Merck & Co Inc (MRK) — Q2 2021 Earnings Call Transcript

Thank you, Mary, and good morning. Welcome to Merck's second quarter 2021 conference call. With me today are Rob Davis, our Chief Executive Officer, Dr. Dean Li, President of Merck Research Labs, Frank Clyburn, President of Human Health, and Caroline Litchfield, Chief Financial Officer. Before we get started, I'd like to point to 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 in our press release. I would 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 2020 10-K, identified 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 Rob.

Thanks, Peter. And good morning, everyone. I'm deeply honored to speak to you today in my new role as CEO. Merck is a special Company, and I'm fortunate to be surrounded by talented and dedicated colleagues who are intently focused on bringing important life-enhancing and life-saving medicines and vaccines to people and animals around the world. This longstanding and unwavering commitment to our mission is real, is tangible, and is what drives us to perform every day. The prioritization of investment in research and development under Ken's leadership, and the focus of resources behind key growth drivers, has put us in a position of strength that I intend to build upon. As I consider Merck's future, I continue to believe investment in the Research and Development, with patients at the center of everything we do, is core to who Merck is and is our best path to sustainable, ongoing success and value creation. However, how we go about both delivering the best external and internal scientific opportunities, as well as how we bring those innovations to patients, must evolve. As I transition to the role of CEO, I solicited candid feedback from colleagues and external stakeholders. What I heard reaffirms my convictions. There's a broad agreement that investment in R&D should remain our highest strategic priority. Employees are confident that we're on the right path. We have rebuilt and reinvigorated our discovery research engine and have a growing and robust pipeline. We're successfully executing on clinical development and we're delivering strong commercial growth across both our human and animal health businesses now and will continue to do so well into the future. While we are on the right path, we need to work with more speed, urgency, and agility, more closely matching the pace of change in the broader environment. We need to accelerate the delivery of our innovations to the patients who need them, and to be leaner, nimbler, and more digitally enabled. We need to leverage the scale and reach we have as a global biopharmaceutical leader while also embracing a commitment to evolve to address new challenges. And we need to move with focus and intentionality, which is a priority for both me and my management team. I know that it's not about promising, it's about performing. Actions speak louder than words. With that understanding, I pledge to do all I can to ensure that Merck remains a global biopharmaceutical leader long into the future, delivering value to current and future patients, and growth and value for our shareholders. Now, turning to the quarter, we had very good performance with strong growth. Our results demonstrate that the impact of the pandemic on our business is lessening. Patient access to healthcare providers has improved, and we expect continued strong growth in the remainder of the year. We're also making meaningful clinical advancements, which Dean will speak to in just a few moments. Our seamless execution during a period in which we successfully completed a complex spin-off, without business interruption, underwent leadership transitions and delivered accelerated growth only increases my confidence in what our organization can achieve in the future. Organon is now an independent Company, an important milestone in our Company's history. This transaction is a meaningful catalyst to Merck becoming a more focused, more efficient, and faster-growing Company. Let me spend a moment speaking about KEYTRUDA, which again experienced very strong growth this quarter. I'm confident that KEYTRUDA will continue to be a foundational cancer therapy and achieve strong growth for years to come. We are a leader in immuno-oncology and are determined to leverage this into sustained success. We are rapidly advancing a diverse set of oncology assets, many of which we highlighted in our recent ASCO investor presentation. Across our oncology portfolio, we expect over 90 potential new indications by 2028, more than tripling our current base. We have a wide array of clinical partnerships, providing valuable insights into the biology of disease and into important potential external innovation. With our expanding oncology portfolio outside of KEYTRUDA, we will extend our leadership in cancer long into the future. I also strongly believe we will successfully navigate the eventual KEYTRUDA loss of exclusivity, given the breadth of opportunity in areas both within, as well as outside of oncology. Internally, our leaders are intensely focused on this period and efforts are underway. Externally, I understand the importance of providing investors with increased transparency into the breadth of opportunities we see in our pipeline that will help us do this. As we've done recently in highlighting islatravir, our broader HIV portfolio, and our next-generation oncology assets, we're planning deep dive investor events with our scientific and commercial leaders, focused on other areas of our pipeline that we believe hold great promise, such as our suite of vaccine candidates, our cardiometabolic assets, as well as others. Business development plays an important role, and we are putting increased emphasis on ensuring we are appropriately aggressive and accessing the best external science. Executing value-enhancing BD is the top priority, and we intend to add to our pipeline through acquisitions, partnerships, licensing deals and collaborations. We will be unbounded by therapeutic area, though we are mindful of the need to have a balanced portfolio over time. We'll seek new products, modalities, and platforms that allow us to establish beachheads in important areas. Our recent acquisition of Pandion and its potentially foundational immunology asset is a good example of this. We will look at both early and late-stage opportunities, and we have the financial flexibility to consider deals of all sizes, particularly given the $9 billion distribution from the Organon spinoff. And given our strong operational momentum, we are most interested in transactions that are easily integrated and less disruptive, where value is principally derived by the introduction of innovative new products that address patient needs instead of through cost savings. Before I turn the call over to Frank to discuss second quarter performance in our Human Health business, I want you to know that I appreciate and applaud the increasing societal and investor demands in corporations to act responsibly. In fact, I believe our strong performance across environmental, social, and governance issues has and will continue to create sustainable value for all of our stakeholders. Merck has a long track record and history of strong corporate citizenship, and I'm committed to remaining a leader in this area. With that, let me turn the call over to Frank.

Thanks, Rob. Good morning. As Rob highlighted, our Human Health business continues to regain momentum and we achieved 18% growth in the quarter, excluding the impact of exchange. Across our business, we've been engaging in investing with urgency to encourage more normal levels of physician office visits, oncology screenings, and vaccination rates, including catch-up for missed doses. The agility demonstrated by our teams around the world, to quickly reallocate resources to drive these patient activation programs, has benefited our largely physician-administered portfolio. In the U.S., we are encouraged that wellness visits and surgical procedures have returned to more normal levels. And on Oncology, we're seeing screening rates continue to improve. We're confident that these favorable trends, and the strong underlying demand for our products, will drive accelerated underlying business momentum in the second half of the year. Now, I'll turn to the second quarter performance of our key brands. My comments will be on an ex-exchange basis. In oncology, KEYTRUDA sales grew 20% to $4.2 billion, reflecting continued strong global demand. In the U.S., KEYTRUDA continues to demonstrate strong growth, and over the course of the pandemic, has increased its market share of new patients within the immuno-oncology class. KEYTRUDA also maintains its leadership position in lung cancer, capturing 8 out of 10 eligible new patients. We continue to see strong growth across all key tumors, including renal cell carcinoma, bladder cancer, adjuvant melanoma, and our MSI high indication. Additionally, we are off to a very strong start with our launch of KEYNOTE-355 in metastatic triple-negative breast cancer, and we look forward to adding overall survival to the label. We're also excited by the recent approval and upcoming launch of KEYNOTE-522 in the neoadjuvant and adjuvant setting. Outside the U.S., growth continues to be driven by lung cancer indications and the ongoing launches in head and neck cancer and renal cell carcinoma. Lynparza grew 34% in the quarter and remains the leading PARP inhibitor. Growth continues to be driven by approvals of recent indications, and we look forward to a potential future launch in adjuvant breast cancer based on the OlympiA data presented at ASCO this year. LENVIMA grew 15% in the quarter, reflecting increased demand in hepatocellular carcinoma following the NRGL listing in China. We're also excited to launch the recently approved combination of LENVIMA plus KEYTRUDA in endometrial carcinoma. And in the near future, to potentially launch in renal cell carcinoma based on KEYNOTE-581. Our vaccines portfolio recovered sharply due to the return to more normal levels of wellness visits. GARDASIL had a very strong quarter, growing 78%. In the U.S., higher sales were driven by a recovery from the negative impact of last year's lockdowns. Outside the U.S., growth was driven by increased demand in China. Sales also benefited from increased supply due to improved manufacturing, which I'll provide additional details on in a moment. Our hospital business continued its recovery. BRIDION sales grew 67% year-over-year, driven by increased surgeries as patient's access to hospitals improved from last year. Turning to our outlook, the recovery we saw in the quarter gives us confidence that we will have a very strong second half resulting from both market recovery and strong commercial execution. Over the quarter, Merck quickly pivoted its focus and resources to patient activation campaigns to ensure that patients are putting their health first and recognize the importance of returning to physicians' offices for screenings, early detection, and routine visits. Our efforts in partnership with public health constituent groups, paired with the continued rollout of COVID-19 vaccinations, has resulted in meaningful improvements in patients accessing healthcare providers. In adolescents, we've seen more than one-third of teens in the U.S. vaccinated against COVID-19 with at least one dose. We assume that these rapidly growing vaccination rates and continued commercial execution will help to drive a near-normal back-to-school season. Merck has also shown increased agility and efficiency across our organization. And importantly, we've made improvements that will enable meaningful future growth. Of note, we expect GARDASIL to significantly benefit from increases in productivity across our supply chain, which will allow us to fulfill demand that we were previously unable to supply. Furthermore, as global demand for GARDASIL continues to outpace supply, our teams have been working to ensure we have the right regulatory approvals and lead time to appropriately allocate doses to areas of increased demand, particularly as the pandemic continues to force lockdowns in many geographies. These improvements alone will drive very strong sequential and year-over-year growth for GARDASIL in the back half of the year, especially in ex-U.S. markets such as China. In oncology, we are encouraged by the recovery we've seen to-date, and our overall performance throughout the pandemic. We remain confident in the underlying demand for our broad and innovative portfolio, including KEYTRUDA, Lynparza, LENVIMA, and if approved, belzutifan, and expect to drive strong and sustained growth across key tumor types and stages of disease. Overall, the improvements in patient access we are seeing in major markets gives us increased confidence as we look to the second half of the year. Before I conclude, I would like to mention the strong execution of our commercial colleagues around the world that enabled our Company to drive strong growth in the first half of the year. All the while, we're working to successfully complete the spin-off of Organon. We are confident that the spin-off results in meaningful benefits to the commercial organization, including the ability to drive even stronger growth through more focused commercial execution. To close, our business has regained momentum, and we are well-positioned to achieve strong growth in the third and fourth quarters. Our portfolio has rebounded with strength, and demonstrated not only its resiliency, but its value to patients globally. We have confidence in the underlying demand for our innovative medicines and vaccines. And we look forward to a return to robust long-term demand-driven growth. With that, I'll turn the call over to Caroline.

Thank you, Frank. Good morning. Our business delivered meaningful growth in the quarter, driven by strong underlying demand for products across our growth pillars and the continued recovery of the business as patient access improved. As we exit the quarter, we are confident that our position of financial and operational strength will enable us to drive long-term revenue growth and meaningful margin expansion, creating value for our shareholders by delivering on our mission to improve health and wellness for people and animals worldwide. Now, turning to our second quarter results which reflect Merck on a continuing operations basis. Total Company revenues were $11.4 billion, an increase of 22%, or 19%, excluding the positive impact of foreign exchange. Further adjusting for the estimated impact of the pandemic, total revenues grew 8% year-over-year, evidence of the underlying strength of our business. The remainder of my comments will be on an ex-exchange basis. As Frank highlighted, our Human Health business showed improving momentum, growing 18%, or 6% when adjusted for the estimated impact of the pandemic. Animal Health had an outstanding quarter, increasing 27% driven by very strong global demand across Companion Animal and Livestock, which increased to 38% and 20% respectively. Animal Health sales grew 19% when adjusted for the estimated pandemic impact. In Companion Animal, growth was driven by higher global demand for vaccines as well as parasiticides, including the BRAVECTO line of products. Performance in livestock reflects increased global demand across ruminant, swine, and poultry products, along with higher demand for our Animal Health intelligence products. I'll now walk you through the remainder of our P&L, and my comments will be on a non-GAAP basis. Gross margin was 76.5% in the quarter, a decrease of 0.6%, reflecting the unfavorable effects of foreign exchange, pricing pressure, and higher manufacturing costs, partially offset by favorable product mix. Operating expenses increased 13% year-over-year to $4.8 billion, driven largely by higher clinical development costs, increased investment in our early-stage pipeline, and higher promotion costs in support of returned care activities for our key growth drivers. The effective tax rate for the quarter was 14.6%, an increase of 1.3% from a year ago, driven by these three items last year. Taken together, we are at $1.31 per share, an increase of 27%. Before turning to our 2021 guidance, I want to remind you briefly of the benefits we expect to achieve as a result of the spin-off of Organon. With the spin completed, Merck is now a more focused Company and better positioned to unlock the full potential of our growth pillars and drive accelerated profitable growth. We're very excited about our future. And as we look out to 2024, we continue to believe that our revenue potential is underappreciated. Now, for 2021. Health systems and patients have largely adapted to the impacts of the pandemic and we assume this trend will continue. We are narrowing and raising our expected revenue range to $46.4 billion to $47.4 billion, representing growth of 12% to 14%, including a positive impact from foreign exchange of less than 2% using mid-July rates. The underlying demand for our growth pillars and our strong commercial execution provides us with confidence that we will continue to see strong momentum throughout the remainder of the year. As such, we expect total revenues to be sequentially higher in each consecutive quarter. Our gross margin is expected to be between 76% and 77%. We expect operating expenses to grow at a high single-digit rate, driven by increased investment in promotion, and patient activation programs to accelerate our near-term business momentum, and by increased R&D investment, to advance our exciting pipeline to support sustainable long-term revenue growth. As a reminder, our operating margin from continuing operations will be lower than what they were as a combined Company, as our guidance range implies significant operating leverage in 2021. In addition, we continue to expect operating margins of greater than 42% in 2024, driven by our accelerated revenue growth and disciplined investment in our business. In other income and expense, we expect expense of approximately $300 million. We expect our full-year tax rate to be between 14.5% and 15.5%. We assume 2.53 billion shares outstanding. Taken together, we expect non-GAAP EPS to be between $5.47 and $5.57, reflecting growth of 21% to 23%. This range includes the positive impact from foreign exchange of approximately 2% using mid-July rates. As you consider your models and the allocation of revenues to various products, there were two areas to focus on: GARDASIL and Animal Health. Frank described the strong acceleration in growth expected in GARDASIL, and we also expect continued momentum in our Animal Health business. Our updated guidance also reflects the benefits of the approval of KEYNOTE-522, and as a reminder, does not include revenues from the potential launch of molnupiravir. Turning to capital allocation, we received a $9 billion cash distribution from Organon, which we intend to deploy in value-enhancing strategic business development opportunities that align with the parameters Rob outlined. In the absence of meaningful business development, we will return cash to shareholders through share repurchases. We remain committed to investing in support of our key brands, and progressing our innovative pipeline, and we will look to increase our dividend payout ratio over time. To conclude, as a leaner, more focused, and agile Company, Merck is prepared to capitalize on the meaningful opportunities that lie ahead and is better equipped to succeed in an ever-changing landscape. Merck remains in a position of financial and operational strength, which we will leverage to drive long-term sustainable growth and value creation for our patients and shareholders. With that, I'd now like to turn the call over to Dean.

Thank you, Caroline. I'm delighted to be here today to provide an overview of progress made over the past quarter. I will cover key regulatory milestones in clinical updates, initially on oncology, and then across the broader pipeline. As Rob highlighted, we continue to show strong momentum in our oncology pipeline, which positions us well. And it's worth reiterating our goal; to potentially deliver 90 plus approvals and new indications by 2028. A recent report from the American Cancer Society noted that there has been a rapid decrease in lung cancer and melanoma death from 2014 to 2018. One factor attributed to this decline is advancements in research, including targeted therapies and immune checkpoint inhibitors. The report also notes there is an urgent need to accelerate a decline in death rates for breast, prostate, and other cancers, where Merck is just beginning to make an impact. We are hopeful that our contributions and the advances being made industry-wide will continue to fuel this decline. Notably, during the last quarter, we achieved several milestones for treatments targeting women's cancer. In triple-negative breast cancer, the most aggressive subtype of breast cancer, which, historically, treatment options have been limited, I am pleased to announce several advancements which will improve options for patients. The first is FDA approval for a new indication in high-risk, early-stage triple-negative breast cancer based on results from the pivotal Phase III KEYNOTE-522 study, evaluating KEYTRUDA in combination with chemotherapy as neoadjuvant treatment, and then as monotherapy adjuvant treatment post-surgery. These practice-changing event-free survival results were presented just 2 weeks ago, which demonstrated a remarkable 37% reduction in the risk of progression precluding definitive surgery, local or distant recurrence, second primary malignancy, or death from any cause compared to chemotherapy alone in patients. Now additionally, we announced positive clinically meaningful top-line overall survival results from the Phase III KEYNOTE-355 study, evaluating KEYTRUDA in combination with chemotherapy in patients with untreated metastatic triple-negative breast cancer, whose tumors express PD-L1 with a combined proportion score greater than or equal to 10. This positions KEYTRUDA to be the first anti-PD1 therapy in combination with chemotherapy to show statistically significant overall survival in metastatic triple-negative breast cancer. We will work with regulators to expand the existing indication to include survival benefits and we'll aim to share full results soon. Also for early-stage breast cancer, along with our partners at AstraZeneca, we presented results at ASCO from the Phase III OlympiA trial, evaluating Lynparza for the adjuvant treatment of certain patients with germline BRCA high-risk HER2 negative early-stage breast cancer. These findings clearly demonstrated that Lynparza reduced the risk of invasive breast cancer recurrence, second cancers, or death by 42%. Results will be submitted to global regulatory authorities, and the trial continues to evaluate overall survival. Now, also at ASCO, with our partners at Seagen, we presented additional encouraging data from the HER2CLIMB studying to Kaiser in patients with early-stage HER2-positive breast cancers. It is clear that Merck is establishing a foothold in breast cancer with multiple agents. The progress we are making in this area of significant unmet patient need is one example of our strategy to expand into earlier lines of therapy and our strong conviction that our oncology assets have the potential to change the way early-stage cancers are treated. We are also making progress across women's cancer more broadly. We received an approval from the FDA for an expanded indication for the combination of KEYTRUDA and LENVIMA for the treatment of certain patients with advanced endometrial carcinoma, where along with our partners at Eisai, we showed results from the confirmatory Phase III KEYNOTE-775 study earlier this year. And finally, we have positive results from the pivotal Phase III KEYNOTE-826 trial, investigating KEYTRUDA in combination with platinum-based chemotherapy for the first-line treatment of patients with persistent, recurrent, or metastatic cervical cancer, regardless of their PD-L1 status. The trial met its dual primary endpoint of overall survival and progression-free survival. Results will be presented at an upcoming medical meeting and submitted to regulatory authorities. Additional FDA approvals this quarter included two new indications for KEYTRUDA. The first is in combination with trastuzumab for the first-line treatment of patients with locally advanced unresectable or metastatic HER2-positive gastric or gastroesophageal junction adenocarcinoma based on results from the Phase III KEYNOTE-811 study. The second approval was an expanded indication for cutaneous squamous cell carcinoma for patients with locally advanced disease that is not curable by surgery or radiation. This was granted under accelerated approval based on a Phase II KEYNOTE-629 study. The FDA also granted priority review based on Phase 3 data from KEYNOTE-581 for first-line treatment of advanced renal cell carcinoma. We expect a decision in the third quarter. Now, outside the U.S., the European Commission approved a new indication for KEYTRUDA plus chemotherapy in certain patients with esophageal cancer or HER2-negative gastroesophageal junction adenocarcinoma, based on results from KEYNOTE-590. And in China, Lynparza was granted conditional approval for certain patients with metastatic castration-resistant prostate cancer, who progressed following prior treatment with certain new hormonal agents. This is the first PARP inhibitor to be approved for advanced prostate cancer in China. Now, also at the ASCO virtual meeting, new data supporting the benefit of KEYTRUDA in earlier lines of therapy from the pivotal Phase III KEYNOTE-564 trial for the adjuvant treatment of certain patients with renal cell carcinoma was presented. KEYTRUDA given after surgery demonstrated a statistically significant and clinically meaningful reduction in the risk of disease recurrence or death by 32% compared to placebo. Results will be submitted to global regulatory authorities and the trial will continue to evaluate overall survival. We are making progress on our strategy to extend the benefit of KEYTRUDA to more patients. This includes the initiation of a Phase III trial evaluating a subcutaneous formulation of Pembrolizumab in combination with chemotherapy in patients with non-small cell lung cancer. We believe this new formulation could be an important additional option for patients. And finally, belzutifan continues to make good progress with additional Phase Two data presented at ASCO and an expected FDA action date in September, and a development program with three Phase III studies in renal cell carcinoma that are gaining momentum. Now, turning to our broader pipeline. In response to the outbreak of SARS-CoV-2 in India, we made the decision to enable access to molnupiravir in low and middle-income countries through voluntary license agreements with several Indian generic manufacturers. While the ongoing studies in India are recruiting a different patient population, we are encouraged by the data being generated and we look forward to continuing to help with the crisis. We remain excited about the progress in molnupiravir and the data we've seen to date. Along with our partner Ridgeback Biotherapeutics, we announced the presentation of full results from the dose-finding phase of Phase II/III studies in both outpatient and hospitalized patients at the European Congress of Clinical Microbiology and Infectious Disease 2021. We look forward to the readout from the Phase III portion of this study in the October timeframe. Additionally, we posted a new Phase III study evaluating molnupiravir as a post-exposure prophylactic option, and look forward to a readout in the first half of 2022. In HIV, we continue to progress our islatravir development program, our investigation on nucleoside reverse transcriptase translocation inhibitor. Phase II data presented at the International AIDS Society meeting a few weeks ago continued to support the safety and tolerability profile of oral once-monthly islatravir in the PrEP setting. We are continuing to enroll patients across diverse populations and geographies in the Phase III empower trials and are moving forward with studies evaluating islatravir in treatment and prevention settings. In vaccines. I am pleased to note the FDA approval of VAXNEUVANCE, the first in a suite of promising pneumococcal conjugate vaccine candidates for the prevention of invasive pneumococcal disease in adults 18 years and older caused by 15 serotypes. Along with immune response data showing that VAXNEUVANCE can maintain progress achieved to date, based on non-inferiority to stereotypes shared with PCV13, VAXNEUVANCE also induced superior immune response to PCV13 for shared serotypes 3 and for the 2 serotypes unique to VAXNEUVANCE, 22F and 33F. These immunogenicity data position this vaccine to offer an important new option and protection for adults from invasive pneumococcal disease. We look forward to further engagement with the ACIP, including discussing the positive results we achieved through our robust development program studying a broad range of adult populations and clinical circumstances, including adults at increased risk. Building on our clinical evidence for VAXNEUVANCE, we also announced that two of our Phase III pediatric studies met their primary immunogenicity and safety endpoints in supporting potential use in healthy infants who may have previously started a pneumococcal vaccination series with PCV13, and in the catch-up setting for healthy children who have either not received pneumococcal vaccines or have received a full or partial regimen with lower valency pediatric PCVs. We continue to anticipate data from our Phase I/II program, evaluating V116, our adult-focused vaccine, to read out later this year. To conclude, I remain excited about the progress in our broader pipeline and efforts stemming from Merck Research Labs that contribute to improving options and treatments for diseases that affect people globally. We continue to deliver on our strategy with speed and urgency to harness the benefits of our cancer therapies for as many patients as possible, while advancing a broad pipeline of promising vaccines and therapeutic candidates. Now I will turn the call back to Peter.

Thank you, Dean. Mary, will you please start the question-and-answer session? And to help to get to more questioners today, we ask that each analyst limit themselves to one question. Thank you.

Thank you for the question. I have a broader inquiry for Rob regarding the business development environment. Could you provide more details on this? Beyond the Organon transaction that you've mentioned, R&D is a priority, along with increasing innovation within the Company. How are you approaching deals that might enhance the Company's investments in oncology, where you clearly have a competitive advantage, compared to diversifying into other therapeutic areas? Additionally, could you discuss the advantages and disadvantages of considering larger transactions versus a series of smaller deals? I understand you're evaluating various options, but I'm curious if there's a preference leaning one way or the other at this time. Thank you.

I appreciate the question, Chris, and good morning. As I mentioned in my prepared remarks, we are very focused on business development, recognizing that we need to enhance our pipeline. However, I want to emphasize that we do have a strong internal pipeline, which I hope you noted in what Dean discussed. We are confident in our ability to advance a variety of oncology assets, as well as assets outside of oncology, including vaccines and HIV treatments. While we understand the importance of expanding our offerings, our focus remains strong. Our strength in oncology is significant, and we aim to build on that to position ourselves as a major player in that field, leveraging the foundational position of KEYTRUDA and expanding our reach beyond it, which we are already starting to do. In terms of business development, I believe there are still significant unmet needs in oncology. Despite the advances we’ve made with KEYTRUDA and other new therapies, many patients still lack effective solutions for their cancers. There is a lot of scientific progress in this area, and we have the ability to leverage our position and insights to identify and pursue promising opportunities. We also recognize the need for balance and are looking at areas outside oncology. Our goal is to establish a strong foundation in oncology while also diversifying our portfolio. Regarding the pros and cons of large versus small deals, ideally, we want to target assets that are earlier in development, where we can apply our clinical expertise to add value. Historically, those are the types of deals we have pursued. However, we are open to larger deals as well, as our primary focus is identifying the right science, guided by its potential impact on our portfolio. If we find suitable opportunities, we will pursue them, regardless of their size. Nevertheless, we believe we do not need to engage in very large synergy-driven deals at this time, as we have sufficient capabilities within our own pipeline and can enhance our portfolio through science-focused partnerships.

Thank you, Chris. Next question please.

Hi guys, thanks so much for taking my question. I thought I'd focus a little bit on molnupiravir, since that's the trial that's coming up. And presumably, it's also the biggest needle mover on numbers for next year as we think about it. My question is this, the 0.5 to 0.7 log antiviral benefit that you're seeing, what feedback are you hearing on that magnitude of viral load drop? And what's the feedback on the clinical benefit observed with that in the mobile trial? And I ask because it looks like even though you are limiting your primary analysis to patients enrolled in less than five days, I still think there's a fair amount of seropositives embedded within the way you're looking at the data. And I almost wonder if seronegative is probably that population where you've probably seen the most cleanest signal. I'd be very curious. Thank you.

Yes, this is Dean. Let me address that question. We are currently advancing molnupiravir in a Phase III clinical trial, which is focused on the outpatient setting and targets high-risk patients. I want to emphasize this because your comments regarding viral load are indeed important observations. However, in the context of the U.S. regulatory framework, the critical issue is not the viral load but rather whether we can influence clinical outcomes. Therefore, concentrating on high-risk patients is essential for us. The trial has a primary completion date set for October, and we are very optimistic about its progress. We anticipate data in the coming months from this blinded global study, which is crucial given the evolving nature of the pandemic. This trial is not limited to the U.S. and the EU but includes important countries like South Africa, Brazil, and Colombia, which are vital for demonstrating not only a reduction in viral load but also a significant impact on clinical outcomes. This is the key focus for our trial.

Great, thanks, Umer, next question please.

Hi. Thanks for taking my question. My question for you is just how we should think about your margin expansion opportunities. I know you've given some longer-term guidance. But let's say over the next 12 months, how would that progress? Thank you.

Louise, this is Caroline. Thank you for your question. First, I'll start with our pipeline is rich. And therefore as a Company, we are focused on growing expenses to support the near-term and long-term opportunities that we have, which will enable us to drive long-term revenue growth. That said, we are also expecting to drive margin expansion. And that margin expansion will come from a few different factors. It will come through from the revenue growth. It will also come from a change in our product mix. And it will also come through efficiencies across our business and our commitment to deliver $1.5 billion of operating efficiencies over the 3-year period. Finally, we do expect an increase in margin in 2024 as a result of the step-down of royalties, specific to KEYTRUDA and GARDASIL. So as I think about margin expansion, our guidance for this year at the midpoint of the range assumes that a 2 percentage point increase in margin. And I expect that margin expansion to continue to grow as you look out to the coming year.

Great. Thanks, Louise. Next question, please.

Great. Thanks for taking the question. Two-parter: I guess, Rob, just curious if you're setting any internal timelines for the use of the Organon proceeds and would welcome your latest view of asset valuations. And then for Dean, there's obviously been a tremendous amount of progress with new platforms over the last 12 to 18 months. And Rob, you touched on some of these, but any of that particularly stand out to you as having the potential to be as transformative as antibodies were 20 years ago? Thank you.

Terrence, thanks for the question. As we look forward, we're actively looking and want to move with speed. I don't want to put a time limit on how fast because, obviously, some of it is based on market factors and where assets are in their own lifecycle, and in discussions we're having. Right now, we're focused on trying to find the ways to deliver to the pipeline through BD, but it's not timed down. I think what Caroline's really trying to say is, eventually, if we don't find those opportunities, we're not going to sit on the cash forever. But I want to make sure that we put the priority on BD first before we make that determination.

In response to your second question, there are so many advancements in data and technology that I know I will miss some. I will focus not just on platforms, as there is significant progress in data platforms that are crucial, but also in technology platforms necessary for creating molecules like antibodies. There is notable progress in protein engineering, protein degradation, and antibody-drug conjugates, and we are interested in all these areas. A key consideration for us as a vaccine company is mRNA. The successful development of a monovalent SARS-CoV-2 vaccine has shown both speed and scalability. We were early investors in mRNA for vaccines, infectious diseases, and oncology. We're applying those lessons and prioritizing programs where we think mRNA will be beneficial. However, I should point out that programs like pneumococcal vaccines may not be suitable for mRNA. Similarly, complex multivalent vaccines with established clinical benefits, such as GARDASIL, may not be the right fit for mRNA. Beyond infectious diseases, we maintain a productive partnership with Moderna in oncology but are more cautious regarding mRNA in other areas. We are closely following the advancement of that technology.

And Terrence, my apologies. I recognized I didn't answer the last part of your question on valuations. What we are seeing in the marketplace are things tend to still be fully valued. And as we know, there's a lot of capital flowing into the biotech space. That obviously presents a challenge, but I would just point to you that we recognize we need to be appropriately aggressive as we go after these opportunities. I continue to believe that if we apply where we see differential opportunity based on our scientific read of what's out there, we can still create value while we're strategically adding to the pipeline. And that's really where we're focused.

Thank you, Terrence. Next question please.

The market doesn't credit the pipeline that you're doing, including growth such as islatravir. Without stating specific numbers, I'm focused on the end of the decade. The reason I say that is previously, Rob, you have highlighted Merck recognizes need to raise the curtains on a pipeline axis to a great degree with shown historically. You have very large safe spaces among others. When should we expect to see that curtain being raised? And then just an add on. Yes, does Merck have a program of islatravir they're taking in to commit? Do you believe it infringes your intellectual property? Thank you.

Andrew, we'll do our best to address your question. To be frank, your message was quite unclear. I believe the initial part of your question pertained to pipeline transparency and when we will provide more information on that front. As I mentioned, this is an important area for us. We previously shared insights into our broader HIV portfolio and our recent work to shed light on our early-stage oncology portfolio beyond KEYTRUDA. We’re considering holding another session as we get closer to the end of the year. Additionally, we will reassess as we move into next year. We want to emphasize that we are increasingly focused on cardiometabolic areas and we see significant potential within our broader vaccines portfolio.

I want to emphasize that islatravir is a foundational element that one could build on, and that's what our strategy is built on, monotherapy for prevention and combination in terms of treatment. So the interest in islatravir, I kind of take it as validation of how strong we believe in islatravir and this mechanism. In terms of the legal status, we're very comfortable in where we fit in relationship with islatravir. I don't want to speak directly to freedom to operate and all of that in relationship to other people's compounds until we see the details of the structure in all of this. But we are very confident in our investment and our patent position in relationship to islatravir.

Thank you, Andrew. Next question, please.

All right. Thanks for the question. I just want to ask one on pneumococcal. I wonder if you could give us your base and best case for the October ACIP meeting, given the June preview analysis. Didn't it consider some of the strengths of your vaccine around Serotype 3 and other strong points?

Let me first take it and then I'll pass it on to Frank. We're very confident in the clinical program of our V114 vaccine event and the strength of the data that serves as the basis for the filing, which showed broad protection against disease-causing serotypes and improved immune performance for serious serotypes that persist. This will be an important point. Not all serotypes are equal. There are certain serotypes that are far more important than others. And so, I think it will be very important at the ACIP to understand the epidemiology and how one thinks through that. Now, we've demonstrated that the immune response data really shows that we have non-inferiority to stereotypes shared with PCV13, and that we have superiority for three that are quite important from an epidemiologic standpoint. I think the other issue that I just want to also elevate, is that we also are advancing V114, or VAXNEUVANCE, not just in relationship to adults, but we're advancing it aggressively in relationships to the pediatrics. And we are also advancing a more bespoke adult-focused vaccine V116 that we hope to share data on over the next year or so. Frank?

We are excited about the overall opportunity for the pneumococcal franchise. Regarding your question on ACIP, we are waiting to gain clarity on future recommendations for all the vaccines, including PNEUMOVAX, VAXNEUVANCE, and PREVNAR 20. As you may have noted from the information released in June, there could be a shift towards some of the newer pneumococcal vaccines, particularly with age-based recommendations that focus on various populations. Our priority is to ensure that they understand our data and the benefits of our products, specifically PNEUMOVAX 23 and VAXNEUVANCE. Although there may be risks associated with PNEUMOVAX, we believe VAXNEUVANCE offers a strong competitive advantage in the adult market. We are also enthusiastic about opportunities in pediatrics, as evidenced by our two Phase III trials in that demographic, alongside our continuing development of V116 for adults and V117. Overall, we view vaccines as a key growth pillar for our company, and we are confident in their continued growth both in the near and long term.

Thank you, Daina. Next question please.

Hey guys. Good morning and thanks for the question. Rob, I want to ask another strategy question just coming off the completion of the spin, and to see what the guardrails are when you think about BD. So the question is, would diversifying the revenue mix away from oncology take priority over the up margin expansion you're expected to have? And then to put a finer point on therapeutic areas. I know you lead wherever the science takes you, but what are your thoughts on the orphan drug arena or expanding the footprint of neuroscience, now that there's apparently a more favorable FDA environment? Thank you.

I appreciate the question. As we consider business development in relation to our margin goals, I want to make a couple of points. First, we believe that over time, we need to achieve a more balanced portfolio and diversify our offerings. I want to clarify that I differentiate between diversification away from KEYTRUDA and diversification away from oncology, which is a broad field with significant unmet needs. We can utilize our strengths with KEYTRUDA, including our solid foundational position, data, and insights gained from extensive testing with various agents. Therefore, expanding and diversifying our presence in broader oncology is a key goal for us moving forward. Additionally, we should explore other therapeutic areas. We have a strong position in vaccines and are looking into that. We've also mentioned cardiometabolic as an area of interest. Dean can also comment on our ongoing early-stage programs in neuroscience, which we are excited about. Regarding what we prioritize, my primary focus is on long-term sustainable growth, which is driven by innovation and investment in science. We will always prioritize this, and I believe we can achieve both growth and operating margin expansion. However, if it comes down to reducing costs or investing in growth, I will always choose to invest in growth.

Let me take a shot at that question that you had in relationship to orphan disease and neuroscience. I would highlight that if we're looking at rare diseases, I do like rare diseases because it's a very quick way to understand proof-of-concept and can move quickly. And then once you're at that situation, the ability to expand from that beach head is very important. The reason I want to emphasize that is deals such as in oncology is really a rare disease play with the possibility of expanding into broader cancers. Whether we see that in cancer or in non-cancer assets and pathways and possibilities, that's something that we're very interested to replicate. In relationship to neuroscience, you're right. There has been movement recently of the FDA and the important biomarkers. But I do want to level set that the importance of biomarkers must also be balanced by the importance of being able to show changes in important clinical events for patients. It has changed and we're very anxious to understand how we can best utilize that movement for biomarkers, and especially, for example, our phospho Tau program, which we're very enthusiastic about advancing. How that should navigate, and how we should think about, for example, biomarkers such as Tau biomarkers in that clinical strategy is of intense interest to us, giving the shifting landscape. We have other neuroscience programs, MK-8189 is in Phase II for schizophrenia, and we have MK-1942 that we're advancing for treatment-resistant depression. The regulatory landscape changing in neuroscience is important. It is something that we've taken into account and it is affecting how we navigate the field and accelerate the programs that we have. And it also changes how we look at business development as well.

Thank you, Geoff. We realize it's 9 o'clock. We're going to go a few minutes late to get to more questions. Next question, please.

Good morning, and thank you for accommodating me. I wanted to ask about the use of mRNA in a multivalent approach. It's a challenging problem. Is this a theoretically impossible issue, or is it simply an engineering challenge to develop multivalent messenger RNA vaccines?

I'll address that question. The challenge with multivalency is that as you increase the number of valences in vaccines, it complicates the issue. Another factor to consider is the necessary dosage and what we term reactogenicity each time something is added. I wouldn’t say anything is impossible, as science and technology are always evolving. However, I wanted to convey that there are areas where advancements in mRNA could have a significant clinical impact. In other areas, further discovery and technological development will be crucial to overcoming initial challenges.

Thank you, Ronny. Next question, please.

Thank you for the question. I wanted to ask about pricing. At the start of this year, Merck mentioned that pricing could continue to be a significant issue for the pharmaceutical industry, with increasing pressure. Recently, there was some discussion from the Biden administration regarding government negotiations on Medicare pricing. As we wrap up 2021 and move into 2022, what are the Company's thoughts on pricing?

Yeah. Thank you. I'll take that question. Clearly, we continue to expect to see ongoing pressure on pricing and I think the dialogue that you're pointing to the tapping right now with Congress. And then, also, with the Biden administration only reinforces that that threat continues to be there. But I think as we focus on it, a couple of points. One, as we look forward, all of the expectations we have for our growth as a Company that we've communicated in the past does assume we face meaningful price pressure. So we continue to believe our growth will be driven more by volumes than price. And I think that's important as you think about the long-term risk position of the Company. As we look out over the next five plus years, we're largely at risk to our revenue goals. And I think we can achieve it regardless of price. Putting that aside, as you think about it from a policy perspective, we're very willing to engage with the U.S. government in discussions about how best to achieve a goal of reducing the out-of-pocket costs for patients. That is our foremost goal. We actually recognize that need and are willing, and want, to work with them around that goal. Understanding, we want to protect innovation because we also want to be able to ensure we can bring the innovations for the next generation of patients that need them. I think the whole situation with COVID has shown why you want a robust and innovative industry because at the moment, you need it. It's important that it's here in our country and we can invest and drive it. So that's our focus. But again, it's really about where it is that we can see reductions in out-of-pocket cost areas where they look either legislatively or otherwise that don't shift any kind of savings to the patient in their pocketbook, we’re opposed to.

Thank you, Mara. Next question please.

Good morning. Thank you for the opportunity to ask a question. I wanted to discuss the performance in China, as you had a very strong quarter there. I would like to know more about what contributed to that performance, particularly regarding GARDASIL and LENVIMA. I am interested in this within the context of your expectations for GARDASIL's performance in the second half and the additional supply capacity that will be available. Any insights on these points would be appreciated. Thank you.

Yeah. Hi, Carter, it’s Frank. Yeah, China grew very strong this quarter, I think it was 42% if you exclude foreign exchange. It was really driven by GARDASIL. Very strong growth as we mentioned and we anticipate that will continue as we move forward because of the significant number of patients and still the relatively small penetration that we have for GARDASIL in China. So clearly we see opportunities there. I'd also like to highlight that we did see very strong growth, again within oncology, LENVIMA, Lynparza, KEYTRUDA grew very strong this quarter. So a number of our growth drivers, and in addition to that, we also are still seeing strong growth for Januvia in diabetes in China as well. So we anticipate that we'll continue to see growth. I think this ties very well to our strategy where we pivoted and focused more on our innovative portfolio of products for China and that’s why we are very confident in the future growth within China.

Thank you, Carter. We have time for one last question.

Thank you very much. Can you provide an update on the anti-IoT4 antibody? A number of new trials have been initiated recently. What is it that Merck sees in this target that is interesting? Thank you.

IoT4 is a program that we are closely monitoring within our pipeline. This initiative began as we analyzed patient data from clinical trials involving Pembrolizumab, focusing on both responsive and non-responsive patients to understand the underlying mechanisms. Additionally, while IoT4 functions similarly to a checkpoint inhibitor, it is distinct in that it is not a T-cell checkpoint inhibitor. There has been ongoing debate regarding the significance of other immune cell types, like myeloid cells, which is another reason for our interest. However, it's essential to conduct clinical trials to validate these scientific insights. We are moving forward with clinical trials for IoT4. The interest from other companies in following our lead is likely due to our advancements in the program, and we believe our data will support this progression. Ultimately, we need to determine the extent of the benefits it provides, but it represents a highly differentiated first-in-class mechanism, not only at the molecular level but also in our innovative cellular approach to combating cancer.

Thank you, Steve, and thank you all for your really good questions today. I’ll turn it to Rob for some closing remarks.

Great. Thanks, Peter. As we discussed today, hopefully what you get a sense of is that we do have significant opportunities for growth and value creation. I'm committed to making it happen and I know my team is as well, and importantly, we're confident we'll be able to do so. Merck is a Company that matters. And as we think about that, we know we need to evolve, that we hold a special place in the world and we're committed to delivering for the patients who are counting on us. And frankly to deliver the sustainable growth that I know our shareholders want to see and I'm confident we will do so. So I look forward to giving you updates on our progress as we move forward, and I wish you all to have a great rest of your day.

Thank you very much.