Merck & Co Inc (MRK) — Q1 2019 Earnings Call Transcript

Thank you, Darla, and good morning, everyone. Welcome to Merck's first quarter 2019 conference call. Today I'm joined by Ken Frazier, our Chairman and Chief Executive Officer; Rob Davis, our Chief Financial Officer; and Dr. Roger Perlmutter, President of Merck Research Labs, who will each have prepared remarks. In addition, I'm also joined by Mike Nally, our Chief Marketing Officer; and Frank Clyburn, our Chief Commercial Officer, who will be available for the Q&A portion of the call. Before I turn the call over to Ken, I'd like to point out a few items. You will see that we have items in our GAAP results such as acquisition-related charges, restructuring costs, and certain other items. You should note that we have excluded these from our non-GAAP results and provide a reconciliation of these in our press release. We have also provided a table in our press release to help you understand the sales in the quarter for the business units and products. I would like to remind you that some of the statements we made during today's call may be considered forward-looking statements within the meaning of the Safe Harbor Provision of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are based on the current beliefs of Merck's management and are subject to significant risks and uncertainties. If our underlying assumptions prove inaccurate or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements. Our SEC filings, including Item 1A in the 2018 10-K identify certain risk factors and cautionary statements that could cause the company's actual results to differ materially from those projected in any of our forward-looking statements made this morning. Merck undertakes no obligation to publicly update any forward-looking statements. You can see our SEC filings as well as today's earnings release on merck.com. Finally, similar to last quarter, we have posted a presentation to the investors section of merck.com, which includes some of our highlights from the quarter. With that, I'd like to turn the call over to Ken.

Thank you, Teri. Good morning and thank you all for joining us today. We had a very strong start to 2019. And we are seeing our fundamental strategy of investing thoughtfully in R&D involving the science payoff. Our current portfolio of assets continues to drive strong growth and we are working to ensure that we capture the near-term opportunities in front of us to maintain this momentum, while planning for the next generation of treatments. Our first quarter performance with double-digit year-over-year sales and EPS growth are the results of portfolio and operational strengths driven by oncology, vaccines, and select hospitals and specialty products. We’re confident that products within these areas, including KEYTRUDA, LYNPARZA, LENVIMA, GARDASIL, BRIDION, and others together with our Animal Health franchise will lead to strong growth over the coming years. Our performance in this first quarter also speaks to our success globally as we've received a number of additional approvals and launched new products in various markets around the world. Our international business, which represented nearly 60% of our sales this quarter, has strong momentum. And we believe that we've only scratched the surface in terms of the opportunity in key markets such as China, where we are seeing significant growth. We foresee a stream of additional approvals from our current portfolio of products across markets globally, and we will look to maximize these opportunities powered by our commercial team's proven ability to execute. In parallel, we are also focused on advancing our promising pipeline and continuing to augment our internal research and development efforts with external innovation. We are excited by the prospect of our pipeline, which includes potential new treatments and vaccines in oncology, HIV, and many other areas of significant and ongoing unmet needs. There is also impressive work underway in our discovery hubs in Cambridge, London, and South San Francisco, where we are incorporating some of the most scientifically advanced modalities and technologies in the world. Importantly, these hubs are located where many of the best biotech and scientific minds are gathered. And we're benefiting from the vibrant academics and biotech communities in each of our respective hubs. Finally, we're continuing to evolve in a rapidly changing industry environment to best position Merck for sustainable, profitable growth over the long term, while helping to drive positive outcomes for patients. The overall healthcare landscape remains dynamic as the industry grapples with complex issues such as the rising cost of healthcare, generally, pharmaceutical prices in excess, and the shift to more outcomes-based reimbursement systems. At the same time, we believe that demand for even better outcomes for more innovative medicines will continue around the world giving us back and growing unmet need in cancer, Alzheimer's disease and in many other areas as the global population continues to grow, while certain countries age. As a result, we will remain steadfast in going where the science leads us in order to bring forward transformative medicines and vaccines. We are confident in our strategy, our growth prospects, and our ability to continue to deliver significant benefits for patients and value to shareholders in 2019 and beyond. We look forward to discussing these matters in more detail with you in our Investor Day in June, where we plan to give you a deeper understanding of our pipeline and company and provide you with the opportunity to meet a broader set of our scientists and business leaders. With that, I'll pass the call over to Rob to go through the details of our quarterly results. Rob?

Thanks, Ken, and good morning, everyone. As Ken mentioned, Merck had one of its strongest quarters in recent history. Our first quarter results reflect broad based strength across our portfolio and continued discipline in our resource allocation. We executed very well across our key growth stores, and our updated guidance reflects confidence that we remain well positioned to deliver strong growth this year and in the future. Turning to the top line, total company revenues were $10.8 billion, an increase of 8% year-over-year, or 11%, excluding the negative impact from foreign currency. This quarter was led by our human health business with growth of 12%, excluding exchange. Animal Health revenues grew 3%, excluding exchange. The remainder of my comments pertaining to sales will be on an exchange basis. The increase in human health revenues was led by key products in our oncology, vaccines, and hospital and specialty businesses. Growth was strong in both the U.S. and international markets, and especially in China, where sales increased 67% year-over-year, driven largely by newly launched products. In oncology, KEYTRUDA sales were nearly $2.3 billion this quarter, an increase of 60% versus the first quarter of 2018. Growth was primarily driven by higher use in first line non-small cell lung cancer both as monotherapy and with the rollout of the chemo combo. In addition, utilization remains strong across the breadth of indications including melanoma, head and neck, bladder, and MSI-high cancers. With our recent approvals and adjuvant melanoma and renal cell carcinoma in the United States, we are now approved in 18 indications across 11 different tumor types, plus a pan-tumor approval in MSI-high patients. We are also very excited by recent approvals in Japan and China, and look forward to making additional indications available to patients and markets around the world. In the U.S., first-line lung cancer remains a key driver of growth given further penetration of the chemo combo in both nonsquamous and squamous non-small cell lung cancer. We also are encouraged by early feedback in adjuvant melanoma, which was our first approval in the adjuvant setting. First-line lung has also become a larger contributor in ex-U.S. markets with growth driven by further uptake of our monotherapy indication and PD-L1 high expressers, and also by demand for the chemo combo, following regulatory and reimbursement approvals in select EU markets and Japan. In Europe, the uptake of the chemo combo and non-squamous patients has strong end-markets, where we have gained reimbursement. And we look forward to potential additional reimbursement approvals later this year as well as an introduction of the chemo combo in the squamous setting. In Japan, KEYTRUDA growth accelerated this quarter given the recent approvals across additional indications, including lung, adjuvant melanoma and MSI-high cancers, with utilization of the chemo combo and first-line lung cancer as a particularly strong driver of growth. Finally, in China, we are seeing strong sales of KEYTRUDA, following our launch late last year and in metastatic melanoma. And we were very excited by our recent approval in China in first-line lung cancer. Overall, we remain very confident in KEYTRUDA's benefit to patients and long-term growth potential given its established immune-oncology leadership and increased utilization across many indications, and in markets around the world, as well as our expectation for many additional approvals going forward. We also remain encouraged by the progress and potential of both LYNPARZA and LENVIMA, which we are developing and marketing in collaboration with AstraZeneca and Eisai respectively. LYNPARZA sales doubled this quarter, driven by further uptake in ovarian cancer following the U.S. approval of SOLO-1 in December, as well as uptake in new markets such as China and Japan. In the U.S., across all tumors, LYNPARZA continues to lead the PARP inhibitor class with over 50% total patient share. We remain excited by the long-term potential of LYNPARZA, especially with the recent start of the initial Phase 3 KEYTRUDA combination studies. LENVIMA is another important product for our oncology portfolio. Sales this quarter reflected continued strong performance in hepatocellular carcinoma following recent launches around the world. The launch in China is still early, but we believe that opportunity there is large given the high prevalence of HTC in that market. Now turning to vaccines. Our vaccines business reflected strong demand for GARDASIL, which achieved sales of over $800 million this quarter, representing growth at 31% compared to Q1 of 2018. Ex-U.S. demand remains particularly robust while continued strong uptake in China following the GARDASIL 9 launch last May, and increased general neutral vaccination in Europe. The decline in the U.S. reflects timing of public sector purchases which will more than offset underlying demand. The strong growth demonstrating across our overall vaccines portfolio was also helped by the performance of certain pediatric products. Our hospital and specialty business was led by 30% growth in sales of BRIDION. U.S. growth reflects BRIDION's increased utilization in procedures involving neuromuscular reversal agents, including in robotics and minimally invasive surgeries. Animal Health revenue increased 3% this quarter to just over $1 billion. Companion animal sales grew 6%, primarily driven by strong demand globally for the BRAVECTO line of products. Livestock sales grew 1%, driven by volume growth, particularly from new poultry and swine vaccines. This was largely offset by lower aluminum product sales, driven by distributor purchasing patterns and weather-related softness resulting in delayed movement of cattle into the feedlots in the United States. While Animal Health growth this quarter was light compared to recent trends, we still expect our full year performance to again outpace the overall market. Additionally, we are very excited by the recent closing of our acquisition of Antelliq, which establishes Merck as a leader in animal identification and monitoring, one of the fastest growing parts of the Animal Health industry. Turning to the rest of our P&L, my comments will be on a non-GAAP basis. Gross margin was 75.9% in the quarter, an increase of 30 basis points versus the first quarter of 2018, favorably impacted by product mix and foreign currency which were mostly offset by lower price, higher royalties, and amortization of milestone payments. Operating expenses of $4.4 billion increased 2% year-over-year, including a favorable two-percentage-point impact from foreign exchange. Our investments in research and development grew by 9%, driven by clinical development spending in oncology and vaccines as well as our discovery and early development efforts. SG&A spending declined by 3% year-over-year as we continue to drive productivity and reallocate resources to our highest value growth opportunities. Other income and expense reflected $21 million of expense this quarter versus $259 million of income last year. The negative variance was primarily due to a litigation settlement gain in last year's first quarter, as well as lower income from certain investments in equity securities and higher net interest expense this year. Our tax rate of 16.5% for the quarter was 350 basis points lower year-over-year, largely due to favorable discrete items, primarily related to foreign tax credits and prior year mix of income adjustments booked this quarter. Taken together, our earnings per share increased by 18%, excluding exchange to $1.22. Turning to our outlook for the year, we are narrowing and raising both our revenue and non-GAAP EPS guidance ranges for 2019, reflecting our strong and continued operational performance. We remain confident in both our near and long-term prospects to revenue growth, driven by expected demand for innovative products across key growth pillars, which more than overcome expected headwinds from price, foreign currency, and pressures on mature and LOE products. For 2019, we now expect revenues of $43.9 billion to $45.1 billion, which represents 4% to 7% growth versus 2018, driven by strength across our oncology, vaccines, hospital and specialty, and Animal Health businesses. This range assumes a negative impact from foreign exchange of just over one-percentage-point using mid-April rates, which is slightly above our former assumption. We are also increasing our expected EPS range to be between $4.67 and $4.79, including a slightly positive impact from foreign exchange at mid-April rates, down from the one-percentage-point positive impact we had previously assumed. The new range represents growth of approximately 8% to 10% versus 2018. Other elements of our guidance remain unchanged, including our expectation for roughly flat gross margins, a low to mid-single digit increase in operating expense, driven mostly by the meaningful investments we continue to make in R&D, which we expect to increase in the back half of the year, an expectation for roughly $0 in other income and expense, and finally, a full year tax rate of a range of 18.5% to 19.5%. In summary, we are very pleased by our first quarter performance. We expect our operational momentum to continue throughout the remainder of 2019 with continued strength across our key pillars of growth. Strong revenue growth along with disciplined resource allocation will allow us to make important investments in our pipeline while at the same time delivering a leveraged P&L and meaningful increases in earnings per share. We believe our ongoing efforts to develop and deliver innovative products that help meet unmet medical needs for patients worldwide, coupled with strong commercial execution and disciplined financial management positioned us very well to generate strong short- and long-term value to society and to our shareholders. With that, I would like to turn the call over to Roger.

Thanks, Rob. The first quarter saw continued progress across all aspects of the R&D portfolio. As has already been mentioned, early in the quarter we obtained U.S. approval for KEYTRUDA when used as Adjuvant therapy in the treatment of patients for malignant melanoma with lymph node involvement following definitive resection. More recently we obtained approval for combined use of KEYTRUDA and Pfizer's axitinib in the first-line treatment of advanced renal cell carcinoma based on the results of our KEYNOTE-426 trial. The strength of this study in which improved overall response rates, progression-free survival, and overall survival compared with traditional treatment with single-agent sunitinib were observed led to a very rapid review with approval secured nearly two months prior to the PDUFA date. I should also note that the combination of KEYTRUDA plus axitinib yielded consistently favorable results versus sunitinib in all traditionally defined patient subgroups and irrespective of PD-L1 expression in the tumor. KEYTRUDA acts on a very broad range of malignancies. The current FDA label includes indications from salvage to adjuvant therapy across 11 different tumor types with more indications currently under review. During the quarter, we also gained approval for KEYTRUDA in China when combined with platinum plus pemetrexed chemotherapy in the first-line treatment of non-small cell lung cancer. With this approval, we hope to bring the benefits of this combination regimen previously approved in the United States, the EU, Japan, and other major jurisdictions to the very large population of patients in China suffering from pulmonary malignancy. We also obtained FDA approval for the use of KEYTRUDA monotherapy in patients with non-small cell lung cancer whose tumors expressed PD-L1 at 1% or more of tumor cells based on the results of our KEYNOTE-042 study. This indication broadly extends the use of KEYTRUDA monotherapy to a much larger set of patients. Previously, only those patients in whom 50% or more of tumor cells expressed PD-L1 were included in the monotherapy indication. This recent broader approval also includes stage III patients who are not candidates for surgical resection of their disease or for treatment by definitive chemoradiation. At this point, I should note that at the end of the first quarter, we posted our 1,000th KEYTRUDA study on clinicaltrials.gov. And surprisingly, the bulk of new studies examined combinations of KEYTRUDA with other regimens and at earlier stages of disease. Not all of these studies yielded the results that we and our patients were hoping for. As we have previously announced, both our KEYNOTE-240 study in patients with hepatocellular carcinoma and our KEYNOTE-062 study in the first-line treatment of patients with gastric cancer did not meet our expectations. However, both of these studies, the results of which we expect to be discussed at the American Society for Clinical Oncology Meeting in June, provided important information that will assist specialists in refining their treatment regimens. In addition, the aggregated results of our clinical programs inform the selection of novel agents. As an example, we have more than 20 molecular entities currently under study in early-stage clinical trials. Beyond this, together with our colleagues at AstraZeneca, we made significant progress in advancing the use of our PARP inhibitor LYNPARZA for the maintenance treatment of patients with malignancies that have evidence of defective DNA repair. Just yesterday, we announced that the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency has adopted a positive opinion recommending LYNPARZA as first-line maintenance treatment for women with advanced BRCA-mutated epithelial ovarian, fallopian tube, or primary peritoneal cancer who have responded to traditional first-line platinum-based chemotherapy. This recommendation follows approval by the European Commission authorizing LYNPARZA for the treatment of germline BRCA-mutated HER2-negative advanced breast cancer based on the OlympiAD trial. Also in the first quarter, we announced that LYNPARZA treatment improved progression-free survival versus placebo in patients with germline BRCA-mutated metastatic pancreatic cancer. This disease had not progressed on platinum-based chemotherapy. Pancreatic cancer is an exceedingly difficult disease to treat. We were gratified to see both statistically significant and clinically meaningful improvement in patients with germline BRCA mutations. On the infectious disease front, earlier this month, we had the opportunity to describe the use of ZERBAXA to treat hospital-acquired and ventilator-associated pneumonia at the European Congress on Clinical Microbiology and Infectious Diseases Meeting in Amsterdam. In this ASPECT-NP study, we evaluated an increased dose of ZERBAXA 3 grams per day, which provided improved intrapulmonary drug levels in infected lungs. The study met its primary and key secondary endpoints in this critically ill population. 92% of them were accessed in intensive care units, including favorable efficacy in patients with key Gram-negative pathogens. The results of ASPECT-NP are currently under priority review at the FDA as a qualified infectious disease product with a PDUFA date of June 3rd. The same medication is also under review by the CHMP in Europe. Looking ahead and beyond ZERBAXA, we have multiple PDUFAs during the second quarter. In the infectious disease area, the first quarter saw acceptance with priority review for a new drug application detailing the activity of our novel beta-lactamase inhibitor Relebactam to be used in combination with Imipenem and Cilastatin for the treatment of susceptible Gram-negative infections with a PDUFA date of July 16th. In the oncology space, the FDA has granted priority review for KEYTRUDA in the first-line treatment of patients with current or metastatic head and neck squamous cell cancer either as monotherapy or in combination with chemotherapy based on the results of the KEYNOTE-048 trial with the PDUFA date of June 10th, and for KEYTRUDA in the third-line treatment of patients with advanced small-cell lung cancer based on results from the KEYNOTE-158 and KEYNOTE-028 trials for the PDUFA date of June 17th. We're also looking forward to a large set of Phase 3 results, including the first data from our registration enabling program for the 15-Valent pneumococcal conjugate vaccine V114, which is intended to provide broad protection against invasive pneumococcal disease in susceptible populations. We will provide more information about this program and about our other areas of research at the Investor Day meeting on June 20th. Now my colleagues and I will take your questions.

Thanks Roger. Darla, we'll move to the Q&A portion. We're sensitive to the rest of our peers reporting this morning. So we'll end our call just before 9 A.M. So I'd ask that you keep your questions to a maximum of one or two so that we can get as many people on the call as possible. So Darla?

I have two questions. First, Ken, could you discuss Merck's future as a primary care company? Many investors seem to believe that the company is shifting away from primary care to focus more on specialty care, especially after the loss of exclusivity for Genuity. However, you have programs like MK-7264. Could you share some insights into the company's long-term commitment and strategy regarding primary care? Secondly, can you provide more details on the KEYTRUDA loan opportunity in China? That would be really helpful. Thank you.

Well, let me start by saying that as a company, we are focused on following the science and coming up with innovative products that make a big difference. We are not saying we're going to be totally a specialty company or vaccines company or primary care company. What we actually want to do is to make sure that we take advantage of the best opportunities. Right now, in oncology, the current growth is largely driven by that. But if you look at our pipeline, things like for example, the pneumococcal vaccines are things that are essentially primary care type products. So I would say we haven't committed ourselves to one area of medicine. It has always been helpful to us to follow the science. And we're going to continue to do that going forward.

Good morning, this is Frank. We're very excited about the overall opportunity in China, as we demonstrated with a 67% growth compared to the previous year. Specifically regarding KEYTRUDA, last year we received our second-line melanoma indication in China, and we just obtained our first-line lung indication in combination with chemotherapy. We are very optimistic about the prospects in China and will be navigating the NRDL listing process with the Chinese regulators. Given the timing of our lung approval, we will have to assess if NRDL listing is feasible this year. A listing would create an exciting opportunity to increase volumes. However, even without that, we believe we are well positioned with KEYTRUDA in China, being the only PD-1 with a first-line lung cancer indication. We also intend to introduce additional indications in China, which we believe will position us well for future growth.

Right. Thanks. Let's move to the next question, please.

I actually wanted to focus not on cancer today for a change and perhaps on HIV for a minute. I just wanted to gauge your expectations into the drive to simplify Phase 2 trials coming up this summer. I understand you have a triple of like regimen. And I guess my question really is what is it that we can learn about MK-8591 in the context of the combination pill? And what are you, specifically looking for on deciding whether to take this program forward into larger Phase 3? Thank you.

MK-8591 has remarkable properties, both in terms of its effectiveness and the duration of its effects. We have previously shared some data, but we now have the opportunity to examine significant long-duration Phase 2 studies. I am optimistic about seeing strong responses in that setting, which will pave the way for Phase 3 programs. Over time, the true advantage of MK-8591 lies in its potential to be developed into a long-term format, such as an implantable option, which could greatly benefit pre-exposure prophylaxis and significantly simplify the treatment regimen for patients already infected with HIV, facilitating long-term viral suppression. We will soon be reviewing the Phase 2 results and will have the opportunity to present them. I believe this will lead to larger studies, and we are very excited about MK-8591.

Okay. Thank you. We'll move on to the next question please, Darla?

Can you provide more details about KEYTRUDA in front-line lung cancer, specifically regarding Europe? What is the current status of reimbursement and market share? How should we anticipate the growth in that first-line lung business for the remainder of this year? Additionally, I would like to understand the longer-term dynamics of margins. Could you discuss the trends in expenses over time? You've mentioned R&D investments for this year and next, but looking further ahead, can we expect expenses to decline after 2020, or is the improvement in long-term margins primarily due to expenses growing at a slower pace than revenue? Thank you.

With regards to KEYTRUDA outside the U.S. and Europe, in particular, first, we're very pleased. We sold close to $985 million this quarter and had growth of almost 69% versus prior year outside the U.S. So we're very pleased with our progress. In lung, specifically, lung represents about 70% of our sales outside the U.S. We have access right now in Germany and many of the mid-European markets. We're still working on access in several of the other large European markets for reimbursements, which we expect will come online hopefully in the second half of this year. So our overall momentum where we have first-line lung approval for monotherapy is very strong with a leader clearly in lung, in that setting. The chemo combination has helped us to ramp, as I mentioned. And we have market-leading shares in the markets in Europe there and look forward to the second half of the year where we'll see additional reimbursement additional markets come onboard for access. So we're very pleased with where we are in Europe and outside the U.S. with regards to lung.

So with your question on margin, maybe just an overall comment then the specifics on what's happening in the operating expense line. We have said and we continue to believe we do expect meaningful operating margin expansion over time driven by revenue growth, the changing mix of our business, our continued focus on efficiencies, and ultimately a moderation of R&D growth over time. So I just put that up there as to set context with, specifically when you look at what will be driving the margin expansion into your question. We will continue to see R&D grow over the next couple of years and we would expect that to be at a rate faster than sales. But after that, we do expect to see R&D moderate. It will still grow. And our overall OpEx we believe will continue to grow. It just will be growing at rates slower than sales that should allow for the margin expansion we've been talking about. So it's not that we expect absolute reduction in spend, but just a moderation of growth as we move through the bolus of investments in the really expansive and frankly impressive clinical program that our MRL colleagues have put together in the near term here.

Let's move on to the next question, please.

If I may, regarding KEYTRUDA, could you share what the average net prices in Europe are compared to the net price here in the U.S.? Is the administration's characterization of the pricing differential between the U.S. and EU of 1.3 to 1 accurate? Also, on the China market, how significant is KEYTRUDA currently in China? That would be very helpful to us. Thank you.

Yes. So on the first question, this is Frank, with regards to KEYTRUDA, we're really focused on our overall strong underlying demand in the U.S. and outside the U.S. in our strong data. We haven't shared with regards to net pricing outside the U.S. With regards to China, we see the opportunity as very significant. If you look at the lung market in particular, the 600,000 to 700,000 lung cancer patients in China, half of them have a driver mutation, and we think a couple hundred thousand of those patients are available for treatment with our overall KEYNOTE-189 regimen. So we see China as a very significant opportunity for growth going forward. And we're very pleased that we're rolling out our new lung cancer indication.

Thanks, Frank. We'll move on to the next question please, Darla.

So one, maybe just on the lung side, you mentioned the KEYNOTE-042 approval. Can you maybe just quantify sort of your expectations on the use of monotherapy in patients with PD-L1 between 1 to 50? And then also the stage three opportunity, I think maybe because people may surprise with that label expansion. So if you can talk about the commercial opportunities there? And then maybe, Ken, just building on the earlier question around primary care and sort of business development priorities. Can you maybe just comment broader on the sort of the size of deals that you want to focus on the science? I think a lot of investors are also curious on just as you think about bolt-on versus larger transactions or any changes in your priorities there?

We view KEYNOTE-042 as a significant step forward for our position in non-small cell lung cancer. As Roger mentioned, our new indication targets patients who are not suitable for surgical resection or definitive chemoradiation, allowing us to access Stage 3 patients. Although this is a smaller subset of Stage 3 patients, it is a crucial indication for us to expand within non-small cell lung cancer. Additionally, KEYNOTE-042 enables us to include all PD-L1 positive patients in the metastatic setting seeking a monotherapy option. Some patients may prefer monotherapy due to their performance status or other comorbidities, which we see as an important opportunity. We are very pleased that KEYNOTE-042 enhances our overall lung strategy and positions us strongly for future growth in this area.

Okay. And on the business development side, I would just say that first of all, last year, we were very active. We did about 60 transactions spanning licensing, technology deals, and clinical collaborations. As we said before, our goal is to find the best scientific opportunities that we can. Our balance sheet gives us the opportunity to look across the entire spectrum of opportunities. But we've also been very clear that while we look at everything, what is most appetizing to us are the bolt-on deals because we believe that they are the least disruptive from an R&D standpoint. I would also comment that while at the end of last year, we felt valuations were going in the right direction with the first quarter 2019 market recovery, assets are being more fully valued. As we look forward, we continue to say we have to be disciplined and look for those opportunities where we can create value going forward. Thank you.

Thanks, Ken. We'll move on to the next question.

I have two questions, please. The first one for Roger on V114. I'm simplistically wanted to say, well, your competitor is in the market experience that has a great number of stereotype areas, pressure for replacement strains. And so I underline the word simplistically. But what is it that you believe Merck brings to the table apart from speed to market, which you think is going to make sure that Merck is a major participant both pediatric and adult segments? And then second, in relation to the IPI proposals, and this is addressed to Ken or Frank. What do you think is the ultimate impact of IPI given the ability to negotiate in Europe provides nontransparent discounts but increased lift? Because what is the complexity of attacks this pricing the 340B hospitals? How does that all shake out? And do you think it's actually feasible to find a solution that works?

We are well-versed in the pneumococcal disease market, having had pneumovax available for decades. Our experience in this area is extensive, and we've been developing pneumococcal conjugate vaccines for over 20 years in our labs. I initiated these programs during my first tenure quite some time ago, allowing us to gain significant insights into creating highly effective vaccines. In particular, we have learned how to balance stereotypes to ensure a broad immune response. Our program, which includes V114 and others, will play a vital role in enhancing human health and providing protection against invasive pneumococcal disease in both adults and children. This will evolve over the coming years, and it will undoubtedly be a significant contributor.

On the international price index situation, so we have, first of all, we submitted our comments. We continue to see that it's not the best approach to dealing with the major problem that we have with patient out-of-pocket costs. I think we are much better approaching this issue in terms of trying to provide value based on what we deliver to patients. I don't think anyone's opposition to easing the burden on patients is actually the right thing. Finally, I would say that we've looked at some of the calculations in the report about KEYTRUDA. We're not sure it's actually the right one, but I will tell you that we continue to focus on the strong data that makes KEYTRUDA a unique product across many indications.

Right. Thanks, Ken. We'll move on to the next question.

A couple questions. KEYTRUDA numbers were impressive, but a touch below expectations. Just wondering if there were any one-time factors that impacted the Q1 number? And secondly, on gefapixant, it looks like an effective drug and a safe drug, but I don't believe the Phase II data in OA or OA pain ever was presented neither were other smaller studies that completed sometime ago. So can you elaborate on the data set supporting gefapixant? Thank you.

Yes. So KEYTRUDA sales, as we've mentioned, were $2.3 billion this quarter of 60% growth year-over-year as exchange. And what I tend to look at is what's happening from an underlying demand perspective. When you look both versus prior year and sequentially, we're seeing very good continued underlying demand. You will see quarter-to-quarter some fluctuations based on some inventory movements. But overall, I think that we feel very good about how we're seeing the demand ramp. In particular, we're seeing strong overall demand with regard to our lung cancer indications both in non-squamous claims and squamous cell carcinoma non-small cell lung cancer. In fact, in squamous cell lung cancer, we're seeing our market shares exceed 75% for new patients. So we've become the standard of care in that subset of patients. We also are feeling very excited about the opportunities outside of lung. In the U.S., as Roger mentioned, we have our new indication now based off of KEYNOTE-426 and renal cell carcinoma. We see that as a very significant opportunity for future growth. As well as Roger also highlighted KEYNOTE-48 with a PDUFA date coming up in June for head and neck cancer, and we have market leadership position in head and neck in later lines of therapy. We're very excited about KEYNOTE-48; additionally, I mention is outside the U.S. as we've been saying, we see significant opportunities based on some of the continued rollouts in Japan and China and in Europe. So we're very confident about the KEYTRUDA ramp and feature growth prospects going forward.

Thanks, Frank. We will move to Roger.

On 7264, it makes sense that the underlying logic of this is the belief based on a variety of preclinical studies that the purinergic receptors, and particularly P2X3, contribute to a neuronal hypersensitivity syndrome. In the setting of chronic stimulation, there is sort of a feed forward phenomenon that contributes to Angelin and other sensitivity syndromes. That's true. We believe, in the first case, in the chronic cough setting where an early stimulus, usually a result of inflammation leads to a cough syndrome that does not resolve after eight weeks. In that setting, as we've demonstrated in Phase II studies, gefapixant has dramatic effects, but as well in some other chronic stimulation syndromes. We're looking at a number of those, including endometriosis, there's a lot of preclinical data that supports the conjecture, but fundamentally, we need better clinical data, and that's what we're going to get.

Thanks, Roger. We’ll move like to the next question.

Frank, I'd like to ask about lung trends in the U.S. The brand impact data indicates that first-line share has remained stable at around 60% in Q1. Are you observing any moderation in sequential share gains in the U.S.? What do you believe the ceiling share could be for first-line lung? Additionally, Roger, can you discuss how you plan to optimally leverage the recent immune design technology now that it's in-house? How do you perceive a new engine and approach in immuno-oncology overall? Thank you.

Geoff, in the U.S. and lung, we're seeing is with regards to share, you have to take out patients that do not have EGFR or ALK genomic tumor aberrations. So we see our market shares somewhere in the low 70% share for the non-squamous non-small cell lung cancer segment. We see very strong penetration, Geoff, within PD-L1 positive patients. The 15 above segment, which we're pretty much getting all of those patients in the 145, we have penetrated very significantly. We still have opportunity for growth in the PD-L1 negative patient population. That's a focus for the commercial team. So I do see that as being the opportunity we'll continue to educate, in particular, the community physicians in the U.S. with regards to lung. As I mentioned with regards to the squamous non-small cell lung cancer patient population, we have penetrated that very rapidly over three quarters. Those patients are now being treated with a chemo combo regiment or with monotherapy. We still see growth for squamous, but clearly we have penetrated that segment very rapidly. As I mentioned before, we are very excited not only about lung but all the other indications that I spoke about, and Roger spoke about that are upcoming new launches for us in the U.S.

In immune design, we identified two key assets that are of significant interest to us. The first is the molecularly defined adjuvant, which we believe could enhance some of our newer vaccines that need an adjuvant, as well as some older vaccines that aim for a reduced number of vaccinations. We are carefully evaluating these factors. The adjuvant has been tested in thousands of individuals, so we have a solid understanding of its safety profile, which is reassuring. The second asset is the lentivirus vaccine, which stands out for several reasons: its selective targeting of dendritic cells, its high carrying capacity, and its considerable clinical exposure showing it can stimulate an immune response. This can be utilized for neoantigens, as well as for more traditional cancer testis antigens that are often overlooked but may gain prominence in the future. We are eager to explore these strategies alongside other immune modulators that we have already developed.

Thanks, Roger. We'll move on.

So my first question is on China. And do you think that individual drugs have blockbuster potential? And if so, what has to change in the market for this to happen? And then just a follow-up question on V114, if it's approved, what is your go-to-market strategy? You might have competition that's in the market now and potentially coming. For example, will you target children first and then go after adults? What do you anticipate the ACIP recommendation may be? Thank you.

With regards to China, we see China as a very significant opportunity for us. As we mentioned, we're seeing very strong growth. I think, for us, what's important is we have pivoted to innovation in China. And this has always been a part of our overall strategy at Merck. So when you think about the launches right now in China of GARDASIL, of KEYTRUDA, LYNPARZA, LENVIMA, BRIDION, JANUVIA has just now received an NRDL listing. We see a significant opportunity for China across a number of products within our innovative portfolio.

When we think about V114 and the opportunity going forward, we think there's a great opportunity in both the pediatric and adult segments. Obviously, we've had a presence in the adult segment as Roger noted within Pneumovax 23 for over 35 years. As we think about the pediatric segment, clearly, we were touching all pediatric offices basically around the world with our existing vaccines. And so when we look at the opportunity for 114, a lot of it comes down to really understanding the underlying epidemiology and how that's evolving over time. With 114 at a market level, that is different, but also across pediatric and the adult segments, the epidemiology is evolving quickly. As we think about the ultimate recommendations, it’s clear that customers want choice in this market. With 114, we think we provide a really valid alternative, especially given the fact that we have a very balanced immune response across all 15 stereotypes that we’re covering in our vaccine. What we're seeing today is that there are some stereotypes that are inadequately covered. We're seeing breakthrough with those from the existing vaccines.

Thanks, Mike. We'll move on to the next question, please.

I have a couple of questions. If I repeat anything, I apologize. First, regarding Animal Health, the constant currency growth was 3%, which includes 1% in livestock. Was the issue in livestock just at the end of the quarter in the U.S.? There were Midwest floods and other weather issues at the end of the quarter, but I’m unsure if there were additional factors that affected the livestock business. You mentioned that you expect growth for the full year to surpass the market for Animal Health. What is the market anticipated to grow in 2019? Additionally, could you provide details on the inventory fluctuations for KEYTRUDA in the first quarter, and for Gardasil if there were any? Thank you.

As you look at what happened with Animal Health in the first quarter, your numbers are quoting are correct. And really what we were seeing is the impact of the cold weather. It's not necessarily the flooding that went through the middle part of the country. It's really more due to the cold weather patterns, which cause the cattle to stay in the fields longer and not move into the feedlots as quickly. Given that a lot of our products are more focused on feedlots, that mix dynamic of just how it played out affected us in the quarter. We also then just see some buyout from our distributor partners due to some consolidation going on in the distributor space. It was really a combination of a change in channel and buy down to pull down inventory in the channel and the seasonality impacts that affected the business in the first quarter. As we look to the full year, we do expect to grow above market. If you look at where the Animal Health market has been over the last couple of years, it's in the roughly, I would say, low to mid-single digits of growth. So we expect to outpace that, and as before, we layer in the impact of the Antelliq acquisition.

With regards to KEYTRUDA, as I mentioned, with the brand that is now of this size, you're going to see some slight movements with regards to the channel quarter-to-quarter. We're focused, as I mentioned, really on the strong underlying demand that we're seeing in our major indications, as well as the future indications we're prepared to launch.

Right. Let's move on to the next question, please.

Frank, a follow-up if I may on the KEYTRUDA opportunity. In China given that it sounds like it's going to become increasingly important. As I'm sure you know there are Chinese companies that are also working on PD-L1, some of them moving to late stage. And these could compete with you on price. So as you look at China longer term. What's the outlook from a competitive perspective in immuno-oncology? And do you also see a future where these PD-1s compete with KEYTRUDA in the U.S. and developed markets? And if I may, could you provide your estimated KEYTRUDA sales by indications in major markets? Thank you.

So on the estimated sales in the U.S. by indication, we usually don't provide that out. So 65% of our sales in the U.S. are lung, 10% are approximately melanoma, and head and neck represents about 5%. As I mentioned, we're very excited about the opportunity we have upcoming in head and neck, bladder represents about 5%, and MSI-High is becoming a very important indication for us representing about 5%, and all others approximately 10%. Going back to your question on China, we believe oncology is really a data-driven area. Given the severity of the disease, if you look right now what's been accomplished with KEYTRUDA, and we've always said that this wall of data is going to be important. We think that this continues to differentiate us in the marketplace. China will clearly be a competitive market. But our first-mover advantage with the first-line lung cancer approval, we think sets us up very well. The local players in China do not have an approved indication right now in first-line lung nor have they conducted or achieved the results of a trial like KEYNOTE-189. Our strategy as we've seen in the U.S. right now, there are five additional competitors there. We believe our clinical execution and commercial execution and our significant amount of data will help us to compete in China as well as any other market around the world.

Right. We're going to try to get at least one more, and if we can squeeze it in.

Just a broader question on China in general, big growth in the quarter, but they've implemented certain policy changes like this four-plus tendering process yet a lot of industry participants think is going to slow down overall Chinese growth for multinationals. What is your outlook for that for Merck's overall book of business? The second question is KEYTRUDA. The triple-negative breast 522 has been trial system update. Are we likely going to see data this year? Is that still possible? And if it is, is that just going to be PCR? Or could we actually see clinical efficacy being reported out? Thank you.

So in China, for us, we have pivoted to more of the innovative products that are driving our growth. Gardasil, KEYTRUDA, BRIDION, LYNPARZA, and LENVIMA. We feel that we are very well positioned, and that's going to help us to continue to see growth. We will likely see some impact from some of the older products based on some of the pricing initiatives that are underway in China and some of the provinces. While we may see some bumping us along the way, we have shifted the majority of our portfolio. Approximately 60% to 70% of it is now focused on innovative products. We feel as though that positions us very well not only in the near term but for the long-term growth in China.

On KEYNOTE-522, the study is supervised by an external data monitoring committee, and they will be evaluating as it's event-driven. My expectation is that it is possible for sure that we could see some review from them. There was a previous interim which led to the study continuing and our expectation is that there will be an opportunity to see additional data. But I can't speak to what those data will be. As soon as we know, we'll have the opportunity to announce it. That's basically they're in control.

So thank you for joining the call today. We are executing well across our business and we remain confident in our performance for the year and the long term. We look forward to discussing our pipeline and business in more detail at our Investor Day in June. Thank you.