) expense, net, see Note 11 to the condensed consolidated financial statements.
- 41 - --------------------------------------------------------------------------------
Segment Profits Three Months Ended Six Months Ended June 30, June 30, ($ in millions) 2022 2021 2022 2021 Pharmaceutical segment profits$ 9,173 $ 7,257 $ 18,673 $ 13,845 Animal Health segment profits 571 552 1,156 1,124 Other (5,257) (6,092) (10,481) (10,265) Income from Continuing Operations Before Taxes$ 4,487
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 and R&D expenses 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, R&D 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 intangible assets and amortization of purchase accounting adjustments, intangible asset impairment charges, and expense or income related to 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 increased 26% and 35% in the second quarter and first six months of 2022, respectively, reflecting higher sales, partially offset by higher promotional and administrative costs and the unfavorable effect of foreign exchange.Animal Health segment profits grew 3% in the second quarter of 2022 reflecting favorable product mix and lower R&D costs, partially offset by higher selling and administrative costs and the unfavorable effect of foreign exchange.Animal Health segment profits grew 3% in the first six months of 2022 reflecting higher sales, partially offset by higher selling and administrative costs and the unfavorable effect of foreign exchange.
Taxes on Income
The effective income tax rates from continuing operations were 12.0% and 29.3% for the second quarter of 2022 and 2021, respectively, and 11.7% and 15.8% for the first six months of 2022 and 2021, respectively. The effective income tax rates from continuing operations reflect the beneficial impact of foreign earnings. Additionally, the effective income tax rates from continuing operations in the second quarter and first six months of 2021 reflect the unfavorable effect of a charge for the acquisition of Pandion for which no tax benefit was recognized. The effective income tax rate from continuing operations for the first six months of 2021 also reflects a net tax benefit of$207 million related to the settlement of certain federal income tax matters as discussed below. In the first quarter of 2021, the Internal Revenue Service (IRS) concluded its examinations ofMerck 's 2015-2016U.S. federal income tax returns. As a result, the Company was required to make a payment of$190 million (of which$172 million related to continuing operations and$18 million related to discontinued operations). 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$236 million net tax benefit in the first six months of 2021 (of which$207 million related to continuing operations and$29 million related to discontinued operations). This net benefit reflects reductions in reserves for unrecognized tax benefits and other related liabilities for tax positions relating to the years that were under examination.
Non-GAAP Income and Non-GAAP EPS from Continuing Operations
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 since management uses non-GAAP measures to assess 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, income and losses from investments in equity securities, 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 a non-GAAP EPS metric. Management uses non-GAAP measures internally for planning and forecasting purposes - 42 - -------------------------------------------------------------------------------- and to measure the performance of the Company along with other metrics. In addition, senior management's annual compensation is derived in part using a non-GAAP pretax income metric. 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 in theU.S. (GAAP). In 2022, the Company changed the treatment of certain items for purposes of its non-GAAP reporting. Historically,Merck 's non-GAAP results excluded expenses for upfront and milestone payments related to collaborations and licensing agreements, as well as charges related to pre-approval assets obtained in transactions accounted for as asset acquisitions, to the extent the charges were considered by the Company to be significant to the results of a particular period (as well as any related adjustments recorded in a subsequent period). Beginning in 2022,Merck 's non-GAAP results will no longer exclude charges related to these items. Prior periods have been recast to conform to the current presentation.
A reconciliation between GAAP financial measures and non-GAAP financial measures (from continuing operations) is as follows:
Three Months Ended Six Months Ended June 30, June 30, ($ in millions except per share amounts) 2022 2021 2022 2021
Income from continuing operations before taxes as reported under GAAP
$ 4,487 $ 1,717 $ 9,348 $ 4,704 Increase (decrease) for excluded items: Acquisition and divestiture-related costs 530 503 1,168 1,000 Restructuring costs 258 128 384 462 Loss (income) from investments in equity securities, net 234 (258) 918 (819)
Other items: Charges for the discontinuation of COVID-19 development programs
- 37 - 225 Non-GAAP income from continuing operations before taxes 5,509 2,127 11,818 5,572
Taxes on income from continuing operations as reported under GAAP
538 503 1,092 741 Estimated tax benefit on excluded items (1) 223 65 552 113
Net tax (expense) benefit from the settlement of certain federal income tax matters
- (1) - 207 Non-GAAP taxes on income from continuing operations 761 567 1,644 1,061 Non-GAAP net income from continuing operations 4,748 1,560 10,174 4,511
Less: Net income attributable to noncontrolling interests as reported under GAAP
5 1 2 5
Non-GAAP net income from continuing operations attributable to
$ 4,743 $ 1,559 $ 10,172 $ 4,506
EPS assuming dilution from continuing operations as reported under GAAP
$ 1.55 $ 0.48 $ 3.25 $ 1.56 EPS difference 0.32 0.13 0.76 0.21
Non-GAAP EPS assuming dilution from continuing operations
$ 0.61 $ 4.01 $ 1.77
(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 acquisitions and divestitures of businesses. 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 acquisitions and divestitures of businesses. Non-GAAP income and non-GAAP EPS also exclude amortization of intangible assets related to collaborations and licensing arrangements.
Restructuring Costs
Non-GAAP income and non-GAAP EPS exclude costs related to restructuring actions (see Note 5 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. 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. - 43 - --------------------------------------------------------------------------------
Income and Losses from Investments in
Non-GAAP income and non-GAAP EPS exclude realized and unrealized gains and losses from investments in equity securities either owned directly or through ownership interests in investment funds.
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 2021 are charges related to the discontinuation of COVID-19 development programs (see Note 3 to the condensed consolidated financial statements) and a net tax benefit related to the settlement of certain federal income tax matters (see Note 12 to the condensed consolidated financial statements).
Research and Development Update
The Company currently has several candidates under regulatory review in the
MK-4482, Lagevrio, is an investigational oral antiviral medicine for the treatment of mild to moderate COVID-19 in adults who are at risk for progressing to severe disease.Merck is developing Lagevrio in collaboration with Ridgeback. The FDA granted Emergency Use Authorization for Lagevrio inDecember 2021 ; as updated inFebruary 2022 , to authorize Lagevrio for the treatment of mild to moderate COVID-19 in adults with positive results of direct SARS-CoV-2 viral testing, and who are at high risk for progression to severe COVID-19, including hospitalization or death, and for whom alternative COVID-19 treatment options approved or authorized by the FDA are not accessible or clinically appropriate. The authorization is based on the Phase 3 MOVe-OUT trial. Lagevrio is not approved for any use in theU.S. and is authorized only for the duration of the declaration that circumstances exist justifying the authorization of its emergency use under the Food, Drug and Cosmetic Act, unless the authorization is terminated or revoked sooner. Lagevrio has also received Conditional Marketing Authorization in theUK and Special Approval for Emergency inJapan . InNovember 2021 , theEuropean Medicines Agency (EMA) issued a positive scientific opinion for Lagevrio, which is intended to support national decision-making on the possible use of Lagevrio prior to marketing authorization. InOctober 2021 , the EMA initiated a rolling review for Lagevrio for the treatment of COVID-19 in adults.Merck plans to work with the Committee for Medicinal Products for Human Use (CHMP) of the EMA to complete the rolling review process to facilitate initiating the formal review of the Marketing Authorization Application. Applications to other regulatory bodies are underway. Lagevrio is also being evaluated for post-exposure prophylaxis in the Phase 3 MOVe-AHEAD trial, which is evaluating the efficacy and safety of Lagevrio for the prevention of COVID-19 in adults who reside with a person with COVID-19. MK-7264, gefapixant, is an investigational, orally administered, selective P2X3 receptor antagonist, for the treatment of refractory chronic cough or unexplained chronic cough in adults under review by the FDA and EMA. The marketing applications for gefapixant are based on results from the COUGH-1 and COUGH-2 clinical trials. InJanuary 2022 , the FDA issued a Complete Response Letter (CRL) regardingMerck 's New Drug Application for gefapixant. In the CRL, the FDA requested additional information related to the cough counting system that was used to assess efficacy. The CRL was not related to the safety of gefapixant. The Company is performing additional analyses and anticipates submitting this information to the FDA in the first half of 2023 in response to the CRL. The review period in the EU has been extended pending the receipt of additional information from the Company. The Company plans to submit the information to the EMA in the first half of 2023. V114, (Pneumococcal 15-valent Conjugate Vaccine), is an investigational 15-valent pneumococcal conjugate vaccine under review inJapan for use in both adults and pediatric patients. V114 is also under review in the EU for pediatric patients. V114, Vaxneuvance, was approved by the EC in 2021 for use in individuals 18 years of age and older. MK-3475, 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 1,750 clinical trials, including more than 1,300 trials that combine Keytruda with other cancer treatments. These studies encompass more than 30 cancer types including: biliary, estrogen receptor positive breast cancer, cervical, colorectal, cutaneous squamous cell, endometrial, esophageal, gastric, glioblastoma, head and neck, hepatocellular, Hodgkin lymphoma, non-Hodgkin lymphoma, non-small-cell lung, small-cell lung, melanoma, mesothelioma, ovarian, prostate, renal, triple-negative breast, and urothelial, many of which are currently in Phase 3 clinical development. Further trials are being planned for other cancers. Keytruda is under review by the FDA for the treatment of patients with previously treated advanced HCC. This submission is based on data from the Phase 3 KEYNOTE-394 trial along with supportive data from the KEYNOTE-240 and KEYNOTE-224 trials. Keytruda is approved for this indication in theU.S. under theFDA's accelerated approval process. This submission is to convert the accelerated approval to full (regular) approval. - 44 - -------------------------------------------------------------------------------- Keytruda is also under review by the FDA for the adjuvant treatment of patients with stage IB (?4 centimeters), II or IIIA NSCLC following complete surgical resection. The supplemental BLA is based on data from the pivotal Phase 3 KEYNOTE-091 trial, also known as EORTC-1416-LCG/ETOP-8-15 - PEARLS. The FDA set a Prescription Drug User Fee Act date ofJanuary 29, 2023 , however, further data may be provided during the review process that may delay this date. Keytruda is also under review for this indication in the EU. Keytruda is under review inJapan in combination with chemotherapy as neoadjuvant treatment, and then continued as monotherapy as adjuvant treatment after surgery for adults with locally advanced, or early-stage TNBC at high risk of recurrence based on results from the Phase 3 KEYNOTE-522 trial. Keytruda is also under review inJapan in combination with chemotherapy, with or without bevacizumab, for the treatment of persistent, recurrent or metastatic cervical cancer in adults whose tumors express PD-L1 based on results from the Phase 3 KEYNOTE-826 trial.
Additionally, Keytruda is under review in
InJuly 2022 ,Merck announced that the Phase 3 KEYNOTE-412 trial evaluating Keytruda with concurrent chemoradiation therapy (CRT) followed by Keytruda as maintenance therapy (the Keytruda regimen), did not meet its primary endpoint of event-free survival for the treatment of patients with unresected locally advanced HNSCC. At the final analysis of the study, there was an improvement in event-free survival for patients who received the Keytruda regimen compared to placebo plus CRT; however, these results did not meet statistical significance per the pre-specified statistical plan. Results will be presented at an upcoming medical meeting. InAugust 2022 ,Merck announced that the Phase 3 KEYNOTE-921 trial evaluating Keytruda in combination with chemotherapy (docetaxel) compared to chemotherapy alone did not meet its dual primary endpoints of overall survival and radiographic progression-free survival for the treatment of patients with metastatic castration-resistant prostate cancer. In the study, there were modest trends toward an improvement in both overall survival and radiographic progression-free survival for patients who received Keytruda plus chemotherapy compared with chemotherapy alone; however, these results did not meet statistical significance per the pre-specified statistical plan. Results will be presented at an upcoming medical meeting.
MK-7339, 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.
Lynparza is under review inJapan for the adjuvant treatment of patients with gBRCAm, HER2-negative high-risk early breast cancer who have been treated with neoadjuvant or adjuvant chemotherapy. Additionally, Lynparza is under review in the EU andJapan for the treatment of certain patients with metastatic castration-resistant prostate cancer based on the PROpel clinical trial. InMarch 2022 ,Merck announced that it would stop the Phase 3 KEYLYNK-010 trial investigating Keytruda in combination with Lynparza for the treatment of patients with metastatic castration-resistant prostate cancer who progressed after treatment with chemotherapy and either abiraterone acetate or enzalutamide.Merck has discontinued the study following the recommendation of an independent Data Monitoring Committee (DMC) after the DMC reviewed data from a planned interim analysis. At the interim analysis, the combination of Keytruda and Lynparza did not demonstrate a benefit in overall survival, one of the study's dual primary endpoints, compared to the control arm of either abiraterone acetate or enzalutamide. The trial's other dual primary endpoint, radiographic progression free survival, was evaluated at an earlier interim analysis and did not demonstrate improvement compared to the control arm. Data from this study will be presented at an upcoming scientific congress. InJuly 2022 ,Merck announced it will stop the Phase 3 LYNK-003 trial investigating Lynparza with or without bevacizumab for the treatment of patients with unresectable or metastatic colorectal cancer who have not progressed following first-line induction. This action follows the recommendation of an independent DMC, after the DMC reviewed the data from a planned interim analysis. At the pre-specified interim analysis for progression-free survival, the efficacy of Lynparza as a monotherapy and in combination with bevacizumab relative to control met the criteria for futility by the DMC and accordingly, both experimental arms will be discontinued. Data from this study will be shared in a future scientific forum. MK-7902, Lenvima, is an oral receptor tyrosine kinase inhibitor being developed as part of a collaboration with Eisai.Merck and Eisai are studying the Keytruda plus Lenvima combination through the LEAP (LEnvatinib And Pembrolizumab) clinical program. InAugust 2022 ,Merck and Eisai announced that the Phase 3 LEAP-002 trial investigating Keytruda plus Lenvima versus Lenvima monotherapy did not meet its dual primary endpoints of overall survival and progression-free survival as a first-line treatment for patients with unresectable hepatocellular carcinoma (uHCC). There were trends toward improvement in overall survival and progression-free survival for patients who received Keytruda plus Lenvima versus Lenvima monotherapy; - 45 - -------------------------------------------------------------------------------- however, these results did not meet statistical significance per the pre-specified statistical plan. The median overall survival of the Lenvima monotherapy arm in LEAP-002 was longer than that observed in previously reported clinical trials evaluating Lenvima monotherapy in uHCC.Merck and Eisai plan to present these data at an upcoming medical conference. InJune 2022 ,Merck announced the presentation of positive results from a Phase 1/2 study evaluating the safety, tolerability and immunogenicity of V116, the Company's investigational 21-valent pneumococcal conjugate vaccine (PCV), in pneumococcal vaccine-naïve adults 18-49 years of age (Phase 1) and 50 years of age and older (Phase 2). In both populations, V116 met the primary immunogenicity objectives and was well-tolerated with an overall safety profile generally comparable to Pneumovax 23 (Pneumococcal Vaccine Polyvalent) across age groups. InApril 2022 ,Merck announced that V116 received Breakthrough Therapy Designation from the FDA for the prevention of invasive pneumococcal disease and pneumococcal pneumonia caused by Streptococcus pneumoniae serotypes 3, 6A/C, 7F, 8, 9N, 10A, 11A, 12F, 15A, 15B/C, 16F, 17F, 19A, 20, 22F, 23A, 23B, 24F, 31, 33F, 35B in adults 18 years of age and older. The Breakthrough Therapy Designation is an FDA program designed to expedite the development and review of products intended for serious or life-threatening conditions. To qualify for this designation, preliminary clinical evidence must indicate that the product may demonstrate substantial improvement over currently available options on at least one clinically significant endpoint. Enrollment in the Phase 3 STRIDE-3 trial evaluating V116 in vaccine-naive adults has begun. The charts below reflect the Company's research pipeline as ofAugust 2, 2022 . Candidates shown in Phase 3 include 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 2 Cancer Cancer Cancer MK-0482(3) MK-6440 (ladiratuzumab vedotin)(1)(3) MK-7902 Lenvima(1)(2) Non-Small-Cell Lung Breast Biliary MK-1026 (nemtabrutinib) Esophageal Glioblastoma Hematological Malignancies Gastric Pancreatic MK-1200 Head and Neck Prostate Neoplasm Malignant Melanoma Small-Cell Lung MK-1308 (quavonlimab)(2) Non-Small-Cell Lung V937 Non-Small-Cell Lung Prostate Breast MK-1308A (quavonlimab+pembrolizumab) Small-Cell Lung Cutaneous Squamous Cell Advanced Solid Tumors MK-6482 Welireg(3) Head and Neck Colorectal Biliary Melanoma Hepatocellular Colorectal Solid Tumors Melanoma Hepatocellular Cardiovascular Small-Cell Lung Pancreatic MK-2060 MK-2140 (zilovertamab vedotin) Rare cancers Chikungunya Virus Vaccine Breast Von Hippel-Lindau Disease-Associated Tumors (EU) V184 Gastric MK-7119 Tukysa(1) HIV-1 Infection Hematological Malignancies Advanced Solid Tumors MK-8591B (islatravir+MK-8507)(4) Non-Small-Cell Lung Biliary MK-8591D (islatravir+lenacapavir)(1)(4) Ovarian Bladder Hypercholesterolemia Pancreatic Cervical MK-0616 Solid Tumors Colorectal Nonalcoholic Steatohepatitis (NASH) MK-2870(1)(3) Endometrial MK-3655 Neoplasm Malignant Gastric MK-6024 MK-3475 Keytruda Non-Small-Cell Lung Overgrowth Syndrome Advanced Solid Tumors MK-7339 Lynparza(1)(3) MK-7075 (miransertib) MK-4280 (favezelimab)(2) Advanced Solid Tumors Pulmonary Arterial Hypertension Hematological Malignancies MK-7684 (vibostolimab)(2) MK-5475 Non-Small-Cell Lung Melanoma Schizophrenia MK-4280A (favezelimab+pembrolizumab) MK-7684A (vibostolimab+pembrolizumab) MK-8189 Renal Cell Biliary Treatment Resistant Depression Small-Cell Lung Breast MK-1942 MK-4830(2) Cervical Colorectal Colorectal Melanoma Endometrial Non-Small-Cell Lung Esophageal Renal Cell Head and Neck Small-Cell Lung Hematological Malignancies MK-5684(1) Hepatocellular Neoplasm Malignant Prostate MK-5890(3) Non-Small-Cell Lung Small-Cell Lung - 46 -
-------------------------------------------------------------------------------- Phase 3 (Phase 3 entry date) Under Review Antiviral COVID-19 New Molecular
Entities/Vaccines Certain Supplemental Filings
MK-4482 Lagevrio (
Cancer
Cancer MK-4482 Lagevrio (EU)(1) MK-3475 Keytruda MK-1308A (quavonlimab+pembrolizumab) Cough • Second-Line Hepatocellular Cancer Renal Cell (April 2021) MK-7264 (gefapixant) (U.S.)(6) (KEYNOTE-394) (U.S.) MK-3475 Keytruda (EU) • Adjuvent Non-Small-Cell Lung Cancer Biliary (September 2019) Pneumococcal Vaccine (KEYNOTE-091) (U.S.) (EU) Cutaneous Squamous Cell (August 2019) (EU) Adult/Pediatric
• High-Risk Early-Stage Triple-Negative
Gastric (
V114 (JPN) Breast Cancer Hepatocellular (May 2016 ) (EU) (KEYNOTE-522) (JPN) Mesothelioma (May 2018 ) • Cervical Cancer (KEYNOTE-826) (JPN) Ovarian (December 2018 ) • Adjuvent Renal Cell Cancer Prostate (May 2019 ) (KEYNOTE-564) (JPN) Small-Cell Lung (May 2017 ) MK-3475 (pembrolizumab subcutaneous) MK-7339 Lynparza(1) Non-Small-Cell Lung (August 2021 ) • BRCA-Mutated HER2-Negative Adjuvant MK-4280A (favezelimab+pembrolizumab)
Breast
Colorectal (November 2021 ) Cancer (OlympiA ) (JPN) MK-6482 Welireg(3)
• First-Line Metastatic Prostate Cancer
Renal Cell (
(PROpel) (EU) (JPN) MK-7119 Tukysa(1) Breast (October 2019 ) MK-7902 Lenvima(1)(2) MK-7339 Lynparza(1)(3) • First-Line Metastatic Hepatocellular Non-Small-Cell Lung (June 2019 )
Carcinoma
Small-Cell Lung (December 2020 ) (KEYNOTE-524) (U.S. )(7) MK-7684A (vibostolimab+pembrolizumab) Non-Small-Cell Lung (April 2021 ) Small-Cell Lung (March 2022 ) MK-7902 Lenvima(1)(2) Colorectal (April 2021 ) Esophageal (July 2021 ) Gastric (December 2020 ) Head and Neck (February 2020 ) Melanoma (March 2019 ) Footnotes: Non-Small-Cell Lung (March 2019 ) (1) Being developed in a
collaboration.
HIV-1 Infection (2) Being developed in
combination with Keytruda.
MK-8591A (doravirine+islatravir) (February (3) Being developed as monotherapy and/or in combination with Keytruda. 2020)(4)
(4) On FDA clinical hold. HIV-1 Prevention (5) Available in theU.S. under Emergency Use Authorization. MK-8591 (islatravir) (February 2021)(4) (6) In response to the CRL received from the FDA for this application in Pneumococcal Vaccine AdultJanuary 2022 ,Merck is performing additional analyses and anticipates V116 (July 2022 ) submitting this information to the FDA in the first half of 2023. Pulmonary Arterial Hypertension (7) InJuly 2020 , the FDA
issued a CRL for
Merck and Eisai intend to submit additional data when available to the FDA. Respiratory Syncytial Virus MK-1654 (clesrovimab) (November 2021 )
Liquidity and Capital Resources
($ in millions) June 30, 2022 December 31, 2021 Cash and investments$ 10,366 $ 8,466 Working capital 8,948 6,394 Total debt to total liabilities and equity 29.6 %
31.3 %
Cash provided by operating activities of continuing operations was$9.1 billion in the first six months of 2022 compared with$3.2 billion in the first six months of 2021 reflecting stronger operating performance, including the impact of Lagevrio (see Note 4 to the condensed consolidated financial statements). Cash provided by operating activities of continuing operations in the first six months of 2022 was reduced by$1.7 billion of milestone payments related to collaborations compared with$357 million of milestone and option payments related to collaborations in the first six months of 2021. Cash provided by operating activities of continuing operations continues to be the Company's primary source of funds to finance operating needs, with excess cash serving as the primary source of funds to finance capital expenditures, treasury stock purchases and dividends paid to shareholders. As a result of the mandatory change in R&D capitalization rules that are effective for tax years beginning afterDecember 31, 2021 (related to the Tax Cuts and Jobs Act of 2017), the Company expects taxes paid in theU.S. to increase significantly for the full year of 2022. Cash used in investing activities of continuing operations was$2.3 billion in the first six months of 2022 compared with$3.3 billion in the first six months of 2021. The lower use of cash in investing activities was primarily due to lower cash used for acquisitions, partially offset by higher purchases of securities and other investments. - 47 - -------------------------------------------------------------------------------- Cash used in financing activities of continuing operations was$4.9 billion in the first six months of 2022 compared with cash provided by financing activities of continuing operations of$164 million in the first six months of 2021. The change was primarily due to the cash distribution in 2021 received from Organon in connection with the spin-off (see Note 2 to the condensed consolidated financial statements) coupled with net repayments of short-term borrowings in the prior year period.
Capital expenditures totaled
The Company has accounts receivable factoring agreements with financial institutions in certain countries to sell accounts receivable. The Company factored$1.9 billion and$2.8 billion of accounts receivable atJune 30, 2022 andDecember 31, 2021 , 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$3.5 billion and$3.3 billion for the first six months of 2022 and 2021, respectively. InMay 2022 , the Board of Directors declared a quarterly dividend of$0.69 per share on the Company's stock for the third quarter that was paid inJuly 2022 . InJuly 2022 , the Board of Directors declared a quarterly dividend of$0.69 per share on the Company's stock for the fourth quarter that will be paid inOctober 2022 . InFebruary 2022 , the Company's$1.25 billion , 2.35% notes matured in accordance with their terms and were repaid. InJanuary 2021 , the Company's$1.15 billion , 3.875% notes matured in accordance with their terms and were repaid. 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. The Company did not purchase any shares of its common stock during the first six months of 2022. As ofJune 30, 2022 , the Company's remaining share repurchase authorization was$5.0 billion . The Company has a$6.0 billion credit facility that matures inJune 2026 . 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 Estimates
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, 2021 included inMerck 's Form 10K filed onFebruary 25, 2022 . See Note 1 to the condensed consolidated financial statements for information on the adoption of new accounting standards during 2022. A discussion of accounting estimates considered critical because of the potential for a significant impact on the financial statements due to the inherent uncertainty in such estimates are disclosed in the Critical Accounting Estimates section of Management's Discussion and Analysis of Financial Condition and Results of Operations included inMerck 's Form 10-K. There have been no significant changes in the Company's critical accounting estimates sinceDecember 31, 2021 .
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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