Merck & Co., Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Made meaningful progress in delivering medicines and vaccines, with strong clinical momentum and new product launches.
• Announced positive top-line results from Phase III trials for enlicitide and WINREVAIR.
• Regulatory approvals include ENFLONSIA for RSV prevention and FDA acceptance of BLA for WINREVAIR in PAH and NDA for HIV combo.
• Acquired Verona Pharma, bringing Ohtuvayre for COPD.
• Hosted investor event for HIV programs, and oncology pipeline advanced with KEYTRUDA's 10th earlier-stage approval and new trial data.

Segment Performance

• Oncology: KEYTRUDA sales increased 9% to $8 billion, with growth in U.S. and international markets. WELIREG sales rose 29% to $162 million.
• Vaccines: GARDASIL sales decreased, but CAPVAXIVE sales were $129 million, VAXNEUVANCE sales grew 20%. ENFLONSIA launched post-FDA approval and ACIP recommendation.
• Cardiovascular: WINREVAIR had global sales of $336 million, with cumulative net sales exceeding $1 billion in 15 months since launch.
• Animal Health: Sales increased 11% due to higher demand across species and improved supply.

Guidance

• Full-year 2025 non-GAAP revenue expected $64.3B-$65.3B (1%-2% growth excluding foreign exchange impact).
• Gross margin assumption ~82%. Operating expenses projected $25.6B-$26.4B.
• EPS guidance $8.87-$8.97.
• Announced a multiyear optimization program to reallocate $3B from lower-growth to higher-potential areas to drive long-term growth.

Risks

• Foreign exchange fluctuations impacting revenue.
• Competition affecting vaccine sales.
• Regulatory changes potentially delaying product approvals or reimbursements.

Question and Answer

Q: Could you help us understand CADENCE that you said has a September primary completion date? Specifically, can you help us put the outcomes in context?

A: Dean Y. Li discussed outcomes like PVR and 6-minute walk distance, noting PVR as a key signal and the need for a Phase III trial to demonstrate effectiveness in the broader patient population.

Q: Maybe I'll just stick with WINREVAIR. One is actually a follow-up to the earlier question and then one question for myself. So just following up on the CADENCE discussion. I don't know if Dean or if someone could just maybe quantify the patient population. I know you mentioned patients maybe hemodynamically a little more skewed to what we've seen on the PAH side, but just a sense of the market size, it would be helpful because we've been getting a lot of questions on how to think about the opportunity. But my other question -- my main question is actually the ex U.S. uptake of WINREVAIR.

A: Rob Davis and Dean Y. Li talked about early launch, reimbursement progress, and market size for WINREVAIR ex U.S., noting it's early but on track.

Q: I just wanted to dig into the $3 billion restructuring announcement. I know you mentioned in the press release you're planning to fully reinvest that. But just when we balance what seems like a large ramp in the pipeline and the Phase III programs over the next few years against this cost initiative, can you just help us a little bit of how we should think about either operating margins or absolute OpEx growth trending in the next few years?

A: Rob Davis and Caroline A. Litchfield discussed reallocating $3B from slow-growing to fast-growing areas, with continued growth in spend but more productively, targeting pipeline and commercial launch funding.

Q: Three-parter on GARDASIL. First, on GARDASIL U.S., you noted positive price and demand offset by CDC purchasing. Recognizing that CDC purchasing dynamics are always lumpy, they've also been a significant driver over the year. So maybe just speak to your level of confidence on the demand dynamics from that channel in the current environment. And then maybe also just as it relates to the potential for ACIP recommendation towards lower GARDASIL doses in the U.S., can you just update us on how you're thinking about the range of outcomes into the ACIP meeting this fall? And then finally, on China GARDASIL, Caroline, I think you said no shipments through at least the end of this year. So any early thoughts on how you're thinking about 2026 would be helpful.

A: Dean Y. Li and Caroline A. Litchfield talked about ACIP recommendations, China demand softness, and future plans for GARDASIL in 2026.

Q: As we think about business development going forward, I'd love if you could expand on your approach to diligencing assets between Chinese and Western companies. I'm specifically asking in context of the recent Verona acquisition versus a recent collaboration announcement by a competitor for Chinese PDE3/4 inhibitor.

A: Dean Y. Li discussed Verona acquisition diligence, emphasizing first-mover advantage in COPD treatment.

Q: I feel like there's been a ton of interest in the valuation paid for your Chinese partner, LaNova, on the PD-1/VEGF. And my question is, considering the ongoing Phase I is an open-label study, can we reasonably assume everything is, in fact, on track and you are still in a position to start a potentially registration Phase II like a KEYNOTE-21G in the next few months?

A: Dean Y. Li said the LaNova program is on track as planned.

Q: So we're seeing an increase in patient adds for WINREVAIR after some modest decreases over the last 2 quarters. What's the right cadence when you think about this going forward, not only for the rest of 2025, but really 2026 and onwards now that you have the HYPERION and ZENITH results? And really, what's your progress in terms of progressing WINREVAIR into earlier lines of setting? Are you starting to see doctors adopt this medication more aggressively? And then maybe if I could just sneak in one more question. On the Hansoh GLP-1 asset, can you confirm that, that drug has actually moved into the clinic?

A: Rob Davis and Caroline A. Litchfield talked about steady patient adds, increasing segment penetration, and Dean Y. Li confirmed Hansoh GLP-1 moved to clinic on schedule.

Q: I was just -- I was wondering if you could offer any preliminary perspective on how a 15% tariff on pharmaceuticals would impact your 2026 outlook. Recognize you're not going to give guidance at this point, but I was just wondering if you could help frame for us the potential impact there. And then any insight if this would be phased in over time or if this would be implemented more near term?

A: Rob Davis said timing and impact of tariffs are unclear.

Q: Coming back to the comments you've made around the cost savings program and the reallocation of this. Can you give us a little bit of context on your intentions to -- with KEYTRUDA, specifically recognizing that, that asset is coming nearer to the end of its life cycle, yet there are still many launches to come as well as a subcutaneous product launch ahead. And so how you're planning on reallocating in the context of KEYTRUDA SG&A relative to the newer opportunities that you need to fund in both R&D and those new launches.

A: Rob Davis talked about reallocating resources to broader oncology opportunities beyond KEYTRUDA.

Q: It's just one on the One Big Beautiful Bill expanding the orphan drug exclusion under the IRA and how that affects the timing of KEYTRUDA's potential selection for IRA price cuts. So when KEYTRUDA was initially approved, it carried an orphan designation, its first non-orphan indication was approved about a year later. So does this One Big Beautiful Bill update effectively shift KEYTRUDA's IRA selection from 2028 to 2029? And then would the presence of biosimilars by that time actually mean KEYTRUDA won't be selected for IRA?

A: Rob Davis talked about orphan drug support and future selection of KEYTRUDA for IRA.

Q: I was just -- I was wondering if you could offer any preliminary perspective on how a 15% tariff on pharmaceuticals would impact your 2026 outlook. Recognize you're not going to give guidance at this point, but I was just wondering if you could help frame for us the potential impact there. And then any insight if this would be phased in over time or if this would be implemented more near term?

A: Rob Davis said timing and impact of tariffs are unclear.

Q: A couple of long-term questions for Rob. So Rob, you continue to describe the loss of KEYTRUDA as being more of a hill than a cliff. Our model shows the same, but I don't think investors and consensus really believe that. And you say you're confident in return to growth downstream of that period, so two questions. On the hill comment, can you just remind investors the biggest offsets that you see today for how losing a product that's 50% of your revenues at the time of expiry will, in fact, not be a cliff? And then second, when you talk about confidence in growth over the longer term, can you put parameters around that for when that would be likely? We show trough revenues 2031, that would be 3 years past patent expiry. Ballpark, is that a realistic time frame for when consistent growth would return?

A: Rob Davis discussed pipeline opportunities offsetting KEYTRUDA revenue loss and confidence in long-term growth from various therapeutic areas.

Q: For enlicitide, the team has highlighted it as a platform to add other cardiometabolic assets on to. With that context, what combinations and indications could we expect? And when could we receive updates?

A: Dean Y. Li talked about potential combinations for enlicitide in cardiometabolic space, including LDL-lowering and Lp(a) reduction, with data expected later.

Q: One for Dean. Dean, I appreciate everything is on schedule for MK-2010, but was Merck notified of Sino Biopharm's interest in LaNova? And does that have any bearing on Merck's commitment to 2010 or the development of a PD-1/VEGF bispecific more broadly?

A: Dean Y. Li said Merck's commitment is based on long-term interest and LaNova program is on track.

Q: So I have a question regarding the guidance. So if I compare the guidance on an FX basis versus the prior quarter, it does seem like you lowered the upper end of the growth from [indiscernible]. Just wanted to understand if there is a change in the operational business that we need to be aware about.

A: Caroline Litchfield talked about headwinds from COVID cases and biosimilar entry, but underlying growth remains confident.