filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Spin-Off of Organon & Co.
On June 2, 2021, Merck completed the spin-off of products from its women’s health, biosimilars and established brands businesses into a new, independent, publicly traded company named Organon & Co. (Organon) through a distribution of Organon’s publicly traded stock to Company shareholders. The distribution is expected to qualify as tax-free to the Company and its shareholders for U.S. federal income tax purposes. The established brands included in the transaction consisted of dermatology, non-opioid pain management, respiratory, select cardiovascular products, as well as the rest of Merck’s diversified brands franchise. Merck’s existing research pipeline programs continue to be owned and developed within Merck as planned. The historical results of the women’s health, biosimilars and established brands businesses that were contributed to Organon in the spin-off have been reflected as discontinued operations in the Company’s consolidated financial statements through the date of the spin-off (see Note 2 to the condensed consolidated financial statements).
Other Developments
Business Developments
Below is a summary of significant business development activity thus far in 2021. See Note 3 to the condensed consolidated financial statements for additional information.
In January 2021, Merck entered into an exclusive license and research collaboration agreement with Artiva Biotherapeutics, Inc. (Artiva) to discover, develop and manufacture CAR-NK cells that target certain solid tumors using Artiva’s proprietary platform. Merck and Artiva agreed to engage in up to three different research programs, each covering a collaboration target. Merck has sole responsibility for all development and commercialization activities (including regulatory filing and approval). Under the terms of the agreement, Merck made an upfront payment of $30 million, which was included in Research and development expenses in the first nine months of 2021, for license and other rights for the first two collaboration targets and agreed to make another upfront payment of $15 million for license and other rights for the third collaboration target when it is selected by Merck and accepted by Artiva. In addition, Artiva is eligible to receive future contingent milestone payments and tiered royalties on future sales.
In March 2021, Merck and Gilead Sciences, Inc. (Gilead) entered into an agreement to jointly develop and commercialize long-acting treatments in HIV that combine Merck’s investigational nucleoside reverse transcriptase translocation inhibitor, islatravir, and Gilead’s investigational capsid inhibitor, lenacapavir. The collaboration will initially focus on long-acting oral formulations and long-acting injectable formulations of these combination products, with other formulations potentially added to the collaboration as mutually agreed. There was no upfront payment made by either party upon entering into the agreement.
In April 2021, Merck acquired Pandion Therapeutics, Inc. (Pandion), a clinical-stage biotechnology company developing novel therapeutics designed to address the unmet needs of patients living with autoimmune diseases, for total consideration of $1.9 billion. Pandion is advancing a pipeline of precision immune modulators targeting critical immune control nodes.
In September 2021, Merck and Acceleron Pharma Inc. (Acceleron), a publicly traded biopharmaceutical company, entered into a definitive agreement under which Merck will acquire Acceleron for $180 per share in cash for an approximate total equity value of $11.5 billion. Acceleron is focused on harnessing the power of the transforming growth factor (TGF)-beta superfamily of proteins that is known to play a central role in the regulation of cell growth, differentiation and repair. Under the terms of the acquisition agreement, Merck, through a subsidiary, initiated a tender offer to acquire all outstanding shares of Acceleron. The closing of the tender offer is subject to certain conditions, including the tender of shares representing at least a majority of the total number of Acceleron’s outstanding shares, receipt of applicable regulatory approvals, and other customary conditions. The transaction is expected to close in the fourth quarter of 2021.
Coronavirus Disease 2019 (COVID-19) Update
Overall, in response to the COVID-19 pandemic, Merck is focused on protecting the safety of its employees, ensuring that its supply of medicines and vaccines reaches its patients, contributing its scientific expertise to the development of an antiviral therapy, supporting efforts to expand manufacturing capacity and supply of SARS-CoV-2/COVID-19 medicines and vaccines (see below), and supporting health care providers and Merck’s communities. Although COVID-19-related disruptions negatively affected results for the third quarter and first nine months of 2021, Merck continues to experience strong global underlying demand across its business.
In the third quarter and first nine months of 2021, the estimated negative impact of the COVID-19 pandemic to Merck’s sales was approximately $350 million and $1.3 billion, respectively, all of which related to the Pharmaceutical segment. In the third quarter and first nine months of 2020, the estimated negative impact of the COVID-19 pandemic to Merck’s Pharmaceutical sales was approximately $400 million and $1.7 billion, respectively. Roughly 75% of Merck’s
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Pharmaceutical segment revenue is comprised of physician-administered products, which, despite strong underlying demand, have been affected by social distancing measures and fewer well visits.
In April 2021, Merck announced it was discontinuing the development of MK-7110 (formerly known as CD24Fc) for the treatment of hospitalized patients with COVID-19 (see Note 3 to the condensed consolidated financial statements). This decision resulted in charges of $207 million to Cost of sales in the first nine months of 2021.
Operating expenses reflect a minor positive effect in the third quarter and first nine months of 2021 as investments in COVID-19-related research programs largely offset the favorable impact of lower spending in other areas due to the COVID-19 pandemic. Operating expenses were positively affected in the third quarter and first nine months of 2020 by approximately $100 million and $500 million, respectively, primarily driven by lower promotional and selling costs, as well as lower research and development expenses due to the COVID-19 pandemic.
Merck continues to believe that global health systems and patients have largely adapted to the impacts of the COVID-19 pandemic, and that while certain negative impacts will persist, the trend will continue to improve. For the full year of 2021, Merck assumes a net unfavorable impact to sales of less than 3% due to the COVID-19 pandemic, all of which relates to the Pharmaceutical segment.
In November 2021, the Medicines and Healthcare products Regulatory Agency in the United Kingdom (U.K.) granted authorization for molnupiravir (MK-4482, EIDD-2801), an investigational oral antiviral medicine, for the treatment of mild-to-moderate COVID-19 in adults with a positive SARS-CoV-2 diagnostic test and who have at least one risk factor for developing severe illness. The authorization is based on positive results from a planned interim analysis from the Phase 3 MOVe-OUT clinical trial, which evaluated molnupiravir in non-hospitalized, unvaccinated adult patients with laboratory-confirmed mild-to-moderate COVID-19, symptom onset within five days of study randomization and at least one risk factor associated with poor disease outcomes. In the U.K., Lagevrio is the planned trademark for molnupiravir. In October 2021, Merck submitted an Emergency Use Authorization (EUA) application to the U.S. Food and Drug Administration (FDA) for molnupiravir for the treatment of mild-to-moderate COVID-19 in adults who are at risk for progressing to severe COVID-19 and/or hospitalization. The FDA subsequently announced a November 30, 2021 meeting of its Antimicrobial Drugs Advisory Committee to discuss the available data supporting the use of molnupiravir to treat mild-to-moderate COVID-19 in adults who have tested positive for COVID-19 and who are at high risk of progression to severe COVID-19, including hospitalization or death. Also in October 2021, the European Medicines Agency (EMA) initiated a rolling review for molnupiravir. Merck plans to work with the Committee for Medicinal Products for Human Use (CHMP) of the EMA to complete the rolling review process to facilitate initiating the formal review of the Marketing Authorization Application. Merck is developing molnupiravir in collaboration with Ridgeback Biotherapeutics LP (Ridgeback Bio). The companies are actively working with other regulatory agencies worldwide to submit applications for emergency use or marketing authorization in the coming months. In anticipation of the results from the MOVe-OUT trial and the potential for regulatory authorization or approval, Merck has been producing molnupiravir at risk. Merck expects to produce 10 million courses of treatment by the end of 2021, with at least 20 million additional courses expected to be produced in 2022. In June 2021, Merck announced a procurement agreement with the U.S. government under which Merck will supply approximately 1.7 million courses of molnupiravir to the U.S. government upon EUA or approval from the FDA, which will be delivered in scheduled increments. This procurement of molnupiravir will be supported in whole or in part with federal funds. Additionally, Merck has entered into supply and advance purchase commitments for molnupiravir with other governments worldwide, including Australia, South Korea and New Zealand pending regulatory authorization, as well as the U.K., and is currently in discussions with other governments. If approved, Merck will be the principal on sales transactions, recognizing sales and related costs, with profit sharing amounts recorded within Cost of sales. Profits from the collaboration will be split equally between the partners.
Merck is committed to providing timely access to molnupiravir globally, if it is authorized or approved, and intends to implement a tiered pricing approach based on World Bank country income criteria to reflect countries’ relative ability to finance their health response to the pandemic. As part of its commitment to widespread global access, Merck has entered into non-exclusive voluntary licensing agreements for molnupiravir with established Indian generic manufacturers. Merck and the Medicines Patent Pool (MPP) also signed a voluntary licensing agreement to facilitate affordable global access for molnupiravir. Under the terms of the agreement, the MPP will be permitted to further license non-exclusive sublicenses to manufacturers and diversify the manufacturing base for the supply of quality-assured or WHO-prequalified molnupiravir to countries covered by the MPP license, subject to local regulatory authorization. Merck, Ridgeback Bio and Emory University will not receive royalties for sales of molnupiravir under this agreement (molnupiravir was invented at Emory University and licensed to Ridgeback Bio) for as long as COVID-19 remains classified as a Public Health Emergency of International Concern by the World Health Organization. These agreements will help expand access to molnupiravir in more than 100 low- and middle-income countries.
In March 2021, Merck announced it had entered into multiple agreements to support efforts to expand manufacturing capacity and supply of SARS-CoV-2/COVID-19 medicines and vaccines. The Biomedical Advanced Research and Development Authority (BARDA), a division of the Office of the Assistant Secretary for Preparedness and Response
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within the U.S. Department of Health and Human Services, will provide Merck with funding to adapt and make available a number of existing manufacturing facilities for the production of SARS-CoV-2/COVID-19 vaccines and medicines. Merck has also entered into agreements to support the manufacturing and supply of Johnson & Johnson’s SARS-CoV-2/COVID-19 vaccine. Merck will use its facilities in the U.S. to produce drug substance, formulate and fill vials of Johnson & Johnson’s vaccine.
Pricing
Global efforts toward health care cost containment continue to exert pressure on product pricing and market access worldwide. Changes to the U.S. health care system as part of health care reform, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, have contributed to pricing pressure. In several international markets, government-mandated pricing actions have reduced prices of generic and patented drugs. In addition, the Company’s sales performance in the first nine months of 2021 was negatively affected by other cost-reduction measures taken by governments and other third parties to lower health care costs. In the U.S., the Biden Administration and Congress continue to discuss legislation designed to control health care costs, including the cost of drugs. The Company anticipates all of these actions and additional actions in the future will continue to negatively affect sales performance.
Operating Results
Sales
| Three Months Ended September 30, | % Change Excluding Foreign Exchange | Nine Months Ended September 30, | % Change Excluding Foreign Exchange | ||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | 2021 | 2020 | % Change | 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||||||||||
| United States | $ | 6,276 | $ | 5,250 | 20 | % | 20 | % | $ | 16,166 | $ | 14,301 | 13 | % | 13 | % | |||||||||||||||||||||||||||||||
| International | 6,878 | 5,679 | 21 | % | 18 | % | 19,017 | 16,269 | 17 | % | 13 | % | |||||||||||||||||||||||||||||||||||
| Total | $ | 13,154 | $ | 10,929 | 20 | % | 19 | % | $ | 35,183 | $ | 30,570 | 15 | % | 13 | % |
U.S. plus international may not equal total due to rounding.
Worldwide sales grew 20% to $13.2 billion in the third quarter of 2021 and rose 15% to $35.2 billion in the first nine months of 2021. Revenue performance in both periods primarily reflects higher sales in the oncology franchise largely driven by strong growth of Keytruda (pembrolizumab) and increased alliance revenue from Lynparza (olaparib) and Lenvima (lenvatinib), as well as higher sales in the vaccines franchise, primarily attributable to growth in Gardasil (Human Papillomavirus Quadrivalent [Types 6, 11, 16 and 18] Vaccine, Recombinant)/Gardasil 9 (Human Papillomavirus 9-valent Vaccine, Recombinant), Varivax (Varicella Virus Vaccine Live) and ProQuad (Measles, Mumps, Rubella and Varicella Virus Vaccine Live). Higher sales of certain hospital acute care products, including Bridion (sugammadex) Injection and Prevymis (letermovir), as well as higher sales of Animal Health products also drove revenue growth in the third quarter and first nine months of 2021. Additionally, sales in the third quarter and first nine months of 2021 also benefited from the achievement of milestones for an out-licensed product that triggered contingent payments to Merck. As discussed above, the COVID-19 pandemic unfavorably affected sales in the third quarter and first nine months of 2021, but to a lesser extent than in the comparable periods of 2020 which benefited year-over-year sales growth.
Revenue growth in both periods was partially offset by lower sales of Pneumovax 23 (pneumococcal vaccine polyvalent) and the suspension of sales of hospital acute care product Zerbaxa (ceftolozane and tazobactam) for injection. Lower sales of diabetes product Janumet (sitagliptin/metformin HCl) also partially offset revenue growth in the first nine months of 2021.
See Note 16 to the condensed consolidated financial statements for details on sales of the Company’s products. A discussion of performance for select products in the franchises follows.
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Pharmaceutical Segment
Oncology
| Three Months Ended September 30, | % Change Excluding Foreign Exchange | Nine Months Ended September 30, | % Change Excluding Foreign Exchange | ||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | 2021 | 2020 | % Change | 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||||||||||
| Keytruda | $ | 4,534 | $ | 3,715 | 22 | % | 21 | % | $ | 12,609 | $ | 10,387 | 21 | % | 19 | % | |||||||||||||||||||||||||||||||
| Alliance Revenue - Lynparza (1) | 246 | 196 | 25 | % | 25 | % | 721 | 519 | 39 | % | 35 | % | |||||||||||||||||||||||||||||||||||
| Alliance Revenue - Lenvima (1) | 188 | 142 | 32 | % | 30 | % | 498 | 421 | 18 | % | 15 | % |
(1) Alliance revenue represents Merck’s share of profits, which are product sales net of cost of sales and commercialization costs (see Note 4 to the condensed consolidated financial statements).
Keytruda is an anti-PD-1 (programmed death receptor-1) therapy that has been approved as monotherapy for the treatment of certain patients with cervical cancer, classical Hodgkin lymphoma (cHL), cutaneous squamous cell carcinoma (cSCC), esophageal cancer, gastric or gastroesophageal junction adenocarcinoma, head and neck squamous cell carcinoma (HNSCC), hepatocellular carcinoma (HCC), non-small-cell lung cancer (NSCLC), melanoma, Merkel cell carcinoma, microsatellite instability-high (MSI-H) or mismatch repair deficient (dMMR) cancer including MSI-H/dMMR colorectal cancer, primary mediastinal large B-cell lymphoma, tumor mutational burden-high (TMB-H) solid tumors, and urothelial carcinoma including non-muscle invasive bladder cancer. Keytruda is also approved for the treatment of certain patients in combination with chemotherapy for metastatic squamous and nonsquamous NSCLC, in combination with chemotherapy for esophageal cancer, in combination with chemotherapy for gastric cancer, in combination with chemotherapy for HNSCC, in combination with chemotherapy for triple-negative-breast cancer (TNBC), in combination with axitinib for renal cell carcinoma (RCC), and in combination with Lenvima for both endometrial carcinoma and RCC. The Keytruda clinical development program includes studies across a broad range of cancer types. See “Research and Development Update” below.
Global sales of Keytruda grew 22% and 21% in the third quarter and first nine months of 2021, respectively. Sales growth in both periods was driven by higher demand as the Company continues to launch Keytruda with multiple new indications globally, although the COVID-19 pandemic had a dampening effect on growing demand negatively affecting the number of new patients starting treatment. Sales in the U.S. continue to build across the multiple approved indications, in particular for the treatment of advanced NSCLC as monotherapy, and in combination with chemotherapy for both nonsquamous and squamous metastatic NSCLC, along with uptake in the RCC, TNBC, MSI-H cancer, esophageal cancer and HNSCC indications. Keytruda sales growth in international markets was driven by continued uptake predominately for the NSCLC, HNSCC and RCC indications, particularly in Europe. Sales growth in the third quarter and first nine months of 2021 was partially offset by lower pricing in Europe, China and Japan.
In March 2021, the FDA approved Keytruda for the treatment of certain patients with locally advanced or metastatic esophageal or gastroesophageal junction carcinoma that is not amenable to surgical resection or definitive chemoradiation in combination with chemotherapy. The approval was based on the results of the KEYNOTE-590 trial.
In May 2021, the FDA approved Keytruda in combination with chemotherapy for the first-line treatment of patients with locally advanced unresectable or metastatic human epidermal growth factor receptor 2 (HER2) positive gastric or gastroesophageal junction adenocarcinoma based on the results of the KEYNOTE-811 trial. This indication is approved under accelerated approval based on tumor response rate and durability of response; continued approval for this indication may be contingent upon verification and description of clinical benefit in the confirmatory trials.
In July 2021, the FDA approved Keytruda for the treatment of patients with high-risk, early-stage TNBC in combination with chemotherapy as neoadjuvant treatment and then continued as a single agent as adjuvant treatment after surgery, based on the KEYNOTE-522 trial. Additionally, the FDA converted the accelerated approval of Keytruda in combination with chemotherapy for the treatment of patients with locally recurrent unresectable or metastatic TNBC whose tumors express PD-L1 that was originally granted in 2020 to a full (regular) approval based on confirmatory data from KEYNOTE-522.
Also in July 2021, the FDA approved Keytruda as monotherapy for the treatment of patients with locally advanced cSCC that is not curable by surgery or radiation based on data from the KEYNOTE-629 trial.
Additionally, in July 2021, the FDA approved the combination of Keytruda plus Lenvima for the treatment of patients with advanced endometrial carcinoma that is not MSI-H or dMMR, who have disease progression following prior systemic therapy in any setting and are not candidates for curative surgery or radiation. The approval for this population is based on results from the KEYNOTE-775/Study 309 trial, which was the confirmatory trial for the accelerated approval by the FDA in 2019.
In August 2021, Merck announced a label update for Keytruda for its indication in first-line advanced urothelial carcinoma (bladder cancer) in the U.S. The FDA has converted this indication from an accelerated to a full (regular) approval.
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In addition, as part of the label update, this indication has been revised to be for the treatment of patients with locally advanced or metastatic urothelial carcinoma who are not eligible for any platinum-containing chemotherapy.
Also in August 2021, the FDA approved the combination of Keytruda and Lenvima for the first-line treatment of adult patients with advanced RCC based on results from the KEYNOTE-581 trial/Study 307 trial.
In October 2021, the FDA approved Keytruda in combination with chemotherapy, with or without bevacizumab, for the treatment of patients with persistent, recurrent or metastatic cervical cancer based on the KEYNOTE-826 trial. Additionally, the FDA converted the accelerated approval of Keytruda as a single agent for the treatment of patients with recurrent or metastatic cervical cancer with disease progression on or after chemotherapy to a regular approval based on confirmatory data from KEYNOTE-826. This approval was originally granted in June 2018 based on results from the KEYNOTE-158 trial.
In March 2021, Merck announced it was voluntarily withdrawing the U.S. indication for Keytruda for the treatment of patients with metastatic SCLC with disease progression on or after platinum-based chemotherapy and at least one other prior line of therapy. The withdrawal of this indication was done in consultation with the FDA and does not affect other indications for Keytruda. Accelerated approval for this indication was granted in 2019 and was contingent upon completion of the post-marketing requirement establishing superiority of Keytruda as determined by overall survival (OS). As announced in January 2020, KEYNOTE-604, the confirmatory Phase 3 trial for this indication, met one of its dual primary endpoints of progression-free survival (PFS) but did not reach statistical significance for the other primary endpoint of OS.
In July 2021, Merck announced that it plans to voluntarily withdraw the U.S. accelerated approval indication for Keytruda for the treatment of patients with recurrent locally advanced or metastatic gastric or gastroesophageal junction adenocarcinoma whose tumors express PD-L1, with disease progression on or after two or more prior lines of therapy. The decision was made in consultation with the FDA following the Oncologic Drugs Advisory Committee evaluation of this third-line gastric cancer indication for Keytruda as a monotherapy because it failed to meet its post-marketing requirement of demonstrating an OS benefit in a Phase 3 study. The withdrawal of this indication was done in consultation with the FDA and does not affect other indications for Keytruda. As agreed with the FDA, Merck will initiate the withdrawal in January 2022.
In January 2021, Keytruda was approved by the European Commission (EC) as a first-line treatment in adult patients with MSI-H or dMMR colorectal cancer based on the results of the KEYNOTE-177 study.
In March 2021, the EC approved an expanded label for Keytruda as monotherapy for the treatment of adult and pediatric patients aged 3 years and older with relapsed or refractory cHL who have failed autologous stem cell transplant (ASCT) or following at least two prior therapies when ASCT is not a treatment option. This approval is based on results from the KEYNOTE-204 and KEYNOTE-087 trials. This is the first pediatric approval for Keytruda in the European Union (EU).
In May 2021, the EC approved the addition of the 400 mg every six weeks (Q6W) dosing regimen to indications where Keytruda is administered in combination with other anticancer agents.
Also in May 2021, the EC approved an update to the European label for Keytruda to include data from KEYNOTE-361. In the EU, Keytruda is approved for the treatment of adult patients with advanced or metastatic urothelial carcinoma (bladder cancer) who are not eligible for cisplatin-containing chemotherapy and whose tumors express PD-L1. This approval was based on KEYNOTE-052; KEYNOTE-361 was conducted as part of a post-marketing commitment following the initial approval of Keytruda for these patients.
In June 2021, the EC approved Keytruda in combination with chemotherapy for the first-line treatment of patients with locally advanced unresectable or metastatic carcinoma of the esophagus or HER2-negative gastroesophageal junction adenocarcinoma in adults whose tumors express PD-L1. This approval was based on results from the KEYNOTE-590 trial.
In October 2021, the EC approved Keytruda in combination with chemotherapy for the first-line treatment of locally recurrent unresectable or metastatic TNBC in adults whose tumors express PD-L1 and who have not received prior chemotherapy for metastatic disease based on the KEYNOTE-355 trial.
In August 2021, Keytruda received two new approvals from the Japan Pharmaceuticals and Medical Devices Agency: for the treatment of patients with PD-L1-positive, hormone receptor-negative and HER2-negative, inoperable or recurrent breast cancer, based on the results of the KEYNOTE-355 trial; and as a monotherapy for the treatment of patients with unresectable, advanced or recurrent MSI-H colorectal cancer, based on results of the KEYNOTE-177 trial.
In June 2021, Keytruda was approved by the China National Medical Products Administration (NMPA) as a first-line treatment in adult patients with MSI-H or dMMR colorectal cancer that is KRAS, NRAS and BRAF (all wild-type) based on the results of the KEYNOTE-177 study. In September 2021, Keytruda was approved by the China NMPA in combination with chemotherapy for the first-line treatment of patients with locally advanced unresectable or metastatic carcinoma of the esophagus or gastroesophageal junction based on the KEYNOTE-590 trial.
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Lynparza is an oral poly (ADP-ribose) polymerase (PARP) inhibitor being developed as part of a collaboration with AstraZeneca PLC (AstraZeneca) (see Note 4 to the condensed consolidated financial statements). Lynparza is approved for the treatment of certain types of advanced ovarian, breast, pancreatic and prostate cancers. Alliance revenue related to Lynparza increased 25% and 39% in the third quarter and first nine months of 2021, respectively. Sales growth in both periods was largely driven by continued uptake across the multiple approved indications in the U.S. and Europe. Higher demand in China also contributed to sales growth in the year-to-date period. In June 2021, Lynparza was granted conditional approval in China as monotherapy for the treatment of certain previously treated adult patients with germline or somatic BRCA-mutated metastatic castration-resistant prostate cancer based on the results of the PROfound trial.
Lenvima is an oral receptor tyrosine kinase inhibitor being developed as part of a collaboration with Eisai Co., Ltd. (Eisai) (see Note 4 to the condensed consolidated financial statements). Lenvima is approved for the treatment of certain types of thyroid cancer, RCC, HCC, in combination with everolimus for certain patients with RCC, in combination with Keytruda for the treatment of certain patients with endometrial carcinoma, and in combination with Keytruda for the treatment of certain patients with RCC. Alliance revenue related to Lenvima grew 32% and 18% in the third quarter and first nine months of 2021, respectively. Sales growth in both periods reflects higher demand in China and the U.S.
In June 2021, Koselugo (selumetinib) was granted conditional approval in the EU for the treatment of pediatric patients three years of age and older with neurofibromatosis type 1 who have symptomatic, inoperable plexiform neurofibromas based on positive results from the National Cancer Institute Cancer Therapy Evaluation Program-sponsored SPRINT Stratum 1 trial. Koselugo was approved by the FDA in April 2020. Koselugo is part of the same collaboration with AstraZeneca referenced above that includes Lynparza.
In August 2021, the FDA approved Welireg (belzutifan), an oral hypoxia-inducible factor-2 alpha (HIF-2α) inhibitor, for the treatment of adult patients with von Hippel-Lindau (VHL) disease who require therapy for associated RCC, central nervous system hemangioblastomas, or pancreatic neuroendocrine tumors, not requiring immediate surgery. The approval was based on results from the open-label Study 004 trial. Welireg was obtained as part of Merck’s 2019 acquisition of Peloton Therapeutics, Inc. (Peloton). Pursuant to the acquisition agreement, Merck made a $50 million capitalized milestone payment to former Peloton shareholders upon first commercial sale of Welireg in the U.S.
Vaccines
| Three Months Ended September 30, | % Change Excluding Foreign Exchange | Nine Months Ended September 30, | % Change Excluding Foreign Exchange | ||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | 2021 | 2020 | % Change | 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||||||||||
| Gardasil/Gardasil 9 | $ | 1,993 | $ | 1,187 | 68 | % | 63 | % | $ | 4,144 | $ | 2,941 | 41 | % | 35 | % | |||||||||||||||||||||||||||||||
| ProQuad | 244 | 218 | 12 | % | 12 | % | 598 | 507 | 18 | % | 17 | % | |||||||||||||||||||||||||||||||||||
| M-M-R II | 127 | 115 | 11 | % | 10 | % | 295 | 287 | 3 | % | 2 | % | |||||||||||||||||||||||||||||||||||
| Varivax | 290 | 243 | 19 | % | 19 | % | 733 | 595 | 23 | % | 23 | % | |||||||||||||||||||||||||||||||||||
| Pneumovax 23 | 277 | 375 | (26) | % | (26) | % | 600 | 748 | (20) | % | (21) | % | |||||||||||||||||||||||||||||||||||
| RotaTeq | 227 | 210 | 8 | % | 7 | % | 593 | 601 | (1) | % | (3) | % |
Worldwide sales of Gardasil/Gardasil 9, vaccines to help prevent certain cancers and other diseases caused by certain types of human papillomavirus (HPV), grew 68% and 41% in the third quarter and first nine months of 2021, respectively. Sales growth in both periods was driven primarily by strong global demand, particularly in China which also benefited from increased supply, and in the U.S. which also benefited from the timing of public sector purchases. Higher pricing in China and the U.S. also contributed to sales growth in both periods.
Global sales of ProQuad, a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella, grew 12% and 18% in the third quarter and first nine months of 2021, respectively, primarily due to higher sales in the U.S. reflecting higher demand driven by the ongoing COVID-19 pandemic recovery, as well as higher pricing.
Worldwide sales of M‑M‑R II (Measles, Mumps and Rubella Virus Vaccine Live), a vaccine to help protect against measles, mumps and rubella, grew 11% and 3% in the third quarter and first nine months of 2021, respectively, primarily due to higher sales in the U.S. reflecting the ongoing COVID-19 pandemic recovery inclusive of higher public sector mix of business. Lower demand and lower government tenders in international markets partially offset M‑M‑R II sales growth in both periods.
Global sales of Varivax, a vaccine to help prevent chickenpox (varicella), grew 19% and 23% in the third quarter and first nine months of 2021, respectively, primarily reflecting the ongoing COVID-19 pandemic recovery and higher pricing in the U.S. Higher government tenders in Brazil also contributed to Varivax sales growth for the first nine months of 2021.
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Worldwide sales of Pneumovax 23, a vaccine to help prevent pneumococcal disease, declined 26% and 20% in the third quarter and first nine months of 2021, respectively, primarily driven by lower demand in the U.S. reflecting prioritization of COVID-19 vaccination.
Global sales of RotaTeq (Rotavirus Vaccine, Live Oral, Pentavalent), a vaccine to help protect against rotavirus gastroenteritis in infants and children, grew 8% in the third quarter of 2021 largely attributable to higher public sector purchases in the U.S., partially offset by lower demand in certain international markets. Worldwide sales of RotaTeq declined 1% in the first nine months of 2021 reflecting lower demand in certain international markets, partially offset by higher public sector purchases in the U.S.
In July 2021, the FDA approved Vaxneuvance (Pneumococcal 15-valent Conjugate Vaccine) for active immunization for the prevention of invasive disease caused by 15 Streptococcus pneumoniae serotypes in adults 18 years of age and older. The approval was based on data from seven clinical studies assessing safety, tolerability, and immunogenicity in adults. In October 2021, the U.S. Centers for Disease Control and Prevention’s (CDC’s) Advisory Committee on Immunization Practices (ACIP) voted to provisionally recommend vaccination either with a sequential regimen of Vaxneuvance followed by Pneumovax 23, or with a single dose of 20-valent pneumococcal conjugate vaccine both for adults 65 years and older and for adults ages 19 to 64 with certain underlying medical conditions. These provisional recommendations will be reviewed by the director of the CDC and the U.S. Department of Health and Human Services, and final recommendations will become official when published in the CDC’s Morbidity and Mortality Weekly Report. In September 2021, Merck announced a settlement and license agreement with Pfizer Inc., (Pfizer) resolving all worldwide patent infringement litigation related to the use of Merck’s investigational and licensed pneumococcal conjugate vaccine (PCV) products, including Vaxneuvance. Under the terms of the agreement, Merck will make certain regulatory milestone payments to Pfizer, as well as royalty payments on the worldwide sales of its PCV products. The Company will pay royalties of 7.25% of net sales of all Merck PCV products through 2026; and 2.5% of net sales of all Merck PCV products from 2027 through 2035.
Vaxelis (Diphtheria and Tetanus Toxoids and Acellular Pertussis, Inactivated Poliovirus, Haemophilus b Conjugate and Hepatitis B Vaccine), developed as part of a U.S.-based partnership between Merck and Sanofi Pasteur, is now available in the U.S. for active immunization of children six weeks through four years of age to help prevent diphtheria, tetanus, pertussis, poliomyelitis, hepatitis B, and invasive disease due to Haemophilus influenzae type b. In February 2021, the CDC’s ACIP included Vaxelis as a combination vaccine option in the CDC’s Recommended Child and Adolescent Immunization Schedule. Sales of Vaxelis in the U.S. are made through the U.S.-based Merck/Sanofi Pasteur partnership, the results of which are reflected in equity income from affiliates included in Other (income) expense, net. Supply sales to the partnership are recorded within Sales. Vaxelis is also approved in the EU where it is marketed directly by Merck and Sanofi Pasteur.
Hospital Acute Care
| Three Months Ended September 30, | % Change Excluding Foreign Exchange | Nine Months Ended September 30, | % Change Excluding Foreign Exchange | ||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | 2021 | 2020 | % Change | 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||||||||||
| Bridion | $ | 369 | $ | 320 | 16 | % | 15 | % | $ | 1,096 | $ | 843 | 30 | % | 27 | % | |||||||||||||||||||||||||||||||
| Prevymis | 96 | 77 | 23 | % | 22 | % | 270 | 200 | 35 | % | 31 | % | |||||||||||||||||||||||||||||||||||
| Noxafil | 64 | 79 | (19) | % | (20) | % | 197 | 247 | (20) | % | (23) | % | |||||||||||||||||||||||||||||||||||
| Zerbaxa | (2) | 43 | (105) | % | (105) | % | (11) | 112 | (110) | % | (110) | % |
Worldwide sales of Bridion, for the reversal of two types of neuromuscular blocking agents used during surgery, grew 16% and 30% in the third quarter and first nine months of 2021, respectively, due to higher demand globally, particularly in the U.S. and Europe, attributable in part to the COVID-19 pandemic recovery. Bridion was also approved by the FDA in June 2021 for pediatric patients aged 2 years and older undergoing surgery.
Worldwide sales of Prevymis, a medicine for prophylaxis (prevention) of cytomegalovirus (CMV) infection and disease in adult CMV-seropositive recipients of an allogenic hematopoietic stem cell transplant, grew 23% and 35% in the third quarter and first nine months of 2021, respectively, due to continued uptake since launch in several international markets, particularly in Europe and the U.S. Prevymis was approved by the EC in January 2018 and by the FDA in November 2017.
Global sales of Noxafil (posaconazole), an antifungal agent for the prevention of certain invasive fungal infections, declined 19% and 20% in the third quarter and first nine months of 2021, respectively, primarily due to generic competition in Europe, partially offset by higher demand in China. The patent that provided market exclusivity for Noxafil in a number of major European markets expired in December 2019. As a result, the Company is experiencing lower demand for Noxafil in these markets as a result of generic competition and expects the decline to continue.
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In December 2020, the Company temporarily suspended sales of Zerbaxa, a combination antibacterial and beta-lactamase inhibitor for the treatment of certain bacterial infections, and subsequently issued a product recall, following the identification of product sterility issues. The Company expects a phased resupply for Zerbaxa beginning with the U.S. market in the fourth quarter of 2021.
Immunology
| Three Months Ended September 30, | % Change Excluding Foreign Exchange | Nine Months Ended September 30, | % Change Excluding Foreign Exchange | ||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | 2021 | 2020 | % Change | 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||||||||||
| Simponi | $ | 203 | $ | 209 | (3) | % | (5) | % | $ | 619 | $ | 615 | 1 | % | (5) | % |
Sales of Simponi (golimumab), a once-monthly subcutaneous treatment for certain inflammatory diseases (marketed by the Company in Europe, Russia and Turkey), declined 3% in the third quarter of 2021 and increased 1% in the first nine months of 2021. Excluding the effect of foreign exchange, sales performance in both periods was largely attributable to lower pricing in Company’s marketing territories in Europe, partially offset by higher volumes. Sales of Simponi are being unfavorably affected by biosimilar competition for competing products. The Company expects this competition will continue to unfavorably affect sales of Simponi.
The Company’s marketing rights with respect to Simponi will revert to Janssen Pharmaceuticals, Inc. in the second half of 2024.
Virology
| Three Months Ended September 30, | % Change Excluding Foreign Exchange | Nine Months Ended September 30, | % Change Excluding Foreign Exchange | ||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | 2021 | 2020 | % Change | 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||||||||||
| Isentress/Isentress HD | $ | 189 | $ | 205 | (8) | % | (7) | % | $ | 590 | $ | 646 | (9) | % | (9) | % |
Global combined sales of Isentress/Isentress HD (raltegravir), an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection, declined 8% and 9% in the third quarter and first nine months of 2021, respectively, primarily due to competitive pressure particularly in Europe and the U.S. The Company expects competitive pressure for Isentress/Isentress HD to continue.
Cardiovascular
| Three Months Ended September 30, | % Change Excluding Foreign Exchange | Nine Months Ended September 30, | % Change Excluding Foreign Exchange | ||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | 2021 | 2020 | % Change | 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||||||||||
| Alliance Revenue - Adempas/Verquvo (1) | $ | 100 | $ | 83 | 20 | % | 20 | % | $ | 248 | $ | 216 | 15 | % | 15 | % | |||||||||||||||||||||||||||||||
| Adempas | 59 | 55 | 7 | % | 8 | % | 188 | 167 | 13 | % | 7 | % |
(1) Alliance revenue represents Merck’s share of profits from sales in Bayer’s marketing territories, which are product sales net of cost of sales and commercialization costs (see Note 4 to the condensed consolidated financial statements).
Adempas (riociguat), a cardiovascular drug for the treatment of certain types of pulmonary arterial hypertension, is part of a worldwide collaboration with Bayer AG (Bayer) to market and develop soluble guanylate cyclase (sGC) modulators including Adempas (see Note 4 to the condensed consolidated financial statements). Alliance revenue from the collaboration grew 20% and 15% in the third quarter and first nine months of 2021, respectively. Revenue from the collaboration also includes sales of Adempas in Merck’s marketing territories, which grew 7% and 13% in the third quarter and first nine months of 2021, respectively, primarily reflecting higher demand.
In January 2021, the FDA approved Verquvo (vericiguat), an sGC stimulator, to reduce the risk of cardiovascular death and heart failure hospitalization following a hospitalization for heart failure or need for outpatient intravenous diuretics in adults with symptomatic chronic heart failure and reduced ejection fraction. Verquvo was also approved in Japan in June 2021 and in the EU in July 2021. The approvals were based on the results of the VICTORIA trial. Verquvo is part of the same collaboration with Bayer referenced above that includes Adempas.
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Diabetes
| Three Months Ended September 30, | % Change Excluding Foreign Exchange | Nine Months Ended September 30, | % Change Excluding Foreign Exchange | ||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | 2021 | 2020 | % Change | 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||||||||||
| Januvia/Janumet | $ | 1,339 | $ | 1,327 | 1 | % | — | % | $ | 3,895 | $ | 3,948 | (1) | % | (4) | % |
Worldwide combined sales of Januvia (sitagliptin) and Janumet, medicines that help lower blood sugar levels in adults with type 2 diabetes, declined 1% in the first nine months of 2021 primarily due to continued pricing pressure and lower demand in the U.S., largely offset by higher demand in China and Latin America. The Company expects U.S. pricing pressure to continue. Januvia and Janumet will lose market exclusivity in the U.S. in January 2023. The supplementary patent certificates that provide market exclusivity for Januvia and Janumet in the EU expire in September 2022 and April 2023, respectively. The Company anticipates sales of Januvia and Janumet in these markets will decline substantially after loss of market exclusivity.
Animal Health Segment
| Three Months Ended September 30, | % Change Excluding Foreign Exchange | Nine Months Ended September 30, | % Change Excluding Foreign Exchange | ||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | 2021 | 2020 | % Change | 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||||||||||
| Livestock | $ | 864 | $ | 758 | 14 | % | 12 | % | $ | 2,503 | $ | 2,145 | 17 | % | 14 | % | |||||||||||||||||||||||||||||||
| Companion Animal | 553 | 462 | 20 | % | 18 | % | 1,804 | 1,390 | 30 | % | 26 | % |
Sales of livestock products grew 14% and 17% in the third quarter and first nine months of 2021, respectively, primarily due to higher demand for ruminant products, including animal health intelligence solutions for animal identification, monitoring and traceability, as well as higher demand for poultry and swine products. Sales of companion animal products grew 20% and 30% in the third quarter and first nine months of 2021, respectively, primarily due to higher demand for parasiticides, including the Bravecto (fluralaner) line of products, as well as higher demand for vaccines.
Costs, Expenses and Other
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| ($ in millions) | 2021 | 2020 | % Change | 2021 | 2020 | % Change | |||||||||||||||||||||||||||||
| Cost of sales | $ | 3,450 | $ | 3,013 | 15 | % | $ | 9,752 | $ | 8,589 | 14 | % | |||||||||||||||||||||||
| Selling, general and administrative | 2,336 | 2,060 | 13 | % | 6,804 | 6,336 | 7 | % | |||||||||||||||||||||||||||
| Research and development | 2,445 | 3,349 | (27) | % | 9,177 | 7,609 | 21 | % | |||||||||||||||||||||||||||
| Restructuring costs | 107 | 113 | (5) | % | 487 | 265 | 84 | % | |||||||||||||||||||||||||||
| Other (income) expense, net | (450) | (312) | 44 | % | (1,007) | (637) | 58 | % | |||||||||||||||||||||||||||
| $ | 7,888 | $ | 8,223 | (4) | % | 25,213 | 22,162 | 14 | % |
Cost of Sales
Cost of sales increased 15% and 14% in the third quarter and first nine months of 2021, respectively. Cost of sales includes the amortization of intangible assets recorded in connection with acquisitions, collaborations, and licensing arrangements, which totaled $346 million and $403 million in the third quarter of 2021 and 2020, respectively, and $1.2 billion and $1.4 billion for the first nine months of 2021 and 2020, respectively. Costs in the first nine months of 2021 also include charges of $225 million related to the discontinuation of COVID-19 development programs. Also included in cost of sales are expenses associated with restructuring activities which amounted to $48 million and $38 million in the third quarter of 2021 and 2020, respectively, and $113 million and $131 million for the first nine months of 2021 and 2020, respectively, including accelerated depreciation and asset write-offs related to the planned sale or closure of manufacturing facilities. Separation costs associated with manufacturing-related headcount reductions have been incurred and are reflected in Restructuring costs as discussed below.
Gross margin was 73.8% in the third quarter of 2021 compared with 72.4% in the third quarter of 2020. The gross margin increase reflects lower amortization of intangible assets (noted above), as well as the favorable effect of product mix, partially offset by higher manufacturing costs, including asset write-offs. Gross margin was 72.3% in the first nine months of 2021 compared with 71.9% in the first nine months of 2020. The gross margin increase reflects lower amortization of intangible assets and the favorable effect of product mix, partially offset by higher costs associated with COVID-19 development programs, including charges related to the discontinuation of certain COVID-19 development programs, as well as the unfavorable effects of pricing pressure, higher manufacturing costs and foreign exchange.
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Selling, General and Administrative
Selling, general and administrative (SG&A) expenses increased 13% and 7% in the third quarter and first nine months of 2021, respectively, primarily due to higher administrative costs, including compensation and benefits, higher promotional expenses in support of the Company’s key growth pillars, as well as the unfavorable effect of foreign exchange. The COVID-19 pandemic contributed to lower spending in the prior year periods.
Research and Development
Research and development (R&D) expenses declined 27% in the third quarter of 2021 primarily due to lower upfront payments related to collaborations, partially offset by higher oncology and COVID-19 clinical development spending, increased investment in discovery research and early drug development, as well as higher compensation and benefit costs. R&D expenses increased 21% in the first nine months of 2021 primarily due to higher upfront payments related to acquisitions and collaborations, as well as higher clinical development spending and increased investment in discovery research and early drug development. The COVID-19 pandemic contributed to lower spending in the prior year periods.
R&D expenses are comprised of the costs directly incurred by Merck Research Laboratories (MRL), the Company’s research and development division that focuses on human health-related activities, which were $1.8 billion and $1.6 billion in the third quarter of 2021 and 2020, respectively, and $5.3 billion and $4.6 billion in the first nine months of 2021 and 2020, respectively. Also included in R&D expenses are Animal Health research costs, licensing costs and costs incurred by other divisions in support of R&D activities, including depreciation, production and general and administrative, which in the aggregate were approximately $710 million and $625 million for the third quarter of 2021 and 2020, respectively, and $2.1 billion and $1.9 billion in the first nine months of 2021 and 2020, respectively. Additionally, R&D expenses in the first nine months of 2021 include a $1.7 billion charge for the acquisition of Pandion as noted above. R&D expenses in the third quarter and first nine months of 2020 include charges of $832 million related to transactions with Seagen Inc. (Seagen) (see Note 3 to the condensed consolidated financial statements).
Restructuring Costs
In 2019, Merck approved a new global restructuring program (Restructuring Program) as part of a worldwide initiative focused on further optimizing the Company’s manufacturing and supply network, as well as reducing its global real estate footprint. This program is a continuation of the Company’s plant rationalization, builds on prior restructuring programs and does not include any actions associated with the spin-off of Organon. As the Company continues to evaluate its global footprint and overall operating model, it subsequently identified additional actions under the Restructuring Program, and could identify further actions over time. The actions currently contemplated under the Restructuring Program are expected to be substantially completed by the end of 2023, with the cumulative pretax costs to be incurred by the Company to implement the program estimated to be approximately $3.0 billion. The Company expects to record charges of approximately $700 million in 2021 related to the Restructuring Program. The Company anticipates the actions under the Restructuring Program will result in annual net cost savings of approximately $900 million by the end of 2023.
Restructuring costs, primarily representing separation and other related costs associated with these restructuring activities, were $107 million and $113 million for the third quarter of 2021 and 2020, respectively, and were $487 million and $265 million for the first nine months of 2021 and 2020, respectively. Separation costs incurred were associated with actual headcount reductions, as well as estimated expenses under existing severance programs for headcount reductions that were probable and could be reasonably estimated. Also included in restructuring costs are asset abandonment, facility shut-down and other related costs, as well as employee-related costs such as curtailment, settlement and termination charges associated with pension and other postretirement benefit plans and share-based compensation plan costs. For segment reporting, restructuring costs are unallocated expenses.
Additional costs associated with the Company’s restructuring activities are included in Cost of sales, Selling, general and administrative expenses and Research and development costs. The Company recorded aggregate pretax costs of $168 million and $185 million in the third quarter of 2021 and 2020, respectively, and $630 million and $500 million, for the first nine months of 2021 and 2020, respectively, related to restructuring program activities (see Note 5 to the condensed consolidated financial statements).
Other (Income) Expense, Net
Other (income) expense, net, was $450 million of income in the third quarter of 2021 compared with $312 million of income in the third quarter of 2020 primarily due to higher income from investments in equity securities, net, largely related to higher realized and unrealized gains on certain investments, partially offset by higher pension settlement costs. Other income (expense), net, was $1.0 billion of income in the first nine months of 2021 compared with $637 million of income in the first nine months of 2020 primarily due to higher income from investments in equity securities, net, largely related to higher realized and unrealized gains on certain investments including the disposition in 2021 of the Company’s ownership
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interest in Preventice Solutions Inc. (Preventice) as a result of the acquisition of Preventice by Boston Scientific. The favorability in the year-to-date period was partially offset by higher pension settlement costs.
For details on the components of Other (income) expense, net, see Note 12 to the condensed consolidated financial statements.
| Segment Profits | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| ($ in millions) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Pharmaceutical segment profits | $ | 8,606 | $ | 7,026 | $ | 22,450 | $ | 19,235 | |||||||||||||||
| Animal Health segment profits | 505 | 459 | 1,629 | 1,347 | |||||||||||||||||||
| Other non-reportable segment profits | — | (1) | — | 1 | |||||||||||||||||||
| Other | (3,845) | (4,778) | (14,109) | (12,175) | |||||||||||||||||||
| Income from continuing operations before taxes | $ | 5,266 | $ | 2,706 | $ | 9,970 | $ | 8,408 |
Pharmaceutical segment profits are comprised of segment sales less standard costs, as well as SG&A expenses directly incurred by the segment. Animal Health segment profits are comprised of segment sales, less all cost of sales, as well as SG&A and R&D expenses directly incurred by the segment. For internal management reporting presented to the chief operating decision maker, Merck does not allocate the remaining cost of sales not included in segment profits as described above, R&D expenses incurred by MRL, or general and administrative expenses, nor the cost of financing these activities. Separate divisions maintain responsibility for monitoring and managing these costs, including depreciation related to fixed assets utilized by these divisions and, therefore, they are not included in segment profits. Also excluded from the determination of segment profits are costs related to restructuring activities and acquisition and divestiture-related costs, including the amortization of intangible assets and amortization purchase accounting adjustments, intangible asset impairment charges, and expense or income related to changes in the estimated fair value measurement of liabilities for contingent consideration. Additionally, segment profits do not reflect other expenses from corporate and manufacturing cost centers and other miscellaneous income or expense. These unallocated items are reflected in “Other” in the above table. Also included in “Other” are miscellaneous corporate profits (losses), as well as operating profits (losses) related to third-party manufacturing sales.
Pharmaceutical segment profits increased 22% and 17% in the third quarter and first nine months of 2021, respectively, reflecting higher sales and the favorable effect of foreign exchange, partially offset by higher administrative and promotional costs. Animal Health segment profits grew 10% and 21% in the third quarter and first nine months of 2021, respectively, reflecting higher sales, partially offset by higher promotional, selling and administrative costs.
Taxes on Income
The effective income tax rates from continuing operations were 13.2% and 14.0% for the third quarter of 2021 and 2020, respectively, and 14.4% and 15.1% for the first nine months of 2021 and 2020, respectively. The effective tax rates from continuing operations in the third quarter and first nine months of 2021 reflect the beneficial impact of the settlement of a foreign tax matter. The effective income tax rate from continuing operations for the first nine months of 2021 reflects the unfavorable effect of a charge for the acquisition of Pandion for which no tax benefit was recognized, as well as a net tax benefit of $207 million related to the settlement of certain federal income tax matters as discussed below.
In the first quarter of 2021, the Internal Revenue Service (IRS) concluded its examinations of Merck’s 2015-2016 U.S. federal income tax returns. As a result, the Company was required to make a payment of $190 million (of which $172 million related to Merck continuing operations and $18 million related to Organon discontinued operations). The Company’s reserves for unrecognized tax benefits for the years under examination exceeded the adjustments relating to this examination period and therefore the Company recorded a $236 million net tax benefit in the first nine months of 2021 (of which $207 million related to Merck continuing operations and $29 million related to Organon discontinued operations). This net benefit reflects reductions in reserves for unrecognized tax benefits and other related liabilities for tax positions relating to the years that were under examination.
Non-GAAP Income and Non-GAAP EPS from Continuing Operations
Non-GAAP income and non-GAAP EPS are alternative views of the Company’s performance that Merck is providing because management believes this information enhances investors’ understanding of the Company’s results as it permits investors to understand how management assesses performance. Non-GAAP income and non-GAAP EPS exclude certain items because of the nature of these items and the impact that they have on the analysis of underlying business performance and trends. The excluded items (which should not be considered non-recurring) consist of acquisition and divestiture-related costs, restructuring costs, income and losses from investments in equity securities, and certain other items.
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These excluded items are significant components in understanding and assessing financial performance. Non-GAAP income and non-GAAP EPS are important internal measures for the Company. Senior management receives a monthly analysis of operating results that includes non-GAAP EPS. Management uses these measures internally for planning and forecasting purposes and to measure the performance of the Company along with other metrics. In addition, senior management’s annual compensation is derived in part using non-GAAP pretax income. Since non-GAAP income and non-GAAP EPS are not measures determined in accordance with GAAP, they have no standardized meaning prescribed by GAAP and, therefore, may not be comparable to the calculation of similar measures of other companies. The information on non-GAAP income and non-GAAP EPS should be considered in addition to, but not as a substitute for or superior to, net income and EPS prepared in accordance with generally accepted accounting principles in the U.S. (GAAP).
A reconciliation between GAAP financial measures and non-GAAP financial measures (from continuing operations) is as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| ($ in millions except per share amounts) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Income from continuing operations before taxes as reported under GAAP | $ | 5,266 | $ | 2,706 | $ | 9,970 | $ | 8,408 | |||||||||||||||
| Increase (decrease) for excluded items: | |||||||||||||||||||||||
| Acquisition and divestiture-related costs | 445 | 447 | 1,445 | 1,600 | |||||||||||||||||||
| Restructuring costs | 168 | 185 | 630 | 500 | |||||||||||||||||||
| Income from investments in equity securities, net | (684) | (346) | (1,503) | (944) | |||||||||||||||||||
| Other items: | |||||||||||||||||||||||
| Charge for the acquisition of Pandion | — | — | 1,704 | — | |||||||||||||||||||
| Charges for the discontinuation of COVID-19 development programs | — | — | 225 | — | |||||||||||||||||||
| Charges for the formation of collaborations (1) | — | 1,082 | — | 1,082 | |||||||||||||||||||
| Other | (87) | (1) | (26) | (17) | |||||||||||||||||||
| Non-GAAP income from continuing operations before taxes | 5,108 | 4,073 | 12,445 | 10,629 | |||||||||||||||||||
| Taxes on income from continuing operations as reported under GAAP | 695 | 380 | 1,436 | 1,271 | |||||||||||||||||||
| Estimated tax (expense) benefit on excluded items (2) | (30) | 272 | 86 | 411 | |||||||||||||||||||
| Net tax benefit from the settlement of certain federal income tax matters | — | — | 207 | — | |||||||||||||||||||
| Adjustment to tax benefits recorded in conjunction with the 2015 Cubist Pharmaceuticals, Inc. acquisition | — | (67) | — | (67) | |||||||||||||||||||
| Non-GAAP taxes on income from continuing operations | 665 | 585 | 1,729 | 1,615 | |||||||||||||||||||
| Non-GAAP net income from continuing operations | 4,443 | 3,488 | 10,716 | 9,014 | |||||||||||||||||||
| Less: Net income attributable to noncontrolling interests as reported under GAAP | 4 | 2 | 9 | 1 | |||||||||||||||||||
| Non-GAAP net income from continuing operations attributable to Merck & Co., Inc. | $ | 4,439 | $ | 3,486 | $ | 10,707 | $ | 9,013 | |||||||||||||||
| EPS from continuing operations assuming dilution as reported under GAAP | $ | 1.80 | $ | 0.92 | $ | 3.36 | $ | 2.81 | |||||||||||||||
| EPS difference | (0.05) | 0.45 | 0.86 | 0.74 | |||||||||||||||||||
| Non-GAAP EPS from continuing operations assuming dilution | $ | 1.75 | $ | 1.37 | $ | 4.22 | $ | 3.55 |
(1) Includes $832 million related to transactions with Seagen (see Note 3 to the condensed consolidated financial statements).
(2) The estimated tax impact on the excluded items is determined by applying the statutory rate of the originating territory of the non-GAAP adjustments.
Acquisition and Divestiture-Related Costs
Non-GAAP income and non-GAAP EPS exclude the impact of certain amounts recorded in connection with acquisitions and divestitures. These amounts include the amortization of intangible assets and amortization of purchase accounting adjustments to inventories, as well as intangible asset impairment charges, and expense or income related to changes in the estimated fair value measurement of liabilities for contingent consideration. Also excluded are integration, transaction, and certain other costs associated with acquisitions and divestitures. Non-GAAP income and non-GAAP EPS also exclude amortization of intangible assets related to collaborations and licensing arrangements.
Restructuring Costs
Non-GAAP income and non-GAAP EPS exclude costs related to restructuring actions (see Note 5 to the condensed consolidated financial statements). These amounts include employee separation costs and accelerated depreciation associated with facilities to be closed or divested. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the revised useful life of the asset, based upon the anticipated date the site will be closed or divested or the equipment disposed of, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. Restructuring costs also include asset abandonment, facility shut-down and other related costs, as well as
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employee-related costs such as curtailment, settlement and termination charges associated with pension and other postretirement benefit plans and share-based compensation costs.
Income and Losses from Investments in Equity Securities
Non-GAAP income and non-GAAP EPS exclude realized and unrealized gains and losses from investments in equity securities either owned directly or through ownership interests in investment funds.
Certain Other Items
Non-GAAP income and non-GAAP EPS exclude certain other items. These items are adjusted for after evaluating them on an individual basis, considering their quantitative and qualitative aspects. Typically, these consist of items that are unusual in nature, significant to the results of a particular period or not indicative of future operating results. Excluded from non-GAAP income and non-GAAP EPS in 2021 is a charge for the acquisition of Pandion, charges related to the discontinuation of COVID-19 development programs (see Note 3 to the condensed consolidated financial statements) and a net tax benefit related to the settlement of certain federal income tax matters (see Note 13 to the condensed consolidated financial statements). Excluded from non-GAAP income and non-GAAP EPS in 2020 are upfront payments related to collaborations, including transactions with Seagen (see Note 3 to the condensed consolidated financial statements), and an adjustment to tax benefits recorded in conjunction with the 2015 Cubist Pharmaceuticals, Inc. acquisition.
Research and Development Update
MK-4482 (EIDD-2801), molnupiravir, is an investigational oral antiviral medicine, for the treatment of mild-to-moderate COVID-19 in adults who are at risk for progressing to severe COVID-19 and/or hospitalization. In October 2021, Merck submitted an EUA application to the FDA for molnupiravir based on positive results from a planned interim analysis of the Phase 3 MOVe-OUT clinical trial in which molnupiravir significantly reduced the risk of hospitalization or death in at risk, non-hospitalized adult patients with mild-to-moderate COVID-19. The FDA subsequently announced a November 30, 2021 meeting of its Antimicrobial Drugs Advisory Committee to discuss the available data supporting the use of molnupiravir to treat mild-to-moderate COVID-19 in adults who have tested positive for COVID-19 and who are at high risk of progression to severe COVID-19, including hospitalization or death. In October 2021, the EMA initiated a rolling review for molnupiravir. Merck plans to work with the CHMP of the EMA to complete the rolling review process to facilitate initiating the formal review of the Marketing Authorization Application. Merck is developing molnupiravir in collaboration with Ridgeback Bio. The companies are actively working with other regulatory agencies worldwide to submit applications for emergency use or marketing authorization in the coming months. Molnupiravir is also being evaluated for post-exposure prophylaxis in the Phase 3 MOVe-AHEAD trial, which is evaluating the efficacy and safety of molnupiravir in preventing the spread of COVID-19 within households. As previously announced, data from the MOVe-IN clinical trial indicated that molnupiravir is unlikely to demonstrate a clinical benefit in hospitalized patients, who generally had a longer duration of symptoms prior to study entry; therefore, the decision was made not to proceed to Phase 3.
MK-7264, gefapixant, is an investigational, orally administered, selective P2X3 receptor antagonist, for the treatment of refractory chronic cough or unexplained chronic cough in adults under review by the FDA. The New Drug Application (NDA) for gefapixant is based on results from the COUGH-1 and COUGH-2 clinical trials. In July 2021, the FDA informed Merck of its decision to extend the goal date for the NDA to provide time for a full review of the submission. The extended Prescription Drug User Fee Act (PDUFA) date, or target action date, is March 21, 2022. Gefapixant is also under review in the EU and Japan.
V114, Vaxneuvance (Pneumococcal 15-valent Conjugate Vaccine), is an investigational 15-valent pneumococcal conjugate vaccine under review by the EMA for the prevention of invasive disease and pneumonia in adults. In October 2021, the EMA’s CHMP recommended the approval of Vaxneuvance for active immunization for the prevention of invasive disease and pneumonia caused by Streptococcus pneumoniae in individuals 18 years of age and older. The CHMP recommendation will now be reviewed by the EC for marketing authorization in the EU, and a final decision is expected by the end of 2021. The CHMP opinion was based on data from seven randomized, double-blind clinical studies evaluating Vaxneuvance in a variety of adult populations and clinical circumstances. The Company has several ongoing Phase 3 trials evaluating V114 in pediatric patients. In August 2021, Merck announced positive topline results from the pivotal Phase 3 PNEU-PED study evaluating the immunogenicity, safety, and tolerability of Vaxneuvance in infants and has submitted a supplemental licensure application to the FDA for pediatric use. V114 previously received Breakthrough Therapy designation from the FDA for the prevention of invasive pneumococcal disease in pediatric patients 6 weeks to 18 years of age.
Keytruda is an anti-PD-1 therapy approved for the treatment of many cancers that is in clinical development for expanded indications. These approvals were the result of a broad clinical development program that currently consists of more than 1,600 clinical trials, including nearly 1,200 trials that combine Keytruda with other cancer treatments. These studies encompass more than 30 cancer types including: biliary tract, estrogen receptor positive breast cancer, cervical, colorectal, cutaneous squamous cell, endometrial, esophageal, gastric, glioblastoma, head and neck, hepatocellular, Hodgkin lymphoma, non-Hodgkin lymphoma, non-small-cell lung, small-cell lung, melanoma, mesothelioma, ovarian, prostate, renal, triple-
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negative breast, and urothelial, many of which are currently in Phase 3 clinical development. Further trials are being planned for other cancers.
Keytruda is under priority review by the FDA for the adjuvant treatment of adult and pediatric (12 years and older) patients with Stage IIB or IIC melanoma following complete resection. This submission is based on data from the Phase 3 KEYNOTE-716 trial. In August 2021, Merck announced that the KEYNOTE-716 trial met its primary endpoint of recurrence-free survival for the adjuvant treatment of patients with surgically resected high-risk stage IIB and IIC melanoma. These results were presented at the European Society of Medical Oncology (ESMO) Congress in September 2021. The FDA set a PDUFA date of December 4, 2021. Keytruda is also under review in the EU for this indication.
Keytruda is also under priority review by the FDA for the adjuvant treatment of patients with RCC at intermediate-high or high risk of recurrence following nephrectomy (surgical removal of a kidney) or following nephrectomy and resection of metastatic lesions based on data from the Phase 3 KEYNOTE-564 trial. The FDA set a PDUFA date of December 10, 2021. Keytruda is also under review in the EU and Japan for this indication.
Additionally, Keytruda is under review by the FDA for the treatment of patients with advanced endometrial cancer that is MSI-H or dMMR, who have disease progression following prior systemic therapy in any setting and are not candidates for curative surgery or radiation. This submission is based on data from the KEYNOTE-158 trial. The FDA set a PDUFA date of March 28, 2022.
Keytruda in combination with chemotherapy is under review in the EU and Japan for the treatment of patients with high-risk, early-stage TNBC as neoadjuvant treatment, and then as a single agent as adjuvent treatment after surgery based on the KEYNOTE-522 trial.
Keytruda is under review in Japan in combination with chemotherapy for the first-line treatment of patients with locally advanced unresectable or metastatic carcinoma of the esophagus or HER2-negative gastroesophageal junction adenocarcinoma in adults whose tumors express PD-L1 based on the results from the KEYNOTE-590 trial.
Additionally, Keytruda is under review in Japan for treatment of adult patients with advanced or recurrent TMB-H solid tumors that have progressed after chemotherapy (limited to use when difficult to treat with standard of care) based on the KEYNOTE-158 trial.
Keytruda in combination with platinum-based chemotherapy with or without bevacizumab is also under review in Japan for the first-line treatment of patients with persistent, recurrent or metastatic cervical cancer based on the KEYNOTE-826 trial.
In October 2021, the CHMP of the EMA adopted a positive opinion recommending approval of the combination of Keytruda plus Lenvima for the first-line treatment of adult patients with advanced RCC based on data from the Phase 3 KEYNOTE-581 trial/Study 307. The CHMP also adopted a positive opinion recommending approval of Keytruda in combination with Lenvima for the treatment of adult patients with advanced or recurrent endometrial carcinoma who have disease progression following prior treatment with a platinum-containing therapy in any setting and who are not candidates for curative surgery or radiation, based on data from the Phase 3 KEYNOTE-775 trial/Study 309. The CHMP’s recommendations will now be reviewed by the EC for marketing authorization in the EU and decisions are expected in the fourth quarter of 2021. Keytruda is also under review for both of these indications in Japan.
Merck and Eisai have stopped LEAP-007, the Phase 3 study evaluating the first-line treatment of Lenvima in combination with Keytruda in participants with metastatic squamous or non-squamous NSCLC, whose tumors are PD-L1 positive with no EGFR or ALK genomic tumor aberrations. The trial has been discontinued following the recommendation of the external Data Monitoring Committee (eDMC) which met, as scheduled, to assess safety and futility. The eDMC determined that the study had met the criteria for declaring futility and the benefit/risk profile of the combination did not support continuing the trial.
Merck and Eisai have closed LEAP-011 for further enrollment. LEAP-011 is a Phase 3 study evaluating Lenvima in combination with Keytruda for the first-line treatments of patients with platinum-ineligible urotherial carcinoma. Enrollment was closed following the recommendation of the eDMC, which met, as scheduled, to assess safety and futility. Data from the study will be presented at an upcoming medical meeting.
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In April 2021, Merck announced the discontinuation of development of MK-7110 (formerly known as CD24Fc) which was being evaluated for the treatment of hospitalized patients with COVID-19. Merck acquired MK-7110 in December 2020 through its acquisition of OncoImmune, a privately held clinical-stage biopharmaceutical company. In 2021, Merck received feedback from the FDA that additional data would be needed to support a potential EUA application and therefore the Company did not expect MK-7110 would become available until the first half of 2022. Given this timeline and the technical, clinical and regulatory uncertainties, the availability of a number of medicines for patients hospitalized with COVID-19, and the need to concentrate Merck’s resources on accelerating the development and manufacture of the most viable therapeutics and vaccines, Merck decided to discontinue development of MK-7110 for the treatment of COVID-19. Due to the discontinuation, the Company recorded charges of $207 million in the first nine months of 2021, which are reflected in Cost of sales and relate to fixed-asset and materials write-offs, as well as the recognition of liabilities for purchase commitments*.*
In September 2021, the FDA approved updated labeling for Steglatro, Steglujan and Segluromet, medicines for adults with type 2 diabetes, to include the primary efficacy and safety results from the VERTIS CV trial, which assessed the effect of Steglatro compared with placebo on cardiovascular outcomes in adult patients with type 2 diabetes and established atherosclerotic cardiovascular disease. The FDA issued a Complete Response Letter (CRL) concerning the Company’s application for a new indication, based on additional results from the VERTIS CV trial, to reduce the risk of hospitalization for heart failure. The Company is reviewing the CRL to assess next steps.
The chart below reflects the Company’s research pipeline as of October 27, 2021. Candidates shown in Phase 3 include specific products and the date such candidate entered into Phase 3 development. Candidates shown in Phase 2 include the most advanced compound with a specific mechanism or, if listed compounds have the same mechanism, they are each currently intended for commercialization in a given therapeutic area. Small molecules and biologics are given MK-number designations and vaccine candidates are given V-number designations. Except as otherwise noted, candidates in Phase 1, additional indications in the same therapeutic area (other than with respect to cancer) and additional claims, line extensions or formulations for in-line products are not shown.
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| Phase 2 | Phase 3 (Phase 3 entry date) | Under Review | ||||||
| Cancer MK-0482 Non-Small Cell Lung MK-1026 Hematological Malignancies MK-1308 (quavonlimab)(2) Non-Small-Cell Lung MK-1308A (quavonlimab+pembrolizumab) Advanced Solid Tumors Colorectal Hepatocellular Melanoma Small-Cell Lung MK-2140 Breast Non-Small-Cell Lung MK-3475 Keytruda Advanced Solid Tumors MK-4280 (favezelimab)(2) Hematological Malignancies Non-Small-Cell Lung MK-4280A (favezelimab+pembrolizumab) Renal Cell Small-Cell Lung MK-4830 Non-Small-Cell Lung Small-Cell Lung MK-5890*(2)* Non-Small-Cell Lung Small-Cell Lung MK-6440 (ladiratuzumab vedotin)(1)(3) Breast Esophageal Gastric Head and Neck Melanoma Non-Small-Cell Lung Prostate Small-Cell Lung MK-6482 Welireg*(3)* Biliary Colorectal Pancreatic Rare cancers Von Hippel-Lindau Disease-Associated Tumors (EU) MK-7119 Tukysa*(1)* Advanced Solid Tumors Biliary Tract Bladder Cervical Colorectal Endometrial Gastric Non-Small-Cell Lung MK-7339 Lynparza*(1)(3)* Advanced Solid Tumors MK-7684 (vibostolimab)(2) Melanoma MK-7684A (vibostolimab+pembrolizumab) Biliary Breast Cervical Endometrial Esophageal Hematological Malignancies Prostate MK-7902 Lenvima*(1)(2)* Biliary Tract Glioblastoma Pancreatic Prostate Small-Cell Lung V937 Breast Cutaneous Squamous Cell Head and Neck Melanoma Solid Tumors Cardiovascular MK-2060 Chikungunya Virus Vaccine V184 HIV-1 Infection MK-8591B (islatravir+MK-8507) MK-8591D (islatravir+lenacapavir) (1) Nonalcoholic Steatohepatitis (NASH) MK-3655 MK-6024 Overgrowth Syndrome MK-7075 (miransertib) Pneumococcal Vaccine Adult V116 Pulmonary Arterial Hypertension MK-5475 Respiratory Syncytial Virus MK-1654 Schizophrenia MK-8189 Treatment Resistant Depression MK-1942 | Cancer MK-1308A (quavonlimab+pembrolizumab) Renal Cell (April 2021) MK-3475 Keytruda Biliary Tract (September 2019) Cervical (October 2018) (EU) Cutaneous Squamous Cell (August 2019) (EU) Gastric (May 2015) (EU) Hepatocellular (May 2016) (EU) Mesothelioma (May 2018) Ovarian (December 2018) Prostate (May 2019) Small-Cell Lung (May 2017) MK-3475 (pembrolizumab subcutaneous) Non-Small-Cell Lung (August 2021) MK-6482 Welireg*(3)* Renal Cell (February 2020) MK-7119 Tukysa*(1)* Breast (October 2019) MK-7339 Lynparza*(1)(3)* Colorectal (August 2020) Non-Small-Cell Lung (June 2019) Small-Cell Lung (December 2020) MK-7684A (vibostolimab+pembrolizumab) Non-Small-Cell Lung (April 2021) MK-7902 Lenvima*(1)(2)* Colorectal (April 2021) Esophageal (July 2021) Gastric (December 2020) Head and Neck (February 2020) Melanoma (March 2019) Non-Small-Cell Lung (March 2019) HIV-1 Infection MK-8591A (doravirine+islatravir) (February 2020) HIV-1 Prevention MK-8591 (islatravir) (February 2021) | New Molecular Entities/Vaccines Antiviral COVID-19 MK-4482 (molnupiravir) (U.S.)(4) (EU) Cough MK-7264 (gefapixant) (U.S.) (EU) (JPN) Pneumococcal Vaccine Adult V114 (EU) (JPN) Certain Supplemental Filings Cancer MK-3475 Keytruda • Resected Stage IIB and IIC Melanoma (KEYNOTE-716) (U.S.) (EU) • Adjuvent Renal Cell Cancer (KEYNOTE-564) (U.S.) (EU) (JPN) • MSI-H or dMMR Endometrial Cancer (KEYNOTE-158) (U.S.) • High-Risk Early-Stage Triple-Negative Breast Cancer (KEYNOTE-522) (EU) (JPN) • Advanced Unresectable Metastatic Esophageal Cancer (KEYNOTE-590) (JPN) • Tumor Mutational Burden-High (KEYNOTE-158) (JPN) • Cervical Cancer (KEYNOTE-826) (JPN) MK-7902 Lenvima*(1)(2)* • First-Line Metastatic Hepatocellular Carcinoma (KEYNOTE-524) (U.S.)(5) • Advanced Unresectable Renal Cell Carcinoma (KEYNOTE-581) (EU) (JPN) • Advanced Endometrial Cancer (KEYNOTE-775) (EU) (JPN) | ||||||
| Footnotes: (1) Being developed in a collaboration. (2) Being developed in combination with Keytruda. (3) Being developed as monotherapy and/or in combination with Keytruda. (4) Under review for Emergency Use Authorization. (5) In July 2020, the FDA issued a Complete Response Letter for Merck’s and Eisai’s applications. Merck and Eisai intend to submit additional data when available to the FDA. |
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Liquidity and Capital Resources
| ($ in millions) | September 30, 2021 | December 31, 2020 | |||||||||
| Cash and investments | $ | 10,451 | $ | 8,835 | |||||||
| Working capital | 7,330 | 437 | |||||||||
| Total debt to total liabilities and equity | 28.3 | % | 34.7 | % |
Cash provided by operating activities from continuing operations was $8.0 billion in the first nine months of 2021 compared with $4.2 billion in the first nine months of 2020 reflecting stronger operating performance. Cash provided by operating activities from continuing operations in the first nine months of 2021 includes $400 million of payments related to collaborations compared with $2.1 billion in the first nine months of 2020. Cash provided by operating activities from continuing operations continues to be the Company’s primary source of funds to finance operating needs, capital expenditures, treasury stock purchases and dividends paid to shareholders.
Cash used in investing activities of continuing operations was $4.4 billion in the first nine months of 2021 compared with $4.5 billion in the first nine months of 2020. The lower use of cash in investing activities was driven primarily by lower cash used for acquisitions, largely offset by lower proceeds from sales of securities and other investments and higher capital expenditures.
Cash used in financing activities of continuing operations was $2.1 billion in the first nine months of 2021 compared with $4.2 billion in the first nine months of 2020. The lower use of cash in financing activities was primarily driven by the cash distribution received from Organon in connection with the spin-off (see Note 2 to the condensed consolidated financial statements), lower payments on debt (see below) and lower purchases of treasury stock, partially offset by lower proceeds from the issuance of debt (see below), a higher net decrease in short-term borrowings and higher dividends paid to shareholders.
Capital expenditures totaled $3.2 billion and $3.0 billion for the first nine months of 2021 and 2020, respectively.
The Company has accounts receivable factoring agreements with financial institutions in certain countries to sell accounts receivable. The Company factored $2.4 billion and $2.1 billion of accounts receivable at September 30, 2021 and December 31, 2020, respectively, under these factoring arrangements, which reduced outstanding accounts receivable. The cash received from the financial institutions is reported within operating activities in the Condensed Consolidated Statement of Cash Flows. In certain of these factoring arrangements, for ease of administration, the Company will collect customer payments related to the factored receivables, which it then remits to the financial institutions. The net cash flows relating to these collections are reported as financing activities in the Condensed Consolidated Statement of Cash Flows.
Dividends paid to stockholders were $5.0 billion and $4.7 billion for the first nine months of 2021 and 2020, respectively. In May 2021, the Board of Directors declared a quarterly dividend of $0.65 per share on the Company’s stock for the third quarter that was paid in July 2021. In July 2021, the Board of Directors declared a quarterly dividend of $0.65 per share on the Company’s stock for the fourth quarter that was paid in October 2021.
In January 2021, the Company’s $1.15 billion, 3.875% notes matured in accordance with their terms and were repaid. In October 2021, the Company’s €1.0 billion, 1.125% notes matured in accordance with their terms and were repaid.
In February 2020, the Company’s $1.25 billion, 1.85% notes and $700 million floating-rate notes matured in accordance with their terms and were repaid.
In June 2020, the Company issued $4.5 billion principal amount of senior unsecured notes consisting of $1.0 billion of 0.75% notes due 2026, $1.25 billion of 1.45% notes due 2030, $1.0 billion of 2.35% notes due 2040 and $1.25 billion of 2.45% notes due 2050. Merck used the net proceeds from the offering for general corporate purposes, including without limitation the repayment of outstanding commercial paper borrowings and other indebtedness with upcoming maturities.
In 2018, Merck’s Board of Directors authorized purchases of up to $10 billion of Merck’s common stock for its treasury. The treasury stock purchase authorization has no time limit and will be made over time in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions. In May 2021, Merck restarted its share repurchase program, which the Company had temporarily suspended in March 2020. The Company purchased $822 million (11 million shares) of its common stock during the first nine months of 2021. As of September 30, 2021, the Company’s remaining share repurchase authorization was $5.1 billion.
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The Company has a $6.0 billion credit facility that matures in June 2026. The facility provides backup liquidity for the Company’s commercial paper borrowing facility and is to be used for general corporate purposes. The Company has not drawn funding from this facility.
Critical Accounting Estimates
The Company’s significant accounting policies, which include management’s best estimates and judgments, are included in Note 2 to the consolidated financial statements for the year ended December 31, 2020 included in Merck’s Form 10‑K filed on February 25, 2021. See Note 1 to the condensed consolidated financial statements for information on the adoption of new accounting standards during 2021. A discussion of accounting estimates considered critical because of the potential for a significant impact on the financial statements due to the inherent uncertainty in such estimates are disclosed in the Critical Accounting Estimates section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Merck’s Form 10-K. There have been no significant changes in the Company’s critical accounting estimates since December 31, 2020.
Recently Issued Accounting Standards
For a discussion of recently issued accounting standards, see Note 1 to the condensed consolidated financial statements.
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