Merck & Co., Inc. (MRK) Goldman Sachs 44th Annual Global Healthcare Conference

Merck & Co., Inc. (NYSE:MRK) Goldman Sachs 44th Annual Global Healthcare Conference June 12, 2023 7:00 PM ET

Company Participants

Caroline Litchfield - Chief Financial Officer

Conference Call Participants

Frank Clyburn - Goldman Sachs

Dean Li - Executive Vice President and President

Frank Clyburn

Okay, let’s get underway. Welcome everybody to the afternoon session here at the Goldman Sachs 44^th Annual Healthcare Conference. We are, as always, super excited to have Merck join us, CFO, Caroline Litchfield, President of Merck Research Labs [Indiscernible] Dean Li. So, thank you both for joining us. Lots to discuss, last year when you were here, we saw your stock on a great trajectory and now I think we started this year and I had Rob on the dais and like gosh, where do we go from here?

But what an eventful year-to-date actually. And for so many of these topics that we're going to discuss Merck has really been front and center, very much front tip of the spear kind of stuff, really we're going to discuss some many things in terms of, you know, it's always about capital allocation priorities, et cetera, and strategic build, leadership, it’s just coming on the heels of ASCO. Obviously, some very Dynamic data. You guys are very deeply engaged with all sorts of partners and co-platforms and things, then obviously mainstream above those bold headlines was the decisive step, from a legal standpoint, that Merck led the way in terms of filing suit against the federal government for CMS. So we'll talk about all of those topics here.

But maybe we'll just do what gentle power and spreading of the opening and ask you Caroline about, the fact as the year has progressed, just how you are feeling about where we're at?

Caroline Litchfield

Very good. So first, Frank, thank you for having us and thank you for joining. We have real momentum in our business and Chris has touched on some of those elements. And that momentum is as a result of the dedicated colleagues we have all across the globe. We have really made significant progress in our company over the last few years. We are executing on our inline portfolio with progressing our pipeline. We are augmenting that pipeline with scientifically focused and financially disciplined business development. So, there's great momentum and we started the year strong. We had a first quarter with underlying revenue growth of 15% excluding LAGEVRIO and foreign exchange.

And we increased our guidance expectations for the full year, now expecting growth of between 8% and 10% and that's as a result of the strong global demand we have for our medicines and vaccines across oncology affecting portfolio and of course animal health. So, we're executing. We're progressing the pipeline and Dean will touch on that in a moment.

So that gives us a lot of confidence for driving growth, both in the near term and the longer term. As Rob said, actually in the first quarter earnings call, our strategy is working. We continue to build our innovation engine and it's that innovation that will drive impact for patients in years to come. It will drive value for our shareholders and will drive growth into the next decade. So, with that, Dean.

Dean Li

Yeah, we'll just emphasize, if we look back let’s say 2021 when there are was leadership transition, I think we were very clear to the broader audience that we were going to really focus on, no longer just speaking about KEYTRUDA and cancer. But in cancer, we would use our concentrated leverage to move into things like other iOS, which we've done that we would move into other sort of places such as tissue targeting, which now, you know, we just came out of meetings, I'm getting asked about.

And also this concept of moving from late-stage to earlier stage we think is going to be really important. So that's diversification throughout oncology just as a quick, but it's also through the broader pipeline. You know, I would say that in the last two years, I get a lot of questions, not just about oncology or infectious disease and vaccines, but I get a lot of questions about cardiovascular and immunology, which was not something that was the high on the list of questions I would get just two years ago.

Frank Clyburn

Right. I think that's a perfect framing of so many things and topics that we want to cover. Let's go directly to the legal action against federal government over the IRA. I remember being on the paying attention to the ASCO broadcast and this is a question that I know you're both very comfortable with addressing. But really, what really jumped out of me, Dean, was sort of like the verb, the emphatic nature of the tone that you that you expressed with some of the things that help us understand sort of, what is underpinning some of the emphasis behind the decision and the direction that you're taking here, particularly from your point of view.

Dean Li

So, what I will do is, I will let my compatriot give you the kinds of verb.

Frank Clyburn

Yeah, it’s British accent. It's just like makes it convincing right away, right?

Dean Li

And then, when I'm ready to go on how I view it.

Frank Clyburn

Okay.

Dean Li

And I just want to make sure that my view is not just from an MRK standpoint. It's from an MERCK point of view and it's from a trajectory of medicine point of view. But I'll reserve that for ASCO.

Caroline Litchfield

As I think all of you appreciate, Merck is a company that really focuses on translating breakthrough science to invent medicines and vaccines that will help save and prolong life. That's guided us for the last 130 plus years. And as a result, we and others have had a significant impact on human health. The element of the Inflation Reduction Act that looks at price setting and a single note time setting is what we have taken objection to.

This has the risk of significantly impacting innovation for the pharmaceutical industry. So we felt it was important to stand up and stand up because of the concerns for the trajectory of innovation, stand up because of the concerns for the impacts for patients over the longer term and stand up because the Act is written is unconstitutional. It is actually violating both the Fifth and the First Amendments. So we’ve moved forward with our lawsuit.

We've done that not because Merck is impacted to a greater extent than anyone else. Indeed we’ve stated publicly that we believe we have a strong innovation engine and that we will be able to sustain growth into the future incorporating the impacts of the IRA as it's currently written. But we've stood up because it's important that we all look to protect innovation.

So what we're hoping to do is to ensure that we work with the government, work with the government to enable patient-focused innovation. But we enable value and we enable access and that's why we have acted preventing.

Dean Li

So if you look at ASCO and I just point out that the decision that we made in terms of the legal action occurred on June 6, which is an important day and that important date is, it followed ASCO. And if you were at ASCO, the headlines that all of you were reading is really late-stage going to earlier stage. And early detection is important. You had, the potential future NIH Director speaking about the passably, the word cure got used a lot in multiple situations.

It was related to CDKs and breast cancer. It was related to EGF RTK inhibitors in lung cancer. It was related to our work and other people's in PD1. And I would just step back and ask everyone, those earlier stage cancer trials that occur after you prove that it works in metastatic, how long do they take? So the CDK trial takes five years. The EGF RTK inhibitors, that's not our company, it takes eight years.

You just look at the trajectory especially a small molecule touching important nodal pathways. In the future, do you think that those pathways they're going to be done in metastatic. Have you put in? And this is what I said, you have a cancer moonshot shuttle that is tasting early detection and cure. Have you inadvertently put an o-ring in there that's going to make that shuttles path difficult, especially when there's so much advancements especially in small molecules in cancer.

The reason I also think it's important is, I would remind all of us, not just the pharmaceutical industry, the investors, but my academic colleagues, and the broader ecosystem. If you think nine years in small molecules and 12 years in biologics is, is the goal. You have to remember that four weeks ago or five weeks ago, a smart Act or legislation was proposed to drop it to five and five. So, when I was talking to people, I'm like do you know what that means? And people immediately said, no one's ever going to do those trials.

And that to me is a clarion call, not for Merck or a pharma or investors or stuff, it's the trajectory of medicine that's that you're going to affect. We support the cancer moonshot ambitions of this administration. But we are calling out that that inadvertent o-ring, especially when people do the smart act, that's more like a smart bomb driven directly at that cancer moonshot shuttle. So those are important points for - that was why I was so animated because it's not a Merck issue. It's a broader issue.

Frank Clyburn

Animated. Very good word choice. You talked about working with the government and really kind of there were emotional elements to what you just commented upon, Dean and you know the ideals that were there. And at the same time, the language was just lexicon bursting just really colorful stuff. Frame a little bit around some of the language. There are things like tantamount to extortion and just the exhortations were very dramatic emphatic, memorable.

Obviously, you know, legal counsel was involved with the actual writing of this et cetera. Help us understand, sort of the tone of the actual suite.

Dean Li

I'm going to let Caroline handle it, because, I've already shown you the emotion that I have not related to the suite per se. I just think it's really important but the whole ecosystem. This is not about rare disease. This is about one of the most important diseases that we could address. But in terms of that emotion that was placed within my discussion here and at ASCO it was, do all of you understand what is at stake here. Caroline?

Caroline Litchfield

And so, the language that we've used in the lawsuit is really showing the issue of the price setting component of the IRA. So number one, what negotiation does or doesn't mean. And while the IRA suggests that there will be negotiation on the price. The reality of the process means it doesn't really work as a negotiation.

We wanted to ensure we had appropriate language to ensure people understand what negotiation is and what it is not. Similarly, the fact that at the end of the day, a pharmaceutical company would need to agree to that price really, you're not given a choice, but to agree. And again, we wanted to ensure the appropriate language around what the Inflation Reduction Act for this price setting component is actually requiring us to do.

We feel strongly as a company, you've seen us act this way for 130 plus years that it's important to do things to advance science and do it in the right way. And that's what you're hearing from a company in the scientific discussion, but also in the discussion of doing things in the right way in the lawsuit.

Dean Li

But from the scientific standpoint, as I've expressed the concerns that I have for the field not from Merck itself, especially in relationship with small molecules can hit critical oncogene has never been able to hit before. It’s , advertently the Inflation Reduction Act could be conceived as an innovation reduction Act.

Frank Clyburn

There's a constitutional approach to this that Amendment, First Amendment, you've basically outlined with some of those were with the Fifth Amendment, I've been doing a lot of learning as many of us have last year, or two years ago, we all became Omnicare virologist. Now we're becoming constitutional lawyers, et cetera understanding about things like the takings clause et cetera. So, it's interesting, but there may be some real concrete things you guys were the first seems as if Chamber of Commerce as follows, there's echoes in the vocabulary of conversations I've having with other sea suites from other companies, as if that there's an alignment. So perhaps others will follow. What is your sense of optimism about that?

Caroline Litchfield

I think the industry had a unified voice last year on the devastating impact that this could have on innovation and many companies voiced that concern and farmers voice that concern. So, while we can't speak on exactly what other companies would do, we do expect other companies are likely to show their voices in a way similar to what our company has done.

Frank Clyburn

Timing June 6, you mentioned it you follow the ASCO with a clear demonstration of sort of linkage of the consequences for people to see et cetera. But from a legal standpoint this is a question of, does an entity have standing which is very specific vocabulary from a legal language and standpoint. Have you been the recipient or on the receiving end of harms or injury one could argue, which is all about what lawyers do et cetera that that not - has not necessarily come to pass as of yet, but there are procedural aspects of this that are very relevant in terms of thinking about what kind of goal can we get to over what kind of timeframe and we all know that a lot of legal process take a lot of time.

So, talk to me about the timing of this decision in particular, and bringing up the issue of standing. But what other factors went into the timing of why now? We're also kind of like ahead of September 1st et cetera.

Dean Li

Well, I'll just take the concept of standing just clear. So, we've shown you why we're very concerned about Inflation Reduction Act. It may change as the trajectory of the path. Let's say in cancer that has been tried and proved for 50 years. And so, we have a concern about it. But we believe that we have standing. So the appropriate position when you think there is legislative overreach is to file a suite.

So we believe that we are standing in each company, left it to find how they express their thoughts. Not just with thoughts, but clearly they have to decide with their upstanding and how to proceed. I just want to emphasize that there have been times where we, for example, think that there's two different judicial overreach recently in Texas and decisions were that, one could argue that we don't precisely have standing, but we show support by being part of the amicus brief in relationship to what we view as judicial overreach that threatens the ecosystem of medical innovation because it threatens the FDA.

And so, each company is going to have to decide to path that's important for them, what's important for them. But they also have to decide whether they have standing and it is our legal colleagues’ point of view that standing is clearly with us given what we think is the timing. And so, we didn't think, should we be first or not? This is we have standing. We should do this.

We're not going to poll everyone should we go first or this? You know, this is a company that has a tradition in this leadership team and the previous leadership team that when you're clear about your principles, you act.

Frank Clyburn

Yeah, no. And that's threaded through decades of the history of the company's culture of clear river blindness can move decision around Penn States, just so many ways that you guys have really stood front and center. So that makes sense. Process two. So, we're going about constitutional challenge here. Ultimately, the defining arena could be the Supreme Court, but you chose a district court, sort of like a game plan. And there again, there's some very basic decision. You guys are headquartered in New Jersey, Washington. DC is where the filing took place. Pros, and cons of sort of that and the implications because ultimately, there's usually this question of, we all on the street to code this is like, oh, it's judge X who was involved with the 2014 ACA case and you know the political leanings and the capabilities of different courts. How should we understand what the pros and cons were of the sort of procedural decision to file a suite in a district that you did and the prospects of ultimately getting to Supreme Court?

Caroline Litchfield

We decided to move forward in the area that we would be able to best move forward this case in an expeditious way. So that's why we made the decision.

Frank Clyburn

And to be expeditious and to meet that goal what is the time we're talking? Are we talking 2026?

Caroline Litchfield

So it's hard for us to get ahead of what the court system will be in the timeline around it. But we would expect this thing.

Frank Clyburn

Okay. Let's consider this is the first round of volleys on some very fascinating questions. I'm sure you've had many fascinating discussions and we will continue to do so. But with the 15 minutes that I have left, let's move on to some other cool stuff that you guys are up to. Capital allocation business development, et cetera. I would argue that you guys have done some of the coolest deals.

I think that actually, Acceleron and sotatercept and - and how that asset has really manifested is arguably one of the best-in-class type deals and the Prometheus asset, I covered Prometheus their novel mechanism of action there. So, ACC, a little bit worried going into that Analyst Meeting. It was quite the victory lap here in terms of the quality and the caliber that data and the enthusiasm, which we know about sotatercept in particular in terms of what's next Dean? I know you've been going back and forth between all sorts of.

Dean Li

Sotatercept itself, I think it's very important that we understand that our interest is sotatercept and also RMK-5475, this is about PAH. Is it is about PAH and really using that as a laboratory understand right heart failure. So when you think about where we plan to investigate sotatercept, it is in PAH, but it's also in diastolic heart failure, as well. When you look at our inhaled SGC MK-5475 it is about PAH. But it is also about pulmonary hypertension driven by COPD.

So we are very excited about whether we can make an impact on right heart failure which using PAH as a platform. In terms of others, interest that we have I think you've called out Prometheus and I would just, I was asked this question, what do I like? And I can tell you what I like. I like companies that have bet on platforms and products that if you ask me back in my biotech years, whether I would start a company on this 5, 8,10, 15 years ago and I would sit there and go, I wouldn't. And then I see data that clearly shows that was a mistake Dean.

So I look at the Acceleron. I know that field. I was in that field and you ask me this 20 years ago, and people did ask me 20 years ago. I'm like I'm not so sure when you see that card flip over, that gets me excited. If you ask me could you get another tnf looking drug to have that sort of data in all comers but not just in an all-comers you have a path with biomarkers to make it even more profound? I would have said 10 years ago I don't think so. So those are the business development deals that I especially like.

Frank Clyburn

We have sotatercept. There is that opportunity to focus on the PAH side of it. It seemed as if the physicians had a quite a bit of enthusiasm around the initial data here, maybe some of the dust has settled and people are thinking a little bit more soberly, but nonetheless, where do you see sotatercept fitting into the existing WHO Group 1 PAH paradigm?

Dean Li

I think that that we will see at the data continues to roll out both from Stellar long-term and as the others that I think that people will look at it and sit there and go a six minute walk and also the hospitalization and the eight out of nine. I don't know that people have seen that in any mechanism period, but especially a mechanism that is so distinguished from all of basal dilatory mechanisms. And as that data continues to come out, I think people will ask themselves and patients will ask themselves why not me? I think there will be an increased enthusiasm as the data sort of matures of asking the question, how earlier in the line of therapy should I put this?

And I would imagine that there are some institutions and some investigators who are looking at the Stellar trial and asking when this launches how do I get in that inclusion criteria and I better start doing whatever is required to do that now. So that's how I think it could play out.

Frank Clyburn

Got it. And then, switching over to the Prometheus asset with TL1A. This essentially sort of refurbishes and re raises the profile of the immunology franchise. There was talk about a fourth pillar and it was - and it was quite clever in the standpoint of, you didn't have an obvious commercial presence at this current iteration of what Merck is, people concerned about the FTC and with deal-making. So, once again, that transaction in my mind had a level of smarts because of the ability to sort of evade that potential obstacle, no guarantee, but certainly confident in the timing of potential close in the third quarter continues to be clinical data and profiles. And here's where Elia voice gets a little bit uppity at me, because I'm just like well you know I saw the R&D deck from the idle speed of the independent company and here's when the pastry was going to read out and he leaned forwards and get so huffy, she's like we are adamant about being able to keep programs on track as we integrate and attract them.

So, with the TL1A, we're eager to know about some maintenance data. All these immunology drugs are about induction, but we know that the money is made in essence of on chronic maintenance therapy, et cetera. Where are we about the maintenance data for that asset? And might we see that this year? and I recognize there's something strange because the deal has not closed yet but, your level of confidence and things on track relative to what's been articulated by the originator company.

Dean Li

So I'm very confident in the data that we've seen in the maintenance and also other data makes me as confident if not more confident in the induction, because the question that you're asking is, the impact that you saw in the clinical trial is that enduring? That's essentially the question that's coming through. We believe it's enduring and we think it could change. Similarly, as I talked about sotatercept, how people think about what drug should be used, when, in what cycle in inflammatory bowel disease. We’re also very interested not just in all sort of colitis, but also in Crohn's disease.

There is a theoretical point of view that's been done in preclinical, which is the potential and point of TL1A in fibrosis which is especially important for Crohn's disease. And we're anxious to see that data as it rolls out, because that that will be important as well. And then clearly this issue of how you rethink about the field in terms of biomarkers and then the final issue that I would just emphasize is, is that, in many ways Prometheus is a platform company based on important work done at Cedars-Sinai by Stephan Target. And we think that there is more there than just the first two assets that have been highlighted, the TL1A, as well as the other assets that are in there, as well.

So we're most focused on making sure this integration of product and platform is followed by a true integration of people because that's what we need in integration. They understand something that we at Merck can help them accelerate. But we also have to understand that these people have done something that other people we do not believe have done at Merck and at other places to work focused on the people part of that integration, which is going extremely well.

And I think one of the storylines, the narrative of Prometheus is a company initially was this notion of bringing precision medicine to immunology and certainly seems just like a, on a whiteboard exercise as a very noble and important, the right drugs, right patient, the right time, et cetera. And yet immunology is inherently like a really attractive market from a commercial and an industry standpoint because of the complexities are still so much we have to understand about patience and biomarkers et cetera.

So Dean, do you think how realistic is it? Investors love the precision oncology story, right being able to have genetic markers quite defined, panels that would identify things being able to measure over pretty short periods of time. How close or far are we from precision medicine in immunology?

Dean Li

So, I think Prometheus is that first shot at doing it. And we're very interested in relationship to TL1A. But when I spoke about the broader concepts, when I look at their data sets, you could use their data sets not just to define new pathways and figure out where to base them. I think you could use their data sets to begin to fractionate the population in terms of response to known drugs. So this concept of you were going to use TL1A to explore how to position TL1A, but in doing so, not only will we have other molecules coming through, but it may also influence how we think about molecules that are already there.

Who's the best person who should get a TNF. Who is the best person who could get an IO 23. I wonder whether their data sets might help us elucidate a broader aspect of the field, not just the importance of biomarkers for TL1A.

Frank Clyburn

I have about five minutes left. And we, we grounded ourselves quite a bit in the conversation in, on the legal front, which I thought was important and timely. So, I won't be able to get all the questions here, but I think we'll take off a couple of things here. Capital allocation strategy on the board now assuming that we closed Prometheus. Just the generic questions in terms of how are you feeling about capacity, prioritization which are going after now.

Caroline Litchfield

So, our capital allocation priorities as a company are unchanged as same as they were pre Prometheus acquisition announcement. As a company we're focused first and foremost in investing in our business and the rich opportunities we have to invest in our pipeline and in our portfolio. We're committed to our dividends and increasing that dividend over time as the instead we are committed to business development and continuing to augment our pipeline with deals of all sizes in all different therapeutic areas that really where we see excellent science in areas of unmet medical need and where we can get the science and value to align that will act as you've seen us do. We've got a very strong balance sheet. We've got ample capacity to do deals of all kinds of sizes and we've got strong cash flow generation in the years ahead of us.

And then finally, from a capital priority, we will return excess cash to our shareholders by share buybacks. We've indicated we expect a modest level of share buyback and that's because of the rich opportunities we have to invest in our company to drive the next wave of innovation and growth into the future.

Frank Clyburn

An important to recent news related, a question on this topic is the FTC and the actions that they're doing in relation to Amgen Horizon. How does this factor into your calculus and thinking?

Caroline Litchfield

So it's clear that the FTC is taking a rigorous approach in assessing transactions in the pharmaceutical industry and outside of our industry. And we do look at the potential assessments from the FTC. All the transactions we look at are scientifically focused. We're looking at bringing the best innovation and driving that innovation, driving it with speed and driving it to hopefully impact more patients. So we believe the kind of transactions we look at are pro innovation and that pro patient access and therefore should be enabled through an FTC regime.

Frank Clyburn

Business development more broadly speaking does include some partnerships. So I want to conclude by asking Dean a little bit about two of the data points coming out of ASCO which we just recently exited as well. The data that was presented on 2870 with the antibody drug conjugate. Then also want to touch upon something related to Moderna the mRNA 4157.

Maybe key takes on the ADC and in particular, these are adding at junctures we're everyone speculating about what the Phase 3 programs could look like. You know, help make us a little bit smarter by sitting in this room together with you today to sort of feels like post ASCO, we're about to Phase 3. What's the proprietary color that you can whisper might?

Dean Li

What - fundamentally with the antibody drug conjugates, we show the initial profile. We recognize that it's early profile. But it give us a great confidence to move that ADC fast. Most people are focused, for example in lung and I would just emphasize the importance in lung is pembro and chemo. KEYNOTE-189 is out there. Then is the finish line or you might even say the starting line isn't monotherapy.

The starting line is the minute you start doing Pembro plus ADCs. And so the profile of our ADC gives us confidence to move quickly. And we think that's an important place related to lung. There's also other places that clearly we have evidence for and that we will advance. But the other point is, we will do that looking at the totality of our data. The totality of the field’s data and the totality of ADCs that are moving very fast in our pipeline internally and with Keyman’s partnership in relationship where to put the right ADC with the right indication.

Frank Clyburn

And then on the new acronym for the Moderna assets, I'm not supposed to say.

Dean Li

Yes.

Frank Clyburn

Remind us what the acronym.

Dean Li

All of that - I would not answer a question related to a personalized cancer. And it would be sort of individual - but I just would emphasize, it's essentially a path to tickle the immune system add it with, you know a drug such as KEYTRUDA that unleashes the immune system. And it's essentially IO, plus IO, and what you saw was an impact in melanoma, in a phase 2 in a randomized trial, where KEYTRUDA in adjuvant has a important effect.

And you have a contribution of components where you can say the INT individual neoantigen therapy is clearly doing something based on real clinical responses. And also we’ve provided additional data at ASCO, as well. So, we look at it and we're like, that's a place that we need to think carefully about and we have to think ourselves where can we play with our strength.

And so, clearly, tissues that we know are immune sensitive tumors, because we have the physiologic probes to define that, which is Pembro. That's a place that we will go. Other companies with those therapies have gone a different way and we will monitor that and transition should they be successful? But we're going to play strong where we have our data in a Phase 2 randomized trial and where we understand the possibility of IO plus IO can work best.

Frank Clyburn

And then the final question another asset that tickles the immune system TIGIT. So how should we think about you're going after the adjuvant melanoma setting? Is there a complementarity of the positioning multiple shots on goal frame? How to think about these two programs as they progress?

Dean Li

Yeah. So, one of the things that I've just emphasized in previous has the field has naturally gone to IO plus IO in metastatic, because that's where the initial IO was, It is my view that in the earlier stage cancer, IO plus IO could be more impactful than IO plus IO in the metastatic. So that's why we drove a lot of trials in the metastatic with IO plus IO, but as we've done it, we've opened a new trial and a new KEYNOTE in adjuvant melanoma. And we'll have to see whether that sort of view is correct. And we've actually asked ourselves other IO, IO agents that have been placed in metastatic, should we reconsider them in the earlier stage, as well? Not just TIGIT.

Frank Clyburn

Got it. Okay. Well, we're out of time, Caroline Litchfield, Dean Li, thank you, both for joining. Thank you for Merck's leadership. And with you guys in the scrum, looking forward to the second half of the Year.

Dean Li

All right. Thank you.

Caroline Litchfield

Thank you.

Question-And-Answer Session

End of Q&A