Okay. Welcome to the second day of the B of A Healthcare Conference. My name's Geoff Meacham. I'm the Senior Biopharm Analyst. We're thrilled today to have Merck with us, and Caroline Litchfield, CFO, is with me on stage. Welcome, Caroline.
Thank you. Great to be here.
Good to see you. Maybe just talk about, you know, following the, you know, first quarter. You know, give us kind of how you see, you know, growth over the balance of the year, we'll get into some questions on some of the products and BD.
Sure
... et cetera, et cetera.
Let me start with, it's great to be here. It's amazing that one year has flown, and I thank all of you for your interest and support of our company and for being here today. As we start 2023, we've started really strong. There is momentum in our business. Now, if I take a step back, we're really proud of the progress that we've made as a company. We're progressing with the portfolio of assets that we have today, we're progressing our pipeline, and we're augmenting that pipeline with meaningful, scientifically driven, and disciplined business development. That gives us a lot of confidence in how we're performing and the future prospects for the company. Specific to the first quarter, we had revenue growth excluding LAGEVRIO and foreign exchange of 15% in the quarter. That enabled us to raise and narrow our guidance.
We're expecting between 8% and 10% growth for the full year this year, excluding LAGEVRIO and foreign exchange. That growth will be as a result of the continued demand that we have for our innovative portfolio across oncology, across vaccines, as well as animal health. We're progressing our pipeline, I'm sure we'll talk about that, with some exciting progress in oncology and cardiovascular, and we're obviously pleased to progress that pipeline with business development and immunology with the proposed acquisition of Prometheus. We're feeling good about where we are as a company. We feel good about the momentum in our business. There's always still more to do, but we think we've got a great foundation to continue to drive growth for our company.
Perfect. That's a good background. Caroline, when you think about the drivers of top line.
Yeah.
KEYTRUDA obviously is the big, you know, it's the big one.
Yes.
Talk about like over the cadence of this year, maybe looking into next, like what are some of the newer, you know, line extensions that we should expect that could, you know, inflect, and is there a bias like US versus versus OUS?
focusing just on KEYTRUDA at this stage.
Yep
I guess we'll go through the others. KEYTRUDA is a phenomenal product, first and foremost for the impact it's having on patients all around the world. We've been seeing exceptional revenue growth from the product. As we go forward this year, we expect continued strong growth from KEYTRUDA, and that growth will largely come from moving increasingly into the earliest stage cancer setting. What we're expecting is strong growth in triple-negative breast cancer, renal cell carcinoma, melanoma, and we're moving into early stage lung. We'll see that come through in the United States, albeit we will lap some of the launches that we've had, specifically triple-negative breast. We'll expect that growth to moderate over the course of the year.
As we look at outside of the United States, we've got great opportunities with the continued introduction of new indications, especially moving into the earlier stage indications. We've just started that journey for triple-negative breast ex US. One thing we did point out in the first quarter sales and earnings call is as we do launch those new indications in Europe, we will see some pricing pressure. This is something we've had throughout KEYTRUDA's journey. As you introduce new indications, you then speak with the reimbursement body to talk about the incremental patients that you'll be able to serve and what that new price point will be. We'll expect some pricing pressure on KEYTRUDA, but extremely strong volume growth as we introduce those new indications, and therefore remain very confident in our ability to drive strong growth for KEYTRUDA and great patient impact.
When you take that growth and you invest back in the business.
Yes
... you know, combinations with KEYTRUDA...
Yeah
... you know, have been a pretty, you know, standard, you know, strategy for you guys.
Yes.
You have PCV combos coming up, and there's lots of IO combos going forward. Maybe talk about the, you know, how you're investing back in the business and how you think about the sort of the cadence of the end of the decade, you know, sort of dynamic with respect to the impact from all these combinations with KEYTRUDA?
Focusing first on oncology, because we're investing in R&D in many different areas. In oncology, we're investing in continuing with KEYTRUDA and moving to earlier stage cancer treatment. We've stated in the past, we expect 50% of the growth of KEYTRUDA in the period 2021 through 2025 to come from that earlier stage cancer setting. It will grow thereafter, and we've also stated representing 25% of the global business in the year 2025. Clearly that's part of our investment to drive earlier stage cancer treatment and therefore improved prognosis. We're also investing, as Geoff noted, on combinations with KEYTRUDA, and those combinations are IO, where we have programs in TIGIT, in CTLA-4, in LAG-3. We're also investing now in what we were calling a personalized cancer vaccine.
We now term it as an individualized neoantigen therapy with Moderna, where we're really excited at the prospect of this treatment alongside KEYTRUDA to improve outcomes for patients. We also have a Platform of ADCs that we are developing. Given how great KEYTRUDA is with chemotherapy, ADCs being that next generation of chemotherapy, we see real possibility to link with the ADCs that we have, where we have TROP2, we have another that we haven't disclosed what its mechanism is, and we have seven preclinical candidates with our collaboration with Kelun-Biotech. We have a lot going on, and we have many other assets in oncology with our Orion partnerships. They're hoping to do something in prostate cancer and obviously still LYNPARZA and LENVIMA. As we look out over this decade, we are confident in our ability to drive growth in KEYTRUDA.
We have a subcutaneous formulation that we hope will enable us to continue to benefit patients, especially in the earlier stage cancer setting. We have many new novel agents that we're working on to try and continue the progress that we're making in cancer care.
Right. Caroline, while we're talking about KEYTRUDA and sort of the intermediate to long-term growth-
Yeah
... help us with kind of the policy impact of that, right? looking at.
Yeah
... end of the decade with respect to the IRA and how Merck is thinking about, you know, managing that.
Starting with the philosophy of our company has always been to invest in innovation and bring that innovation to countries around the world, price our product responsibly based on the value that those products can bring. That's the headline of who Merck is. We now have the backdrop though of the Inflation Reduction Act, which brought some good things with it to cap out of pocket costs for patients, also areas of, quite frankly, significant concern, which is the price setting or what's the term, price negotiation for products. In Europe, there's also potential changes-
Right
... with the regulatory framework there that was recently announced. Some of it's good as they look to simplify the regulations and enable, hopefully, swifter access to innovation. At the same time, there's a shortening of the timeline of regulatory data exclusivity, while there's some conditions that allow you to increase it. What we're seeing around the world is pressure on the timeline the pharmaceutical industry has to generate returns on the significant investments that we make. What that means for us is we are looking at each of our investments in research, and the hurdle rates got higher for what our expectations are so that we can generate returns for our company, for our shareholders. As it pertains specifically to KEYTRUDA, the timeline around the IRA negotiation is pretty much in line with the timeline of the LOE of KEYTRUDA.
As we look at combinations, co-formulations, what the government has announced is two active agents will not be required to be negotiated. We are working on trying to bring forward innovation, looking at active agents that can together do more for patients, and we'll continue to progress in that way.
Is that part of the life cycle management here, if you have, say, a subcu or a fixed dose combination? You know, obviously monotherapy KEYTRUDA at the end of the decade, you know, maybe that is subject to a biosimilar, you know, launches. Like the combinations though, I think give you a little bit more runway.
Correct.
Just like, help us through that.
Exactly.
Yeah.
Yes. Exactly that. The subcutaneous formulation is a formulation that we're working on, looking at the activating of hyaluronidase with pembrolizumab to try and bring benefit to patients in having them not go into an infusion center and spend many hours visiting the hospital to get the treatment. As we increasingly move into earlier stage cancer treatment, the patient profile changes. It's often a younger patient, a patient who's working each day and caring for what's important in their lives. We see a real opportunity to help the patient, to help the healthcare system in having a different route of administration for that patient.
What we've stated at this stage is we think that approximately 50% of the patients on KEYTRUDA are likely to be in the earliest stage cancer setting or potentially on monotherapy or in combination with an oral agent. That means this could be a really beneficial profile of KEYTRUDA for those patients to be taking. We're working on that to bring that benefit. Similarly, the other co-formulations would be new products in their own right with the different active ingredients that are coming forward.
That's helpful. Yeah. Let's go back to, you know, to where we started on the first quarter.
Yeah
GARDASIL is an asset that, you know, a lot of investors have been concerned about concentration risk. If you look at, you know, what's today in Merck's portfolio that's growing, that's not KEYTRUDA, it's a major asset, right?
Yeah.
We're talking about, you know, 35% growth in the first quarter. Help us with kind of how we think about this over the cadence of this year, and then you know, with respect to supply looking next year and beyond, like how do you envision that?
GARDASIL is an amazing vaccine. It's helping prevent HPV-related cancers in both females and males. Quite frankly, we're still only at the start of the journey, 14 years in to this vaccine being available, because we've only helped protect the lives of around 10% of the world's eligible population. There's work to do to create the demand side of an equation, meaning people making sure they're going and getting their adolescents vaccinated. People who are in the age cohort 27-45, where 50% of HPV issues occur, going and getting vaccinated, having governments approve vaccinations for boys and men as well as for girls. There's work to do to activate the full cohort, which we are focused on as a team. At the same time, we're building supply.
Over the last few years, we've been effective at driving productivity within the current supply chain of our company and adding to that supply chain at the drug product level, so the formulation and filling level of GARDASIL. We're also bringing on board two bulk manufacturing facilities, and those facilities will come online progressively during 2023, 2024, and 2025. By 2026 we'll be unconstrained. I'd expect us to have a gradual ramp up in the level of supply that we will have to the marketplace to support the protection of lives around the world. As we think about the growth, we had an amazing 2022 with the growth of GARDASIL. I think we posted 27% growth excluding the impact of foreign exchange. We've guided that we think the growth in 2023 will be an acceleration on that growth we achieved.
It's higher than 27%. As Geoff notes, we achieved 35% in the first quarter, 43% excluding the impact of foreign exchange. That did include some shipment timing benefit as we did pull forward some shipments into the China market specifically to enable us to have enough vaccines on the ground as the China regulatory authorities have widened the age cohort for GARDASIL 9 from 16-26, now to 9-45 years old. We've seen some benefit of that. As we look for the full year, we expect the first half growth of GARDASIL to be stronger than the second half, full year to be extremely strong and acceleration versus 2022.
Caroline, put this in the context of, you know, the overall top line at Merck. When you look at non-KEYTRUDA sort of franchises, so vaccines including GARDASIL, you know, are really important, but how strategically, you know, do you think about it from an investment perspective, from BD, in-internal versus external?
We're in a position in our company where we actually have a rich pipeline to invest in. That rich pipeline is in oncology, it's in vaccines including PCV, pneumococcal vaccines, dengue, RSV. We're investing in cardiovascular quite significantly and with some impact. We will be investing in immunology. In terms of the investment posture of our company, we are investing in R&D. We're investing in that R&D both internally and augmenting that with the best science that we can find externally that is driving for solutions for unmet medical need. We will continue that R&D investment with the focus of driving growth in the next decade.
There's not an intention though, per se, outside of oncology, but it just happens to be that there are opportunities, you know, in the.
There are, yeah. You know, there's plenty of opportunities.
Okay.
With Acceleron, that was a significant opportunity.
Yeah
...for us outside of our company to look in an area of significant unmet medical need, an area of great advancement in science and potential impact for patients, and therefore we acted.
Right.
Internally, we're investing in our oral PCSK9 program, which has significant opportunity to help the many patients around this world who are on statins who don't get to goal. We have a lot of investments.
Yep
...in many different areas.
The proposed Prometheus deal, we'll talk about that.
Yeah.
You know, in the context of, you know, what Merck could have done, like this is, you know, obviously investors, you know, like the deal. If you think about like, you know, the appetite for additional, you know, how much of a priority is BD on top of what you guys have done with...
Yes
...with Prometheus and then, you know, obviously historically with Acceleron?
Let me start with our company's core is innovation. A lot of great innovation happens within Merck, but a lot of great innovation happens outside of Merck. Therefore, we remain focused on business development. It's a priority of our company to go and find compelling science in areas of unmet medical need, where we can align that with the valuation of the company and then bring that into Merck. While in Merck, use the expertise that we have to hopefully accelerate, broaden programs, and bring access to patients and value to patients and shareholders. We have, and Rob has stated this actually in our quarterly earnings call, we have a portfolio of BD that we continue to evaluate. Some that were on it have now got a check mark or almost...
Yeah
...got the check mark. We will continue to progress with business development because it's important ensuring, a healthy innovation engine for our company and for long-term growth.
If you look at the, you know, the ADC deals that you guys did at the end of the year and Acceleron. Give us some context for, you know, is therapeutic area the main focus? Is it adding newer technologies that don't exist or, or not, you know, heavily, represented at Merck today? Just the balance of those two priorities?
It's kind of all of the above.
Uh.
-is the reality. We're following the science, which means we're not bounded by therapeutic area. We're mindful though of the therapeutic areas to ensure that we're building on the expertise we have, and we're building breadth. We're not just looking at products, we do also look at platforms and technologies. I would say our answer here is really following the science where we see unmet medical need, and then we will move, as you've seen us do so.
If you think about the impact of these investments, so from a margin perspective, you know, Merck has the potential to really accelerate, you know, as you anniversary some of these tumor types with Keytruda, there's not a lot of incremental investment. How do you think about like the balance of, you know, adding new assets in the form of BD or, you know, just, you know, M&A, and then, you know, just showing that, you know, with respect to P&L growth?
Our focus is on investing for the future, investing in R&D. We're disciplined in our investments, but we are focused on investing in the pipeline we've got today, and it is a rich pipeline. We're focused on making sure that we maximize the opportunities from these business development transactions we've done to ensure we're investing the appropriate amount in R&D to see those assets hopefully come to their full potential. That's priority number 1. That said, we are as a company in quite a privileged position in that we expect margin expansion in our company. The reason we expect that margin expansion is as a result of the top line and the mix of that top line. We have the roll-off of some royalties, specifically on GARDASIL and KEYTRUDA, and we'll have disciplined expense management looking for productivity in our manufacturing processes in SG&A.
We still do point to, and I should use the word underlying operating margin because it's ex what IPR&D may happen.
Right.
Underlying operating margin in the year 2025 is greater than 43%.
Are there drivers beyond that though, when you think about, you know, the lower royalty burden, you know, the, you know, and coming off the Organon deal, I mean, Merck has a smaller footprint and could benefit from, you know, efficiencies, you know, going forward. Is the goal here to reinvest some of that or to, you know, or to just, you know, show the 43% and sort of that's kind of it is what it is type of approach?
I'm not wedded to the 43%. What I am wedded to is investing in a disciplined way in our business to drive growth over the longer term. With Organon, we delivered efficiencies across our business. We actually delivered more than we stated publicly, and we invested in the business and in the pipeline that I think you're starting to see come to fruition.
Okay. One of the benefits of more recent deals from Acceleron, so sotatercept has had a fantastic profile so far. Give us some context for what we could see coming up, you know, at, you know, for the potential launch at the end of the year, and how you're thinking about that franchise, you know, in the context of, you know, Merck's therapeutic focus?
Yeah. We as a team were delighted to go to ACC and show the phenomenal data that we have on sotatercept with the STELLAR study, as well as show our phase II data on the oral PCSK9. Merck is back in cardiovascular, and we are really excited about the prospects we have on those two assets, as well as many other assets that we have in our portfolio. Specific to sotatercept, we are working with urgency to ensure that we get this product to as many patients that can benefit from it. We're working with the FDA to complete our filing for the registration of sotatercept. That will be during the third quarter, and we're expecting launch early 2024.
Because of the profound data that we had with the STELLAR study, not only the six-minute walk distance, but we hit eight out of nine secondary endpoints, and that included time to clinical worsening. This is really important because this is accelerating our timeline to launch in markets outside of the United States, specifically Europe. We're currently expecting to be filing during the second part of this year, launching the second part of 2024 in Europe. What we're doing to be ready is making sure that we have our supply chain working effectively, so we'll support the demand that we expect to see. We are building a world-class operating model to support this rare disease area, so that we can provide the right kind of support to the healthcare professionals, to patients, and to stakeholders.
We're excited to be launching the product and are expecting a pretty strong take-up given the outstanding impact that sotatercept had for the PAH patients.
In the case of sotatercept, you know, I mean, it's cardiovascular, but it's still relatively, you know, a niche, more of an orphan indication, right? Is this sort of a newer dimension of Merck to look into more, you know, more orphan, you know, indications? Or is it just we found the asset, we found a great, you know, risk-benefit profile and you look at them sort of a in a different, you know, sort of separately?
I think we look at the products and the impacts that they can have for different patient groups, and where that's significant...
Right.
We'll move. Which means we're in a rare disease type area, such as PAH, we'll augment that further. We've got an inhaled sGC as well. There'll be more activity in that space. At the same time, you see us operating in cholesterol lowering, with our work for the oral PCSK9. We will continue to follow science, but we're as focused on that science in the rare disease population of PAH, as you described, as we are in broader populations.
That's helpful. Yeah. If you think about other categories within Merck, you know, in the mid stage, you know, pipeline, like what would you call out as something that like, you know, investors, you may not have thought about or could be a pretty high impact, like, you know, in the intermediate to longer term?
Sure. I could talk for a long time because there's a lot of great things in our company. Maybe let me start with, we've made a ton of progress over the last few years, and I expect our company will continue to make great progress. If we look at our pipeline today, if I start in vaccines, we are really excited about our population-specific pneumococcal vaccine. We have VAXNEUVANCE targeting pediatrics, which has great data, especially in the first year of life, which is so important as the majority of pneumococcal disease will happen in that first year of life for babies. We have V116 coming, phase III data later this year for the adult segment. The data that we've got thus far suggests this vaccine will help provide coverage for 85% of IPD. We think this is significant.
In vaccines, we've also got dengue coming, good data at the end of last year, and we've got RSV. We are really excited about the cardiovascular area, as we've touched on. sotatercept is going to be a hugely impactful product for patients and a multi-billion dollar opportunity for our company. The oral PCSK9 has got fabulous data that we shared at phase II. We're working quickly to move to phase III, as well as doing a simultaneous cardiovascular outcomes trial. We think this could be a huge product globally. We're looking at trying to ensure a cost of goods that enables us to have access for this product all over the world. We've got others in cardiovascular.
In oncology, we're excited about the areas we've touched on already, Geoff, in our opportunities to progress with KEYTRUDA, with combinations, with co-formulations, with ADCs, with the individualized neoantigen therapy and others. Of course, we're really excited about the prospects of PRA023.
Great.
The asset that we have from the acquisition of Prometheus, which could be a game changer for a population in need of new innovations in both ulcerative colitis and Crohn's disease. Those are just a few to keep your eyes on.
Right.
That we're really excited about.
When you look at some of the, you know, across the biopharma space, I mean, neuroscience, you know, and metabolic-
Yeah.
With and particularly obesity or some of the higher profile, higher growth indications, is there, you know, an intention, sort of a focus on future BD to, you know, capture some of that? Do you just. You know, I know the answer is probably follow the science, but I just wanted to ask. You know, in that sort of perspective.
We're consistent, if nothing else. We do have assets in our own pipeline in both of those spaces earlier on, but assets we're pretty excited about in neuroscience as well as cardiometabolic. We will also continue to scan the outside world to see what could make sense to augment our pipeline further.
Prometheus, the framework of that when you think about pipeline and the product, multiple indications.
Yes.
you know, and the like, it, I'm assuming that is for Merck today probably more of a priority than just a straight platform with a newer technology that you add to the, you know, to the mix.
Correct.
All right. Okay. Perfect. Well, with that, we're out of time. Thank you, everyone. Thank you, Caroline.
Thank you very much.