After $600M sales hit from pandemic, Merck's open to 'all forms' of M&A deals, incoming CEO says

With Merck's sales dragging from the pandemic and the company becoming increasingly reliant on immuno-oncology superstar Keytruda, the pharma giant's executive team unveiled a willingness to flex its M&A muscle.

“We are open to any opportunity to add a meaningful asset,” president and soon-to-be CEO Rob Davis said on a Thursday call with investors. “We are open to all forms of deals and we have the capital” for those deals, he added.

It'll soon have some extra cash on hand, too, thanks to the spinoff of Organon, which is expected to wrap up on June 2. Once the spinoff closes, Merck expects "to receive a special tax-free dividend of $9 billion, which we hope to deploy in a value-enhancing strategic business development opportunity," chief financial officer Caroline Litchfield said.

The comments came during Merck’s first-quarter earnings call, where the drug giant reported sales for the period of $12.08 billion. Cancer mainstays Keytruda and Lynparza held the line, alongside surgery drug Bridion and the drugmaker’s animal health business. Elsewhere, pandemic disruptions took their toll.

In all, Merck missed analysts' sales estimates by around $500 million. Analysts had figured the company would generate around $12.6 billion.

Merck estimated that the COVID-19 pandemic took a roughly $600 million bite out of its pharma revenue during the first three months of the year. The company now expects the pandemic to crimp 2021 sales by around 3%.

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Merck's vaccine business suffered a particularly tough period as the COVID-19 vaccine rollout reached a fever pitch in the U.S. Sales of Merck’s HPV shot Gardasil fell 16% to $917 million, while revenues for its polysaccharide pneumococcal vaccine Pneumovax 23 dropped 33% to $171 million.

Those products could perform better in the back half of the year, once a majority of people in the U.S. have received their COVID shots and routine vaccinations resume, execs said. The CDC recommends people don't receive other vaccines within two weeks of their COVID-19 shots.

Considering those struggles, it's a good thing for Merck that its cancer stalwart Keytruda continued its ascent. The drug pulled in a whopping $3.9 billion during the quarter—up around 19% versus the same period last year.

But Merck likely won’t be able to count on Keytruda's use in third-line stomach cancer soon. An external panel summoned by the FDA voted 6-2 recommending the agency remove that accelerated approval from Keytruda’s label. The “no” voters all pointed to the change in treatment landscape as a reason to pull the nod. The FDA doesn’t have to follow the committee’s opinion, but it often does.

On the flip side, FDA panelists voted to maintain Keytruda's second-line approval in patients with hepatocellular carcinoma while additional trials play out.

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Looking forward, while Merck says M&A isn’t off the table, one team of analysts figure there’s plenty to like in the company’s existing portfolio and pipeline.

“[W]e still believe there is a lot of value to be unlocked in [Merck's] products as well as its pipeline,” Cantor Fitzgerald analysts wrote in a note to clients Thursday morning. Growth across oncology, vaccines, animal health and select hospital and specialty care products remain “underappreciated,” the analysts wrote.

Plus, the company snagged recent approvals for Keytruda in esophageal cancer, and for new med Verquvo in chronic heart failure.

The other positive, to hear Bernstein's Ronny Gal tell it, was that Merck's new management seems to be more active "on both business development (the $9B from Organon will be spent on BD) and promise to communicate more clearly with the market about its pipeline and growth expectations."

All told, the company now forecasts between $51.8 billion to $53.8 billion in 2021 sales.

Editor's note: This story has been updated with details on Merck's Organon spinoff.