Merck’s $10.8 billion acquisition of Prometheus Biosciences earlier this year gave the New Jersey company increased diversity in its portfolio, much needed considering its overwhelming dependence on cancer juggernaut Keytruda.
But buying out the San Diego immunology specialist has not satisfied Merck’s appetite for M&A, executives said during the company's second-quarter earnings call.
“We continue to have a priority to do business development, so you should not necessarily expect a slowdown,” CEO Rob Davis said. “If and when assets that bring important scientific opportunities present themselves—where we see an alignment with strategy and where we can see value creation—we have the capacity and we will be willing to act on those."
While Merck has been focused on expanding its business by 2028—the year Keytruda loses its exclusivity—another date now looming is 2026. That’s when the Inflation Reduction Act will allow Medicare to negotiate prices for the drugs on which it spends the most, with Keytruda at the top of the list.
On Tuesday, Davis called the negotiation measure “unconstitutional price setting.” The company is one of four that have filed lawsuits against the government, challenging the legality of the IRA.
“We’ll take it through District Court and if need be, Circuit Court and ultimately to the Supreme Court,” Davis said. “This will take a while to play out. What I do think is highly likely is that we will be able to see this result by the time we get into the 2026 timeframe.”
Win or lose, Merck will eventually have to deal with the loss of Keytruda revenues, leaving M&A as the top solution, especially considering the company’s firepower.
“We believe Merck is actively looking to use its strong cash position to make acquisitions to boost growth,” Edward Jones analyst John Boylan wrote in a note to investors.
Merck enhanced its cash position in the second quarter thanks largely to sales of Keytruda, which reached $6.27 billion, up 19% from Q2 of 2022 and up from $5.79 billion in the first quarter.
“Keytruda’s growth has been exceptional in recent quarters, outperforming our expectations, driven in part by robust uptake of recently launched early-stage indications,” Merck chief financial officer Caroline Litchfield said on the call. “We continue to expect strong year-over-year growth of Keytruda but not quite at the levels experienced in recent quarters.”
Litchfield chalked the slowdown in momentum up to a result of “lacking launches and the impact of continued pricing headwinds,” particularly in Europe.
Edward Jones still expects sales of Keytruda to reach $29 billion this year, up from $20 billion in 2022.
HPV vaccine Gardasil also blew away expectations, generating $2.46 billion, which was a 53% increase from the second quarter of last year and also up significantly from its $1.97 billion performance in the previous quarter.
The boost was fueled by increased demand in all geographies, including China, where Gardasil’s use has been expanded to more women, Litchfield said. She added however that the company doesn’t expect this to continue in the second half of the year as shipments to China are expected to decline.
Merck’s revenue for the quarter reached $15.04 billion, exceeding analyst expectations of $14.44 billion. It was the eighth straight quarter that the company posted a revenue beat, according to Benzinga.
With the result, Merck boosted its revenue guidance for 2023 to a new range of $58.6 billion to $59.6 billion. Previously, the company expected to deliver between $57.7 billion and $58.9 billion in annual revenues.
Sales were up 6% in Merck’s pharma sector. The performance was particularly impressive considering sales of COVID oral antiviral Lagevrio fell from $1.18 billion in the second quarter of last year to $203 million in the most recent quarter.
“Excluding sales of Lagevrio, Merck delivered operational growth of 14%, which is the kind of growth that gets us excited,” Third Bridge analyst Lee Brown wrote.