Merck & Co Inc (MRK) — Q3 2021 Earnings Call Transcript

Thank you, Grace. Good morning. Welcome to Merck's third quarter 2021 conference call. Speaking on today's call, we will be Rob Davis, Chief Executive Officer, Frank Clyburn, President of Human Health, Caroline Litchfield, Chief Financial Officer, and Dr. Dean Li, President of Merck Research Labs. 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 provide a reconciliation in our press release. I would like to remind you that some of the statements that we make today may be considered forward-looking statements within the meaning of the Safe Harbor provision of the U.S. 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 10K, 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. During today's call, a slide presentation will accompany our speakers' prepared remarks. The presentation today's earnings release, as well as our SEC filings, are all posted to the Investor Relations section of Merck's website. With that, I'd like to turn the call over to Rob.

Thanks, Peter. Good morning, everyone, and thank you for joining today's call. I'm very pleased to report significant progress across our key growth and strategic priorities in Merck's first full quarter as a more agile and focused science-driven Company. We have strong momentum in our business. We've achieved notable clinical milestones, acted on a significant business development opportunity consistent with our strategy, and executed commercially to drive strong performance this quarter. We're also working with diligence and urgency, which is reflected in the speed with which we were able to bring forward our investigational COVID-19 antiviral Molnupiravir and to rapidly file for emergency use authorization with the FDA. It's an exciting time at Merck, and we are determined to build on our recent successes as we pursue our mission to deliver innovations that save and improve lives and as we seek to create long-term value for both our patients and our shareholders. Dean will speak to the significant pipeline advancements we are making in a minute. But I first want to congratulate him and our research colleagues, as well as our partners at Ridgeback Biotherapeutics on the meaningful clinical results we recently reported regarding the development of Molnupiravir. From the onset of the pandemic, Merck has sought out opportunities to apply its scientific expertise in the global fight against COVID-19, and we are very pleased to now be in a position to make a meaningful difference. As you are aware, at a planned interim analysis of our Phase 3 trial in at-risk, non-hospitalized adult patients with mild to moderate COVID-19, Molnupiravir reduced the risk of hospitalization or death by approximately 50% compared with placebo. Based on these results, and in consultation with the FDA, we stopped our trial early. We're now working with the FDA as the agency reviews our EUA application and we look forward to next month's advisory committee discussion. I'm pleased with the progress we're making to enter supply and purchase commitments with numerous governments and healthcare systems around the world and with the success of our efforts to rapidly build supply. I'm also proud that we will be positioned to provide access to patients around the world through voluntary license agreements, tiered pricing based on country affordability, and through our agreement with the Medicines Patent Pool. We've also taken a meaningful step towards augmenting our pipeline through business development, a key strategic priority. The announced acquisition of Acceleron is a perfect example of our efforts to identify and bring in the strongest external science to supplement our own work. Acceleron's lead product candidate, Sotatercept, has the potential to become foundational as an add-on therapy in the treatment of pulmonary arterial hypertension where there is a strong need for a new agent that can potentially address the underlying illness and not just the symptoms of this grievous disease. We look forward to the completion of our tender offer in the near future and to receiving the necessary regulatory approvals that will permit us to close the transaction. With its multi-billion-dollar peak sales potential and commercial exclusivity well into the next decade, Sotatercept can contribute meaningful revenue growth in the KEYTRUDA LOE period, an important attribute of this and potential future targets. Dean and I will continue to work with our team to identify additional scientifically compelling business development opportunities, while also continuing to pursue our robust and growing internal pipeline. Our business performed exceptionally well this quarter and the team continues to display superior and focused execution. We achieved very strong commercial and financial results with meaningful growth across our oncology, vaccines, and animal health businesses, and even greater growth in earnings. As expected, GARDASIL sales were particularly robust as we benefited from the sharp improvement in manufacturing output and availability of more doses to help address ongoing strong underlying demand. We are confident that the momentum we are seeing will continue through the end of the year, setting us up for continued growth over the next several years. We remain focused on our efforts to transform the way we work by evolving our operating model to be leaner, nimbler, and more digital-enabled. My leadership team is fully aligned behind the need for Merck to work with more speed, urgency, and agility across all aspects of our business. We must stay ahead of the evolving external environment to ensure we are able to make the significant investments required to deliver future innovations that will address unmet medical needs across the globe. In doing so, we aim to deliver important medicines and vaccines to patients while continuing to drive long-term sustainable growth and value creation for all of our stakeholders. Finally, I want to highlight the recent publication of Merck's environmental, social, and governance progress report. This year's report highlights important updates on metrics and goals around our four ESG priority areas, which include access to health, our employees, including their health and safety, engagement and diversity, environmental sustainability, and ethics and values. These ESG efforts are grounded in the core values that have always guided our mission and support our business strategy. We look forward to providing ongoing updates on these important efforts. With that, I will pass it to Frank to review the details behind our human health performance.

Thanks, Rob. Good morning. As Rob highlighted, the momentum in our Human Health business continued in the third quarter and we achieved 17% growth excluding the impact of foreign exchange. We have continued to invest with urgency and patient activation programs that improve patient awareness and encourage more normal levels of physician office visits, oncology screenings, and vaccination rates. These actions, while aimed at benefiting patient health, also meaningfully benefited our largely physician-administered portfolio in the quarter. In the U.S., we are encouraged that wellness visits and surgical procedures remain at mostly normal levels. In oncology, while screening rates and diagnosis continued to improve, they are unfortunately still below pre-COVID levels. This is impacting new patient starts. Outside of the U.S., our business performance remains strong despite lingering impacts from the pandemic in certain markets. Now turning to the third quarter performance of our key brands, my comments will be on an ex-exchange basis. In oncology, KEYTRUDA sales grew 21% to $4.5 billion, reflecting continued robust global demand. In the U.S., KEYTRUDA continues to demonstrate durable momentum across all key tumors, including growth from our recent launches, such as KEYNOTE-522, in neoadjuvant-adjuvant triple-negative breast cancer. KEYTRUDA is continuing to extend its very strong overall IO class leadership, improving new and total patient market share. KEYTRUDA continues to maintain its leadership position in lung cancer, capturing 8 out of 10 eligible new patients despite continued competition. Outside of lung, key tumors contributing to growth include renal cell carcinoma, triple-negative breast, MSI High, esophageal, and head and neck. We're also excited by the recent approval and upcoming launch of Keynote 826, which is a first anti-PD-1 combination approved as a first-line treatment of cervical cancer. Outside of the U.S., KEYTRUDA growth continues to be driven by lung cancer indications and the ongoing launches in head-neck and renal cell carcinoma. We are continuing to see the opportunity to expand our reach into earlier lines of therapy materialize. We are very excited about the potential upcoming adjuvant launches of KEYNOTE-564 in renal cell carcinoma and KEYNOTE-716 in melanoma. In fact, in the U.S. we expect over half of KEYTRUDA's growth to come from indications in early-stage treatment settings through 2025 and to represent roughly 30% of total KEYTRUDA sales by that time. Lynparza sales grew 25% and it remains the leading PARP inhibitor. Growth was driven by our breast cancer indication and continued uptake of the most recent indications, including ovarian and prostate, and we look forward to the potential launch next year in a broader prostate population based on the PROpel trial. LENVIMA sales grew 30%. In the U.S., growth was driven by renal cell carcinoma and endometrial cancer. We're seeing very encouraging early trends from the launch of KEYNOTE-581 in first-line renal cell carcinoma. Outside the U.S., growth is reflective of increased demand following NRDL listing in China in March of this year. We're also excited by the recent approval of WELIREG, for patients with certain VHL-associated tumors. We've received very positive feedback from scientific leaders, providers, and patients about the benefits of WELIREG, which is off to a promising start and we are hopeful to extend the reach of WELIREG to broader RCC indications in the future. Our vaccines portfolio continued to deliver strong growth from GARDASIL, which grew 63% to $2 billion, and has grown 35% year-to-date. In the U.S., the increase in year-over-year growth was primarily driven by the timing of CDC purchases, which helped us overcome a below-normal back-to-school season. Underlying demand for GARDASIL remained strong and we're seeing some benefits from the recovery of missed doses due to the pandemic. Outside of the U.S., growth was largely driven by strong underlying demand in China, as well as increased supply and our ability to reallocate doses. In our hospital acute care portfolio, BRIDION sales grew 15% driven by our ability to capture increased market share within the growing neuromuscular blockade reversal class. Turning to our outlook, the robust underlying demand for our products paired with our continued excellent commercial execution gives us confidence in the outlook for our business. Merck has shown increased urgency and agility across our organization that has resulted in improvements that will enable meaningful future growth. On GARDASIL, we continue to expect robust ex-U.S. demand and increased supply to drive fourth-quarter performance. We expect to see more normal seasonality for GARDASIL with the third quarter reflecting the highest in sales. Our teams have been working to ensure we have the right processes in place to appropriately allocate doses to areas of increased demand, particularly as COVID variants continue to impact certain geographies. These dynamics will drive very strong year-over-year growth for GARDASIL in the fourth quarter, driven by ex-U.S. markets such as China. Given global HPV vaccination levels remain low, we continue to believe the long-term growth opportunity for GARDASIL remains significant. In oncology, we are encouraged by our strong performance throughout the pandemic, with new launches more than offsetting the headwinds seen from reduced new patient starts. We remain confident in the underlying demand for our broad and innovative portfolio, including KEYTRUDA, Lynparza, and LENVIMA, and we'd expect to drive sustained growth across key tumor types and in earlier stages of disease. Next, let me provide a few comments on the outlook for Molnupiravir. As Rob mentioned, we are very excited about the potential to offer the first oral treatment option to at-risk adults with mild to moderate COVID-19 in an effort to help combat the pandemic. Merck is committed to providing widespread access to Molnupiravir globally and is implementing a tiered pricing approach based on World Bank country income criteria. We have announced a number of supply and purchase commitments to date, and we continue to have discussions on similar agreements with customers around the world. We are also encouraged by the recent unanimous vote by the Advisory Committee on Immunization Practices. Upon adoption, as a final recommendation by the CDC, this sequence would offer patients the broadest coverage with a strong immune response against the serotypes responsible for about two-thirds of invasive pneumococcal disease cases in adults. As we think about our pneumococcal portfolio more broadly, we're excited about the potential opportunity for VAXNEUVANCE in the pediatric setting, which represents a larger market segment. To conclude, there is continued momentum in our business driven by demand and strong commercial execution and we are well-positioned as we move through the end of the year. The growth in the third quarter underscores our confidence in the underlying strength of our business and global demand for innovative medicines and vaccines, and we look forward to driving that growth long into the future. With that, I'll turn the call over to Caroline.

Thank you, Frank. Good morning. Our team drove exceptional financial performance in the third quarter. The investments we are making in our strong portfolio and pipeline, as well as in business development, are helping us deliver outstanding near-term performance, while also positioning us to continue to deliver important innovations and long-term value to patients and shareholders. Now turning to our third-quarter results. Total company revenue was $13.2 billion, an increase of 20% or 19%, excluding the positive impact of foreign exchange. The remainder of my comments will be on an ex-exchange basis. As Frank highlighted, our Human Health business achieved improving momentum, growing 17%. Our animal health business also delivered robust growth with sales increasing 14% driven by strong global demand across both companion animal and livestock. Companion animal sales increased 18% driven by global demand in parasiticides, including the BRAVECTO line of products, as well as companion animal vaccines. Livestock sales increased 12%, reflecting strong global demand for ruminant and poultry products, including our animal health intelligence products. I will now walk you through the remainder of our P&L, and my comments will be on a non-GAAP basis. Gross margin was 76.8%, an increase of 0.3 percentage points, reflecting the favorable effect of product mix, partially offset by higher manufacturing costs. Operating expenses increased 11% to $4.7 billion. This was driven by investments in our key growth pillars, particularly in supportive care activities and in our early and late-stage pipeline, including Molnupiravir. Other expenses increased by approximately $200 million, reflecting higher pension settlement costs. The effective tax rate was 13%, a decrease of 1.4 percentage points driven by discrete items. Taken together, we earned $1.75 per share, an increase of 26%. Turning now to our 2021 non-GAAP guidance. While the pandemic continued to impact many regions around the world, health systems and patients have largely adapted and we assume this trend will continue. Our guidance assumes the Acceleron transaction will close during the fourth quarter, subject to the successful completion of the tender offer and regulatory approvals, and does not include potential sales or earnings from Molnupiravir. The underlying strength of our business enabled us to narrow and raise our expected revenue range to $47.4 to $47.9 billion, representing growth of 14 to 15%, including a positive impact from foreign exchange of approximately 1.5% using mid-October rates. Adverse margin is expected to be approximately 76.5%. We continue to expect operating expenses to grow at a high single-digit rate. In other income and expense, we expect an expense of approximately $450 million. We expect our full-year tax rate to be between 14% and 14.5%. We assume 2.5 billion shares outstanding. Taken together, we are raising and narrowing our EPS range to $5.65 to $5.70, reflecting significant growth of 25% to 26%. This range includes a positive impact from foreign exchange of approximately 2% using mid-October rates. As you consider your models, there are a few areas to focus on, starting with Molnupiravir revenue. We expect the global opportunity to be approximately $5 billion to $7 billion through 2022, including $0.5 to $1 billion expected to be realized this year. This assumes emergency use authorization in December. As a reminder, we will share any profit equally with our partner Ridgeback, with the market responsible for recording global revenues and costs and will reflect the profit share with the same cost of sales. For GARDASIL, we have had excellent momentum, driven by strong demand and benefits from the step function increase in supply we are achieving this year. Fourth-quarter sales will be lower than the third quarter due to normal seasonality and timing effects. However, we expect the growth in the quarter to remain very robust. Animal health has had exceptional growth in the first three quarters of the year, driven in part by the pandemic effect on pet adoption and pet spending. In the fourth quarter, we will normalize this as we said, and we expect a more normalized year-over-year growth rate as a result. Our operating margin in the third quarter benefited from very strong revenue performance, including the normal seasonality of our vaccine business. As we move through the fourth quarter, we expect operating margins to normalize due to this seasonality and the phasing of spend. More broadly, as we look out to 2024, we remain confident in our revenue potential and continue to believe it is underappreciated. And, we remain on track to achieve our 2024 operating margin target of greater than 42%. Our capital allocation priorities remain unchanged. We will continue to invest in the business to drive the many significant net and long-term growth opportunities we see in our safe-risk portfolio and rich pipeline. We also continue to execute on our business development strategy, including our announced acquisition of Acceleron. We will pursue additional value-enhancing and strategic business development opportunities, and we retained significant balance sheet capacity to do so. We remain committed to the dividend, with the goal of increasing it over time. To the extent we have excess cash, we will return it to shareholders through share repurchases. To conclude, Merck continues to make exceptional progress on its commitment to drive growth and value for patients and shareholders. We remain in a position of financial and operational strength, which will enable us to deliver on that promise now and well into the future. With that, I'd now like to turn the call over to Dean.

Thank you, Caroline. Good morning, everyone. It is a pleasure to be here to provide a summary of progress made since our last quarter call. I will provide an update on our oral antiviral candidate Molnupiravir, highlight the proposed Acceleron acquisition, spotlight some recent progress with our pipeline, and finish with this synopsis of notable regulatory milestones and clinical updates from across the pipeline. The need for additional treatment options remains key in combating the COVID-19 pandemic. Interim analysis from MOVe-OUT, our Phase 3 study evaluating Molnupiravir in at-risk, non-hospitalized patients with mild to moderate COVID-19 showed an approximately 50% reduction in the risk of hospitalization or death compared to placebo. We had no deaths reported and patients who received Molnupiravir fared better than those on placebo. This is the first oral antiviral for respiratory viruses to demonstrate benefits based on robust clinical outcomes and the first to show a meaningful five-day window for therapeutic intervention after symptom onset. Based on these positive results and at the recommendation of the independent data monitoring committee and in consultation with the FDA, recruitment into the study was stopped early. In light of these findings and given the urgency to address the pandemic, our teams worked tirelessly to submit a robust package to the FDA for EUA within 10 days of receiving data. We look forward to discussing the EUA submission at an upcoming meeting of the Antimicrobial Drugs Advisory Committee scheduled for November 30th. In addition to Korlym, we continue to engage with the FDA to support its review. Applications have also been submitted to multiple regulatory agencies around the world. I do wish to take a moment to thank the investigators, patients, and their families for their participation in the MOVe-OUT study. I'm also grateful to our collaborators at Emory University, Ridgeback, and Merck's internal teams for the incredible work done in conducting this program during a very challenging time. A comprehensive vaccination strategy remains the best sustainable means to confront this COVID-19 pandemic. Timely intervention following symptom onset with an oral agent that can be self-administered at home may provide an additional meaningful option for patients, healthcare systems, and public health, which could make a significant and positive impact on the pandemic. Based on available viral sequence data, Molnupiravir showed consistent efficacy against the Gamma, Delta, and new COVID-19 variants. As a reminder, we continue to actively recruit participants in the MOVe-AHEAD trial, which is evaluating the safety and efficacy of Molnupiravir in preventing the spread of COVID-19 within households as a post-exposure prophylactic, with a planned readout in the spring of 2022. Now, turning to the proposed Acceleron acquisition. Acceleron has an excellent scientific platform, which has yielded an important treatment for anemia in adult patients with certain rare blood disorders. Their lead clinical candidate has the potential to be a foundational asset as an add-on therapy for the treatment of pulmonary arterial hypertension and provide a complementary addition to our growing cardiovascular pipeline. As such, following the close of the deal, our strategy would be to advance the wide-ranging Phase 3 clinical program. Now onto the portfolio and pipeline starting with HIV. We continued to generate clinical data that reinforces the foundational potential of our HIV treatments. At the European Aids Conference in London this week, we presented data from the Phase II study evaluating one of our candidates in previously untreated adults with HIV infections, which demonstrated continued maintenance of viral suppression through 144 weeks. We also recently reported positive top-line results from two pivotal trials evaluating a once-daily oral regimen of another candidate in a switch setting for adults with HIV infection who are virologically suppressed on other HIV therapy regimens. At 48 weeks, both trials met their primary efficacy endpoint for percentage of the participants with levels of HIV RNA greater than or equal to 50 copies per milliliter, demonstrating comparable efficacy with those receiving the comparator antiretroviral therapy. We plan to present these findings at an upcoming medical congress and incorporate the data into a global regulatory submission. This week, we also announced the start of a Phase 2 clinical study evaluating a once-weekly oral combination treatment in people living with HIV who are virologically suppressed on antiretroviral therapy. We have made great progress in our collaboration with Gilead and look forward to reporting our future development, including our long-acting injectable formulation. Next, onto VAXNEUVANCE. We received a positive opinion for VAXNEUVANCE from the European Medicine Agency's Committee for Medicinal Products for Human Use in individuals 18 years of age and older. More recently, in the U.S., the CDC's ACIP voted unanimously to provisionally recommend VAXNEUVANCE, followed by PNEUMOVAX as an option for pneumococcal vaccination in adults 65 years and older, as well as for adults aged 19 to 64 with certain underlying medical conditions, with both patient populations being studied in our clinical trial. Vaccine performance is multi-dimensional and includes eliciting a strong immune response, as well as providing coverage for important disease serotypes. Our two-dose regimen accomplishes the best of both by eliciting a robust immune response across the 15 serotypes in VAXNEUVANCE, including serotype 3, as well as providing the broadest serotype coverage among current pneumococcal vaccine options, some of which are unique to PNEUMOVAX. Furthermore, VAXNEUVANCE has the most extensive clinical development program of the newly licensed pneumococcal vaccine. This includes completed or ongoing evaluations among those with certain chronic or immune-compromised conditions that increase susceptibility and severity of pneumococcal disease. We also announced positive top-line results for VAXNEUVANCE from the pivotal study evaluating immunogenicity, safety, and tolerability in the pediatric setting. We have submitted an application to the FDA. Evidence indicates that the incorporation of serotypes 22F and 33F, as well as strong immunogenicity against serotype 3, has the potential to play an important role in the prevention of pneumococcal disease in infants and children. These three serotypes represent more than a quarter of all cases of invasive disease in children under the age of five. We will present full results at an upcoming scientific congress. Finally, speaking of oncology, the rich flow of data from our clinical development programs across tumor types continues. We maintain momentum in the development of new treatment options for women's cancer with the approval of KEYTRUDA plus chemotherapy with or without Bevacizumab for recurrent or metastatic cervical cancer based on data from KEYNOTE-826. This study showed a meaningful 36% reduction in the risk of death. This is the first anti-PD-1 combination treatment option for patients in the first-line setting, and together with our industry-leading human papilloma virus vaccine, GARDASIL and GARDASIL 9, we are uniquely positioned to address certain unmet needs in cervical cancer with a focus on both prevention and treatment. At ESMO in September, we presented final results from KEYNOTE-355, our study of KEYTRUDA in combination with chemotherapy for advanced triple-negative breast cancer, which showed a reduction in the risk of death by 27%. KEYTRUDA is the only immuno-oncology agent approved in metastatic triple-negative breast cancer. This, along with additional data presented across endometrial and ovarian cancers, reinforces the remarkable progress being made in our broad women's cancer portfolio. We are also making inroads in new cancer types, including prostate cancer. With our partners at AstraZeneca, we announced positive results from the Phase 3 PROpel study for the frontline treatment of metastatic castration-resistant prostate cancer. This study demonstrated that Lynparza in combination with abiraterone significantly delayed disease progression regardless of biomarker status. Lynparza is the first PARP inhibitor to demonstrate clinical benefit and radiographic progression-free survival in combination with a new hormonal agent in this study. We are encouraged by this study and the potential to help the increasing number of men diagnosed with metastatic castration-resistant prostate cancer. Results will be presented at an upcoming medical meeting and submitted to regulatory authorities globally. Next, to renal cell carcinoma, which represents an important area of expansion. In August, we received FDA approval for a first-in-class HIF-2alpha inhibitor therapy for the treatment of adult patients with von Hippel-Lindau disease who require therapy for associated renal cell carcinoma and for pancreatic neuro-endocrine tumors not requiring immediate surgery. This approval provides a beachhead as we evaluate WELIREG's potential in broader RCC indications and beyond. Also, in RCC, in partnership with A5, following FDA priority review, we received approval for the combination of KEYTRUDA and LENVIMA in the front-line setting based on results from a trial. This brings forth an important new first-line treatment option for patients with advanced RCC. We are also rapidly expanding programs into earlier lines of therapy. During the quarter, the FDA granted priority review for application for KEYTRUDA as an adjuvant therapy for patients with RCC at intermediate high or high risk of recurrence following nephrectomy and resection of metastatic regions from the KEYNOTE-564 studies. Additionally, we received priority review for KEYTRUDA for the treatment of patients with surgically resected high-risk stage 2 melanoma, based on results from the KEYNOTE-716 studies that showed an improvement in recurrent-free survival compared to placebo. Both of these studies demonstrate the benefit of expanding the use of KEYTRUDA to earlier stages of disease, allowing us to extend treatment benefits to more patients sooner. We look forward to decisions on both studies by the end of the year. To conclude, I am proud of the progress across our broad pipeline, and I look forward to providing further updates on our scientific progress in the future. Now, I turn the call back to Peter.

Thank you, Dean. Grace, can you please start the Q&A portion of the call?

And I'd like to ask the questioners to limit themselves to one question today in order to get to as many different questions as possible.

So, I will just ask on KEYTRUDA and adjuvant lung instead. Have you had an interim and does the stat plan allow for hierarchy where PD-L1 positives is first, and do you expect the benefit to show in patients that did and did not get adjuvant chemo? Thank you very much.

Yes, thank you very much. I appreciate the question. First, I want to elaborate for just a second, we are excited by the emerging data regarding the role of PD-1 and PD-L1 in early treatment in the adjuvant space. For us, we are gratified that in renal melanoma, breast cancer is just, there appears to be a great effect and these are cancers where there are frequently employed methods for early screening. In relationship to lung specifically, we enjoy a dominant position in lung cancer and in lung cancer, the treatment of later-stage cancer is the predominant stage. As the data, and you somewhat alluded to from other companies indicate that in lung cancer, the PD-1, PD-L1 class could be effective in early and adjuvant. In specific and relationship to, then we have a number of early and adjuvant-stage lung cancers, and it was a collaborative study with the European Organization for Research and Treatment of Cancer, and Merck is a collaborator on this trial. This is an event-driven study and we are in active communication with EORTC, and together, we are awaiting data from the trial before the end of the year. Any public announcement from Merck would likely be revealed at the beginning of the New Year.

Great. Thank you. Umer. Next question, please.

Hi, kind of maybe a two-part question on Molnupiravir and how you're moving forward. The first is there's been some concerns publicly about the genotoxicity and I wonder if you could address the data you have that makes you not concerned about that; and then the second concern is maybe with resistance and I wonder how you're thinking about the future and combinations and whether that will be needed to prevent any resistance, maybe from low compliance to Molnupiravir?

Yes. Thank you for that question. This is Dean. I would emphasize we are very confident in the safety profile of Molnupiravir based on our pre-clinical and clinical data. In relationship to the clinical data, I think most people recognize that in the interim analysis, we had a profound reduction in hospitalization and death compared with placebo. It was stopped early in consultation with the FDA. In that interim analysis, the incidence of any adverse effects was comparable in both Molnupiravir and placebo. If you look closely, there were fewer subjects in the Molnupiravir group who discontinued therapy due to an adverse event compared with the placebo group. In relationship to our confidence in the safety profile based on our extensive pre-clinical evaluation, it’s important to recognize that Molnupiravir is a nucleoside analog that functions by creating errors in the genetic material of RNA viruses. These nucleoside analogues are often used in many other antiviral treatments, including HIV and hepatitis. We have done a comprehensive non-clinical program to characterize the safety profile of Molnupiravir. It has been widely recognized in scientific journals as well, and we will be presenting all of this data at the AdCom that the FDA will be holding. Probably the most important pieces of information are two distinct in vivo rodent mutagenicity assays, commonly called the Big Blue and the Big A, which are well-characterized and considered to provide a robust measure of the ability of a drug or chemical to induce mutations in vivo. In these studies, we administered Molnupiravir for longer and higher doses than those employed in the human clinical trial, and the totality of the data from these studies indicate that Molnupiravir is not mutagenic or genotoxic in these in vivo mammalian systems. We have shared these results with regulatory agencies worldwide and will continue to provide additional data as this process continues.

Great. Thank you, Daina. Next question, please.

Questions for Frank on Molnupiravir. Just in relation to supply, it strikes me given some of the published improvements in manufacturing and full gram per patient dose. The 20 million looks like a very conservative estimate, given particularly the inclusion of third parties, what could be achieved given the dosing and the API. I'd like a comment, please, on where you think the 2022 real supply could be and second, perhaps you could just comment on the appetite of Merck to use direct-to-consumer advertising or other promotion on Molnupiravir. I understand that promotion and advertising is allowed under an EUA, if you could confirm or deny that would be great.

Hey Andrew, this is Frank. I want to highlight a few things. First, we are on track to produce 10 million courses this year, and we expect to at least double that in 2022. To answer your question, we are committed to increasing the supply of this product. We also have voluntary license partners and other collaborators to ensure global supply. You can rest assured we are focused on supply. Regarding direct-to-consumer initiatives, it's still early for us, and we haven't made any decisions on that yet. Our main priority is to secure agreements with governments and make the product available worldwide. We will provide more information as we move forward, but addressing the pandemic is our top priority.

Andrew, this is Rob and I just want to make sure because as I listen to your question, I think Frank hit it but just to emphasize in case others on the phone aren't catching this, the 20 million estimate is more than doubling what we can do next year. That is Merck's production. We are not including in any of those numbers the eight voluntary licensed partners in India nor anyone who the Medicines Patent Pool signs up. Obviously, global production of Molnupiravir will be significantly more next year; we were just speaking to what volumes we will produce within Merck.

Let me just add one thing because I recognize that this question is also somewhat linked to the other question that relates to how we think about Molnupiravir scientifically in the pandemic phase, and there's going to be an endemic phase. There could be other phases after that. But for the pandemic phase, I just want to emphasize we have the MOVe-OUT trial, and then we'll have to see the potential in the MOVe-AHEAD to see whether we both have a treatment and a prophylaxis. In the endemic phase, when the pandemic becomes endemic, it's highly likely that SARS-CoV-2 will become an endemic infection, and we all have to recognize that many individuals across the globe will have high copy numbers of the virus that may lead to a constant brewing of variants. So, this question of resistance becomes very important. It is crucial to emphasize that Molnupiravir has an extremely high barrier to resistance. It has broad efficacy across all SARS-CoV-2 variants to-date; and in our pre-clinical studies of others, it has broad efficacy across a variety of RNA viruses. This high barrier to resistance is critically important for both the pandemic and the endemic phases, and I need to emphasize that for this reason, we prioritized Molnupiravir over other programs, including an internal protease inhibitor given the paramount importance we place on ensuring the highest barrier to resistance, given the current global health situation.

Great. Thank you, Andrew. Next question, please.

Good morning, everyone. Thank you for the opportunity to ask a question. I want to focus on Molnupiravir as well, specifically for Frank and Caroline. I’m looking to understand what was included in your guidance regarding distribution for next year, particularly how your supply aligns with the distribution to low and middle-income countries through the MPP. I understand there will be tiered pricing, but it appears that you might not fully utilize your available capacity. Any insights on this would be appreciated.

Yeah Carter, this is Frank. I'll start and see if Caroline wants to add anything. In our assumptions, and we appreciate this is a very fluid situation, we do assume an early use authorization in December this year, and we are including the contracts that we already have in place as well as those that are underway. We're comfortable with that $5 to $7 billion range through '22. To reemphasize, the number is based on the agreements we've signed, those in line of sight, and others that have a high probability of execution. A couple of other things we’ve mentioned, and Rob reiterated, are that we will produce 10 million courses of therapy by the end of '21 and are committed to at least doubling that in '22. Our focus initially is on treatment for COVID-19. The broad global access comes with global tiered pricing. If our post-exposure prophylactic trial is successful, there is potential outside of these estimates. Throughout 2022, we do not assume we will utilize all of the supplies available. We have the ability to fulfill additional demand. We also assume that there will be other oral antivirals in the market and we'll have to see how that unfolds. We look forward to providing you with additional detail and clarity as we move forward over the next couple of months.

Great. Thank you, Carter. Next question, please, Grace.

Thank you. Merck views its competitive position in pneumococcal vaccines as strong, but ACIP did not appear to agree, viewing the cost benefit of the 20 valent as superior, even when assuming it was ineffective against type 3. So where does Merck think ACIP erred, and how does Merck change that narrative? Thank you.

First, we're very confident in our VAXNEUVANCE outcomes. There are two areas where we're advancing: in adult and pediatric populations. The pediatric market is quite robust and we're advancing our program. We have submitted to the FDA, and we hope to hear back from them shortly, so we're very focused in the pediatric area. Regarding adults, the critical issue for us in relation to GARDASIL is to provide the best coverage in terms of serotypes, not just by immunogenicity but also by studying clinical events, especially in patients who are compromised or at risk or have other conditions that could increase their susceptibility to invasive pneumococcal disease. We think clinical data directly studied in these populations is critically important for understanding true vaccine efficacy. Frank, did you want to add anything?

The only thing I'll add is actually we were very pleased that it was a unanimous approval for the sequence of that events and PNEUMOVAX. We feel that the sequence offers patients broad coverage with strong immune responses against several serotypes that are responsible for two-thirds of pneumococcal disease in adults. ACIP highlighted that the regimen was both cost-effective and cost-saving in the 65+ patient population. We're excited about the opportunity for VAXNEUVANCE in the pediatric segment, which we believe is the larger market opportunity. Overall, from our perspective, we feel very good about the ACIP recommendation.

Thank you, Steve. Next question, please, Operator.

Morning, guys. Thanks for the question. You touched on a little bit with Molnupiravir during the first oral antiviral, but how do you expect it to play out commercially versus the booster strategy for vaccines? Would you expect any more formal guidelines from the CDC or others about how Molnupiravir fits into the algorithm? Thank you.

I apologize, Geoff, you were kind of garbled. I'll repeat what I think your question was. I believe your question was that this is the first oral antiviral. But we continue to have out there vaccines that are important as really the first line and do we think there is any discussion on how this will fit into the regimen? I don't think we can really comment on how advisory committees, the FDA or others, and the CDC would look at that. From our perspective, first and foremost, people should be vaccinated. We continue to believe that the vaccine is the best option. We see our therapy as an important addition to the armamentarium. In instances where people cannot get vaccinated or experience breakthrough infections, there is definitely a need for this, but it serves as a complement to the vaccine and not a replacement. That's our perspective. We'll let the government speak to their own plans.

Great. Thank you, Geoff. Next question, please, Grace.

Great. Thanks so much for the question. I'm just trying to get my hands around GARDASIL and the results in the quarter. Can you clarify or quantify a little bit how much of the $2 billion in sales this quarter was stocking versus underlying demand? And more broadly, are we still in a position where demand is exceeding supply, I guess on a global basis as we think about the recent capacity expansion? I'm trying to get my hands around, will there be another step-up in sales for this franchise as we look out to 2023 and beyond with the new facility coming online or are the capacity efforts you've made so far addressing most of the demand that's out there? Thanks so much.

So, Chris, this is Caroline. I'll start and then hand over to Frank. In the quarter, as you note, we've had an exceptional quarter driven by strong global demand and the step-up we have in supply. We also did benefit from CDC timing, and that was approximately $125 million of buy-in in the third quarter of this year. That can trough to a buyout actually in the third quarter of 2020. So, year-over-year, we feel we've benefited by approximately $180 million to the results. Now, in terms of how we see this going forward, we're very excited about the opportunity. We see increased supply through '22 and beyond as we see the other capacity come online, but let me hand you over to Frank to talk about the demand that we have.

Yeah, Chris, thanks for the question. A couple of other things that I want to highlight as you think about GARDASIL, this is something we've been discussing for a while: both near-term results with long-term prospects. First, only 9% of the eligible cohort globally has been vaccinated. We still have significant opportunity. If you think about markets such as China, the approval in Japan, and the gender-neutral opportunities we have in Europe, as well as other age cohorts in adults in the U.S., we feel there is significant potential for continued GARDASIL growth. As you saw, there's a step-up in our supply, and we will continue to see that. It will be a more modest pace next year, but rest assured as we bring on the two new bulk manufacturing facilities in '23, we feel the long-term growth prospects for GARDASIL are very significant. It will to be a key growth driver for the Company going forward.

Thank you, Chris. Next question, please. Grace.

Thank you. Question on additional M&A. So maybe for Rob. On the Acceleron investor call you held, I asked whether Merck would do more M&A even if it meant taking a rating debt downgrade. You were very frank in your answer and you said yes. But the Company has not been willing to quantify what additional debt that would potentially trigger a downgrade. My understanding is that another $10 billion cash deal would be enough to trigger a one-notch downgrade. If there's a $30 billion cash deal, that could be a two-notch downgrade. So, my new question is, would Merck actually do the deal big enough to cause a two-notch rating downgrade? Thank you.

I appreciate the question. I would start at a more high level. Do we continue to pursue additional business development? The answer is yes. It will be driven as it has always been, based on what we see as a compelling scientific opportunity, where we see science addressing an unmet need that is strategically aligned with us and where we can bring value. So that is unchanged. As we look at capacity, I would just say, we believe we have the firepower to do any deal out there that we would have a strategic interest in doing. The balance sheet will not limit us; we have very strong balance sheet capacity. I don't think we want to get into trying to get specifics. Some of the numbers frankly, were quite a bit off actually, but I don't want to get into those kinds specifically because it depends on rating agencies and the target. Cash flow coming from the target will be considered. I think the important message is balance sheet capacity is not going to be a brake for us.

Thank you, Tim. Next question, please, Grace.

Great. Thanks for the question. Just a quick one on the earlier stage pipeline. I'm a little surprised you guys are presenting your first oral PCSK9 inhibitor in a late breaker at AHA in two weeks. But it isn't included in your pipeline summary. Could you just help us understand why not? And just as a follow-up to that, when might we hear more about the earlier-stage pipeline? Will it be at an R&D day in 2022? What's the right time to start showing a little bit more of the earlier stage pipeline that Merck's been building over the last 3 to 4 years via acquisition and then internally? Thanks.

This is Rob. Maybe I'll let Dean just comment specifically on the oral PCSK9, then I can give a comment on the additional transparency question. Specifically in relationship to the PCSK9, it is going to the American Heart Association. It is slipping into Phase 2 and that's why we aren't showing it in our pipeline without it already having that Phase 2 designation. However, we're trying to demonstrate increased transparency by showing something that is about to enter that phase. The presentation at the American Heart Association will be well attended; a lot is riding on this product. Trying to create an oral PCSK9 has been a holy grail in the cardiovascular field for some time and hasn't been achieved. We believe we have achieved it and it reflects Merck's innovation capabilities. Furthermore, when we look at how we created that molecule, it's a question of what other targets could Merck explore inside of cardiovascular space. Rob? As Dean highlighted, we plan to turn our views as things move from Phase 1 into Phase 2. That's when we will start discussing it. Our aim is to provide better transparency as more things transition into the clinical space. Cardiovascular is the next area we would like to highlight because I can tell you I’m excited about the pipeline. There's a lot going on but we know it's not fully appreciated. We want to wait to discuss the Acceleron deal so we can include their assets in that conversation. That will happen as soon as we can confirm when the deal will close, either later this year or early next year. Beyond that, I'm very pleased with the visibility we've provided into our HIV pipeline, which is promising. Neuroscience also has a lot happening that I'll be looking to share next.

Thank you, Seamus. It's a little past 9. I think we have time for one more question. Next question, please.

Hi, thanks for taking my question here. There are several players trying to bring lower-priced checkpoint inhibitors to the market. Do you believe that these discounted pricing strategies will have any traction, why or why not? Thank you.

Hey Louise, this is Frank. I'll take that from a couple of different angles. I know there's been discussion around that. First, we want to emphasize that oncology is really data-driven and strongly reliant on robust clinical data, and I think you've seen our strong position reflected there. The wall of data we established with KEYTRUDA, with 33 indications right now and the familiarity and growth we're seeing across many different cancer types, makes us feel in a very good position. We also think that new entrants will face an increasing regulatory hurdle with more KEYTRUDA approvals. It keeps us in a leading position to leverage our experience. We think that also you would have to have a broader structural change to be adopted in the U.S. broadly. So, we continue to monitor the competitive landscape but feel very confident in our growth prospects going forward.

Maybe just a couple of points. First, I want to thank and recognize our Merck employees across the globe for their hard work and dedication, particularly during the pandemic. The way we've been able to execute truly shows the best of who we are and I couldn't be more proud across all elements of our business, whether that's clinically, commercially, or in manufacturing. I also want to highlight this is an exciting time at Merck. We have growing momentum, and I can tell you growing confidence that we can grow not only in the near-term but that our portfolio of assets positions us sustainably to be an important contributor to human health and to deliver significant value for our shareholders. We are a more focused company and a faster-growing one, working with urgency to achieve our mission for both patients and shareholders. This was evident in the developments discussed today and all the outstanding achievements we made, including the progress made with Molnupiravir. Thank you for your time.

Thank you, presenters.