Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Developments

Below is a summary of significant business development activity thus far in 2023. See Note 2 to the condensed consolidated financial statements for additional information.

In April 2023, Merck announced an agreement to acquire Prometheus Biosciences, Inc. (Prometheus), a clinical-stage biotechnology company pioneering a precision medicine approach for the discovery, development, and commercialization of novel therapeutic and companion diagnostic products for the treatment of immune-mediated diseases. Prometheus’ lead candidate, PRA023, is a humanized monoclonal antibody directed to tumor necrosis factor-like ligand 1A, a target associated with both intestinal inflammation and fibrosis. Prometheus is developing PRA023 for the treatment of immune-mediated diseases including ulcerative colitis, Crohn’s disease, and other autoimmune conditions. Under the terms of the acquisition agreement, Merck, through a subsidiary, will acquire all of the outstanding shares of Prometheus for $200 per share in cash for a total equity value of approximately $10.8 billion. The acquisition is subject to Prometheus shareholder approval. The closing of the proposed transaction will be subject to certain conditions, including the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and other customary conditions. The transaction is expected to close in the third quarter of 2023. If the proposed transaction closes, the Company anticipates it will be accounted for as an asset acquisition, which would result in a charge of approximately $10.3 billion in Research and development expenses or approximately $4.00 per share. Additionally, Merck anticipates earnings per share (EPS) will be negatively affected by approximately $0.25 in the first 12 months following the closing of the transaction resulting from investments to advance the related pipeline assets, as well as the cost of financing.

In February 2023, Merck and Kelun-Biotech (a holding subsidiary of Sichuan Kelun Pharmaceutical Co., Ltd.) closed a license and collaboration agreement expanding their relationship in which Merck gained exclusive rights for the research, development, manufacture and commercialization of up to seven investigational preclinical antibody drug conjugates (ADCs) for the treatment of cancer. Kelun-Biotech retained the right to research, develop, manufacture and commercialize certain licensed and option ADCs for Chinese mainland, Hong Kong and Macau. Merck made an upfront payment of $175 million, which was recorded in Research and development expenses in the first quarter of 2023. In addition, Kelun-Biotech is eligible to receive future contingent milestone payments and tiered royalties on future net sales for any commercialized ADC product. Also, in connection with the agreement, Merck invested $100 million in Kelun-Biotech’s Series B preferred shares in January 2023.

In January 2023, Merck acquired Imago BioSciences, Inc. (Imago), a clinical stage biopharmaceutical company developing new medicines for the treatment of myeloproliferative neoplasms and other bone marrow diseases, for $1.35 billion (including payments to settle share-based equity awards) and also incurred approximately $60 million of transaction costs. Imago’s lead candidate bomedemstat, MK-3543 (formerly IMG-7289), is an investigational orally available lysine-specific demethylase 1 inhibitor currently being evaluated in multiple Phase 2 clinical trials for the treatment of essential thrombocythemia, myelofibrosis, and polycythemia vera, in addition to other indications. The transaction was accounted for as an acquisition of an asset. Merck recorded net assets of $219 million, as well as Research and development expenses of $1.2 billion in the first quarter of 2023 related to the transaction. There are no future contingent payments associated with the acquisition.

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 enacted in prior years 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 three months of 2023 was negatively affected by other cost-reduction measures taken by governments and other third parties to lower health care costs. In 2022, the U.S. Congress passed the Inflation Reduction Act, which makes significant changes to how drugs are covered and paid for under the Medicare program, including the creation of financial penalties for drugs whose prices rise faster than the rate of inflation, redesign of the Medicare Part D program to require manufacturers to bear more of the liability for certain drug benefits, and government price-setting for certain Medicare Part D drugs (starting in 2026) and Medicare Part B drugs (starting in 2028). 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 negatively affect sales and profits.

Supply Chain

As a result of global macroeconomic conditions, the Company is experiencing some minor disruption and volatility in its global supply chain network. These disruptions could increase in the future and cause delays in shipments of raw materials and packaging, as well as related cost inflation.

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Operating Results

Sales

			Three Months Ended March 31,																		% Change Excluding Foreign Exchange
($ in millions)			2023						2022						% Change
United States			$	6,659					$	7,339					(9)		%				(9)		%
International			7,828						8,563						(9)		%				(2)		%
Total			$	14,487					$	15,901					(9)		%				(5)		%

U.S. plus international may not equal total due to rounding.

Worldwide sales declined 9% to $14.5 billion in the first quarter of 2023 primarily due to lower sales in the virology franchise, largely attributable to Lagevrio (molnupiravir), which had sales of $392 million in the first quarter of 2023 compared with $3.2 billion in the first quarter of 2022. Also contributing to the revenue decline in the first quarter of 2023 were lower sales in the diabetes franchise due to Januvia (sitagliptin) and Janumet (sitagliptin and metformin HCl), as well as lower sales of Pneumovax 23 (pneumococcal vaccine polyvalent). The sales decline in the first quarter of 2023 was partially offset by higher sales in the oncology franchise, largely driven by strong growth of Keytruda (pembrolizumab), higher sales in the vaccines franchise, primarily attributable to growth of Gardasil 9 (Human Papillomavirus 9-valent Vaccine, Recombinant) and the ongoing launch of Vaxneuvance (Pneumococcal 15-valent Conjugate Vaccine) for pediatric use, as well as higher sales of hospital acute care products, including Bridion (sugammadex) Injection.

See Note 15 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.

Pharmaceutical Segment

Oncology

			Three Months Ended March 31,																		% Change Excluding Foreign Exchange
($ in millions)			2023						2022						% Change
Keytruda			$	5,795					$	4,809					20		%				24		%
Alliance Revenue - Lynparza (1)			275						266						3		%				8		%
Alliance Revenue - Lenvima (1)			232						227						2		%				5		%
Alliance Revenue - Reblozyl (2)			43						52						(19)		%				(19)		%
Welireg			42						18						*						*

** > 100%*

(1) Alliance revenue represents Merck’s share of profits, which are product sales net of cost of sales and commercialization costs (see Note 3 to the condensed consolidated financial statements).

(2) Alliance revenue represents royalties and, for 2022, also includes a payment received related to the achievement of a regulatory approval milestone (see Note 3 to the 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, cutaneous squamous cell carcinoma, esophageal or gastroesophageal junction (GEJ) carcinoma, 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 (solid tumors) including MSI-H/dMMR colorectal cancer, MSI-H/dMMR advanced endometrial carcinoma, primary mediastinal large B-cell lymphoma (PMBCL), tumor mutational burden-high (TMB-H) cancer (solid tumors), and urothelial carcinoma including non-muscle invasive bladder cancer. Additionally, Keytruda is approved as monotherapy for the adjuvant treatment of certain patients with renal cell carcinoma (RCC) at intermediate-high or high risk of recurrence and for certain patients with completely resected stage IIB, IIC or III melanoma, and for adjuvant treatment following resection and platinum-based chemotherapy for adult patients with stage 1B (T2a ≥4 cm), II, or IIIA NSCLC. Keytruda is also approved for certain patients with high-risk early-stage triple-negative breast cancer (TNBC) in combination with chemotherapy as neoadjuvant treatment, and then continued as a single agent as adjuvant treatment after surgery. In addition, Keytruda is approved for the treatment of certain patients in combination with chemotherapy for metastatic squamous and nonsquamous NSCLC, in combination with chemotherapy with or without bevacizumab for advanced cervical cancer, in combination with chemotherapy for esophageal cancer, in combination with trastuzumab, fluoropyrimidine- and platinum-containing chemotherapy for human epidermal growth factor 2 (HER2)-positive gastric or GEJ adenocarcinoma, in combination with chemotherapy for HNSCC, in combination with chemotherapy for locally recurrent unresectable or metastatic TNBC, in combination with axitinib for advanced RCC, in combination with Lenvima for certain patients with advanced endometrial carcinoma or advanced RCC, and in combination with enfortumab vedotin for certain patients with locally advanced or metastatic urothelial carcinoma who are not eligible for cisplatin-containing chemotherapy. 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 20% in the first quarter of 2023. Sales growth was primarily driven by higher demand as the Company continues to launch Keytruda with multiple new indications globally. Sales growth in the U.S. reflects increased

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uptake across earlier-stage indications including in high-risk early stage TNBC, as well as certain types of RCC and melanoma, and higher demand across the multiple approved metastatic indications, in particular for the treatment of certain types of RCC, NSCLC, TNBC, and HNSCC cancers. Keytruda sales growth in international markets reflects higher demand for the HNSCC and RCC metastatic indications, as well as uptake in earlier-stage indications, particularly in Europe and Latin America.

Keytruda received the following regulatory approvals thus far in 2023.

Date			Approval
January 2023			FDA approval as a single agent for adjuvant treatment following surgical resection and platinum-based chemotherapy for adult patients with stage IB (T2a ≥4 cm), II, or IIIA NSCLC, based on the KEYNOTE-091 trial.
March 2023			FDA full approval for the treatment of adult and pediatric patients with unresectable or metastatic MSI-H or dMMR solid tumors that have progressed following prior treatment and who have no satisfactory alternative treatment options. The conversion from an accelerated to a full (regular) approval is based on results from the Phase 2 KEYNOTE-158, KEYNOTE-164 and KEYNOTE-051 trials.
April 2023			FDA accelerated approval in combination with enfortumab vedotin-ejfv for the treatment of adult patients with locally advanced or metastatic urothelial carcinoma who are not eligible for cisplatin-containing chemotherapy, based on data from the KEYNOTE-869 trial dose escalation cohort, Cohort A and Cohort K, which was conducted in collaboration with Seagen and Astellas.

Lynparza (olaparib) is an oral poly (ADP-ribose) polymerase (PARP) inhibitor being developed as part of a collaboration with AstraZeneca PLC (AstraZeneca) (see Note 3 to the condensed consolidated financial statements). Lynparza is approved for the treatment of certain types of advanced or recurrent ovarian, early or metastatic breast, metastatic pancreatic and metastatic castration-resistant prostate cancers. Alliance revenue related to Lynparza increased 3% in the first quarter of 2023 largely driven by higher demand, particularly in Europe in certain patients with ovarian cancer.

Lenvima is an oral receptor tyrosine kinase inhibitor being developed as part of a collaboration with Eisai Co., Ltd. (Eisai) (see Note 3 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 advanced RCC, and in combination with Keytruda for certain patients with advanced endometrial carcinoma or advanced RCC. Alliance revenue related to Lenvima grew 2% in the first quarter of 2023 reflecting uptake in the advanced RCC indication in Europe, partially offset by lower volumes in China.

Reblozyl (luspatercept-aamt) is a first-in-class erythroid maturation recombinant fusion protein that is being commercialized through a global collaboration with Bristol Myers Squibb (see Note 3 to the condensed consolidated financial statements). Reblozyl is approved for the treatment of anemia in certain rare blood disorders. Merck recorded alliance revenue related to this collaboration of $43 million in the first quarter of 2023 (consisting of royalties) compared with $52 million in the first quarter of 2022 (consisting of royalties of $32 million and the receipt of a regulatory approval milestone payment of $20 million).

Sales of Welireg (belzutifan), for the treatment of adult patients with certain von Hippel-Lindau disease-associated tumors, were $42 million in the first quarter of 2023 compared with $18 million in the first quarter of 2022 due to continued uptake in the U.S. following launch in 2021.

Vaccines

			Three Months Ended March 31,																		% Change Excluding Foreign Exchange
($ in millions)			2023						2022						% Change
Gardasil/Gardasil 9			$	1,972					$	1,460					35		%				43		%
ProQuad			190						162						17		%				18		%
M-M-R II			102						103						(1)		%				—		%
Varivax			236						204						15		%				17		%
RotaTeq			297						216						38		%				42		%
Vaxneuvance			106						5						*						*
Pneumovax 23			96						173						(44)		%				(40)		%

** > 100%*

Combined worldwide sales of Gardasil (Human Papillomavirus Quadrivalent [Types 6, 11, 16 and 18] Vaccine, Recombinant) and Gardasil 9, vaccines to help prevent certain cancers and other diseases caused by certain types of human papillomavirus (HPV), grew 35% in the first quarter of 2023 driven primarily by strong demand outside of the U.S., particularly in China, which also benefited from the timing of shipments and increased supply. Sales of Gardasil 9 in the U.S. were essentially flat in the first quarter of 2023 as lower sales due to public sector buying patterns were offset by higher pricing.

Global sales of ProQuad (Measles, Mumps, Rubella and Varicella Virus Vaccine Live), a pediatric combination vaccine to help protect against measles, mumps, rubella and varicella, increased 17% in the first quarter of 2023 primarily reflecting higher demand and pricing in the U.S. and higher demand in Europe.

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Worldwide sales of M-M-R II (Measles, Mumps and Rubella Virus Vaccine Live), a vaccine to help protect against measles, mumps and rubella, declined 1% in the first quarter of 2023 primarily due to lower tenders in Latin America, largely offset by higher pricing and demand in the U.S.

Global sales of Varivax (Varicella Virus Vaccine Live), a vaccine to help prevent chickenpox (varicella), grew 15% in the first quarter of 2023 primarily attributable to higher demand and pricing in the U.S.

Global sales of RotaTeq (Rotavirus Vaccine, Live Oral, Pentavalent), a vaccine to help protect against rotavirus gastroenteritis in infants and children, grew 38% in the first quarter of 2023 primarily due to inventory stocking in China.

Worldwide sales of Vaxneuvance, a vaccine to help prevent invasive pneumococcal disease, increased to $106 million in the first quarter of 2023 primarily due to continued uptake in the pediatric indication in the U.S. following launch in 2022.

Worldwide sales of Pneumovax 23, a vaccine to help prevent pneumococcal disease, declined 44% in the first quarter of 2023 primarily reflecting lower demand in the U.S. as the market continues to shift toward newer adult pneumococcal conjugate vaccines following changes in the recommendations of the U.S. Centers for Disease Control and Prevention’s Advisory Committee on Immunization Practices in 2021. The Company expects the decline in U.S. sales of Pneumovax 23 to continue.

Hospital Acute Care

			Three Months Ended March 31,																		% Change Excluding Foreign Exchange
($ in millions)			2023						2022						% Change
Bridion			$	487					$	395					23		%				27		%
Prevymis			129						94						38		%				44		%

Worldwide sales of Bridion, for the reversal of two types of neuromuscular blocking agents used during surgery, grew 23% in the first quarter of 2023 primarily due to higher demand, particularly in the U.S., reflecting Bridion’s growing share among neuromuscular blockade reversal agents. The patent that provides market exclusivity for Bridion in the European Union (EU) will expire in July 2023; the Company anticipates sales of Bridion in these markets will decline thereafter.

Worldwide sales of Prevymis (letermovir), a medicine for prophylaxis (prevention) of cytomegalovirus (CMV) infection and disease in adult CMV-seropositive recipients of an allogenic hematopoietic stem cell transplant, grew 38% in the first quarter of 2023 due to higher demand in the U.S. and Europe, as well as uptake from the 2022 launch in China. In February 2023, the FDA granted priority review for a supplemental New Drug Application (NDA) for Prevymis for prophylaxis of CMV disease in adult kidney transplant recipients at high risk (D+/R-); the Prescription Drug User Fee Act (PDUFA), or target action, date is June 5, 2023.

Cardiovascular

			Three Months Ended March 31,																		% Change Excluding Foreign Exchange
($ in millions)			2023						2022						% Change
Alliance Revenue - Adempas/Verquvo (1)			$	99					$	72					38		%				38		%
Adempas			59						61						(3)		%				5		%

(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 3 to the condensed consolidated financial statements).

Adempas (riociguat) and Verquvo (vericiguat) are part of a worldwide collaboration with Bayer AG (Bayer) to market and develop soluble guanylate cyclase (sGC) modulators (see Note 3 to the condensed consolidated financial statements). Adempas is approved for the treatment of certain types of pulmonary arterial hypertension and chronic pulmonary hypertension. Verquvo is approved 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 approved in the U.S., the EU and Japan in 2021 and has since been approved in several other markets. Alliance revenue from the collaboration grew 38% in the first quarter of 2023 primarily due to higher profit sharing reflecting increased demand in Bayer’s marketing territories. Revenue also includes sales of Adempas and Verquvo in Merck’s marketing territories. Sales of Adempas in Merck’s marketing territories were nearly flat in the first quarter of 2023 compared with the prior year.

Virology

			Three Months Ended March 31,																		% Change Excluding Foreign Exchange
($ in millions)			2023						2022						% Change
Lagevrio			$	392					$	3,247					(88)		%				(87)		%
Isentress/Isentress HD			123						158						(23)		%				(20)		%

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Lagevrio is an investigational oral antiviral COVID-19 medicine being developed in a collaboration with Ridgeback (see Note 3 to the condensed consolidated financial statements). Following initial authorizations in certain markets in the fourth quarter of 2021, Lagevrio has since received multiple additional authorizations worldwide. Sales of Lagevrio declined 88% in the first quarter of 2023 largely attributable to sales in the U.S. and UK markets in the first quarter of 2022 that did not recur in the first quarter of 2023. The Lagevrio sales decline was also attributable to lower sales in Japan and Australia. The Company expects full-year 2023 Lagevrio sales to be approximately $1.0 billion. In April 2023, Japan’s Ministry of Health, Labor and Welfare granted full approval for Lagevrio. Lagevrio was previously granted Special Approval for Emergency in Japan in December 2021.

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 23% in the first quarter of 2023 primarily due to lower global demand, reflecting in part competitive pressure particularly in Europe and the U.S. The Company expects competitive pressure for Isentress/Isentress HD to continue. The patent that provides market exclusivity for Isentress/Isentress HD in the EU will expire in July 2023; the Company anticipates sales declines of Isentress/Isentress HD in these markets will accelerate thereafter.

Diabetes

			Three Months Ended March 31,																		% Change Excluding Foreign Exchange
($ in millions)			2023						2022						% Change
Januvia/Janumet			$	880					$	1,233					(29)		%				(25)		%

Worldwide combined sales of Januvia and Janumet, medicines that help lower blood sugar levels in adults with type 2 diabetes, declined 29% in the first quarter of 2023 primarily reflecting the loss of exclusivity in several markets in Europe and the Asia Pacific region, as well as in Canada, coupled with lower demand and pricing in the U.S. due to competitive pressures.

While the key U.S. patent for Januvia and Janumet claiming the sitagliptin compound expired in January 2023, as a result of favorable court rulings and settlement agreements related to a later expiring patent directed to the specific sitagliptin salt form of the products (see Note 8 to the condensed consolidated financial statements), the Company expects that Januvia and Janumet will not lose market exclusivity in the U.S. until May 2026 and Janumet XR will not lose market exclusivity in the U.S. until July 2026, although another non-automatically substitutable form of sitagliptin is likely to be available prior to 2026. As a result of competitive pressures, the Company anticipates pricing and volume declines for Januvia and Janumet in the U.S. for the remainder of 2023 and thereafter.

The Company lost market exclusivity for Januvia in all of the EU and for Janumet in some European countries in September 2022. Exclusivity for Janumet was lost in other European countries in April 2023. While the Company lost market exclusivity for Januvia in China in 2022 with the launch of a generic equivalent product, the impact on sales in 2023 is expected to be modest. Although several generic equivalents of Janumet have been approved in China, none have launched, and the Company expects it is unlikely that any will launch prior to December 2023.

Combined sales of Januvia and Janumet in Europe, China and the U.S. represented 11%, 13% and 37%, respectively, of total combined Januvia and Janumet sales for the first quarter of 2023.

In response to a request from a regulatory authority, Merck evaluated its sitagliptin-containing products for the presence of nitrosamines. Nitrosamines are organic compounds found at trace levels in water and food. Nitrosamines can also result from chemical reactions and can form in drugs either due to the drug’s manufacturing process, chemical structure, or the conditions in which the drugs are stored or packaged. The Company detected a nitrosamine identified as Nitroso-STG-19 (NTTP) in some batches of its sitagliptin-containing medicines. The Company has engaged with major health authorities around the world and has implemented additional quality controls to ensure its portfolio of sitagliptin-containing products meet health authorities’ interim acceptable NTTP limits for continuing distribution of product to the market. The Company is making progress in its efforts to reduce the level of nitrosamines in its sitagliptin-containing medicines. However, difficulties in reducing those levels, or achieving timely regulatory approvals for required changes, could result in product shortages.

Animal Health Segment

			Three Months Ended March 31,																		% Change Excluding Foreign Exchange
($ in millions)			2023						2022						% Change
Livestock			$	849					$	832					2		%				8		%
Companion Animal			642						650						(1)		%				2		%

Sales of livestock products grew 2% in the first quarter of 2023 primarily reflecting strong demand in the ruminant and poultry product portfolio, which includes technology solution products, as well as higher pricing. Sales of companion animal products declined 1% in the first quarter of 2023. Excluding the unfavorable effect of foreign exchange, companion animal sales performance primarily reflects higher pricing. Sales of the Bravecto (fluralaner) parasiticide line of products were $314 million in both the first quarter of 2023 and the first quarter of 2022.

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Costs, Expenses and Other

			Three Months Ended March 31,
($ in millions)			2023						2022						% Change
Cost of sales			$	3,926					$	5,380					(27)		%
Selling, general and administrative			2,479						2,323						7		%
Research and development			4,276						2,576						66		%
Restructuring costs			67						53						26		%
Other (income) expense, net			89						708						(87)		%
			$	10,837					$	11,040					(2)		%

Cost of Sales

Cost of sales decreased 27% in the first quarter of 2023. Cost of sales includes $221 million and $1.7 billion in the first quarter of 2023 and 2022, respectively, related to sales of Lagevrio, which is being developed in a collaboration with Ridgeback (see Note 3 to the condensed consolidated financial statements). Cost of sales also includes the amortization of intangible assets recorded in connection with acquisitions, collaborations, and licensing arrangements, which totaled $532 million and $683 million in the first quarter of 2023 and 2022, respectively. Amortization expense in the first quarter of 2023 and 2022 includes $72 million and $250 million, respectively, of cumulative catch-up amortization related to Merck’s collaborations with Eisai and AstraZeneca, respectively, (see Note 3 to the condensed consolidated financial statements). Also included in cost of sales are expenses associated with restructuring activities, which amounted to $29 million and $46 million in the first quarter of 2023 and 2022, 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 72.9% in the first quarter of 2023 compared with 66.2% in the first quarter of 2022. The gross margin improvement primarily reflects the favorable impacts of lower Lagevrio sales (which have a low gross margin), product mix and lower amortization of intangible assets (noted above).

Selling, General and Administrative

Selling, general and administrative (SG&A) expenses increased 7% in the first quarter of 2023 primarily due to higher administrative costs and increased promotional spending, partially offset by the favorable effect of foreign exchange.

Research and Development

Research and development (R&D) expenses increased 66% to $4.3 billion in the first quarter of 2023 primarily due to a $1.2 billion charge for the acquisition of Imago, as well as higher upfront charges related to collaborations and licensing arrangements. Also contributing to the increase in R&D expenses were higher compensation and benefit costs, reflecting in part increased headcount to support clinical development activity, higher investments in discovery research and early drug development, as well as increased clinical development spending. The increase in R&D expenses was partially offset by the favorable effect of foreign exchange.

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 $2.1 billion and $1.8 billion for the first quarter of 2023 and 2022, 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 $2.2 billion and $750 million for the first quarter of 2023 and 2022, respectively. The increase in these expenses in the first quarter of 2023 was largely attributable to a $1.2 billion charge for the acquisition of Imago (as noted above) and a $175 million charge for a license and collaboration agreement with Kelun-Biotech. See Note 2 for additional information related to business development activity.

Restructuring Costs

In 2019, Merck approved a global restructuring program (Restructuring Program) as part of a worldwide initiative focused on optimizing the Company’s manufacturing and supply network, as well as reducing its global real estate footprint. The actions 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 $3.7 billion. Merck expects to record charges of approximately $400 million for the full year of 2023 related to the Restructuring Program. The Company anticipates the actions under the Restructuring Program will result in cumulative 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 $67 million and $53 million for the first quarter of 2023 and 2022, respectively. Separation costs incurred were associated with actual headcount reductions, as well as estimated expenses under existing severance programs for involuntary 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

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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 $97 million and $127 million in the first quarter of 2023 and 2022, respectively, related to restructuring program activities (see Note 5 to the condensed consolidated financial statements).

Other (Income) Expense, Net

Other (income) expense, net, was $89 million of expense in the first quarter of 2023 compared with $708 million of expense in the first quarter of 2022. The change was primarily due to net unrealized gains from investments in equity securities recorded in the first quarter of 2023 compared with net unrealized losses recorded in the first quarter of 2022, as well as higher interest income in the first quarter of 2023. The favorability was partially offset by a $572.5 million charge in the first quarter of 2023 related to settlements with certain plaintiffs in the Zetia antitrust litigation (see Note 8 to the consolidated financial statements).

For details on the components of Other (income) expense, net, see Note 11 to the condensed consolidated financial statements.

Segment Profits
			Three Months Ended March 31,
($ in millions)			2023						2022
Pharmaceutical segment profits			$	9,140					$	9,501
Animal Health segment profits			566						585
Other			(6,056)						(5,225)
Income Before Taxes			$	3,650					$	4,861

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 of 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 arrangements.

Pharmaceutical segment profits declined 4% in the first quarter of 2023 reflecting lower sales, largely attributable to Lagevrio, as well as higher administrative and promotional costs, and the unfavorable effect of foreign exchange. Animal Health segment profits declined 3% in the first quarter of 2023 reflecting higher administrative and promotional costs, as well as increased research and development expenses.

Taxes on Income

The effective income tax rates were 22.6% and 11.4% for the first quarter of 2023 and 2022, respectively. The effective income tax rate for the first quarter of 2023 reflects the unfavorable discrete impact of a charge for the acquisition of Imago for which no tax benefit was recognized, as well as higher foreign taxes, the impact of the R&D capitalization provision of the Tax Cuts and Jobs Act of 2017 on the Company’s U.S. global intangible low-taxed income inclusion, and net unrealized gains from investments in equity securities, which were taxed at the U.S. tax rate, partially offset by higher foreign tax credits. The effective income tax rate in the first quarter of 2022 includes the favorable impact of net unrealized losses from investments in equity securities, which were taxed at the U.S. tax rate.

Non-GAAP Income and Non-GAAP EPS

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 since management uses non-GAAP measures to assess 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. These excluded items are significant components in understanding and assessing financial performance.

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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 a non-GAAP EPS metric. Management uses non-GAAP 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 a non-GAAP pretax income metric. 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 is as follows:

			Three Months Ended March 31,
($ in millions except per share amounts)			2023						2022
Income before taxes as reported under GAAP			$	3,650					$	4,861
Increase (decrease) for excluded items:
Acquisition- and divestiture-related costs			590						637
Restructuring costs			97						127
(Income) loss from investments in equity securities, net			(429)						684
Other items:
Charge for Zetia antitrust litigation settlements			573						—
Non-GAAP income before taxes			4,481						6,309
Taxes on income as reported under GAAP			825						554
Estimated tax benefit on excluded items (1)			88						329
Non-GAAP taxes on income			913						883
Non-GAAP net income			3,568						5,426
Less: Net income (loss) attributable to noncontrolling interests as reported under GAAP			4						(3)
Non-GAAP net income attributable to Merck & Co., Inc.			$	3,564					$	5,429
EPS assuming dilution as reported under GAAP			$	1.11					$	1.70
EPS difference			0.29						0.44
Non-GAAP EPS assuming dilution			$	1.40					$	2.14

(1) 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 of businesses. 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 of businesses. 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 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 2023 is a charge related to settlements with certain plaintiffs in the Zetia antitrust litigation (see Note 8 to the condensed consolidated financial statements).

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Research and Development Update

The Company currently has several candidates under regulatory review in the U.S. and internationally.

MK-4482, Lagevrio, 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 disease. Merck is developing Lagevrio in collaboration with Ridgeback. The FDA granted Emergency Use Authorization for Lagevrio in December 2021; last issued in February 2023, to authorize Lagevrio for the treatment of adults with a current diagnosis of mild to moderate COVID-19, and who are at high risk for progression to severe COVID-19, including hospitalization or death, and for whom alternative COVID-19 treatment options approved or authorized by the FDA are not accessible or clinically appropriate. The authorization is based on the Phase 3 MOVe-OUT trial. Lagevrio is not approved for any use in the U.S. and is authorized only for the duration of the declaration that circumstances exist justifying the authorization of its emergency use under the Food, Drug and Cosmetic Act, unless the authorization is terminated or revoked sooner. In November 2021, the European Medicines Agency (EMA) issued a positive scientific opinion for Lagevrio, which is intended to support national decision-making on the possible use of Lagevrio prior to marketing authorization. In October 2021, the EMA initiated a rolling review for Lagevrio for the treatment of COVID-19 in adults. In February 2023, Merck and Ridgeback announced that the Committee for Medicinal Products for Human Use (CHMP) of the EMA has recommended the refusal of the marketing authorization application (MAA) for Lagevrio. Merck and Ridgeback have appealed the decision and requested a re-examination of the MAA. Applications to other regulatory bodies are underway.

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 and the EMA. The marketing applications for gefapixant are based on results from the COUGH-1 and COUGH-2 clinical trials. In January 2022, the FDA issued a Complete Response Letter (CRL) regarding Merck’s NDA for gefapixant. In the CRL, the FDA requested additional information related to the cough counting system that was used to assess efficacy. The CRL was not related to the safety of gefapixant. The Company is performing additional analyses and anticipates submitting this information to the FDA in the second quarter of 2023 in response to the CRL. The review period in the EU was extended pending the receipt of additional information, which Merck submitted to the EMA in the first quarter of 2023.

MK-3475, 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 encompasses more than 30 cancer types including: biliary, 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-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 review by the FDA for the treatment of patients with previously treated advanced HCC. This submission is based on data from the Phase 3 KEYNOTE-394 trial along with supportive data from the KEYNOTE-240 and KEYNOTE-224 trials. Keytruda is approved for this indication in the U.S. under the FDA’s accelerated approval process. This submission is to convert the accelerated approval to full (regular) approval.

Additionally, Keytruda is under review by the FDA for the treatment of adult and pediatric patients with recurrent locally advanced or metastatic Merkel cell carcinoma. This submission is based on data from the Phase 3 KEYNOTE-913 trial. Keytruda is approved for this indication in the U.S. under the FDA’s accelerated approval process. This submission is to convert the accelerated approval to full (regular) approval.

Keytruda is also under review by the FDA in combination with fluoropyrimidine- and platinum-containing chemotherapy, for the first-line treatment of patients with locally advanced unresectable or metastatic gastric or GEJ adenocarcinoma. The submission is based on data from the KEYNOTE-859 trial, in which Keytruda plus chemotherapy demonstrated a statistically significant improvement in overall survival versus chemotherapy alone, regardless of PD-L1 expression, in patients who were HER2 negative. The FDA set a PDUFA date of December 16, 2023. KEYNOTE-859 is also under review in the EU.

In addition, Keytruda is under review by the FDA as a perioperative treatment regimen for patients with resectable stage II, IIIA or IIIB NSCLC based on the KEYNOTE-671 study. A perioperative treatment regimen includes treatment before surgery (neoadjuvant) and continued after surgery (adjuvant). The FDA set a PDUFA date of October 16, 2023. KEYNOTE-671 is also under review in the EU.

Keytruda is under review in the EU for the adjuvant treatment of patients with stage IB (≥4 cm), II or IIIA NSCLC following complete surgical resection. The submission is based on data from the pivotal Phase 3 KEYNOTE-091 trial, also known as EORTC-1416-LCG/ETOP-8-15 – PEARLS.

Keytruda is under review in Japan for the treatment of patients with relapsed or refractory PMBCL. This submission is based on data from the Phase 2 KEYNOTE-170 study and the Phase 1 KEYNOTE-A33 study.

In February 2023, Merck announced it was discontinuing the Phase 3 KEYNOTE-641 trial evaluating Keytruda in combination with enzalutamide and androgen deprivation therapy (ADT) for the treatment of patients with metastatic castration-resistant prostate cancer (mCRPC) based on the recommendation of an independent Data Monitoring Committee. At an interim analysis, Keytruda in combination with enzalutamide and ADT did not demonstrate an improvement in radiographic progression-

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free survival or overall survival, the trial’s dual primary endpoints, compared to placebo plus enzalutamide and ADT, and crossed a pre-specified futility boundary for overall survival.

In March 2023, Merck provided an update on the open-label arm of the non-registrational Phase 2 KeyVibe-002 trial. KeyVibe-002 is evaluating MK-7684A, a coformulation of vibostolimab, an anti-TIGIT therapy, and Keytruda, with or without docetaxel for the treatment of patients with metastatic NSCLC with progressive disease after treatment with immunotherapy and platinum-doublet chemotherapy. KeyVibe-002, a partially blinded study, was designed with two primary objectives: 1) to evaluate the efficacy of MK-7684A alone compared with docetaxel, a standard of care; and 2) in a blinded assessment, evaluate the efficacy of adding MK-7684A to docetaxel compared with docetaxel alone. Results from the open-label arm of the study evaluating MK-7684A alone showed that the coformulation did not reach statistical significance for the primary endpoint of progression-free survival and was numerically less effective compared with docetaxel. The blinded arms of the study will continue to further evaluate MK-7684A with docetaxel versus docetaxel alone. Results will be presented at an upcoming medical meeting once further data from the blinded study arms are available.

MK-7339, Lynparza, is an oral PARP inhibitor currently approved for the treatment of several cancers being co-developed for additional cancer types as part of a collaboration with AstraZeneca (see Note 3 to the condensed consolidated financial statements).

In April 2023, the FDA convened its Oncologic Drugs Advisory Committee (ODAC) to discuss the supplemental NDA for use of Lynparza in combination with abiraterone and prednisone or prednisolone (abi/pred) for the treatment of adult patients with mCRPC, based on the results of the Phase 3 PROpel trial. By a vote of 11 to 1 with one abstention, the OADC supported FDA approval of Lynparza plus abi/pred for the first-line treatment of adult patients with BRCA-mutated (BRCAm) mCRPC. The committee voted that the FDA should restrict use of Lynparza plus abi/pred to these BRCAm mCRPC patients, recommending against approval beyond this patient population. The ODAC provides the FDA with independent, expert advice and recommendations on marketed and investigational medicines for use in the treatment of cancer. The FDA is not bound by the committee’s guidance but takes its advice into consideration. AstraZeneca and Merck will continue to work with the FDA as the agency completes its review of the application. Lynparza is also under review in Japan for the treatment of certain patients with mCRPC based on the PROpel trial.

MK-7902, Lenvima, is an oral receptor tyrosine kinase inhibitor currently approved for the treatment of several cancers being developed as part of a collaboration with Eisai. Merck and Eisai are studying the Keytruda plus Lenvima combination through the LEAP (LEnvatinib And Pembrolizumab) clinical program.

In April 2023, Merck and Eisai announced the discontinuation of the Phase 3 LEAP-003 trial evaluating Keytruda plus Lenvima for the first-line treatment of adults with unresectable or metastatic melanoma based on the recommendation of an independent Data Monitoring Committee, which reviewed data from a planned interim analysis and determined Keytruda plus Lenvima did not demonstrate an improvement in overall survival, one of the study’s dual primary endpoints, versus Keytruda alone. Merck and Eisai also provided an update on the Phase 3 LEAP-017 trial evaluating Keytruda plus Lenvima for the treatment of patients with unresectable and metastatic colorectal cancer that is mismatch repair proficient or not MSI-H who experienced disease progression on, or became intolerant to, prior therapy. The trial did not meet statistical significance for its primary endpoint of overall survival in the final pre-specified analysis.

The charts below reflect the Company’s research pipeline as of May 3, 2023. Candidates shown in Phase 3 include 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
Cancer MK-0482*(2)* Non-Small-Cell Lung MK-1308 (quavonlimab)(2) Non-Small-Cell Lung MK-1308A (quavonlimab+pembrolizumab) Colorectal Hepatocellular Melanoma Small-Cell Lung MK-2140 (zilovertamab vedotin) Bladder Breast Gastric Hematological Malignancies Non-Small-Cell Lung Ovarian Pancreatic MK-2870*(1)(3)* Neoplasm Malignant MK-3475 Keytruda Advanced Solid Tumors Prostate MK-3543 (bomedemstat) Myeloproliferative Disorders MK-4280 (favezelimab)(2) Non-Small-Cell Lung MK-4280A (favezelimab+pembrolizumab) Baldder Esophageal Melanoma Renal Cell Small-Cell Lung MK-4830*(2)* Colorectal Esophageal Melanoma Non-Small-Cell Lung Ovarian Renal Cell Small-Cell Lung MK-5684*(1)* Prostate MK-5890 (boserolimab)(2) Non-Small-Cell Lung Small-Cell Lung			Cancer 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 Endometrial Esophageal Hepatocellular Pancreatic Rare cancers Von Hippel-Lindau Disease-Associated Tumors (EU) MK-7119 Tukysa*(1)* Advanced Solid Tumors Biliary Bladder Cervical Endometrial Gastric Non-Small-Cell Lung MK-7339 Lynparza*(1)(3)* Advanced Solid Tumors MK-7684A (vibostolimab+pembrolizumab) Biliary Bladder Breast Cervical Colorectal Endometrial Esophageal Gastric Head and Neck Hematological Malignancies Hepatocellular Ovarian Prostate			Cancer MK-7902 Lenvima*(1)(2)* Biliary Melanoma Pancreatic Prostate Small-Cell Lung V940*(1)(2)* Melanoma Dengue Fever Virus Vaccine V181 HIV-1 Infection MK-8591B (islatravir+MK-8507)(4) MK-8591D (islatravir+lenacapavir)(1)(5) Hypercholesterolemia MK-0616 Nonalcoholic Steatohepatitis (NASH) MK-6024 (efinopegdutide) Pulmonary Arterial Hypertension MK-5475 Pulmonary Hypertension Due To Left Heart Disease MK-7962 (sotatercept) Schizophrenia MK-8189*(6)* Thrombosis MK-2060 Treatment Resistant Depression MK-1942

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Phase 3 (Phase 3 entry date)			Under Review
Antiviral COVID-19 MK-4482 Lagevrio (U.S.) (May 2021)(1)(7) Cancer MK-1026 (nemtabrutinib) Hematological Malignancies (March 2023) MK-1308A (quavonlimab+pembrolizumab) Renal Cell (April 2021) MK-3475 Keytruda Biliary (September 2019) Cutaneous Squamous Cell (August 2019) (EU) Hepatocellular (May 2016) (EU) Mesothelioma (May 2018) Ovarian (December 2018) Small-Cell Lung (May 2017) MK-3475 (pembrolizumab subcutaneous) Non-Small-Cell Lung (August 2021) MK-3475A (pembrolizumab+hyaluronidase subcutaneous) Non-Small-Cell Lung (February 2023) MK-4280A (favezelimab+pembrolizumab) Colorectal (November 2021) Hematological Malignancies (October 2022) MK-6482 Welireg*(3)* Renal Cell (February 2020) MK-7119 Tukysa*(1)* Breast (October 2019) Colorectal (August 2022) MK-7339 Lynparza*(1)(2)* Non-Small-Cell Lung (June 2019) Small-Cell Lung (December 2020) MK-7684A (vibostolimab+pembrolizumab) Melanoma (January 2023) Non-Small-Cell Lung (April 2021) Small-Cell Lung (March 2022) MK-7902 Lenvima*(1)(2)* Esophageal (July 2021) Gastric (December 2020) Head and Neck (February 2020) Non-Small-Cell Lung (March 2019) HIV-1 Infection MK-8591A (doravirine+islatravir) (February 2020)(5) Pneumococcal Vaccine Adult V116 (July 2022) Pulmonary Arterial Hypertension MK-7962 (sotatercept) (January 2021) Respiratory Syncytial Virus MK-1654 (clesrovimab) (November 2021)			New Molecular Entities Antiviral COVID-19 MK-4482 Lagevrio (EU)(1)(8) Cough MK-7264 (gefapixant) (U.S.)(9) (EU)			Certain Supplemental Filings Cancer MK-3475 Keytruda • Second-Line Hepatocellular Carcinoma (KEYNOTE-394) (U.S.) • Locally Advanced or Metastatic Merkel Cell Carcinoma (KEYNOTE-913) (U.S.) • First-Line HER2 Negative Locally Advanced Unresectable or Metastatic Gastric Cancer (KEYNOTE-859) (U.S.) (EU) • Resectable Stage II, IIIA or IIIB NSCLC (KEYNOTE-671) (U.S.) (EU) • Adjuvant Non-Small-Cell Lung Cancer (KEYNOTE-091) (EU) • Relapsed or Refractory Primary Mediastinal B-Cell Lymphoma (KEYNOTE-170/KEYNOTE-A33) (JPN) MK-7339 Lynparza*(1)* • First-Line Metastatic Prostate Cancer (PROpel) (U.S.) (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) On FDA clinical hold. (5) On FDA partial clinical hold for higher doses than those used in current clinical trials. (6) Phase 2b development costs are being co-funded. (7) Available in the U.S. under Emergency Use Authorization. (8) Requested re-examination of EU MAA following CHMP recommendation for the refusal of the marketing authorization. (9) In response to the CRL received from the FDA for this application in January 2022, Merck is performing additional analyses and anticipates submitting this information to the FDA in the second quarter of 2023.

Analysis of Liquidity and Capital Resources

($ in millions)			March 31, 2023						December 31, 2022
Cash and investments			$	11,677					$	14,207
Working capital			10,271						11,483
Total debt to total liabilities and equity			28.5		%				28.1		%

Cash provided by operating activities was $1.3 billion in the first three months of 2023 compared with $4.8 billion in the first three months of 2022 primarily reflecting the impact of lower Lagevrio sales. Cash provided by operating activities was reduced by milestone payments related to certain collaborations of $115 million and $1.2 billion in the first three months of 2023 and 2022, respectively. Cash provided by operating activities continues to be the Company’s primary source of funds to finance operating needs, with excess cash serving as the primary source of funds to finance business development transactions, capital expenditures, dividends paid to shareholders and treasury stock purchases.

Cash used in investing activities was $2.4 billion in the first three months of 2023 compared with $1.2 billion in the first three months of 2022. The higher use of cash in investing activities was primarily due to the acquisition of Imago and higher purchases of securities and other investments, partially offset by higher proceeds from sales of securities and other investments.

Cash used in financing activities was $2.1 billion in the first three months of 2023 compared with $3.1 billion in the first three months of 2022. The decrease in cash used in financing activities was primarily due to lower payments on long-term debt, partially offset by treasury stock purchases and higher dividends paid to shareholders.

Capital expenditures totaled $1.0 billion in the first three months of 2023 compared with $984 million in the first three months of 2022.

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The Company has accounts receivable factoring agreements with financial institutions in certain countries to sell accounts receivable. The Company factored $2.4 billion and $2.5 billion of accounts receivable at March 31, 2023 and December 31, 2022, 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 $1.9 billion and $1.7 billion for the first three months of 2023 and 2022, respectively. In January 2023, the Board of Directors declared a quarterly dividend of $0.73 per share on the Company’s outstanding common stock for the first quarter that was paid in April 2023.

As discussed above, in April 2023, Merck announced an agreement to acquire Prometheus for $200 per share in cash for a total equity value of approximately $10.8 billion. The acquisition is subject to Prometheus shareholder approval. The closing of the proposed transaction will be subject to certain conditions, including the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and other customary conditions. The transaction is expected to close in the third quarter of 2023.

In February 2022, the Company’s $1.25 billion, 2.35% notes matured in accordance with their terms and were repaid. In September 2022, the Company’s $1.0 billion, 2.40% notes matured in accordance with their terms and were repaid.

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. The Company anticipates making modest share repurchases under this program in 2023. During the first three months of 2023, the Company purchased $149 million (1 million shares) of its common stock for its treasury under this program. As of March 31, 2023, the Company’s remaining share repurchase authorization was $4.9 billion.

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, 2022 included in Merck’s Form 10‑K filed on February 24, 2023. See Note 1 to the condensed consolidated financial statements for information on the adoption of new accounting standards during 2023. 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, 2022.

Recently Issued Accounting Standards

For a discussion of recently issued accounting standards, see Note 1 to the condensed consolidated financial statements.