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MRK > SEC Filings for MRK > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for MERCK & CO. INC.

Form 10-Q for MERCK & CO. INC.


7-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Business Developments
In May 2014, the Company announced that it had entered into a definitive agreement to sell its Merck Consumer Care ("MCC") business to Bayer AG ("Bayer") for $14.2 billion. Under the terms of the agreement, Bayer will acquire Merck's existing over-the-counter ("OTC") business, including the global trademark and prescription rights for Claritin and Afrin. The Company expects the pretax gain from the sale of MCC to be between $11.0 billion and $11.3 billion. Merck expects to close the sale of MCC in the second half of 2014, subject to customary closing conditions, including regulatory approvals.
The Company also announced a worldwide clinical development collaboration with Bayer to market and develop its portfolio of soluble guanylate cyclase ("sGC") modulators. This includes Bayer's Adempas (riociguat), the first member of this novel class of compounds. Adempas is approved to treat pulmonary arterial hypertension ("PAH") and is the first and only drug treatment approved for patients with chronic thromboembolic pulmonary hypertension ("CTEPH"). Adempas is currently marketed in the United States and Europe for both PAH and CTEPH and in Japan for CTEPH. The two companies will equally share costs and profits from the collaboration and implement a joint development and commercialization strategy. The collaboration also includes clinical development of Bayer's vericiguat, which is currently in Phase 2 trials for worsening heart failure, as well as opt-in rights for other early-stage sGC compounds in development at Bayer. Merck will in turn make available its early-stage sGC compounds under similar terms. In return for these broad collaboration rights, Merck will make an upfront payment to Bayer of $1.0 billion with the potential for additional milestone payments upon the achievement of agreed-upon sales goals. For Adempas, Bayer will continue to lead commercialization in the Americas, while Merck will lead commercialization in the rest of the world. For vericiguat and other potential opt-in products, Bayer will lead in the rest of world and Merck will lead in the Americas. For all products and candidates included in the agreement, both companies will share in development costs and profits on sales and will have the right to co-promote in territories where they are not the lead. The formation of this collaboration is subject to the closing of the MCC sale to Bayer.
Also, in May 2014, Merck entered into an agreement to sell certain ophthalmic products to Santen Pharmaceutical Co., Ltd. ("Santen") in Japan and markets in Europe and Asia Pacific. The ophthalmic products included in the agreement are Cosopt (dorzolamide hydrochloride-timolol maleate ophthalmic solution), Cosopt PF (dorzolamide hydrochloride-timolol maleate ophthalmic solution) 2%/0.5%, Trusopt (dorzolamide hydrochloride ophthalmic solution) sterile ophthalmic solution 2%, Trusopt PF (dorzolamide hydrochloride ophthalmic solution) preservative-free, Timoptic (timolol maleate ophthalmic solution), Timoptic PF (timolol maleate preservative free ophthalmic solution in unit dose dispenser), Timoptic XE (timolol maleate ophthalmic gel forming solution), Saflutan (tafluprost) and Taptiqom (tafluprost-timolol maleate ophthalmic solution, in development). The agreement provides that Santen make upfront payments of approximately $600 million and additional payments based on defined sales milestones. Santen will also purchase supply of ophthalmology products covered by the agreement for a two- to five-year period. Upon closing of the transaction in most markets on July 1, 2014, Santen made $548 million of the upfront payments to the Company. The remaining markets continue to be subject to certain closing conditions and are expected to close by the end of 2014.
In August 2014, Merck completed the acquisition of Idenix Pharmaceuticals, Inc. ("Idenix") for $24.50 per share in cash for a total of approximately $3.85 billion. Idenix is a biopharmaceutical company engaged in the discovery and development of medicines for the treatment of human viral diseases, whose primary focus is on the development of next-generation oral antiviral therapeutics to treat hepatitis C virus ("HCV") infection. Idenix currently has three HCV drug candidates in clinical development: two nucleotide prodrugs (IDX21437 and IDX21459) and a NS5A inhibitor (samatasvir). These novel candidates are being evaluated for their potential inclusion in the development of all oral, pan-genotypic fixed-dose combination regimens.

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Operating Results
Sales
Worldwide sales were $10.9 billion for the second quarter of 2014, a decline of 1% compared with the second quarter of 2013. The revenue decline in the second quarter of 2014 was driven primarily by lower sales of Temodar (temozolomide), Victrelis (boceprevir), Nasonex (mometasone furoate monohydrate), Cozaar (losartan potassium)/Hyzaar (losartan potassium and hydrochlorothiazide), and PegIntron (peginterferon alpha-2b). The sales decline was also attributable to lower revenue as a result of product divestitures that occurred in 2013 as discussed below. These declines were partially offset by growth in Remicade (infliximab), Zetia (ezetimibe), Simponi (golimumab), Janumet (sitagliptin and metformin HCl), and Isentress (raltegravir), as well as by higher revenue from the Company's relationship with AstraZeneca LP ("AZLP").
Worldwide sales were $21.2 billion for the first six months of 2014, a decline of 2% compared with the same period in 2013. Foreign exchange unfavorably affected global sales performance by 1% in the first six months of 2014. The revenue decline was driven primarily by lower sales of Temodar, Nasonex, Victrelis, Cozaar/Hyzaar, Singulair (montelukast sodium) and PegIntron. Lower revenue as a result of product divestitures and from AZLP also contributed to the sales decline. These declines were partially offset by higher sales of Remicade, Janumet, Simponi, Isentress, Dulera Inhalation Aerosol (mometasone furoate/formoterol fumarate dihydrate) and Zetia. In addition, the Company recognized revenue of $232 million in the first six months of 2014 in connection with the sale of the U.S. marketing rights to Saphris (asenapine).
Global efforts toward health care cost containment continue to exert pressure on product pricing and market access worldwide. In the United States, health care reform is contributing to an increase in the number of patients in the Medicaid program under which sales of pharmaceutical products are subject to substantial rebates. In many international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, other austerity measures negatively affected the Company's revenue performance in the first six months of 2014. The Company anticipates these pricing actions, including the biennial price reductions in Japan, and other austerity measures will continue to negatively affect revenue performance for the remainder of 2014. As discussed in Note 2 to the interim consolidated financial statements, on October 1, 2013, the Company sold its active pharmaceutical ingredient ("API") manufacturing business and, effective December 31, 2013, certain related products within Diversified Brands. In November 2013, Merck sold the U.S. rights to certain ophthalmic products and in January 2014 sold the U.S. marketing rights to Saphris. The aggregate sales in 2013 associated with these divested assets were approximately $570 million. The sales in 2013 associated with the divested products were approximately $420 million of which approximately $380 million related to the Pharmaceutical segment and $40 million related to the Consumer Care segment. The sales recorded in 2013 associated with the divested API manufacturing business were approximately $150 million and related to non-segment revenues.
In addition to the above transactions, other divestitures that remain pending will also negatively impact future sales upon closing. Sales in 2013 of the OTC business being sold to Bayer include Consumer Care segment sales of $1.9 billion, as well as Pharmaceutical segment sales of approximately $200 million related to sale of the prescription rights to Claritin and Afrin. In addition, sales of the ophthalmic products in the international markets being divested to Santen (most of which closed on July 1, 2014) were approximately $400 million in 2013 and related to the Pharmaceutical segment.

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Sales of the Company's products were as follows:

                                        Three Months Ended            Six Months Ended
                                              June 30,                     June 30,
 ($ in millions)                          2014           2013         2014         2013
Primary Care and Women's Health
Cardiovascular
Zetia                               $       717        $    650    $    1,328    $  1,279
Vytorin                                     417             417           777         810
Diabetes
Januvia                                   1,058           1,072         1,916       1,956
Janumet                                     519             474           995         883
General Medicine and Women's Health
NuvaRing                                    178             171           346         322
Implanon                                    119             102           221         187
Follistim AQ                                102             134           213         257
Dulera                                      103              79           205         147
Hospital and Specialty
Hepatitis
PegIntron                                   103             142           216         268
Victrelis                                    46             116           105         226
HIV
Isentress                                   453             412           843         775
Hospital
Cancidas                                    156             163           322         326
Invanz                                      134             120           249         230
Noxafil                                      98              71           172         136
Bridion                                      82              69           155         131
Primaxin                                     81              85           151         168
Immunology
Remicade                                    607             527         1,211       1,076
Simponi                                     174             120           330         228
Other
Cosopt/Trusopt                              100             103           198         209
Oncology
Emend                                       144             135           266         250
Temodar                                      93             219           176         434
Diversified Brands
Respiratory
Nasonex                                     258             325           570         711
Singulair                                   284             281           554         618
Clarinex                                     69              64           131         125
Other
Cozaar/Hyzaar                               214             255           419         522
Arcoxia                                     141             121           268         242
Fosamax                                     121             144           245         281
Zocor                                        69              74           133         156
Propecia                                     58              67           131         135
Remeron                                      40              53            90         106
Vaccines (1)
Gardasil                                    409             383           792         773
ProQuad/M-M-R II/Varivax                    326             339           606         611
RotaTeq                                     147             144           316         306
Zostavax                                    156             141           298         309
Pneumovax 23                                102             108           203         219
Other pharmaceutical (2)                  1,209           1,430         2,387       2,789
Total Pharmaceutical segment sales        9,087           9,310        17,538      18,201
Other segment sales (3)                   1,796           1,631         3,336       3,343
Total segment sales                      10,883          10,941        20,874      21,544
Other (4)                                    51              69           324         137
                                    $    10,934        $ 11,010    $   21,198    $ 21,681

(1) These amounts do not reflect sales of vaccines sold in most major European markets through the Company's joint venture, Sanofi Pasteur MSD, the results of which are reflected in Equity income from affiliates. These amounts do, however, reflect supply sales to Sanofi Pasteur MSD.

(2) Other pharmaceutical primarily reflects sales of other human health pharmaceutical products, including products within the franchises not listed separately.

(3) Represents the non-reportable segments of Animal Health, Consumer Care and Alliances. The Alliances segment includes revenue from the Company's relationship with AZLP. Effective July 1, 2014, the Company no longer records supply sales from AZLP.

(4) Other revenues are primarily comprised of miscellaneous corporate revenues, sales related to divested products or businesses, and other supply sales not included in segment results. Other revenues in the first six months of 2014 include $232 million received by Merck in connection with the sale of the U.S. marketing rights to Saphris. Other revenues also include third-party manufacturing sales, a substantial portion of which was divested in October 2013.

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The provision for discounts includes indirect customer discounts that occur when a contracted customer purchases directly through an intermediary wholesale purchaser, known as chargebacks, as well as indirectly in the form of rebates owed based upon definitive contractual agreements or legal requirements with private sector and public sector (Medicaid and Medicare Part D) benefit providers, after the final dispensing of the product by a pharmacy to a benefit plan participant. These discounts, in the aggregate, reduced sales by $1.7 billion and $1.3 billion for the three months ended June 30, 2014 and 2013, respectively, and by $3.1 billion and $2.5 billion for the six months ended June 30, 2014 and 2013, respectively. Inventory levels at key U.S. wholesalers for each of the Company's major pharmaceutical products are generally less than one month.
Pharmaceutical Segment
Primary Care and Women's Health
Cardiovascular
Combined global sales of Zetia and Vytorin (ezetimibe/simvastatin), medicines for lowering LDL cholesterol were $1.1 billion in the second quarter of 2014, an increase of 6% compared with the second quarter of 2013 including a 1% favorable effect from foreign exchange. Combined global sales of Zetia and Vytorin were $2.1 billion in the first six months of 2014, an increase of 1% compared with the same period in 2013.
Worldwide sales of Zetia (marketed outside the United States as Ezetrol), a cholesterol absorption inhibitor, were $717 million in the second quarter of 2014 and $1.3 billion in the first six months of 2014, increases of 10% and 4%, respectively, compared with the same periods of 2013. Foreign exchange unfavorably affected global sales performance by 1% in the first six months of 2014. The increase in both periods was driven primarily by higher sales in the United States reflecting higher pricing and, for the second quarter of 2014, increased wholesaler purchases.
Global sales of Vytorin (marketed outside the United States as Inegy), a combination product containing the active ingredients of both Zetia and Zocor (simvastatin), a statin for modifying cholesterol, were $417 million in the second quarter of 2014, essentially flat as compared with the second quarter of 2013, and were $777 million in the first six months of 2014, a decline of 4% compared with the first six months of 2013. Foreign exchange favorably affected global sales performance by 2% and 1% in the second quarter and first six months of 2014, respectively. The sales decline in the year-to-date period primarily reflects lower volumes in the United States.
The IMPROVE-IT trial is an approximately 18,000 patient, event-driven cardiovascular outcomes study evaluating ezetimibe/simvastatin against simvastatin alone in patients presenting with acute coronary syndrome. Based on the targeted number of 5,250 clinical endpoints and the rate of event reporting, the trial is projected to conclude later in 2014. After final data collection and confirmation, and analysis of key endpoints, the results will be presented at a scientific meeting. If the results of the IMPROVE-IT trial fail to demonstrate an incremental benefit of ezetimibe/simvastatin on cardiovascular morbidity and mortality over and above that demonstrated for simvastatin, sales of Zetia and Vytorin could be materially adversely affected and, if so, the Company may take non-cash impairment charges with respect to the carrying values of the Zetia and Vytorin intangible assets, which were $4.2 billion and $2.3 billion, respectively, at June 30, 2014 and such charges could be material. Diabetes
Worldwide combined sales of Januvia (sitagliptin) and Janumet, medicines that help lower blood sugar levels in adults with type 2 diabetes, were $1.6 billion in the second quarter of 2014, an increase of 2% compared with the second quarter of 2013, and were $2.9 billion in the first six months of 2014, an increase of 3% compared with the same period in 2013.
Global sales of Januvia, Merck's dipeptidyl peptidase-4 ("DPP-4") inhibitor for the treatment of type 2 diabetes, were $1.1 billion in the second quarter of 2014, a decrease of 1% compared with the second quarter of 2013, driven by lower sales in Japan due to pricing, partially offset by volume growth in Europe. In April 2014, all DPP-4 inhibitors, including Januvia, were subject to repricing in Japan. Worldwide sales of Januvia were $1.9 billion for the first six months of 2014, a decline of 2% compared with the first six months of 2013, driven primarily by lower sales in Japan, reflecting lower volumes and lower pricing, partially offset by volume growth in Europe. Foreign exchange unfavorably affected global sales performance by 1% in the first six months of 2014. The Trial Evaluating Cardiovascular Outcomes after treatment with Sitagliptin ("TECOS"), an event-driven, cardiovascular outcomes study for sitagliptin, began in 2008 and has over 14,000 patients enrolled. TECOS will evaluate the impact of sitagliptin when added to usual care compared to usual care without sitagliptin in a large, high-risk type 2 diabetes population across multiple countries. TECOS is expected to be completed later in 2014 with results presented in 2015. Worldwide sales of Janumet, Merck's oral antihyperglycemic agent that combines sitagliptin (Januvia) with metformin in a single tablet, grew 9% in the second quarter of 2014 to $519 million compared with the second quarter of 2013 driven largely by volume growth in Europe. Foreign exchange favorably affected global sales performance by 1% in the second quarter of 2014. Global sales of Janumet grew 13% in the first six months of 2014 to $995 million compared with the same period of 2013 driven primarily by volume growth across the emerging markets and in Europe.

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General Medicine and Women's Health
Worldwide sales of NuvaRing (etonogestrel/ethinyl estradiol vaginal ring), a vaginal contraceptive product, increased 4% in the second quarter of 2014 to $178 million and grew 7% in the first six months of 2014 to $346 million compared with the same periods in 2013. The sales growth in both periods primarily reflects higher pricing in the United States.
Worldwide sales of Implanon (etonogestrel implant), a single-rod subdermal contraceptive implant, grew 16% to $119 million in the second quarter of 2014 and increased 18% to $221 million in the first six months of 2014 compared with the same periods of 2013 driven primarily by higher demand in the United States. Global sales of Follistim AQ (follitropin beta injection) (marketed in most countries outside the United States as Puregon), a fertility treatment, declined 24% in the second quarter of 2014 to $102 million and decreased 17% in the first six months of 2014 to $213 million compared with the same periods in 2013. The sales declines were driven largely by lower volumes in the United States. Foreign exchange unfavorably affected global sales performance by 1% in both the second quarter and first six months of 2014.
Global sales of Dulera Inhalation Aerosol, a combination medicine for the treatment of asthma, were $103 million in the second quarter of 2014 compared with $79 million in the second quarter of 2013 and were $205 million in the first six months of 2014 compared with $147 million in the first six months of 2013. Sales growth in both periods was driven by higher demand in the United States.
Hospital and Specialty
Hepatitis
Worldwide sales of PegIntron, a treatment for chronic hepatitis C, were $103 million in the second quarter of 2014 and $216 million in the first six months of 2014, declines of 27% and 19%, respectively, compared with the same periods in 2013. The sales declines were driven by lower volumes in nearly all regions, particularly within the emerging markets, as the availability of new therapeutic options has resulted in loss of market share or patient treatment delays in markets anticipating the availability of new therapeutic options. Foreign exchange unfavorably affected global sales performance by 1% and 2% in the second quarter and first six months of 2014, respectively.
Worldwide sales of Victrelis, an oral medicine for the treatment of chronic hepatitis C, were $46 million in the second quarter of 2014, a decline of 60% compared with the second quarter of 2013, and were $105 million in the first six months of 2014, a decline of 53% compared with the same period in 2013. The sales declines were driven by lower volumes in nearly all regions, particularly within the United States, as the availability of new therapeutic options has resulted in loss of market share or patient treatment delays in markets anticipating the availability of new therapeutic options.
Sales of the Company's products indicated for the treatment of chronic hepatitis C including PegIntron and Victrelis discussed above, as well as Rebetol (ribavirin USP), continue to be adversely affected by new therapeutic options becoming available as discussed above. During the second quarter, these trends accelerated more rapidly than previously anticipated by the Company, which led to changes in the cash flow assumptions for both PegIntron and Victrelis. These revisions to cash flows indicated that the PegIntron and Victrelis intangible asset values were not recoverable on an undiscounted cash flows basis. The Company utilized market participant assumptions to determine its best estimate of the fair values of the intangible assets related to PegIntron and Victrelis that, when compared with their related carrying values, resulted in impairment charges of $523 million and $137 million, respectively, in the second quarter of 2014 recorded within Materials and production costs. In the event that the availability of new treatment options adversely affects sales of products currently marketed by the Company for the treatment of chronic hepatitis C to a greater extent than anticipated by the Company, or in the event other circumstances arise that significantly reduce cash flow projections for these products, the Company may record additional intangible asset impairment charges in the future and such charges could be material. The remaining carrying value of the intangible assets related to these three products was $552 million in the aggregate at June 30, 2014.
HIV
Global sales of Isentress, an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection, grew 10% in the second quarter of 2014 to $453 million and increased 9% in the first six months of 2014 to $843 million compared with the same periods in 2013 reflecting growth in Europe, Latin America and the United States. Hospital
Global sales of Cancidas (caspofungin acetate), an anti-fungal product, declined 5% in the second quarter of 2014 to $156 million driven largely by the timing of shipments in China. Sales of Cancidas decreased 1% in the first six months of 2014 to $322 million. Foreign exchange favorably affected global sales performance by 2% in the second quarter of 2014 and by 1% in the first six months of 2014.
Bridion (sugammadex sodium injection), for the reversal of certain muscle relaxants used during surgery, is approved and has been launched in many countries outside of the United States. Sales of Bridion grew 20% to $82 million in the second

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quarter of 2014 and rose 18% to $155 million in the first six months of 2014 compared with the same periods of 2013. Sales growth in both periods was driven by volume growth in most markets. Foreign exchange unfavorably affected global sales performance by 1% and 5% in the second quarter and first six months of 2014, respectively. In September 2013, the Company received a Complete Response Letter ("CRL") from the FDA for the resubmission of the New Drug Application ("NDA") for sugammadex sodium injection (see "Research and Development" below). Immunology
Sales of Remicade, a treatment for inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), were $607 million in the second quarter of 2014 and $1.2 billion for the first six months of 2014, increases of 15% and 13%, respectively, compared with the same periods of 2013. Foreign exchange favorably affected sales performance by 6% and 5% in the second quarter and first six months of 2014, respectively. Sales growth in both periods reflects volume growth in Europe. In September 2013, the European Commission (the "EC") approved an infliximab biosimilar. While the Company is experiencing generic competition in certain smaller European markets, the Company anticipates a more substantial decline in Remicade sales following loss of market exclusivity in major European markets in February 2015.
Sales of Simponi, a once-monthly subcutaneous treatment for certain inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), were $174 million in the second quarter of 2014 compared with $120 million in the second quarter of 2013 and were $330 million in the first six months of 2014 compared with $228 million in the first six months of 2013. Sales growth was driven by continued launch activities, as well as a positive impact from the ulcerative colitis indication. In September 2013, the EC approved Simponi for the treatment of adult patients with moderately to severely active ulcerative colitis who have had an inadequate response to conventional therapy or who are intolerant to or have medical contraindications for such therapies. Other
Worldwide sales of ophthalmic products Cosopt and Trusopt declined 3% to $100 million in the second quarter of 2014 and declined 5% to $198 million in the first six months of 2014 compared with the same periods in 2013. Foreign exchange unfavorably affected global sales performance by 3% in the first six months of 2014. The decline was driven in part by the divestiture of the U.S. rights to Cosopt and Cosopt PF as noted below. Additionally, the patent for Cosopt expired in a number of major European markets in March 2013 and the Company is experiencing sales declines in those markets. The patents that provided market exclusivity for Trusopt in a number of major European markets . . .

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