Merck & Co Inc (MRK) — Q2 2024 Earnings Call Transcript

Thank you, Brad. And good morning, everyone. Welcome to Merck's second quarter 2024 conference call. Speaking on today's call will be Rob Davis, Chairman and Chief Executive Officer; Caroline Litchfield, Chief Financial Officer; and Dr. Dean Li, President of Merck Research Labs. Before we get started, I'd like to point out that we have items in our GAAP results, such as acquisition-related charges, restructuring costs and certain other items and we have excluded these from our non-GAAP results there was a reconciliation in our press release. I would also 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 US 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 2023 10-K identify certain risk factors and cautionary statements that could cause the company's actual results to differ materially from those projected in any of our forward-looking statements made this morning. Merck undertakes no obligation to publicly update any forward-looking statements. During today's call, a slide presentation will accompany our speakers' prepared remarks. These slides, along with our earnings release, today's prepared remarks and 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. And thank you for joining today's call. Our business is demonstrating strong momentum as we exit the first half of the year. We remain guided by our purpose of harnessing the power of leading-edge science to save and improve lives around the world. Our ambitious and dedicated teams are working tirelessly to reach more patients with our broad commercial portfolio and advance our deep pipeline with the goal of delivering future innovations that solve for additional unmet medical needs. Through excellent scientific, commercial and operational execution, we’re achieving significant milestones for our company and for patients. This quarter, we’re proud to have successfully launched WINREVAIR, which has introduced a novel mechanism to treat adults suffering from pulmonary arterial hypertension. We’re also pleased by the recent FDA approval of CAPVAXIVE, the first approved pneumococcal conjugate vaccine specifically designed for adults, as well as the subsequent ACIP recommendation. Both of these important innovations demonstrate our unwavering commitment to creating value for patients and shareholders. And we remain committed to the execution of strategic business development to further augment our pipeline. We recently announced and have now closed the acquisition of EyeBio, which expands our effort in ophthalmology and brings to Merck a novel, late-phase candidate for the treatment of retinal diseases. This promising new mechanism adds another substantial potential commercial opportunity to our expanding pipeline in an area of significant unmet medical need. In addition, our Animal Health business closed the acquisition of Elanco’s aqua business, which establishes Merck as a leader in this important production animal category. 3 years ago, I was honored to step into the role of CEO, and it remains my top priority to uphold and build on Merck’s legacy as a premier science-driven, patient-focused biopharmaceutical company. At that time, I affirmed Merck’s strategic commitment to the research and development of innovative medicines and vaccines as the source of long-term value creation. I communicated our intention to be appropriately aggressive in making the necessary investments to both advance our broad internal pipeline and augment it with the best external science through business development. Since then, we’ve made substantial progress in expanding and evolving our pipeline to the benefit of future patients. We have the potential to bring as many new drugs to market in the next 5 years as we launched over the last 10 years, across a greater number of therapeutic areas and modalities, and with a significant proportion having blockbuster-plus potential. We’ve made tremendous progress building on our past successes, enabling the creation of a sustainable engine that will drive future innovations for patients. And we continue to leverage our scientific prowess to identify new therapeutic targets where we can add value through our expertise in clinical development and regulatory affairs, and our global commercial scale. I’m also proud of the substantial improvements we’ve made across our sustainability focus areas. We’re reaching more people with our medicines and vaccines across a greater number of countries globally than ever before, and doing so with a dedicated, highly talented and diverse employee base. Finally, we’re driving increased innovation and productivity through widespread integration of data, digital and analytics in all areas of our business. Going forward, I’m committed to ensuring our actions remain aligned with our strategy, and I’m confident that we are well positioned to deliver value to patients and shareholders long into the future. Turning to our second quarter results, we achieved strong growth, reflecting continued demand across our broad portfolio, which is reflected in our updated full year guidance, which Caroline will speak to in just a moment. Turning to our broader research efforts and new launches. In cardiometabolic, we’ve seen a very favorable reception by physicians, patients and payors to the availability of WINREVAIR. While still early, the U.S. launch has gone very well, in line with our own high expectations. We’ve deployed a focused, customer-centric rare disease model and are pleased to see an increasing number of prescriptions being written and patients obtaining access. We’ve also received a positive CHMP opinion and look forward to potential regulatory approval in Europe in the near future. We continue to see a tremendous opportunity to positively impact the lives of patients living with this devastating disease. In vaccines, we continue to bring forward innovations for both adults and children. We are proud of the recent FDA approval of CAPVAXIVE for the prevention of invasive pneumococcal disease and pneumococcal pneumonia in adults, and the unanimous ACIP recommendation. Given its compelling clinical profile, we expect that CAPVAXIVE will achieve a majority market share in the adult setting. We were also pleased to announce positive topline results from the Phase 2b/3 clinical trial of clesrovimab, our investigational monoclonal antibody for the prevention of RSV in infants, and we are moving swiftly to bring this important option to market. Finally, at our ASCO investor event, we highlighted the significant broadening of our oncology pipeline and the progress we’ve made in building on the success of KEYTRUDA. We presented data for multiple novel candidates, demonstrating our commitment to advancing standards of care and maintaining leadership over the long term. As a company, we remain highly focused and continue to work with urgency to bring forward these innovations, and others, for the patients we serve. In summary, I want to again recognize the tremendous efforts of our global team. Together, we’ve made significant progress across our diverse pipeline and portfolio. As a company, we’ve been advancing science for the benefit of patients for over 130 years, and I’m confident that Merck is well positioned to deliver value to patients, shareholders and to all of our stakeholders well into the future. With that, I’ll turn the call over to Caroline.

Thank you, Rob. Good morning. As Rob noted, we delivered another excellent quarter, with growth driven by robust global demand across our innovative portfolio. These results are enabled by the excellent execution of our teams and reinforce the conviction we have in our science-led strategy. We remain confident in our ability to continue to deliver strong results in the near-term, and are committed to making disciplined investments in compelling science to drive long-term value for patients, customers and shareholders. Now, turning to our second quarter results. Total company revenues were $16.1 billion, an increase of 7%, or 11% excluding the impact of foreign exchange. The following revenue comments will be on an ex-exchange basis. Our Human Health business sustained its momentum with double-digit growth of 11% primarily driven by Oncology. Our Animal Health business also delivered solid performance, with sales increasing 6%, driven by growth in livestock products. Turning to the performance of our key brands. In Oncology, sales of KEYTRUDA grew 21% to $7.3 billion driven by increased uptake from earlier stage cancers and continued strong global demand from metastatic indications. In the U.S., KEYTRUDA grew across a broad range of tumors. In the earlier-stage setting, the increase was largely attributable to uptake from KEYNOTE-671 and KEYNOTE-091 in non-small cell lung cancer. KEYTRUDA has now achieved market leadership in the neoadjuvant and adjuvant settings, building on its existing leadership position as adjuvant therapy. In metastatic disease, we saw continued strong uptake in first-line advanced urothelial cancer following the recent launch of KEYNOTE-A39. KEYTRUDA plus Padcev has now surpassed platinum chemotherapy-based regimens in new patient starts. Outside the U.S., KEYTRUDA growth was driven by increased use in certain earlier stage cancers, including high-risk, early-stage triple negative breast cancer and intermediate-high or high risk renal cell carcinoma as well as continued strong demand from patients with metastatic disease. Inflation-related price increases consistent with market practice in Argentina also contributed to growth. Alliance revenue from Lynparza and Lenvima each grew 4%. WELIREG sales more than doubled to $126 million driven by increased uptake in certain patients with previously treated advanced renal cell carcinoma. Our vaccines portfolio delivered solid growth. GARDASIL sales increased 4% to $2.5 billion. In the U.S., sales benefitted from price as well as demand and favorable CDC purchasing patterns. Outside the U.S., higher demand across many international markets was partially offset by the timing of shipments to China. In pneumococcal, VAXNEUVANCE sales increased 16% to $189 million. Growth was driven by ongoing launches in international markets. As Rob noted, we are very excited by the opportunity to positively impact the lives of adult patients with pulmonary arterial hypertension following the recent U.S. launch of WINREVAIR. Recall, we received FDA approval on March 26th, with the first patients receiving therapy about one month later. Initial patient and physician feedback has been favorable, and we recorded $70 million of sales in the quarter. We estimate that approximately 40% of sales were attributable to doses administered to patients, with the remainder due to distributors building inventory in support of increasing demand. The launch is off to a strong start. As of the end of June, more than 2,000 patients received a prescription for WINREVAIR. Our experience to date with those prescriptions suggests that approximately 75% to 80% will receive commercial product. Of those, more than 1,000 patients started treatment in the quarter, largely reflecting prescriptions written in April and May, as it currently takes approximately one month to complete the steps necessary to commence therapy. More than 500 physicians have written at least one prescription, with many looking to gain experience with the product as they prioritize treating the most advanced patients, who are in greatest need of additional therapy. Most prescribers are from either large academic centers or larger private practices. We are pleased that payors are recognizing the value of WINREVAIR and are already providing access to patients. Many payors have established coverage policies consistent with the label or STELLAR study criteria, while others are in the process of developing their policies. In summary, we are pleased with the strong start and look forward to continued progress in enabling access for appropriate patients over the coming months. Our Animal Health business delivered another solid quarter, with sales increasing 6%. Livestock sales grew 11% driven by higher demand for poultry and ruminant products as well as price. Companion animal sales grew 1%, reflecting price partially offset by a reduction in distributor inventory. We are also excited to have launched a long-acting BRAVECTO injectable in a number of international markets during June. 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 80.9%, an increase of 4.3 percentage points driven by reduced royalty rates for KEYTRUDA and GARDASIL as well as favorable product mix. Operating expenses decreased to $6.2 billion. There were no significant business development expenses in the quarter, compared with a $10.2 billion charge a year ago. Excluding this charge, operating expenses grew 8%, reflecting strategic investments to realize the promise of our robust early- and late-phase pipeline and support the promotion of our key growth drivers. Other expense was $108 million. Our tax rate was 14.1%. Taken together, earnings per share were $2.28. Now turning to our 2024 non-GAAP guidance. The continued operational strength of our business has enabled us to raise and narrow our full year revenue guidance. We now expect revenue to be between $63.4 and $64.4 billion, an increase of approximately $200 million at the midpoint. Our increased guidance range represents strong year over year revenue growth of 5% to 7%, including an approximate 3 percentage point negative impact from foreign exchange using mid-July rates. Our gross margin assumption remains approximately 81%. We now expect operating expenses to be between $26.8 and $27.6 billion. This range reflects an incremental $1.5 billion of charges related to the one-time cost to acquire EyeBio and ongoing expenses to advance the assets, as well as investments to progress our innovative pipeline. As a reminder, our guidance does not assume additional significant potential business development transactions. Other Expense is expected to be approximately $350 million, which now includes financing costs for the acquisitions of EyeBio and Elanco’s aqua business. Our full year tax rate is now expected to be between 15.5% and 16.5%, which includes an unfavorable impact related to the EyeBio acquisition that is not tax-deductible. We assume approximately 2.54 billion shares outstanding. Taken together, we expect EPS of $7.94 to $8.04. This range includes a negative impact from foreign exchange of more than $0.30, using mid-July rates. Recall our prior guidance range was $8.53 to $8.65. Including the one-time charge of $1.3 billion, or $0.51 per share, related to the acquisition of EyeBio and an estimated $0.09 to advance the assets as well as finance the EyeBio and Elanco aqua business transactions, our prior guidance range would have been $7.93 to $8.05, with a midpoint of $7.99. Our current guidance midpoint remains the same as our higher revenue estimate is being offset by increased investments to support our business. As you consider your models, there are a few items to keep in mind. We look forward to the opportunity to help protect certain adults from invasive pneumococcal disease and pneumococcal pneumonia following the recent FDA approval and ACIP recommendation of CAPVAXIVE. We are now working toward the achievement of certain milestones that will enable commercial uptake. These milestones include publication in the morbidity and mortality weekly report, which typically lags an ACIP recommendation by a few months, as well as obtaining payor coverage and contracting with customers. For GARDASIL, over the past few years we’ve benefitted from extremely strong demand in China, including from the expanded indication for GARDASIL 9 to the 9 to 45 year age cohort in late 2022. In the second quarter however, there was a significant step down in shipments from our distributor and commercialization partner into the points of vaccination, compared with prior quarters, resulting in above normal inventory levels at the partner. We are working closely with them to more fully understand the dynamics that caused this change. As we learn more, we will assess future shipments to our partner and work to bring their inventory back to more normal levels. If shipments from the distributor into the points of vaccination do not increase it is likely that we will ship less than our full year 2024 contracted doses by the end of this year. We believe the opportunity in China remains very attractive as there are more than 120 million females in the addressable population living in Tier 1 to Tier 5 cities who have not yet received the protection of an HPV vaccine. As we said before, it will take increasing efforts to educate and activate the next wave of patients. Together with our partner, we are focused on and committed to investing in additional resources and patient education on the value of GARDASIL given the important benefits it provides. We also look forward to the potential approval for males which we believe represents a meaningful opportunity. More broadly, we remain confident in the opportunity for GARDASIL globally based on the protection it provides against HPV-related cancers and low immunization levels overall, and continue to believe we will achieve sales of over $11 billion by 2030. Our initial launch of WINREVAIR is having a positive impact for patients. We are very pleased with its performance and look forward to supporting more patients in the U.S. and across the globe. Outside the U.S., we are pleased with the positive CHMP opinion and potential near-term launch in Europe. Following EU approval, we will need to obtain reimbursement, which should occur in 2025 in most major markets, but expect that Germany will receive reimbursement and launch this year. We remain confident in the successful launch of WINREVAIR, consistent with our high expectations, and look forward to providing further updates on our progress. Now turning to capital allocation, where our strategy remains unchanged. We will prioritize investments in our business to drive near and long-term growth. We will continue to invest in our expansive pipeline of novel candidates, each of which has significant potential to address important unmet medical needs. We remain committed to our dividend, and plan to increase it over time. Business development remains a priority and we are well positioned to pursue additional science-driven, value-enhancing transactions. We will continue to execute a modest level of share repurchases. To conclude, as we enter the second half of the year, there is continued strength in our business, driven by global demand and commercial execution. We remain confident in our outlook, driven by our unwavering commitment to leverage leading-edge science to save and improve the lives of patients. With investment in innovation and our ongoing focus on execution, we are well positioned to deliver value to patients, customers and shareholders now and well into the future.

Thank you, Caroline. Momentum continued in the second quarter with several clinical and regulatory milestones, as well as progress in our science-led business development strategy. Today, I will speak first to programs in vaccines, then cover oncology, followed by cardiometabolic disease. As Rob noted, last month the FDA approved CAPVAXIVE our 21-valent pneumococcal conjugate vaccine, and we subsequently received a unanimous recommendation from the CDC’s Advisory Committee of Immunization Practices, for its use in certain adult populations. CAPVAXIVE is the first vaccine specifically designed to help protect adults against pneumococcal pneumonia and invasive pneumococcal disease and, as such, provides an important new public health option. It has been designed to address those serotypes responsible for approximately 85% of the incidence of invasive pneumococcal disease in individuals 65 years and older, based on CDC generated surveillance data. The CAPVAXIVE marketing authorization application is also under review by the European Medicines Agency’s Committee for Medicinal Products for Human Use. We continue to evaluate novel approaches to alleviate the burden of infectious disease. Recently, we announced positive topline results for clesrovimab, our investigational respiratory syncytial virus preventative antibody, a single, fixed-dose option to help protect infants from birth through their first full RSV season. In the Phase 2b/3 trial, clesrovimab met its primary efficacy and safety endpoints as well as its secondary endpoint regarding RSV-associated hospitalization. Detailed findings of the study will be presented at an upcoming scientific congress and we plan to file these data with global regulatory authorities. Globally, RSV infection is a leading cause of hospitalization for otherwise healthy infants under one year of age. The historically high surge in incidence in the 2022, 2023 season reinforced the need for more effective preventative measures. Now to oncology. During the investor event at ASCO, we detailed how we have leveraged our foundational position with KEYTRUDA to create a diverse pipeline by executing on our three pillared strategy comprised of immuno-oncology, precision molecular targeting and tissue targeting candidates. This quarter, tangible progress has been made across each of these pillars. In immuno-oncology, we received FDA approval for the combination of KEYTRUDA and chemotherapy for the treatment of primary advanced or recurrent endometrial cancer regardless of mismatch repair status, based on the Phase 3 KEYNOTE-868 study. Data continues to flow from the KEYTRUDA clinical development program including from studies which achieve an overall survival benefit, the gold standard for many oncology trials. We announced an overall survival benefit in high-risk, early-stage triple negative breast cancer based on the KEYNOTE-522 study. KEYTRUDA is the only PD-1 or PD-L1 to date to receive approval for nine earlier stage indications, of which four have now demonstrated a statistically significant overall survival benefit including in non-small cell lung cancer, renal cell carcinoma, cervical cancer and most recently, triple negative breast cancer. We were pleased to announce that KEYNOTE-811 met its overall survival dual primary endpoint for the first line treatment of patients with HER2-positive advanced gastric or gastroesophageal junction adenocarcinoma. These results build on the previously reported positive data that formed the basis for the FDA approval last year. A similar approval was received from the National Medical Products Administration in China this quarter. Also in immuno-oncology, the FDA granted priority review for KEYTRUDA in combination with chemotherapy for the first-line treatment of patients with unresectable advanced or metastatic malignant pleural mesothelioma based on the overall survival benefit demonstrated in the KEYNOTE-483 trial. The FDA has set a target action date of September 25th. KEYTRUDA has now received approval for 40 distinct indications in the U.S. and has demonstrated statistically significant overall survival in 25 trials. Next to precision molecular targeting, we exercised the exclusive development option to advance the program for opevesostat, an oral nonsteroidal inhibitor of CYP11A1, through our collaboration with Orion. Two pivotal Phase 3 trials evaluating opevesostat in combination with hormone replacement therapy for the treatment of certain patients with metastatic prostate cancer, OMAHA-1 and OMAHA-2, are ongoing. Lastly, in the tissue targeting space, The European Medicines Agency’s Committee for Medicinal Products for Human Use adopted a positive opinion recommending approval for KEYTRUDA in combination with Padcev for the first-line treatment of adult patients with unresectable or metastatic urothelial carcinoma. We are also advancing a broad portfolio of diverse antibody-drug conjugates with Kelun-Biotech and Daiichi Sankyo, as well as our own internal programs. Last month, together with Daiichi Sankyo, we announced receipt of a Complete Response Letter from the FDA for the Biologics License Application for patritumab deruxtecan, for the treatment of certain adult patients with locally advanced or metastatic EGFR-mutated non-small cell lung cancer previously treated with two or more systemic therapies. The letter was issued based on findings from an inspection of a third-party manufacturing site. We are working with Daiichi Sankyo to provide appropriate support as they work with the FDA and the manufacturer to address the feedback in a timely manner. Of note, the findings identified in the CRL have no bearing on either ifinatamab deruxtecan nor raludotatug deruxtecan. Turning to cardiometabolic disease, as Caroline indicated there is strong interest from physicians and patients for WINREVAIR in the U.S. Building on this momentum, we were pleased to receive a positive opinion from the European Medicines Agency’s Committee for Medicinal Products for Human Use recommending the approval of WINREVAIR as a treatment option for certain patients with pulmonary arterial hypertension. The European Commission’s decision on the marketing authorization application is expected in the third quarter. Finally, we continue to execute on our science-led business development strategy with a focus on seamlessly integrating efforts across our internal pipeline with the best external science through our One Pipeline approach. We recently closed the acquisition of EyeBio that includes Restoret, MK-3000, an investigational, late-phase, potentially first-in-class tetravalent, tri-specific Wnt antibody candidate for diabetic macular edema and neovascular age-related macular degeneration, as well as additional preclinical assets targeting retinal diseases. There remains a significant medical need in this space and our teams are eager to work alongside the talented EyeBio team to advance these promising candidates. In closing, over the past 3-plus years, we have successfully built on the solid foundation established by the previous leadership team to assemble one of the strongest pipelines in recent memory. We have diversified in oncology while strengthening and expanding in other therapeutic areas including cardiometabolic, immunology, infectious diseases, neuroscience and vaccines. We have strong momentum and I look forward to providing further updates on our progress. And now I turn the call back to Peter.

Thank you, Dean. Brad, we're ready for Q&A now. And I request that analysts limit themselves to one question today. Thank you.

Hi, great. Thanks so much for the question and congrats on the progress. I just want to kick off with just a question on GARDASIL dynamics in China. Maybe just a 2-part question here. First, can you quantify what percent of your international sales are coming from China? And just any additional color on what drove the step down in 2Q. I'm trying to get my hands around this. And maybe as part of that, the 2024 guidance update is the potential for shipments to come below the 2024 contracted doses now reflected in that guidance? Or would that represent an incremental headwind to numbers to the extent that played out? Thank you.

Thanks for the question. I'll address the first part and then let Caroline discuss guidance. To answer your query, China accounts for approximately 60% to 70% of GARDASIL's sales. This highlights the significant opportunity present in the market. There are over 120 million eligible females in China who still need protection against HPV, encompassing about 60% to 70% of the eligible population. The importance of protecting against HPV-related diseases aligns with China's Healthy 2030 initiative. We believe there is substantial ongoing support for this. Additionally, we have applied for the male indication, which has been accepted, representing another significant opportunity. It's important to note that we continue to see a meaningful opportunity in the Chinese market. However, we are trying to understand the substantial drop in shipments from our distributor to vaccination points during the second quarter, which was unexpected and marked a significant departure from previous trends observed throughout most of 2023 and into early 2024. As we investigate this issue, we are considering multiple factors that could be influencing these changes, and we are collaborating closely with our partner to gain clarity. Notably, data indicates that the overall HPV market in China has also experienced this decline, which is not unique to Merck. Importantly, GARDASIL's market share remains stable or possibly increasing, suggesting that this drop does not reflect any shift in the competitive landscape, and GARDASIL remains the clear market leader. We believe the recent activity in the HPV vaccine sector may be influenced by China's anti-bribery and anticorruption initiatives that began last year. Although we did not see significant impacts until now, we think they are beginning to affect the market, particularly due to a decrease in scientific engagement in the healthcare sector, especially within the CDC in China, leading to fewer immunizations. Additionally, we observed a reduction in promotional support for HPV vaccinations while our distribution partner expanded its portfolio. We need to delve deeper into these issues. We have a strong partnership and are already implementing a comprehensive plan to boost promotional efforts aimed at raising awareness, education, and engaging the remaining eligible females. This plan includes both resources from our partner and direct support from Merck. As we move forward, we will monitor how these activities affect vaccination shipments. We will evaluate future shipments to China with our partner as more information becomes available. I want to emphasize that, looking long term, there is a significant opportunity in China for the remaining 120 million eligible females, along with the potential for the male indication. Outside of China, we have seen double-digit growth in all regions during the quarter. We remain on track and optimistic about growth for this vital vaccine. That's why, despite the quarter's challenges in China, we are confident in reaching the $11 billion goal by 2030. Now, I'll turn it over to Caroline to address your questions related to guidance.

Thank you, Rob. So Chris, in terms of our guidance, we've assumed a range of scenarios from providing the fully contracted 2024 doses during this year to providing something less than that. If I anchor to the midpoint of our guidance, we have been measured in assuming a scenario that has less than the contracted 2024 GARDASIL doses shipped to China. And even with that, we were able to raise our guidance at the midpoint by $200 million. And that's really as a result of the underlying momentum that we have in the rest of our business, including oncology, with KEYTRUDA and WELIREG. It includes in animal health with the launch of BRAVECTO in injectable, as well as the acquisition of the Elanco aqua business, and we remain confident in our outlook for WINREVAIR and the opportunities to drive patient impact and growth consistent with our high expectations.

Great. Thank you, Chris. Next question, please, Brad.

Hi, guys. Thanks for taking my question. Can I just dial down the GARDASIL point just a little more. Rob, I know you mentioned there's an anti-bribery, anticorruption drive going on in China, which started last year. But it also feels like some of the shipment delays are happening, perhaps a few months ahead of potential competition hitting the market as well. So could you speak to whether there's any future contracting happening and whether your long-term price integrity will stay intact on GARDASIL in China? Thank you.

Yes. No, thanks for the question. So everything we're seeing in the marketplace would point to dynamics that we don't see the competition, the future potential competition. And I think you're referring to the fact that we very well could see a 9-valent sometime next year come into the marketplace. So I don't believe from anything we've heard in the marketplace from competitive intelligence as well as what we're hearing from our partner that, that is what's happening here. As we look forward, and Caroline can comment specifically, we have always expected that as we see the peak move through from the indication we got for the expansion of the age cohort that you would see a flattening out over time of the demand in China. And then that for women specifically, and then we would bring on the male indications that should allow us then to continue to drive the business forward from there. Nothing has changed in that dynamic in what we're seeing right now. So as we look forward, our belief in China being a significant contributor is unchanged. But I'll let maybe Caroline can speak specifically as we're thinking about some of the guidance around how we think about next year.

So what I would add is we have always contemplated that we would have a 9-valent competitor within the Chinese market. As such, the current contracted doses with our partner for 2025 are less than what the contract is for 2024 as we would expect to participate in that market but understand a competitor would likely gain share in that market. We also, though, as we said in the prepared remarks, has the potential opportunity of a male launch in China. And we are hopeful for an approval with GARDASIL 4 and 9 by the first half of next year and be coming to the market at that stage. So we are confident that China will remain an important part of our GARDASIL business as we move forward, and more importantly, are confident in the opportunity to drive GARDASIL longer term to the $11 billion that we've stated.

Yes. And maybe, Umer, just to give one little bit of color because it's probably worth pointing out, I'm assuming people understand when we talk about the anti-bribery and anticorruption what is happening. And one question that could be there is this has been going on since late last year, and we did not see impacts early on, what's changed and how do we see it evolving. And what I would point out, first of all, one, just reiterate, as we think about what's happening in China around the anti-bribery and anticorruption we very much support those activities because it means we have a fair, open and transparent market. So we're very supportive of what the Chinese government is trying to do there. But as we see how this is impacting us at the CDC, we have seen some dampening in them engaging in scientific discussions and driving for vaccination. We believe some of this could be due to the fact that there was criminal charges brought against a senior scientific representative of one of the local players related to a COVID vaccine that we believe has had a dampening effect overall. And how long this lasts, how it will continue to play out, we'll have to see. But I thought I would provide additional color because I don't want to assume that you all are aware of what really is happening there.

Great. Thanks, Umer. Next question please, Brad.

Good morning. Thank you for your questions. I'd like to shift the discussion to WINREVAIR. Can you describe the pace of new starts? Do you believe it is sustainable or could it improve? Considering the one-month delay from prescription to start, can you explain how much of this is affected by payer issues versus the need for nurse training? Do you anticipate any changes in this process? Thank you.

Thank you for the question. As of the end of June, we have seen more than 2,000 patients receive a prescription for WINREVAIR, which we are pleased about. Currently, our experience indicates that approximately 75% to 80% of those who receive a prescription will transition to the commercial product. In this quarter, revenue was driven by about 1,000 patients who began treatment. So, as of now, we have 1,000 patients who started treatment this quarter from the total of 2,000 prescriptions, and we anticipate that 75% to 80% of those prescriptions will lead to commercial sales. The difference in numbers is partly due to access issues and partly due to patient dropout, as some patients may not qualify after undergoing blood work and medical evaluations. Regarding the 30-day period you mentioned, we estimate that it takes about 2 to 3 weeks from when a person receives a prescription until they gain access approval. There is certainly room for improvement in that timeframe. It's important to remember that, in addition to the blood test and getting insurance approval, a nurse must come to the patient's home for initiation and training on self-administration of WINREVAIR. All these factors affect the timeline, and we will have to observe how that evolves over time.

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

Oh, thank you very much. Just going back to GARDASIL. I know you're reiterating your $11 billion figure, at least $11 billion in 2030. The shape of the curve over that time in China specifically, are there likely to be periods where year-on-year sales actually contract beyond 2024 in the inventory issue? Because it does seem like pricing is really going to be a risk here, the way pricing works with vaccines in China, and some of these other offsetting indications like males are going to take time to launch. So it seems like there may be periods there where you could have year-on-year declines in sales over the next, let's say, 5 or 6 years. So if you could just describe the shape of that curve, please?

Yes, sure. So as we look at it, we do expect you will see a flattening of the curve as we see the female indication be more fully penetrated. Obviously, more to go there, given what we believe is still the addressable population. And then it will ramp back to growth as the male population comes on in full. So that is what we're expecting to happen. And on the pricing point, I think it's just important to understand the way this market works and how we operate in the market. We sell into the distributor, who then is responsible for doing the bidding with the provinces and actually then determining ultimately that end sale to the point of vaccination. As we look forward, I think it's important to understand that GARDASIL, as we think about the addressable population, we continue to believe it will be a highly sought after vaccine even in the face of competition, and we're dealing in an overall population when we quote the $200 million total females of which we would say we're 30% to 40% penetrated today. That's really in the Tier 1 to 5 cities that we think can afford a cash pay market. The total population accessible in China is much bigger, and so I don't think we should assume we're all competing for that small slice. There's a much bigger slice. We have chosen not to go for that bigger piece because obviously, we can't get into the local vaccination program because we don't produce GARDASIL in China. Our competitors will be able to do that. So I think I would just caution all to not view it as a zero-sum game. I think there's still a market expansion opportunity in China that will benefit both us and the competitors. And frankly, the other thing we have to see is how quickly will the male indication be given to others beyond us. We believe there's a chance we could be sitting alone with that as well. So the dynamics need to play themselves out. But I think we need to first understand what we're seeing in the quarter specific, a short-term event or something else. And that's still not clear because I would just point that the trend break was pretty significant. It's not what we've seen in any of the markets that you would expect. And that's why we're a little hesitant to say this is just demand in China. And also, I would also bring back the fact that actually, if you separated out what happened in China, we had one of our strongest quarters in every other market around the world with strong double-digit growth. So those are all dynamics that we'll have to play themselves out.

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

Thank you. How does clesrovimab compare on hospitalizations to Beyfortus, which has 85% to 90% effectiveness on hospitalizations? I appreciate you're not going to give out data specifics. But for instance, would you say your product is highly competitive? And I'm just curious, how does it achieve longer durability given that it has a shorter half-life than Beyfortus? Thank you.

Yes. So this is Dean. Thanks for the question. As you point out, there is a significant global unmet need both for the healthy and at-risk infants. And as we've said, from the PKPD studies such that this is something that can be given as a single dose. It's not weight-based, so single dose broadly. And we are very comfortable in relationship to the PKPD in relationship with the half-life regarding the affinity that's the prevention, which was studied would cover the entire RSV season, which is 5, 6 months. We did announce the top line. We're not going to get ahead of the public presentation of these that we hope to have at some session in the second half. I do point out that what you highlight is really important, which is the RSV associated hospitalization will be a really important point in relationship to looking at this vaccine versus others, and we are very confident in that profile.

Great. Thank you, Steve. Next question, please, Brad.

Great. Thank you very much for taking my question. And just trying to understand the long-term growth path for GARDASIL, it seems like a lot of it, it would depend on raising awareness in those Tier 1 to 5 cities and male vaccination. So the question is, of those Tier 1, 2, 5 cities, where do you think there is bigger opportunity because, I mean, going to Tier 4 and 5 could be challenging. And then based on your main vaccination experience in the developed world, how should we think about China in that context? Thank you.

If you look across the Tier 1 to 5 cities, we estimate our penetration among females to be between 30% and 40%. Specifically, in the Tier 4 and 5 cities, we're around 30%, while in Tier 1 to 3, we're closer to 40%. The difference in penetration rates between these groups isn't substantial. Therefore, we will continue our efforts in all areas as we've been doing. Activating the male population in these regions is a separate challenge since we currently lack the necessary indications. On a global scale, it's worth noting that total penetration of GARDASIL among the eligible population is about 10%. This indicates a significant opportunity to engage patients worldwide as we expand our capacity. We are actively working to engage the mid-adult segment in the private market, particularly in Europe, which has contributed to the double-digit growth we're seeing outside of China. We're also beginning to see positive responses in the private market in parts of Latin America and Asia Pacific. Our strategy includes targeting low and middle-income markets, as we see substantial opportunities there, and we are well on our way to adjusting our costs to compete effectively in that sector. Additionally, while China exemplifies the need for a male indication to promote gender-neutral vaccination to eliminate cervical cancer and address other HPV-related cancers, we are committed to this work not only in China but also across Asia, Europe, and other regions where there is still considerable potential. Japan continues to show growth thanks to a renewed NIP program, which includes an initial phase and a catch-up phase, as well as long-term opportunities for males. The potential for growth is significant, and we have multiple strategies to pursue that, which reinforces our confidence in achieving the long-term goal of $11 billion. This framework is essential to understand the overall discussion.

Great. Thanks, Mohit. We have availability to go a bit past 10, so we'll continue on with questions. Next question, please, Brad.

Good morning. Thanks for taking my question. I wanted to follow up on RSV antibody, please. Can you confirm that you can file in all major markets this year? And then I just wondered about China in this context, is that a market where you'll be filing soon? And what the opportunity is there? How much education is required to access the private market? Thank you.

Yes. So let me just level set in relationship to clesrovimab, and the RSV antibody. So we have the data, and that data will be presented at some time in the second half of this year as the different plenary sessions of different conferences occur. In relationship to filing, our plan is to file such that it would be available, not for this season, but for the next season within the United States. And so that's the sort of next wave in relationship. So I want to make sure that there's no concept that this is coming out this RSV season. We're targeting next RSV season in relationship to when we're seeking approval and licensure.

Yes. And maybe just on the broader question, could this be an opportunity in China. We are continuing to look at all global markets. And I would point out, as Dean points out, we're looking at the 2025, 2026 RSV season, so next year. And then beyond that, we will go globally thereafter. And China is a market we are looking at.

Great. Thank you, Luisa. Next question, please, Brad.

Hi, thank you for the question. I want to ask about the recent ODAC that was on periadjuvant development in lung cancer. I wonder, let's assume FDA takes a hard line on requiring the contribution of the neoadjuvant and adjuvant phases. And you look forward to the current KEYTRUDA development program. Do you see any risk to that hard line to any of your label extension plans? And how are you going back to looking at your development, especially of novel combos in the early stage given that discussion? Thank you.

Thank you very much. To provide some context, the recent outcome discussed the use of PD-1 or PD-L1 in earlier stages, particularly in resectable cases, with administration before surgery, after surgery, and both before and after. The challenge arises in this curative setting regarding the relative benefit-risk comparison, as it differs from the metastatic setting. I want to emphasize that we are tracking developments and engaging in discussions with the FDA concerning our clinical trials. It's important to note that demonstrating overall survival, especially in earlier-stage cancers, is quite challenging. That’s why we highlight that while we have nine earlier-stage approvals, only four of them have demonstrated overall survival, and to our knowledge, no one else has achieved four overall survivals. I also want to mention that two of those overall survivals are in triple-negative breast cancer and lung cancer, and they are perioperative. Future studies need to take into account the FDA's feedback, which is clear that overall survival is the gold standard, particularly in earlier stages. As we advance our program, we consider both the recent advisory committee meeting and the continued focus from the FDA on demonstrating the contribution of new agents in conjunction with PD-1, showing overall survival, and using platforms that confirm that by adding something new, we can continue to increase the benefits regarding overall survival.

Great. Thank you, Dana. Next question, please, Brad.

Hey, thanks so much. And really helpful color on GARDASIL. Just one more here. Looking at the latest distributor contract, it looks like there's around $4.5 billion in potential sales for 2024. That's projected to decline in 2025 and 2026 to around $2.5 billion. Historically, however, it looks like you've always exceeded that contracted figure. So just to be clear, does the contracted decline in sales over the next 2 years bake in the upside for potential male approval? And should we expect the distributor contract to get renegotiated as we get further clarity on demand? Thanks so much.

Thank you for the question. So the contract that we have at this stage is focused on the current approval that we have in the market. So it's really focused on the female population in the cohort 9 through 45. As we move forward, and we have a male indication, we will, of course, be working with our partner to have the appropriate doses so that we can protect as many males as possible.

Thank you, Akash. Next question please.

Hi, guys. Thanks for taking my question. Just one on CAPVAXIVE. During the ACIP at the end of June, there was a big discussion on the plus 50 population for the product. They never got around to reviewing it those. So is it possible we can get that looked at in October for a potential updated recommendation?

Thank you so much for bringing that up. There was a lot of discussion. There were a lot of points that the ACIP working group had to vote on. And what they had said is that they were very interested in revisiting this in October. I want to be very clear that we have not had a formal confirmation of that reevaluation. But we did listen to the discussion. And the discussion was very clear that there was an interest in revisiting that in the 50 to 64 age group, most notably in the ratio of disparities. And I went back to the comments that were made by different individuals, but I focused on some of the points that those who actually vote in the ACIP, one resonated with me when that member said, the burden in 50 to 64-year-old black individuals is comparable to greater than 65 when we're all endorsing universal recommendation for over 65. And that member wondered whether we, the ACIP, was missing something too, by not deciding, and that we, the ACIP needed to decide at some point, and I hope we get there pretty soon in part because of the racial and ethnic disparities in the invasive disease. So we are very confident in our data, and we look forward to the ACIP considering this expanded age-based recommendation potentially in October, and we hope to find out at some appropriate time that they're going to formally confirm that reevaluation.

Thanks Trung. Next question please, Brad.

Hi, thank you for taking my question here. I wanted to ask you on WINREVAIR, how you think about sales in the third quarter of '24, given some stocking that we saw this quarter? Thank you.

So thank you for the question, Louise. We feel that we're off to a really strong start with WINREVAIR. As we've described, as at the end of the quarter, we have 2,000 patients who now have the prescription for WINREVAIR, of which 75% to 80% historically have been receiving commercial product. So we're confident in what we expect for the profile for WINREVAIR in the third quarter. And we actually expect that the stock level should increase as more patients have prescribed the product. So we remain confident in the outlook for WINREVAIR consistent with the high expectations that we have.

Great. Thank you, Louise. Next question please, Brad.

Thank you. On business development, this is typically a question that you get closed in June, you did comment that the company does have an expressed interest in the cardiometabolic space, thinking about second and third generation opportunities potentially in weight management. Can you just provide us with the latest views, house used in terms of appetite, size, therapeutic area in particular noting obesity? Thank you.

Yes. No, Chris, thanks for the question. Obviously, we discussed what we did in the quarter with EyeBio and Elanco aqua business, we're going to continue to follow the same strategy we've been looking at, which is really focusing on the science and looking at how can we best continue to drive where we see a scientific opportunity that matches our portfolio and our skill set to bring that in more on the earlier stage settings and with some mid-late but clearly not commercialized products more to build the pipeline. So the continuation of the strategy we've been following. We continue to have the financial flexibility to consider deals of all sizes. But as we've pointed out in the past, we tend to look in that $1 billion to $15 billion, is a good indication of where we would most likely play. And to the obesity question specifically, our view continues to be that if we can find opportunities to look at next-generation plays in that space, those will be things we will continue to evaluate and consider. We don't believe going after today's first generation is the place to play. So it will continue to be looking at second and third generation waves of innovation, whether it be around oral delivery, looking for where there's high tolerability, combinability and or preservation of muscle mass. Those are the areas of focus for us. And if we see something, we continue to have the capacity and the interest to act.

Great. Thank you, Chris. Next question, please, Brad.

Great. Thanks for taking the question. Just a two-part on WINREVAIR for me. I was just wondering if you think you've already worked through the initial bolus of patients in kind of late line or if there's more to go here for the second half? And then any color on background therapy in terms of the patients that have already started on sotatercept. Thank you.

Yes, I'll address the second part first and then return to the first part. Regarding background therapy, the majority of patients, as expected, are those who are sicker or whom doctors are prescribing the drug to first. There is a significant number using triple or double therapy, and we are also seeing usage with prostacyclin. This aligns with what was observed in the STELLAR study. Overall, we anticipate transitioning to earlier lines of therapy over time. As for the bolus, we don’t think we’ve fully worked through it yet. More broadly, we continue to see growth in both the number and type of prescribers, now exceeding 500 doctors, while we estimate that about 800 to 900 doctors are responsible for most prescribing. Thus, there's still room to grow in terms of reaching what I consider to be heavy prescribers of the medication. As this group continues to expand and access improves—about a third of lives are currently covered under medical plans for WINREVAIR with reimbursement protocols in place—we expect this to increase. Many plans typically take around 90 to 120 days after a drug launch to establish coverage. With increasing access, a growing number of physicians, and a wider patient base, I believe we will see a continued upward growth trend.

Great. Thank you, Terence. Next question please, Brad.

Hi, guys. Thank you so much for the update today. So give me interest in the schizophrenia space with a number of readouts coming in the second half of the year. Can you characterize what we should expect from your Phase IIb trial of MK-8189? It looks like the study completed back in June. Just wondering when we might do the data on kind of how we should be comping this to the novel developments in the space?

Yes. So this is Dean. Thank you very much for that. Neuroscience question for MK-8189. I should just point out that I believe it was just in May that we published the Phase IIa, and it shows its efficacy in relationship to schizophrenia. But what was also interesting was that there was a reduction in body weight of around 6 pounds over just 4 weeks. And the reason why that's important is that oftentimes, it's not simply how efficacious the drug is. It's whether a patient will stay on and what are the adverse effects that will drive a patient not to take the drug. So that Phase IIa was really important that triggered the Phase IIb. So I'll just lay out that if we see things that are comparable to that Phase IIa and our Phase IIb, we would be eager to see such results.

Great. Thank you, Evan. Brad, one more question, please.

Morning. Thank you for the question. For WINREVAIR the conversion of the 75% to 80% of scripts into commercial embedded within fiscal year '24 guide? And quickly, is there any time line on the INTerpath filing? Thank you.

So the answer to your first question is yes. And the answer to the second question, I would let Dean address.

So in relationship to our collaboration with Moderna in relationship to the INT, that's something that we're focused on getting the Phase III fully enrolled and to move forward as that's really important in relationship to how we will see the program and how the FDA will see that program.

Great. Thank you, James, and thank you all for your good questions today. As always, the IR team is available for any follow-up questions. Rob, any closing comments that you'd like to make.

No. No. I just want to thank you for your interest this morning. Hopefully, you appreciate the transparency with which we try to bring. But I maybe would close by just bringing back the confidence we see in the business, both in the short term and the long term. Obviously, we'll work through what we see happening with GARDASIL in China. But the fact that we see strengthening, and I would call them, green shoots around GARDASIL everywhere else in the world gives us confidence in the $11 billion for that, as we've talked about. But then beyond that, the growing breadth of our pipeline, obviously, KEYTRUDA continues to deliver meaningfully for the business and for patients. But I am growing in my own excitement for the breadth and depth of the pipeline we have coming. Hopefully, it wasn't lost on everyone that we pointed out, we would be launching more drugs in the next 5 years than we've launched in the last 10, many, many of which will be blockbuster-plus opportunities. So the pipeline is maturing, and we're starting to see the green shoots of opportunity that continue to grow our confidence as we look to 2028 into the 2030s and beyond. And that's where we will continue to focus. But we will not take our eye off the short term where we are equally confident in the guidance, we raised revenue today. Obviously, we kind of were neutral on earnings, but that's because of the investment we're making into the business, bringing in even more opportunities like EyeBio. So there's a lot out there, and I just want to leave you with that note of what's driving my confidence and my appreciation for your support of the stock. Thank you.