Merck & Co., Inc.

Good morning. My name is Darla, and I will be your conference operator today. At this time, I would like to welcome everyone to the marketing company Q2 sales and earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Terri Locksum, SVP, Investor Relations and Global Communications. Please go ahead.

Thank you, Darlene. Good morning. Welcome to Merck's second quarter 2019 conference call. Today I'm joined by Ken Frazier, our Chairman and Chief Executive Officer, Rob Davis, our Chief Financial Officer, and Dr. Roger Perlmutter, President of Merck Research Labs, who will each have prepared remarks. In addition, I'm also joined by Mike Nally, our Chief Marketing Officer, and Frank Clyburn, our Chief Commercial Officer, who will be available for the Q&A portion of the call. Before I turn the call over to Ken, 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 of these in our press release. We have also provided a table in our press release to help you understand the sales in the quarter for the business units and products. I would like to remind you that some of the statements that we make during today's call may be considered forward-looking statements within the meaning of a 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 statement. Our SEC filings, including Item 1A and the 2018 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 forward-looking statements made this morning. Merck undertakes no obligation to publicly update any forward-looking statements. You can see our SEC filings as well as today's earnings release on Merck.com. We've also posted a presentation to the investor section of Merck.com, which includes some of our highlights from the quarter. With that, I'd like to turn the call over to Ken.

Thank you, Terri. Good morning, and thank you all for joining the call. Our science-led strategy, together with our clinical and commercial execution, drove another quarter of accelerating revenue growth with strength across our global portfolio. Our results demonstrate the continued momentum of our business through the first half of the year and further show that our focus on the kind of innovation that significantly improves health outcomes is paying off. As highlighted in our recent Investor Day, we are confident that our innovative portfolio of product and significant pipeline opportunities, supported by unparalleled R&D and commercial execution, will continue to drive strong growth while we invest in cutting-edge science to deliver breakthroughs over the next decade and beyond. Over the past quarter, we continued to advance our pipeline and presented encouraging data across our programs, including two additional regulatory approvals and a filing acceptance for Keytruda, two new regulatory approvals in infectious diseases, as well as new clinical data on the V14114 pediatrics trials, MK8591, and many others. Our clinical and regulatory progress reflects Merck's unwavering commitment to biomedical research aimed at bringing forward products that can make a meaningful difference in the lives of patients around the world. In addition, we continue to strategically invest in business development to strengthen our pipeline through value-enhancing external opportunities. This quarter alone, we announced two acquisitions that will bolster our oncology pipeline with Peloton Therapeutics and Telos Therapeutics, respectively. We also successfully completed our tender offer for immune design and closed on the acquisition of Antelic in animal health. We remain confident that our strategy, growth prospects, outstanding scientific and commercial talent, and leadership team, together with our focus on execution, will enable us to drive significant value for patients and shareholders this year and for years to come. And with that, I'll now turn the call over to Rob to review the details of our quarterly performance. Rob?

Thanks, Ken, and good morning, everyone. As Ken mentioned, our performance in the second quarter is a clear testament to the strong momentum and growth potential of our business. Our results over the last several quarters continue to reinforce the confidence we have in our ability to drive sustained long-term revenue growth and meaningful operating margin expansion. while maintaining a disciplined capital allocation strategy focused both on investing in the business and returning capital to shareholders. Now turning to our results. Total company revenues were $11.8 billion, an increase of 12% year-over-year, or 15% excluding the negative impact from foreign currency. This growth was led by our human health business, which increased 17% this quarter, excluding exchange. Animal health grew 9% excluding exchange. The remainder of my comments pertaining to sales will all be on an ex-exchange basis. The increase in human health revenues was led by key products in our oncology, vaccines, and hospital businesses. In oncology, Keytruda sales exceeded $2.6 billion this quarter, an increase of 63% year-over-year. Growth was driven by increased adoption globally in the first-line lung setting as well as uptake in recently approved indications. In the U.S., strong demand across all indications continues to drive performance. Keytruda is firmly established as the standard of care for indicated patients in first-line lung, and we continue to further penetrate segments of the population, including low and non-PD-L1-expressing patients. In addition, we are encouraged by our recent launches in metastatic renal cell carcinoma and adjuvant melanoma, where we are already seeing strong adoption by oncologists. We're also excited about our opportunity in first-line head-to-neck cancer, for which we received approval in June. With 20 indications currently approved in the United States, we are further establishing Keytruda as a foundational cancer treatment. Outside the U.S., Keytruda sales grew 73% driven by lung as we continue to gain reimbursement for the chemo combo in more countries in the EU. In Japan, we are now the leading anti-PD-1 agent, which speaks to our execution and the breadth of our indications. And in China, we've seen very strong growth given the recent launch in first-line lung and continued uptake in melanoma, and our growth should continue as we reach more patients and expect to launch additional indications. Keytruda is changing the way in which cancer is being treated, and we are still in the early days of the Keytruda journey. we remain very confident in the long-term growth potential given our established IO leadership and our expectation for many additional approvals around the world. Our results also reflect continued strength in both Lenparza and Lenvima, products we market in collaboration with AstraZeneca and Esai, respectively. Lenparza revenue more than doubled this quarter, driven by further uptake in ovarian cancer based on the results of SOLO1 in the United States. as well as strength in Europe, China, and Japan. Lemparsa continues to lead the PARP inhibitor class in the United States with nearly 60% total patient share. We look to further establish Lemparsa as the PARP inhibitor of choice in additional tumor types and in combination with Keytruda. Lenvima revenue also more than doubled as we continue to drive sales in HCC in the United States and China and launch in several other markets. We believe Lenvima will be an important product for our oncology portfolio and look forward to the potential for additional indications across our broad development program. Turning to vaccines. Our vaccines business reflects strong growth in our pediatric portfolio, as well as strength in Gardasil, which was driven by public sector purchases and greater demand in the adolescent cohorts in the United States, as well as continued demand across Europe and the emerging markets, especially China. Our hospital business benefited from 20% growth in Breon, which is annualizing at over $1 billion, reflecting strong performance in the United States as we continue to increase share within the reversal market. Animal health revenue increased 9% this quarter to $1.1 billion. Livestock grew 13%, primarily due to the contributions from the products acquired in the Antelic acquisition. Companion animal sales grew 4%, as volume growth in vaccines and insulin products were partially offset by the timing of customer purchases in the prior year for Roberto. Turning to the rest of our P&L, my comments will be on a non-GAAP basis. Gross margin was 75.4% in the quarter, an increase of 100 basis points year over year. Recall that a sizable catch-up adjustment for an accrued sales milestone related to a DEMPAS was included in the second quarter of 2018. Operating expenses of $4.8 billion increased 9% year over year. R&D drove a large portion of the increase in spend and reflects higher expenses in support of our discovery and clinical development efforts, as well as business development transactions during the quarter. SG&A also grew year over year, reflecting continued investments to accelerate our key growth drivers and the launch of new indications. The decrease in other income this quarter reflected the unfavorable year-on-year impact of mark-to-market income on equity securities, as well as higher net interest expense. Taken together, we earned $1.30 per share, an increase of 25% excluding exchange. This growth demonstrates the continued momentum in our business as we drive strong top-line growth combined with disciplined resource allocation, enabling operational leverage. Turning to our outlook for the year, given the confidence we have in our strong continued performance, we are narrowing and raising both our revenue and non-GAAP EPS guidance ranges for the full year of 2019. We now expect revenues of $45.2 billion to $46.2 billion which represents 7% to 9% growth versus 2018, driven by strength across our key growth pillars. This range assumes a negative impact from foreign exchange of just over one percentage point using mid-July rates. We expect OPEX to increase by mid-single digits, primarily driven by investments in R&D. We now expect non-GAAP EPS to be in the range of $4.84 to $4.94, which represents growth of approximately 12% to 14% versus 2018. We now expect a slightly negative impact from foreign exchange. All other elements of our guidance provided in April remain unchanged. In summary, we are operating from a position of strength as reflected in our second quarter results and our updated guidance. We are confident in our ability to drive strong revenue growth in the near and long term and we remain committed to delivering a leveraged P&L while balancing the need to invest in innovation, all of which we expect will deliver significant and sustainable value to patients and our shareholders. With that, I'd like to turn the call over to Roger.

Thanks, Rob. The second quarter was a very important one for Merck Research Laboratories, with meaningful progress made in every part of our organization. First, we received numerous approvals from the U.S. Food and Drug Administration, including, as previously mentioned, supplementary approval for the use of Keytruda both as monotherapy and in combination with chemotherapy in the first-line treatment of squamous cell carcinoma of the head and neck, and supplementary approval of Keytruda as monotherapy for third-line treatment of small cell lung cancer. We also received supplementary approval for Xervaxa in the treatment of hospital-acquired ventilator-associated pneumonia caused by sensitive bacterial strains. This represents an important advance in the treatment of a life-threatening illness, especially when caused by, for example, resistant pseudomonas species. More recently, we obtained approval of Recarbrio, our combined imipenem, psilostatin, and relobactin therapy for complicated urinary tract or intra-abdominal infections. Relobactin was specifically engineered to enable extended activity of imipenem against certain otherwise resistant bacterial species expressing a form of beta-lactamase. and is part of our effort to address the increasing threat of antimicrobial resistance. During the second quarter, we also had the opportunity to review exciting new data from our antiretroviral program, including 48-week data from the combination of Duraverine with our new nucleosidal reverse transcriptase translocation inhibitor, Islatravir, for the maintenance of low viral burdens in patients infected with human immunodeficiency viruses. These data, which were presented last week at the International AIDS Society meetings in Mexico City, were complemented by studies of a subcutaneous latrovir implant that might permit long-term, perhaps once yearly, prophylaxis against HIV infection. In the infectious disease space, we also presented data on the immunogenicity of V114, our new 15-valent pneumococcal conjugate vaccine in pediatric populations. We are very enthusiastic about V114 for which Phase III data from our comprehensive development program will become available beginning towards the end of this year. Returning to the oncology space, just yesterday we announced that the Data Monitoring Committee supervising our Keynote 522 Phase III study of neoadjuvant and adjuvant Keytruda combined with chemotherapy found that Keytruda treatment was associated with an improvement in pathologic complete response rates, one of two dual primary endpoints of the study. as compared with chemotherapy alone. I wish to make two key points regarding this study. First, neoadjuvant therapy occupies an increasingly important role in the treatment of breast cancer, especially in the triple negative subset, which represents between 15% and 20% of breast cancer. In this setting, the use of neoadjuvant therapy can reduce tumor burden, permit less aggressive surgical resection, and provide improvement in long-term outcomes. Second, achievement of a pathologic complete response in which examination of the surgical specimen shows that tumor cells have been eliminated, has been repeatedly associated with improved event-free survival and overall survival in this often quite aggressive malignancy. Hence, we are very encouraged by the interim analysis demonstrating successful achievement at this endpoint. In this context, the Keynote 522 Data Monitoring Committee recommended that the study continue unchanged until the data become mature enough to assess event-free survival. In the meantime, we look forward to discussing the Keynote 522 data with regulatory authorities and to presenting our data in an upcoming scientific meeting. Finally, I wish to note that we anticipate that the brisk pace of regulatory approvals in major jurisdictions that we have achieved during the first six months of the year will continue, especially in the oncology space. I look forward to sharing these notifications with you in due course. Now my colleagues and I will take your questions.

Thanks, Roger. Darla, we'll turn it over to the Q&A portion, and I'd like to remind everyone if they could keep their questions to a maximum of two to allow as many questions on the call as possible.

If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. And your first question is from Terrence Flynn with Goldman Sachs.

Hi. Thanks for taking the question. Ken, there's obviously been a more significant focus on larger deals in this space following some of the recent announcements. I would just welcome your latest thoughts here on Merck's capital allocation strategy. I know you touched on this a little bit at your investor day about a month ago, but just wondering if you could provide us an update there. Thank you very much.

Thank you very much for the question, Terrence. We have watched some of the activity around us in the sector. I think each one of those companies is evaluating companies their own growth prospects over the next few years. We feel very, very confident in our growth prospects going forward. As we have said in the past, given all of that, we're not interested particularly in a large merger that we believe can be disruptive to the company, including R&D. We continue to look at bolt-on deals. We do look across the spectrum in terms of size for bolt-ons. We don't define it by a dollar amount. But at the end of the day, we think the operational complexity, the cultural disruption, the R&D disruption that has been associated with large mergers, counsel that we should not go there particularly because we feel very confident about our ability to grow our company organically, supplemented by both our deals.

Great. Thank you. We'll take the next question, please.

This is from Seamus Fernandez with Guggenheim. Hi.

Oh, thanks very much for the question. So maybe just two very quickly. On the first one, you know, some spectacular growth in the pediatric vaccines across the board, as well as Gardasil. Could you guys just help us more fully understand the sustainability of the kind of growth that we saw this quarter? And then, and just incremental to that, if you could just comment on what happened with NuvaRing this quarter in particular. And then the second question, just broadly speaking for Roger, 8591, you know, the data looked solid for the Duraverine combination. Obviously, the PrEP information is quite impressive and exciting, particularly if you can get to annual dosing with the implants. But Just wanted to better understand how you guys are working towards finding a better partner than Darabarine for 8591 and if you're willing to work with other companies and collaborate on those programs. Those were some concerns raised by physicians that other great products are out there and that unfortunately it doesn't look like the companies are collaborating with each other on that front. So just wanted to ask on that front. Thanks so much.

Great. Thanks, Seamus. We'll start with Frank.

Sure, Seamus. So let me start, of course, with NuvaRing. No really new news there, no generic entry this quarter. Seamus, so we continue to promote NuvaRing as we have done in the past. With regards to vaccines, a couple of things. Let me start with Gardasil. Gardasil had a very strong quarter growth of 50%, if you would exclude exchange on a global basis. We did see in the U.S., we did see CDC purchases in Q2 of this year, which actually took place in Q1 of last year. So you do see some bumpiness with some of our vaccine sales. But I would ask them to take a look at, Seamus, on a year-to-date basis, vaccines for Gardasil Globally is up about 35%. So we're seeing very strong demand. especially in our 11- to 12-year-old cohorts in the U.S. and some in the 19- to 26-cohorts. We're also seeing very strong ex-U.S. demand as we talked about on Investor Day, in particular in China and Europe and a lot of the general neutral programs that are rolling out. So we're still very confident in our growth prospects for Gardasil. The pediatric vaccines did also see a very strong quarter this quarter, That was driven by demand as well. There was some buying to the private sector within the U.S. this quarter based on some of the measles outbreaks that you've read in the news. And we do believe that we'll continue to see growth for our pediatric vaccines going forward. So the durability of our vaccine business we feel very good about, both for near-term and long-term growth, as we mentioned just on Investor Day.

All right, Seamus. Roger, with regard to Islatravir MK8591, I mean, first of all, I would say, again, the performance of Islatravir is quite remarkable, and especially in the implant setting, the durability is remarkable. And it's important to note the very long intracellular half-life of Islatravir and the very impressive resistance profiles. I would take nothing away from Duraverine in terms of its capabilities. For many in the market, they're used to the previous non-nucleoside reverse transcriptase inhibitors, Favarin's in particular, which had a lot of adverse events associated with them. Duraverine is superior to those and is a very effective agent. And I think the combination of Islatravir and Duraverine will be good. That said, we're also considering lots of other combinations and lots of other conversations And over time, you'll have the opportunity to see the broader impact of Islatravir in a variety of different settings. The important thing to emphasize is it can be administered on a daily, a weekly, a monthly, or even a longer duration regimen, which offers great possibilities, I think, for changing treatment patterns in HIV-infected individuals. Thanks.

Thanks. We'll take the next question, please.

It's from Andrew Baum with Citi.

Thank you. A couple of questions, please. Firstly, I'm interested in your thoughts on the Senate proposal to fund catastrophic coverage, given your exposure to Lemvib and Limpaza, Genuvia, and others. Second, on the Zlatrovir question for Roger, thinking about PrEP, both with the implant as well as the once monthly, do you think the FDA is ready to accept anything other than traditional non-inferiority trials and what do you think that could do to the timelines in order to bringing Isla Trevira to market as PrEP? Thank you.

Okay, so let me just comment generally about what's happening with the various things that are going on in some of these proposals that were included in the Senate finance package. Let me start by saying that as a company, we are very supportive of the kinds of changes that will relieve patients in terms of their out-of-pocket costs. I think the catastrophic changes are a step in the right direction, but that's a very small number of people who actually progress through the system and get the catastrophic. So we continue to work with people as part of the legislative process and the administration because we support lowering costs for seniors at the counter and not just at the catastrophic portion. And so with respect to the impact on our programs, Our own portfolio, I'm going to turn it over to Frank.

Yeah, so just on the oncology front, I think you heard from our colleagues at AstraZeneca, Lamparza for Part D is approximately 25% of our business flows through Part D. To remind everyone with regards to Keytruda, that is reimbursed through Part B. So it is not a Part D product. So we feel as though we're balanced across our oncology portfolio going forward.

Yeah, and Andrew, with respect to PrEP regimens, I think it's a great concern to the community as a whole that if one has to do active comparator controls because of equipoise, and that's understandable, the event rates are so low that you will need very, very large populations and very difficult to execute clinical trials. FDA and other regulatory agencies are not unaware of this. There have been discussions among a variety of sponsors, and particularly in the very active patient community about this and what could be done. And we have a lot of ideas in mind, but thus far we don't really have a novel trial design that would permit more rapid registration. Watch this space. I mean, we're very concerned about this issue.

Thanks. We'll move on to the next question.

It's from Chris Schott with J.P. Morgan.

Great. Thanks very much for the questions. Just two here. Maybe first elaborate a little bit more on the China dynamics that are driving that 51% growth. I guess what products in particular are behind this, and can you just remind us the overall size of your China business at this point? My second question was just Keytruda in RCC. Can we just get a quick update in terms of uptake you're seeing so far, where in the market you're seeing the most traction with the data, et cetera? I know it's obviously an important new indication for you guys. Thank you.

Hi, Chris. It's Frank. On China, China is about $725 million this quarter, and it grew to your point 50%. It's really been driven by a number of products. As we mentioned, we've pivoted to innovation. So our oncology portfolio, Lamparsa, Lumbema, Catruda is driving growth. Gardasil has had a significant uptake in China. We have NRDL listing also for Genuvia. So it's a broad-based innovative portfolio that is driving that 50% growth, and we believe that will continue in China. With regards to RCC, we're very excited, Chris, about where we are to date. As we mentioned when we rolled out the data for RCC, it's important to note that Keytruda plus ExitNib shows a benefit across all three risk groups, which differentiates us from the competition. So we are seeing uptake across all three risk groups, and it's really based on the strong overall survival, progression-free survival, and very strong response rates. Eighty percent of our targeted accounts in the U.S. have adopted this regimen into their guidelines, which I think is a very strong early indicator, and we're seeing and hearing very strong feedback from both community and academic physicians. So I feel really good, Chris, about RCC in the U.S., and as you know, we also plan to be rolling that out around the world. So we see this as a key indication, key growth drivers for us going forward.

Great. And Roger? On 522? Oh, my bad. Sorry. I misheard the question. Apologies. Next question, please.

It's from Nathan Jacob with UBS.

Hi, thanks for taking the question. Sorry if I missed this, but would it be possible to quantify how much of the U.S. Gardasil public sector buying pattern was, if you could actually quantify that amount, that would be helpful. And then just on Keytruda plus Lamparza in first line long, could you remind us where those trials are, when we could expect to see readouts there? And as a corollary to that, Keytruda in prostate cancer, you were going to be starting three phase three trials there as well. Wondering when we could hear updates from those trials as well. Thank you very much.

We'll start with Roger.

Right. Okay. So as we have discussed and we showed some data from our Investor Day, you know, there's quite a large opportunity for combinations of Keycruda with Linparza. And in one of those cases, it's prostate cancer. We've indicated that we will be starting registration and enabling studies for those. And, you know, as the studies move forward, obviously they take some time to conduct. We'll then have a chance to update you on the results. But we're enthusiastic about the opportunity of the combination, and and believe that there will be many circumstances. I should point out that not only the lincarza combination, but the lendema combination as well, where we just received breakthrough designation for the patecellular carcinoma first-line indication, too. So there's an awful lot going on in combination studies with both agents.

Yeah, and on Gardasil, as I mentioned, we had a CDC purchase in Q2, which was not purchased in Q2 of 2018. It was actually purchased in Q1 of 2018. So the way in which I would characterize Gardasil is in the U.S., year-to-date, we have grown 20% when you look on a six-month basis. I think that's the best way to look at it from a Gardasil perspective. So think of the U.S. growing about 20% right now versus prior year for the half-year mark, because you are going to see different timing with regards to CDC purchases.

Good. Thank you, Frank.

Next question, please.

It's from Emma Rafat with Evercore.

Hi. Thanks so much for taking my questions. I have two, if I may. First, Ken, you mentioned low complexity as being a key consideration for bolt-ons you're looking at. And in that vein, I guess my question is, are you open to therapeutic areas like Orphan? And also, if there's a company with, let's say, $50 billion market cap or value, is that still a tuck-in as long as the complexity is low? And secondly, on gross margin, so I see two big drivers going forward, one, of course, being Keytruda's Bristol-Myers royalty reduction in 2023, but also anything you may be baking in on pricing reform. I was curious if you could add numbers around each of those. Thank you very much.

So I'll start with the BG questions. Thanks, Boomer, for your questions. I don't think the size is the issue necessarily for complexity. I think it has to do with whether or not the two companies overlap and whether or not we're spending a lot of our time integrating IT systems, manufacturing systems. So if it's a true add-on, a separate kind of business, a true bolt-on, then I don't think the size drives the complexity at all. As it relates to orphan versus other kinds, our preference is to do the most good for the most people, But having said that, we are not against the right kind of therapy, even including orphan indications or orphan approaches to therapy. What we care about is are we getting good science that we can leverage together with our internal efforts to actually create value for shareholders as well as patients.

Morning, Amir. This is Rob. To your question, just to remind everyone for gross margin, Over time, as we indicated at the investor day, we do expect to see gross margin generally flat because while we do see product mix benefits flowing from products like Katruda and our vaccines business, we also, as we mentioned, have assumed negative price going forward. The impact of royalties, you've hit obviously the one with Katruda that does step down in 2023, and the impact of the collaborations which in the near term will be a drag on margin, although long-term they become accretive. We haven't given specific dollar numbers to those, and frankly we don't want to get that specific in guidance, but clearly how those interplay will determine whether you see our product growth margins slightly up, slightly down, or flat over the period, with most of what's driving our operating margin expansion, as we've talked about, coming from reducing growth in operating expense relative to sales.

Thanks, Rob. Next question, please.

It's from David Reisinger with Morgan Stanley.

Yes, thanks very much. I guess first I'd like to start with actually the last comment, and I know that this was mentioned previously at the analyst meeting. But in terms of Merck's projection of negative price going forward, that's – That's a bit different than some of your peers. I think some of your peers talk about flat pricing. So maybe you could provide some more color regarding what you see as the biggest downward pressures on price for Merck going forward. And then second, could you just provide an update on the growing meningitis concerns I jumped on the call late, so I don't know if this is addressed, but wanted to hear about that topic and then also the durability of Merck's ProQuad MMR2 revenue line strength. Thank you.

Great. We'll start with Rob. Good morning, David. So thanks for the question. With regard to pricing, you know, again, I think the important thing to focus on is how we see the mix going forward and I can't speak to what our competitors are implying. But recall, we've actually seen negative price quite some time outside the United States. So that's not a new phenomenon. We've been absorbing headwinds in price outside the United States for several years. Historically, that was offset by price increases in the United States. As we look going forward, we no longer see the benefit of those price increases in the United States. because of obviously the changing dynamics. And so as you look in total, we do continue to believe we're going to see declining price as we look forward, impacting our margins.

Thanks. And Frank, on the pediatric vaccines?

Yeah, so on the pediatric vaccines, we are continuing to see very good demand within the pediatric vaccines. And clearly the measles outbreak has driven some of that demand, especially in the private sector. We also did see buy-in this quarter in Q2. We do anticipate that some of that buy-in will come out in Q3 and Q4. But as I mentioned before, we see our pediatric vaccine business as a very strong part of our growth story, and we see it as a very durable business going forward.

Thanks. We'll take the next question, please.

It's from Tim Anderson with Wolf Research.

Thank you. A couple of questions. A longer-term question on Keytruda. We published an analysis a while back claiming that cancer drugs very often ultimately sell much more outside the U.S. and in the U.S. as they mature to the tune of 50% more or so. When I look at how we and the analyst community at large models Keytruda and other PD1s, for that matter, no one ever really seems to have the XUS even surpassing the U.S. And I'm wondering if you can tell us what your long-term model assumes in this regard. Could the XUS markets eventually kind of blow away the U.S. market over time? It could be billions of dollars more potentially. Second question, Bristol recently top-lined Part 1 of 227 as positive, which I think was a surprise. Can you remind us where you are with your CTLA-4 combination program, specifically what are the latest stage trials and in what tumor types? My guess is you may have kind of backed off this initiative that you started maybe a couple of years ago. Thank you.

We'll start with Frank on Keytruda.

Yeah, so for Keytruda, as we look long-term, we do see significant opportunity outside the U.S., in particular markets like China. especially when you look at some of the GI malignancies and the actual prevalence there. We are seeing, obviously, very strong uptake in Japan as well. I'm not going to give a specific number, but we clearly do see the ex-U.S. opportunity is very significant. In fact, this quarter alone, we sold $1.1 billion outside the U.S. and grew 73%. So, We see both ex-U.S. and U.S. get through the opportunities, but clearly China is the one I would highlight as significant potential growth for us going forward.

And, Tim, with respect to CTLA-4 directed therapy, you know, our interest has been in demonstrating or assessing whether or not adding CTLA-4 directed therapy actually has and impact over Keytruda alone. That is powering the study to see whether CTLA-4 plus Keytruda is in fact superior to Keytruda in any setting. And we have done that both with ipilimumab and also with MK1308, our own CTLA-4 directed therapy. And so Registration-enabling studies are going on in both settings with both kinds of combinations, which includes, for example, the Keynote 598 study and a couple of others. And we could go through the details with you, but you can find them easily on clinicaltrials.gov.

Okay. We'll move on to the next question, please. It's from Jason Garberry with Bank of America.

Hi, good morning, thanks for taking my question. First, just a follow-up on the Bristol Opdivo Urovoid data. Just curious, Roger, how do you think oncologists are gonna benchmark the Checkmate 227 data against the already approved either Merck combination or Keytruda monotherapy in the PD-L1 greater than 1% populations? And then my second question, maybe just for Frank, Can you frame the importance of NRDL listing for Katruta in the lung setting? And what I'm specifically curious about is the percent of the market accessible with and without the listing. Thanks.

We'll start with Roger.

Well, Jason, it's pretty hard to comment on the data from the Checkmate 227 program because we haven't actually seen it. We have the top-line announcement that one part of it was in the PD-L1 greater than 1% did succeed in the combination with dipilimumab, but we don't know what that success looked like in overall survival. We don't know what the hazard ratios looked like. And it's a complicated study, as you appreciate, because the study was broken down into multiple parts, and part of it was predicated on a tumor mutational burden analysis, and then subsequent subset. So without actually seeing the data, pretty hard to know how oncologists will respond. With time, the data will become available, and I think people will want to have a look at it and understand what the meaning of that might be. Our own data, I think, are extremely strong, of course, with Keytruda and the combination of Keytruda plus traditional chemotherapy with typically on the order of a doubling of overall survival. So there is important value that can be gained there. And we're optimistic that we're going to continue to be able to advance therapies that will improve overall survival of this disease.

Thanks, Roger. We'll go to Frank on the NRDL.

Yeah, and just one additional point to what Roger was saying. Commercially, with regards to lung, I do believe we're in a very strong position with our data. And as you mentioned, with monotherapy, you know, in the PD-L1 high population with very strong overall survival, as well as keynote 189, reducing the risk of death in half. That data is playing very well around the world, and it has helped us to penetrate now eight out of every 10 new eligible patients in lung. So we feel as though there'll be a lot of data readouts here from competition, but we feel as though our data positions us well in lung today and in the future. NRDL, we are waiting to see if we'll be invited to actually participate for next year. It is an important potential listing. It does expand the population in China fairly significantly. There's 500,000 to 600,000 lung cancer patients in China. There's probably 300,000 of those that are a part of our labeled indication. And NRDL gives us a chance, if invited, to expand into that patient population. We'd also like to highlight we expect to expand our label in China. China is going to be important for us, not only for 2020, but 2020 and beyond. And we are also seeing good self-pay market uptake in China as well. But clearly, we'll keep you informed as the NRDL process unfolds.

Thanks. Let's move on to the next question, please.

It's from Steve Scala with Cowan.

Thank you. A couple questions, both for Roger. If you could clarify your keynote 522 comments. I think you said you needed EFS to file, but that you would share the PCR data with regulators. So were you implying you would seek to file and potentially garner approval on PCR? That is why you're going to share it in the first place. or are you saying you absolutely definitely need the EFS? And then secondly, if Bristol's 227 delivered a percent of patients alive greater than the 69% that Keynote 189 reported at 12 months, just wondering how Merck would respond, or do you think that that is extremely unlikely? Thank you.

Right, Steve. So with respect to Keynote 522, You know, the goal in discussing the data with regulatory agencies is to ask whether or not they think that represents a finding of sufficient importance to consider making the drug available for patients in that setting. So that's the reason to do it. As I indicated, pathologic complete response is associated with favorable outcomes, particularly in the breast cancer setting, and has been repeatedly demonstrated to have that impact in the triple negative breast cancer setting. On the other hand, this is something that agencies have to look at with regard to the totality of the data. So that's basically where we are there. And with regard to 227, pretty hard to respond to a hypothetical without actually seeing what the data look like. I really don't know what to say about that. I think there's some interest in seeing what the subset data The flip side of that was that, maybe unsurprisingly, but in light of what we've seen, you know, beginning with the Cheknade 026, I mean, the combination of nivolumab plus chemotherapy was not successful in part two, you know, which for us, Keytruda plus chemotherapy, the as we've demonstrated repeatedly in non-squamous and squamous cell, non-small cell lung cancers. So, you know, these are behaving differently in these settings for whatever reason.

Thank you. We'll move on to the next question, please.

Your next question is from Louise Shen with Cancer.

Hi. Thanks for taking my questions. My first question is on Keytruda in China. Just curious if you will disclose sales. There we get that question a lot, so seeing if you can provide any color. And then how will you compete with the local players that are much less expensive on a price basis, at least for now? And then second question is just potential competition for Keytruda from some of the upcoming trial readouts in second half 19 and beyond that will be in non-small cell lung cancer, RCC, and melanoma. Thank you.

Yes, we don't intend to actually share our sales number for Keytruda in China. As far as competing with the local players, we feel as though oncology is a data-driven market. There clearly are local players that are entering the market at a lower price. They are penetrating into some segments of the market. However, we're continuing to see very good penetration and very good growth in China. There are clearly patients that are in the self-pay market is where we compete today that can afford Contruda. We have patient assistance programs, and we have a very strong commercial presence in China. So I feel really good that we'll be able to compete with the local players going forward.

Great. And then the Contruda positioning in the U.S. given peer position,

Yeah, I think as we mentioned, there's going to be a lot of competitive data readouts in lung and across many different cancer types. What I would say is right now we are in a very strong first mover advantage in many of those cancer types. When you think about 20 indications across 12 different tumors, We right now have built a wall of data that we feel very comfortable with. And, in fact, many of the community oncologists are getting significant real-world experience using Keytruda. So we'll have to see how the data unfolds with the competition. But as Roger and I have just mentioned, we feel as though our data right now, strong overall survival across many different cancer types, bladder, renal cell carcinoma. I haven't even spoken about adjuvant melanoma, which is a very important launch for us right now, head and neck. The teams are just launching that indication off of strong overall survival in the first-line setting. So, you know, we know it's going to be competitive. We feel as though we're very well positioned based on our strategy and the data that we have, as well as what you heard in our investor data, significant amount of data to come, not only in the metastatic setting, but also in the neoadjuvant and adjuvant setting going forward.

Thanks, Frank. We'll take the next question, please.

It's from Mara Goldstein with Mizuho. Yes, thank you.

Mara, we couldn't hear your question, if you wouldn't mind repeating that.

Sure, thank you very much. I have two questions, and the first is on the Keytruda plus lymph parser trials in non-small cell lung cancer, and I'm just wondering... what the expectation is in terms of expanding patient population based on that clinical trial. And then the second question is one around regulatory strategy in Europe. Just understanding that yesterday or the day before we learned that they see HMP had removed accelerated status for Novartis' Zolgesma, but we've also seen this as not an isolated incident with other drugs, and in particular oncology drugs, being taken off that accelerated track, and I'm wondering if the company can share any thoughts around this dynamic and any potential impact on your own regulatory plans in Europe.

Right. Mara, the The underlying logic behind Keytrudopus lymparza in a whole variety of settings is that where there are defects in DNA repair, and those include a whole variety of different defects, not just the BRCA1, BRCA2 mutations, but a whole variety of different molecular defects, the effect of lymparza can be to increase the representation of epitopes that potentially could be recognizable by immune cells and release of constraints with Keytruda in combination with that should be beneficial. That's the hypothesis that's being tested in a whole variety of different settings and, you know, quite broadly. So we're enthusiastic about it. We're encouraged that this could be extremely important. One of the things I would point out with respect to Limparsa, It's extraordinarily well tolerated. People stay on it for years, and the ability to maintain a treatment effect as has been shown, for example, in the ovarian setting is really quite remarkable. So that's extremely promising. With regard to EU strategy, you know, the regulatory strategy really hasn't changed there. A prime program within CHMP in order to permit more rapid review. In general, a good thing about EU reviews is that they go along a very well-defined timeline, which we understand extremely well. And at this point, we're moving forward with those EU reviews, as we've announced even just this week. So all of that is going very well for us.

Thanks, Roger. And we were able to get to all of the caller's questions, so I'll turn it over to Ken for some closing comments.

Okay. I want to thank you again for joining us today. As you can see, our strong second quarter results reinforce why we're so confident in our ability to deliver sustained strong growth, not only this year, but beyond. And as we mentioned in Investor Day, we have a de-risked portfolio of innovative assets. Together with our differentiated scientific, commercial, our capabilities, and our ability to execute. We believe that uniquely positions Merck to deliver strong results for patients and shareholders well into the future. So thanks again. We look forward to joining you in the future.

This concludes the Merck & Company Q2 sales and earnings call. You may now disconnect.