Merck & Co., Inc.

Q4 sales and earnings conference call. At this time, all participants are on a listen-only mode until the question and answer session of today's conference. At that time, to ask a question, press star one on your phone and record your name at the prompt. This call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Ms. Peter Dannenbaum, Vice President Investor Relations, there you may begin.

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 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 gap 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 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 speaker's 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.

Thanks, Peter. Good morning, and thank you for joining today's call. 2022 was an exceptional year for Merck. Our science-led strategy is working, and I couldn't be more proud of what our team has delivered scientifically, commercially, and operationally. We're focusing on what matters and keeping the patient at the center of everything we do. We made significant progress in 2022, advancing our broad pipeline with important internal success complemented by a portfolio of strategic acquisitions, collaborations, and partnerships. We've moved with speed and urgency to drive strong progress, and we've provided increased transparency into several of our long-term opportunities, including for Gardasil, for our cardiovascular pipeline, and more recently, for newer assets that leverage our leadership position in oncology. We enter 2023 with even greater confidence that we're creating a sustainable engine that will bring forth innovation and generate value for both patients and shareholders over the long term. Turning first to our results, the business is performing extremely well. The growth we've experienced in 2022 reflects the sustained track record of fundamental strength from our de-risk key growth pillars. We begin the year with confidence that we'll maintain the strong underlying growth after taking into account the significant impact Ledebrio had during the height of the pandemic last year and are pleased to reflect this in our 2023 initial guidance. Importantly, our pipeline is advancing with significant progress across several late-stage programs. In oncology, we have expansive research efforts, including our ambition to move treatment into earlier-stage settings where there is a higher potential for more favorable longer-term outcomes for patients. In December, along with our partner Moderna, we were pleased to announce highly encouraging Phase II results for our personalized mRNA therapeutic cancer vaccine in combination with Keytruda in the treatment of adjuvant melanoma. We're excited by the potential that this combination may have for patients across a range of tumor types. And last week, we were pleased to receive FDA approval for Keytruda for the treatment of certain patients with early-stage non-small cell lung cancer following resection and platinum-based chemotherapy which Caroline and Dean will speak to. In cardiovascular, we're exploring candidates across a broad range of diseases and have made substantial progress from just one year ago. At the American College of Cardiology Conference, we will present data from the STELLAR trial, evaluating Sirtatracept in pulmonary arterial hypertension, and from the Phase II trial of MK0616, our oral PCSK9 inhibitor, and we will also host an investor event to discuss these programs. In vaccines, Instituto Butantan in Brazil, with whom we are collaborating for vaccine development, reported very encouraging top-line results for their candidate to the prevention of dengue. These data will inform future development of our dengue vaccine, V181, and our efforts to address this critical public health challenge. Finally, through our business development efforts, we brought in four programs which will have phase three trial starts in 2023 and which have the opportunity to contribute meaningful growth during the latter half of this decade and into the next. We are following our disciplined approach to business development and will act when scientific opportunity and value align. We have more to do, but I feel very good about the progress we've made in 2022, and we believe that all of these efforts will lead to real benefits for patients and in turn, for shareholders. We enter 2023 with confidence in the innovation engine we are building and our ability to deliver sustainable value for patients well into the next decade. We will continue to execute on our de-risked assets and act with urgency to advance and grow our pipeline. We are doing all of this with an approach to sustainability that is closely aligned to our overall business strategy. I'm very confident in the short and long-term outlook of our company And I look forward to providing future updates. With that, I'll turn the call over to Caroline.

Thank you, Rob. Good morning. As Rob noted, 2022 was an exceptional year for our company. We delivered excellent top-line growth of 22%, driven by strength across our few pillars of oncology, vaccines, and hospitals, as well as a significant contribution from Legabrio. 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 revenue was $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 inline 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 US, Keytruda growth continues to be driven by uptake in metastatic indications, including non-small cell lung cancer, as a net 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. Limparda maintains its leadership of the PARP inhibitor class, aligns revenue group 14%, primarily due to continued demand in certain patients with high-risk, early-stage breast cancer. then FEMA 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, WELI-REG is performing in line with our expectations, and we are proud of the impact this is having on adult patients with certain VHL-associated tumors. Our vaccine 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. Vaccine sales also benefited from the pediatric launch of Vaccine Advance, which is off to an encouraging start, with revenues also benefiting from inventory stocking. In our hospital acute care portfolio, Bridgion sales grew 7% driven by an increase in market share among neuromuscular blockage reversal agents and an increase in surgical procedures. Hospital acute care sales also benefited from the resupply of the Baxa which started in the fourth quarter of 2021. Our animal health business delivered another solid quarter with sales increasing 6% reflecting strategic price action 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. Growth 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 is 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 and $58.7 billion, including approximately $1 billion from Ligebrio. Excluding the negative impact of Ligebrio 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 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 Balloon 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 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 a 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 US 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 & Johnson. On the rest of the P&L, we project the 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 increasing estimated tax rate due to the unfavorable impact of the R&D capitalization provision as well as an approximate one percentage point impact related to Imago. Now shifting to capital allocation, where our priorities remain unchanged. We will continue to prioritise 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 sciences through value-advancing business development to augment our internal pipeline and will invest appropriately to maximize the potential of our R&D program. 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.

Thank you, Caroline. Today, I will provide notable updates since our last earning call. We continue to make significant advancements and achieve important regulatory milestones. The fourth quarter marks the end of a successful year with progress made across oncology, vaccines, infectious diseases, and cardiology. Let me start with oncology. We remain committed to transforming the landscape of cancer therapy with an ongoing focus on treating earlier stages of disease. We are pleased by the recent approval of CATRUDA for the adjuvant treatment of adult patients with stage 1B, 2, or 3A non-small cell lung cancer following resection and platinum-based chemotherapy based on the results of Keynote 091. This approval provides for the very first time an adjuvant immunotherapy option for this patient population with stage 1B, disease, and regardless of PD-L1 status. Beyond Keynote 091, we have additional ongoing studies in earlier stages of non-small cell lung cancer, including Keynote 671, evaluating Contruda with platinum doublet chemotherapy as neoadjuvant, followed by adjuvant therapy in resectable stage 2, 3A, and 3B disease. Keynote 867, evaluating Keytruda in patients undergoing stereotactic body radiotherapy with unresected stage 1 or 2 disease, and Keylink 012, studying Keytruda in combination with Lamparza in stage 3 disease. These trials are all part of our broader effort to treat earlier stages of cancer and further improve patient outcomes across tumor types, such as melanoma. Together with Moderna, we announced positive Phase II results for V940 mRNA-4157 in combination with Keytruda for the adjuvant treatment of Stage III and IV melanoma in patients with high risk of recurrence following complete resection. The combination demonstrated a statistically significant and clinically meaningful improvement in recurrent free survival versus Keytruda alone. This investigational personalized neoantigen therapy utilizes mRNA technology and is specifically tailored to target the unique mutational signature of each patient's tumor. We plan to discuss the results with regulators and initiate phase three trials in multiple tumors this year. Detailed results will be presented at an upcoming medical meeting. We also announced positive results from the Phase III Keynote 966 trial, evaluating Keytruda in combination with chemotherapy. This trial demonstrated an improvement in overall survival for the first-line treatment of patients with advanced or unresectable biliary tract cancer. In addition, we announced positive top-line results from the Phase III Keynote 859 trial, evaluating Keytruda in combination with chemotherapy for the first-line treatment of patients with HER2-negative locally advanced unresectable or metastatic gastric or gastroesophageal junction adenocarcinoma. In November, we announced the acquisition of Imago Biosciences, which closed last month. Imago's lead candidate, vomodanset, is a potentially first-in-class orally available lysine-specific demethylase 1 inhibitor. It is currently being evaluated in multiple Phase II clinical trials for the treatment of essential thrombocythemia, myelofibrosis, and polycythemia vera. The combined team is now focused on continuing to advance the ongoing clinical development program. At the American Society of Hematology Annual Meeting, data were presented from multiple pipeline candidates, including tavazilumab, our anti-LAG3 antibody, zilivertamab, the dotin, an antibody drug conjugate targeting ROR1, and nemtobrutinib, an oral reversible non-covalent BTK inhibitor, as well as Keytruda. Updated Phase II data for vomodenset, inessential thrombocytenia, and advanced myelofibrosis were also presented. We continued to deliver on our regulatory strategy. In the European Union, along with our partner, AstraZeneca, we announced the approval for Lymparza in combination with abiratinone and prednisone. for the treatment of certain patients with metastatic castration-resistant prostate cancer based on the results of the PROPEL trial. In China, based on the results of Keynote 522 and Keynote 394, we received approvals for Keytruda in neoadjuvant, adjuvant, high-risk, early-stage triple-negative breast cancer, and hepatocellular carcinoma, respectively. With our partners, Astellas and Seagen, We announced the FDA has accepted supplemental biologic license application for Keytruda with Padtiv, an antibody drug conjugate targeting Nectin-4 for the first-line treatment of certain patients with locally advanced or metastatic urethelial cancer who are not eligible to receive cisplatin-containing chemotherapy. The agency set a PDUFA date of April 21, 2023 for each application. Building on the clinical benefits observed with Keytruda in combination with chemotherapy and antibody drug conjugates, we have focused on augmenting our tissue targeting candidates through business development. We announced the expansion of our agreement with Kahlun Biotech with the addition of up to seven preclinical antibody drug conjugates. The collaboration leverages technology with the potential to yield a new generation of candidates designed to precisely target and deliver potent anti-cancer agents to the tumor site. This follows previously disclosed agreement for two clinical stage candidates, including MK2870, an investigational TROP2 targeting ADC we're planning to advance in phase three trials this year. We also expanded our collaboration with Peptidrine to include the discovery and development of peptide drug conjugates. This technology potentially provides for improved permeability and drug selectivity in targeting tumor tissue. Next, to our vaccine portfolio. We were encouraged by the progress scientists and clinicians at the Instituto Butantan in Brazil made in developing a single-dose dengue vaccine candidate for registration in Brazil. We are collaborating with the team there to conduct a detailed analysis of these positive top-line Phase III results to determine next steps for our own dengue vaccine candidate, V181, currently in Phase II development. Merck's goal is to make V181 available outside of Brazil for populations at risk for dengue. As Caroline noted, we are receiving positive feedback from the field regarding the recent launch of VaxNuVans in the pediatric setting and remain confident in our population-specific strategy for the prevention of pneumococcal disease. VaxNuVans offers strong protection, including in the first year of life, with robust immunity across all shared and unique serotypes. This is important because the incidence of invasive pneumococcal disease is greatest in the first year of life for children. Also, we are on track and look forward to the phase three results from our V116 program for the protection of adults this year. We, along with others in the industry, are making a real impact in our goal to help reduce cancer incidence. It was noteworthy that the American Cancer Society's recently published annual report on cancer facts and trends include the remarkable observation that there has been a 65% reduction in cervical cancer incidence in women 20 to 24 years old from 2012 through 2019. It is this type of finding that further reinforces Merck's commitment to bringing forward treatment and prevention options to help patients with this devastating disease. As part of this commitment, we are encouraged by the role Gardasil continues to play in helping to prevent certain HPV-related cervical cancers. Turning to the broader portfolio, with the continued impact of COVID-19 in China, treatment options are urgently needed to help reduce the incidence of disease and burden on healthcare systems. We were pleased Ligevrial was granted conditional marketing authorization by China's National Medical Product Administration in December for use in adult patients with mild to moderate COVID-19 infection and a high risk of progressing to severe cases. I wish to reinforce something Rob mentioned. Please mark your calendars for March 6th, where we will present detailed findings of the Phase III stellar trial, evaluating cetatocept in patients with pulmonary arterial hypertension, and the Phase II results for MK0616, our oral PCSK9 inhibitor, at the American College of Cardiology in conjunction with the World Congress of Cardiology meeting in New Orleans. We will also host a live investor event to answer your questions. We look forward to bringing Citadacept as an important treatment option to patients and are currently working towards submission of the data from the STELR trial. We are in discussions with the FDA about submission of the data on a rolling basis, which is likely to result in a potential approval in early 2024. As we close out 2022, it is important to highlight that over the course of the year, we made strong progress across therapeutic areas, modalities, stages of development, and multiple business development transactions. In oncology, we obtained several important regulatory approvals globally for Keytruda and Lamparza, as well as advanced a number of programs evaluating earlier stage cancer regimens. In vaccines, we received an important approval in pediatrics for vaccine events, and in addition, we were granted expanded authorizations in China, and active recommendations were reinstated in Japan for Gardasil. In HIV, we resumed our clinical development program for Islafevir, and finally, in cardiovascular disease, we made significant progress across our pulmonary arterial hypertension and hypercholesterolemia programs. Taken together, We continue to deliver on our strategy, advancing promising candidates across multiple therapeutic areas. We have strong momentum across our pipeline and look forward to providing further updates on our progress in 2023. And now, I will turn the call back to Peter.

Thanks, Dean. Kelly, we're 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.

Ladies and gentlemen, if you wish to ask a question, please press star one on your telephone keypad. You may withdraw your question at any time by pressing star two. If you are using a speakerphone, please pick up the handset before pressing . Once again, if you have a question, you may press star one. One moment for our first question. Our first question is from Carter Gold from Barclays. Carter, your line is open.

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 more mature data from the PERL study potentially this year? Thank you.

Yeah, so I believe you're speaking about Keynote 091. So I just want to take a broad view and then the today view and the tomorrow view. So I would just count that, you know, the American Cancer Society 2023, you know, it's really remarkable. They suggest that for between 1991 and 2023, there's a massive reduction in lung cancer of 58%, 36%, and Keynote has been critical in that story. And now we're moving to early lung. The label is broad. It is regardless of PD-L1. And it reflects the clinical trial where we demonstrated a 27% reduction. We're pushing into these earlier lines with other trials. But I think for what we need to set for is two things. We need to make it much more easier with scientific innovation. other means to get sub-Q, to get Keytruda, and that's why we're very eager to push our sub-Q Pembrolizumab with hyaluronidase into phase three this year. But we also need to do a lot to improve adherence to established guidelines, which currently only have 6% or so of individuals actually who should be screened being screened in the United States. So I think with that, you know, we have work to do in relationship to really taking this important advance and making it broadly available to individuals who should be getting screened.

So Carter, maybe I can just add on a little bit about the commercial opportunity. As Dean said, this will be a 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 were about 230,000 people who were diagnosed with lung cancer in the 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 resection or have surgery and be in the stage 1B through 3A, which is what our label indicates. So you're 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 outcomes 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, but it's 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.

Our next question is going to come from Andrew Baum from Citi. Andrew, Andrew, Andrew.

Hi, thank you. A couple of questions. Could you please address the demand on Merck's business to plug the hole associated with the Ketuda LOE post-2028? Alternatively, instead, just build the exit growth rate and focus less on finding revenues to plug the hole as you think about your BD strategy. And perhaps quickly for Dean, could you 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 read for the whole trial is somewhere in 24, but it strikes me you may have a separate analysis for that greater than 50 subgroup. Thank you.

Great. Well, maybe, Andrew, I'll start off and if Carolyn or Dean want to jump in, but to give you a sense Obviously, we haven't given specific guidance to the LOE period, but just to ground everyone in the facts, Katruda, in our expectation, will lose exclusivity in the United States in 2028 and in China in 2028. It loses it in Europe in 2030 and in Japan in 2032. So obviously, by shorthand, we refer to 2028, but the reality of it is over most of the markets, and Katruda increasingly is becoming, as you know, a global product. It's spread out. But as we look at where we sit today, I would say we feel good about the progress we've made. We're confident that we're on a path to sustainable growth into the next decade. Obviously, we have more work to do, but I would just point you to a few proof points that I think support that. First of all, as we've talked about in the last 18 months, we've made meaningful progress in our cardiovascular pipeline. We have eight potential approvals between 2025 and 2030, obviously. The centerpiece of that is Certatercept and what we're seeing from the Stellar data, which really was just quite phenomenal. If you look at that, we expect those products, that portfolio of opportunity, on an un-risk-adjusted basis to be in excess of $10 billion as you approach the mid-2030s. We recently discussed the fact that through the business development deals we've done that have brought in new assets apart from Katruta, apart from Lemparsa, Lendema, and Wellereg, that themselves, these new mechanisms, I would point you to things like Orion and Imago. Those products, along with what we see in the ABC space as a portfolio, we think themselves have the potential for $10 billion or more of revenue as you get into the early to mid-2030s. So today, we sit there with the expectation that we are starting to make meaningful progress, and that excludes all the work we're doing to bring an incremental value to patients on Keytruda. Obviously, as great as Keytruda is, it still only has an overall response rate averaging around 30%. We need to deepen and drive better response. We're looking to do that through combinations and through other means to find ways to improve on Keytruda. We're looking to continue to expand into new tumor types as well and clearly move into earlier lines of therapy where we believe we can start to move to a point that we can actually give people an extension of life and hopefully someday get to a point that we talk about cancer as a chronic disease, not a fatal disease. Obviously, we have more to do there, but that is the aspiration and we have a lot of efforts underway to do that through what we're doing in IO-IO combinations, IO-ADC combinations with our subcutaneous offering, and then obviously we're very excited recently about the deal we did with Moderna for the personalized cancer vaccine, which is really a therapeutic that we think in combination with Keytruda, while we're studying it first in melanoma, obviously we believe it has the potential to move into broader tumors. So that in and of itself gives us a lot of confidence, and we're doing similar activities with Lemparsa, with Lumbema, and then obviously Weller-Egg, it's in its early days. So if you look at the total of that, and I haven't even gotten into our vaccines portfolio and what we see as excitement there, we feel like we've made a lot of progress. We have more to do, but that's why you hear me talk more about how do we build the sustainable engine to drive growth well into the next decade, and that really should be our focus point because I'm confident if we do that well, the LOE of Katrina will take care of itself. So, Dean?

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 threes. In fact, just recently in December, we opened up KeyVibe 10, which is phase three in early melanoma. In relationship to KeyVibe 003, which I think is the question, we added a TPS greater than 50% as an endpoint. These are event-driven, and as the events drive to statistically and clinically meaningful data, we'll announce it appropriately. Great.

Thank you, Andrew. Next question, please, Kelly.

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

Hi, guys. Thank you so much for taking the question. I would love for you to talk to what might make MK2870 a better trope to targeting ADC versus those that we've seen from Gilead and Astra and Daiichi. Also, do you still believe that it's too difficult to combine an ADC plus IO in a fixed-dose combination? Thank you.

Yeah, so let me just state, you know, we'll be starting a whole series of Phase III trials this year. I really appreciate your question. You know, 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're very excited to be pushing forward our trope to ADC. I can get into the details of the molecules and the linkers and the payloads and the DARS. But really the better sort of thing is I believe that this year we will be presenting our phase two studies. And at the end of the day, that'll be the most convincing data to provide to you as to why we think we have an important play with our trope to ADC. But it's also the play of that trope to 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.

Great. Thank you, Evan. Next question, please, Kelly.

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

Hi. Thanks for taking my question here. So, wanting to know how you're thinking about your Phase III trial design for your oral PCFK9, and how will that design really highlight the competitive advantages of your product? Thank you.

Thank you very much. So first, I don't want to get ahead too much of our March 6th investor meeting where we'll be showing the data that we have in relationship to the oral PCSK9 and Sertaticep. I will just sort of emphasize what we're trying to accomplish. And what we're 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, you know, 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, in order to maximize the access. In relationship to Phase 3, there's a general 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 to, at the same time, drive towards outcomes, which is also going to be important. So our phase three trial design is informed by what the history of the field has been and what the FDA's regulatory sort of outlines have been for others. Great. Thank you, Louise.

Next question, please, Kelly.

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

Thank you. If I could ask you a question on V940, the cancer vaccine. What tumor types outside of melanoma do you already have any positive human data in, even if those are earlier stage? And if you don't have any human data in non-melanoma tumor types, can you talk about animal data? I'm trying to obviously think about what phase three trials you may be starting in 2023 with that product. Thank you.

Thank you very much. So you're speaking about the wonderful partnership that we have with Moderna in the personalized cancer vaccine. I just want to preface everything. What we've released is top-line 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 three. So we have a lot of work to do just in melanoma. I'm not going to speak ahead of what 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're 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 therapies. And so we think that that's a realm 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 those indications, because it creates a base for us to actually do these clinical trials. Great. Thank you, Tim. Next question, please, Kelly.

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

Great. Morning, guys. Thanks for the question. Dean, on sub-Q, can you talk about the cadence of data this year and what you're ultimately looking for from a risk-benefit perspective, you know, as you evaluate different technologies? And, Rob, I wasn't sure where this program ranks in kind of your strategic priorities across IO. Thank you.

So thank you very much for that question. You know, I think it's on, you know, we'll be, when we talk about starting 10 to 15 phase three clinical trials just in oncology, this sub-Q program is a critical component to that. And we will be starting those phase threes this year. What are we seeking to achieve? I've talked about the early cancer space. Early cancer space I think is really important just from a medical standpoint. of where we can impact really the outcomes of patients, you know, we can markedly improve that. If you're going to go in the early space, whether it's neoadjuvant or adjuvant, you know, 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. You know, in doing that, we have to think carefully about how do we give as much optionality Q3 weeks, Q6 weeks in that sub-Q regimen, and that's what we're trying to drive to in our phase three trials. Rob, did you want to answer anything else?

Well, you know, I appreciate the question, Jeff. I think Dean covered it well. You know, this is a very important part of our overall strategy as we think about moving into earlier lines of therapy and then to drive convenience and access for patients which is very important. So it's meaningful and it's something we're going to pursue as fast as we can.

Thanks Jeff. Next question please Kelly.

Next question comes from Mohit Bansal from Wells Fargo at your left.

Great. Thank you very much for taking my question. I think I have a big question regarding IO-IO combinations the development strategy there, because a common criticism is that many of these big Phase 3 studies were started after less than robust Phase 2 data, and that's why they failed to show benefit in Phase 3. I mean, looking at your data in Phase 2, they are single-arm data as well. So can you just help us understand what gives you confidence that this is the right strategy to move forward, and wouldn't it be better to do some kind of Phase 2 trial where you are you have FEMRO as a control. Thank you.

Yeah, thank you very much. You know, I'll 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, you know, other therapies that kill cancers may be especially important in the metastatic But IOI strategies in the early stage could be quite impactful. And so, as I've just said, you know, we have advanced our IOI strategy. We've advanced it with TIGIT, CTLA-4, and LAG-3. So, another component point that I would just say is I don't know that there's one single addition to Katruda that will have the breadth of Katruda. So, we've 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 early spaces with Keytruda because that allows us to execute in an IO, IO strategy in early stage cancers. Thanks, Mo. Next question, please, Kelly.

Our next question comes from Chris Schott from J.P. Morgan. Chris, your line is open.

Great. Thanks very much. I think you mentioned that you're looking to review share repo, and it does seem like maybe, Rob, some of your recent business development commentary has been skewed towards smaller deals or collaborations. So can you just put into context what you view as an appropriate level of leverage for Merck And should we be thinking about kind of cash generation beyond that level as maybe going towards repo going forward? And if I could just slip in a really quick second one, just help me on FX. I think you were talking about 2% headwind. Most of your peers aren't seeing much given the recent weakening of the dollar. Are there any currencies that stand out we should be keeping in mind there? Thanks so much.

So Chris, this is Caroline. First to talk to Shelley Purchase. As we've 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'll be ensuring we have ample capacity to pursue business development, which is the higher 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 so and hope to have news that we'll be sharing in the future. So priority remains BD, invest in the business, but to the extent there is excess cash, we will return that to shareholders through the share buybacks. We will maintain an appropriate leverage for our company. We are very comfortable operating at the credit rating we are at and 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 top line, 10% on the bottom line. But with our effective 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 one percentage point on the top and the bottom line. What is impacting the guidance that we've 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.

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

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

Great. Thanks so much for taking the questions. I know you guys typically don't give product level guidance, Caroline, but I was wondering if you can speak at a high level about your vaccine franchise this year. Obviously, you have new capacity coming out for Gardasil, but you also talked about the pediatric opportunity for VaxNuVans. So, just wondering how we should think about those this year. And then one follow-up for Dean on cetatercept. I know you're talking to the FDA now. Are you still confident that that single trial will be sufficient for approval, or is there a possibility you could need data from the other ongoing studies? Thank you.

Thank you for the question. So the guidance that we've provided for 2023 is underpinned by very strong revenue growth of 7 to 10% when you exclude the impact of Ligetrio and foreign exchange. The drivers of that growth are our key pillars of oncology, where we expect continued impacts of patients and growth driven the portfolio of indications we have in Keytruda, Lymphata, and Lendema. Vaccines, as you rightly note, driven by an acceleration expected in the growth of Gardasil, as we have new supply coming online, as well as an acceleration in our vaccine violence 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's some headwinds against that that we've talked about with Ligebrio, with foreign exchange, And with an increased level of pricing expected, especially in Europe, different changes to the BPAS scheme in the UK and in Germany. But overall, very confident in the underlying growth of our business anchored to oncology, vaccines, and animal health.

Yeah, so again, March 6th, clinical trial data for Cetatricep will be more fully discussed. I think it will be very impactful data, and I have no indication at this point that we will need a readout from any other trial from a clinical standpoint to support our filing to the FDA for Cicatricep.

Thank you, Terrence. Next question, please, Kelly.

Our next question comes from Colin Bristow of UBS. Colin, your line is open.

Hey, good morning, and thanks for taking the questions. I guess I'll piggyback on a couple of the others. On Tidget, we've obviously seen some competitive data recently, and then we have some phase three competitive readout this year. What is your level of enthusiasm for this class currently, and just what underpins that in terms of the data we've 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.

Yeah, well, thank you for that question. In relationship to TIGIT, I mean, we're very confident in our molecule. As I've said, we have nine ongoing five phase three trials. you know, pushing the boundaries of what PEMBRO can do or PD-1 can do with another IO agent has been something that's very important for the field. And, you know, the way that I can simply answer your question about the confidence in the molecule is, you know, we just opened an additional key vibe study, a phase three study, in the earlier stages of cancer for this IO-IO combination.

And for Gardasil, we, as you know, have driven productivity in the existing manufacturing facilities we have, and we have two new facilities coming online over the course of 23-24. So it will be a progressive ramp, but I'll reiterate, we're expecting an acceleration in our growth during 2023. Great.

Thank you, Carla. Next question, please, Kelly.

Our next question comes from Umar Rafat from Evercore. Umar, your line is open.

Hi, guys. Thanks for taking my question. There was a story in New York Times last week which mentions Merck has a patent estate of 180 patents on Keytruda. And I'm curious, since your 10-K only points to the earliest patent expiry date of 2028, can you speak to the types of patents encompassed in this 180 patent estate? And is it reasonable to assume that your true patent estate on Keytruda goes well past 2035? Thank you.

So, I would just want to elevate the question a little bit. The focus of what we're trying to do is we're trying to drive the concept of inhibition of checkpoint inhibitors can really have a profound effect throughout cancers in all stages and all tumor types. We talk about expanded to different tissue types and stages. deepen in combination and extend with routes of delivery, routes of administration and frequency. 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 of providing benefit to patients. And we have filed where appropriate intellectual property for that. Thank you, Wilmer.

Last question, please, Kelly.

Our last question comes from Steve Scala from Cowan. Steve, it is open.

Thank you. Novartis said yesterday that it believes the treatment of cardiovascular disease is moving towards infrequently administered injectables as opposed to orals, citing very poor compliance with orals. They probably have a good point because the Merck PCSK9 could be associated with GIT, issues and other issues which may make oral delivery a challenge. So I assume you disagree. Is that because indeed your oral PCSK9 is very well tolerated and clean, or do you disagree for other reasons? Thank you.

You know, we'll be talking about the detailed data from the PCSK9. We believe that it's very clean, but I'll just step back. As a cardiologist who trained and the late 80s 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 compliance. What we're trying to do is to create the most potent LDL cholesterol-lowering pill ever made, that does not require constant interactions with the healthcare system, we think that that access is actually one that's very important, not just in the US, but also globally. And this is, personally speaking, as someone who practiced 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'm prescribing at an individual.

Thank you, Steve, and thank you everybody for your thoughtful questions. Please follow up with me and the IR team if you have anything additional, and we look forward to staying in touch. Take care.

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