【Transcript】Merck at JPM19

Merck & Co., Inc. (MRK) at JPMorgan HealthcareConference (Transcript)

Merck & Co., Inc. (NYSE:MRK)

JPMorgan Healthcare Conference

January 07, 2019, 19:30 PM ET

Company Participants

Ken Frazier - Chairman and CEO

Roger Perlmutter - EVP and President, Merck ResearchLaboratories

Conference Call Participants

Chris Schott - JPMorgan

Chris Schott

Good afternoon, everybody. I’m Chris Schott fromJPMorgan. It’s my pleasure to be hosting a fireside chat with the Merckmanagement team this afternoon. From the company we have the Chairman and CEO,Ken Frazier; as well as Roger Perlmutter who heads Merck’s R&D. As ahousekeeping item before we start, we’re not going to be hosting a breakoutsession after this, so we’ll just do the fireside.

But with that, I’d like to kickoff the session maybefirst question to Ken with your thoughts on 2019. Merck’s coming off of a verystrong 2018, stocks significantly up performing its peers. What shouldinvestors be focused on as we think about Merck in the new year?

Ken Frazier

So, first of all, thanks Chris for having us. I do think2018 was a very exciting year and I think we have a lot of momentum coming into2019. We’re very pleased with the way our four important growth pillars areperforming; oncology, animal health, hospital and specialty products andvaccines.

We continue to see the way that the healthcareenvironment is developing, the landscape is developing. It’s more and moreimportant to be innovative and to have differentiated products and we believethat we have them in our current portfolio. We’re very excited by our pipelineopportunities. So, it’s a good time to be at Merck. It’s an exciting time to beat Merck.

Chris Schott

Absolutely. KEYTRUDA was obviously a huge success storyfor Merck over the past few years. Maybe just first on the commercialopportunity. Can you just updateus in terms of where we stand with the ramp in first-line lung in the U.S.?Where are we with penetration now? Where do you think penetration can go overtime?

Ken Frazier

如果看新诊断的非鳞群体，我们拿下了70%，这在去年春季189研究的结果揭示前就已经占据了有利地位【】。根据407再来展望鳞癌群体，根据美国的表现，又将是一个巨大的机会。

So right now I think if you look at the nonsquamouspopulation for newly diagnosed patients, we’re getting over 70% of those peoplewhich is a very positive thing. That compares very favorably to where we werebefore the 189 trial was unveiled last spring. I think as you look beyond the squamouspopulation with 407 and the outcomes that we have with 407 in the UnitedStates, we really do believe that that’s another great opportunity for us.

从第三季度的情况来看，美国以外市场占了40%，但是9月份189的适应症在欧盟获批，前几天189、407和其它适应症在泥轰获批，所以在美国之外有着大大的机会，就像189在欧盟将涉及患者群体增加到了3倍。另外也刚刚在天朝上市了黑色素瘤，所以在这些市场都有很大的机遇。

If you look outside the United States at the thirdquarter, the ex-U.S. market share was around 40%. But in September as you know189 was approved in the EU. Just very recently 189 along with a number of otherstudies, 407 and others were approved in Japan. So we see ourselves as having agreat opportunity outside the United States. Just with 189 it triples theaddressable population we have in the EU. So we’re just getting started withmelanoma in China, so there’s a great opportunity across all those markets.

Chris Schott

Yes. So on the international side, if I can just get alittle more color, some of those markets maybe have a lag between the approvaland when we actually see the commercial ramp. How do you think about somethinglike KEYTRUDA where the evidence seems to be so strong? Is that something thatcould be a little different in terms of faster uptake or it’s just you have togo through these procedures and these processes?

Ken Frazier

We have to go through the procedure. There’s certaincountries like Germany pretty quick and there are other countries that couldtake a year, 16 months or 18 months. So it all depends on the market, but we’revery excited because I think what you’re saying is true. I think the data is sostriking and the outcomes data in particular in terms of overall survival is socompelling that hopefully people will streamline the reimbursement process.

Chris Schott

Okay. So talking about '19 and the international side ofthe KEYTRUDA business is something that should be a pretty healthy growthdriver for --

Ken Frazier

I think it is. Again, I want to come back to thebeginning. I think '19 is a very exciting year. We’ve got these growth drivers,including oncology. I think we need to acknowledge though at the same timethere’s some challenges. Obviously pricing is a challenge not just for Merckbut across the industry. And again, it underscores why being an innovativecompany is so important. We’re going to face more headwinds as it relates toForex. Last year we had to overcome about $800 million worth of foreignexchange.

There will be challenges with respect to the more matureand the LOE part of our portfolio with Sanofi in Europe, for example, having todeal with generic Humira with in United States Januvia facing additionalproblems with respect to the doughnut hole calculation. So there are challengesthat we’ll face. I also think it’s important to acknowledge that we are facingunprecedented opportunities that Roger and his colleagues I think have done afantastic job developing KEYTRUDA, putting KEYTRUDA in a place withunquestioned leadership in lung. But we have a number of other opportunitiescoming behind us with KEYTRUDA as well as with LENVIMA, LYNPARZA in ouroncology franchise.

You look beyond our oncology franchise and Roger couldtalk about this in greater detail, we’ve never had a stronger vaccine pipelinethan we have right now. So I [indiscernible] to say that in addition to thechallenges that I just talk about, this is a period where we have to investbecause there’s never been this kind of opportunity for us. It’s unprecedentedin terms of the scope. Ifyou know, KEYTRUDA is approved today in 10 tumor types, including lung. We’veshown activity in 25 tumor types. So there’s a huge amount of investment that’snecessary both in monotherapy as well as in combinations across all thedifferent lines of therapy.

Chris Schott

Great. So maybe before we turn to the pipeline, one lastquestion; you mentioned investment. One question we get is just how we thinkabout the margin expansion opportunity for Merck over time? It seems on onehand you’ve been highlighting you need to invest properly to support this veryinteresting pipeline. At the same time as KEYTRUDA keeps ramping, it seems likeit reached a point where it’s just hard to spend away the type of growth thatwe’d expect from that asset. So help us just frame out how we should bethinking about the margin story at Merck not so much in '19 but just as wethink about the next few years?

Ken Frazier

Okay. So what we’ve said is that we’re committed over thelong term to our leverage P&L and that we’re committed over the long termto driving greater margin expansion driven by first of all revenue growth forthings like KEYTRUDA but also the mix shift that we anticipate as well asadditional efficiencies. But as you think about the timing of that in the nearterm, again, we have so many great opportunities to invest in.

So I would say near term, the emphasis will be oninvesting to continue to maintain our leading areas like oncology to expand inother areas like vaccines, hospital specialty where we have opportunities withthe Afrin compound, opportunities in our HIV pipeline and other things, animalhealth. We want to make sure that we invest properly in the short term. So Isee the margin expansion is being driven largely over the longer term by thekind of revenue growth and mix shift that we expect.

Chris Schott

Great. So bringing Roger in the conversation, maybe firston KEYTRUDA. A lot of focus has been on lung but there’s so many otherindications seems to be developed – you’re developing over time. Can you justmaybe talk a little bit about the additional indications beyond lung we shouldbe focusing on and some of the readouts that we should be watching on thenumber on one side?

Roger Perlmutter

事实上从来没有像KEYTRUDA一样广谱的抗肿瘤药物，5年前我们就开始探索充分利用单药治疗的价值，大多数的单药研究已经完成，就像去年年底肝癌和默克细胞癌适应中的活性得到认可并且获批，前面还有一些其它的数据像食管癌等等。

Right. Chris, so as you say, a huge number and Kenalready spoke a little bit about this. The reality is that there has never beena broad spectrum antineoplastic agent like KEYTRUDA just based on its currentapprovals. And we mounted an effort starting now five years ago to explore thefull use of the molecule in monotherapy. We’re getting to the point where mostof that monotherapy work has been done with a recognition of its activity inhepatocellular carcinoma, primary B cell mediastinal lymphoma with the Merkelcell approval that we got at the end of the year and a few others movingforward that will be additional data, for example, in esophageal cancer.

另外联合治疗的有效性你们也见识到了，189和407拓展了KAYTRUDA的通用性，我们也在治疗头颈鳞癌的研究中看到了联合化疗的效果，去年ESMO上展示的KEYNOTE-048让大家意识到可以改变临床实践，将会提交全球药监部门审理。K联合axitinib一线治疗RCC的426的数据也非常牛逼，即将在ASCO-GU披露。

But I think what we’ve also seen and you alluded to itbefore is that the effectiveness of the combinations, particularly chemotherapeuticcombinations. So with KEYNOTE-189 and 407 in lung cancer that really expandsthe utility of KEYTRUDA, we’re going to see similar kind of chemo comboutilization in squamous cell carcinoma of the head and neck. The KEYNOTE-048data which we presented at ESMO I think everyone recognized these as practicechanging. Clearly they will be under review at regulatory authorities aroundthe world as we move forward. We have top lined the data for the combination of axitinib and KEYTRUDAin the KEYNOTE-426 study in renal cell carcinoma. Those data too veryimpressive will be presented at ASCO GU.

未来将看到在一些其它的数据，只举几个例子：食管癌和非肌层浸润型膀胱癌；另外也有机会看到在辅助和新辅助治疗研究的中的数据，例如，TNBC新辅助治疗的KEYNOTE-522研究，我们最近看了一次内部分析结果，确实令人鼓舞。FDA想看长期的研究结果，因为这个疾病偏惰性需要看长期的疗效，但是我们看到这一点还是很鼓舞。

And looking forward you’re going to see additional datain esophageal cancer and non-muscle invasive bladder cancer just to give acouple of examples and we’ll also have the opportunity to see data from some ofour adjuvant and neoadjuvant studies. For example, the KEYNOTE-522 study neoadjuvant breastcancer triple negative breast, those data we had a chance to look at interimdata recently which were quite encouraging. FDA is eager to see alonger-term study because of the fact that these diseases tend to be moreindolent and one wants to see the effect over time. But we are encouraged bywhat we’ve seen to this point and as you can tell it’s obviously a very, verybroad spectrum anti-malignant drug.

Chris Schott

On the triple negative breast, what’s the next timelinewe should think about of when we can hear another update from you on that --?

Roger Perlmutter

522的结果可能在19年底或者20年上半年看到

Well, there will be an update on the 522 program later inthe year and exactly when depends a little bit on how the data accrue. But inaddition there are other programs that we’re looking at in breast cancer thatlook in the adjuvant setting, so you’ll have a chance to see quite a bit ofdata towards the end of this year and first part of next year.

Chris Schott

And one other question just thinking about the IOlandscape, it seems like you’ve had real success either with chemo combo or TKIcombos. The one area that I think there was a lot of enthusiasm a few years agothat so far hasn’t necessary panned out has been the IOIO combos more broadly. What’s your latest thinking interms of the role that beyond CTLA-4 other IO agents may play with PD-1 as youthink about the different directions that the market can move over time?

Roger Perlmutter

之前我想过为什么有的患者对K药没有应答，如果你们看卡特总统，进展型黑色素瘤转移到了肝脏、肺和脑，接受K药治疗时91岁，现在全部病灶消失了，现在已经4年了，依旧很活跃，所以说这是很显著的效果，不像之前看到的。

Well, as I’ve said in this forum before, I try to thinkat a high altitude about why it is that patients don’t respond to KEYTRUDA,because the responses are so fantastic when we see them. If you look in themelanoma case the image to have in mind is of former President Jimmy Carter.He’s 91 receiving KEYTRUDA and at a time when he had advanced melanoma withliver and pulmonary and intracerebral metastases and all of that goes away andhe’s still very much with us and very active now four years later. That’s quitea remarkable effect and not like anything anyone has ever seen before.

看到了K药的这种广谱性，就会期待能看到更多类似这样的缓解，但是却没有

When we look at that more broadly at KEYTRUDA, you wouldexpect that we ought to be able to see more responses like that. And thereasons why we wouldn’t are either first of all because the tumor is notrecognizable by any immune system in which case we have to tag it in some way or it’s recognizable bysome immune system just not that patient’s immune system in which caseimmunization seems like it might be a good approach to expand a precursorfrequency reactive with the tumor, or it’s possible thatthere are cells that are reactive that that person’s immune system can see thetumor but there’s some other checkpoint.

有20个新药，可以以不同方式来影响免疫轴，目前在临床1期看下能不能把基础机制和抗肿瘤反应关联起来，很乐观接下来1-2年看到一些亦可赛艇的结果。

I think all of us who are working in this field aretrying to understand which one of those buckets will be most effective. We have 20 new agents thatinfluence the immune axes in various ways that are currently in Phase 1programs looking at combination studies asking whether we can tease apart thesefundamental mechanisms related to anti-tumor responses and I’moptimistic that over the next year or two we’ll see some exciting results.

Chris Schott

Great. And maybe one on the pipeline just beyondKEYTRUDA, I think we touched on some of these but can you say what you’re mostexcited about in the pipeline beyond KEYTRUDA?

Roger Perlmutter

Well, I think Ken made reference to the fact that we’venever had a more exciting vaccine portfolio at Merck than we have right now andI can speak across nearly 25 years of experience with the Merck vaccineportfolio. That includes the opportunity with GARDASIL which is extraordinaryas public health authorities around the world are thinking much more seriouslyabout actually eliminating HPV infection as a source of human disease. Themagnitude of that task where at a two-dose regimen if you want to immunize theentire birth cohort of the world is more than 200 million doses a year, not tomention the catch-up with the extended approval that we have in an olderpopulation here in the United States and elsewhere. That’s an enormousopportunity to do a lot of good and of course a huge opportunity for thecompany.

In addition, we have our pneumococcal conjugate vaccine,the V114 program, eight Phase 3 studies currently underway that we will bereading out this year or towards the beginning of next year should be veryexciting data, very important data for preventing invasive pneumococcaldisease. So that’s really quite interesting for us and then pediatricpopulations later. We have a really interesting CMV vaccine and we have our dengue vaccine programwe recently announced our collaboration with Instituto Butantan to develop thatvaccine which with global warming I hate to say could become more and moreimportant for the United States as well as for equatorial populations. So thevaccine program looks terrific.

Our anti-infective programs are remarkable, including theHIV program with MK-8591 sort of the belle of the ball, the most exciting newanti-HIV agent because it works by a novel mechanism which is blockingtranslocation of the reverse transcriptase. And we’ll have a chance this yearto see some data and we’ll of course share it with all of you from the Phase 2program with Doravirine, our new non-nucleoside reverse transcriptase inhibitorin combination with 8591. That’s just a small glimpse of the data that’s goingto come out. We have other data in metabolic disease, cardiovascular disease.It’s really going to be a terrific year for us.

Chris Schott

Great to hear. Maybe Ken a question on – maybe building onthose pipeline questions, how do you think about diversification within Merck?It’s obviously a diversified business but KEYTRUDA seems to rapidly becomingone of the largest products that we’ve ever seen and it’s a good problem tohave. But how do you ensure that Merck’s growth doesn’t become overly dependenton one asset and you kind of keep a balanced growth profile for the overallorganization?

Ken Frazier

So obviously we want to have a diverse pipeline comingforward and Roger just gave you some of the things that make us excited. Theother aspect of that obviously is business development and we continue to focuson opportunities to develop new molecules through business development that areactually going to be differentiated to make a big difference.

We talk about oncology, everybody focuses on KEYTRUDA butI think if you look at the assets that we got in our deals with Eisai andAstraZeneca, respectively, LENVIMA and LYNPARZA, we think those as monotherapyas well as in combination with KEYTRUDA will be very significant contributorsbeyond just KEYTRUDA.

And of course, Roger mentioned the 20 other unique typesof molecules that we have in development in our oncology field. So I would saythe way to think about this is first of all I like the fact that we’rediversified today. It’s good to have a vaccine business. It’s good to have ananimal health business.

In another context, people will often say how do you feelabout the pricing pressure on the industry? Well, those are two verysignificant growth pillars. They’re not largely subject to that kind of pricingpressure and they provide a lot of steady cash flow. So diversification is animportant thing as long as you’re bringing forward the kinds of products thathave the kind of differentiation meeting unmet medical need that the healthcareenvironment will pay for.

Chris Schott

Great. And you mentioned this business development, howthis has been a focus for the organization. You’ve brought assets in. But canyou just maybe talk a little bit about the environment you’re seeing right nowfor business development? Certainly 2019 started out as a pretty active yearfor some of your competitors. Has the market pullback created someopportunities that you can maybe look towards either larger acquisitions ormore broadly than you’re able to look before or maybe just any color you haveon what you see out there as you look to augment the internal pipeline with --?

Ken Frazier

It’s got a very high elevation. I think it’s helpful thatvaluations have begun to come down. We continue to look for those assets thatwe believe can create value for our shareholders and then I think it becomesmore possible with more recent valuations. We’re very active. I think the factthat you haven’t seen a large deal coming out of Merck recently is not areflection of the fact that we’re not looking at those.

When I say large, I mean an important deal notnecessarily large from a size standpoint. We are active. We’ve actually triedto consummate some deals. They haven’t worked because we haven’t had a willingseller or the asset was too robustly competitive because it was a late-stageasset. But broadly speaking I think with the valuations coming down, it createsmore possibilities.

Chris Schott

Great. Another topic just on animal health and a sourceof diversification. Maybe first question on animal health, can you just commenton the recent acquisition of Antelliq and what that adds to the franchise?

Ken Frazier

So right now in the animal health business the fastestgrowing areas have to do with identification and monitoring. And Antelliq isthe market leader in those areas and as we move forward into a more digitalenvironment, people become much more concerned about for example on theirproduction side what’s the source of the protein that they’re eating, theability to identify and monitor it, trace it back, detect, predict, all thosethings become more important. And so this gives us a completely different growthplatform. It’s actually the fastest growing part of animal health right now isthis detection area over and above the pharmaceuticals and vaccines that weprovide to our customers, we are able to provide a set of solutions that theyvalue very much.

Chris Schott

And I know you’re asked this all the time in terms of isMerck the right owner for the animal health business. I appreciate thediversification it brings, but when you balance that against some of themultiples we’re seeing for some of the standalone animal health companies, howdo you – just help us out how you think about that balance and how you evaluatewhether it’s – does it make sense to keep that within the Merck family?

Ken Frazier

So to start with your first question about whether Merckis a good owner of that business, I think the answer to that question can belooked at because the animal health business is in fact a market leader when itcomes to growth, when it comes to profit margins. So that business has notsuffered being a part of Merck. To the contrary, it’s actually the marketleader. There’s no other business that’s quite as good as that business. Andobviously it provides us the growth, the cash flow, the diversification.

I think as we look beyond that we have to ask ourselves questionslike what are the synergies associated with having unentered access to ourhuman health R&D and we continue to believe that those are extremelyvaluable. So we see ourselves as not a disadvantaged owner but an advantagedowner of that business as we sit here today. But I also want to say that as wethink about it, we constantly challenge ourselves about how our pipeline –excuse me, how our portfolio ought to evolve.

So we’re not I guess I would say stubbornly focused onmaintaining that as a part of Merck. As we sit here today we think it makessense for all the reasons we’ve said for it to be a part of Merck, but we haveto constantly challenge ourselves and make sure that we are thinking about itfrom the standpoint of what’s best for the long-term health of the company andwhat’s best from the standpoint of long-term shareholder value creation.

Chris Schott

Great. Thanks for that. Last few minutes here. I guessfirst one I was wondering about was on capital deployment absent deals. We sawwith 3Q obviously some announcement about dividend step up and share repo.Absent more meaningful transactions, can we expect more of that from Merck on ago-forward basis?

Ken Frazier

Well, our priorities are obviously – again going back towhat we said a little while ago, we have unprecedented opportunities to investin our current pipeline. We’ve never had the opportunities like we have justfor oncology with KEYTRUDA, LENVIMA and LYNPARZA. So those are actually verysubstantial opportunities to reinvest. Then there’s business development whichwe think is critical going forward and we believe that the steps that we tookwith the ASR as well as the steps that we took with the 15% increase in ourdividend are actually showing our confidence in the growth of our businessgoing forward, because we don’t think they in any way inhibit our ability to dobusiness development. So at the end of the day we want to reinvest in ourbusiness what we have in our current portfolio as well as bringing new thingsinto our portfolio and then obviously with respect to excess cash we want toreturn it to shareholders in a cost effective way.

Chris Schott

Okay. Roger, can I ask about one of your pipelineproducts in the vaccine side, the V114, the pneumococcal vaccine. Maybe justhelp us provide some perspective in terms of the additional coverage that thatoffers relative to PREVNAR and what you see that bringing to market?

Roger Perlmutter

Right. I think there has been a tendency among somelooking at it from a distance to say it’s really just a function of counting upthe different specificities whether you have 13 or 15 or 20 or 25; that sort ofwhat matters. We’ve got a lot of experience in this business having marketedPNEUMOVAX for a long time. And we know from the experience that our colleaguesat Pfizer have had with PREVNAR that what happens over time is that theepidemiology of pneumococcal disease does change in specific markets and itbecomes more important to ensure that you have appropriate immunity directedagainst particular serotypes.

So I think the thing to watch in addition to the numberis what is the extent of protection that really is achieved usingimmunogenicity as a surrogate for each one of those serotypes and particularlythe ones that are emerging and being in essence selected for by virtue ofprevalent immunity from immunization? So that’s the important issue. We’vetaken great pains in developing V114 to ensure that the most importantserotypes are actually highly immunogenic in that conjugate and that will havebig advantages.

We’ll see how the data play out over time but certainlywe’re extremely encouraged not only by our adult data but also our pediatricdata and the serotypes that are important are different in those two differentpopulations. So there’s a lot to look at here and it’s not just a numericalexercise.

Question-and-Answer Session

Chris Schott

That’s helpful. I think we’re just about out of time. Itsounds like a very exciting year ahead for the company and thanks so much forjoining us today.

Ken Frazier

Very excited. Thank you for having us.

Roger Perlmutter

Thanks.