Merck & Co Inc (MRK) — Q4 2020 Earnings Call Transcript

Thank you, Lara, and good morning. Welcome to Merck's fourth quarter 2020 conference call. Today I'm joined by Ken Frazier, our Chairman and Chief Executive Officer; Rob Davis, our Chief Financial Officer; Dr. Dean Li, President of Merck Research Labs; Frank Clyburn, our Chief Commercial Officer; and Mike Nally, our Chief Marketing Officer. Before we get started, 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 provided a reconciliation in our press release. We've also provided a table in our press release to help you understand the sales in the quarter for the business units and products. And the supplemental financials posted to our website include recapped 2020 quarters based on the reporting change we are announcing today. I would also like to remind you that some of the statements that we make 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 made based on the current beliefs of Merck's management and are subject to significant risks and uncertainties. If our underlying assumptions prove inaccurate or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements. Our SEC filings, including Item 1A in the 2019 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. Our SEC filings, today's earnings release, and an investor presentation with highlights of our results are all posted on merck.com. With that, I'd like to turn the call over to Ken.

Thank you, Peter. Good morning and thank you all for joining today's call. Before turning to our financial results and our future perspective, I'd like to make a few comments about this morning's other announcement. It has been a distinct honor and privilege to serve this great company as its CEO over the past decade. I thank all of my Merck colleagues for their extraordinary support throughout this period. We are making this leadership change with the knowledge that Merck has the elements in place for a strong future of scientific innovation and profitable growth. Rob Davis is well prepared and well suited to help Merck capitalize on the many exciting opportunities before it as well as to take on the challenges that lie ahead. He and the Merck senior team will provide outstanding leadership for our company in the coming years. Given Merck's current position of strength, the Merck Board and I believe it is a good time to begin transitioning the company's day-to-day decision-making as well as a strategic direction to Rob, who will assume the title of President in April, at which point our operating divisions, Human Health, Animal Health, Manufacturing and Research, will begin reporting to him. I will retire as CEO at the end of June but remain for some time as Executive Chairman to assist Rob, Dean, and the rest of the senior team. I am extremely confident in the capabilities and commitment of Merck's people and Rob's ability to guide the company to an even brighter future. Moving on to our results. Despite challenges from the pandemic, Merck achieved solid growth in revenues and earnings in 2020, made meaningful advancements in our pipeline and added important assets through business development. Despite the particular impact on our portfolio, the underlying demand for our innovative medicines and vaccines remains strong. And our initial guidance reflects our expectation for a return to strong growth this year, 2021. Looking out to 2024, we continue to believe our revenue potential is underappreciated. Longer-term, the work we are doing in advancing our internal pipeline and adding assets through business development gives us increasing line of sight to significant potential growth drivers later this decade and into the next. I'm amazed by the dedication of our employees who rallied to keep supply uninterrupted, regulatory filings on track, and clinical and commercial execution in line with our goals. And I remain continually inspired by what Merck accomplishes for patients around the world. I'm also encouraged by the progress scientific experts across the biopharmaceutical industry have achieved in bringing vaccines to market that will help address the pandemic and start to return the world to normalcy. These successes further underscore the societal value of our industry's ongoing investments in science and innovation. Merck remains committed to developing an effective response to COVID-19 also. We have discontinued development of our COVID-19 vaccine candidate, but our therapeutic research programs continue to move forward. We believe that our oral antiviral candidate molnupiravir could make an important contribution to treating COVID-19 patients, and we look forward to seeing the results of our pivotal trials. More recently, we acquired OncoImmune and accelerated the development of MK-7110, a Phase 3 candidate with strong potential in the treatment of severe and critical COVID-19 patients. I am encouraged by the innovative research happening in our lab, not just on the COVID front, but across our broad late-stage pipeline of promising medicines and vaccines, including in oncology, HIV, and pneumococcal disease. We remain highly focused on business development to enhance our internal pipeline. We completed 120 transactions in total in 2020, including important acquisitions, such as OncoImmune, VelosBio, and ArQule, as well as collaborations including CGEN and Ridgeback. Our plan to spin off Organon remains on track for completion late in the second quarter. As an independent and more focused company, I am confident Merck and Organon will have the ability to more effectively pursue their respective market opportunities and business strategies to bring more value to patients and to shareholders. Let me conclude by expressing my confidence in the leaders of this company and how proud I am of the Merck team's success in advancing our pipeline and maintaining business continuity in a challenging environment. Additionally, I'd like to recognize and thank the frontline healthcare workers, scientists, and government officials working together to bring the world back to normalcy. And with that, I'll pass it on to my colleague, Rob, to review the details of our performance and our outlook.

Thanks, Ken, and good morning, everyone. I am honored to be named Merck's next Chief Executive Officer and look forward to continuing our important work in providing medicines and vaccines to those in need. Under my leadership, Merck will stay focused on scientific innovation as the key to long-term value for our patients and shareholders. Ken's unwavering commitment to excellence and patient-centered scientific innovation is deeply embedded in our company culture. During his leadership, Merck has experienced improved growth and clinical success, particularly with KEYTRUDA, along with a revitalized pipeline and research capabilities that will benefit the company and our patients for years to come. Ken has positioned us for financial and operational strength, allowing us to pursue our mission of saving and sustaining lives through scientific innovation. I have personally and professionally benefited from his mentorship and want to express my gratitude. His role will be hard to fill, but I am confident in the talent and commitment of Merck's employees worldwide, ensuring our continued success through this transition and well into the future as we build upon Ken's legacy. Now, regarding the business, our resilience amid the challenges posed by the global pandemic is a testament to the hard work and dedication of our employees worldwide. Our performance during this time reinforces our confidence in our science-led strategy and potential for strong growth in 2021 and beyond. Underlying demand for our key growth areas enabled our business to achieve 2% growth year-over-year, or 4% when excluding the impact of exchange rates, while absorbing approximately $2.5 billion in negative pandemic-related revenue effects. Without the pandemic, we estimate our growth for the year would have been around 9%, excluding exchange. Now, looking at our fourth-quarter results. Total company revenues reached $12.5 billion, a 5% year-over-year increase, both nominally and excluding foreign currency impact. Our fourth-quarter results were negatively affected by approximately $400 million due to the pandemic. Excluding this impact, fourth-quarter revenues would have increased by about 9%, excluding exchange. I will now comment on an excluding exchange basis. Our Human Health revenues rose by 6%. In Oncology, KEYTRUDA sales in the quarter increased by 27% to $4 billion, marking a 30% growth for the year to $14 billion. In the U.S., KEYTRUDA continues to lead in lung cancer and shows strong usage across all major tumor types. We are also witnessing robust growth outside of lung cancer, particularly in renal and endometrial carcinomas, alongside increased uptake of our Q6 weekly dosing regimen. Internationally, KEYTRUDA's growth is primarily driven by lung cancer indications. The uptake from KEYNOTE-189 in newly reimbursed markets for KEYNOTE-407 remains a significant growth driver in the EU. In Japan, price adjustments in the first half of the year more than compensated for underlying volume growth. Lynparza and Lenvima continue to show strong growth and contribute meaningfully to our oncology portfolio, increasing by 53% and 26%, respectively, year-over-year. Our vaccines portfolio has been affected by lower than normal wellness visits, especially in the U.S. GARDASIL sales grew year-over-year mainly due to the $120 million CDC stockpile replenishment in the quarter and a $120 million borrowing in the fourth quarter of 2019, resulting in a total positive impact of $240 million year-over-year. Our hospital performance showed further improvement in the fourth quarter with BRIDION sales growing by 13% year-over-year due to ongoing market share gains, tempered somewhat by fewer elective surgery procedures. Our Animal Health business also had a strong quarter with sales of $1.2 billion and 6% growth, driven by a 9% increase in Companion Animal sales due to demand for vaccines and parasiticides, and a 4% rise in Livestock sales, largely reflecting an additional month of sales from the Antelliq acquisition. Regarding our profit and loss, on a non-GAAP basis, the gross margin was 73% for the quarter, up 0.4 percentage points, driven by a favorable product mix and manufacturing variances, though partially offset by higher inventory write-offs due to a recall of ZERBAXA, pricing pressure, and foreign exchange effects. Operating expenses rose 4% year-over-year to $5.4 billion. COVID-19 had a largely neutral impact as operational savings were balanced by additional spending to advance our COVID-19 research programs. The quarter's operating expenses reflect overall growth in R&D spending and a donation to the Merck Foundation. Other income rose year-over-year owing to income from equity securities. The effective tax rate for the quarter was 15.3%, down 1.6 percentage points from last year due to a favorable earnings mix. In total, we earned $1.32 per share, an increase of 17%. Before discussing our 2021 outlook, I want to point out that our press release outlines changes to our reporting that will take effect in the first quarter, which are reflected in our guidance ranges. These changes will better align our non-GAAP results with our underlying operational performance and reduce unpredictable quarterly volatility. While these changes will affect our non-GAAP results going forward, they will not impact cash flow. Now, for our 2021 guidance, we expect revenues of $51.8 billion to $53.8 billion, representing growth of 8% to 12% compared to 2020, excluding any potential revenue from our COVID therapeutics. This range accounts for a positive foreign exchange impact of roughly 2 percentage points based on mid-January rates, and anticipates full-year pandemic impacts of approximately 2% or about $1 billion, primarily in the first half of the year. We estimate a gross margin of around 77%, including a 1.8 percentage point benefit from the reporting change. Operating expenses are expected to grow at a high single-digit to low double-digit rate, while normalized for COVID impacts, they would increase closer to mid-single digits. We foresee other expenses around $400 million in our other income and expense line, mainly from net interest expense. Under our previous reporting, we would have projected an expected $400 million of income, translating to an $800 million unfavorable swing. This difference stems from anticipated gains on the sale of Preventice, mark-to-market gains on our investment holdings, including our indirect investment in Moderna, and other expected investment gains that will now be excluded from non-GAAP reporting. Our projected full-year tax rate is between 15% and 16%, with an anticipated 2.53 billion shares outstanding. Thus, we expect our non-GAAP EPS to range from $6.48 to $6.68, reflecting a growth of 12% to 15% compared to the recast EPS for 2020. This range incorporates roughly a 3 percentage point positive impact from foreign exchange. Our EPS growth under the new reporting framework benefits from the exclusion of the disproportionate mark-to-market equity gains recorded in 2020. However, regardless of the reporting method, we expect significant operating margin leverage of 1 percentage point or more in 2021. The benefit to our 2021 EPS guidance is only $0.08 under the new reporting compared to the previous method. We will closely monitor the ongoing pandemic's effects on wellness visits and delayed procedures as we progress through 2021. We remain confident in our growth potential in both the near and long term, propelled by our innovative and derisked portfolio. Now, turning to Organon, we are on track to complete its spin-off, expected to occur in late second quarter. The strategic benefits of this transaction are increasingly clear. In 2020, the products we plan to spin off as part of Organon generated revenues of $6.5 billion. The high-level metrics we shared a year ago are largely unchanged, and we anticipate Organon will generate revenues of $6 billion to $6.5 billion in 2021. As the negative effects of the loss of exclusivity on key brands decrease, we expect Organon to see longer-term revenue growth in the low to mid-single digits. As an independent company after the spin-off, we expect Organon's operating margins to be in the mid-30% range, growing over time, compared to a non-GAAP operating margin of around 45% within Merck, reflecting the additional costs Organon will face as a standalone entity. Initial EBITDA margins are projected to be in the high 30% range and are expected to improve over time. This represents a slight decrease from our earlier guidance due to a lower-than-anticipated proportion of capital assets transferred to Organon. We forecast Organon's initial debt to be between $9 billion and $9.5 billion. Merck is projected to receive a special tax-free dividend of between $8.5 billion and $9 billion before the spin-off. We continue to expect Organon to pay a significant dividend that will be entirely incremental to Merck's dividend. For Merck, the spin-off of Organon is anticipated to allow for approximately $1.5 billion in incremental operating efficiencies over three years, including about $500 million in 2021, which is incorporated in our guidance. We now project operating margins greater than 42% by 2024, an improvement of 2 percentage points compared to our previous expectation exceeding 40%, as a result of our reporting change. For modeling purposes, please remember that Merck will continue to incur overhead costs previously allocated to Organon’s products, estimated at approximately $400 million annually. These stranded costs will decrease over time and are factored into our overall efficiency target. In conclusion, the strength and resilience demonstrated by our business in 2020 bolster our confidence as we enter the new year. Demand for our key growth drivers remains solid, and we are optimistic about delivering strong growth in 2021 and the following years. We will leverage our solid financial position to make significant investments in our pipeline, seizing both internal and external opportunities, and making strategic decisions like the Organon spin-off to ensure our ongoing success. With that, I will hand it back to Ken.

Thank you, Rob. As I've underscored many times, innovative research is the cornerstone of Merck. This is why we planned carefully for Dr. Roger Perlmutter's retirement and the transition of leadership of the Merck Research Laboratories to Dr. Dean Li, who I'm pleased to welcome to today's call. Dean is a physician scientist who has a keen understanding of Merck's mission, dedication to science, and our early and late-stage assets. He has hands-on experience leading key areas of research, including early discovery in translational medicine, while under Roger's leadership at Merck, as well as in his prior role where he exploited new technologies to found companies and was a leader in an academic healthcare delivery system. We believe he is uniquely positioned to take on this important role and advance Merck's promising pipeline. I'm confident that under Dean's leadership, Merck's legacy of innovative R&D will continue, and we will persist in successfully bringing forward breakthrough medicines and vaccines that make a real difference for patients and shareholders alike. Dean?

Thank you, Ken. I'm delighted to be here for my first earnings call as Head of Merck Research Laboratories. For my remarks today, I will provide an update on our COVID research effort, cover key regulatory milestones, clinical updates, and recent business developments, first in our oncology pipeline and then the broader pipeline. Regarding our COVID-19 research programs, Merck has made the decision to discontinue the development of its vaccine candidate, V590 and V591. This decision was based on clinical findings from the Phase 1 study showing that, while the vaccines were well tolerated, immune responses were inferior to those observed with natural infection and those reported for other authorized COVID vaccines. We are grateful to our collaborators and the volunteers who participated in this trial. Our COVID-19 efforts now shift, advancing our two therapeutic candidates, molnupiravir, often known as MK-4482, and MK-7110. Our orally available antiviral candidate molnupiravir, which we are developing in collaboration with Ridgeback Biotherapeutics, continues to progress in our Phase 2/3 trials studying hospitalized and non-hospitalized patients. The primary completion date is in May 2021, but it is possible that we may have interim efficacy data in the first quarter, which, of course, we would share publicly if meaningful. Molnupiravir has the potential to play an important role in the current pandemic as well as other emerging novel coronavirus infections. We have been scaling production capacity and expect to have over 10 million courses of therapy available by the end of 2021. We recently added the second candidate to address COVID-19 through the acquisition of OncoImmune. This agent, MK-7110, is a recombinant fusion protein administered by IV infusion that targets the novel immune checkpoint. Final results are expected in our clinical trial in the first quarter. Turning to oncology. In the fourth quarter, KEYTRUDA received an additional new approval in the U.S. in combination with chemotherapy for first-line treatment of patients with metastatic triple-negative breast cancer, whose tumors express PD-L1 at a combined proportion score of 10 or greater. The approval was based on progression-free survival results from KEYNOTE-355, and this marks the 17th tumor type for which KEYTRUDA has been approved. Also in the last quarter, the FDA accepted a supplemental New Drug Application with Priority Review for KEYTRUDA in combination with chemotherapy in previously untreated patients with esophageal carcinoma regardless of PD-L1 expression based on KEYNOTE-590. These results demonstrated clinically meaningful improvement in overall survival, progression-free survival, and overall response rate. The FDA target action date is April 13. Working with our partners at Eisai, we are pleased to note positive results from the KEYNOTE-581 trial for KEYTRUDA plus Lenvima versus sunitinib for first-line treatment of renal cell carcinoma. The study demonstrated statistically significant improvements across primary and secondary endpoints, and these data will be presented at ASCO GU next week. We also announced that KEYNOTE-775 evaluating KEYTRUDA plus Lenvima for treatment of second-line endometrial carcinoma was stopped early. The independent data monitoring committee reported that KEYTRUDA plus Lenvima demonstrated a significant improvement across all endpoints versus chemotherapy. The success of KEYNOTE-581 and KEYNOTE-775 reinforces the opportunity presented by the combination of KEYTRUDA in the multi-tyrosine kinase inhibitor, Lenvima. We continue to explore this combination in 19 studies spanning multiple tumor types. Now looking ahead, we look forward to meeting with the FDA's Oncologic Drug Advisory Committee to discuss data from the third interim analysis from KEYNOTE-522, evaluating neoadjuvant and adjuvant treatment of patients with early-stage, triple-negative breast cancer as compared with an alternative regimen. The BLA that includes data from this study is currently under FDA review with a PDUFA date next month. Business development remains a priority. In the fourth quarter, we completed the acquisition of VelosBio, whose lead candidate, VLS-101, known as MK-2140, is a ROR1 targeted antibody drug conjugate currently being evaluated in a Phase 2 study of patients with solid tumors and in Phase 1 for patients with hematologic malignancies. This opportunity, along with the LIV-1 antibody-drug conjugate that we are developing in partnership with Seagen, underscores our commitment to investigating tumor-targeted chemotherapy using next-generation antibody drug conjugates. Now, as part of our strategy to explore new tumor-targeting technology, we recently entered collaborations with A2 Biotherapeutics and Artiva Biotherapeutics aimed at evaluating opportunities for K and NK cell therapy, and a third collaboration with Janux Therapeutics on their T-cell engager technology. These collaborations, along with work already underway with Dragonfly Therapeutics to design targeted NK cell engagers, support our commitment to tumor-targeting technologies. Now turning to our broader pipeline. We continue to progress our suite of pneumococcal vaccine candidates, V114, V116, and V117. Each one is designed for targeted production against prevalent pneumococcal disease serotypes across different age groups. For V114, our 15-valent pneumococcal vaccine candidate was recently granted Priority Review by the FDA for the prevention of invasive pneumococcal disease in adults. The target action date is July 18. Adults administered V114 produced comparable levels of antibodies for all serotypes in the currently available conjugate vaccines with higher responses observed for serotype 3, one of the most common causes of invasive pneumococcal diseases in adults and in children. Robust response to unique disease-causing serotypes, 22F and 33F, were also observed. Now in the U.S., serotypes 22F and 33F have been linked to 13% of invasive pneumococcal disease seen among adults aged 65 and older and, in Europe, 7% to 12% of adult cases. Our V114 Phase 3 pediatric studies are on track, and we anticipate results from these trials this year. In addition to V114, we are progressing our adult and pediatric next-generation vaccines, V116 and V117. The infectious disease space is latravir, our novel nucleoside reverse transcriptase translocation inhibitor for HIV continues to progress in both the treatment and in the PrEP setting. In the PrEP setting, we expect to begin recruitment soon for 2 new Phase 3 trials, IMPOWER 22 and IMPOWER 24 in different populations at high risk of acquiring HIV infection. Now IMPOWER 22 will evaluate the efficacy and safety of islatravir as a once-monthly oral capsule in adult women and adolescent girls. IMPOWER 24 will evaluate the same regimen in men who have sex with men and transgender women who have sex with men. Also, in the PrEP setting, positive interim results from the Phase 2 trial evaluating islatravir as a once-monthly oral PrEP regimen were recently presented at HIV Research for Prevention 2021. These interim results show that islatravir achieved the efficacy pharmacokinetic threshold at each of the 2 doses studied, 60 milligrams and 120 milligrams, and that these doses are well tolerated. These findings offer further evidence for the potential of islatravir to provide a monthly oral PrEP option for people at risk of acquiring HIV. Now, in addition, as we announced previously, we are advancing MK-8507, our non-nucleoside reverse transcriptase inhibitor, in combination with islatravir into a Phase 2 study as a potential once-weekly oral treatment option. This weekly islatravir MK-8507 combination builds on the once-daily islatravir plus doravirine combination currently in a Phase 3 study, which we expect to start to read out in the second half of 2021. Finally, we received FDA approval for Verquvo following Priority Review. This new option for patients who've experienced worsening heart failure built on our commitment to develop therapies for patients with cardiovascular disease. We at Merck Research Laboratories are well positioned to continue to take full advantage of our considerable strength in oncology and vaccines while investing in other therapeutic areas and exploring new modalities and complementing and supplementing our internal pipeline with external opportunities. I will now turn the call back over to Peter.

Thank you, Dean. We recognize there could be additional questions today, and we're prepared to extend the call past 9 AM. But in order to get to as many analysts as possible, I ask that you please limit yourselves to one question. Lara, could you start the queue, please?

So Rob, congratulations on the CEO appointment. Just wanted to get a sense of your thoughts in terms of Merck moving forward. You've talked about the underappreciation of the upside that you see for the company in 2023 relative to consensus expectations, but the obvious question that is going to continue is, how are you thinking about the evolution of the company in sort of 2026 to 2030 as KEYTRUDA basically approaches its patent expiration? What do you think the company really needs to do in that regard? And then just as a follow-up to that, just from a strategic perspective, can you just give us your thoughts around the Animal Health business as part of Merck? Could that be part of a future restructuring?

Thanks, Seamus, for the question. As we look forward, from a strategic perspective, obviously, there'll be a lot more time as we move into the months and quarters to come to continue to have the dialogue. But I think at the highest level, the important point is that the strategy we've been under, which is focused on scientific innovation as the core of who we are, driven first by really the revitalization of what we're doing in drug discovery and from a clinical development perspective, which I think you're seeing the fruits of, and obviously, what we're achieving with KEYTRUDA and with what we see as a growing earlier-stage pipeline, which we're excited about. So, as we look at 2025 and beyond, and into the 2030 timeframe, it really is to continue to focus first and foremost on investing behind the best science, whether it comes from inside the company or outside the company, and execute on the pipeline we have. We have a lot of great near-term, late-stage launches coming. We've got islatravir, we've got our V114, the entire pneumococcal franchise that we're building. We have obviously a whole host of opportunities in oncology which I'm sure Dean and others would be happy to comment on. Looking at both what we can do to extend the breadth of KEYTRUDA's reach to the number of patients it serves as well as its efficacy through combinations as well as broadening into other oncology fields and broader mechanisms, which we have. So, that all will be continued to be where we will focus our efforts. But as we started to highlight even at the JPMorgan Conference, I think people underappreciate what we have as growth opportunities as we start to move into that 2028 and beyond timeframe. Clearly, we have a real opportunity to continue to grow between now and then with KEYTRUDA, but I think actually we will have an opportunity to grow beyond it through all of the things I mentioned. So more of the same from that regard. And then with regard to Animal Health, we continue to see Animal Health as a strategic part of this business. If you look at the growth that business delivers, it's best-in-class within the animal health space. It's accretive to the overall position for Merck, and we are investing in it, and I think it is positioned to continue to show very strong growth, both through the existing products it has but also through a very good portfolio of pipeline products which is leveraging the synergies we have with the MRL function we have on the Human Health side. So, as we sit here looking forward, I continue to see Animal Health as a core part of our strategy. And as we've said, we always are looking at our portfolio, but everything I see tells me that this is something we will maintain and grow because we are the most advantaged owner, in my mind.

Next question please, Lara.

I have a question about islatravir. Roger was quite adamant that cabotegravir was not the appropriate partner for fixed-dose combinations in treatment. However, aside from the capsid inhibitor, there don’t appear to be many other alternatives. With Dean's leadership bringing a fresh perspective, should we assume that things will stay the same, or could there be potential in reconsidering cabotegravir as a combination? Additionally, could you discuss whether, in the PrEP setting, it’s possible to bridge islatravir to investigate various delivery formulations, including very long-acting options, without needing to conduct separate trials?

Thank you for that question. I’d like to provide some insights on how to consider islatravir. One way to view it is as a potential foundational medicine for both PrEP and treatment. Key attributes to consider include the pharmacokinetic dosing schedule, route of administration, resistance profile, tissue levels, and compatibility with other treatments. Regarding treatment, we've discussed dosing once daily and once weekly, but if this molecule is as foundational as we believe, it could be combined with various mechanisms and other molecules. Integrase inhibitors, particularly cabotegravir, are an important class that Merck values, so it’s essential to investigate this carefully. Lenacapavir represents a new mechanism, and we believe islatravir should be explored in a wide range of combinations since we consider it foundational. This foundation could offer significant benefits to many patients, and we should investigate all possible combinations to validate and demonstrate this.

Next question please, Lara.

Congratulations, Ken, on your outstanding career and best wishes for the future. Also, congratulations to Rob on his new role and responsibilities; best of luck to you. I have a two-part question. Rob, could you share your thoughts on the share repurchase outlook for 2021? You have the $8 billion to $9 billion dividend coming in from Organon, so how aggressive do you plan to be in that area? Additionally, Dean, regarding MK-4482 and building on Ken's comment about its significant contribution to the COVID situation, do you already have some of the initial Phase 2 data available?

Maybe I'll start and then let Dean chime in. Thanks for the question, Terence, and I appreciate the kind words. Regarding share repurchase, as we’ve mentioned, our primary focus remains on business development. Our top priority is to fund our internal R&D and the ongoing capacity expansion from a capital standpoint. Beyond that, we aim to pursue business development opportunities, which is why we've been cautious with share repurchases. It's also important to note that we're not just trying to accumulate cash for its own sake, nor are we solely focused on enhancing our credit rating. If we don't find sufficient opportunities for using our cash in business development over time, we will return it to shareholders consistently. You specifically asked about the $8 billion to $9 billion potential dividend from Organon. We have the same priority on business development first, but if we don’t identify those opportunities, we will consider returning that to shareholders. We’ll have a clearer view of this by late second quarter and into the second half of 2021.

Yes. In terms of the 4482 question, it's a Phase 2/3 trial. It has different interim analysis. The critical component of the Phase 2 different interim analyses is to sort of establish dose. At this point, we have not fully taken a look at all of the data that is available to us regarding that Phase 2.

Thank you, Terence. Next question please.

Thanks for the questions, and congrats as well to both Ken and Rob. I just had a 2-part question on capital deployment in Biz Dev. It's obviously been a big focus and remains a big focus of the organization. Should we think about any pauses or slowdown in activities, specifically as you think about larger transactions given the leadership transitions that are occurring in the organization? And then on BD, I guess all else equal, would your bias be towards a series of smaller transactions versus a larger one that brings multiple assets? So we think about issues of ease of execution, integration, et cetera. I know you're probably looking at everything, but if you had a choice, which direction would the organization lean?

So let me just start by saying that the purpose behind this CEO transition is not to slow Merck down in any respect. The senior team and Rob have the responsibility and the autonomy going forward to evaluate the situation the company faces and to make the right decisions to position this company for long-term growth. So I wouldn't read into the transition that there would be any hesitation at all about taking steps that we believe are the right steps for this company's long-term success.

Yes, I appreciate that. Chris, to answer your question about our preferred business development strategy, we still favor seeking smaller opportunities where we can discover promising science early and integrate it into Merck Research Labs. We believe this approach will provide a competitive advantage and differentiation for those assets. Our focus will remain on this strategy. As we've mentioned frequently, we are open to various therapeutic areas, driven by scientific exploration. However, we are not entirely closed off to larger deals, as we assess size more in terms of disruption and complexity rather than just financial aspects. We understand the importance of enhancing our pipeline to boost our revenue potential, so we are considering those options as well. Nevertheless, it is important to note that we do not see transformative deals primarily driven by synergies as a viable path; instead, our approach will continue to be science-led, concentrating on opportunities that present unique value.

Thank you, Chris. Next question please, Lara.

So Rob, what about your experience and skill set make you the right fit for where Merck is in its journey right now? And then, Dean, when you look into your pipeline currently, is there anything there that you think could take the place of KEYTRUDA?

Yes. Great. Louise, thanks for the question. If you look back at my career and what I've done, I've spent my whole career dedicated to healthcare and to the pharmaceutical industry. The time I began at Eli Lilly, where I spent nearly 15 years before moving on to Baxter and saw a different view of the business, running the diversified medtech side of that company before coming to Merck. So I have a broad base of experience in the industry and a lens that has really seen it from different views. I think that is always important to challenge our internal thinking, to make sure we have an external focus and that we are looking externally. As we look forward, while scientific innovation will continue to be the core of who we are, and I believe, is our best path to succeed in a world where you're going to face increasing margin pressure, we also have to marry that with a continuing focus on how do we evolve the business to make it more nimble, simplified, and really more focused such that we can drive ever greater efficiency and productivity, not in terms of reducing spend, rather the opposite. We're going to invest in this business to grow, but we have to find a way to make every dollar we invest more productive so that we get a greater return than the dollar of output, and that is really where our focus is going to be on how do we leverage new technologies and new capabilities to do that. How do we think about broadening our view long-term, as you think about not only the drug, but we have to focus increasingly on the outcomes from our medicine, the value we demonstrate, and how we ensure affordable access. So those are the cores of what we're looking at. My experience broadly in the industry and being a part of the leadership team here at Merck has positioned me to, I believe, do that.

Let me address the other part of that question by making four points. First, immuno-oncology has fundamentally changed cancer biology and treatment. A clear indication of this is that reading the book "Emperor of All Maladies" feels outdated due to the transformative impact of immuno-oncology. The key player in this transformation has been pembrolizumab. We are focused on expanding its use across different tumor types and cancer stages. Our goal is to enhance patient responses through combinations of agents that have immunomodulatory effects, which is what our internal pipeline is dedicated to, along with incorporating agents that directly kill tumors, largely through business development. We aim to increase the value and accessibility of pembrolizumab by exploring different routes of administration, dosing schedules, combinations, co-formulations, and biomarkers. Regarding your question about whether we have any assets in our pipeline that could reshape an entire field, I currently do not have such an asset. It is crucial to note that we were initially not involved in cancer research, and immuno-oncology has allowed us to make a significant and transformative impact in this area. Rob, Ken, and Roger have often mentioned the importance of being therapy agnostic because we cannot predict where the next major advancement or transformation will happen. It could emerge from our pipeline or someone else's. However, as of now, there hasn't been anything comparable to KEYTRUDA or pembrolizumab in the entire pharmaceutical industry.

Thank you, Louise. Next question please.

Yes. Thanks very much, and I wanted to add my congratulations to Ken and Rob as well. So my question is, could you discuss the opportunity for weekly combination HIV treatment including your internal assets for a combination regimen and how you are assessing and seeing the opportunity to move that forward versus pursue an external partnership opportunity to bring forward a weekly combination treatment regimen?

Yes. I'll take a first shot at that. This is Dean. Fundamentally, we're doing it stepwise, right? We're doing it in PrEP, and we're doing it in treatment. We're trying to demonstrate to ourselves and to others that this is what we think it is, that this is a really important medicine. So we're stepwise doing once daily, once weekly. I do agree with you. We have to think about what's really going to be important for patients and their access to medicine. Less frequent dosing will be important, and that less frequent dosing will be important for both treatment and for PrEP. Both are places that Merck needs to explore fully to create that full suite of options as we build the story for islatravir. But Mike, did you want to make some comments?

Yes. Thank you for the question, Dave. I think a couple of things just to add to what Dean said. First and foremost, islatravir is the best partner across a whole range of different mechanisms of action. We think it will add a lot of value. We do think the market will ultimately evolve to a longer-acting format. We see up to a majority of the HIV market ultimately being in a long-acting format. Weekly would be the starting place, and then we look even further out in the treatment space. In the PrEP space, I think what I would add is that we don't necessarily need a partner with islatravir in the PrEP space. We think there, through both an oral route of administration and other forms of administration, we can go to long-acting format, potentially even longer than a week initially in the PrEP space. That's how we're looking at the market.

Next question please.

Thank you for the question and congratulations from me all around. I wonder talking about business development in oncology and KEYTRUDA. We've had a couple of negative trial readouts to competitors on TGF-beta and oncolytic virus approaches. I wonder if you could update us on your current perspective on the path forward for some of the early IO assets Merck has acquired in recent years, including Tilos, Viralytics, and Immune Design?

Yes. Let me take a stab at that. I sort of separated how one might think about the IO space and related to pembrolizumab and especially related to solid tumors. When you look at our internal pipeline, we speak about having over 25 mechanisms in the clinic. You're aware of 3 immune modulatory mechanisms that are advancing into Phase 3 and they have the opportunity to be co-formulated: TIGIT, LAG-3, and our CTLA-4. We also showed ILT4. The other sort of thing that I would also emphasize is that the word is sometimes overused, but it's called orthogonal. KEYTRUDA, when combined with tumor-killing mechanisms or standard-of-care mechanisms like chemo, surgery, and potentially radiation, there seems to be enhancement. Because of that, that creates a possibility for us from a business development standpoint. The business development you saw with Eisai and AZ, but we are excited with Seagen with the LIV-1 ADC, the Velos with the ROR1 ADC because we are confident that pembro plus chemo works really well. We’re first-in-class, best-in-class, and transformative-in-class in lung. Seagen and Velos are ADCs where you're essentially developing a chemotherapy that's a little bit more precise. Our interest goes past that. I would call your attention to Peloton, targeting an oncogenic nodal pathway. We hope that not only can we advance Peloton with a potential 2021 filing, but we're also interested in looking at HIF-2α in relationship to pembrolizumab. We are in an advantaged situation. The advantage situation is that if you're developing a drug in cancer and you're a biotech company, you must ask what your molecule will do in relationship to IO. If you're going to look for a partner, you're going to look for a partner who can give you that quickness, speed, and rigor to advance that. We have 1,400 trials, including more than 950 combinations and more than 90 registrational trials, which I would remind myself that most of those combinations are in combinations with other assets from other companies. It allows us to do business development, not simply by looking at PowerPoint decks, but by actually getting our hands wet with the agents of other companies.

Thank you, Daina. Next question please, Lara.

My congratulations to Rob as well. I wanted to focus on the COVID and MRL. My question is, is it fair to assume that the first upcoming trial is the hospitalized trial? And the time from symptoms to study enrollment is a little more loose in the hospitalized trial versus non-hospitalized. Should we assume that the hospitalized setting is more difficult? And could you also update us on your progress for attempting to characterize in vitro activity against the new variants?

Yes. Let me address both of your questions. We are making progress in both areas, and we believe it is important to do so without distinguishing between hospitalized and non-hospitalized patients. We feel that advancing it for both groups is necessary as it will impact the viral application and viral load. Regarding your question about variants, we need to conduct further experiments, but we predict that the mechanism by which molnupiravir operates would enable it to be effective against all variants. It is important to note that molnupiravir is not limited to coronaviruses; it is effective against many RNA viruses, particularly respiratory RNA viruses. While there is some variation within SARS-CoV-2, it is significantly less than the variation found across different classes of RNA viruses. To specifically answer your question, we need to conduct tests to validate this, but we expect that molnupiravir will effectively address the variants based on its mechanism of action.

Thank you, Umer. Next question please.

And let me add my congratulations to Rob, and thanks to Ken for your many contributions. Ken, I think 2 of your more significant contributions to Merck were guiding it through the Vioxx litigation and buying Schering-Plough. The industry once again finds itself dealing with CV risk of oral arthritis drugs and you don't prefer big deals. On the former, what observations would you make on Vioxx 15 years later, particularly since I believe it's back on the market? Why do you not prefer big deals when it was perhaps your biggest contribution?

Thank you for giving me the opportunity for retrospective here. Let me start by saying, I think if there's one lesson that I learned from Vioxx, it is that for a company like Merck, you have to stand strong on your heritage. People see this as a litigation defense. For every one of us inside the company, it was really about articulating to an audience, particularly in that case, jurors, what this company really stood for. I thought we won repeatedly because we were able to remind people of the importance of what we do for the world and the integrity by which we do it. I won't go into any more details about the decision to withdraw the drug, but it was also based largely on this company's sense of what was in the best interest for patients based on what we knew at that time. Regarding the issue around Schering-Plough, this company was in a very different situation at that time relative to its pipeline and its growth prospects. That deal was done at a time where we saw an opportunity in the market based on where the valuations of companies were. We saw that as an opportunity that was appropriate for Merck back in 2009. The reality of the world is, none of us were really smart enough to know that among the assets we were acquiring was pembrolizumab. So I would like to take a bow, but that's a classic example of the narrative fallacy when people say, 'Look at a great deal you did.' One thing we learned from that deal is that when we bought that company, we had our eye on Organon and the work that was being done in the basic research labs at Organon. We knew we were buying a company that not only gave us an opportunity for cost synergies but also an opportunity for growth based on the quality of the science. At the end of the day, the problem with large transactions, and I think if you look at the industry history, is that they are really difficult for our research organizations to respond to and recover from. That's the main reason I oppose those mergers. They're highly disruptive. When you get through your cost synergies, you still either have a pipeline or you don't. What we're focusing on right now is developing that pipeline. Thanks for the question.

Thank you, Steve. I realize it's 9 o'clock. We're prepared to continue on with some additional questions. So next question please?

I'll add my congrats to the course as well to both Ken and Rob. Rob, if I may ask about Organon, please. In the past, Merck had suggested that there are some pipeline assets that could furnish the Organon spin-off. Wondering if there's any more color to add as to what those assets may be, just to help us with trying to model out what revenues could look like for the next few years?

Yes. Thanks for the question, Navin. As you look at Organon and the assets that will make up that spin, the key growth drivers that sit within that business are, first and foremost, the women's health business, anchored by NEXPLANON, which we continue to believe is going to be a blockbuster drug. It has patent protection for several years. It is growing globally. As you look at the need for contraception, it continues to fill in a very important niche. That is a core area of growth. The broader women's health business, including our fertility drugs and other drugs, supports this. So that business is the core growth driver. If you could dissect within Merck and look at that business, excluding the impact of the loss of exclusivity of some key franchises, that has been growing and will continue to grow. So really, what is accelerating the growth will be further focused on investment in that. You layer upon that the biosimilars business, which is really a burgeoning business. Very small now but will grow very fast and will contribute meaningfully to the growth. Between those 2 pieces of Organon, they will comprise, I think as we get out over the next 4 or 5 years, they'll be 30%, 40-plus percent of the total revenue of the company. Why the business has been declining over the last couple of years is really twofold. One, it is mainly loss of exclusivity. Most recently, we're experiencing the loss of NuvaRing. Before that, we had Zetia/Vytorin. We've been hit by those LOEs. As we look forward, we really don't have those. Those should start to sunset as we get through 2021. It will really allow those businesses, which have been good businesses to start to shine, and they'll accelerate that growth through focus and investment and a core formulation strategy and a business development strategy to augment those assets long-term. We do think they will continue to look at the assets and ask how they can extend them and broaden them, but that's really the focal point. There are no key R&D programs being transferred over. It's more of how they will focus on those strategies moving forward across those growth businesses with the LOEs out of the base.

Thank you, Navin. Next question please.

Congrats, gentlemen. Maybe a 2-parter for the newer guys in the newer roles. Dean, what are some modalities you'd like to enhance or add to MRL? And Rob, I realize this decision has been made on Animal Health, at least for now. Your comments are obviously in line with what Ken has been saying for a few years. I certainly get that Merck is investing in that business and that it's performing well. But how do you bridge the gap between how helpful it is to Merck versus how valuable it would be if it stood alone and traded at 35 times earnings or more? I realize that's one moment in time, but it's not like these peers just all of a sudden trade at a high multiple and are likely to change? So again, understand why it's helpful to Merck, but how do you bridge the gap to why it's not better served and better valued elsewhere?

I'll take that first question. I'll say 2 or 3 things. The first thing is, modalities are important. They're platform. It's critical that we focus on products. If you don't have the right platforms, it makes it more difficult for you to move quickly. In terms of platforms that we are building currently, clearly, we're a company that's really well-known for our chemistry. Over the last few years, we've become a more biologics company with KEYTRUDA. Our continued evolution to use that from antibodies to bispecific immune engagers to TriNKETs to protein engineering, those fields are going to be very important. As we build biologics, it will also help us in relationship to the space between chemistry and biologics, especially with targeted therapy. So that's a very important play. What I would also say is that I group them in the nucleic acids, whether you talk about mRNA or sRNA or gene delivery systems. Those platforms, we have to take a look at. One can't willy-nilly decide 'I want this platform because I'm really interested in the platform, that it's neat and cool.' One has to say, 'What am I going to do with that platform? What is the product? How am I going to drive it from discovery to development to registration?' So we look at modalities, and we look at what's moving throughout the landscape, but we don't get enamored specifically with a platform by itself.

Okay. Great. The key to understanding Animal Health in our view is focusing on the output. One is, how much margin does it contribute, and what is the scale of growth? We see strong growth. We also have to look at the input and ask, 'What are we investing in? How does that return?' We think that is an important foundational growth. The one thing Ken and I have talked about is that as we think about our business structurally, we do think of it as a portfolio piece. This goes beyond how you ultimately deploy or hold it within your structure. It also speaks to how you build assets and deploy assets appropriately, and how we need to manage those relationships to make sure we're investing where we can invest well. We're going to build the best pieces over time but create synergies through understanding how organic growth relates to how they should be appropriately blended and what could be done better in pieces. We're in a position to say which areas we want to invest in with the greatest differentiation on commercial and technology application, and they can allow us to value our long-term investments accordingly.

Thank you, Gregg. We have time for one more question.

So Rob, I just have a question for you, and that is with the benefit of having occupying the CFO seat, what are you looking for from that position once you have transitioned to your new role as CEO? And if I could also just ask, with the incremental bump in the operating margin guidance post spin-off, does that change the upper end of the aspirational dividend payout ratio as well?

Yes. On the first question, with regard to the next CFO of the company, what I would expect from that person and what I think is an important role that the CFO can play is, obviously, first and foremost, you have to be a strong fiduciary for the company. You have to focus and make sure that the controls are in place, compliance is met, and that the company is meeting its reporting responsibilities. That's kind of table stakes and expected. What differentiates a CFO, in my perspective, is the ability to partner with the business to find solutions on how to grow strategically. We're looking to invest for growth. We know that there is going to be pressure on margins. The world is transforming around us. We'll have to find ways to drive productivity so that every dollar we invest is more productive than before. An important area where a CFO can help is to gather perspectives. I believe that being a CFO allowed me to see the entire company as an integrated whole and to start to look at how we can challenge and drive optimization at the seams that sit between divisions because, frankly, those are always where the corporate tax is paid. Looking at dividend payout ratio, it does not change our view of the dividend payout ratio. We're still shooting for that 47% to 50% range. We're looking at that now as well as thinking long-term.

Thank you, Rob. As you've heard, we are executing on our clinical and commercial priorities while making the necessary changes in our business model, and importantly, investing in opportunities for future growth for the short, intermediate, and longer term. I'm confident that if we continue to follow this strategy and with new leadership, charged with taking a fresh look at how we operate our business and our strategic opportunities, and in charge also with taking the right actions for Merck going forward, the company will be positioned to continue to deliver important value to patients and shareholders in the future. It's been a privilege working in this job for 10 years. I'm pleased to be handing it over to Rob and the senior team at this time. I want to thank you for joining us and for your continuing interest and support. I hope you have a healthy and Happy New Year.

Thank you, all.