Merck & Co., Inc.

Thank you for standing by. Welcome to the Merck and Company Q4 Sales and Earnings Conference Call. At this time, all participants are in a listen-only mode until the question and answer session of today's conference. 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 Mr. Peter Dannenbaum, Vice President, Investor Relations. Sir, you may begin.

Thank you, Ivy, and good morning, everyone. Welcome to Merck's fourth quarter 2023 conference call. Speaking on today's call will be Rob Davis, Chairman and Chief Executive Officer, Caroline Litchfield, Chief Financial Officer, and Dr. Dean Lee, President of Merck Research Labs. Before we get started, I'd like to point out a few items. You will see that we have items in our GAAP results, such as acquisition-related charges, restructuring costs, and certain other items. You should note that we have excluded these from our non-GAAP results and provide a reconciliation in our press release. I would like to remind you that some of the statements that we make today may be considered forward-looking statements within the meaning of the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are made based on the current beliefs of Merck's management and are subject to significant risks and uncertainties. If our underlying assumptions prove inaccurate or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements. Our SEC filings, including item 1A and the 2022 10K, 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. These slides, along with the earnings release, today's prepared remarks, and our SEC filings are all posted to the investor relations section of Merck's website. With that, I'd like to turn the call over to Rob.

Thanks, Peter. Good morning, and thank you for joining today's call. 2023 was another very strong year for Merck. I'm extremely pleased by the progress we've made to develop and deliver transformative therapies and vaccines that will help save and improve lives around the world. We reached more than 500 million people with our medicines last year alone, over half of which were through donations. We also made substantial investments in research and development in our ongoing effort to discover and bring forward to patients the next generation of impactful innovations, over $30 billion in total, including the cost of certain acquisitions and collaborations. As we move forward, I'm confident that our strong momentum will continue, underpinned by the unwavering dedication of our talented global team. We're realizing the benefits of our sustained focus on key strategic priorities. The excellence of our commercial and operational execution enables us to deliver tangible value in the short term while we invest in new innovations and strengthen our pipeline for the long term. In 2023, we advanced important clinical programs and augmented our pipeline with promising business development, such as the acquisition of Prometheus and our collaboration with Daiichi Sankyo. Guided by our science-led strategy, I'm confident that the focused and disciplined business decisions we make and the actions we take will lead to sustainable benefits for the patients we serve and long-term growth and value for our shareholders. Turning to our results and initial outlook for 2024, we delivered excellent underlying growth in 2023, reflecting robust demand for our innovative portfolio. I'm pleased to share that we expect continued strong growth in 2024 driven by demand for our key products, which Caroline will speak to momentarily. Turning to the progress we're making in research, we're currently pursuing programs across a more diverse set of therapeutic areas with high unmet need and across more modalities than in any time in recent memory. This year, we'll remain keenly focused on advancing our broad and diverse pipeline, which includes two launches that will address critical health needs and have blockbuster commercial opportunity. In cardiometabolic, we're very excited by the anticipated FDA action on our application for Sertatacept in the United States, which we believe has the potential to transform the treatment journey for many patients suffering from pulmonary arterial hypertension. Our commercial and manufacturing teams are fully prepared for the strong uptake we expect. Sertatacept is an important component of our growing cardiometabolic pipeline, which we believe has significant long-term potential. In vaccines, the FDA accepted for priority review are filing for V116. If approved, V116 would be the first vaccine specifically designed to address the majority of invasive pneumococcal disease in adults ages 65 and older. Based on its compelling profile, V116 has the potential to become an important new preventative option for adults, and we believe it can achieve majority market share in this setting. We look forward to a potential approval in June. And in oncology, we continue to expand into additional tumor types and earlier stages of certain cancers, as well as progress our increasingly broad pipeline of novel candidates. We have achieved substantial diversification with a dramatically expanded set of late stage programs, which Dean will speak to. I'm confident that Merck is well positioned to provide important innovation to patients and sustain its leadership in oncology well into the future. I know Dean and his team are energized by our progress and are prepared to build on the success we've had in 2023 to further advance Merck's pipeline and bring transformative innovation to patients this year and beyond. In summary, our science-led strategy, which keeps the patient at the center of everything we do, is delivering important advancements and helping us build a sustainable growth engine for our company. We've made considerable progress over the past year in advancing and expanding our pipeline, which has resulted in substantially increased long-term commercial opportunities. We've taken meaningful steps to diversify and position ourselves for sustained leadership in oncology, while also building one of our deepest and broadest pipelines across discovery and development in our recent history outside of oncology and notably in cardiometabolic and immunology. Further, we also expect to benefit from promising late-stage programs across our vaccines, neurosciences, HIV, and animal health pipelines, a robust set of early phase programs, and the potential to add exciting innovation through future science-led business development. As a result, we are increasingly confident that we're well-positioned to drive patient impact and value creation this year and well into the next decade. I would again like to thank our global teams for their commitment to strong research, commercial, and operational execution. With a concerted focus on achieving continued excellence, I'm very confident in our ability to deliver short and long-term stakeholder value. I look forward to providing future updates on our progress and impact. With that, I'll turn the call over to Caroline.

Thank you, Rob. Good morning. 2023 was another impactful year for our company. we delivered strong revenue growth of 12%, excluding Ligevrio and foreign exchange. Growth was driven by robust performance across oncology, vaccines, and animal health. We remain confident in our ability to continue to deliver strong results in the near term while making disciplined investments in innovative science, which will drive long-term value for patients and shareholders. Now turning to our fourth quarter results, Total company revenues were $14.6 billion. Excluding the impact from Ligevrio and foreign exchange, the business delivered strong growth of 13%. The following revenue comments will be on an exchange basis. Our human health business sustained its momentum. Excluding Ligevrio, growth was 14%, driven by oncology and vaccines. sales in our animal health business increased 4%, driven by companion animal products. Turning to the performance of our key brands. In oncology, sales of Keytruda grew 22% to $6.6 billion. Global growth was driven by increased uptake in earlier stage cancers, including triple negative breast cancer and renal cell carcinoma, with particularly strong growth in international markets due to the more recent launches of these important indications. Growth was also driven by the strong global need of patients with metastatic disease. We continue to be encouraged by the positive impact our recent approvals are having on certain patients with earlier stage non-small cell lung cancer. In the U.S., we have made considerable progress, in helping to improve drug treatment rates and have further increased our leadership position in the adjuvant setting. We also received positive feedback from healthcare providers following the recent launch of Keynote A39 in advanced urothelial cancer. With this approval, Keytruda, in combination with PADSES, is now indicated for first-line advanced urothelial cancer patients regardless of cisplatin eligibility. Based on the outstanding clinical data, we believe this regimen has the potential to transform the standard of care for these patients. Alliance revenue from Limpaza and Lemvima grew 8% and 5% respectively. Relireg cells grew 78% to $72 million, driven by increased uptake in VHL-associated tumors. We are excited by the opportunity to provide a new treatment option for certain patients with previously treated advanced renal cell carcinoma, following the recent approval based on the LightSpark 005 study. Our vaccines portfolio delivered excellent growth led by Gardasil, which increased 27% to $1.9 billion, driven by global demand, particularly in China. In the U.S., Gardasil sales benefited from CDC purchasing patents. Vaxnuvant sales grew to $176 million, driven by ongoing launches in Europe and continued uptake of the pediatric indication in the U.S. As a reminder, fourth quarter 2022 sales in the U.S. benefited from inventory stocking in preparation for the pediatric launch. In our hospital acute care portfolio, Bridgion sales declined 3%. Increased market share among neuromuscular blockade reversal agents in the US was more than offset by the impact of generic entrants in international markets, particularly in Europe. Our animal health business delivered another solid quarter, with sales increasing 4%. Companion animal sales grew 12%, driven by the Brevetto line of products due to strong underlying demand and timing of purchases. Livestock sales were flat, reflecting favorable price actions, offset by the timing of ruminant product purchases. I will now walk you through the remainder of our P&L, and my comments will be on a non-GAAP basis. Growth margin was 77.2%. an increase of 1.5 percentage points, largely due to favorable product mix, including a benefit from lower sales of Ligebrio. Operating expenses increased to $11.6 billion, including a $5.5 billion one-time charge related to our collaboration with Daiichi Sankyo. Excluding this charge, operating expenses grew 8%, reflecting disciplined investment in support of our expansive early and late phase pipeline and key growth drivers. Other expense was $174 million. Our tax rate was approximately 114%, which reflects the impact of the charge related to Daiichi Senkyo. Excluding this charge, the underlying tax rate was 13.1%. Taken together, earnings per share were $0.03, which includes a $1.69 negative impact from the charge related to Daiichi Senkyo. Now turning to our 2024 non-GAAP guidance. We expect another year of strong growth driven by key marketed products and will begin to benefit from the anticipated launches of impactful new products such as Cetatacept and V116. We project revenue to be between $62.7 and $64.2 billion, representing growth of 4% to 7%. This growth includes a negative impact from foreign exchange of approximately 2% using mid-January rates. The headwind is primarily due to the devaluation of the Argentine peso, which we expect will largely be offset by inflation-related price increases consistent with market practice. Our gross margin assumption is approximately 80.5%, which includes the benefit from reduced royalties paid on Keytruda and Gardasil. Operating expenses are assumed to be between $25.1 and $26.1 billion, which includes an approximate $650 million one-time charge related to the announced acquisition of Harpoon Therapeutics. As a reminder, our guidance does not assume additional significant potential business development transactions. Other expense is expected to be approximately $200 million. We assume a full year tax rate between 14.5% and 15.5%. we assume approximately 2.54 billion shares outstanding. Taken together, we expect EPS of $8.44 to $8.59. This range includes an approximate 26 cents per share charge related to the planned acquisition of Harpoon Therapeutics, which is not tax deductible, and the negative impact from foreign exchange of approximately 25 cents using mid-January rates, including the impact from Argentina. Now turning to capital allocation where our strategy remains unchanged. We will prioritize investments in our business to drive near and long-term growth. We are excited by the significant progress our team has made to advance and augment our innovative pipeline in 2023. In 2024, we will increase this investment, including the initiation of more late-stage clinical trials across multiple novel candidates, each of which has significant potential to address important unmet medical needs. We remain committed to our dividend and plan to increase it over time. Business development remains a high priority. we maintain ample capacity given our strong investment-grade credit rating and cash flow to pursue additional science-driven value-enhancing transactions going forward. We will continue to execute a modest level of share repurchases. To conclude, we enter 2024 with confidence in the outlook for our business in the near and long term. Global demand for our innovative medicines and vaccines remain strong, and we are excited about our expansive pipeline. We are in a position of financial and operational strength as a direct result of our longstanding commitment to science in order to improve the lives of the patients we serve. Our continued investment in innovation and excellent execution will enable us to deliver value to patients, customers, and shareholders well into the future. With that, I'd now like to turn the call over to Dean.

Thank you, Caroline. Good morning. Today, I will provide notable R&D updates since our last earnings call and a brief summary of 2023 accomplishments. Momentum in the pipeline remains strong. Progress is spanning both early and late phase programs across multiple therapeutic areas. Starting with oncology, We are diversifying our portfolio and executing on our strategy, which is broadly based on three strategic pillars, immuno-oncology, precision molecular targeting, and tissue targeting. In immuno-oncology, we remain committed to the development of Keytruda and further transforming cancer care to address the needs of certain patients. In the fourth quarter, we received approvals from both the FDA and the European Commission in two gastrointestinal indications. one in combination with chemotherapy for the first-line treatment of adults with locally advanced unresectable or metastatic HER2-negative gastric or gastroesophageal junction adenocarcinoma based on Keynote 859, and another in combination with gencitabine and cisplatin for the treatment of patients with locally advanced unresectable or metastatic biliary tract cancer based on Keynote 966. As we continue to harness the potential of Keytruda, we have an increased focus on earlier stages of disease, where we believe timely, effective intervention may significantly improve patient outcomes. Last month, we announced FDA approval for Keytruda in combination with chemoradiotherapy for the treatment of FIGO Stage 3 through 4A cervical cancer based on the Phase 3 Keynote A18 trials. This is an important advancement and provides a new option that has potential to become the standard of care. To date, with all the research conducted with checkpoint inhibitors, the only studies that have demonstrated statistically significant overall survival benefit in earlier stage cancers are Keynote 671 as part of a neoadjuvant followed by post-surgery adjuvant treatment regimen for certain patients with resectable non-small-cell lung cancer, and Keynote 564 as a post-surgery adjuvant treatment regimen for certain patients with renal cell carcinoma. Since the approval of Keynote 671 in October, it is notable that the American Cancer Society released guidance recommending that certain individuals with significant smoking history undergo an annual low-dose CT scan. The guidance also expands the age range for lung cancer screening. We look forward to the opportunity to help impact patients and support the identification of more patients at risk. Additional data from Keynote 564 demonstrating an overall survival benefit were presented at the ASCO GU conference last week. Detailed findings from Keynote 123 evaluating Keytruda for the adjuvant treatment of patients with localized muscle-invasive and locally advanced resectable urothelial carcinoma demonstrating a disease-free survival benefit versus observation were also presented at ASCO-GU. Also, in the earlier stage setting, along with our partner, Moderna, we announced three-year recurrent free survival and distant metastasis-free survival data for our individualized neoantigen therapy V940 in combination with Keytruda for the adjuvant treatment of stage three and four melanoma following complete resection. We are encouraged by the durability of the responses observed and the potential for this regimen to impact patients earlier in their diagnosis. The phase three trials in the adjuvant setting for certain patients with melanoma and non-small cell lung cancer are actively enrolling. Progress continues in precision oncology. The FDA approval for Vuelareg, our HIF-2-alpha inhibitor for the treatment of adults with advanced RCC following a PD-1 or PD-L1 inhibitor and a VEGF-TKI marks the first drug approved in a new therapeutic class for eligible patients with advanced renal cell carcinoma in nearly a decade and builds on the 2021 approval for the treatment of adults with certain von Hippel-Lindau disease-associated tumors. Additional Phase III studies for Vuelareg combination with Keytruda and or Levatinib for the treatment of certain types of renal cell carcinoma in the advanced and adjuvant settings are ongoing. Finally, moving to the tissue targeting space, together with Astellas and Segen, now Pfizer, we announced the FDA approval for Keytruda in combination with Patsyth, a Nectin-4 targeting ADC for the first line treatment to patients with locally advanced or metastatic urethelial cancer based on results from Keynote A39. These results demonstrated a superior overall survival benefit versus gemcitabine plus cisplatin or carboplatin and extend our pioneering work in combining Keytruda with chemotherapy, as well as reinforcing the value of an ADC to enable targeted delivery of chemotherapy to the tumor tissues. Following the announcement of our collaboration with Daiichi Senkyo in October, we are pleased to receive priority review from the FDA for MK1022, or patritamab daruxtacan, our investigation of fully humanized anti-HER3 ADC for patients with advanced EGFR-mutated non-small cell lung cancer previously treated with two or more systemic therapies. The agency has set a target action date of June 26th. Through our agreements with Kalu and Daiichi Senko, as well as our own discovery programs, we have established a robust pipeline of tissue-targeting ADCs. And the recently announced acquisition of Harpoon Therapeutics provides the opportunity to help complement and strengthen our approach by providing a portfolio of novel T-cell engagers, the most significant of which is HPN328, an investigation-owned Delta-like Ligand 3 targeting T-cell engager being evaluated in small cell lung cancer and neuroendocrine tumors. A strong, diverse portfolio of immuno-oncology, precision molecular, and tissue targeting agents positions us well to have a profound impact on even more patients long into the future. Next, to our vaccine pipeline. We are making notable advancements with our population-specific vaccine program for pneumococcal disease. The FDA has accepted for priority review the new biologics license application for V116, our 21-valent pneumococcal conjugate vaccine, specifically designed for adults, supported by results from multiple Phase III clinical trials evaluating V116 in both pneumococcal vaccine naive and vaccine-experienced adult patient population. Results from STRIDE III trial were presented at the World Vaccine Congress West Coast in November. And additional data from STRIDE III as well as STRIDE studies IV, V, and VI will be presented at the International Society of Pneumonia and Pneumococcal Disease Congress in March. If approved, as Rob noted, V116 would be the first pneumococcal conjugate vaccine specifically designed to address the serotypes responsible for approximately 83% of invasive pneumococcal disease and is about 65 years of age and older, according to CDC data from 2018 to 2021. Importantly, V116 includes eight unique serotypes, which account for 30% of disease, according to the same CDC data. These serotypes are not covered by currently licensed pneumococcal vaccine options. The FDA has set a target action date of June 17th. Turning to programs in the cardiometabolic disease pipeline, we are eager to bring Cetatricep to patients as an important treatment option for pulmonary arterial hypertension. The FDA has set a target action date of March 26. Beyond data from the STELLAR trial, we have the Phase III Zenith and Hyperion studies, which are evaluating Cetatricep in patients with more advanced disease and those earlier on their disease journeys. In addition, the Phase 2 cadence trial will evaluate WHO Group 2 pulmonary hypertension focused on a type of left heart disease. As we close out 2023, it is important to highlight our significant progress and execution across therapeutic areas and modalities, as well as multiple business development transactions. In the year, we have more than 25 regulatory approvals in major markets, We also initiated over 20 Phase III studies across multiple new classes of assets, including in oncology with Bomadensta, our LSD1 inhibitor in essential thrombocythemia, Nemtobrutinib, our BTK inhibitor in first-line chronic lymphocytic leukemia of small lymphocytic lymphoma, MK2870, our TROP2 ADC in collaboration with Caloon in non-small-cell lung cancer and endometrial carcinoma, MK-5684, our CYP11A1 inhibitor in collaboration with Orion in metastatic castrate-resistant prostate cancer, and V940 in collaboration with Moderna for the adjuvant treatment of certain types of melanoma and non-small cell lung cancer. Also in immunology with Talisa-Kibark in ulcerative colitis, Finally, in cardiometabolic disease with multiple trials for MK0616 in hypercholesterolemia. As a result of the increasing depth and breadth of our pipeline, we are planning to initiate an even greater number of phase three trials in 2024. Considerable credit goes to my colleagues across the organization for their hard work and unwavering dedication. We are executing on our science-led strategy and look forward to providing further updates on our progress throughout the year. And now, I will turn the call back to Peter.

Thank you, Dean. Ivy, we're now ready to take questions. If analysts could please limit themselves to one question today in order to get to as many questioners as possible, we'd appreciate it. Thank you.

Ladies and gentlemen, if you wish to ask a question, please press star 1 on your telephone keypad. You may withdraw your question at any time by pressing star 2. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, you may use star 1. Our first question will come from the line of Umar Rafiq from Evercore ISI. Please go ahead.

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

I'll take this. Humer, thank you very much for that question. I mean, just to recognize that in MSI high, we have a strong presence with EMBRO there. The larger group in CRC or colorectal cancer is in the MSS population. At this point, there's not really been any checkpoint inhibitor that's shown dramatic impact in MSS CRC. So our interest in driving PEMBRO plus LAG3 in that is to demonstrate that a checkpoint inhibitor could have a meaningful impact in MSS CRC. If we should get a positive signal in that, clearly we would use that as a beachhead to expand and extend the the role of checkpoint inhibitors in MSS-CRC, which is a place that requires a lot of more innovation. In terms of specific interim analysis in this, we generally try to keep that when there's data that's worth sharing, that's when we share it. Thanks.

Just real quick, just a quick microphone check. Can you hear us? Yeah, we're muted.

No, we can hear you.

Oh, you can? Okay, we were showing that we're muted. Sorry.

Oh, no, you're fine. We can hear you loud and clear.

All right, great. Next question, please, Ivy.

Next, we'll go to the line of Trung Nguyen from UBS. Please go ahead.

Morning, guys. Thanks for taking my question. So for cetacicept, we noticed the Hyperion study primary completion date has now moved to August 26. It was November 29 on clinicaltrial.gov. That's three years earlier. Could you just let us know the reason for that change? And if I could sneak one in, is there a place to transition cetacicept from inpatient clinic administration to self-administration? Thanks very much.

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

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

Next, we'll go to the line of Dana Graybosh from Laring Partners. Please go ahead.

Hi. Thank you for the question. I have one on oncology for one of the new assets going into Phase III. The Orion MK5684. I wonder if you could talk more about that asset and what gives you confidence that it will demonstrate broad benefit in prostate cancer in addition to the patients with the ARLBD mutations. And can you confirm the stat design of the two Omaha studies will prioritize a hierarchy to statistically look at the mutation segment first?

Yeah, so just so that everyone is looking at this asset in the same way, there have been critical medicines that ablate androgen-fueled growth in prostate cancer. And the interest in this CYP11A1 is it's very high upstream, and we think that it could be an important contribution. Clearly, we're in, as you point out, we're interested both broadly, but especially in the specific mutation patients. And so we will be advancing those trials to look at that subpopulation as well as more broad populations. In terms of the statistical sort of analysis in that, that's something that I think, you our clinical teams at a different time. Thank you, Damon.

Next question, please.

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

Thank you very much for taking the question. Good morning. Maybe following up on the commentary on V116, you talked about the potential to reach a majority market share. What does that sort of imply around the potential ACIP recommendation or the potential for a catch-up opportunity in the adult segment?

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

Great. Anything else? Okay. Next question, please, Avi.

Next, we'll go to the line of Evan Siegerman from BMO Capital Markets. Please go ahead.

Hi, guys. Thank you so much for taking my question. I was wondering if you could expand on some of the nuances of your guidance. Specifically, do you include meaningful revenues from CETA Intercept or P116, assuming their approval at some point this year?

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

Great. Thanks. Next question, please, Ivy.

Next, we'll go to the line of Terrence Flynn from Morgan Stanley. Please go ahead.

Great. Thanks so much for taking the question. Competitor recently reported some disappointing data with their Trope II ADC and later line lung. I recognize, you know, these Trope IIs are all different given the technology, the linkers, Does this impact at all your development strategy for Eurotrope 2 in lung or perhaps increase the need for a biomarker strategy here? Thank you.

Yeah, this is Dean. Thanks for that question. So I'll just step back, and I think I've said this previously. Especially in lung, it's very important to understand what the standard of care is and that one would have to beat it in a significant way. And the standard of care is In our minds, in the late stage is roughly Keynote 189, and now in the earlier stage, it's clearly in Keynote 671, both with clear OS data. What we have said previously is that we are unclear that any 180C can have as broad of an impact as Keynote 189 or 671. and that in order for ADC to have a substantial advantage in those patient populations, one may need to focus on a biomarker-selected patient population. And so the data that we saw does not change our way of thinking. It's the way of thinking that we've discussed previously. And I would just add that it's really important. There's also data out there where people are doing retrospective biomarker data in this, For us to demonstrate true efficacy in any patient population, we'd need a biomarker strategy that is prospective and one that can be easily actionable throughout the world. Thanks.

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

Next, we'll go to the line of Tim Anderson from Wolf Research. Please go ahead.

Hi, thank you for taking our question. This is Adam on for Tim. On Gardasil, a two-dose regimen was recently approved in China. We're wondering if that poses a revenue problem. Potentially it doesn't, if it just means that more supply gets spread out across more people and Merck ends up selling just as many doses in total. Can Merck share its perspective here?

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

The only ad, if I may, is we have significant opportunity to protect further females in China. At the end of 2023, we also submitted to the regulatory authorities our data on Gardasil for males. So we're hopeful to introduce that in the Chinese market in the future.

Great. Thanks, Adam. Next question, please.

Next, we'll go to the line of Mohit Bansal from Wells Fargo. Please go ahead.

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

Yeah, I'll start and then Caroline can jump in as well. But, you know, I think as you look at the market size and the comments, I don't want to speak to comments that others have made. I think it's also important to understand that as we bring a vaccine which brings significant incremental coverage at 83% versus if you look at PCV20, just an example, it's closer to 50%. So you're looking at significant incremental coverage, which I think can have an impact on how you think both about catch-up to cover the disease. As Dean noted in his prepared comments, we have eight serotypes covering 30% of what is causing disease, which is unique to us. So we think that that will have implications both in terms of catch-ups as well as potentially to be able to go for patients 50 and plus versus 65 and plus. So if you take all those things into account, we still see this as a very large opportunity for us. You know, our view is it's about an $8 billion market in 23. We anticipate it actually growing to be over $10 billion later in the decade. And with that being the pediatric segment of that is about 70%. So we're looking at 30% of that is what is the adult piece. So, you know, as we see it, this is still a growing market, a good market. And we remain very confident that B116 will both have a majority share and be a meaningful contributor.

Great. Thanks, Mo. Next question, please.

Next, we'll go to the line of Chris Schott from J.P. Morgan. Please go ahead.

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

Yeah, Chris, thanks for the question. You know, obviously, first, I just want to reinforce the pride I have in what Dean and the team have been able to do and the meaningful progress we're making both in our internal pipeline and what we've been able to do through the business development, which is, you know, I think in some ways, in a weird way, underlying your question. But You know, as we sit here today, while I feel very good about the progress we've made and the growing portfolio, the diverse and deep portfolio we have in our pipeline, we do continue to believe we need more, and we will continue to prioritize business development. And I would say that our views of deals like Prometheus, like Acceleron, are still the size of deals we are very interested in if we can find great assets. So clearly that's an area of focus, but also continuing to do smaller deals as well, like what you saw with Harpoon. So it's going to be a range of deals, but I think as you look in that zero to kind of 15 billion, one to 15 billion, it continues to be where we will look for. And then obviously, you know, we've also, I think, shown that not only are we very open to doing acquisition, but we see collaboration as an important tool as well, very similar to what we did with Daiichi Sankyo. So we're going to be looking at the full suite and including deals that fit those categories.

Great. Thanks, Chris. Next question, please, Ivy.

Next, we'll go to the line of Andrew Baum from Citi. Please go ahead.

Thank you. I was going to ask you about your expectations for the ACIP recommendation on revaccination of prevenile vaccinated patients, but I suspect you may not want to share that view. So instead, maybe I could ask you about the first-line TROP2-SKB non-small-cell trial that you're running in combination with Keytruda. Some of the recently published academic data suggest that trope 2 internalization is a biomarker in patients who are primarily resistant to PD-1. So it just seems like an old population to be exploring the drug and assuming that is a real and not a fake signal. And I take completely the caveat that it's retrospective data analysis in other settings. But given that, it would seem to be more sensible to have a combination with chemo and layering it on top? And can you do this given the profile of the drug in terms of bone marrow suppression?

Yeah, so I'll just answer more broadly in relationship to TROP2 as an ADC and specifically our compound. One of the things that is extremely useful to us is its adverse effect profile, especially for lung cancer patients in relationship to lung toxicity is huge. readily manageable. It's a quite good profile. In terms of your question about the paper that I think that you talked about, about internalization and this, I think those are interesting and important papers for us to consider. But I think one of the things that's also important for us to do is to do the clinical experiment and see what the results are in relationship. We are confident that trope 2 ADC will have an impact. Trope 2 ADCs in breast cancer has had an impact, and we believe that our trope 2 ADC, especially with the linker payload, will have an important impact in lung cancer. And then the question that you have is, how do you combine it? Do you combine it with chemo? Do you combine it with PD-1? How do you think through that? I think those are questions that our clinical team thinks deeply about. But we also think deeply about what line of therapy and also what the standard of care is. And if you want to move to first line, the standard of care is Keynote 189 with a chemo PEMBRO basis. So one has to think about how one would advance a trope two from different lines all the way to first line. So those considerations come in quite heavily. Thanks.

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

Next, we'll go to the line of Seamus Fernandez from Guggenheim Securities. Please go ahead.

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

So this is Dean. I'll take a first question and then I'll hand it over to Rob and Caroline because the economic question and the payer is also related to the innovation that you provide. I just want to make sure that our way of thinking about something like PEMBRO with hyaluronidase giving its sub-Q is really there's going to be a call for that innovation. I'll just emphasize we constantly speak about the earlier stage cancer And right now we have nine approvals. And as I've said in relationship in the prepared remarks, you know, of those approvals, the only two that have checkpoint inhibitors that OS benefit is Keytruda base, which is early lung cancer and RCC. I actually just came from a meeting speaking to a bunch of thoracic oncologists in this, and it's quite interesting to hear how they speak. For those who are thoracic oncologists who are linked to a setting with medical oncologists, they very clearly understand why Keynote 671 perioperative is a Category 1. In situations where you may have a CT surgeon outside of a major care plan or a major medical center, sometimes you have CT surgeons moonlighting doing lobectomies and the such, and For that, the keynote 091. And constantly what we hear from the physicians and the provider, and many of them are in provider systems of all different types, is the need to have an alternative way to get the Keytruda to them, either Q3, Q6, given the regimen. So I just want to emphasize that. that the sub-Q PEMBRO plus hyaluronidase is an innovation that is going to be demanded and is being demanded by the field.

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

Next question, please.

Next, we'll go to the line of Jeff Meacham from Bank of America. Please go ahead.

Hey, guys. Good morning. Thanks for the question. Caroline, on margins, you highlighted a benefit from Keytruda and Gardasil this year, which I think was expected. But looking forward, is the guidance this year a reasonable target until the Keytruda LOE? I wasn't sure if there's other drivers going forward or whether MIX could impact margins as well. Thank you.

Thank you for the question, Jeff. As you all know, our company has made great progress in expanding operating margin over a number of years. As we look to 2024, we expect operating margin to improve, and that's really driven by the strength of the top line and mix of revenue, by the roll-off of royalties that we've noted on Keytruda and Gardasil, being disciplined in our expenses while we do invest fully behind our expansive pipeline. As we go beyond 2024, we still point to an operating margin of greater than 40% in 2025, but our focus as a company and as a team is to really ensure that we are fueling the pipeline, supporting the portfolio of products that we're launching to drive growth into the long term.

Great. Thanks, Jeff. Next question, please.

Next, we'll go to the line of Steve Scala from TD Cowan. Please go ahead.

Thank you. I believe the Merck RSV monoclonal antibody phase 2 slash 3 study is registrational and reads out this year. Is that correct? And assuming positive, how soon could Merck be on the market and how might this product be differentiated from by Fortis? It's just a little odd that this could be a billion dollar opportunity, not that far off, and Merck never talks about it. Thank you.

I really appreciate the question, so I will talk about it. In relationship to the RSV monoclonal antibody, it's for the early birth. It's an antibody. It's passive immunization, and it's for the pediatric population. This is a single shot. This is not weight-based, and we believe it has a longer season in relationship to other choices. And so we think it's an important readout, and we're very excited and interested to move on this RSV monoclonal antibody. I would also emphasize that the New England Journal of Medicine just published a series of papers, not in RSV, but also in dengue, that also we're very excited about, and we're moving that forward quickly. And then more broadly from the ID vaccine, You know, I've said previously that I'm very intrigued to see the results of our NRTTI, Islachivir, and our other NRTTI, MK8527. So that will also be coming out this year. We'll be able to see those. So it is the RSV, it is the dengue that was just out there, and it is the HIV data that we're going to be very interested in seeing across this year.

Yeah. And Steve, just to maybe from a commercial perspective, build on the question, from a launch timing perspective, our expectation is that we would be in the market in 2025. And obviously we're working to be ready for that season in 2025. And then from a differentiator for us, recall that our coverage covers what is the full prevention season for RSV, which is five to six months for a single fixed dose, not a weight-based administered shot. So for us, those are all very important things. And the last thing I note is the side of action for us is really, we think, has low risk of development of resistance and is different than the competition. So we actually are very bullish on this. I think we don't talk about it, frankly, because we have so many other good things to talk about. It sometimes gets lost, but It doesn't mean we're not excited about this and or dengue, which frankly, I still believe dengue, it's a little bit obviously later than this, but huge for us. So those are things we're excited about. It just reinforces the breadth of the portfolio we have.

Thank you, Steve. Next question, please, Ivy.

Next, we'll go to the line of Chris Shibutani from Goldman Sachs. Please go ahead.

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

Chris, that's a great question and an expansive question, so let me just hit in relationship to the TL1A antibody. We have our ulcerative colitis trial moving forward, and that's been listed, and that's moving forward. I think probably the really important thing for me that I look out is getting the Crohn's disease trial moving. The reason I think it's really important is I'll remind myself that T01A is in the super TNF family, but T01A may be different than run-of-the-mill TNF in its ability to not just dampen inflammation but affect fibrosis. So going from ulcerative colitis to Crohn's disease, Crohn's disease has lots of strictures in this. That'll be important. And it'll be also important to look and follow, I follow our data in T01A in relationship to lung disease and scleroderma. So that's with that. I would also emphasize that there are other assets within the partnership or acquisition that we did with Prometheus and those compounds, which had already been discussed previously, are advancing through the pipeline as well. And then the other question that you have is, are we interested in other platforms and moving forward? The answer is absolutely yes. I think you had a question in terms of cell therapy with immunology. I think there is interesting data there, but as you know, When we've looked at cell therapy in relationship to cancer, especially not in heme but in solid, we've been a little bit probably more exploratory. And right now, our view of cell therapy in immunology is one that might be more similar to our view of cell therapy in solid tumor, a little bit more exploratory.

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

And for our final question, we'll go to the line of Luis Chen from Cantor Fitzgerald. Please go ahead.

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

Thank you very much for that question. So when we think about tissue targeting, we think of ADCs. And the answer is, I think the ADC fields will continue to develop And I think there will be other payloads, other linkers, but also the specificity by which you do the tissue targeting in relationship to the antibody may change. There's also clearly evidence of potential movements into peptide drug conjugates that we're interested in, as well as the possibility that the payload is no longer chemotherapy-based, but other sort of compound-based. So we're interested in that. In tissue targeting more broadly, We are interested, and so we view that as, okay, that's how we're going to move sort of toxic cell chemotherapy agents into tissue targeting sort of scheme, making chemotherapy precision medicine. But we also are very interested in the IO space in relationship to tissue targeting, and that is our foray, and that is really helped by our proposed acquisition with Harpoon that has a very interesting asset in relationship to tissue targeting and immune engagers.

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

Thank you all for participating in the Merck and Company Q4 Sales and Earnings Conference Call. That concludes today's conference. Please disconnect at this time and have a great rest of your day.