Peter Dannenbaum:

Thank you, Brad. And good morning, everyone. Welcome to Merck's second quarter 2024 conference call. Speaking on today's call will be Rob Davis, Chairman and Chief Executive Officer; Caroline Litchfield, Chief Financial Officer; and Dr. Dean Li, President of Merck Research Labs. Before we get started, I'd like to point out that we have items in our GAAP results, such as acquisition related charges, restructuring costs and certain other items and we have excluded these from our non-GAAP results there was a reconciliation in our press release. I would also remind you that some of the statements that we make today may be considered forward-looking statements within the meaning of the Safe Harbor provision of the US Private Securities Litigation Reform Act of 1995. Such statements are made based on the current beliefs of Merck's management and are subject to significant risks and uncertainties. If our underlying assumptions prove inaccurate or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements. Our SEC filings, including Item 1A in the 2023 10-K identify certain risk factors and cautionary statements that could cause the company's actual results to differ materially from those projected in any of our forward-looking statements made this morning. Merck undertakes no obligation to publicly update any forward-looking statements. During today's call, a slide presentation will accompany our speakers' prepared remarks. These slides, along with our earnings release, today's prepared remarks and our SEC filings, are all posted to the Investor Relations section of Merck's website. With that, I'd like to turn the call over to Rob.

Caroline Litchfield:

Thank you, Rob. Good morning. As Rob noted, we delivered another excellent quarter, with growth driven by robust global demand across our innovative portfolio. These results are enabled by the excellent execution of our teams and reinforce the conviction we have in our science-led strategy. We remain confident in our ability to continue to deliver strong results in the near-term, and are committed to making disciplined investments in compelling science to drive long-term value for patients, customers and shareholders. Now, turning to our second quarter results. Total company revenues were $16.1 billion, an increase of 7%, or 11% excluding the impact of foreign exchange. The following revenue comments will be on an ex-exchange basis. Our Human Health business sustained its momentum with double-digit growth of 11% primarily driven by Oncology. Our Animal Health business also delivered solid performance, with sales increasing 6%, driven by growth in livestock products. Turning to the performance of our key brands. In Oncology, sales of KEYTRUDA grew 21% to $7.3 billion driven by increased uptake from earlier stage cancers and continued strong global demand from metastatic indications. In the U.S., KEYTRUDA grew across a broad range of tumors. In the earlier-stage setting, the increase was largely attributable to uptake from KEYNOTE-671 and KEYNOTE-091 in non-small cell lung cancer. KEYTRUDA has now achieved market leadership in the neoadjuvant and adjuvant settings, building on its existing leadership position as adjuvant therapy. In metastatic disease, we saw continued strong uptake in first-line advanced urothelial cancer following the recent launch of KEYNOTE-A39. KEYTRUDA plus Padcev has now surpassed platinum chemotherapy-based regimens in new patient starts. Outside the U.S., KEYTRUDA growth was driven by increased use in certain earlier stage cancers, including high-risk, early-stage triple negative breast cancer and intermediate-high or high risk renal cell carcinoma as well as continued strong demand from patients with metastatic disease. Inflation-related price increases consistent with market practice in Argentina also contributed to growth. Alliance revenue from Lynparza and Lenvima each grew 4%. WELIREG sales more than doubled to $126 million driven by increased uptake in certain patients with previously treated advanced renal cell carcinoma. Our vaccines portfolio delivered solid growth. GARDASIL sales increased 4% to $2.5 billion. In the U.S., sales benefitted from price as well as demand and favorable CDC purchasing patterns. Outside the U.S., higher demand across many international markets was partially offset by the timing of shipments to China. In pneumococcal, VAXNEUVANCE sales increased 16% to $189 million. Growth was driven by ongoing launches in international markets. As Rob noted, we are very excited by the opportunity to positively impact the lives of adult patients with pulmonary arterial hypertension following the recent U.S. launch of WINREVAIR. Recall, we received FDA approval on March 26th, with the first patients receiving therapy about one month later. Initial patient and physician feedback has been favorable, and we recorded $70 million of sales in the quarter. We estimate that approximately 40% of sales were attributable to doses administered to patients, with the remainder due to distributors building inventory in support of increasing demand. The launch is off to a strong start. As of the end of June, more than 2,000 patients received a prescription for WINREVAIR. Our experience to date with those prescriptions, would suggest that approximately 75% to 80% will receive commercial product. Of those, more than 1,000 patients started treatment in the quarter, largely reflecting prescriptions written in April and May, as it currently takes approximately one month to complete the steps necessary to commence therapy. More than 500 physicians have written at least one prescription, with many looking to gain experience with the product as they prioritize treating the most advanced patients, who are in greatest need of additional therapy. Most prescribers are from either large academic centers or larger private practices. We are pleased that payors are recognizing the value of WINREVAIR and are already providing access to patients. Many payors have established coverage policies consistent with the label or STELLAR study criteria, while others are in the process of developing their policies. In summary, we are pleased with the strong start and look forward to continued progress in enabling access for appropriate patients over the coming months. Our Animal Health business delivered another solid quarter, with sales increasing 6%. Livestock sales grew 11% driven by higher demand for poultry and ruminant products as well as price. Companion animal sales grew 1%, reflecting price partially offset by a reduction in distributor inventory. We are also excited to have launched a long-acting BRAVECTO injectable in a number of international markets during June. I will now walk you through the remainder of our P&L, and my comments will be on a non-GAAP basis. Gross margin was 80.9%, an increase of 4.3 percentage points driven by reduced royalty rates for KEYTRUDA and GARDASIL as well as favorable product mix. Operating expenses decreased to $6.2 billion. There were no significant business development expenses in the quarter, compared with a $10.2 billion charge a year ago. Excluding this charge, operating expenses grew 8%, reflecting strategic investments to realize the promise of our robust early- and late-phase pipeline and support the promotion of our key growth drivers. Other expense was $108 million. Our tax rate was 14.1%. Taken together, earnings per share were $2.28. Now turning to our 2024 non-GAAP guidance. The continued operational strength of our business has enabled us to raise and narrow our full year revenue guidance. We now expect revenue to be between $63.4 and $64.4 billion, an increase of approximately $200 million at the midpoint. Our increased guidance range represents strong year over year revenue growth of 5% to 7%, including an approximate 3 percentage point negative impact from foreign exchange using mid-July rates. Our gross margin assumption remains approximately 81%. We now expect operating expenses to be between $26.8 and $27.6 billion. This range reflects an incremental $1.5 billion of charges related to the one-time cost to acquire EyeBio and ongoing expenses to advance the assets, as well as investments to progress our innovative pipeline. As a reminder, our guidance does not assume additional significant potential business development transactions. Other Expense is expected to be approximately $350 million, which now includes financing costs for the acquisitions of EyeBio and Elanco’s aqua business. Our full year tax rate is now expected to be between 15.5% and 16.5%, which includes an unfavorable impact related to the EyeBio acquisition that is not tax-deductible. We assume approximately 2.54 billion shares outstanding. Taken together, we expect EPS of $7.94 to $8.04. This range includes a negative impact from foreign exchange of more than $0.30, using mid-July rates. Recall our prior guidance range was $8.53 to $8.65. Including the one-time charge of $1.3 billion, or $0.51 per share, related to the acquisition of EyeBio and an estimated $0.09 to advance the assets as well as finance the EyeBio and Elanco aqua business transactions, our prior guidance range would have been $7.93 to $8.05, with a midpoint of $7.99. Our current guidance midpoint remains the same as our higher revenue estimate is being offset by increased investments to support our business. As you consider your models, there are a few items to keep in mind. We look forward to the opportunity to help protect certain adults from invasive pneumococcal disease and pneumococcal pneumonia following the recent FDA approval and ACIP recommendation of CAPVAXIVE. We are now working toward the achievement of certain milestones that will enable commercial uptake. These milestones include publication in the morbidity and mortality weekly report, which typically lags an ACIP recommendation by a few months, as well as obtaining payor coverage and contracting with customers. For GARDASIL, over the past few years we’ve benefitted from extremely strong demand in China, including from the expanded indication for GARDASIL 9 to the 9 to 45 year age cohort in late 2022. In the second quarter however, there was a significant step down in shipments from our distributor and commercialization partner, Zhifei, into the points of vaccination, compared with prior quarters, resulting in above normal inventory levels at Zhifei. We are working closely with them to more fully understand the dynamics that caused this change. As we learn more, we will assess future shipments to our partner and work to bring their inventory back to more normal levels. If shipments from Zhifei into the points of vaccination do not increase it is likely that we will ship less than our full year 2024 contracted doses by the end of this year. We believe the opportunity in China remains very attractive as there are more than 120 million females in the addressable population living in Tier 1 to Tier 5 cities who have not yet received the protection of an HPV vaccine. As we said before, it will take increasing efforts to educate and activate the next wave of patients. Together with Zhifei, we are focused on and committed to investing in additional resources and patient education on the value of GARDASIL given the important benefits it provides. We also look forward to the potential approval for males which we believe represents a meaningful opportunity. More broadly, we remain confident in the opportunity for GARDASIL globally based on the protection it provides against HPV-related cancers and low immunization levels overall, and continue to believe we will achieve sales of over $11 billion by 2030. Our initial launch of WINREVAIR is having a positive impact for patients. We are very pleased with its performance and look forward to supporting more patients in the U.S. and across the globe. Outside the U.S., we are pleased with the positive CHMP opinion and potential near-term launch in Europe. Following EU approval, we will need to obtain reimbursement, which should occur in 2025 in most major markets, but expect that Germany will receive reimbursement and launch this year. We remain confident in the successful launch of WINREVAIR, consistent with our high expectations, and look forward to providing further updates on our progress. Now turning to capital allocation, where our strategy remains unchanged. We will prioritize investments in our business to drive near and long-term growth. We will continue to invest in our expansive pipeline of novel candidates, each of which has significant potential to address important unmet medical needs. We remain committed to our dividend, and plan to increase it over time. Business development remains a priority and we are well positioned to pursue additional science-driven, value-enhancing transactions. We will continue to execute a modest level of share repurchases. To conclude, as we enter the second half of the year, there is continued strength in our business, driven by global demand and commercial execution. We remain confident in our outlook, driven by our unwavering commitment to leverage leading-edge science to save and improve the lives of patients. With investment in innovation and our ongoing focus on execution, we are well positioned to deliver value to patients, customers and shareholders now and well into the future. With that, I’d now like to turn the call over to Dean.

Peter Dannenbaum:

Thank you, Dean. Brad, we're ready for Q&A now. And I request that analysts limit themselves to one question today. Thank you.

Chris Schott:

Hi, great. Thanks so much for the question and congrats on the progress. I just want to kick off with just a question on GARDASIL dynamics in China. Maybe just a 2-part question here. First, can you quantify what percent of your international sales are coming from China? And just any additional color on what drove the step down in 2Q. I'm trying to get my hands around this. And maybe as part of that, the 2024 guidance update is the potential for shipments to come below the 2024 contracted doses now reflected in that guidance? Or would that represent an incremental headwind to numbers to the extent that played out? Thank you.

Caroline Litchfield:

Thank you, Rob. So Chris, in terms of our guidance, we've assumed a range of scenarios from providing the fully contracted 2024 doses during this year to providing something less than that. If I anchor to the midpoint of our guidance, we have been measured in assuming a scenario that has less than the contracted 2024 GARDASIL doses shipped to China. And even with that, we were able to raise our guidance at the midpoint by $200 million. And that's really as a result of the underlying momentum that we have in the rest of our business, including oncology, with KEYTRUDA and WELIREG. It includes in animal health with the launch of BRAVECTO in injectable, as well as the acquisition of the Elanco aqua business, and we remain confident in our outlook for WINREVAIR and the opportunities to drive patient impact and growth consistent with our high expectations.

Operator:

The next question comes from Umer Raffat of Evercore. Your line is open.

Rob Davis:

Yes. No, thanks for the question. So everything we're seeing in the marketplace, I would just reiterate, would point to dynamics that we don't see the competition, the future potential competition. And I think you're referring to the fact that we very well could see a 9-valent sometime next year come into the marketplace. So I don't believe from anything we've heard in the marketplace from competitive intelligence as well as what we're hearing from Zhifei that, that is what's happening here. As we look forward, and Caroline can comment specifically, we have always expected that as we see the peak move through from the indication we got for the expansion of the age cohort that you would see a flattening out over time of the demand in China. And then that for women, specifically, and then we would bring on the male indications that should allow us then to continue to drive the business forward from there. Nothing has changed in that dynamic in what we're seeing right now. So as we look forward, our belief in China being a significant contributor is unchanged. But I'll let maybe Caroline can speak specifically as we're thinking about some of the guidance around how we think about next year.

Rob Davis:

Yes. And maybe, Umer, just to give one little bit of color because it's probably worth pointing out, I'm assuming people understand when we talk about the anti-bribery and anticorruption what is happening. And one question that could be there is this has been going on since late last year, and we did not see impacts early on, what's changed and how do we see it evolving. And what I would point out, first of all, one, just reiterate, as we think about what's happening in China around the anti-bribery and anticorruption we very much support those activities because it means we have a fair, open and transparent market. So we're very supportive of what the Chinese government is trying to do there. But as we see how this is impacting us at the CDC, we have seen some dampening in them engaging in scientific discussions and driving for vaccination. We believe some of this could be due to the fact that there was criminal charges brought against a senior scientific representative of one of the local players related to a COVID vaccine that we believe has had a dampening effect overall. And how long this lasts, how it will continue to play out, we'll have to see. But I thought I would provide additional color because I don't want to assume that you all are aware of what really is happening there.

Operator:

The next question comes from Carter Gould of Barclays. Your line is open.

Rob Davis:

Yes. No, thanks for the question. So to give you a sense of what we've seen as of the end of June, we've had more than 2,000 patients receive a prescription for WINREVAIR. So that's -- obviously, we feel very good about that. And right now, what our experience would tell us is that about 75% to 80% of those receiving a prescription will convert to commercial product. So that gives you a sense of what's happening. Right now, actually, in the quarter, driving the revenue you saw was about 30 -- about 1,000 patients actually on treatment had started treatment. So as we sit here today, you have 1,000 patients who have started treatment in the quarter, the 2,000 total scripts, and we would expect that the 75% to 80% of those 2,000 scripts will ultimately convert to the commercial sales. And so if you look at what's driving that difference, some of that is due to access, but also some of it is due to patient dropout and the fact that you will have some patients who despite getting a script after they go through blood [ph] work and go through the medical evaluations don't qualify. So you have all of those dynamics happening. If you look at the 30 days and specifically that you're referring to, we think that probably the total period from when a person gets a script to when they get their approval for -- from an access perspective is about 2 weeks to 3 weeks. So there is obviously opportunity to improve that. But just remember that in addition to going and getting a blood test, getting your insurance approval, you then have to schedule to have a nurse come to your home to go through the initiation and training around administration -- self-administration of WINREVAIR. So all of those elements are contributing to that time frame, how much of that time over time we'll have to see.

Operator:

The next question comes from Tim Anderson of Wolfe Research. Your line is open, sir.

Rob Davis:

Yes, sure. So as we look at it, we do expect you will see a flattening of the curve as we see the female indication, be more fully penetrated. Obviously, more to go there, given what we believe is still the addressable population. And then it will ramp back to growth as the male population comes on in full. So that is what we're expecting to happen. And on the pricing point, I think it's just important to understand the way this market works and how we operate in the market. We sell into Zhifei, Zhifei then is responsible for doing the bidding with the provinces and actually then determining ultimately that end sale to the point of vaccination. As we look forward, I think it's important to understand that GARDASIL as we think about the addressable population, we continue to believe we'll be a highly sought after vaccine even in the face of competition, and we're dealing in an overall population when we quote the $200 million total females of which we would say we're 30% to 40% penetrated today. That's really in the Tier 1 to 5 cities that we think can afford a cash pay market. The total population accessible in China is much bigger and so I don't think we should assume we're all competing for that small slice. There's a much bigger slice. We have chosen not to go for that bigger piece because obviously, we can't get into the local vaccination program because we don't produce GARDASIL in China. Our competitors will be able to do that. So I think I would just caution all to not view it as a zero-sum game. I think there's still a market expansion opportunity in China that will benefit both us and the competitors. And frankly, the other thing we have to see is how quickly will the male indication be given to others beyond us. We believe there's a chance we could be sitting alone with that as well. So the dynamics need to play themselves out. But I think we need to first understand what we're seeing in the quarter specific, a short-term event or something else. And that's still not clear because I would just point that the trend break was pretty significant. It's not what we've seen in any of the markets that you would expect. And that's why we're a little hesitant to say this is just demand in China. And also, I would also bring back the fact that actually, if you separated out what happened in China, we had one of our strongest quarters in every other market around the world with strong double-digit growth. So that's -- those are all dynamics that we'll have to play themselves out.

Operator:

The next question comes from Steve Scala of TD Cowen. Your line is open.

Dean Li:

Yes. So this is Dean. Thanks for the question. As you point out, there is a significant global unmet need both for the healthy and at-risk infants. And as we've said, from the PKPD studies as such, this is something that can be given as a single dose. It's not weight-based, so single dose broadly. And we are very comfortable in relationship to the PKPD in relationship with the half-life in relationship to the affinity that's the prevention, which was studied would cover the entire RSV season, which is 5, 6 months. We did announce the top line. We're not going to get ahead of the public presentation of these that we hope to have at some session in the second half. I do point out that what you highlight is really important, which is the RSV associated hospitalization will be a really important point in relationship to looking at this vaccine versus others, and we are very confident in that profile.

Operator:

The next question comes from Mohit Bansal with Wells Fargo. Your line is open.

Rob Davis:

Yes. So if you look across the Tier 1 to 5 cities, we're actually -- when we quote that we're 30% to 40% penetrated, and again, this is just to the females. So this is -- we're only speaking to females right now. We're 30% to 40% penetrated. We're a little bit less penetrated, I think we're around kind of, say, 30th percent in the 4 and 5 Tier cities, and we're around 40% into 1 to 3. So there's not a huge spread between the Tier 1 to 3 and the 4 to 5. So we will continue to focus efforts across all of those areas as we have been to date. And then it's a whole different exercise to activate the male population across that same area, which is, frankly, doesn't -- isn't there today because of the fact that we don't yet have the indication. As you think about how all of this fits into the broader global picture, I think it's also important just to remind everyone that the total penetration of GARDASIL on a global basis to the eligible population is approximately 10%. So our opportunity to activate patients globally as we bring on additional capacity is significant. And as we've talked about in the past, we were going to continue to look to activate the mid adult segment in the private market. We're doing that today in Europe, and that's part of when I comment that we're driving double-digit growth across the rest of the world outside of China. Part of it is we are starting to see uptake in that private market activation, both in Europe and across parts of Latin America and Asia Pacific more broadly. We're going to continue to drive into the low and middle income markets, we see that as a meaningful opportunity going forward, and we are well on our way to getting our costs in a position to be able to compete in that space quite effectively. We will continue to drive that. And then obviously, while China is the best example of where we need to get a male indication to drive for gender-neutral vaccination if we truly want to eliminate cervical cancer and increasingly address the other cancers we know related to people with HPV, including head and neck cancers, which are very prominent, especially if you look across the Asia Pacific area. That is work we will continue to do, but not only in China and across Asia but also across Europe and other parts of the world where there still is a lot of opportunity to drive for gender neutral. And then lastly, Japan is a market where we are continuing to see growth driven by the fact that we've had a renewed NIP program there with both initial NIP and a catch-up phase and longer term opportunities for males there as well. So the opportunities are significant. The context of how we will drive growth has multiple levers for us to look at to do that. And that's why we are confident in the $11 billion number long term. And I think that's important as we shape the overall context of the discussion.

Operator:

The next question is from Luisa Hector of Berenberg. Your line is open.

Dean Li:

Yes. So let me just level set in relationship to clesrovimab, and the RSV antibody. So we have the data, and that data will be presented at some time in the second half of this year as the different plenary sessions of different conferences occur. In relationship to filing, our plan is to file such that it would be available, not for this season, but for the next season within the United States. And so that's the sort of next wave in relationship. So I want to make sure that there's no concept that this is coming out this RSV season. We're targeting next RSV season in relationship to when we're seeking approval and licensure.

Peter Dannenbaum:

Great. Thank you, Luisa. Next question, please, Brad.

Dana Graybosch:

Hi, thank you for the question. I want to ask about the recent ODAC that was on periadjuvant [ph] development in lung cancer. I wonder, let's assume FDA takes a hard line on requiring the contribution of the neoadjuvant and adjuvant phases. And you look forward to the current KEYTRUDA development program. Do you see any risk to that hard line to any of your label extension plans? And how are you going back to looking at your development, especially of novel combos in the early stage given that discussion. Thank you.

Peter Dannenbaum:

Great. Thank you, Dana. Next question, please, Brad.

Akash Tewari:

Hey, thanks so much. And really helpful color on GARDASIL. Just one more here. Looking at the latest Zhifei contract, it looks like there's around $4.5 billion in potential sales for 2024. That's projected to decline in 2025 and 2026 to around $2.5 billion. Historically, however, it looks like you've always exceeded that contracted figure. So just to be clear, does the contracted decline in sales over the next 2 years bake in the upside for potential male approval? And should we expect the Zhifei contract to get renegotiated as we get further clarity on demand? Thanks so much.

Peter Dannenbaum:

Thank you, Akash. Next question, please.

Trung Huynh:

Hi, guys. Thanks for taking my question. Just one on CAPVAXIVE. During the ACIP at the end of June, there was a big discussion on the plus 50 population for the product. They never got around to reviewing it those. So is it possible we can get that looked at in October for a potential updated recommendation?

Peter Dannenbaum:

Thanks, Trung. Next question, please, Brad.

Louise Chen:

Hi, thank you for taking my question here. I wanted to ask you on WINREVAIR, how you think about sales in the third quarter of '24, given some stocking that we saw this quarter? Thank you.

Peter Dannenbaum:

Great. Thank you, Louise. Next question, please, Brad.

Chris Shibutani:

Thank you. On business development, this is typically a question that you get closed in June, you did comment that the company does have an expressed interest in the cardiometabolic space, thinking about second and third generation opportunities potentially in weight management. Can you just provide us with the latest views, house used in terms of appetite, size, therapeutic area in particular noting obesity? Thank you.

Peter Dannenbaum:

Great. Thank you, Chris. Next question, please, Brad.

Terence Flynn:

Great. Thanks for taking the question. Just a two part on WINREVAIR for me. I was just wondering if you think you've already worked through the initial bolus of patients in kind of late line or if there's more to go here for the second half? And then any color on background therapy in terms of the patients that have already started on sotatercept. Thank you.

Peter Dannenbaum:

Great. Thank you, Terence. Next question, please.

Evan Seigerman:

Hi, guys. Thank you so much for the update today. So give me interest in the schizophrenia space with a number of readouts coming in the second half of the year. Can you characterize what we should expect from your Phase IIb trial of MK-8189? It looks like the study completed back in June. Just wondering when we might do the data on kind of how we should be comping this to the novel developments in the space?

Peter Dannenbaum:

Great. Thank you, Evan. Brad, one more question, please.

James Shin:

Morning. Thank you for the question. For WINREVAIR the conversion of the 75% to 80% of scripts into commercial embedded within fiscal year '24 guide? And quickly, is there any time line on the INTerpath filing? Thank you.

Dean Li:

So in relationship to our collaboration with Moderna in relationship to the INT [ph], that's something that we're focused on getting the Phase III fully enrolled and to move forward as that's really important in relationship to how we will see the program and how the FDA will see that program.

Rob Davis:

No. No. I just want to thank you for your interest this morning. Hopefully, you appreciate the transparency with which we try to bring. But I maybe would close by just bringing back the confidence we see in the business, both in the short term and the long term. Obviously, we'll work through what we see happening with GARDASIL in China. But the fact that we see strengthening, and I would call them, green shoots around GARDASIL everywhere else in the world gives us confidence in the $11 billion for that, as we've talked about. But then beyond that, the growing breadth of our pipeline, obviously, KEYTRUDA continues to deliver meaningfully for the business and for patients. But I am growing in my own excitement for the breadth and depth of the pipeline we have coming. Hopefully, it wasn't lost on everyone that we pointed out, we would be launching more drugs in the next 5 years than we've launched in the last 10 many, many of which will be blockbuster plus opportunities. So the pipeline is maturing, and we're starting to see the green shoots of opportunity that continue to grow our confidence as we look to 2028 into the 2030s and beyond. And that's where we will continue to focus. But we will not take our eye off the short term where we are equally confident in the guidance, we raised revenue today. Obviously, we kind of were neutral on earnings, but that's because of the investment we're making into the business, bringing in even more opportunities like EyeBio. So there's a lot out there, and I just want to leave you with that note of what's driving my confidence and my appreciation for your support of the stock. Thank you.

Caroline Litchfield:

Thank you, Rob. Good morning. As Rob noted, we have had a strong start to the year with robust growth across our business, which reinforces the confidence we have in our outlook. We are also making strategic investments to leverage leading-edge science to save and improve lives around the world, positioning us to continue to deliver long-term value for patients, customers and shareholders. Now turning to our first quarter results. Total company revenues were $15.8 billion, an increase of 9% or 12% excluding the impact of foreign exchange. The impact from exchange is primarily driven by the devaluation of the Argentine peso, which was largely offset by inflation-related price increases consistent with market practice.

Peter Dannenbaum:

Thank you, Dean. Surely, we're ready to begin Q&A. [Operator Instructions] Thank you.

Terence Flynn:

This is probably one for Dean. Obviously, you guys have been focused on building out your cardiometabolic franchise now. You have the sotatercept launch underway. You've got an oral PCSK9 in late-stage development. You have a GLP glucagon also moving forward for NASH, I believe. But I guess I'd just be curious how you think about the opportunity in obesity broadly as, on one hand, it seems like it could align with your current footprint. But on the other hand, it seems like Merck has gone more towards specialty markets and away from kind of primary care. So maybe just would love your thoughts there, Dean, as you think about building out.

In relationship to your question about GLP and obesity, I think there's 2 ways to look at it:

you can look at it from a GLP angle, and you can look at it from an obesity angle. If you look at it from a GLP angle, there has been really important work showing its impact in diabetes, weight loss, more recently, in cardiovascular outcomes, most recently in sleep apnea.

Evan Seigerman:

I wanted to touch on some of your work in lung cancer, specifically with KRAS G12C, echoing Dean's comment. So this space is becoming increasingly crowded. Maybe walk me through what you believe differentiates your assets today from the currently approved one or from the pan-KRAS assets in development.

Chris Shibutani:

Maybe focusing on the pipeline on areas that you do not highlight as often, specifically immunology. And then a lot of the discovery work that you talk about in CNS. With immunology with a TL1A, can you just help us understand where we are on the Crohn's study there and also the Pandion acquisition, like in just Phase II.

Dean Li:

Thank you very much. So I'll first touch immunology and specifically in the TL1A space. So that TL1A, we think that it will be a highly effective -- the higher efficacy, and also not just in terms of efficacy, in terms of tolerability. That ulcerative colitis program Phase III has started already and is recruiting. We are hopeful that we will be announcing the opening of the Phase III and patients coming in for the Crohn's disease over the next few months. So we are very excited about moving TL1A eagerly and appropriately aggressively move it in Phase III to really sort of outline the really differentiated profile that we have seen for TL1A, and specifically, our compound.

Daina Graybosch:

I want to ask some on pneumococcal vaccine. You mentioned several times V116 is customized for adults 65 and older. In the ACIP meeting, they discussed a recommendation in adult 50 or older. And I wonder if you could comment on where you think that ACIP recommendation will end up for V116. And on V117, I wonder if you could talk about how the stack scene, which I believe is now in Phase I is customized for pediatric patients.

Dean Li:

Yes. I would just add, again, we want to be respectful of ACIP and the FDA. But you did point out something that I think is something that clearly we took notice. When Rob talks about that 83% versus 50% and 30% more, and the specific question that you're asking about, 50 to 64, I would remind everyone that dropping that age for universal vaccination have been considered previously for other vaccines. And they could not come to a situation where they thought that it would be a good idea based on cost effectiveness and as such. And by increasing it from 50% to 83%, we believe that we changed the calculus, and that made why there is renewed interest in lowering that age based on the broader coverage given for V116.

Operator:

Our next question comes from James Shin with Deutsche Bank.

Robert Davis:

Yes. Maybe, James, I'll start. And thank you for the question. The short answer is, unfortunately, we don't provide product-level guidance. So I don't think we want to get into trying to tell you what we see WINREVAIR as being a contributor in 2024.

Dean Li:

Yes. So I'll just add a little bit in relationship to WINREVAIR. I think it's important to emphasize that the indication or the label that we have is a broad indication and is based on STELLAR. And there will be potential data flows that will continue to inform and strengthen the field. We have STELLAR and SOTERIA, which is open label. We have ZENITH, which is advanced, and that will look at mortality and morbidity; and HYPERION, which is in more -- earlier in the journey.

Umer Raffat:

I'm just trying to think through your next-gen HPV vaccine. And I guess, how should we think about potential penetration rates with a revaccination opportunity with the new broader-spectrum HPV, especially in patients who have already taken GARDASIL 9.

Robert Davis:

The new [indiscernible].

Operator:

Our next question comes from Tim Anderson with Wolfe Research.

Operator:

Our next question comes from Louise Chen with Cantor.

Dean Li:

I think there's just going to be a stream of data. There's going to be follow-ups and a series of KEYNOTE, whether it be gastric, hepatocellular, biliary, bladder, non-small cell lung cancer. There will be discussions of many of the programs that I think you're beginning to see coming up in the clinical trial website in relationship to a whole series of Phase III related to molecules that you're familiar with, but also molecules that are sort of earlier in our Phase III development, ranging from bomedemstat to the KRAS program, to many of the ADCs and the updates that we've shown in relationship to not just the Daiichi Sankyo ADCs, but the other ADCs, whether it be TROP2 Claudin or [indiscernible]. So you'll have a whole full array of discussions of those compounds, some at the ASCO, but some at the ASCO investor event.

Operator:

Our next question comes from Trung Huynh with UBS.

Robert Davis:

Yes. I appreciate the question. So as you point out, we are very focused on ensuring that patients get access to the medicine. We're very much committed to it. And that's why we do have -- in addition to our normal programs we would run, we do have the access program we run. That program is actually independent of our commercial operations. We don't really report data coming out of that because it's run through a separate foundation and with the goal, frankly, of making sure that patients get medicines there. So that is available. It can be accessed on our website, and we're committed to making sure patients get the medicine. But specifics on that, we're not going to go into.

Carter L. Gould:

Maybe on your personalized cancer vaccine with Moderna, as the Phase III sort of nears completion of enrollment, it of course begs the question around the potential to sort of file based on the existing data you have. Can you maybe just update us on your thoughts there and whether you think you still need Phase III data or manufacturing would preclude an early filing? Any help there would be appreciated.

Operator:

Our next question comes from Chris Schott with JPMorgan.

Caroline Litchfield:

Chris, it's Caroline. So in terms of the phasing of GARDASIL, as you pointed out, during 2023, we saw in China an acceleration of the shipment from the second half of the year to the first half of the year, specifically to the second quarter. What that's done is it's provided an actual tailwind to revenue growth in the first quarter for China, but it will provide a headwind more significant in the second quarter. And that's what we've called out.

Operator:

Your next question comes from Luisa Hector with Berenberg.

Operator:

Our next question comes from Seamus Fernandez with Guggenheim.

Operator:

Thank you. And that does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.

Peter Dannenbaum:

Thank you, Ivy and good morning everyone. Welcome to Merck’s fourth quarter 2023 conference call. Speaking on today’s call will be Rob Davis, Chairman and Chief Executive Officer; Caroline Litchfield, Chief Financial Officer; and Dr. Dean Li, President of Merck Research Labs. Before we get started, I’d like to point out a few items. You will see that we have items in our GAAP results, such as acquisition-related charges, restructuring costs and certain other items. You should note that we have excluded these from our non-GAAP results and provide a reconciliation in our press release. I would like to remind you that some of the statements that we make today maybe considered forward-looking statements within the meaning of the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are made based on the current beliefs of Merck’s management and are subject to significant risks and uncertainties. If our underlying assumptions prove inaccurate or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements. Our SEC filings, including Item 1A and the 2022 10-K identify certain risk factors and cautionary statements that could cause the company’s actual results to differ materially from those projected in any of our forward-looking statements made this morning. Merck undertakes no obligation to publicly update any forward-looking statements. During today’s call, a slide presentation will accompany our speakers’ prepared remarks. These slides, along with the earnings release, today’s prepared remarks and our SEC filings, are all posted to the Investor Relations section of Merck’s website. With that, I’d like to turn the call over to Rob.

Caroline Litchfield:

Thank you, Rob. Good morning. 2023 was another impactful year for our company. We delivered strong revenue growth of 12%, excluding LAGEVRIO and foreign exchange. Growth was driven by robust performance across oncology, vaccines and animal health. We remain confident in our ability to continue to deliver strong results in the near-term while making disciplined investments in innovative science, which will drive long-term value for patients and shareholders. Now turning to our fourth quarter results. Total company revenues were $14.6 billion. Excluding the impact from LAGEVRIO and foreign exchange, the business delivered strong growth of 13%. The following revenue comments will be on an ex-exchange basis. Our Human Health business sustained its momentum. Excluding LAGEVRIO, growth was 14% driven by Oncology and Vaccines. Sales in our Animal Health business increased 4% driven by companion animal products. Turning to the performance of our key brands. In Oncology, sales of KEYTRUDA grew 22% to $6.6 billion. Global growth was driven by increased uptake in earlier stage cancers, including triple-negative breast cancer and renal cell carcinoma, with particularly strong growth in international markets due to the more recent launches of these important indications. Growth was also driven by the strong global need of patients with metastatic disease. We continue to be encouraged by the positive impact our recent approvals are having on certain patients with earlier stage non-small cell lung cancer. In the U.S., we have made considerable progress in helping to improve drug treatment rates and have further increased our leadership position in the adjuvant setting. We also received positive feedback from healthcare providers following the recent launch of KEYNOTE-A39 in advanced urothelial cancer. With this approval, KEYTRUDA in combination with PADCEV is now indicated for first-line advanced urothelial cancer patients regardless of cisplatin eligibility. Based on the outstanding clinical data, we believe this regimen has the potential to transform the standard of care for these patients. Alliance revenue from Lynparza and Lenvima grew 8% and 5% respectively. WELIREG sales grew 78% to $72 million driven by increased uptake in VHL-associated tumors. We are excited by the opportunity to provide a new treatment option for certain patients with previously treated advanced renal cell carcinoma, following the recent approval based on the LITESPARK-005 study. Our Vaccines portfolio delivered excellent growth led by GARDASIL, which increased 27% to $1.9 billion, driven by global demand, particularly in China. In the U.S., GARDASIL sales benefited from CDC purchasing patterns. VAXNEUVANCE sales grew to $176 million driven by ongoing launches in Europe and continued uptake of the pediatric indication in the U.S. As a reminder, fourth quarter 2022 sales in the U.S. benefited from inventory stocking in preparation for the pediatric launch. In our hospital acute care portfolio, BRIDION sales declined 3%. Increased market share among neuromuscular blockade reversal agents in the U.S. was more than offset by the impact of generic entrants in international markets, particularly in Europe. Our Animal Health business delivered another solid quarter, with sales increasing 4%. Companion animal sales grew 12% driven by the BRAVECTO line of products due to strong underlying demand and timing of purchases. Livestock sales were flat, reflecting favorable price actions offset by the timing of ruminant product purchases. I will now walk you through the remainder of our P&L and my comments will be on a non-GAAP basis. Gross margin was 77.2%, an increase of 1.5 percentage points largely due to favorable product mix, including a benefit from lower sales of LAGEVRIO. Operating expenses increased to $11.6 billion, including a $5.5 billion one-time charge related to our collaboration with Daiichi Sankyo. Excluding this charge, operating expenses grew 8%, reflecting disciplined investment in support of our expansive early-and late-phase pipeline and key growth drivers. Other expense was $174 million. Our tax rate was approximately 114%, which reflects the impact of the charge related to Daiichi Sankyo. Excluding this charge, the underlying tax rate was 13.1%. Taken together, earnings per share were $0.03, which includes a $1.69 negative impact from the charge related to Daiichi Sankyo. Now turning to our 2024 non-GAAP guidance. We expect another year of strong growth driven by key marketed products and we will begin to benefit from the anticipated launches of impactful new products, such as sotatercept and V116. We project revenue to be between $62.7 billion and $64.2 billion, representing growth of 4% to 7%. This growth includes a negative impact from foreign exchange of approximately 2% using mid-January rates. The headwind is primarily due to the devaluation of the Argentine peso, which we expect will largely be offset by inflation-related price increases, consistent with market practice. Our gross margin assumption is approximately 80.5%, which includes the benefit from reduced royalties paid on KEYTRUDA and GARDASIL. Operating expenses are assumed to be between $25.1 billion and $26.1 billion, which includes an approximate $650 million one-time charge related to the announced acquisition of Harpoon Therapeutics. As a reminder, our guidance does not assume additional significant potential business development transactions. Other expense is expected to be approximately $200 million. We assume a full year tax rate between 14.5% and 15.5%. We assume approximately 2.54 billion shares outstanding. Taken together, we expect EPS of $8.44 to $8.59. This range includes an approximate $0.26 per share charge related to the planned acquisition of Harpoon Therapeutics, which is not tax-deductible and the negative impact from foreign exchange of approximately $0.25 using mid-January rates, including the impact from Argentina. Now turning to capital allocation, where our strategy remains unchanged. We will prioritize investments in our business to drive near and long-term growth. We are excited by the significant progress our team has made to advance and augment our innovative pipeline in 2023. In 2024, we will increase this investment, including the initiation of more late-stage clinical trials across multiple novel candidates, each of which has significant potential to address important unmet medical needs. We remain committed to our dividend and plan to increase it over time. Business development remains a high priority. We maintain ample capacity given our strong investment-grade credit rating and cash flow to pursue additional science-driven, value-enhancing transactions going forward. We will continue to execute a modest level of share repurchases. To conclude, we enter 2024 with confidence in the outlook for our business in the near and long term. Global demand for our innovative medicines and vaccines remain strong, and we are excited about our expansive pipeline. We are in a position of financial and operational strength as a direct result of our longstanding commitment to science in order to improve the lives of the patients we serve. Our continued investment in innovation and excellent execution will enable us to deliver value to patients, customers and shareholders well into the future. With that, I’d now like to turn the call over to Dean.

Peter Dannenbaum:

Thank you, Dean. Ivy, we’re now ready to take questions. [Operator Instructions] Thank you.

Umer Raffat:

Hi, guys. Thanks for taking my questions. I know there is a trial due for you guys later this year, KEYFORM-007 trial. That’s the LAG-3 with pembrolizumab in colorectal cancer. Just curious how you’re thinking about the risk profile and the odds of success heading into that and if there is been any interim OS analysis. Thank you very much.

Rob Davis:

Just real quick, just quick microphone check. Can you hear us?

Rob Davis:

You can? Okay, we were showing we are muted. Sorry.

Rob Davis:

Alright. Good.

Operator:

Next, we will go to the line of Trung Huynh from UBS. Please go ahead.

Dean Li:

So let me take the first question. So there is a series of trials and relationships with sotatercept. So the March date that we talk about is for a potential decision by the FDA for approval based on the STELLAR trial. And we think in the second half of 2024, we may be in a position in relationship to the EU. We have other trials, as you point out, especially Phase 3 trials, and they are ZENITH and they are HYPERION. Those two are based on events. So it’s a tracking of events that sort of define when those happen. So ZENITH, I think, is now like September 2025 and HYPERION, August 2026. So that’s just been event-driven. In relationship to how best to treat patients, well we’re in conversations with the FDA in relationship to where is the best place for patients to be treated. But I’ll just highlight that we have an image of an auto injector moving very fast through our pipeline. So that might give you a sense of where we think this may end up.

Operator:

Next, we will go to the line of Daina Graybosch from Leerink Partners. Please go ahead.

Dean Li:

Yes. So just so that everyone is looking at this asset in the same way, there have been critical medicines that ablate androgen field growth in prostate cancer. And the interest in the SIP is it’s very high upstream, and we think that it could be an important contribution. Clearly, we’re in – as you point out, we’re interested both broadly, but especially in the specific mutation patients. And so we will be advancing those trials to look at that subpopulation as well as more broad populations. In terms of the statistical sort of analysis in that, that’s something that I think probably would be best sort of discussed with our clinical teams at a different time.

Operator:

Next, we will go to Carter Gould from Barclays. Please go ahead.

Dean Li:

Yes. So I’ll just – so again, we’re talking about V116. We’re talking about FDA potential action in June 2024, followed by ACIP, followed by MMWR. I think it’s in March that we’re going to be presenting STRIDE-3 and 6, and I think the data will be out there. And as you’ll see in that, between STRIDE-3 and throughout STRIDE-3 all the way to 6, you’ll see data in relationship to vaccination of those who are naive versus previously vaccinated. And you will see data in the patient population – or the population that 65, but also in the 50-plus as well. As that data is digested, both by the FDA, but probably very importantly, by the ACIP, I think those data will guide how the ACIP makes their decision.

Operator:

Next, we will go to the line of Evan Seigerman from BMO Capital Markets. Please go ahead.

Caroline Litchfield:

Thank you for the question, Evan. This is Caroline. As we’ve guided for 2024, we’re very confident in the underlying momentum in our business across Oncology, across Vaccines, across Animal Health. We also are very excited about the potential launches for sotatercept and V116. For sotatercept, given the significant clinical data we have and the understanding that there are many patients that have already been identified who can benefit for sotatercept on top of the treatments they have, we are expecting a strong launch. For V116, as Dean just outlined, we will wait for the FDA approval, the ACIP recommendation. We will then expect MMWR to publish, and therefore, expect to have impact with V116 coming towards the end of this year.

Operator:

Next, we will go to the line of Terence Flynn from Morgan Stanley. Please go ahead.

Dean Li:

Yes. This is Dean. Thanks for that question. So I’ll just step back, and I think I’ve said this previously, especially in lung, it’s very important to understand what the standard of care is and that one would have to beat it in a significant way. And the standard of care, in our minds, in the late stage, is roughly KEYNOTE-189. And now in the earlier stage, it’s clearly in KEYNOTE-671 both with clear OS data. What we have said previously is that we are unclear that any one ADC can have as broad of an impact as KEYNOTE-189 or 671 and that in order for ADC to have a substantial advantage in those patient populations, one may need to focus on a biomarker-selected patient population. And so the data that we saw does not change our way of thinking. It’s the way of thinking that we’ve discussed previously. And I would just add that it’s really important, there is also data out there where people are doing retrospective biomarker data in this. For us to demonstrate true efficacy in any patient population, we need a biomarker strategy that is prospective and one that can be easily actionable throughout the world. Thanks.

Operator:

Next, we will go to the line of Tim Anderson from Wolfe Research. Please go ahead.

Rob Davis:

Sure. Adam, thanks for the question. So there has actually been Chinese competitors with an offering for some time actually in the Chinese market. And that market is large. We continue to believe in the eligible cohorts in just the urban females, which was the Tier 1 to Tier 3 cities, is about 200 million – a little over 200 million women. And so of that, we think probably about 30% have actually received vaccination. So, you are still looking at 120 million, 130 million eligible population. As we look at this and as we have seen over time, we continue to be very competitive. We are maintaining a vast majority of share in the private market. And really, you are seeing most of the local competitors go to the lower-tier cities and to a different population than we have been targeting. So, that does not change our view of the growth potential in China. Long-term, obviously we will continue to face competition there, and we are positioning ourselves to continue to succeed there. But the approval you are talking about is not changing our view.

Peter Dannenbaum:

Great. Thanks Adam. Next question please.

Mohit Bansal:

Great. Thank you very much for taking my question and congrats on the progress. Maybe one question on V116 as well. So, Pfizer has recently made comments around adult market shrinking at this point. So, could you comment on how do you see the peak opportunity for V116 in the context of adult market shrinking and then you are taking share from a shrinking market? Thank you.

Peter Dannenbaum:

Great. Thanks Mohit. Next question please.

Chris Schott:

Great. Thanks for the question. Just a bigger-picture question on business development. The company has obviously been very active the past few years. And I am just trying to get a sense of just kind of size and stage of assets that you consider just given the current R&D investments you are making and the asset – the kind of the amount of capital you are allocating there. So, I guess specifically, are deals along the lines of an Acceleron or a Prometheus still deals that Merck would look at and prioritize, or at this point, should we be thinking about maybe earlier-stage assets that, that would be more of the focus? Thanks so much.

Peter Dannenbaum:

Great. Thanks Chris. Next question please.

Andrew Baum:

Thank you. I was going to ask you about your expectations for the AI – ACIP recommendation on revaccination of prevent [ph] or vaccinated patients, but I suspect you may not want to share that view. So instead, maybe I could ask you about the first-line TROP2 SKB non-small cell trial that you are running in combination with KEYTRUDA. Some of the recently published academic data suggests that TROP2 internalization is a biomarker in patients who are primary resistant to PD-1. So, it just seems like an old population to be exploring the drug in, assuming that is real and not a fake signal. And I take completely the caveats that it’s retrospective data analysis in other settings. But given that, it would seem to be more sensible to have a combination with chemo and layering on top. And can you do this given the profile of the drug in terms of bone marrow suppression?

Peter Dannenbaum:

Thank you, Andrew. Next question, please Ivy.

Seamus Fernandez:

Thanks very much for the question and congrats on the quarter and the guidance. Can you just talk a little bit about subcutaneous KEYTRUDA, how you anticipate payers’ acceptance of this new delivery modality as well as potential economic benefits to patients given the shift from Part B to Part D? I think there could be some benefits from the updated catastrophic cap being drivers there. But struggling in the face of potential biosimilars of KEYTRUDA after 2028 to see how payers would treat this, just interested to have a little bit more color on the economic benefits, not just the benefits of the patients of subcutaneous KEYTRUDA. Thanks so much.

Rob Davis:

Yes. Thanks Dean. And to the questions on the economics, and I think we have commented on this a little bit in various settings. But as we think about our strategy for bringing this to the market from a commercial perspective, our view is the quality-of-life benefits this brings does demonstrate and afford us the ability to get a premium price. But we also are very cognizant that any subcu pembro will have to be considered in the context of a generic IV version. So, we will price our subcu to drive for volume and to do for conversion, which means we will be looking at prices really more in line with where you would see the generic version at a premium that history has shown is very manageable and expected and covered by payers today when you look at the different delivery for them. So, in that sense, we think we will be able to manage this. The whole question of Part B versus Part D, we will have to see how it plays out as far as the ultimate side of administration. But if it does end up being into the Part D category, which is a reasonable chance, you are correct and that some of the new coverages that are out there in catastrophic and with the cap, also then from a patient perspective, should lower the burden they are going to face, which we also think could help with conversion.

Operator:

Next, we will go to the line of Geoff Meacham from Bank of America. Please go ahead.

Caroline Litchfield:

Thank you for the question, Geoff. So, as you all know, our company has made great progress in expanding operating margin over a number of years. As we look to 2024, we expect operating margin to improve. And that’s really driven by the strength of the top line and mix of revenue by the roll-off of royalties that we have noted on KEYTRUDA and GARDASIL. Being disciplined in our expenses, while we do invest fully behind our expansive pipeline, as we go beyond 2024, we still point to an operating margin of greater than 43% in 2025. But our focus as a company and as a team is to really ensure that we are fueling the pipeline supporting the portfolio of products that we are launching to drive growth into the long-term.

Operator:

Next, we will go to the line of Steve Scala from TD Cowen. Please go ahead.

Dean Li:

I really appreciate the question. So, I will talk about it. In relationship to the RSV monoclonal antibody, it’s for the early birth, it’s an antibody, it’s passive immunization, and it’s for the pediatric population. This is a single shot. This is not weight-based. And we believe it has a longer season in relationship to other choices. And so we think it’s an important readout, and we are very excited and interested to move on this RSV monoclonal antibody. I would also emphasize that the New England Journal of Medicine just published a series of papers, not in RSV, but also in dengue that also we are very excited about. And we are moving that forward quickly. And then more broadly from the ID vaccine, I have said previously that I am very intrigued to see the results of our NRTTI islatravir and our other NRTTI, MK-8527. So, that will also be coming out this year. We will be able to see those. So, it is the RSV. It is the dengue that was just out there, and it is the HIV data that we are going to be very interested in seeing across this year.

Peter Dannenbaum:

Thank you, Steve. Next question please, Ivy.

Chris Shibutani:

Thank you. If I could ask about immunology, essentially a reentry into that realm with the Prometheus acquisition, if you could just update us on what we should be expecting to learn and also what you find interesting perhaps being to further build out on the immunology platform. Specifically, the clinicaltrials.gov has the Phase 2 maintenance data and UC is enrolling. Should we expect to hear from you on results there? I did not observe something there on Crohn’s disease. What’s the update on that program? And then in immunology further, it appeared from the start of the year a lot of excitement about different modalities, cell therapies in particular, oral advanced treatments. Share with us some views on where you think immunology could go to take Merck to be a relevant presence in the 2030s. Thank you.

Peter Dannenbaum:

Great. Thank you, Chris. Ivy, we have time for one more question please.

Louise Chen:

Hi. Thanks for taking my question. I just wanted to ask you on your ADC platform, if you feel that what you have is enough for now or do you want to expand or add on to it. And any interest in radiopharmaceuticals? Thank you.

Peter Dannenbaum:

Great. Thank you, Louise and thank you all for the really good questions and appreciate you sticking to mostly one question. We got to a lot of questioners, so appreciate that. If you have any follow-ups, please reach out to IR. We will be seeing you soon. Thank you.

Peter Dannenbaum:

Thank you, Julie, and good morning, everyone. Welcome to Merck’s third quarter 2023 conference call. Speaking on today’s call will be Rob Davis, Chairman and Chief Executive Officer; Caroline Litchfield, Chief Financial Officer; and Dr. Dean Li, President of Merck Research Labs. Before we get started, I’d like to point out a few items. You will see that we have items in our GAAP results, such as acquisition related charges, restructuring costs and certain other items. You should note that we have excluded these from our non-GAAP results and provide a reconciliation in our press release. I would like to remind you that some of the statements that we make today may be considered forward-looking statements within the meaning of the Safe-Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995, such statements are made based on the current beliefs of Merck’s management and are subject to significant risks and uncertainties. If our underlying assumptions prove inaccurate or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements. Our SEC filings, including Item 1A and the 2022 10-K identify certain risk factors and cautionary statements that could cause the company’s actual results to differ materially from those projected in any of our forward-looking statements made this morning. Merck undertakes no obligation to publicly update any forward-looking statements. During today’s call, slide presentation will accompany our speakers’ prepared remarks. These slides along with the earnings release, today’s prepared remarks and our SEC filings are all posted to the Investor Relations section of Merck’s website. With that, I’d like to turn the call over to Rob.

Caroline Litchfield:

Thank you, Rob. Good morning. As Rob highlighted, we achieved very strong growth this quarter driven by robust underlying demand across our innovative portfolio and we remain confident in our ability to continue to deliver strong results in the near-term. We are also making disciplined investments to leverage leading-edge science to save and improve lives around the world well into the future, positioning us to deliver long-term value for patients and shareholders. Now turning to our third quarter results. Total company revenues were $16 billion. Excluding the impact from LAGEVRIO and foreign exchange, the business delivered strong growth of 8%. The remainder of my revenue comments will be on an ex-exchange basis. Our Human Health business sustained its strong momentum. Excluding LAGEVRIO, growth was 10%, driven by Oncology and Vaccines. Sales in our Animal Health business increased 2%. Turning to the performance of our key brands. In Oncology, sales of KEYTRUDA grew 17% to $6.3 billion driven by increased uptake from earlier stage cancers and continued strong global demand for metastatic indications. In the U.S., KEYTRUDA growth was driven by increased utilization in both metastatic indications and earlier stage cancers such as triple-negative breast cancer. Uptake in earlier stages of non-small cell lung cancer remains strong and KEYTRUDA has now achieved brand leadership in this setting, reflecting the significant impact it is having as adjuvant treatment for patients with stage IB to IIIA disease. Our recently approved KEYNOTE-671 indication provides an important additional treatment option to patients and physicians by including usage in the neoadjuvant and adjuvant setting. We remain exceptionally well positioned to serve patients with non-small cell lung cancer and extend our leadership to the earlier stage setting. In bladder cancer, we are excited to potentially expand usage of KEYTRUDA to cisplatin-eligible patients based on the compelling results from the KEYNOTE-A39 study. If approved, this study would more than double the eligible patient population for KEYTRUDA in first-line bladder cancer. Outside the U.S., KEYTRUDA growth was driven by uptake in earlier stage cancers, including high-risk, early-stage triple-negative breast cancer and renal cell carcinoma, as well as increased demand in metastatic renal cell carcinoma and certain types of head and neck cancer. Lynparza remains the market leading PARP inhibitor, with alliance revenue growing 6% this quarter. Lenvima alliance revenue had growth of 30%, driven by shipment timing in China, which we expect will negatively impact growth in the fourth quarter. Growth was also driven by increased demand for the treatment of certain patients with advanced renal cell carcinoma and endometrial cancer in the U.S. Our Vaccines portfolio delivered strong growth, led by GARDASIL, which increased 16% to $2.6 billion, driven by underlying global demand, particularly in China. In the U.S., GARDASIL sales decreased due to CDC purchasing patterns. Vaccine sales also benefited from continued uptake in the pediatric indication of VAXNEUVANCE in the U.S. and its launch in key European markets. In our Hospital Acute Care portfolio, BRIDION sales were flat as increased market share among neuromuscular blockade reversal agents in the U.S. was offset by the impact of generic entry in Europe. Sales in our Animal Health business grew 2%. Livestock sales grew 7% reflecting price actions as well as higher demand for ruminant products. Companion animal sales declined due to a reduction in vet visits in the U.S., partially offset by pricing actions. I will now walk you through the remainder of our P&L and my comments will be on a non-GAAP basis. Gross margin was 77%, consistent with last year as the impact from unfavorable foreign exchange was offset by product mix. Operating expenses decreased 4% to $5.8 billion. There were no significant business development expenses in the quarter, compared with $690 million of charges a year ago. Excluding these charges, operating expenses grew 9%. This growth reflects increased investments in support of our robust early and late-phase pipeline, with research and development expenses increasing 17%. Other expense was $133 million. Our tax rate was 15%. Taken together, earnings per share were $2.13. Before I cover the outlook for the balance of the year, I wanted to briefly touch upon the recently announced strategic collaboration with Daiichi Sankyo. This transaction follows a similar, de-risked and disciplined financial structure as we have employed in prior successful collaborations and we are very excited about the opportunity to create meaningful value for patients and shareholders. Now turning to our 2023 non-GAAP guidance, which includes the strategic collaboration with Daiichi. The continuing operational strength of our business has enabled us to raise and narrow our full year revenue guidance. We now expect revenue to be between $59.7 and $60.2 billion, an increase of approximately $900 million at the midpoint. This range reflects strong double-digit underlying year-over-year revenue growth of 11% to 12%, excluding LAGEVRIO and an approximate 2-percentage-point negative impact from foreign exchange using mid-October rates. Our gross margin assumption is unchanged at approximately 77%. We now estimate operating expenses to be between $39.8 billion and $40.4 billion. This range reflects $17.1 billion in acquisition and upfront collaboration research and development expenses, including $5.5 billion for the collaboration with Daiichi, as well as those associated with Prometheus, Imago and Kelun. Our guidance does not assume additional significant potential business development transactions. We now assume other expense of approximately $200 million, which reflects updated foreign exchange expectations given recent dollar strengthening and higher net interest expense related to Daiichi. Our full year tax rate is expected to be between 39% and 40%, which includes an approximate 24.5-percentage-point impact related to our business development activity. Our underlying tax rate is approximately 14.5% to 15.5%. We assume approximately 2.55 billion shares outstanding. Taken together, we expect EPS of $1.33 to $1.38. This range includes a negative impact from foreign exchange of approximately 6 percentage points versus 2022 using mid-October rates. Recall our prior guidance range was $2.95 to $3.05. Including the one-time charge of $5.5 billion or $1.70 per share and an estimated $0.04 to advance the assets and financing costs from the collaboration with Daiichi, our prior guidance range would have been $1.21 to $1.31, with a midpoint of $1.26. Our current guidance midpoint of $1.36 represents an increase resulting from strength in our business of approximately $0.15, partially offset by an incremental headwind from foreign exchange of approximately $0.05. Now turning to capital allocation, where our priorities remain unchanged. We will continue to prioritize investments in our business to drive near- and long-term growth. We are proud of the significant progress our team is making to advance and augment our pipeline, including our collaboration with Daiichi. We will continue to invest in our pipeline, which contains many assets with tremendous potential to address significant unmet medical needs, positioning us for strong performance well into the future. We remain committed to our dividend and plan to increase it over time. Business development continues to be a high priority. Our track record demonstrates our ability to identify compelling science and technologies that have the potential to advance standard-of-care, access such opportunities in a disciplined and capital-efficient manner, and importantly, to rapidly progress the opportunities for the benefit of the patients we serve and our shareholders. We maintain ample capacity given our strong investment grade credit rating and cash flow to pursue additional, science driven, value enhancing transactions going forward. We continue to execute a modest level of share repurchases. To conclude, as we finish the year, we remain very confident in the outlook of our business in the near- and long-term, driven by the global demand for our innovative medicines and Vaccines and our exceptional pipeline. We are in a position of financial and operational strength and our continued excellent execution will enable us to deliver value to patients, customers and shareholders well into the future. With that, I’d now like to turn the call over to Dean.

Peter Dannenbaum:

Thanks, Dean. Julie, we are ready to take questions. And as usual, we request that analysts limit themselves to a single question please.

Chris Shibutani:

Thank you. Good morning. The comments from the capital allocation standpoint seem to indicate that you feel that you have done some critical mass and certainly some of the deals that you have done have been very important and meaningful. You set the cardiovascular revenue goal in 2030 to $10 billion. Do you think you have done enough there and then to provoke relatedly, Animal Health, do you still feel that that fits within the portfolio, you have been building, but is there reshaping that’s still could come? Thank you.

Dr. Dean Li:

I would just add one thing, Chris, in relationship to your question, but not related to revenues or finance. I would just remind that we have made incredible advances in cancer and we are known as an oncology company. But the unmet need -- the unmet patient needs in cardiovascular and metabolic diseases in the U.S. and in the world is quite substantial, and I don’t know that we are ever going to be done with that field in the near-term, so we are still very committed to do more.

Operator:

Thank you. Our next question comes from Mara Goldstein with Mizuho. Your line is open.

Rob Davis:

Yeah. The short answer, Mara, is we are ahead of our -- of where we thought we would be. And just to remind everyone, we have been commenting that we expect 50% of our growth to come from movement into the earlier stages of disease in oncology, as we look forward to ultimately get to a global percent with it being about 25% of our total revenues. But I can tell you as where we sit here today, we are tracking ahead of where we expected we would be. And obviously not surprising when you see just a phenomenal results from KEYNOTE-671, what that’s going to mean in the perioperative space for people in early-stage lung cancer building on 091, the continued strength we are seeing across adjuvant and RCC and melanoma, we are up now to eight approvals in this space. So we are in a very good position. But I may about ask Caroline if she has anything she would like to add.

Dr. Dean Li:

Yeah. I just want to make as a call out, because we had an investor discussion this past Sunday and we are really focused on the ADC and Daiichi Sankyo and Kelun, but I just want to call out that for me KEYNOTE-671 is a watershed moment for the field. I would remind everyone that a similar watershed happened in metastatic lung cancer in 2018 KEYNOTE-189 and 2018 is when KEYNOTE-671 was initiated. It’s an earlier stage and only after 5.5 years, after only 5.5 years in an earlier stage trial, you have clear evidence of EFS and OS benefit and I really think this will catalyze a change in how we treat early-stage lung cancer, how we detect early lung cancer and how we screen. If you think about treating early those patients with Stage 2 and 3, you can reduce their mortality by 28%. I think it will catalyze people really looking at any one going to surgery in Stage 2 and 3, not just in Stage 3, people are going to have to think very carefully of why someone should get this regimen. In terms of detecting early, I think it’s really important. How many individuals have a chest CT or chest x-ray with incidental findings and there’s little follow-up and day and age of electronic health records, it’s very easy to figure out how many people have incidental nodules that never got followed up. I think that will change. And I think in screening, early we have guidelines, where the adherence is only 6% to 7% and these guidelines were set four, five years ago, where the concept was it would reduce mortality by 20%. With these data that we have, that number is no longer at 20%, it’s much lower. And so, I think there will be a push by the American Cancer Society, NCCN, NCI, NIH to simplify and broaden those guidelines, because that is -- this is the inexorable march of IO into earlier stage and into the most important cancer, which is lung cancer, which is the number one cause of death for women and the number one cause for men and our commitment to this field is not just 671 and 91, it is also as we highlighted our interest of moving INT the individualized neoantigen therapy into earlier stage in lung cancer.

Operator:

Thank you. Our next question comes from Carter Gould with Barclays. Your line is open.

Dr. Dean Li:

Yeah. Specifically to any ADC that we would advance in any tissue tumor type, one thinks about monotherapy and one thinks about a clear indication and a line of sight, but one also thinks about how the field develops and in combinations and those combinations can be with PD -1s, but I would also highlight, it can be with chemo, it can be RAS, it can be with novel hormonal agents, it can be with PAR, it can be with other ADCs and you have to think from late and earlier. In relationship to TROP2, specifically in non-small cell lung cancer, I believe that I have said in the past that, one has to think about how the field has evolved, there was a watershed moment, it was KEYNOTE-189 and pembro plus chemo in a broad patient population along that indication do really well. So those of us who want to advance, what I would say, in ADC and NextGen chemo, that’s how I think about it, have to think about a way to combine it with PD-1 in a way that is not just effective, but substantially effective over KEYNOTE-189. We are very interested in advancing our TROP2 ADC in relationship to that and that combination, like all chemotherapy based treatments, whether it’s chemotherapy or whether it’s chemotherapy on a payload with ADC, one has to think about adverse effects and combinatorial adverse effects and the ability to keep patients on the medicines. The data that we have shown with our partner, our valued partner Kelun is that we think that there is room to be able to advance MK-2870 and PD-1 in a variety of tumors and that they are combinable, tolerable and will be effective, but those are the trials that we are starting to do in Phase 3 in the ex-China regulatory arena.

Operator:

Thank you. Our next question comes from Seamus Fernandez with Guggenheim. Your line is open.

Caroline Litchfield:

Seamus, thank you for the question. We have seen really strong margin expansion in our company over the last several years, and as we look-forward, we expect continued margin expansion and that margin expansion really comes from the product mix on the revenue line, it also comes from the roll-off of royalties, as you have just noted, knowing that we have the royalty on global KEYTRUDA sales going from 6.5% to 2.5% at the start of next year and our royalty on GARDASIL going from 7% to zero percent on our global sales, again, at the start of next year will drive significant gross margin improvement. At the same time, we will be investing in our business. We will be disciplined in that investment, but we are investing in the portfolio of products that we have in the market and that we will be launching, as well as investing in our robust and growing pipeline and that obviously includes the Daiichi collaboration, where we have noticed we expect about a $0.25 impact as a result of investing predominantly in the research and development of a wide range of programs, that Dean has partially outlined, as well as this financing costs. We also have made significant progress across our pipelines with many other collaborations, acquisition and the progress we are making with our own internal assets. So, altogether, we still do point to an operating margin of greater than 43% in the year 2025. However, we will not forgo necessary investments in our business to progress our pipeline to ensure that we have advance healthcare and drive growth, which really is our priority.

Operator:

Thank you. Our next question comes from Terence Flynn with Morgan Stanley. Your line is open.

Dr. Dean Li:

Yeah. So I just want to make sure that whether we are talking about our wonderful partnership with Kelun or with Daiichi Sankyo, we sort of lay out certainly indications that become public, but I want to be very clear that those are not the only indications that we would be interested. So that’s number one. Number two, in relationship to MK-2870 and advancing it more broadly and it relates to the other question, there is -- we still have small numbers, but what’s really interesting for us for 2870, there are differences in the construct in terms of payload, in terms of the linker, in terms of the dart for that. And one of the things that’s interesting to us is at least to-date, we do not see serious IOD and that allows us to think broadly and thoughtfully about its combined ability in relationship to broader indications. So we are very interested in advancing. In terms of 2870 and the specific first trial that’s been revealed, it’s -- I will just tell you, it was driven, because of the data that we have and the data that we have we think is quite good and should be advanced. We are going to advance other ones, but the advancement in the EGFR new population is based on data that our partners Kelun and us have generated and we are very confident in advancing in that specific indication.

Operator:

Thank you. Our next question comes from Andrew Baum with Citi. Your line is open.

Dr. Dean Li:

I would just say that in general principle, your observations of how we develop drugs, especially in the IO has been something that we are known for and the structure was laid out by great leaders from Merck, who laid the basis for that. In relationship to timing of interim analysis, we have generally not commented on interim analysis and we let those interim analysis do what they need to do, which is come and if they are significant, we make that publicly known. If there is significance in relationship to public disclosure, that’s when we do that, but we generally do not lay out the timing of our interim analysis prior to them happening.

Operator:

Thank you. Our next question comes from Louise Chen with Cantor. Your line is open.

Rob Davis:

Yeah. Louise, this is Rob. I will maybe jump-in and Caroline can add if I miss anything. I would tell you that we feel well-prepared. So, obviously, we have been working to ensure we have supply to be able to supply the market upon launch. But as we sit here today, given what is happening in the marketplace. So you are seeing warehousing of patients in anticipation of the launch of sotatercept in the United States. And from feedback from key opinion leaders and what we are hearing from the market, the demand for this will be quite high. So our expectation, as you will see a strong launch with this drug and I can tell you we have been invested and built an organization, we actually have a very focused group now in our U.S. -- within our U.S. business whose sole job is to manage this launch. And so, I think, we are both prepared from a commercial perspective and from a manufacturing perspective with the expectation, as I said that, this should go with a very strong quick uptake. And the other thing I would highlight is given the strength of the data, we do expect to see approval in Europe next year, which we originally thought would require a further study. So not only are we preparing in the United States, but we are also preparing in Europe as well and we feel good about both. But Caroline, anything you would want to add.

Dr. Dean Li:

Yeah. I just want to emphasize sotatercept, this is the first drug out there that really is targeting the fundamental genetic basis of the disease. It’s going to be the first activin inhibitor, but most important is activin is what the genetics tells you imbalance that occurs in pulmonary artery hypertension. So this is a really important and I said watershed previously, I do think this is going to be a watershed moment for PAH. Rob already talked about the U.S. and EU, and the reason why that happened is because of the stellar data was quite impressive and that’s what drove the ability to do EU. What I would remind everyone is that we have other trials coming through. We have Zenith, Hyperion and Cadence. Zenith, for example, is one that’s going to look at mortality and those sort of endpoints, as the primary endpoints. Should that read-out in the next year or something like that, relatively soon to the launch, I think whatever estimates that, Caroline and Rob have talked about sotatercept that will only help the uptake of sotatercept. And as Rob has mentioned, this is a field that up many of the physicians, this was a place where I did research back-in the academic days. The phone calls, I am getting is that people are warehousing patients in anticipation of that March launch.

Operator:

Thank you. Our next question comes from Chris Schott with JPMorgan. Your line is open.

Dr. Dean Li:

Yeah. Chris, no, I appreciate the question. So, one, I would say, we feel very proud of GARDASIL [Technical Difficulty] of this business and the fact that people increasingly recognize that we can fundamentally do what’s the most important, which is prevent cancer -- prevent cervical cancer, increasingly prevent certain head-and-neck cancers if we can get people fully vaccinated. So the fact that you are starting to see that progress is important. As we look at the business going forward, I would start by saying, we remain very confident that this as a business that’s going to continue to grow and that we will achieve the expectations we have communicated of over $11 billion in revenue by 2030, so nothing has changed and how we see the business. As you know, we have made significant investments in manufacturing capacity and from that perspective now, we are well-positioned, we have brought on our two sites and they are ramping now, and so we are doing quite well from that perspective. And then as far as the opportunities that exist to potentially continue to drive even beyond, what we just discussed, really, I would put it in three buckets and our ability to achieve that objective and then potentially exceed that objective really come down to these three variables. And first and foremost, while we have had great penetration in the developed world, huge opportunity still exists in the low and middle income markets. And I can tell you we have a focus and an intention to drive this business into the low and middle income markets. Obviously, that’s going to require us to continue to drive down our manufacturing costs, which we have plans to do and I have confidence that we will do and just think about lower price points. But that said, that will be meaningful incremental revenue, as we achieve that over time. And then as you look at the established markets, there is still a large population to address. Obviously, to-date we have been driving largely through public vaccination programs outside the United States, in the United States through the national immunization program, primarily aimed at young women and young girls. Increasingly, the opportunity to go to a broader age cohorts, as we think about going now to people aged 45. That ability to move into the mid adult segment is a real opportunity in the United States that continues to be a driver of growth, it’s increasingly going to be a growth driver in Europe and it is currently an important part of why we are driving growth with the recent expansion we got in China and there are more markets to come. So as we look at that, that’s going to be another lever of growth. Obviously, the difference here is this requires consumer activation that takes commercial investments and a lot of heavy lifting. We have demonstrated we can do it like we have started to do in China and as we are starting to do in the United States. But it is going to take a lot of work and investment and we are committed to doing that. So that’s another variable that we look at it. And then, lastly, this is still largely seen as a female vaccine, we only I think it’s only 70 markets have gender neutral approvals. And even in the markets that do have it, particularly if you look at markets like Europe. There is still a real opportunity to increasingly bring people to understand that this is not just a female cancer vaccine, it is a gender neutral cancer vaccine. And with the growing incidence of head-and-neck cancers, which is primarily a male-dominated cancer, we do see real opportunity to continue to push and drive both getting more markets to gender neutral and in the markets, where we have those approvals drive vaccination rates up and probably one more bigger near-term opportunities is to get gender neutral approved in China, which is an opportunity. So across all of those, there’s opportunities and potential. It’s a heavy lift, I don’t want to indicate that it’s going to be easy and we are going to invest behind it. But that really will determine ultimately our success across those variables will determine the success we see long-term with this franchise. But maybe Dean or Caroline, anything you would add.

Rob Davis:

Thanks for the question, Chris. We have time to take some additional questions and go past the hour. Julie, next question please.

Geoff Meacham:

Hey, everyone. Thanks for the question. Question for Dean or even Rob on ADCs. So you guys have obviously done a number of deals, have partnered assets and clearly you think this approach is strategically important for Merck. So the question is how much of an investment is Merck making in building out a broader ADC platform in-house. I am just thinking beyond the partner programs, and especially, Dean, as you call out the IO paradigm is shifting earlier? Thank you.

Rob Davis:

Thanks, Geoff. Next question please.

Steve Scala:

Thank you very much. What is VAXNEUVANCE’s share in pediatrics now and why hasn’t it seen an inflection in the U.S. sales in line with Merck’s prior comments that it held 30% share of the pediatric market with plans to grow from there. I mean, 30% share of a $6 billion market is a big number and it’s well-ahead of where current sales are landing. So any color would be appreciated? Thank you.

Caroline Litchfield:

This is Caroline. The only thing I’d add to that would be the performance we are also seeing outside of the U.S. So while we are early in our launch outside the U.S., we have gained 50% of the tenders in which we have participated and which being shares north of that one-third, so we are very confident in our ability to continue to drive VAXNEUVANCE and very much looking forward to augmenting our offering with V116 later next year.

Rob Davis:

Steve, let me just clarify one thing, because I think it’s important. I was just reflecting on your question just to clarify my comments. Its 30% is our exit share not overall of the year. So that’s an exit share, as we are seeing the business grow today.

Rob Davis:

Thanks, Steve. Next question please.

Evan Seigerman:

Hi, all. Thank you so much for taking my question. I want to touch on MK-0616, so clearly prioritizing given the advancement into multiple Phase 3 trials. Maybe talk to me about the importance of an oral PCSK9. Given the dynamics we have seen in the injectable market with both the antibodies and other long-acting assets? Thank you so much.

Rob Davis:

Great. Thanks Evan. Maybe final question please, Julie.

Mohit Bansal:

Great. Thank you very much and thanks for squeezing me in. I just wanted to touch upon among EGFR mutant patients, how are you thinking about a TROP2 ADC versus a HER3 ADC, because if you look at your data or even EV’s data, it seems like TROP2 seem to be working quite well among those AGA mutations, so how are you thinking about these two ADCs in that same indication?

Rob Davis:

Thank you, Mohit, and thank you all for your time and attention today. Please follow-up with Investor Relations if you have any additional questions and we look forward to being in touch soon. Thank you all very much.

Peter Dannenbaum:

Thank you, Cedric, and good morning, everyone. Welcome to Merck's second quarter 2023 conference call. Speaking on today's call will be Rob Davis, Chairman and Chief Executive Officer; Caroline Litchfield, Chief Financial Officer; and Dr. Dean Li, President of Merck Research Labs. Before we get started, I'd like to point out a few items. You will see that we have items in our GAAP results such as acquisition-related charges, restructuring costs and certain other items. You should note that we have excluded these from our non-GAAP results and provide a reconciliation in our press release. I would like to remind you that some of the statements that we make today may be considered forward-looking statements within the meaning of the safe harbor provision of the United States Private Securities Litigation Reform Act of 1995. Such statements are made based on the current beliefs of Merck's management and are subject to significant risks and uncertainties. If our underlying assumptions prove inaccurate or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements. Our SEC filings, including Item 1A and the 2022 10-K, identify certain risk factors and cautionary statements that could cause the company's actual results to differ materially from those projected in any of our forward-looking statements made this morning. Merck undertakes no obligation to publicly update any forward-looking statements. During today's call, a slide presentation will accompany our speakers' prepared remarks. These slides, along with the earnings release, today's prepared remarks and our SEC filings are all posted to the Investor Relations section of Merck's website. With that, I'd like to turn the call over to Rob.

Caroline Litchfield:

Thank you, Rob. Good morning. As Rob noted, we delivered another very strong quarter, with underlying growth driven by demand across our innovative portfolio. These results reflect the profound impact of our medicines and vaccines globally and reinforce the confidence we have in the health of our business, and in the outlook for continued strong underlying growth. Now, turning to our second quarter results. Total company revenues were $15 billion. Excluding the impact from LAGEVRIO and foreign exchange, the business delivered very strong growth of 14%. The remainder of my revenue comments will be on an ex-exchange basis. Our Human Health business sustained its strong momentum. Excluding LAGEVRIO, growth was 17%, driven by Oncology and Vaccines. Sales in our Animal Health business increased 2% across both companion animal and livestock products. Now, turning to the second quarter performance of our key brands. In Oncology, KEYTRUDA grew 21% to $6.3 billion driven by increased utilization from approvals in earlier stage cancers and continued strong global demand from metastatic indications. In the U.S., KEYTRUDA grew across all key tumor types and continues to benefit from usage in earlier-stage cancers including triple negative breast cancer, as well as in certain types of renal cell carcinoma and melanoma. We are encouraged by the positive feedback from healthcare providers and initial uptake of KEYNOTE-091, reflecting the significant impact KEYTRUDA is having on patients with earlier stage non-small cell lung cancer. Outside the U.S., KEYTRUDA is maintaining its leadership in non-small cell lung cancer. Growth was driven by demand in metastatic renal cell carcinoma and certain types of head and neck cancer, as well as in earlier-stage cancers, including high-risk, early-stage triple negative breast cancer and renal cell carcinoma, which saw continued uptake in recently launched markets. Lynparza remains the market leading PARP inhibitor. Alliance revenue grew 15% driven by increased demand in certain international markets. Lenvima alliance revenue grew 6% due to increased demand for the treatment of certain patients with advanced renal cell carcinoma and endometrial cancer in the U.S., partially offset by lower sales in China. Our vaccines portfolio delivered exceptional growth, led by GARDASIL, which grew 53% to $2.5 billion. Performance was driven by strong global demand, especially in China, where we are benefitting from the expanded indication of GARDASIL 9 for girls and women 9 to 45 years of age. Vaccine sales also benefited from increased uptake of VAXNEUVANCE following the ongoing pediatric launch, particularly in the U.S. In our Hospital Acute Care portfolio, BRIDION sales grew 19%, driven by increased market share among neuromuscular blockade reversal agents in the U.S. Sales in our Animal Health business grew 2%. Livestock sales growth reflects price actions as well as higher demand for swine and poultry products, partially offset by lower demand for ruminant products, due in part to reduced herd sizes. Companion animal growth reflects price actions, including for the BRAVECTO line of products partially offset by supply challenges for certain vaccines. I will now walk you through the remainder of our P&L, and my comments will be on a non-GAAP basis. Gross margin was 76.6%, an increase of 1.9 percentage points due to favorable product mix, including a benefit from the lower sales of LAGEVRIO. Operating expenses increased to $15.9 billion, including a $10.2 billion one-time charge related to the acquisition of Prometheus. Excluding this charge, operating expenses grew 10%. This growth reflects increased investments in support of near-term opportunities for our in-line portfolio and disciplined investments for the future as we advance our exciting early and late-phase pipeline. Other income was $19 million. Our tax provision was approximately $800 million. As a result of the Prometheus one-time charge, we had a pre-tax loss this quarter. This one-time charge is not tax deductible. Our tax rate is therefore a negative 18.4%. Taken together, we reported a loss of $2.06 per share, which includes a negative impact of $4.02 per share from the one-time charge related to the Prometheus transaction. Turning now to our 2023 non-GAAP guidance. The underlying strength of our business has enabled us to raise and narrow our full year revenue guidance. We now expect revenue to be between $58.6 and $59.6 billion, an increase of $800 million at the midpoint. This range reflects strong underlying year-over-year revenue growth of 10% to 11%, offset by the expected lower sales of LAGEVRIO, which we continue to estimate to be approximately $1 billion this year, and an approximate 2 percentage point negative impact from foreign exchange using mid-July rates. Our gross margin assumption is unchanged at approximately 77%. We now estimate operating expenses to be between $34 billion and $34.6 billion. This range includes $11.6 billion of acquisition and upfront collaboration research and development expenses associated with Prometheus, Imago and Kelun. Our guidance does not assume additional significant potential business development transactions. We now assume other expense of approximately $100 million, which includes incremental financing costs related to Prometheus. Our full year tax rate is expected to be between 30.5% and 31.5%, reflecting an increase due to the Prometheus transaction of approximately 15 percentage points. We continue to assume approximately 2.55 billion shares outstanding. Taken together, we expect EPS of $2.95 to $3.05, which includes the one-time charge for Prometheus and a negative impact from foreign exchange of approximately 5 percentage points versus 2022, using mid-July rates. Recall our prior guidance range was $6.88 to $7, which we noted at the time excluded Prometheus. Had we included the $4.02 one-time charge and an estimated $0.14 to advance the assets and financing costs, our prior guidance range would have been $2.72 to $2.84 with a midpoint of $2.78. Our current guidance midpoint of $3 represents an increase resulting from the strength in our business of approximately $0.24, partially offset by an incremental headwind from foreign exchange of approximately $0.02. Our guidance reflects our continued confidence in the strength of our business driven by our key pillars, enabling us to deliver robust underlying growth while investing in our promising pipeline. As you consider your models, there are a couple of items to keep in mind. KEYTRUDA growth has been exceptional in recent quarters, outperforming our expectations, driven in part by robust uptake of recently launched earlier stage indications. We continue to expect strong year-over-year growth of KEYTRUDA, but not quite at the levels experienced in recent quarters, as a result of lapping launches and the impact of continued pricing headwinds, particularly as we launch new indications in key European markets. In addition, there was a small benefit from wholesaler purchase timing in the U.S. in the second quarter, which we expect to reverse in the third quarter. As we look out to 2024 and beyond, we continue to expect strong growth including the impact of additional approvals. And as a reminder, while we expect the pace of growth of GARDASIL to be higher in 2023 than 2022, the rate of second half growth is anticipated to be below the first half, due in part to the timing of shipments to China. Now turning to capital allocation. We will continue to prioritize investments in our business and growing pipeline to drive near and long-term growth across our portfolio. We remain committed to our dividend, with the goal of increasing it over time. Business development remains a priority. We remain well positioned to pursue the most compelling external science through value enhancing business development to augment our pipeline. We continue to expect to execute a modest level of share repurchases this year. To conclude, as we enter the second half of the year, we remain very confident in both, the strength of our underlying business, driven by global demand for our innovative medicines and vaccines, and the excellent execution of our dedicated teams across all areas of our business, which will enable us to continue to deliver value to patients, customers and shareholders now and well into the future. With that, I’d now like to turn the call over to Dean.

Peter Dannenbaum:

Thank you, Dean. Cedric, we're ready to take questions. We would appreciate analysts limit – limiting themselves to one question, so we can get to as many as possible today. Thank you.

Geoffrey Meacham:

Hey, guys. Thanks so much for the question. Rob, you opened up the call with some comments on the IRA suit, so I wanted to ask you a little bit on that. I know it's hard to talk specifics on your strategy. But at a higher level, how important is it to get more companies to join the fray with Merck? And are there any milestones to watch for this fall on the suit beyond the initial 10 drugs being named next month? Thank you.

Peter Dannenbaum:

Thanks, Geoff. Next question please, Cedric.

Mohit Bansal:

Okay. Thanks very much for taking my question. My question is regarding the onetime items. So Caroline, you mentioned regarding China for GARDASIL, as well as KEYTRUDA in the U.S. Would you be able to quantify this a little bit? Just trying to understand the magnitude of how much is impacted by those onetime items. Thank you.

Peter Dannenbaum:

Thanks, Mohit. Next question please, Cedric.

Louise Chen:

Hi. Thank you for taking my questions. I just wanted to ask you on your Prometheus Phase III clinical trial, if you could give more color on the trial designs and then when you'll start those. And then if you'll pursue any other indications outside of IBD. Thank you.

Peter Dannenbaum:

Great. Thanks, Louise. Next question please, Cedric.

Seamus Fernandez:

Great. Thanks. My question actually is on the pneumococcal vaccine, V116. Dean, just hoping that you could clarify for us what statistically significant means and if that actually implies superiority on individual serotypes, superiority on a new metric that perhaps could be an overall superiority to prevent our 20 (ph) in the STRIDE-3 results or if this is simply implying that it was statistically significant because it met the non-inferiority margin. Just trying to get a little bit more clarification there. And as a follow-up to that, just wanted to get a better sense of, if you believe the data, as it sits today, opens up a meaningful opportunity in international markets where national immunization programs have been reluctant to use pneumococcal vaccine in the adult setting largely because of herd immunity. Thanks.

Robert Davis:

Yeah. No, thank you. Thanks, Dean, and thanks, Seamus, for the question. As Dean just summarized, the data is pretty much about as good as you could expect. So as we sit here today, we're very confident in what this vaccine can offer both in the United States, and we do believe there is a meaningful opportunity for us to take this internationally. So we're going to have to see how it plays out. But as we sit here today, we are excited about this product and ready to launch as soon as we get approval to do so because we do think, as Dean pointed out, we give 85% coverage. That's 30% better than Prevnar 20. It's also better than any other vaccine currently in development. So we think this is an important drug. And when you combine it with what we have with VAXNEUVANCE, our pneumococcal franchise is a significant opportunity that we think could be multibillion as we go out into the future. So this is something we're invested in and we're going to continue to drive aggressively.

Operator:

Yes. Our next question comes from Akash Tewari with Jefferies Group. Your line is open. Sorry, Jefferies, you line is open.

Peter Dannenbaum:

Yes.

Robert Davis:

Yeah. Akash, thanks for the question. I'll let Dean speak to the science side of this. But from a business perspective, we actually have had a presence in immunology. You might recall that across Europe and outside the United States, we sold Remicade. So we've been involved -- and Symphony. So we've been involved in this space. As we sit here today, we don't see a significant commercial build. We think actually we can leverage a lot of the capabilities we have. We will invest in this area for success. And then Dean can comment that we have been building on the science side. Obviously, we did the Pandion acquisition, building off the learning from immuno-oncology into the immunology space and now with Prometheus as well as we brought in some really top talent in both the discovery and development area in this area. So I think we're well positioned to drive this business. And obviously, we're always open to continuing to look for additional business development. But it's not something I think we have to do to fill a gap. It's more of how do we continue to augment for further growth.

Peter Dannenbaum:

Thanks, Akash. Next question please, Cedric.

Christopher Schott:

Hi. Great. Thanks so much. Just a clarification to an earlier question and a follow-up. Just on KEYTRUDA and growth moderating in the second half. I guess, in addition to the U.S. wholesaler dynamic, I think you mentioned some EU price pressures. I just wanted to clarify, is that something incremental that you're expecting in the second half or more just a continuation of pressures you're already seeing in the first half of the year? And then my other question was just on business development. Just more broadly, the company has been pretty active over the past 12 to -- I guess. 12 months to 24 months. I guess what are just the priorities at this point? And should we think about a pause in activity post-Prometheus or is it really still full speed ahead in terms of looking at further transactions? Thank you.

Robert Davis:

Yeah. And Chris, on the business development question. As Caroline noted in the prepared remarks, we continue to have ample firepower to do deals. And while I can tell you, I feel very confident and I know the team feels very confident about the progress we're making with our internal pipeline and with the BD we've already done. If you look forward, we're going to be -- we've either recently announced or will be announcing a number of important Phase III assets across oncology with basically every area of the business, cardiometabolic, what we see in vaccines as well as important upcoming launches. We've talked about V116 data, sotatercept. We can go down the line. So I feel very good about the progress. That being said, we continue to have a priority to do business development. So you should not necessarily expect a slowdown. 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 and are willing to act on those. So we’re actively looking and we’ll continue to drive deals because while I feel very good about where we are, we’re talking about trying to build a sustainable engine well into the next decade. And we want to continue to add to the firepower we have coming out of our own discovery and development labs as well.

Operator:

Yes. Our next question comes from Dana Graybosch with Leerink Partners. Your line is open.

Robert Davis:

Yeah. So I'll start and Caroline can add in if I miss something here. But the high-level answer is we see a lot of room for continued growth both in early-stage cancers, the ones where we have current indications, and importantly, ones that are still coming. So kind of running through the list, triple-negative breast cancer obviously, has driven important growth, both in the adjuvant, neoadjuvant and metastatic setting. It was a big driver of growth last year in the United States. It's a driver of growth in the U.S. this year. That will slow into next year in the U.S., but we're seeing it picking up outside the United States because we're at an earlier phase in the launch across the world. So that will continue to be an important area. And then you saw today, we announced important data in KEYNOTE-756. So that is promising for a future indication that we could potentially see coming down the path in early-stage breast cancer as well. If you look at lung cancer, we continue to expect growth. In fact, we're growing in lung cancer now, both internationally and in the U.S. But importantly, what's going to drive growth longer term is as we continue to penetrate into earlier lines of therapy, obviously we're early in the launch of KEYNOTE-091 in the United States and in certain markets outside the U.S. We're very excited about what KEYNOTE-761 could be and how that will help drive growth in non-small cell lung cancer. And then across RCC, continued good growth in the adjuvant setting, good growth in metastatic. We have what's coming with WELIREG, which is going to continue to broaden our opportunity there. Great growth coming in bladder cancer. I'll stop there, because I could go on but we want to get to other questions. The short answer is a lot of growth, a lot of opportunity with KEYTRUDA. We're going to make a big difference in a lot of patients' lives as we move forward with this drug.

Operator:

Yes. Our next question comes from Tim Anderson with Wolfe Research. Your line is open.

Dean Li:

Yeah. Thank you very much for that question about TROP-2 ADCs, especially in relation to the lung. So as a broader picture, I would just say that initially the focus will be in the metastatic, and then depending on how those play out, it may go into earlier stages of cancer as well more broadly. But as we talk about lung cancer, the critical question that the field has to answer us and others, is whether or not you can dethrone KEYNOTE-189. So we're all trying to dethrone Merck's standard of care, which is pembro plus chemo in first-line in metastatic non-small cell lung cancer. I will just say, lots of people have tried to do it, including us and it's a high bar to try to overcome. And so the issue for us is how do you overcome that? Because I think if you can prove that an ADC can do that, that will be very important for the field. And so we have our data. It's -- we are very comfortable with the safety. But we think that it may be important to maximize the impact of the TROP-2 ADC so that you can give something meaningful benefit over KEYNOTE-189. So I think the biomarker could be important if what you're trying to do is displace KEYNOTE-189 because KEYNOTE-189 is a high bar to beat.

Operator:

The next question comes from Chris Shibutani with Goldman Sachs. Your line is open.

Dean Li:

Yeah. So let me take the science part of that, Chris. In relationship to sotatercept in the STELLAR trial, I think the label in the U.S. will be reasonably clear and follow that of what the STELLAR trial is. I think one of the things that was really important is that when we declared it, we didn't just declare a 6-minute walk. We declared a time to clinical worsening and death, which was really important because I think that creates a different scenario for us than what we had predicted previously in our ability to go-to-market outside of the U.S. So I think that will be in the label within the FDA. But I think where it's important is it may change the speed with which the international markets adopt sotatercept. I hope that gives you that general sense. But as we move this forward, we are looking, and I think we've said previously that we would have the file complete. And I think given the general sense, we thought that we would be launching, at least within the U.S., in the earlier part of 2024.

Peter Dannenbaum:

Great. Thanks, Chris. We have time for couple more questions please, Cedric.

Andrew Baum:

Thank you. A clarification for Dean and then a question for Rob. So just in regards to the previous question about TROP-2, just so I'm clear, do you plan to stratify or select for TROP-2 expression in your first-line -- first and second-line outcome trials, particularly for those patients with actionable -- without actionable genomic mutation. So are you actually going to stratify a select within the trials aimed at that patient cohort? And then second for Rob, if your efforts to repeal or amend the IRA are unsuccessful, would you delay the launch of your oral PCSK9 until you have outcome data in hand? Many thanks.

Robert Davis:

Yeah. And on the question of how we think about the oral PCSK9 and would we delay for an outcome study, I think it's too early to make that kind of decision because, frankly, how we think about the outcome study and whether or not, and what kind of label we get before we have an outcome study is still something we’re working through. So we need to understand the label, we need to understand the timing of the outcome study. And until I know all those points, I wouldn’t want to get ahead of where we would be. So more to come. We’ve got some time on that one.

Operator:

Yes. Our last question comes from Steve Scala with TD Cowen. Your line is open.

Dean Li:

So I'll just step back a little bit. So the KEYNOTE-756, as you've noted, is an ER-positive HER2-negative, it's earlier stage, it is neoadjuvant/adjuvant. We've given -- based on the data that we've given in the press release that it's [indiscernible] in relationship to an interim. As you know, EFS is already event-based. And so the question is how fast do you accrue events in relationship to that. And our hope is -- the answer to your question is yes. But we will just have to see because they are event-based. I would just highlight, in KEYNOTE-522, which is triple negative breast, which is also earlier stage, which is also neoadjuvant/adjuvant and also at a positive path CR, we've demonstrated that path CR is a predictive of the future followed up by EFS. And so we'll have to just watch that data as that data advances.

Robert Davis:

Yeah. Well, I appreciate everyone investing time today with the call. And just really maybe to conclude, I just want to reinforce how confident I am about how well positioned we are to continue to drive value creation for patients, for shareholders and for all of our stakeholders well into the future. And again, I just really want to thank all of my great colleagues across the globe for their substantial efforts. We really do look forward to building on the progress we have in the second half of 2023 and beyond. And hopefully, what you took from our comments today, both prepared and in the Q&A, is our confidence in the progress we're making and really, the difference we can make for patients across an ever broadening area of therapeutic possibility. So it's exciting what we have in front of us right now. Thank you.

Peter Dannenbaum:

Thank you, and good morning. Welcome to Merck's First Quarter 2023 Conference Call. Speaking on today's call will be Rob Davis, Chairman and Chief Executive Officer; Caroline Litchfield, Chief Financial Officer; and Dr. Dean Li, President of Merck Research Labs. Before we get started, I'd like to point out a few items. You will see that we have items in our GAAP results such as acquisition-related charges, restructuring costs and certain other items. You should note that we have excluded these from our non-GAAP results and provide a reconciliation in our press release. I would like to remind you that some of the statements that we make today may be considered forward-looking statements within the meaning of the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are made based on the current beliefs of Merck's management and are subject to significant risks and uncertainties. If our underlying assumptions prove inaccurate or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements. Our SEC filings, including Item 1A and the 2022 10-K, identify certain risk factors and cautionary statements that could cause the company's actual results to differ materially from those projected in any of our forward-looking statements made this morning. Merck undertakes no obligation to publicly update any forward-looking statements. During today's call, a slide presentation will accompany our speakers' prepared remarks. These slides, along with the earnings release, today's prepared remarks and our SEC filings are all posted to the Investor Relations section of Merck's website. With that, I'd like to turn the call over to Rob.

Caroline Litchfield :

Thank you, Rob. Good morning. As Rob highlighted, we are off to a strong start to the year with robust underlying performance across our key growth pillars. These results further demonstrate but our focus on science and innovation as the core of our strategy is working. Our success is enabled by the excellent execution of our team of dedicated colleagues who are delivering our important medicines and vaccines to people and animals across the globe. We remain very confident in our ability to continue to deliver in the short term while we make disciplined investments to maximize long-term value for patients and shareholders. Now turning to our first quarter results. Total company revenues were $14.5 billion. Excluding the impact from LAGEVRIO and foreign exchange, the business delivered very strong underlying growth of 15%. The remainder of my revenue comments will be on an ex exchange basis. Our human health business continued its strong momentum, excluding LAGEVRIO, growth was 18%, driven by oncology and vaccines. Our Animal Health business also delivered solid performance with sales increasing 5% and driven by growth across both livestock and companion animal products. Now turning to the first quarter performance of our key brands. In oncology, KEYTRUDA grew 24% to $5.8 billion, driven by robust global demand for metastatic indications as well as increased utilization driven by approvals in early-stage cancers. In the U.S., KEYTRUDA grew across all key tumor types and continues to benefit from uptake in earlier stage cancers, including triple-negative breast cancer as well as in certain types of renal cell carcinoma and melanoma. We continue to anticipate gradual uptake from KEYNOTE-091 in earlier stage lung cancer as we are working with the medical community to increase adjuvant treatment rates for diagnosed patients receiving surgery. We, along with others, are also working to improve upon the low level of lung cancer screenings and follow-up through diagnosis which we anticipate will increase over time. We are encouraged by the positive feedback received thus far. Furthermore, we are excited by the potential to bring an additional treatment option to patients following the positive results of the KEYNOTE-671 study. Together, these studies position us well to extend our leadership in non-small cell lung cancer. We also look forward to providing a new treatment option to certain adult patients with bladder cancer following the recent approval of KEYNOTE-869. Outside the U.S., KEYTRUDA continues to maintain its leadership in non-small cell lung cancer. Growth was driven by uptake in metastatic renal cell carcinoma and certain types of head and neck cancer as well as in earlier stage cancers, including certain types of high-risk early-stage triple-negative breast cancer, which continues to launch in additional markets. Lynparza remains the market-leading PARP inhibitor. Alliance revenue grew 8%, primarily due to increased demand in key European markets in certain patients with ovarian cancer. Lenvima alliance revenue grew 5% due to increased uptake in the treatment of certain patients with advanced renal cell carcinoma in key European markets. Our vaccines portfolio delivered excellent growth led by GARDASIL, which grew 43% to $2 billion. Performance was driven by strong demand in major ex-U.S. markets particularly China as well as increased supply. Growth also benefited from an acceleration of shipments to China from the second half to the first half of the year to ensure the availability of product to meet heightened demand following the approval of the expanded indication of GARDASIL9 for girls and women, 9 to 45 years of age. Vaccine sales also benefited from the increasing demand for VAXNEUVANCE following the ongoing pediatric launch, particularly in the U.S. In our hospital acute care portfolio, BRIDION sales grew 27%, driven by an increase in market share among neuromuscular blockade reversal agents. Our Animal Health business delivered another good quarter with sales increasing 5%, reflecting strong demand across our livestock portfolio, particularly in ruminant and poultry products as well as strategic price actions. I will now walk you through the remainder of our P&L, and my comments will be on a non-GAAP basis. Gross margin was 76.9%, an increase of 6.1 percentage points due to favorable product mix, which reflects a benefit from the lower sales of LAGEVRIO. Operating expenses increased to $6.7 billion, reflecting $1.4 billion of charges related to the acquisition of Imago and our license and collaboration agreement with Kelun. Excluding these charges, operating expenses grew 12% driven by increased investments to support our key growth drivers and pipeline. Other income was $70 million. Our tax rate was 20.4%, reflecting the unfavorable impact from the Imago transaction, for which no tax benefit was recognized. Taken together, we earned $1.40 per share, which includes a $0.52 impact from charges related to the acquisition of Imago and our agreement with Kelun. Turning now to our 2023 non-GAAP guidance. The continued operational strength of our business enables us to raise and narrow our full year revenue guidance. We now project revenue to be between $57.7 billion and $58.9 billion, including approximately $1 billion from LAGEVRIO. We expect strong underlying revenue growth of 8% to 10%, offset by the decline in LAGEVRIO and an approximate 2 percentage point negative impact from foreign exchange using mid-April rates. Our gross margin is still expected to be approximately 77%. We have narrowed the estimated range of operating expenses to be between $23.3 billion and $24.1 billion. As a reminder, this range includes $1.4 billion of upfront research and development expenses related to the acquisition of Imago and our agreement with Kelun. This guidance does not assume the proposed acquisition of Prometheus or any additional significant potential business development transactions. Other income is anticipated to be approximately $250 million. We continue to assume a full year tax rate between 17% and 18% and approximately 2.55 billion shares outstanding. Taken together, we are increasing and narrowing our expected EPS range to $6.88 to $7.00. This range includes a negative impact from foreign exchange of approximately 4 percentage points, using mid-April rates. It is important to note that this guidance does not include the impact of the proposed acquisition of Prometheus, which is expected to close in the third quarter of this year. We expect the transaction will result in a one-time charge that will increase research and development expense of approximately $10.3 billion, or approximately $4 per share. The impact of this charge will be reflected in both our GAAP and non-GAAP results. In addition, ongoing investment to advance the pipeline assets as well as the cost of financing will negatively impact EPS by approximately $0.25 in the first 12 months following close. As Rob noted, we are very excited by Prometheus’ compelling science and confident that this transaction has the potential to create meaningful value for patients and shareholders. Our guidance reflects our continued confidence in the underlying strength of our business driven by our key pillars in Oncology, Vaccines, and Animal Health. As you consider your models, there are a few items to keep in mind. In the U.S., KEYTRUDA has achieved exceptional growth over the past several quarters driven by recent launches, particularly in early-stage indications, such as triple negative breast cancer. While we continue to anticipate growth from these earlier stage indications, the year-over-year growth rate is expected to moderate as we anniversary their very strong initial uptake. Outside the U.S., we continue to expect strong volume growth for KEYTRUDA; however, pricing is an increasing headwind, particularly as we launch new indications in key European markets, which will temper ex-U.S. growth. Finally, we are confident in our ability to drive strong growth of GARDASIL, particularly in international markets. We are well positioned to protect many more people from HPV-related cancers now and over the long-term and given the strong global demand for the vaccine, we see an acceleration of growth for GARDASIL in the full year 2023 relative to 2022, though not quite at the same level of growth achieved this quarter. Now shifting to capital allocation, where we remain committed to our priorities following the announcement to acquire Prometheus. We will continue to prioritize investments in our business and growing pipeline to realize the value of the many near and long-term opportunities we see. We remain committed to our dividend, and plan to increase it over time. Business development remains a high priority, and we maintain the ability within our strong investment grade credit rating to pursue additional, science driven, value enhancing transactions going forward. We will continue to execute a modest level of share repurchases this year. To conclude, we remain very confident in the outlook of our business driven by the global demand for our innovative medicines and vaccines. We are in a position of financial and operational strength, and our continued excellent execution will enable us to deliver value to patients and shareholders well into the future. With that, I’d now like to turn the call over to Dean.

Peter Dannenbaum:

clinical candidate with a unique dual mechanism of action, including anti inflammatory and anti fibrotic properties. PRA023 Phase 2 results in both Ulcerative Colitis and Crohn's disease demonstrated strong efficacy. Further at an interim analysis, the data and the biomarker positive subpopulation suggested even greater efficacy with patients more likely to achieve clinical remission. By combining Prometheus' deep understanding of inflammatory bowel disease, and Merck's deep expertise in developing and implementing biomarkers. We hope to usher in a new era in immunology, where patients are matched with the right therapy based on a precision medicine approach. Prometheus's biobank of IBD specimens have yielded deep molecular insights that form the foundation for the discovery of PRA052 and we look forward to building on that knowledge to gain further insights, which will enable the identification and prioritization of additional targets. In closing, we continue to make progress towards our goal of creating innovative medicines that will improve the outcomes for patients. And now I will turn the call back to Peter.

Operator:

[Operator Instructions] Terence Flynn with Morgan Stanley.

Dr. Dean Li:

Yes. Thank you. This is Dean. I probably want to just focus really on the Phase 3s that we're advancing in melanoma and likely in others. There is a basket trial that's going through to look at the extent of the tumors that a joint sort of KEYTRUDA plus a personalized or individualized new antigen therapy will work. I can just give you a general sense. We have a little bit of a roadmap as to where immune sensitive tumors are, and we would likely prioritize those in our basket trial.

Operator:

Our next caller is Seamus Fernandez with Guggenheim.

Dr. Dean Li :

I'll just answer by the competitive dynamics make us more enthusiastic to push our programs harder and faster. We will be providing data from the data that we have in a series of cancers at ASCO on June 5th. We'll have an investor, but it will also be in the ASCO, I believe, already accepted for presentation there as well. So we're very interested in that. And we're also very interested in the fact that -- as we know, the first evidence of anti-PD-1 with an antibody drug conjugates and our collaboration with Seagen has shown good effect, and we postulate that, that may be a broader impact, not just with one ADC or one indication, but more broadly, through multiple antibody drug conjugates and therefore, our interest in advancing not just the TROP2 ADC but many other ADCs that we haven't provided data as of this point.

Operator:

Luisa Hector from Berenberg.

Dr. Dean Li :

Let me just grab the question about the early-stage lung. As we've talked, the earlier stages are really important. We've already seen it in triple-negative breast cancer. We've seen it in RCC. We've seen it in melanoma. And I think the aperture of being able to do it in the lung is going to be substantial. Again, for our KEYNOTE-671, which is the first perioperative trial to announce a statistically significant and clinically meaningful improvement in EFS and statistically significant improvement in pathologic complete response. Those will be presented in June as well. I would also emphasize that event-free survival and overall survival are the primary endpoints of our study, and most competitors do not have OS as a primary endpoint I would also emphasize that this is also in the setting where we have perioperative, but we also have adjuvant as well. So we provide a broad treatment choice in relationship to moving forward in the earlier stage. In all earlier stage, whether it be lung, triple-negative, RCC, melanoma, I think it will be increasingly important to provide innovation that allows patients to have "more normal" ability to stay on these treatments long-term, there are different profiles than a metastatic patient. And so we believe that giving other routes of administration will be important. And we're advancing our subcu pembrolizumab, especially with higher round of base because that gives us an ability to do both a 3 weeks and importantly, also allows us to do a Q6 weeks because that frequency, I think, will be very important for patients.

Peter Dannenbaum:

Great. Thank you, Luisa. Next question, please.

Chris Shibutani:

Great. For sotatercept, certainly, a broad scope of potential not just from the stellar results, but in earlier and later line, you have HYPERION and ZENITH. Can you remind us if there's potential for interim readouts and if so, potential what time line? And relatedly, what are you thinking about in terms of your overall sort of PH -- PAH strategy? You have assets now with Prometheus as well that have potential to be used in the systemic sclerosis ILD population, a lot of opportunity. If you can just help frame some strategic thinking?

Peter Dannenbaum:

Great. Thank you, Chris. Next question, please.

Hardik Parikh:

This is Hardik Parikh calling in for Chris Schott. Just one question on the BD front. So when you're thinking about the progress that you guys have had in internal pipeline and then now you have the Prometheus deal, is there a priority or a bias when you consider business development from either early or later stage deals or from therapeutic areas, oncology, CV or maybe some emerging therapeutic areas in your portfolio?

Peter Dannenbaum:

Great, thank you. Next question, please.

Carter Gould:

I guess for Rob and Caroline, would love to kind of hear your latest thoughts on sort of the EU proposed legislation and how that potentially changes how you think about launching drugs in Europe? And I guess also, I guess the read-through would be also to how potential business development as well? And as you think about the timing of the revenues and potentially shorter exclusivity periods? Any thoughts on that front would be helpful.

Peter Dannenbaum:

Great. Thank you, Carter. Next question.

Timothy Anderson:

I have a question on GARDASIL and China. So the GSA contract from your Chinese distributor published a couple of months ago shows really big purchase orders consistently for the next few years and it kind of trails off and declines. And it's interpreted literally it could suggest there was kind of a bolus effect going on where growth isn't linear. It goes up for a while, then it contracts as you work through warehouse patients. Is that how we should think about the longer-term uptake of GARDASIL in that particular market that it might not be linear?

Caroline Litchfield:

The only thing I would add is from a research perspective, we remain focused on studies in China to support gender-neutral vaccination, which could be a great opportunity to protect more lives and provide growth into the future.

Operator:

Evan Seigerman with BMO Capital Markets.

Robert Davis:

Yes. I'll take the question, Evan. Obviously, I would start by saying we feel very good about the progress we've made in a very short period of time. So if you look at the opportunity to be in a situation to have sustainable growth well into the next decade. We feel like we've made significant progress. Whether it's -- as you point out, the deal with Acceleron and then I would add the broad and strong internal pipeline we have in cardiovascular that as you know, we've indicated has 8 potential launches in the '24 to '28 timeframe, which has the potential to generate more than $10 billion as we move into the mid-2030s. We talked about the fact from an oncology perspective. If you look at what we have from an ADC portfolio and a lot of the small molecules, we've brought in through business development, excluding anything from the individualized neoantigen therapy, formally what we used to call the personalized cancer vaccine with Moderna. So that's not even counted. We see greater than $10 billion of opportunity from those assets in that same time frame. So as we sit here today, we've made a lot of progress. I don't want to predict to I think we're in a position to grow or not. We're not giving specific guidance. But I would say I feel, given the rate of progress we've made in such a short period of time and given the timetable we have and our resources going forward and the progress that Dean is driving with his team in our labs, I am no longer focusing on 2028. I am looking at how do we have sustainable growth well into the next decade?

Operator:

Andrew Baum with Citi.

Dr. Dean Li :

Thank you very much for that question. First of all, I just want to emphasize that we're in active discussions with regulatory agencies in relationship to our program as we define the Phase 3 trial. So that will put out there. The second point I would just emphasize is there is an evolving view that I think the field is coming to grips with. It's not just that LDL is an excellent biomarker. It's not just that PCSK9 is an excellent pathway. It is the fact that our 0616 interdicts exactly in the same place as some of the antibodies how 1 interprets that and how it thinks about biomarker data in that setting, I think it will be an evolving discussion with the regulatory agencies. The second question that you point out is the historic in the previous. I think you're referring to the fact that there is a view that if those studies with the antibodies had gone out a little bit longer, that they would have had a more profound impact in terms of outcomes. Those are things that we are speaking to the regulatory agencies as they think about the difference between the biomarker and the outcomes trial. But I do -- I would echo your point of view, which is one doesn't want to go too short that one risks the full maximum impact that you can have on the label. But that, as you said, needs to be balanced with whatever the IRA looks like how many years from now. So those are the balances. But your observation about the other trials is 1 that we observed as well. And my general thinking is we should try to maximize the impact that we have on patients because whatever that label is, that label will stay forever.

Operator:

Mara Goldstein with Mizuho.

Dr. Dean Li :

Yes. So let me just state that it's always something that we do and everyone else does, which is this cross-trial comparison between companies, but also within companies and their own agent. What I will say is that some of the issues that have been discussed was the pembrolizumab monotherapy arm performed comparably to KEYNOTE-054 in the high-risk subgroups, which is 3C and D. and those were also included in the KEYNOTE-942. And in general, the KEYNOTE-942 had more advanced disease than those in KEYNOTE-054. So there is a way for us to sort of probabilitized given the same stage. So we're very comfortable with the pembrolizumab monotherapy arm in the trial that Merck and Moderna proceeded with. I just want to just reemphasize that this to us is an important development scientifically. This is really the first time that I can recall seeing the impact of a personalized or individualized neoantigen therapy or a personalized cancer vaccine that has that profound of a readout in a Phase 2. So we're excited to advance that to Phase 3 for melanoma and to spool up other trials in Phase 3 as we look to see how far we can push this strategy.

Operator:

Umer Raffat with Evercore.

Dr. Dean Li :

So I would just emphasize that I think you're speaking about the Phase 2 trial. And those Phase 2 trials do provide us sort of views of how to think about the 5 Phase 3 trials that we have ongoing. I will just say that those 5 Phase 3 trials are going to be the thing that the FDA looks at. That's what they're going to look at and we're advancing those. And we're advancing them not just in metastatic situations. We have a series of them in lung. But I also just want to emphasize something that I've said previously. It relates to what people have said about KEYNOTE-671. It relates to the question about individualized neoantigen therapy, and it will relate here. When we think about IO strategies and especially IO plus IO strategies, increasingly, our eyes are turning into the earlier stages of diseases both because it's very important for patients. It's a time where we can really interdict early, but we also think that, that's an important place for us to relook on all of our assets that are IO-IO in that earlier stage.

Operator:

Daina Graybosch with SVB Securities.

Dr. Dean Li :

Yes. So I would just step back for just a moment. Our ability to go into earlier-stage cancers were just unlocked maybe a couple of years ago, right? And in order to do combinations, it's very important that your base molecule actually has an impact because that allows you to do contributions of components. So we're very comfortable moving our IO-IO strategies in earlier stages. We are doing it, as you said, both for pembro and TIGIT and as well as pembro plus the individualized neoantigen therapy. We're very confident that the desire of patients to be there is substantial. And our ability to recruit and do an important trial there is also important. I would also say that as you see more readouts of earlier-stage cancer for any of our assets, whether it be Lynparza, whether it be an ADC or whether it be KEYTRUDA, it will be likely that we will target multiple combinations in those spaces.

Operator:

Colin Bristow with UBS.

Robert Davis:

Yes. So I appreciate the question. As we look at the subcutaneous formulation and where that can be utilized, obviously, it's focused more where we have monotherapy as we look at earlier lines of therapy. So as we continue to advance our adjuvant and new adjuvant strategy across multiple tumor types and then where we are combining KEYTRUDA with small molecules. Based on what we see, as we look out, we would expect about half of what we have as KEYTRUDA would be addressable through the subcutaneous route based on that definition of those areas.

Operator:

Trung Huynh with Credit Suisse.

Dr. Dean Li :

Yes, I'll start with that. So as you recall, gefapixant, we had positive Phase 3 trials. We had a CRL. The CRL has nothing to do with the safety or really any major concern that would require another clinical trial. The focus was on the way that the analysis was done in the way that costs were counted. We have submitted additional analysis and will be submitting additional analysis to the FDA in the first half of this 2023 in general, I believe that the timing is that on submission of all of that data, generally speaking, the FDA then readdresses CRL in within 6 months. We have it already approved in Japan and Switzerland. And as you said, there is a renewed interest given the recent transaction, and I don't know if Caroline, would you like to answer that?

Peter Dannenbaum:

Great. Thank you, Trung, and thank you all for your very good questions today. We look forward to hearing from you and engaging with you in the future. Thanks a lot.

Peter Dannenbaum:

Thank you, and good morning. Welcome to Merck’s fourth quarter 2022 conference call. Speaking on today’s call will be Rob Davis, Chairman and Chief Executive Officer; Caroline Litchfield, Chief Financial Officer; and Dr. Dean Li, President of Merck Research Labs. Before we get started, I’d like to point out a few items. You will see that we have items in our GAAP results, such as acquisition-related charges, restructuring costs and certain other items. You should note that we have excluded these from our non-GAAP results and provide a reconciliation in our press release. I would like to remind you that some of the statements that we make today may be considered forward-looking statements within the meaning of the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are made based on the current beliefs of Merck’s management and are subject to significant risks and uncertainties. If our underlying assumptions prove inaccurate or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements. Our SEC filings, including Item 1A in the 2021 10-K, identify certain risk factors and cautionary statements that could cause the company’s actual results to differ materially from those projected in any of our forward-looking statements made this morning. Merck undertakes no obligation to publicly update any forward-looking statements. During today’s call, a slide presentation will accompany our speakers’ prepared remarks. The presentation, today’s earnings release, as well as our SEC filings are all posted to the Investor Relations section of Merck’s website. With that, I’d like to turn the call over to Rob.

Caroline Litchfield:

Thank you, Rob. Good morning. As Rob noted, 2022 was an exceptional year for our company. We delivered excellent topline growth of 22% driven by strength across our key pillars of Oncology, Vaccines and Hospital, as well as a significant contribution from LAGEVRIO. Our Animal Health business delivered strong operational growth, which was offset by foreign exchange. These results are a testament to the profound impact our medicines and vaccines are having on patients globally, which are enabled by our dedicated teams who are executing with excellence to deliver these important innovations. We are confident in the health of our business and in our outlook for continued strong underlying growth. Now, turning to our fourth quarter results. Total company revenues were $13.8 billion, an increase of 2%. Excluding the impact from foreign exchange, the business delivered strong operational growth of 8%. The remainder of my revenue comments will be on an ex-exchange basis. Our Human Health and Animal Health businesses continued their strong growth increasing 9% and 6%, respectively. Now, turning to the fourth quarter performance of our key brands. In Oncology, KEYTRUDA grew 26% to $5.5 billion, driven by strong global demand for in-line indications, as well as continued global expansion from new approvals. In the U.S., KEYTRUDA grew across all key tumor types and continues to benefit from uptake in earlier-stage cancers, including triple negative breast cancer, as well as in certain types of renal cell carcinoma and melanoma. KEYTRUDA continues to have a profound impact on patients, including in earlier-stage cancers, where there is greater potential for better outcomes. We are excited by the recent approval of KEYNOTE-091, which represents KEYTRUDA’s seventh indication in earlier-stage cancers. Early lung cancer detection and screening remain an important unmet need. It is our ambition, along with others to improve lung cancer screening rates to levels similar to other tumor types, such as breast, where screening programs are more routine. While we are committed to addressing this unmet need, we anticipate a more gradual near-term uptake from this indication. In the metastatic setting, KEYTRUDA maintains its leadership position in non-small cell lung cancer, which gives us confidence that we are well-positioned to positively impact patients in the earlier setting. Outside the U.S., KEYTRUDA growth continues to be driven by uptake in metastatic indications, including non-small cell lung cancer, head and neck cancer and renal cell carcinoma, as well as recent launches in earlier-stage cancers, including certain types of high-risk, early-stage triple negative breast cancer and renal cell carcinoma. Lynparza maintains its leadership of the PARP inhibitor class. Alliance revenue grew 14% primarily due to continued demand in certain patients with high-risk, early-stage breast cancer. Lenvima alliance revenue grew 9%, driven by increased uptake in the treatment of certain patients with advanced renal cell carcinoma and advanced endometrial cancer in the U.S. Lastly, WELIREG is performing in-line with our expectations and we are proud of the impact it is having on adult patients with certain VHL-associated tumors. Our Vaccines portfolio delivered growth, with GARDASIL increasing 6% to $1.5 billion, driven by strong demand in major ex-U.S. markets, particularly China. In the U.S., sales decreased primarily due to CDC purchasing patterns. Vaccines sales also benefited from the pediatric launch of VAXNEUVANCE, which is off to an encouraging start, with revenues also benefitting from inventory stocking. In our Hospital Acute Care portfolio, BRIDION sales grew 7%, driven by an increase in market share among neuromuscular blockade reversal agents and an increase in surgical procedures. Hospital Acute Care sales also benefitted from the resupply of ZERBAXA, which started in the fourth quarter of 2021. Our Animal Health business delivered another solid quarter, with sales increasing 6% reflecting strategic price actions and volume growth. Livestock sales grew 12% driven by increased demand in ruminants and poultry products. Companion animal sales were negatively impacted by supply challenges for certain vaccines and a reduction in vet visits in October, which improved during the quarter. I will now walk you through the remainder of our P&L and my comments will be on a non-GAAP basis. Gross margin was 75.7%, an increase of 0.9 percentage points due to favorable product mix and foreign exchange. Operating expenses increased 8% to $5.7 billion, reflecting increased investments to support our portfolio and growing pipeline. Other income was $86 million, reflecting the return on pension plan assets and capitalized interest, which was largely offset by net interest expense. Our tax rate was 15.6%. Taken together, earnings per share were $1.62. Turning now to our 2023 non-GAAP guidance. The strength across our key pillars is expected to continue into this year. We project revenue to be between $57.2 billion and $58.7 billion, including approximately $1 billion from LAGEVRIO. Excluding the negative impact of LAGEVRIO and an approximate 2% negative impact from foreign exchange using mid-January rates, we expect strong underlying revenue growth of 7% to 10%. Our gross margin is expected to be approximately 77%. Operating expenses are assumed to be between $23.1 billion and $24.1 billion, which includes $1.4 billion of research and development expenses related to our acquisition of Imago and the expansion of our collaboration with Kelun Biotech. As a reminder, our guidance does not assume additional significant potential business development transactions. Other Income is anticipated to be approximately $250 million. We assume a full year tax rate between 17% and 18% and approximately 2.55 billion shares outstanding. Taken together, we expect EPS of $6.80 to $6.95. This range includes a negative impact from foreign exchange of approximately 4% using mid-January rates. Our guidance reflects confidence in the continued strong growth across Oncology, Vaccines and Animal Health. As you consider your models, there are a few items to keep in mind. On revenues, we are confident in our ability to drive strong growth of GARDASIL, particularly in international markets. Global immunization levels remain low, which creates a tremendous opportunity to benefit more patients and we are improving supply, which positions us well to support the significant demand we are experiencing today and expect over the long-term for this vaccine that prevents HPV-related cancers. Other Revenue is projected to decline significantly, primarily reflecting a smaller planned benefit from revenue hedges following the U.S. dollar strength last year, which resulted in an approximate $800 million benefit in 2022. Other revenue is also expected to be lower due to the discontinuation of third-party manufacturing sales to Johnson and Johnson. On the rest of the P&L, we project a shift from other expense to other income, which is primarily attributable to an assumption that there will be no pension settlement cost, as well as an expectation of lower net interest expense and higher joint venture equity income. This benefit is more than offset by an increase in the estimated tax rate due to the unfavorable impact of the R&D capitalization provision, as well as an approximate 1 percentage point impact related to Imago. Now shifting to capital allocation, where our priorities remain unchanged. We will continue to prioritize investments in our business to drive near- and long-term growth. We are excited about the significant progress our team has made to advance and augment our pipeline in 2022. In 2023, we will continue to invest in opportunities that will address important unmet medical needs and drive the next wave of growth for our company, including the initiation of many late-stage clinical trials across a broad set of novel candidates. We remain committed to our dividend, with the goal of increasing it over time. We will continue to pursue the most compelling external science through value-enhancing business development to augment our internal pipeline and will invest appropriately to maximize the potential of our R&D programs. Given the strength of our business and balance sheet, we plan to resume share repurchases, while ensuring we maintain ample capacity to pursue additional business development, which is the higher priority. To conclude, we enter 2023 confident in our ability to execute on the important opportunities we have to deliver innovation to patients and sustain the strong underlying growth of our business well into the future. With that, I’d now like to turn the call over to Dean.

Peter Dannenbaum:

Thanks, Dean. Kelly, we are ready to take questions now. We intend to end the call at 9 sharp this morning, so request that analysts limit themselves to one question, please.

Carter Gould:

Hi. Thank you for taking the question. Maybe just you made some comments around sort of uptake in the adjuvant setting after the most recent label update. Can you maybe just sort of set expectations there and does that comment reflect any sort of assumptions around when we might see mature data from the PEARLS study potentially this year? Thank you.

Rob Davis:

So, Carter, maybe I can just add on a little bit about the commercial opportunity. As Dean said, this will be a slower ramp, because we have to drive more people to get diagnosed early so that we can get them the care they need. But just to give you some sizing of this. If you look at 2023, there are about 230,000 people who were diagnosed with lung cancer in U.S. and the majority of that group was not diagnosed until they were in the metastatic setting. So if you think about it from a minority perspective, we would estimate about 120,000 people in the early-stage setting, of which only a quarter will have a section or have surgery and be in the Stage Ib to IIIa, which is what our label indicates. So you are looking at about 30,000 patients who would be the addressable population and then obviously, of that group, historically, only about half of those patients have gone on to receive treatment in the form of chemotherapy or IO. So that’s obviously something we hope to change as we go forward, because we think the outcome will show that if you are resected, you should pursue KEYTRUDA in that setting and it’s our goal over time not only to drive more patients in that segment. But, obviously, the more people we can get diagnosed early pre-metastatic, then actually we will expand the population over time. So we see this as a meaningful opportunity long-term that is going to take us time to ramp as we work to change the paradigm that’s existed in the past. Thank you, Carter. Next question, please, Kelly?

Andrew Baum:

Hi. Thank you. A couple of questions, could you please address the demand on Merck’s business to the hole associated with the KEYTRUDA LOE post-2028 or alternatively instead just build the exit growth rate and focus less on finding revenues to plug the hole as you think about your strategy? And perhaps quickly for, Dean, could you just give us some guidance on the timing for the PFS analysis and the PD-L1 high, greater than 50 cohort from KEYVIBE-003. Should we expect it in the next 12 months? I know the total PFS reset for the whole trial is somewhere in 2024, but it strikes me you may have a mere separate analysis for that greater than 50 subgroup? Thank you.

Dr. Dean Li:

Yeah. So there was a question on our TIGIT program, KEYTRUDA plus TIGIT. Just to remind everyone, we have nine ongoing trials. We have five Phase 3s. In fact, just recently, we opened up KEYVIBE-10, which is Phase 3 in early melanoma. In relationship to KEYVIBE-003, which I think is the question, we added the TPS greater than 50% as an endpoint. These are event driven, and as the events drive to statistically and clinically meaningful data, we will announce it appropriately.

Operator:

Our next question comes from Evan Seigerman from BMO. Evan, your line is open.

Dr. Dean Li:

Yeah. So let me just state, I -- we will be starting a whole series of Phase 3 trials this year. I really appreciate your question. For me, the critical thing is, whether it be an ADC or whether it be a RAS inhibitor in solid tumors, especially as you want to advance them in solid tumors where IO has been important, the combination benefit of the two becomes really important. So we are very excited to be pushing forward our TROP2 ADC. I can get into the details of the molecules and the linkers and the payloads and the darts. But really, the better sort of thing is, I believe that this year, we will be presenting our Phase 2 studies, and at the end of the day, that will be the most convincing data to provide to you as to why we think we have been important play with our TROP2 ADC, but it’s also the play of that TROP2 ADC in relationship to adding it to an IO agent. We think that is an important considerations when thinking about any cancer killing mechanism in solid tumors.

Operator:

Our next question comes from Louise Chen from Cantor. Louise, your line is open.

Dr. Dean Li:

Thank you very much. So, first, I don’t want to get ahead too much of our March 6 Investor meeting where we are least showing the data that we have in relationship to the oral PCSK9 and sotatercept. I will just sort of emphasize what we are trying to accomplish and what we are trying to accomplish is we are trying to accomplish the most potent LDL lowering oral pill for lowering cholesterol. There should be no co-chain, there should be very little need to interact with the healthcare system, which makes it reach very easy and very accessible, not just in the U.S. but globally. And we need to do it at a price point of what I would call a branded oral medicine would be not in order to maximize the access. In relationship with Phase 3, there’s a general set sort of view of how that is. One is you would drive it, because LDL lowering is such a clean biomarker. So that’s something. But one would also have that, at the same time, drive towards outcomes, which is also going to be important. So our Phase 3 trial design is informed by the history of the field has been and what the FDA’s regulatory sort of outline have been for others.

Operator:

Our next question comes from Tim Anderson from Wolfe Research. Tim, your line is open.

Dr. Dean Li:

Thank you very much. So you are speaking about the wonderful partnership that we have with Moderna in the personalized cancer vaccine. I just want to preface everything. What we have released is topline data in melanoma. That data will be presented sometime in the near-term where we present the data that we have for melanoma and we have work to do to move that into Phase 3. So I -- we have a lot of work to do just in melanoma. I am not going to speak ahead of a human data we have outside of that. But I would say two things that are really important. One is one can watch which of the tumors have sensitivity to an immune approach and one can watch about the clinical development with KEYTRUDA to sort of map out where you would think about doing that. The second issue that I would emphasize is that, when we are talking about an IO-IO strategy, which often people speak about, I view this personalized neoantigen therapy as an IO-IO strategy with KEYTRUDA. And the reason I want to emphasize that is, there is a view that we are beginning to develop that IO-IO strategies may be especially useful in early cancer stages and you see that in our interest in our combination projects related to checkpoint inhibitors, but also in relationship to personalized neoantigen therapy. And so we think that, that’s around that we are going to advance and the critical component for us to be able to advance that is to advance KEYTRUDA as a monotherapy in indications, because it creates us to actually do these clinical trials.

Operator:

Our next question comes -- Geoff from Bank of America. Geoff, your line is open.

Dr. Dean Li:

So thank you very much for that question. I think it’s on -- we will be -- when we talk about starting 10 to 15 Phase 3 clinical trials, just in Oncology, this subcu program is a critical component to that and we will be starting those Phase 3 this year. What are we seeking to achieve? I have talked about the early cancer space. Early cancer space, I think, is really important just from a medical standpoint of where we can intact really the outcomes of patients. We can markedly improve that. If you are going to go in the early space, whether it’s neoadjuvant or adjuvant, from my clinical training, working with lung cancer doctors and oncologists, our ability to limit the need for individuals to constantly come to infusion centers is very important and we need to have the scientific innovation to do that. In doing that, we have to think carefully about how do we give as much optionality to three weeks to six weeks in that subcu regimen and that’s what we are trying to drive through in our Phase 3 trials. Rob, did you want to answer anything else?

Operator:

Next question comes from Mohit Bansal from Wells Fargo. Mohit, your line is open.

Dr. Dean Li:

Yeah. Thank you very much. I will just emphasize that as a general rule the way that I have begun to develop my view of IO-IO strategies, is that IO-IO strategies are very important to pursue. I think that IO-IO strategies plus other therapies that kill cancers may be especially important in the metastatic, but IO-IO strategies in the early stage could be quite impactful. And so, as I have just said, we have advanced our IO-IO strategy. We have advanced it with TIGIT CTLA-4 and LAG-3, so another component part. But I would just say this, I don’t know that there’s one single addition to KEYTRUDA that will have the breadth of KEYTRUDA. So we have been a little bit selective there and I think the movement of IO-IO, not just in the metastatic space, but especially in the early space will become important. And the ability to do that requires your first IO of that IO-IO to be approved in the early space and that is why we are so excited about moving into earlier spaces with KEYTRUDA, because that allows us to execute in an IO-IO strategy in early-stage cancers.

Operator:

Our next question comes from Chris Schott from JPMorgan. Chris, your line is open.

Caroline Litchfield:

Yeah. Chris, this is Caroline. First to talk to share repurchase, as we have stated previously, it’s our goal as a company to deploy our cash, first and foremost, behind the business opportunities we have within the company, as well as augment that with business development. We have turned on the share repurchase program, given the strength of our business and our balance sheet, but we will be ensuring we have ample capacity to pursue business development, which is the highest priority and is a better generator of growth and value creation. We have a portfolio of BD that we are reviewing and we will continue to do some test have news that we will be sharing in future. So priority remains really investing in the business, but to the extent, there is excess cash, we will return that to shareholders through the share buyback. We will maintain an appropriate leverage for our company. We are very comfortable operating at the credit rating we are at and we would expect to sustain that kind of level as we go forward. From a foreign exchange perspective, in 2022, we were extremely successful as a company in blunting the impact of foreign exchange with our revenue hedging program. The underlying impact of foreign exchange to our business in 2022 was approximately 6% on the topline, 10% on the bottomline, but with our expected hedging program, which brought revenue on the other revenue line of approximately $800 million that blunted the impact to 4% on the top and 4% on the bottom. As you rightly note, as we look at 2023, we expect the underlying impact of foreign exchange to be around 1 percentage point on the top and the bottomline. What is impacting the guidance that we have given is we obviously don’t expect as significant hedge gains in 2023, which means that the overall impact from foreign exchange year-over-year is expected to be 2% on the top and 4% on the bottom.

Operator:

Our next question comes from Terence Flynn from Morgan Stanley. Terence, your line is open.

Caroline Litchfield:

Thank you for the question. So the guidance that we provided for 2023 is underpinned by very strong revenue growth of 7% to 10% when you exclude the impact of LAGEVRIO as foreign exchange. The drivers of that growth are our key pillars of Oncology, where we expect continued impact to patients and growth driven the portfolio of indications we have in KEYTRUDA, Lynparza and Lenvima. Vaccines, as you rightly note, driven by an acceleration expected in the growth of GARDASIL as we have new supply coming on line, as well as an acceleration in our VAXNEUVANCE performance, especially given the strong data we have for the pediatric setting. And we expect continued growth strong growth in our Animal Health business. There are some headwinds against that that we have talked about with LAGEVRIO with foreign exchange and with an increased level of pricing expected, especially in Europe with the changes we have seen in U.K. and also in Germany. But, overall, very confident in the underlying growth of our business anchored to Oncology, Vaccines and Animal Health. Dean?

Rob Davis:

Thank you, Terence. Next question please, Kelly.

Colin Bristow:

Hey. Good morning and thanks for taking the questions. I guess I will piggyback on a couple of the others. On TIGIT, we have obviously seen some competitive data recently and then we have some Phase 3 competitor readout this year. Just what is your level of enthusiasm for this class currently and just what underpins that in terms of the data we have seen? And then just second on GARDASIL, are you able to give any more granularity on the timing and levels of additional supply that will be coming online with respect to the new manufacturing facility? Thank you.

Caroline Litchfield:

And for GARDASIL, we -- as you know, we have driven productivity in the existing manufacturing facilities we have and we have two new facilities coming online over the course of 2023, 2024. So it will be a progressive ramp, but I will reiterate we are expecting an acceleration in our growth during 2023.

Operator:

Our next question comes from Umer Raffat from Evercore. Umer, your line is open.

Dr. Dean Li:

Yeah. So I would just want to elevate the question a little bit. The focus of what we are trying to do is we are trying to drive the concept of inhibition of checkpoint inhibitors can really have a profound effect throughout cancers in all stages in all tumor types. We talk about expand into different tissue types and stages, deepen in combination and extend with routes of delivery, roots of indentation and frequent safety and these innovations are critically important to make sure that this life saving sort of treatment is available. And we are confident in those innovations providing benefit to patients and we have filed where appropriate intellectual property for it -- for that.

Operator:

Our last question comes from Steve Scala from Cowen. Steve, your line is open.

Dr. Dean Li:

We will be talking about the detailed data from the PCSK9. We believe that it’s very clean. But I will just step back as a cardiologist who trained in the late 1980s and 1990s, the ability to have an oral drug that lowered LDL cholesterol was impactful for the world. Yes, every oral drug, regardless of what therapy it is, has a compliance, so it’s very important to maintain clients. What we are trying to do is to create the most potent LDL cholesterol lowering pill ever made that does not require constant interactions with a healthcare system, we think that, that axis is actually one that’s very important, not just in the U.S., but also globally. And this is personally speaking, as someone who practices early, as of late, as recently as five years ago. If I had an oral PCSK9 LDL lowering pill back then, I would be prescribing it with the other three to four oral pills that I am prescribing an individual.

Operator:

That concludes today’s call. Thank you for participating. You may disconnect at this time.

Peter Dannenbaum:

Thank you and good morning. Welcome to Merck’s third quarter 2022 conference call. Speaking on today’s call will be Rob Davis, President and Chief Executive Officer; Caroline Litchfield, Chief Financial Officer; and Dr. Dean Li, President of Merck Research Labs. Before we get started, I’d like to point out a few items. You will see that we have items in our GAAP results, such as acquisition-related charges, restructuring costs and certain other items. You should note that we have excluded these from our non-GAAP results and provide a reconciliation in our press release. I would like to remind you that some of the statements that we make today maybe considered forward-looking statements within the meaning of the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are made based on the current beliefs of Merck’s management and are subject to significant risks and uncertainties. If our underlying assumptions prove inaccurate or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements. Our SEC filings, including Item 1A in the 2021 10-K, identify certain risk factors and cautionary statements that could cause the company’s actual results to differ materially from those projected in any of our forward-looking statements made this morning. Merck undertakes no obligation to publicly update any forward-looking statements. During today’s call, a slide presentation will accompany our speakers’ prepared remarks. The presentation, today’s earnings release as well as our SEC filings are all posted to the Investor Relations section of Merck’s website. With that, I’d like to turn the call over to Rob.

Caroline Litchfield:

Thank you, Rob. Good morning. 2022 continues to be a year of excellent performance for our business. This quarter, we again achieved exceptional revenue and underlying earnings growth driven by demand for our innovative portfolio. These results reinforce our commitment to our science-led strategy, enabled by the flawless execution of our dedicated colleagues across the globe. We are confident in our ability to continue to deliver in the short-term, while we make disciplined investments to maximize long-term value for patients and shareholders. Total company revenues were $15 billion, an increase of 14%. Excluding LAGEVRIO, the business delivered strong growth of 10%. Underlying growth was 4 percentage points higher given the growing headwind from foreign exchange. The remainder of my revenue comments will be on an ex-exchange basis. Our Human Health business continued its momentum with growth of 19%, or 15% excluding LAGEVRIO, driven by strength across our key pillars. Our Animal Health business delivered a solid quarter as sales increased 4% in both our companion animal and livestock products. Now, turning to the third quarter performance of our key brands. In oncology, KEYTRUDA grew 26% to $5.4 billion driven by strong global demand as well as continued expansion into new indications. In the U.S., KEYTRUDA grew across all key tumor types and continued to benefit from uptake in earlier stage cancers, including triple-negative breast cancer as well as in certain types of renal cell carcinoma and melanoma. Intervening earlier in cancer progression provides the potential for better patient outcomes, which is why we remain excited by the impact KEYTRUDA is having on patients with these early-stage cancers. Notably, there continues to be very strong demand in neoadjuvant, adjuvant, high-risk, early-stage triple-negative breast cancer a testament to the profound effect KEYTRUDA is having for patients with this aggressive form of disease. In the metastatic setting, KEYTRUDA is maintaining its leadership position in non-small cell lung cancer. Outside the U.S., KEYTRUDA growth continues to be driven by uptake in non-small cell lung cancer, head and neck cancer and renal cell carcinoma. Recently approved earlier stage indications, including certain types of high-risk, early-stage triple-negative breast cancer and renal cell carcinoma, are off to a strong start following launches in key European markets earlier this year. Lynparza maintained its leadership of the PARP inhibitor class. Our alliance revenue grew 23% driven by continued demand in certain patients with high-risk, early-stage breast cancer based on the OlympiA study. The outlook for Lynparza remains strong. And if approved, we are confident in the potential to reach patients with metastatic castration-resistant prostate cancer based on the PROPEL study. Lenvima alliance revenue grew 11%, a strong demand in the U.S. driven by continued uptake in advanced renal cell carcinoma and endometrial cancer was partially offset by shipment timing in China. Lastly, WELIREG is performing consistent with our expectations, providing a treatment option to the significant unmet need of patients with certain VHL-associated tumors. Our vaccines portfolio achieved excellent growth led by GARDASIL, which increased 20% to $2.3 billion. Growth is being driven by strong underlying demand in ex-U.S. markets, particularly China. We recently received approval from China’s National Medical Products Administration to expand the use of GARDASIL 9 to girls and women 9 to 45 years of age, which will further expand our opportunity in this important market. Growth in the U.S. was due to timing of CDC purchases, which will negatively impact fourth quarter sales. We are confident in our ability to drive sustainable growth of GARDASIL given its proven effectiveness in preventing certain types of HPV-related cancers and other diseases. Global immunization levels remain low, which provides us a tremendous opportunity to benefit more patients. And we have invested aggressively in manufacturing capacity, which positions us well to supply the demand we expect to see now and over the long-term. In our hospital acute care portfolio, BRIDION sales grew 22%, driven by an increase in market share among neuromuscular blockade reversal agents and an increase in surgical procedures. As mentioned earlier, Animal Health sales increased 4%. Livestock sales increased due to poultry products and ruminant technology solutions. Companion animal sales growth was driven by the BRAVECTO line of products, partially offset by supply challenges for certain vaccines. I will now walk you through the remainder of our P&L and my comments will be on a non-GAAP basis. Gross margin was 77%, an increase of 0.2 percentage points, reflecting favorable product mix and foreign exchange, partially offset by the impact of lower margin LAGEVRIO and supply sales. Operating expenses were $6 billion, which includes $619 million of payments related to certain collaborations and licensing agreements. Excluding these payments, operating expenses grew 13%, driven by increased investments to support our key growth drivers and pipeline. Other expense was approximately $100 million, which reflects lower pension expense compared to last year. Our tax rate was 13.6%. Taken together, we earned $1.85 per share, which includes $0.22 of charges related to significant collaboration and licensing agreement. Excluding these charges, we had exceptional underlying growth. Turning now to our 2022 non-GAAP guidance. The continued operational strength of our business enables us to raise and narrow our full year revenue guidance. We now expect revenue to be between $58.5 billion and $59 billion, including LAGEVRIO sales of $5.2 billion to $5.4 billion. Our increased revenue guidance range represents growth of 20% to 21%. The projected impact from foreign exchange includes an incremental headwind of nearly 1% using mid-October rates, resulting in a full year negative impact of approximately 4%. Excluding foreign exchange and LAGEVRIO, we expect growth of approximately 16%. We are maintaining our gross margin expectation of between 74% and 74.5%. We are increasing and narrowing our operating expense projection to $21.3 billion to $21.7 billion, principally driven by a $250 million payment related to the recent exercise of our option to jointly develop a personalized cancer vaccine as part of our ongoing collaboration with Moderna. As a reminder, our guidance does not assume additional significant potential business development transactions. We continue to assume other expense of approximately $500 million. We expect our full year tax rate to be approximately 14%. We assume 2.54 billion shares outstanding. Taken together, we have increased and narrowed our expected EPS range to $7.32 to $7.37, an increase of $0.05 at the midpoint. The operational momentum in our business would have led to an approximately $0.20 increase in our guidance. However, it is being partially offset by the option payments in Moderna and an incremental headwind from foreign exchange of nearly 1% using mid-October rates. Our guidance reflects confidence in the underlying strength of our business. We continue to demonstrate strong momentum and expect durable underlying demand across our key pillars, including KEYTRUDA, GARDASIL and Animal Health. As you consider your model, there are a few items to keep in mind. While we actively manage foreign exchange through our revenue hedging program, it continues to be a headwind to growth, particularly across products with a larger portion of international revenues, such as in our Animal Health business. The hedging program mitigates the impact of foreign exchange. And to the extent we continue to see foreign exchange headwinds recorded at the product level, we will see a benefit in other revenues. In addition, other revenue includes the supply sales to Organon. As you saw in our results, PNEUMOVAX23 is experiencing pressure, particularly in the U.S. as the market continues to shift towards newer adult pneumococcal conjugate vaccines. We remain committed to our capital allocation priorities. We will continue to prioritize investments in our pipeline and business to drive near and long-term growth across our portfolio. We have made significant progress across our pipeline which Dean will speak to that has the potential to drive sustainable revenue growth. We are augmenting our pipeline by steering the best external science through value-enhancing business development, which we will invest in to realize the promise of these products. We continue to consider the full breadth of the business development landscape. We have ample balance sheet capacity and we will act only when science and value align. Should meaningful business development not materialize and depending on the pipeline of potential transactions, we will opportunistically buyback shares. We remain committed to our dividend with the goal of increasing it over time. To conclude, as we finish the year, we remain confident in the continued growth of our business. Global demand for our innovative medicines and vaccines remains strong and we continue to demonstrate the operational momentum and commercial execution that will enable us to deliver value to patients and shareholders now and well into the future. With that, I’d now like to turn the call over to Dean.

Peter Dannenbaum:

Thank you, Dean. Leo, will you please start the Q&A? [Operator Instructions]

Chris Schott:

Hi, great. Thanks so much. I guess my question was on capital deployment. I think you mentioned in the prepared remarks that if BD doesn’t materialize based on the progression of the pipeline, you’d consider repo at some point down the line. So I guess on that front, how are you thinking about the overall business development landscape at this point? And has your preference on – or I guess actionability of kind of larger deals versus Acceleron type tuck-ins evolved at all as we have gone through this year. I know it’s obviously a big kind of point of debate on the Merck story. So I just love to hear your kind of latest thinking on kind of BD landscape. And are we getting closer to a point where maybe repo makes sense just given the cash that seems to be kind of accumulating at the company? Thank you.

Caroline Litchfield:

So Chris, our capital allocation priorities are unchanged. We seek to provide a competitive return to our shareholders through both the dividend that we pay and we expect will grow, as well as through share repurchases, while we balance the need to invest in our business in driving growth, as well as in our business development strategies, as Robert just outlined. Given where we are, with our focus on business development, our desire to not create excess cash on the balance sheet, we will look opportunistically at share buybacks based on our assessment of that BD pipeline.

Operator:

Next question is from Daina Graybosch with SVB Securities. Please go ahead.

Dean Li:

This is Dean. I’ll take that, and thank you very much for the question. So the top line is, I would just emphasize that our view is that more serotype is not always better and one size does not fit all. Our view and the view that I’ve had when I practice medicine, it’s the right medicine or, in this case, the right vaccine for the right patient at the right time. So when you look at VAXNEUVANCE, which is our 15 valent, which has recurrent responses for serotype 3, but also 22F and 33F. If you look at that and you have to look at the epidemiology of pneumococcal disease, it’s a bimodal curve where really in the first 2 years of life, especially in the first year of life, is really important. And then in the adult section, you realize that there is increasing at 45, 55, 65. So there is a bimodal curve. If you also lay down the different serotypes, the serotypes are quite different between the two. So that’s why we believe it’s the right vaccine for the right patient at the right time. Now we have a pediatric V114 that has ACIP that’s gone through. And in terms of differentiation and relationship to pediatrics, we don’t have clear view of other vaccines, but we are very confident in our ability to give coverage in the first year. And data to date might suggest that, that is an important differentiation in a pediatric study. There is some questions in relationship to top line serotypes that’s been sort of laid out. There has been some discussion of 6 serotype 2 substantial which we can’t really comment on that differentiation, until we know exactly what serotypes and what the real detailed data. In relationship to the adult market, this gives us great insight and great enthusiasm for V116, our 21-valent vaccine. Now that one is specifically targeted for the serotypes that are important for the adult. So it’s 21-valent, but I would just emphasize that 11 serotypes in the 21 valent for V116 is not shared by PCV20. And the reason is that we’re focused on the adult disease, and we are targeting 85% of residual invasive pneumococcal disease. And I would – if I look at the vaccines that are in Phase 3, but also Phase 2 or Phase 1 with recent data, I don’t know that anyone else has a vaccine that’s targeting 85% of the residual invasive pneumococcal disease. So more is not better, one size does not fit all the right vaccine, the right patient at the right time.

Operator:

Next is Colin Bristow with UBS. Please go ahead.

Caroline Litchfield:

This is Caroline. I’ll take a shot at answering your question. So GARDASIL continues to be a very strong growth driver for our company and will be long into the future given to date only 9% of the world’s eligible population are vaccinated. In terms of the quarter results, we saw growth in the U. S., which was largely driven by the CDC timing. In the third quarter of 2021, there was an approximate $125 million buy-in by the CDC. In the third quarter of ‘22, there was an approximate buy-in of $250 million. So year-over-year, that contributed to growth to the tune of approximately $120 million plus. We do expect the majority of that buy-in by the CDC in the third quarter to come out during the fourth quarter. As we look at our opportunity to satisfy the global demand and protect as many lives as we can going forward, we will be supported by the increased supply and capacity that we have coming online commencing 2023. And we expect that, that additional supply will come online over the course of ‘23, ‘24 and ‘25. And therefore, we remain very confident in our ability to protect more lives, to drive growth long into the future, including doubling the revenue of GARDASIL in the year 2030 compared to where we were in 2021.

Operator:

Next is Seamus Fernandez with Guggenheim. Please go ahead.

Dean Li:

Thank you very much for that question. So, yes, we gave top line results. We are moving with speed to present those data to regulatory authorities throughout. But just to step back, I just want to remind, at least myself and every – and others that we were drawn to the sotatercept mechanism because it was a unique mechanism of action. It’s the rebalance activin and BMP signaling. The other mechanisms of action could largely be viewed as vasodilatory, and we have a very strong program in trying to make the best [indiscernible] medicine. But the mechanism of action you would expect for sotatercept, you would expect it would potentially reprogram the cellular response and essentially be disease modifying. We are excited about the results. We know that there was a profound effect on six-minute walk. But as you emphasized, time to clinical worsening, these multi-components are all really important and they came in clinically meaningful and statistically significant. So, we are hopeful that we can potentially reshape the treatment of PAH. I would emphasize that we talk about HYPERION, venous and CADENCE. But VICTORIA, which is the follow-on program. And the reason why that is really important to me is given the results that I see, I very much want the individuals who were on the STELLAR trial have the opportunity to get into VICTORIA, which is an open-label trial, because the effects that we see that will be reported in a meeting likely in 2023 are ones where we must make sure that those individuals who were recruited to STELLAR have continued access to sotatercept. That’s how important we think the results are.

Operator:

Next is Steve Scala with Cowen. Please go ahead.

Rob Davis:

Yes. Steve, thanks for the question. Obviously, it’s been a fast six months – or 16 months in the role. But I would say what I am most proud of, several things. One, the way the organization has come together as one team and really brought more focus in the business. Obviously, the spin-off of Organon, I think was very successful, has given us more simple structures, more focus that I feel very good about. Our progress on business development, obviously, the fact that we moved so quickly with Acceleron and then you heard what are just really exceptional results coming out of the STELLAR study, feel very proud about. But I would say also just overall the way our team has continued to just execute really flawlessly, scientifically, operational, commercially, I couldn’t be prouder of what everyone is doing. We have come together and we are really delivering for all of those things I would say I am very proud about. On the pipeline itself, I actually think we are making a lot of progress. The fact that a year ago won’t even give us credit for having a cardiovascular pipeline. And today, we talk about the fact that by the ‘24 to ‘28 timeframe, we could be having as many as eight new approvals driving revenue that could be in excess of $10 billion by the mid-2030s across the whole suite of assets, some developed internally and obviously some brought into business development, like what we did with Acceleron. So, I feel very good about that. The progress we are making in vaccines, what we are seeing. I think VAXNEUVANCE is underappreciated. There is a notion that Dean laid out of really having a bespoke approach where we were able to cover more of the serotypes that cause disease, whether it be in infants, and then selectively and differently, those in adults. We think that’s a real game changer. Our growing pipeline in neuroscience and immunology, I could go on and on, and the strength that we are continuing to have in adding to our oncology pipeline. So, do I think we have everything we need, no. But do I think we have made great progress in a year, I actually think we have, and it gives me confidence that we are going to continue to drive progress. The fact that we did three important business development deals this quarter alone, spanning mRNA technologies, into circular RNA technologies, personalized cancer vaccines and then more traditional oncology agents with a really novel mechanism, those all are adding to the future promise we have in this company. So, I actually feel very good about that. More to do, but confidence in what we have done so far.

Operator:

Next is Mara Goldstein with Mizuho. Please go ahead.

Rob Davis:

Yes. Maybe I can start that and Caroline or Dean can add on. If you look – if you go back in history, Merck has actually had a strong history and legacy in cardiovascular. And a lot of the – if you will, the muscle memory still exists in our organization. So, I am very confident that we have what it takes. But more importantly, we are already out there right now in PAH. We have Adempas. We have Verquvo. So, we have people calling on these doctors. Recall what drove us to think about Acceleron was what we saw in our pipeline, but also what we saw commercially through that experience. So, we do have the capabilities. And also the other thing I would point out is this is a little different than the way we used to think about the world. This is – in many cases, a lot of these drugs are still specialty drugs. They are not necessarily the true traditional primary care drugs of what we have seen in the past. And I think we are very well positioned. So, I have no worries about our confidence and ability to deliver this commercially. We have done it in the past, and we will do it again.

Operator:

Next is Umer Raffat with Evercore. Please go ahead.

Dean Li:

I will take a shot at both of those questions. I will just emphasize that there is a continuing move to early cancer throughout the field, but especially at Merck. We have talked about the approval that we have in the early stage, both for Lynparza and KEYTRUDA. And this recent Merck-Moderna collaboration is to extend that. It’s essentially an IO-IO combination, initially in melanoma, but with the possibility to expand, deepen and extend throughout other tumor types in different stages. So, given that, the critical thing for patients, especially in the early stage is to be able to have really excellent access to our medicines, and there is a need for scientific innovation. That is why we are advancing the subcu program. And we are confident that, that will not only be important and successful, but it will be really critical as we move into early phase because the ability cannot be linked to an infusion center. So, we are confident in our strategy of moving into early phase, and it is linked. Each scientific innovation required to improve access. In relationship with the RAS program, I have said previously that the RAS program of all of those who are advancing will require a combination. And the ability to move those programs such that you can have a dose and an ability to combine with other medicines is important. We have early data with our RAF inhibitor and many of the attributes that we think are required for that. We are big that the cards are looking like they could positively reflect on our KRAS program. But we will share that data, both in monotherapy and in combination with pembrolizumab, at an appropriate time when we present that at a Congress.

Umer Raffat:

Great.

Operator:

Next is Mohit Bansal with Wells Fargo. Please go ahead.

Dean Li:

Yes. So, let me just speak to, we look at both our both sotatercept, and I would just also emphasize our inhaled soluble guanylate cyclase are the same sort of general sense, which is we are willing to drive it into PAH. But when you look at the mechanism of action, you ask yourself, is there other places that you can affect diseases, that aren’t pulmonary arterial hypertension, but diseases where you have pulmonary hypertension, such as diastolic heart failure or, for example, in lung disease. Our expectation is that we want to explore whether sotatercept and its unique mechanism of rebalancing certain molecular pathways could also be applied to those patients who have diastolic heart failure and pulmonary hypertension. And given the impact that sotatercept has that we have seen already with PAH, that gives us a little bit more confidence that that mechanism may be applicable to those people with diastolic heart failure. Equivalent is as we moved our in-house soluble guanylate cyclase.

Dean Li:

In PAH, we are also evaluating whether that molecule could also be used in those patients with lung disease who have pulmonary hypertension. So, the results give us more confidence at the next step.

Operator:

Next question Chris Shibutani with Goldman Sachs. One moment here and you may go ahead Chris.

Rob Davis:

Sure. Chris, thanks for the question. As we have said in the past, we are always looking at the portfolio. We were always asking what is the best structure to develop and generate long-term value for our business and for our shareholders. And with that view, we continue to believe that the animal health business is a key growth driver for us. It brings a lot of synergies, frankly, in both directions. Obviously, they are benefiting from their ability to access the science on the human health side. We are benefiting from the value they bring and, in some cases, frankly, on the vaccine side, some of the manufacturing technologies are actually being brought over into the human health side. So, we do see synergies in these two businesses. We continue to believe that our ability to invest fully to optimize the opportunity in animal health is there. I think we have demonstrated that to the capital we have deployed and that capital is paying off. And I don’t believe that business would have the capital it’s had to grow if it wasn’t part of Merck. So, it’s benefiting from what we can bring to them. We are benefiting from what it brings to us and as of now we continue to see it as a strategic asset. So, no plans to look at spinning it.

Operator:

Our next question is from Luisa Hector with Berenberg. Please go ahead.

Dean Li:

Thank you very much for that question. So, I just want to emphasize that islatravir is one molecule in our suite of NRTTI molecule. And as you mentioned, we are very interested in the importance of this body of molecules and mechanism, both for the prep setting and for the treatment setting. And it has the possibility of really transforming the longer-acting space. Specifically to your question, we have a large range of clinical data as many…

Peter Dannenbaum:

Excuse me, Dean. Leo, our conference will continue past 9:00 a.m.

Peter Dannenbaum:

Thank you. We are prepared to go a few extra minutes.

Peter Dannenbaum:

Okay. So for those that are still on the line, thank you very much. We’ll have to close the call there because of those technical difficulties. For those that were in the queue, please follow up with IR and we’ll hope to get your questions answered. Thank you all very much.

Peter Dannenbaum:

Welcome to Merck's Second Quarter 2022 Conference Call. Speaking on today's call will be Rob Davis, President and Chief Executive Officer; Caroline Litchfield, Chief Financial Officer; and Dr. Dean Lee, President of Merck Research Labs. Before we get started, I'd like to point out a few items. You'll see that we have items in our GAAP results such as acquisition-related charges, restructuring costs and certain other items. You should note that we have excluded these from our non-GAAP results and provide a reconciliation in our press release. I would like to remind you that some of the statements that we make today may be considered forward-looking statements within the meaning of the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are made based on the current beliefs of Merck's management and are subject to significant risks and uncertainties. If our underlying assumptions prove inaccurate or uncertainties materialize, actual results may differ materially from those in the forward-looking statements. Our SEC filings, including Item 1A and the 2021 10-K, identify certain risk factors and cautionary statements that could cause the company's actual results to differ materially from those projected in any of our forward-looking statements made this morning. Merck undertakes no obligation to imply update any forward-looking statements. During today's call, a slide presentation will accompany our speaker's remarks. The presentation today earnings release as well as our SEC filings are all posted to the Investor Relations section of Merck's website. With that, I'd like to turn the call over to Rob.

Caroline Litchfield:

Thank you, Rob. Good morning. As Rob highlighted, we are maintaining this year's strong momentum with another quarter of exceptional performance in both revenue and earnings. These results further demonstrate that our personal science as the core of our strategy is working. Our success is being enabled by the excellent execution of our dedicated products across the globe and continue to deliver value for patients, customers and shareholders. company revenues were $14.6 billion, an increase of 28%. LAGEVRIO contributing $1.2 billion in revenue. Excluding LAGEVRIO, the business delivered very strong growth of 18%. The remainder of my comments will be on an ex-exchange basis. Our Human Health business continued its strong momentum with growth of 33% or 21%, excluding LAGEVRIO driven by our key pillars. Our Animal Health business also delivered strong performance, with sales increasing 5% driven by growth across both our livestock and companion animal products. Now turning to the second performance of our key brands. In oncology, KEYTRUDA grew 30% to $5.3 billion, driven by the vast global demand as well as continued expansion into new indications and to reflect the preponed impact it is having more patients across the globe. In the U.S., KEYTRUDA continues to demonstrate momentum in metastatic indication and is experiencing strong growth from recent launches in early stage transfers, including triple-native breast renal-cell carcinoma and melanoma. KEYTRUDA is now approved in 6 indications in earlier stage cancers. We've seen strong utilization and are confident in its continued success as physician and patient experience growth. We have seen a particularly strong uptake in neoadjuvant adjuvant high-mileage triple-net breast cancer based on KEYNOTE-522, offering a distinct treatment patients in an area of significant unmet need. In the metastatic setting, KEYTRUDA maintained the leadership position in non-small lung cancer capturing 8 out of 10 patients. Outside the U.S., KEYTRUDA was driven by continued uptake in non-small cell lung cancer and the ongoing in neck cancer and renal cell carcinoma. Initial indicators also point to encouraging trends in the United States indications, including breast cancer and renal carcinoma in key European markets. The Lynparza remains a market-leading part inhibitor. Our revenue grew 17%, driven by uptaking patients with high-risk early stage breast cancer following FDA approval by [indiscernible]. We look forward to potentially expanding leadership by reaching the digital prospect cancer patients based on study. Lenvima revenue grew 33% due to strong demand following the launch of in advanced renal cell carcinoma and PMOT775 in metastatic endometrial cancer. New patient target tumors remain strong. Lastly, we continue to be encouraged by • WELIREG which is tracking in line with expectations. Portfolio again delivered excellent growth rate by GARDASIL, which increased 40% to $1.7 billion. Outside the U.S., GARDASIL significant growth was driven by strong underlying demand, particularly in China as well as increased supply. In the U.S. that decrease primarily due to CDC purchasing patterns, although we continue to be impact from [indiscernible]. We continue to invest behind activation campaign to ensure that parents recognize the importance of routine division to their children, particularly during the [indiscernible]. We remain confident in the growth trajectory of GARDASIL given the proven ability to help prevent certain HPV-related cancers in both females and males. In our hospital acute care portfolio, sales was 15%, driven by greater share among and the increase in surgical procedures. Our animal health business delivered another solid quarter, with sales increasing 5%, grew 6%, driven by higher demand in and poultry. Companion animal sales increased 3% due to global demand for line of product. I will now walk you through the remainder of our P&L, and my comments will be on a non-GAAP basis. Gross margin was 74.7%, a decrease of 1.8 percentage points. The decrease was due to the impact of [indiscernible], higher inventory baseline increased manufacturing costs, partially offset by favorable product mix across the remainder of the portfolio as foreign exchange. Operating expenses decreased 19% to $5.2 billion, reflecting charges primarily related to last year's $1.7 million acquisition of which is reflected in our second quarter 2021 R&D expense. Operating expenses excluding these charges incline our plan, driven by investments in our key growth drivers and pipeline. Other expense was approximately $200 million, reflecting higher-than-expected pension settlement effect. Our tax rate was 13.8%. Taken together, we add $1.87 per share. Turning now to our 2022 non-GAAP guidance. The underlying strength of our business enables us to rate and narrow our full year revenue guidance. We now expect revenue to be between $57.5 billion and $58.5 billion. Our increased revenue guidance range represents growth of 18% to 20% or 13% to 14%, excluding LAGEVRIO and the impact from foreign exchange. The projected impact from burn exchange includes an incremental headwind of more than 1% using this July rent resulting a net impact of approximately 3%. We are maintaining our gross margin expectation of between 74% and 74.5%. We are increasing our operating expense projection to $20.5 billion to $21.5 billion, primarily driven by the $219 million upfront payment from the recently announced collaboration with Orion Corporation. As an ongoing practice, our finance does not include significant potential when we development transaction. We increased our expectations of other expense to approximately $100 million, reflecting higher-than-anticipated pension settlement expense. We continue to assume a full year tax rate between 13.5% and 14.5%. We assumed 2.54 billion shares outstanding. Taken together, we have managed our expected EPS range to $725 to $7.35. The operational front in our business would have led with approximately 20% increase in our guidance. This strength is being offset by the upfront entry to Orion, by pension settlement expense and an incremental headwind on foreign exchange more than 1% due in [indiscernible]. Overall, that guidance reflects our confidence that the strong underlying momentum of our business will continue into the second half of the year. As you consider your models, there are a few things to keep in mind. First, the pandemic as a tailing to growth in the first half of the expect the benefits to yearly reset over the remainder of the year. Also, we actively managed the impact of foreign exchange through our revenue saving program. To the extent we see further negative impact from foreign exchange, we will see additional benefits from our hedging in other revenues as we did in this quarter. Other revenue also includes supply to Organon and the Johnson & Johnson for its COVID-19 vaccine as well as we see related to our out licensing arrangements. In total, we expect other revenue to be higher in the second half versus first half of 2022. With respect to our products, for [indiscernible], we continue to expect a negative impact to U.S. sales, given the shift towards new adults pneumococcal vaccine. On Animal Health, we're seeing normalized industry growth rate as we adverse favorable trends in ending resulting from pandemic and experience foreign exchange headwinds. However, given our broad innovative portfolio, we are well positioned to continue to drive the market growth in 2022 and beyond. Finally, we continue to expect to look at full year sales of $5 billion to $5.5 billion, with second half sales weighted to the fourth quarter. Adaptation priorities remain unchanged. We will continue to clarify investments in our pipeline and business to realize the value of the many near and long-term opportunities in [indiscernible]. We continue to pursue compelling with strategic business development to augment our internal pipeline. Our recent collaboration with Orion is another example of our execution of this strategy. We remain committed to our dividend, which we expect to increase through the time. Finally, to the extent we have extra cash, we will return it to shareholders through share repurchases. To conclude, at the end of the second half of the year, we remain very confident in business, driven by global demand for our innovative medicines and vaccines. Our excellent execution will enable us to continue to deliver value to patients and shareholders well into the future. With that, I'd now like to turn the call over to Dean.

Peter Dannenbaum:

Thank you, Dean. Alan, we're ready for the Q&A session. If you could please assemble the queue.

Unidentified Analyst:

Maybe a 2-part one here. Just wondering if there's a pathway to extend the IP on KEYTRUDA via either subcu formulator maybe some other type of formulation patents? And then is there anything from a technical perspective that would prohibit a co-formulation of KEYTRUDA with an antibody drug conjugate?

Operator:

That will be from Evan Seigerman with BMO Capital Markets.

Robert Davis:

Yes. Evan, thanks for the question. This is Rob. As you said, there is reports out really just came out yesterday of a potential deal with the Senator and in that is elements of what have been part of the build back better plan related to drug pricing. So as we look at that, I think it's important to understand, first and foremost, we do have significant concern on one very important element of the provision, which is the fact that there is what we see as price setting, it's termed in negotiation. But in effect, what it is, it is price setting on drugs after a period of time. And we do believe that will be highly chilling on future innovation because, especially if you think about an area like oncology, oncology is an area that the development of the drug continues long after the first approval. If you take KEYTRUDA, the launch in 2014 between 2014 and 2022, we had something like 30-plus indications approved. We expect to have well more than double that between 2022 and 2028. And our concern is that if you start to have the threat of discounts, mandatory discounts that could cause companies to question that innovation because you'll have to question whether or not you're going to see the return. So we see a higher chilling effect of that, and it's something that we will continue both at and as the industry to make sure that we communicate our concerns there. And the only other thing I might add is, as you think about how we think about this to our business going forward. It's important to understand that as we look at this, while obviously, it will have an impact, importantly, as we've planned for the future of the business, we have always assumed some form of price pressure coming, including in the United States. I think we've communicated that in the past. So as we look at this, and you think of a relative to the guidance we've given in the past of expectations for strong growth through our long-range period. That continues and includes the assumptions around this. So while I think we will manage it, I do worry about what it will do to innovation in the industry.

Andrew Baum:

A couple of questions. Firstly, you've announced a couple of licensing from China of ATC. I think one of them is in late-stage development. It's obviously widely reported that you're in talks with Seagen, which has Phase III data from another ADC molecule, which would compete with in HER2. In general, I'm just interested, Dr. Pastor seems to have closed the doors on seeking approval in the U.S. using data from Chinese trials. But operationally, how fast does it enable you to go, knowing that you have efficacy and safety signals in a Chinese population in expediting the move into Phase III i.e., is there an advantage here that you could enable you to catch up with the market leaders and the respective categories? And then second question on islatravir, perhaps you care to update us how your discussions with Gilead in terms of and the FDA in terms of resuming trials. Is this drug alive as a prophylactic, in PREP as a treatment, both or neither?

Operator:

That will be Louise Chen with Cantor.

Dean Li:

Well, let me answer it from a scientific standpoint. Maybe we'll have Carolina or Rob answer it from a market standpoint. I do think it's really important to just highlight, at least for me, PD-1s have been incredible and metastatic through a broad range of tumor types. And we keep growing for earlier stages. And it's not apriority that a medicine that works in the metastatic patient who has a very different benefit/risk ratio will be truly effective in the early stage. And it's been impressive. We have 6 approvals, whether it be in breast, in renal cell carcinoma and melanoma. And we have a positive trial in relationship to lung, and we have many others advancing. So I think that part of it is I think the uptake has been good, but the most important thing is that scientifically, the data has been very good. And I think the field will adopt it. I think one of the things that will be critical as the field adopts it is that oftentimes, you're now talking not necessarily about a medical oncologist. So there will be work for us to do, but I think the results speak for themselves. And I would recommend that people look at that data, and I think that it's an important advancement in the field. But in terms of the uptake, Caroline, do you want to take with that?

Operator:

We will go to Umer Raffat with Evercore.

Robert Davis:

Yes. I appreciate the questions. And on your first question around the M&A space and what we see in the oncology field. No, I would just start by saying, obviously, we are very proud of the success we've had with KEYTRUDA and the fact that it's been able to impact so many people's lives, as you say, across so many different tumor types. But I think it's important to understand that oncology continues to be an incredibly competitive field, and importantly, it's not monolithic. You have to look tumor by tumor and even modalities, whether it's I/O or targeted therapy. So there are multiple different approaches, multiple modalities and it is a very tumor specific. And as you know, we have to develop these drugs indication by indication of investing in the science to bring each of those forward. And in that regard, as we look at it and as we thought about it, we continue to believe that while the environment is more complex. And obviously, we'll have to be very thoughtful on how we navigate it I believe, we believe, as long as we are doing deals that are science-driven, where we accelerate innovation, and we can show that we can expand access to patients around the world and in the United States to medicines that there are still deals to be done and that there's a path to move forward. And so that's very much where we're focusing and why we continue to believe the opportunity exists to continue to expand treatments for patients and and for the benefit of, frankly, all stakeholders, including shareholders. On your second question, and I think it depends on the way you look at it. as far as the upcoming regulation. Obviously, if you look across what is being proposed, if you're speaking specifically to the potential for mandatory price discounting at some point. Obviously, the language has to be finalized. But if you look at where it is today, the way it is being proposed is that for a period of time after a drug is approved during its period of exclusivity for -- right now, it's roughly 7 years for negotiation for slow molecules, 11 years for large molecules, you were able to operate with no discount. At that period of time, there would be a discussion and opportunity for HSS to select the drug depending on their determination of which drugs to look at. Right now is the language as discussed, we'll pick 10 drugs a year and up to the HSS to determine which drug they pick. But importantly, then the negotiation itself once it is done and the discount is determined and that discount is outlined in the legislation would take effect at year 9 for a small molecule year for a large molecule. So as you think of something like KEYTRUDA, we're really talking about periods of time that are out around the time of loss of exclusivity in 2028. And obviously, there's other language that's being proposed potentially to allow for an exception if there are biosimilar products in development coming that then you would not be subject to it. So the reality of it is it's unclear what the impact will be in the short term, we don't see impacts from that specific part of the regulation. It will be longer term as it relates to our important drugs, KEYTRUDA and GARDASIL. And then obviously, we have to see how the final language comes out. But in the language or then the specified discounts that will be set. So it's not reference price in the way they're setting it up right now. And then obviously, beyond that, there is what they have around the Part B reforms, which actually we support because we believe that will reduce the out-of-pocket costs for patients at the counter, but our -- the reason we continue to oppose the overall legislation is a strong belief that, that focus on mandatory discounts after a period of time as chilling innovation. So I'm not sure I got your question, but I think that's what you were trying to get at.

Geoffrey Meacham:

I just had a couple of quick ones. Dean, I wanted to ask you on KEYNOTE-412, the recent -- it didn't hit significance. Did CRT add complexity to the study in terms of your assumptions? And more broadly, if you look at other indications, does a CRT backbone present any particular challenges when you look at other keynote studies? And then on COVID, the recent infection trends just over the course of this year or the emergence of any new variants, does that change the strategy about the future investments you guys are going to make in LAGEVRIO or even other orals?

Caroline Litchfield:

And Jeff, this is Caroline. The only thing I would add in terms of further investments is our belief in the molecule as being a molecule that could be impactful not only against COVID-19, but also pan coronavirus, RSA and flu. And as a result, we will invest in appropriate programs to try and prove that out.

Mara Goldstein:

Firstly, I just wanted to understand the statement about KEYTRUDA supplemental PDUFA for neoadjuvant and adjuvant non-small cell lung cancer? And have you been asked for additional data? Or are you planning for a major amendment? And then secondarily, I just wanted to also get some clarity on the comment about excess cash for share repurchase. And at what threshold should we be thinking about that if you're also committed to raising dividend?

Caroline Litchfield:

And Mara, in response to your question on our utilization of excess cash, the capital allocation priorities of our company are unchanged. We continue to invest first and foremost in our business and the great opportunities that are in front of us. Business development is a strategic priority for us, and we will invest in business development as we have done in the past. We intend to continue to raise our dividend over time and we will then return any excess cash to our shareholders via share buyback. We do not intend to sit with multiple capacity on our balance sheet for periods of time and not use that cash in this regard. So I hope that addresses the use of our cash.

Seamus Fernandez:

So maybe just 1 M&A question. Can you just clarify whether any acquisition plans or that Merck will consider is likely to be all cash or if there would be a potential use of equity that would be or could be considered in a potential transaction. And then separately, just wanted to get a little bit of the vision for V116? And where and how you see V116 competing in the overall market? Are we really just looking at that as a potential opportunity solely for adults? Or do you envision the '21 balance actually being a high-use target opportunity in the pediatric patient population as well. And then just trying to get a sense of timing of when we could see V116 actually competing in market and how you see the overall market evolving over time?

Dean Li:

Yes, in relationship to the questions that you had about V116, I just want to reiterate or reemphasize the strategy that we think, which is in different age groups or different populations, the stereotypes that are most troublesome for different populations is very different. So the whole focus of V116, the whole focus of the V116 is to recognize the serotypes that are specifically important for adults and to target that. And that's what V116 is, and that's why we had the first of 4 current Phase III trials that have to run its course. There is not a view from my standpoint, scientifically, that this is a vaccine that I would drive into the pediatric population because the epidemiology as of right now would suggest that, that would not be the right place to put this vaccines. We want to put the vaccines where the serotypes match what is happening to that patient population.

Operator:

That will come from Carter Gould with Barclays.

Dean Li:

Yes. So I just want to emphasize that trial is on track, and that trial should -- our intention is it should support filings? I should also emphasize that we have more than just 1 subcutaneous program and different images and different subcutaneous because we think that there may be a different patient population that will be important for different sort of formulations, the group formulations. I should also emphasize that just like we have Q3 weeks and weeks Q3 weeks and Q6 weeks were intravenous. I think it's also important that we open up that possibility in the subcutaneous range as well.

Robert Davis:

Yes. Well, I'd just like to thank everyone for joining us today, and maybe I'll just conclude by reiterating my appreciation for the tremendous efforts of the Merck team and really, we're continuing to perform exceedingly well in a tough environment to advance our science and ensure our important medicines and vaccines reach the patients around the world that are counting on us. So I appreciate that, and I can tell you, I remain very confident in our underwriting momentum, and I look forward to continuing to give you updates on our progress as we move forward. With that, have a great day.

Peter Dannenbaum:

Thank you, Grace, and good morning. Welcome to Merck's first quarter 2022 conference call. Speaking on today's call will be Rob Davis, President and Chief Executive Officer; Caroline Litchfield, Chief Financial Officer; and Dr. Dean Li, President of Merck Research Labs. Before we get started, I'd like to point out a few items. You will see that we have items in our GAAP results such as acquisition-related charges, restructuring costs and certain other items. You should note that we have excluded these items from our non-GAAP results and provide a reconciliation in our press release. I would like to remind you that some of the statements that we make today may be considered forward-looking statements within the meaning of the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are made based on the current beliefs of Merck's management and are subject to significant risks and uncertainties. If our underlying assumptions prove inaccurate or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements. Our SEC filings, including Item 1A and the 2021 10-K, identify certain risk factors and cautionary statements that could cause the Company's actual results to differ materially from those projected in any of our forward-looking statements made this morning. Merck undertakes no obligation to publicly update any forward-looking statements. During today's call, a slide presentation will accompany our speakers' prepared remarks. The presentation, today's earnings release as well as our SEC filings are all posted to the Investor Relations section of Merck's website. With that, I'd like to turn the call over to Rob.

Caroline Litchfield:

Thank you, Rob. Good morning. As Rob highlighted, we have had a very strong start to 2022 with exceptional performance in both revenues and earnings. These results further demonstrate that our focus on science and innovation at the core of our strategy, enabled by excellent execution of our dedicated colleagues across the globe, is delivering value for patients, customers and investors. Total company revenues were $15.9 billion, an increase of 50%. LAGEVRIO contributed $3.2 billion in revenue. Excluding LAGEVRIO, the base business delivered very strong growth of 19%. The remainder of my comments will be on an ex-exchange basis. Our human health business continued its strong momentum. Excluding LAGEVRIO, the human health business grew 21% driven primarily by our key pillars as well as the reduced impact of the pandemic. Our Animal Health business also delivered above-market performance with sales increasing 9% driven by growth across both companion animals and livestock segments. Now turning to the first quarter performance of our key brands. In oncology, KEYTRUDA grew 27% to $4.8 billion, reflecting continued robust global demand and the expansion into new indications. In the U.S., KEYTRUDA continues to demonstrate strong growth across all key tumors and is benefiting from recent launches in earlier stage cancers, including triple-negative breast, renal cell carcinoma and melanoma. KEYTRUDA is currently approved to treat five indications in earlier stage cancers, and we are excited about the potential opportunity to expand into adjuvant lung cancer based on the encouraging data from KEYNOTE-091. We continue to be confident that KEYTRUDA's robust clinical data, combined with physicians' familiarity and experience with the product, will support expanded use and patient benefit in early-stage disease. In the metastatic setting, KEYTRUDA continues to maintain its leadership position in non-small cell lung cancer, capturing 8 out of 10 eligible new patients. Outside the U.S., KEYTRUDA's growth continues to be driven by lung cancer and the ongoing launches in head and neck cancer and renal cell carcinoma. Lynparza remains the market-leading PARP inhibitor. Our alliance revenue grew 20%, driven by uptake in metastatic breast cancer. We are also excited by the expanded opportunity in early stage breast cancer, following the recent FDA approval based on the OlympiA study. Further, we look forward to potentially reaching a broad prostate population based on the PROPEL study. Lenvima alliance revenue also had very strong growth driven by uptake following the launches of KEYNOTE-581 in advanced renal cell carcinoma and KEYNOTE-775 in metastatic endometrial cancer, where we are seeing encouraging new patient share trends across each of these tumor types. Lenvima growth also benefited from increased demand in hepatocellular carcinoma in China and certain onetime items. We are also excited by the launch of WELIREG for patients with certain VHL-associated tumors. WELIREG continues to generate strong interest among scientific leaders, providers and patients. Although still early in its launch, WELIREG has had strong uptake, providing a treatment option to the significant unmet need for these patients. We are working to potentially extend its reach to broader RCC indications in the future. Our vaccines portfolio again delivered excellent performance led by GARDASIL, which increased 60% to $1.5 billion. Outside the U.S., significant growth was driven by strong underlying demand across key geographies and particularly in China as well as increased supply. In the U.S., sales increased due to the timing of CDC practices. Global demand for GARDASIL remains robust support strong clinical and real-world data as well as efforts to increase the recognition of GARDASIL as a vaccine that can help prevent certain HPV-related cancers in both females and males. In our hospital acute care portfolio, BRIDION sales grew 20%, driven by the ongoing recovery in surgical procedures during the quarter and continued strong leadership of the neuromuscular blockade reversal agent class. Our Animal Health business delivered another quarter of robust growth, with sales increasing 9%. Companion animal sales increased 13%, driven by global demand in parasiticides, including the BRAVECTO line of products as well as vaccines. Livestock sales increased 7% due to higher demand in ruminant and poultry. I will now walk you through the remainder of our P&L, and my comments will be on a non-GAAP basis. Gross margin was 70.7%, a decrease of 5.9 percentage points, driven primarily by higher LAGEVRIO sales. As a reminder, we share profits from LAGEVRIO equally with our partner Ridgeback, which is reflected within cost of sales and reduces our gross margin percentage. Gross margin this quarter also reflects favorable impact of product mix, offset by higher manufacturing costs. Operating expenses increased 7% to $4.8 billion as we continue to prudently invest behind our growth drivers and pipeline. Other expense was approximately $140 million. Our tax rate was 14%. Taken together, we earned $2.14 per share. Turning now to our 2022 non-GAAP guidance. As a reminder, at the request of the SEC, certain companies in our industry, including ours, have made changes to non-GAAP reporting. We will no longer exclude significant expenses for upfront and milestone payments related to collaborations and licensing agreements as well as transactions accounted for as asset acquisitions from non-GAAP results. As a result, $1.7 billion of R&D charges primarily related to the acquisition of Pandion are now included in our recast 2021 non-GAAP results. This increased R&D expense by $1.7 billion and decreased non-GAAP EPS by $0.65. There was no impact to the first quarters of 2021 and 2022. Our 2022 guidance does not assume any significant transactions that would have previously been excluded from non-GAAP. So this could change in future quarters if we execute business development which is a strategic priority. The underlying strength of our business enables us to raise and narrow our full year guidance. We now expect revenue to be between $56.9 billion and $58.1 billion, representing growth of 17% to 19% or 11% to 12%, excluding LAGEVRIO and the impact from foreign exchange. The projected impact from foreign exchange includes an incremental headwind of approximately $200 million using mid-April rates, resulting in a full year negative impact of just over 2%. We are increasing our gross margin expectation to between 74% and 74.5%. We expect operating expenses of $20.3 billion to $21.3 billion. At the midpoint, this is consistent with what was implied by our prior guidance. We expect other expense of approximately $350 million. We assume a full year tax rate between 13.5% and 14.5% due to an increase in estimated U.S. taxes to be paid on foreign income. We assume 2.53 billion shares outstanding. Taken together, we have increased our expected EPS range to $7.24 to $7.36, representing pull-through of the operational strength from our key pillars and operating expense leverage, offset in part by a slight reduction in the top end of our LAGEVRIO sales assumption, the increase in our tax rate and an incremental 1% headwind from foreign exchange using mid-April rates. As you consider your models, there are a few areas to focus on. First, on LAGEVRIO, we are narrowing the range of our full year guidance to $5 billion to $5.5 billion. We have entered into supply and purchase agreements for approximately 10 million courses of therapy. Since authorization, we delivered 6.4 million courses of therapy, including 5 million in the first quarter. We expect approximately half of the remaining full year revenue from LAGEVRIO in the second quarter. We continue to expect strong annual growth for GARDASIL, especially in ex-U.S. markets, including China. Finally, as a reminder, our other revenue line contains several items, including supply sales to Organon, which we began recording upon the completion of the spin-off last year and to Johnson & Johnson for its COVID vaccine. Also included are our revenue hedge and royalties. Other revenue in the first quarter also benefited from approximately $100 million in receipts relating to out-licensing agreement. Our capital allocation priorities remain unchanged. First, we will continue to prioritize investments in our business and pipeline to drive near- and long-term growth. We will continue to be appropriately aggressive in augmenting our internal pipeline through strategic business development, and we intend to pursue additional value-enhancing opportunities. We remain committed to the dividend with the goal of increasing it over time. To the extent, we have excess cash, we will return it to shareholders through share repurchases. To conclude, we remain very confident in the growth of our business, driven by the global demand for our innovative medicines and vaccines. We are in a position of financial and operational strength and our continued execution will enable us to deliver value to patients and our shareholders well into the future. With that, I'd now like to turn the call over to Dean.

Peter Dannenbaum:

Thank you, Dean. Grace, if you could please begin the Q&A. And we request that analysts limit themselves to one question each to get to as many questioners as possible. Thank you.

Ed Carter:

This is Ed Carter on for Carter. We wanted to ask about GARDASIL. If you could talk about any impact you're seeing in China, either from a demand perspective or disruptions to manufacturing? And in that context, should we think about cadence -- or should we think about cadence over the year being notably different than in the years past? There's just a lot of different crosses play. So any color there would be helpful.

Operator:

Thank you. Next up, we have Mohit Bansal from Wells Fargo. Your line is open.

Dr. Dean Li:

Thank you for that question. So I just wanted to emphasize the question focuses on the addition of another checkpoint inhibitor TIGIT on top of PD-1. And this is a strategy to sort of deepen the response of PD-1 and PD-L1. I think it will be very important to see that data and look at the contribution of components. And really, we're -- we have a TIGIT program that we're also advancing in non-small cell lung cancer and small lung cancer. So, the field will have to sort of see as the data evolves, how much does TIGIT add to PD-1 in the lung space. But I do want to make a broader sort of comment, which is you'll see movements in TIGIT that was recently movement in PD-1, and CPLA4 and PD-1 and LAG-3. What you recognize as each of those combinations, what they do is if you're able to show a benefit of the additional agent, it doesn't have as broad of an impact as PD-1 has in many different tumors. And so, one of the things that I think is important to highlight is our strategy is not to just be invested in LAG-3, not to be just invested in CPLA4, not be just invested in TIGIT, but to be invested in all three and to focus them in specific tumor types.

Seamus Fernandez:

So, just really wanted to focus in on sotatercept and the six-minute walk test as the primary endpoint. If you guys could just help us understand what is being done in the clinical trial to really manage closely the risk that sort of a subjective endpoint represents? Or is your confidence that the magnitude of the difference that you saw in the Phase II will comfortably cover the challenges of the six-minute walk test that we've seen in some other studies given some placebo responses that raised levels of concern? So just love to get your thoughts there.

Operator:

Thank you. Next, we have Chris Schott from JP Morgan. Your line is open.

Rob Davis:

Great. Chris, thanks for the question. Yes, on the BD landscape question, the short answer is we are not seeing a fundamental shift in seller expectations as of this point. I think as time continues, if we see the market reset to become more permanent and more importantly, if the IPO market continues to be challenged for biotech companies, that might change over time as companies become more cash constrained. There are some smaller players that do have cash challenges. So I think that's where you could see movement first. But fundamentally, we've not seen a change in the landscape yet. We'll have to continue to watch. With regards to the Animal Health business, our view continues to be that the Animal Health business, as you said, is core to the Company. It's core to our strategy as part of a growth driver for the Company. But as we've always said, we look at this regularly. We always are challenging ourselves to ask, what is the long-term value creation opportunity of this business in our hands relative to what would be outside of the Company? And on a long-term view, we continue to believe it is best in our hands as part of the Company. But if that situation evolves, we obviously will continue to be objective in how we analyze that. But we do not look at the short-term the arbitrage opportunity for us. It's more about the long-term value creation, and that has not changed as of now.

Chris Shibutani:

If I could ask a question on KEYTRUDA, the strength, particularly out of the U.S. this quarter, if you could help us with some of the underpinnings there? And relatedly, longer term, 2025, I think you framed how KEYTRUDA, your objective is to have -- I guess the wording changed slightly. You were previously looking for 30% coming from adjuvant with your focus framed around the U.S. If I'm reading it correctly, you brought in the framework here to now think about it as 25% on a global basis. Maybe update us on where you feel you are in terms of making progress towards achieving those objectives of the adjuvant revenue contribution?

Caroline Litchfield:

So to Rob's point, we are extremely excited about the opportunities we have for adjuvant and the impact that, that has on patients. We initially shared that we expected 50% of our growth to come from adjuvant, representing 30% of the U.S. business. We have now extended that to say 50% of the growth will come from adjuvant, representing 25% of our global business in the year 2025. And to Rob's point, our early introductions into the earlier-stage cancers with five indications now in KEYTRUDA are putting us on a very good course to have this impact.

Umer Raffat:

Maybe let me touch up on molnupiravir real quick. I think the total utilization to date is about 200,000 courses through mid-April. And it looks like, at least based on third-party data sets that the Pfizer regimen is getting used 8 to 10x more than molnupiravir. So I guess my question is, if only a couple hundred thousand courses have been used through mid-April and 3.1 million courses were contracted to U.S., is there any recourse for U.S. to return a chunk of these courses back? And I'm asking because some of these sales have been recorded in P&L. I just want to make sure they're permanent sales.

Caroline Litchfield:

So Umer, thanks for the question. First, let me start. We're proud of molnupiravir, LAGEVRIO and the impact that it can have on the world. And it has impact to the comments that Dean made given its importance, especially in patients that have drug-to-drug interactions. The data that we have access to suggest that we have actually had utilization by 500,000 patients globally at this stage. We have shipped 6.4 million courses as of now. Both shipments represent expectations for utilization over a period of time. And we're actually seeing extremely strong utilization, especially in ex-U.S. markets, where the statistics you quote are actually reversed in some of the markets. We have a very strong market share. So as we sit here today, we've guided on the $5 million to $5.5 billion based on the contracts that we have in hand, and we are confident in that in our financials.

Daina Graybosch:

I have another one on KEYTRUDA in early stage. Can you guys talk to how the success of Opdivo plus chemotherapy in neoadjuvant lung cancer changes your expectations or strategy for the early-stage opportunities in lung cancer and in the other tumor?

Operator:

Thank you. Next, we have Andrew Baum from Citi. Your line is open.

Dr. Dean Li:

Yes. So let me just step back for just a moment. The benefit risk of whether its platelet or coagulation factors in terms of clotting is something that's actually very topical in the news. I would just emphasize for years, for probably a decade or more, aspirin has been just everywhere. And recently, people realize the benefit risk one has to be very careful. There's been a major change in the guideline. So that impacts how I think about it. The other sort of thing the impact is, if you look at Factor XI, the fundamental advantage of that is that you can get blockage of the coagulation cascade with, by genetic, very little impact in relationship to adverse effects. And so for me, the critical thing is to prove that as quickly as possible. So, we immediately go, where's the problem, where thrombosis and bleeding is both impacted there. And so, that's why we ran the end stage renal disease. But I could see in the future mechanical devices, one of my favorite sort of things is left ventricular assist device, I think that will continue to need to be monitored in the future. So that's a place where the risk of bleeding and the risk of thrombosis is really high, where we have chosen to be a little bit careful is, for example, broader sort of things such as atrial fibrillation and the risk relationship to stroke because we look at the Factor X as very effective. There are bleeding complications, but to make a safety argument for it, you're talking about a very, very large trial. So, we are racing to places where the benefit risk of thrombosis and clotting and bleeding, where that differential would make something like a Factor XI have the biggest impact.

Louise Chen:

I wanted to ask you about your pneumococcal conjugate vaccine. And how you think your more targeted approach will be a competitive advantage versus the one size fits all that we're seeing now? And is there any precedence to what you're doing with V116 and 117? And maybe just lastly, how will you make that message clear to physicians since if everything goes as planned, you'll have several PCVs on the market?

Operator:

Thank you. Next, we have Mara Goldstein from Mizuho. Your line is open.

Dr. Dean Li:

All right. So, let me just sort of separate. So we always talk about expand, deepen and extend. And when we talk about deepen, we're trying to get a deeper response with PD-1s. And there's a series of things that we do with what I call non-I-O agents, which is chemotherapy, we're doing stuff with many other people as well as ourselves with ADCs. There are RAS programs that are advancing. So, we think that sort of combination, there's large precedents throughout our portfolio already, and there will continue to be. And that's also true with Lenvima and Lynparza. The specific question I think you're driving to is combinations of I-O with I-O agents and LAG-3, CTLA-4 and TIGIT. So at least in our mind, we do recognize that there was demonstration of LAG-3 adding to PD-1 in melanoma. And I think that's an important signal for us. Where we focused our efforts to LAG-3 is in MSS CRC. So we know that PD-1s work in MSI high, and no one's really been able to crack MFS CRC. So, that's very important and also in classic Hodgkin. I would say, in relationships with CTLA-4, there was recent data with HCC. I would make a comment that I think would make some of the people from Merck smile a little bit, we were the ones who actually did the study with PD-1 and CTLA-4 in relationship to lung. And we could not show a clear contribution of component of CTLA-4 over PD-1. So, that is not a place that we think is an important place for patients, and that is not a place that we're going because we have -- we did this study to demonstrate that. Where we think there could be is, clearly, other people have recently released HDC. We're focused in, for example, in renal cell carcinoma. And then PD-1 and TIGIT, our initial focus is in non-small cell lung cancer and also small cell lung. And we're advancing a series of trials in that. So, I hope that gave a comprehensive view of LAG-3, CTLA-4 and TIGIT in relationship to ILT4, other checkpoint inhibitors, such as CD27 or in relationship to cytokines. I think the data that we're doing in earlier stages will have to play out for us to be able to answer that more completely.

Operator:

Thank you. Last question comes from the line of Colin Bristow from UBS. Your line is open.

Caroline Litchfield:

Thank you for the question. This is Caroline. So let me start first with the supply, demand. There is significant demand for GARDASIL. This cancer-preventing vaccine in the HPV area has only reached today 9% of the global eligible population. So, there is significant runway ahead of us to protect lives and to drive growth for Merck. Indeed, we've stated that we expect the revenue in year 2030 to be double the $5.7 billion we achieved in 2021. So, we have significant opportunity ahead of us. In order to achieve that opportunity, we are building new facilities that will be coming online from 2023, 2024 and 2025. So we're going to have a step-up in the level of supply to the market that will happen over that period. Specific then to this year, we will see a continuation of the supply into the market as we did in 2021, albeit not quite at the same step-up that we achieved in 2021. So, we remain really confident in our ability to drive strong growth for GARDASIL both in 2022 and the years to come.

Rob Davis:

Well, just let me say thank you for your time and your interest today. And I'd just like to conclude by again thanking the Merck team globally for their focus and commitment and really in driving the results you've heard about today, but continuing to ensure when we keep the purpose of the Company front and center, which is to deliver for patients. Hopefully, you get the sense, we are very confident in the business momentum we have. And I'd like to say as well we are feeling better and better about the evolution of our pipeline and things you've heard today, we're starting to expand. We're doing all of the things we need to do. We have more to do, but we're making great progress. And that's why I have such confidence in the sustainability of our business long term. So, we look forward to continuing to share these results with you to deliver for the patients that count on us and in turn bring value to the shareholders. So with that, I'd say thank you and have a great day.

Peter Dannenbaum:

Thank you, Grace and good morning. Welcome to Merck’s fourth quarter 2021 conference call. Speaking on today’s call will be Rob Davis, President and Chief Executive Officer; Caroline Litchfield, Chief Financial Officer; and Dr. Dean Li, President of Merck Research Labs. Before we get started, I’d like to point out a few items. You will see that we have items in our GAAP results such as acquisition-related charges, restructuring costs, and certain other items. You should note that we have excluded these from our non-GAAP results and provide a reconciliation in our press release. I would like to remind you that some of the statements that we make today may be considered forward-looking statements within the meaning of the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are made based on the current beliefs of Merck’s management and are subject to significant risks and uncertainties. If our underlying assumptions prove inaccurate or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements. Our SEC filings, including Item 1A in the 2020 10-K identify certain risk factors and cautionary statements that could cause the Company’s actual results to differ materially from those projected in any of our forward-looking statements made this morning. Merck undertakes no obligation to publicly update any forward-looking statements. During today’s call, a slide presentation will accompany our speakers’ prepared remarks. The presentation, today’s earnings release, as well as our SEC filings are all posted to the Investor Relations section of Merck’s website. With that, I’d like to turn the call over to Rob.

Caroline Litchfield:

Thank you, Rob. Good morning. 2021 was a year of exceptional performance for our business. We drove robust top line growth of 17% and bottom line growth of 33%. Our teams performed with agility and executed with excellence, despite challenges from the ongoing pandemic. We are also very proud of the significant efforts to bring molnupiravir to patients worldwide. These results reinforce the confidence we have in our science-led strategy and in our outlook for strong growth. We will continue to invest in our portfolio and pipeline as well as in business development to maximize growth over the near and long term and to create value for patients and shareholders. Now, turning to our fourth quarter results. Total company revenues were $13.5 billion, an increase of 24% or 23% excluding the impacts of foreign exchange. Molnupiravir contributed $952 million in revenue or 9 percentage points of growth. The remainder of my comments will be on an ex-exchange basis. Our Human Health business continued its strong momentum, growing 23%, driven by our key pillars and contribution from molnupiravir. Our Animal Health business also delivered robust performance with sales increasing 8%, driven by companion animal products. Now, turning to the fourth quarter performance of our key brands. In oncology, KEYTRUDA grew 16% to $4.6 billion, reflecting continued robust global demand. In the U.S., KEYTRUDA continues to demonstrate durable momentum across all key tumors and is benefiting from the recent launches in neo-adjuvant and adjuvant triple-negative breast cancer, renal cell carcinoma and in cervical cancer. KEYTRUDA continues to extend its strong IO class leadership and maintain its position in non-small cell lung cancer, capturing 8 out of 10 eligible new patients, despite competition. Outside the U.S., KEYTRUDA growth continues to be driven by lung cancer and the ongoing launches in head and neck and RCC. We continue to expand our reach into earlier lines. We were very pleased to receive two additional adjuvant approvals this quarter in RCC and in melanoma. With these approvals, KEYTRUDA has now received 5 indications in earlier-stage cancers. If approved, we also look forward to expanding into adjuvant lung cancer following the encouraging top line results from the KEYNOTE-091 trial. We are confident that along with strong clinical data, KEYTRUDA’s reputation and familiarity among physicians will be a benefit as we move into early stage disease. Lynparza remains the market-leading PARP inhibitor. Growth of 33% was driven by our breast cancer indication and continued uptake of the most recent indications, including prostate. Our expected launch in a broader prostate population based on the PROpel trial represents a significant opportunity. Lenvima sales grew 31%, driven by RCC and endometrial cancer in the U.S. We have seen very encouraging early trends in new patient share following the launch of KEYNOTE-581 in first-line RCC. We are also excited by the recent launch of WELIREG for patients with certain VHL-associated tumors. WELIREG continues to generate strong interest among scientific leaders, providers and patients and is off to a promising start. We expect to extend its reach to broader RCC indications in the future. Our Vaccines portfolio again delivered strong growth, driven by GARDASIL, which grew 50% to $1.5 billion and nearly 40% for the full year. Outside the U.S., he U.S., robust growth was driven by strong underlying demand across all key geographies and particularly China as well as increased supply. This growth more than offset the decline in the U.S. due to timing of CDC purchases as well as the replenishment of the CDC stockpile in the fourth quarter of 2020. Also impacting HPV immunization levels was the prioritization of COVID vaccinations in younger age cohorts. Underlying global demand for GARDASIL remains strong, as it is increasingly being recognized as a vaccine that can help prevent certain HPV-related cancers in both, females and males. In our hospital acute care portfolio, BRIDION sales grew 24%, driven by increased usage of neuromuscular blockade reversal agents and BRIDION’s growing share within the class. Our Animal Health business delivered another quarter of strong growth, with sales increasing 8%. Companion animal sales increased 26%, driven by global demand in parasiticide, including the BRAVECTO line of products, as well as vaccines. Recall that we experienced changes in distributor purchasing patterns, which negatively impacted last year’s results. Livestock sales was flat, as strong global demand for poultry and swine products was offset by a difficult year-over-year comparison due to the recording of an extra month of sales relating to Antelliq in the fourth quarter of 2020. I will now walk you through the remainder of our P&L, and my comments will be on a non-GAAP basis. Gross margin was 74.8%, a decrease of 0.2 percentage points. As a reminder, we share profits from molnupiravir equally with our partner, Ridgeback, which is reflected within cost of sales and reduces our gross margin. This impact was largely offset by favorable mix and lower discards. Operating expenses increased 3% to $5.3 billion as we continued to invest behind our growth drivers and pipeline. Other expense was approximately $50 million. Our full year tax rate was 11.2%, which is lower than our prior guidance due to a more favorable mix of income and expense than previously estimated. The effective tax rate for the fourth quarter of 4.3% reflects the impacts of the lower full year rate as well as foreign tax credit. Taken together, we earned $1.80 per share. It is worth noting that our underlying operating results were towards the upper end of our expectations and the contributions from molnupiravir and the favorable tax rate resulted in EPS that exceeded our price guidance. Turning now to our 2022 non-GAAP guidance. We believe the strong underlying momentum in our business will continue, and we will also benefit from increased molnupiravir revenues. We expect revenue to be between $56.1 billion and $57.6 billion, representing growth of 15% to 18%, including a negative impact from foreign exchange of approximately 2% using mid-January rates. Our gross margin is expected to be approximately 74%. We expect operating expenses to grow at a mid- to high single-digit rate, driven in part by the addition of R&D expenses related to the Acceleron acquisition. In other income and expense, we expect expense of approximately $350 million. We assume a full year tax rate between 13% and 14%. We assume 2.53 billion shares outstanding. Taken together, we expect EPS of $7.12 to $7.27, reflecting growth of 18% to 21%. This range includes the negative impact from foreign exchange of approximately 1% using mid-January rates. As you consider your models, there are a few areas to focus on. First, on molnupiravir. We are excited by our regulatory authorizations to date and believe molnupiravir will be an important treatment option to combat the ongoing pandemic. We have announced a number of supply and purchase agreements, providing approximately 10 million courses of therapy. Based on agreements now in place, we are confident in our ability to achieve $5 billion to $6 billion in revenues in 2022, weighted to the first half of the year. Next, we expect continued strong growth of KEYTRUDA, which would benefit from increased expansion in ex U.S. market and the continued ramp of recent launches globally. On GARDASIL, we continue to expect robust demand along with increased supply to drive strong year-over-year growth, albeit not at the same pace as in 2021. In the U.S., increased uptake in the mid adult cohort as well as catch up from missed doses due to pandemic will drive growth. Outside the U.S. we continue to expect strong demand across regions, particularly in China and from a relaunch in Japan. Global HPV vaccination levels remain low, and we continue to believe GARDASIL’s opportunity for growth is significant. In pneumococcal, we are excited by the recent launch of VAXNEUVANCE in adults and the potential opportunity for approval in pediatric, which represents a larger portion of the pneumococcal market. We expect some offset however from the impact to U.S. sales of PNEUMOVAX23 as the market continues to shift towards newer pneumococcal conjugate vaccines. We also expect to experience modest LOE pressure on JANUVIA in the second half of 2022, as we lose exclusivity in some of the larger ex-U.S. markets. For Animal Health, given our broad and innovative portfolio, we are well positioned to again drive above-market growth in 2022 and beyond. Finally, as we look out to 2025, we remain confident in our ability to achieve strong revenue growth, driven largely by our derisked portfolio and operating margins in excess of 43%. Our capital allocation priorities remain unchanged. First, we will continue to prioritize investments in our business and pipeline to drive near- and long-term growth. We also continue to augment our internal pipeline through strategic business development. We were active in 2021, including the acquisitions of Acceleron and Pandion, and we intend to pursue additional value-enhancing opportunities. We remain committed to the dividend, with the goal of increasing it over time. To the extent we have excess cash, we will return it to shareholders through share repurchases. To conclude, our growth in the fourth quarter underscores our confidence in the underlying strength of our business and in the global demand for our innovative medicines and vaccines. We remain in a position of financial and operational strength. And our continued execution will enable us to deliver on that promise now and well into the future. With that, I’d now like to turn the call over to Dean.

Peter Dannenbaum:

Thank you, Dean. Grace, would you please start the Q&A? And we’d like to ask analysts to limit themselves to one question this morning, in order to get to as many questioners as possible. Thank you.

Geoff Meacham:

I guess, one for Dean or for Rob. How strategically important is molnupiravir? Is the goal to maximize the revenue this year assuming that resistance doesn’t emerge, or are you guys making investments in a potential combination to turn this business into maybe a longer contributor? Thank you.