Earnings Call Transcript - MRK Q1 2020

Operator, Operator

Good morning. My name is Jerome and I will be your conference operator today. At this time, I would like to welcome everyone to Merck & Company’s First Quarter Sales and Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to Peter Dannenbaum, Vice President of Investor Relations.

Peter Dannenbaum, Vice President of Investor Relations

Thank you, Jerome, good morning. Welcome to Merck's first quarter 2020 conference call. Today, I'm joined by Ken Frazier, our Chairman and Chief Executive Officer; Rob Davis, our Chief Financial Officer; Dr. Roger Perlmutter, President of Merck Research Labs; Frank Clyburn, our Chief Commercial Officer; and Mike Nally, Chief Marketing Officer. Before I turn the call over to Ken, I'd like to point out a few items. You will see that we have items in our GAAP results such as acquisition-related charges, restructuring costs and certain other items. You should note that we've excluded these from our non-GAAP results and provide a reconciliation in our press release. We have also provided a table in our press release to help you understand the sales in the quarter for the business units and products. I'd like to remind you that some of the statements we make during today's call may be considered forward-looking statements within the meaning of the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are made based on the current beliefs of Merck's management and are subject to significant risks and uncertainties. If our underlying assumptions prove inaccurate or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements. Our SEC filings, including Item 1A in 2018 10-K identify certain risk factors and cautionary statements that could cause the company's actual results to differ materially from those projected in any of our forward-looking statements made this morning. Merck undertakes no obligation to publicly update any forward-looking statements. Our SEC filings, today's earnings release and an investor presentation with some highlights of our results are all posted on merck.com. With that, I'd like to turn the call over to Ken.

Ken Frazier, Chairman and Chief Executive Officer

Thank you, Peter. Good morning and thank you all for joining today's call. In this challenging and unprecedented time, our first quarter performance reflects strong demand for our portfolio of innovative products, continued commercial and clinical execution, and the dedication and resilience of our employees around the world. The fundamentals of our business remain strong. The COVID-19 global pandemic poses extraordinary challenges to all of us, including serious threats to the health of people, businesses, and economies around the world. Without question, our industry and our company have a unique ability and responsibility to help the world respond to this global pandemic by working collaboratively to deliver solutions to coronavirus infection, while also maintaining the supply of medically important products to those who need them. Amidst this crisis, we at Merck are focused on protecting the health and safety of our employees and their families, while also ensuring that our essential medicines and vaccines continue to reach the patients we serve. Importantly, the majority of Merck's manufacturing plants and clinical supply sites remain fully operational. And we have seen little impact on the production, supply, or distribution of our medicines, vaccines, and Animal Health products. In many markets around the world, including the U.S., while our offices and laboratories remain open, our colleagues are primarily working from home. And for patients currently enrolled in our clinical trials, we're making every effort to ensure that patients in affected areas are able to continue their treatment and receive appropriate care and monitoring. Conditions are fluid and evolving. But as conditions allow, we are enrolling patients in ongoing studies, and we're starting new studies. Of course, there is great interest in what we're doing to address COVID-19 from a scientific perspective. Roger Perlmutter will speak to the totality of our efforts in more detail. But I will mention that we have deep scientific experience and expertise in both antivirals and vaccines. And our research colleagues are actively engaged in efforts to combat COVID-19. We have teams of scientists researching COVID-19 itself, and assessing antiviral and vaccine candidates for their potential to impact the disease. In addition, we've been working extensively with the broader scientific community to assess different assays and have been engaging with a range of research organizations on collaborative efforts. We know from our experience with viral epidemics like HIV and Ebola that scientific collaborations are essential to develop medicines and vaccines in a global public health emergency like the one we are facing now. We also know that the path to a new medicine or vaccine is rarely short or easy. But we are optimistic that our industry's efforts will create new tools to combat this coronavirus. And Merck is committed to playing its part in response to this global pandemic for the patients that depend on our medicines and vaccines, the global community, and those directly impacted by COVID-19. The underlying demand for our innovative portfolio of products remains strong, and our business remains fundamentally sound. However, the pandemic is impacting patients’ ability to access hospitals and physician offices, particularly for many of our products, which require physician administration. And social distancing measures are also impacting customer access and demand for our Animal Health products. Rob and Frank will speak to the near-term impacts on our business in a minute. But on a longer-term basis, we remain confident in our outlook for strong growth once people adjust and find ways to address the needs of health and healthcare beyond COVID-19. Importantly, our financial strength and strong balance sheet allow us to continue with our capital allocation priorities, including investing in R&D and in our growth drivers, investing in manufacturing capacity expansion, paying our dividends, and continuing our search for value-enhancing business development, which remains a top priority. We also remain fully committed to a spin-off transaction, and we believe we are on track for completion in the first half of 2021. We completed several important milestones in the quarter, including the naming of the new company, Organon & Co. Inc, a name which has strong brand equity and engenders trust among healthcare professionals for its dedication and innovation in Women's Health. We've also named several members of the Organon leadership team. We continue to believe that two more focused companies will allow us to reach more patients, drive stronger growth, and unlock longer-term value for shareholders. To conclude, we recognize now more than ever the importance of our investment in R&D, and the value of our science-based approach. We remain dedicated to our mission to save and improve lives through the discovery of innovative new medicines and vaccines to treat and protect patients in the midst of the pandemic and in the future. With that, I'll now pass it over to Rob Davis to review the details of our performance and outlook.

Rob Davis, Chief Financial Officer

Thanks, Ken, and good morning, everyone. As Ken stated, while we are operating in a challenging time, our first quarter results demonstrate the strong underlying fundamentals of our business, as well as successful planning and execution that is allowing us to maintain continuous supply of our medicines and vaccines to the patients we serve. We remain confident in our long-term growth prospects, driven by the strong underlying demand for our products. However, we are now seeing that COVID-19 will impact our near-term results, due mostly to patient access challenges. In this environment, our strong financial position and conservatively positioned balance sheet are allowing us to maintain strong liquidity and very healthy access to the capital markets, and our capital allocation priorities remain largely uninterrupted. Now turning to our first quarter results. Total company revenues were $12.1 billion, an increase of 11% year-over-year or 13% excluding the negative impact from foreign currency. Both our Human Health and Animal Health businesses contributed to the growth this quarter. COVID-19 had an immaterial impact on our business in the first quarter with both pushes and pulls across our divisions and regions. The remainder of my comments pertaining to sales will be on an ex-exchange basis. Our Human Health revenues grew 12% led by key products in our oncology, vaccines, and hospital businesses. In oncology, KEYTRUDA sales increased 46% year-over-year, reaching $3.3 billion. In the United States, growth was driven by all key tumor types. And we continue to strengthen our overall leadership position in the I/O market, including across indications for lung, bladder, and head and neck cancers. Our launches in renal cell carcinoma and endometrial and first-line head and neck cancers continue to feel momentum. And we are excited about the prospects for our application for a six-week dosing regimen across all indications, which is currently under review by the FDA. Outside the United States, lung cancer indications continue to drive KEYTRUDA growth. In the EU, growth continues to be driven by the uptake of KEYNOTE-189 with secured reimbursement across all major markets, and we are encouraged by early uptake in the adjuvant melanoma, head and neck, and renal cell carcinoma launches. In Japan, KEYTRUDA showed growth driven by new launches and continued strength in lung, despite the implementation of the huge seller price adjustment in February. Our oncology portfolio continues to benefit from both our products in Lynparza and Lenvima, with Lenvima continuing to lead the PARP class in the United States with over 60% share, while Lenvima maintains market leadership in first-line hepatocellular carcinoma and benefits from the launch in combination with KEYTRUDA and in endometrial carcinoma. Turning now to vaccines. GARDASIL growth reflects continued positive underlying demand globally as well as the timing of shipments in China, which contributed roughly $120 million in growth to the quarter, and the timing of public sector purchases in the U.S., which benefited revenue by approximately $70 million. PNEUMOVAX also contributed to growth this quarter, in part due to increased demand related to heightened interest in pneumococcal vaccination, given the COVID-19 pandemic in the United States and Europe. Our hospital business benefited from growth in BRIDION recycling strong performance across all major regions and in PREVYMIS reflecting demand and the benefit of launches globally. Animal Health revenue increased 21% this quarter to $1.2 billion. Livestock grew 24% largely due to the contribution of the Antelliq acquisition and COVID-19 related buy-in. Companion Animal grew 17% driven by demand for BRAVECTO as well as the COVID-19 related buy-in. Turning to the rest of our P&L, my comments will be on a non-GAAP basis. Gross margin was 75.5% in the quarter, a decrease of 40 basis points year-over-year. Operating expenses of $4.4 billion were roughly flat year-over-year. SG&A spend decreased 7% driven by lower promotion and selling costs due in part to COVID-19, while R&D spend increased 10% reflecting higher clinical development and research costs, as well as higher licensing costs. In total, our operating expenses were favorably impacted by $100 million in reduced spending due to COVID-19, largely driven by lower promotional and selling costs, and delayed spending on our clinical trials. The year-over-year increase in other expense was driven by higher net interest expense due to reduced cash balances, partially offset by net gains on our security holdings, predominantly reflecting our investment in Moderna. Our effective tax rate for the quarter was 17%. Taken together, we earned $1.50 per share, an increase of 26% excluding exchange. In summary, the underlying demand for our products in the first quarter, even after adjusting for timing and COVID-19 impacts, delivered very strong growth and demonstrates the continued underlying strength and operational momentum in our business. As we move through the year and eventually put the impact of COVID-19 behind us, this demand will be the foundation upon which we expect to deliver strong and sustained growth into the future. Now turning to our outlook for the remainder of the year. As we head into the second quarter, we are seeing decreased patient visits due to reduced access to hospitals and other healthcare providers, as well as social distancing recommendations. I'd like to pass the call to Frank to provide additional color on the dynamics we are seeing.

Frank Clyburn, Chief Commercial Officer

Thanks, Rob, and good morning, everyone. As you heard from Ken and Rob, the impact on our business from the ongoing pandemic is largely driven by a reduction in healthcare provider and patient interactions, as hospitals redirect resources toward COVID-19 and patients avoid healthcare facility visits and postpone preventive care. To better understand the impact to Merck, it is important to highlight that our portfolio is heavily weighted towards products administered by a physician. In fact, roughly two-thirds of our global Human Health revenue is comprised of physician-administered products. Taking this a level deeper, we've seen updated guidelines and recommendations from the CDC and various professional associations further enforcing social distancing measures via delays in wellness visits and the postponement of treatment. For example, based on recommendations from the American Academy of Pediatrics and CDC, most pediatricians have pushed out the routine immunization of all children, except for those under 24 months in the United States. And in the United States, physician office visits across various areas of medicine are currently running down in neighborhoods of 70% versus pre-COVID-19 levels. As a result of these measures, we are seeing impacts to our vaccine portfolio, including GARDASIL, PNEUMOVAX, and our pediatric vaccines and to our Women's Health products in both our fertility medicines, as well as IMPLANON/NEXPLANON of physician-administered implants. Non-urgent elective procedures have also been postponed or canceled in most major markets in order to slow the spread of disease and enable hospital prioritization of COVID-19 patients. Many sources are reporting current declines in elective procedures of over 70%, with urgent procedure volumes also being affected, though to a much lesser degree. These declines impact a product like BRIDION, which is used across many surgery settings. And even oncologists are delaying appointments and procedures as they prioritize patients based on severity and the immediate needs of different tumor types, resulting in extended dosing schedules for existing patients, as well as delays in the start of therapy for newly diagnosed patients. As Rob will outline in a minute, however, based on our overall assumption with respect to the timeline for return to a more normal environment, as well as our experience in China, a market which was impacted earlier by the pandemic but which is now recovering, we expect to be most heavily impacted in the second quarter. Most importantly, we believe the underlying demand for our portfolio of products remains strong based on the substantial medical benefits they bring to patients. As the peak of the pandemic passes, we believe providers and patients will move quickly to find ways to safely provide and seek treatment. And as a more normal environment for patient access is reestablished, we believe our portfolio will be well positioned to achieve strong long-term growth. With that, I will turn it back to Rob.

Rob Davis, Chief Financial Officer

Thanks, Ken. Now turning to guidance. We expect decreased volumes due to the reduced access and social distancing impacts that Frank described, particularly in the second quarter, which we assume is the peak of the virus in the United States and Europe. We expect to begin to see this dynamic subside as hospitals begin to normalize through the third quarter and as social distancing measures begin to lift across geographies at which point we would expect a phased return to more normal levels of volumes, unencumbered by access concerns. While we do expect to progress to normal pre-COVID-19 volumes by the beginning of the fourth quarter, a large portion of the impact in Q2 will carry to the full year. In Animal Health, we expect to experience a more protracted recovery timeline, given decreased demand for milk and protein due to the shutdown of restaurants and schools, reduced visits to veterinarians, and the impact of reduced employment and incomes. Of course, our actual results could vary based on how the disease progresses, and how various countries respond. We now expect revenues of $46.1 billion to $48.1 billion, which reflects a decrease of $2.5 billion from our previous midpoint. This difference is comprised of approximately $2.1 billion of negative impact due to COVID-19 on an ex-exchange basis, made up of approximately $1.7 billion from Human Health and $400 million in Animal Health. We also now assume a negative impact from foreign exchange of roughly $750 million, or 2.5 percentage points using mid-April rates. Finally, Human Health operational strength of roughly $300 million partially offsets the negative COVID-19 and foreign exchange impacts. We now expect gross margin to be roughly 75%. Operating expenses are expected to decline at a low-single-digit rate driven by lower SG&A. Our updated assumption anticipates lower promotional and selling expenses and clinical trial costs. We now expect our full-year tax rate to be in the range of 17% to 18%. We continue to expect other expenses of roughly $200 million. We continue to anticipate 2.54 billion shares outstanding. Given the current environment and out of an abundance of caution, we have temporarily paused our share repurchase activity, which will help ensure that we preserve our strong financial position to pursue our capital allocation priorities of investment in the business and ongoing business development. Taken together, we now expect our non-GAAP EPS to be between $5.17 and $5.37, which reflects a decrease of $0.43 from our previous midpoint. This range includes a roughly 3.5 percentage point negative impact from foreign currency equating to approximately $0.11 FX headwind versus our prior assumptions. Importantly, the company's financial strength and conservatively positioned balance sheet are allowing us to execute our capital allocation priorities, which remain unchanged despite the currently challenging environment. As of the end of the quarter, we held $8 billion in cash and marketable securities and retained good access to the commercial paper markets. In addition, our cash collections continue as expected, with no significant disruption from the COVID-19 pandemic impact to date. As a reminder, our first priority is to invest in our existing R&D programs, as well as to support new programs aimed at COVID-19. This pandemic underscores our commitment to R&D now more than ever. We will continue to invest in manufacturing capacity expansion, and we remain firmly committed to the payment of our dividend. In addition, as Ken noted, business development remains a priority, and we will continue to look for the best external sources of science to augment our pipeline. We will assess the environment on an ongoing basis and consider reactivating the repurchase program as warranted. In summary, our first quarter results demonstrate the strong demand we see for our innovative portfolio and the underlying fundamental strength in our business. While the pandemic will impact us in the short term, we're well positioned financially to weather this storm and continue the investments we're making across our business to drive growth and, importantly, to bring additional innovations to the patients we serve. We also remain confident in the underlying demand of our products based on their competitive position and the benefits they provide and fully expect to see our growth return once patient access normalizes. As a result, our expectations are unchanged regarding our ability to deliver sustainable long-term growth. We believe all of this continues to be a source of significant and sustainable long-term value for both our patients and our shareholders. With that, I'd like to turn the call over to Roger.

Roger Perlmutter, President of Merck Research Labs

Thanks, Rob. I will divide my commentary on our first quarter results into three parts. First, I will describe the current operational status of Merck Research Laboratories, focusing in particular on clinical research and our interactions with regulatory agencies. Second, I will highlight some of the important results that we achieved during the first quarter and will outline some of what we hope to achieve as the year progresses. Finally, I will comment specifically on the actions that we hope and what we have taken to help address the COVID-19 pandemic. So let me begin with our operational status. As an early point, our global clinical operations team recognized the importance of the SARS-CoV-2 infections that were reported in Wuhan, China, and made advanced preparations to manage what became the COVID-19 pandemic. These preparations included pre-positioning clinical supplies, strengthening our clinical supplies network, putting in place processes to enable virtual monitoring, and over time developing processes for home deliveries of investigational agents, including in some cases, developing alternative infusion sites. Operating virtually, the clinical operations team, including data management and our quality organization, has been able to maintain our overall clinical trial schedule. We have, in some cases, reduced enrollment in certain jurisdictions, but we have not halted enrollment and are continuing to launch new clinical trials across most jurisdictions. As examples, our team processed 36 database logs in the month of March and enrolled more than 700 new patients across our Europe, Middle East, and Africa sites. These numbers provide substantial reassurance that our clinical programs are moving forward. Indeed, although I cannot predict what the course of the pandemic will be in the future, for now, our 2020 MRL objectives are not in jeopardy. This progress is owed entirely to the extraordinary work of teams across our organizations spanning five continents and a very broad set of government regulatory agencies with whom we interact. Turning now to important research accomplishments. As noted previously, the first quarter began with FDA approval of KEYTRUDA as monotherapy for the treatment of certain patients with high-risk, non-muscle invasive bladder cancer, our 23rd KEYTRUDA indication, and we continue to generate important data related to the ability of KEYTRUDA to improve cancer therapy. An interim analysis of the pivotal Phase 3 KEYNOTE-355 studies demonstrated that KEYTRUDA in combination with standard chemotherapy improved progression-free survival versus chemotherapy alone in the first-line treatment of patients with metastatic triple-negative breast cancer, whose tumors expressed PD-L1 with a combined proportion score of greater than or equal to 10. This result complements the data from our KEYNOTE-522 study in which a combination of KEYTRUDA plus chemotherapy provided as neoadjuvant treatment versus chemotherapy alone improves the pathologic complete response rate in patients undergoing surgery for triple-negative breast cancer. We expect to describe these results in detail at an upcoming medical meeting. We also announced the results of our KEYNOTE-204 study which demonstrated that KEYTRUDA monotherapy improved progression-free survival in adult patients with relapsed or refractory classical Hodgkin lymphoma, as compared with brentuximab vedotin. These data strongly support our current indication in classical Hodgkin lymphoma. And the study will continue to permit evaluation of the dual primary overall survival endpoint. Also during the quarter, we announced the results of our KEYNOTE-177 trial, a Phase 3 study in which monotherapy with KEYTRUDA improved progression-free survival as compared to standard chemotherapy in the first-line treatment of patients with unresectable or metastatic colorectal cancer, whose tumors had demonstrated deficiency in mismatch DNA repair or evidence of DNA microsatellite instability, the so-called MSI-high phenotype. The study will continue as is customary to permit evaluation of an overall survival endpoint once the data are mature. Most will recall that in 2017 we gained the very first approval of a tumor-agnostic PD-1 directed therapy indication with the identification completed in collaboration with colleagues at Johns Hopkins University of MSI-high status as a biomarker for tumor responsiveness. At the end of the first quarter, we also received priority review from the FDA for what we regard as a second potential tumor-agnostic indication, the use of KEYTRUDA in certain patients whose tumors have a high mutational burden that is greater than or equal to 10 mutations per megabase of DNA, irrespective of tumor type. We look forward to presenting all of these data at upcoming scientific meetings and in peer-reviewed journals. As I've indicated, we are also engaged in discussions with regulatory agencies regarding these data. Finally, we announced last week that based on discussions with the FDA, we have responded to their prior Complete Response Letter and have resubmitted our application for approval of the use of KEYTRUDA in a 400 milligram every six weeks dosage form across all indications in adults, based both upon modeling information and new data that have emerged from our KEYNOTE-555 study, which will be discussed in part at the American Association for Cancer Research Meeting later today. We've also seen important progress in our partnership with AstraZeneca of Lynparza our leading PARP inhibitor. Just last week, we announced new results from a key secondary endpoint of our PROfound trial, which shows statistically significant improvement in overall survival in men with metastatic castration-resistant prostate cancer, whose tumors have mutations in the BRCA1, BRCA2 genes or the ATM gene, all of which are important for homologous recombination related DNA repair, following treatment of Lynparza as compared with abiraterone or enzalutamide therapy. The result provides yet another example of the benefit of Lynparza therapy in patients whose tumors have defined DNA repair mutations. I’ll remind you that we presented primary data from the PROfound studies at the European Society for Medical Oncology Meeting in October of 2019. We expect the details of the PROfound study, though not those just announced, will be published in a top-tier medical journal in the very near future, perhaps this week. I should also note with respect to Lynparza that our PAOLA-1 study, a Phase 3 trial examining the combination of Lynparza plus bevacizumab versus bevacizumab alone in the first-line maintenance treatment of women with advanced overall ovarian cancer is under review by the FDA for the PDUFA date in the second quarter. I cannot complete our survey of important results in tumor therapy without mentioning the approval two weeks ago of Koselugo, known generically as selumetinib, which is the first selected therapy approved for patients with neurofibromatosis type 1 who are suffering from symptomatic, inoperable plexiform neurofibromas. The approval of Koselugo is part of our longstanding collaboration with colleagues at AstraZeneca, who first identified this important next signal transduction inhibitor. Beyond oncology, we also advanced important programs in other therapeutic areas. Earlier in the quarter, we had the opportunity to present the results of our Phase 3 VICTORIA study performed in collaboration with colleagues at Bayer which demonstrated that vericiguat, an investigational soluble guanylate cyclase agonist, provided benefit as judged by composite endpoints including heart failure hospitalization or cardiovascular death as compared with placebo, when given as add-on therapy to well-treated patients with established heart failure with reduced ejection fraction who had suffered a worsening event. This represents the first study of its kind in the population at very high risk for further cardiac complications. The data were published in the New England Journal of Medicine and presented virtually at The American College of Cardiology Meeting just last month. Also during the quarter, we announced that in our Phase 3 program, gefapixant, our investigational P2X3 antagonist reduced the 24-hour cough frequency in patients with longstanding chronic cough. Details of these results will also be published and presented in the not too distant future. Finally, in the metabolic disease area, we have just announced results for the Phase 3 VERTIS CV cardiovascular outcomes trial. In this study conducted jointly by Merck and Pfizer, compared administration of STEGLATRO, an oral sodium-glucose cotransporter 2 or SGLT2 inhibitor, versus placebo in the treatment of patients with type 2 diabetes and established atherosclerotic vascular disease, and achieved its primary endpoint of non-inferiority for major adverse cardiovascular events. These events were defined as time to the first event of CV death, non-fatal myocardial infarction, or non-fatal stroke. The key secondary endpoints of superiority for STEGLATRO versus placebo for time to the composite of CV death or hospitalization for heart failure, CV death alone, and the composite of renal death, dialysis/transplant or doubling of serum creatinine from baseline were not met. While not a pre-specified hypothesis for statistical testing, a reduction in hospitalization for heart failure was observed with STEGLATRO. The safety profile of STEGLATRO was consistent with that reported in previous studies. Detailed results of VERTIS CV are scheduled to be presented on June 16th at the virtual American Diabetes Association’s 80th Scientific Session. I will now describe activities during the past quarter directed at developing treatments that could have an impact on the course of the COVID-19 pandemic. As a leading vaccine manufacturer for more than 100 years, it is no surprise that we have embarked upon a broad-based development program for SARS-CoV-2 vaccine. Let me put these results in the proper context. Vaccine development is extraordinarily difficult and customarily requires many years of investigation. As others have noted during the past quarter century, despite enormous efforts, there have been only seven vaccines directed against previously unaddressed human pathogens that earned registration. Four of these seven were developed by Merck Research Laboratories. And so we have relevant experience in this area. ERVEBO, our most recent vaccine, which has been demonstrated to provide protection from the Zaire strain of Ebola virus, was developed rapidly and under emergency use authorization to help address outbreaks in West Africa. Nevertheless, there required a multiyear development program and involved building a factory that we're proud to say can produce 1 million doses of vaccine per year. The development and registration of ERVEBO required the efforts of hundreds of our employees as well as an extraordinary commitment from the World Health Organization and then from healthcare workers in Guinea, Sierra Leone, the Democratic Republic of the Congo and many other jurisdictions. With the COVID-19 pandemic, however, we are tasked with creating a completely new vaccine in 1/10th the time that we devoted to ERVEBO, and we must plan to manufacture this vaccine at 1,000 times the scale. We approached this challenge with enthusiasm but also with humility. We know from long experience that creating safe and effective vaccines typically requires decades of efforts and investment. We're mindful of the imperative to act with speed indeed with urgency. Based on the progress that we have made, I will say that I am optimistic that a vaccine capable of inducing a potent neutralizing immune response to SARS-CoV-2 can be invented. But it's also critical to develop a comprehensive understanding of this particular coronavirus which will allow us to design, develop, and ultimately to manufacture vaccine that can be deployed globally. With this in mind, we have first supported efforts to characterize effective immune responses to SARS-CoV-2 infection. As we announced yesterday, we have partnered with scientists at the Institute for Systems Biology, Swedish hospital, and the Providence health system, all in Seattle, with Stanford University and numerous others to collect cells in sera over multiple time points from patients diagnosed with COVID-19. Data derived from these analyses will be made available to researchers worldwide, and will position us to decipher correlates of immunity to this coronavirus. With respect to the vaccines themselves, we have been thoughtful in selecting proven platforms that we’ve used to generate vaccines with desirable qualities in the past. Of course, in light of my prior comments regarding the difficulty of developing successful vaccines, I cannot guarantee to you that any of these approaches will prove effective in the near term. However, you should have no doubt that scientists in our own laboratories and those of our collaborators are committed to this process. We've also worked to identify internal resources that can support the manufacture of these potential new vaccines at an appropriate scale. And we are in discussions with contract manufacturers who could assist in what would surely rank as the most challenging vaccine production initiative ever undertaken. Beyond our search for vaccines, we are also engaged in studying potential antiviral drugs that could be deployed more rapidly. Here too we have evaluated compounds in our own laboratories, and have identified programs at other laboratories that could prove beneficial. Time does not permit me to describe these programs in detail. Instead, I would like to mention that the global community of biopharmaceutical companies has been very open to collaboration to address this challenge. Within MRL, we are trying to help as many of our colleagues as we possibly can, both through the active consortium led by the National Institutes of Health and also through interactions with many companies large and small, that have contacted us for advice and assistance with their own programs. I will close by emphasizing that at Merck our mission is to translate breakthrough research into medicines and vaccines that improve and extend life. This mission has never seemed more vital than it does today. I wish to express my gratitude to all of my colleagues here at Merck for working tirelessly in pursuit of a means to ameliorate the COVID-19 pandemic. I'll now return the call back to Peter.

Peter Dannenbaum, Vice President of Investor Relations

Thank you, Roger. Jerome, while you line up the queue, I just want to remind everybody. Our front comments went a bit longer than normal today. We're prepared to go past 09:00 o'clock. But we do ask that you limit yourself to one or two questions so we can get as many questioners in as possible. So, thank you. Jerome, if you can line up the queue, please.

Operator, Operator

Our first question comes from the line of Terence Flynn with Goldman Sachs. You may now ask your question.

Terence Flynn, Analyst

Maybe two for me. Just wondering, I know you commented a little bit on this. But in terms of the environment and your approach to capital allocation, I know you've called out no further share repurchases. So can you just give us any more detail, the main driver there, is that you see an increasing number of M&A or BD opportunities now in this environment? And the second, I was just wondering with respect to the pharma guidance, specifically, the new guidance. Can you give us any more detail on the pacing of the impact? I'm assuming the majority of that's going to occur in the second quarter. And then can you break that down by product meaning how much was KEYTRUDA versus GARDASIL versus others? Thank you.

Rob Davis, Chief Financial Officer

With regard to maybe the second question first, the pharma guidance is, the majority of that will hit in the second quarter and the majority of it is in the United States. And maybe I'll turn it over to Frank to give you some of the more specifics on product detail before coming back to the first question.

Frank Clyburn, Chief Commercial Officer

Yes. So, in the second quarter, we do anticipate vaccines in particular. It's important to note that we have a very broad vaccine portfolio that ranges from infants, all the way to older adults. And we do anticipate that based on well visits being down approximately 70% that, that will impact our vaccine portfolio. Also in the hospital specialty area, BRIDION, as I mentioned, elective surgeries are down approximately 70%. So we do see an impact there. It's important to note, we have a significant product IMPLANON/NEXPLANON, which requires physician administration. We think there'll be an impact during the second quarter. And then as far as oncology goes, overall, we believe that oncology is pretty resilient. We are seeing new patient visits decline by approximately 10% to 20%, depending on the indication, and we think that will have a slight impact in the quarter from a new patient perspective, but feel very confident as we move into the third and fourth quarter for not only oncology, but for the rest of our portfolio. Rob?

Rob Davis, Chief Financial Officer

Thank you, Frank. And then on your question about the share repurchase program, just to be clear, and I had it in the prepared remarks, but it's worth reinforcing. We really decided to temporarily stop the share repurchase program predominantly out of an abundance of caution. Our financial position continues to be strong. And as we said, it really was to make sure that we can continue to do all of the investments we want to do in R&D and CapEx to support our future growth, and in business development, as you asked. So it's really across all those areas that we want to make sure we can prioritize investment. And we will continue to look at it and very well could reinstate the share repurchase as we see the situation evolve in the marketplace.

Peter Dannenbaum, Vice President of Investor Relations

Thank you. Next question?

Operator, Operator

Your next question comes from the line of Chris Schott with JPMorgan. You may now ask your question.

Chris Schott, Analyst

Just to follow up on the vaccine commentary, can you just talk a little bit more about how you see that business normalizing? This sounds like clearly the 2Q trends are going to be depressed. So should we think about a catch-up in 3Q and 4Q as wellness visits return, or is it just more like normalized volumes, and we shouldn't expect as much of a catch-up, I guess, specifically on that line? The second question which is a bigger picture question about we're clearly seeing high unemployment rates, and what more broadly does that mean for Merck's business? Should we be thinking about lower prices and adverse payer mix as representing a headwind to your business as we look beyond some of these near-term COVID disruptions, or is that a manageable kind of dynamic as we think about the longer-term business? Thank you very much.

Frank Clyburn, Chief Commercial Officer

Hi Chris, it's Frank. Thanks for your question. I'll address your second question regarding payer mix and its impact first. In the U.S., our mix reveals that approximately one-third of our business comes from the commercial sector. It's also important to highlight that around 17% of our mix is from vaccine private pay, largely due to the significant size of our vaccine portfolio. Government payers represent about half of our overall payer mix, with around 26% to 27% of that being related to KEYTRUDA under Medicare Part B. As KEYTRUDA continues to expand, we expect that segment to grow over time. Medicare Part D accounts for about 7%, and we have a small percentage of our business in Medicaid. The rest of our payer mix consists of various federal programs and other categories. Medicaid is quite minimal for us. We're keeping an eye on unemployment rates and will monitor developments closely. At this point, it's premature to make assumptions. However, we've factored in different scenarios into our guidance in anticipation of potential increased unemployment. Particularly, Medicaid remains a small component of our business. Regarding vaccines, as we approach the end of the second quarter and into the third quarter, we anticipate that infants and young children who have missed vaccinations during the COVID-19 pandemic will be prioritized first. We expect a strong comeback in adult pneumococcal vaccinations as we enter flu season, while adolescents and young adults may return at a slower pace as they re-engage with healthcare systems.

Peter Dannenbaum, Vice President of Investor Relations

Great. Next question please?

Operator, Operator

Your next question comes from the line of Tim Anderson with Wolfe Research. You may now ask your question.

Tim Anderson, Analyst

Yes, thank you. So I'm sure it does not go unnoticed by you that Merck so far is the only company to lower guidance, but we're maybe only halfway through. We saw companies reporting. And I'm just really trying to tease out what else beyond product mix could be driving that. Is that you guys running your supply chain narrower or you’re less able to kind of manage business from a work-from-home environment? Could it be that you’re possibly more conservative, for example, you're pausing share buybacks? In Merck, I think there's been a pretty strong cash position. You have a slowdown in brands, but I would think also you have a slowdown in spending that you could find as an offset kind of again mirroring what other companies are seeming to be able to pull off in their guidance. So, I don't know if there's anything else that you can add beyond what you said, but it just strikes me as odd. Second question is on KEYTRUDA and a big industry overhang is data from Roche, a good oncology company; it's randomized Phase 2, its first-line lung that’s coming up here at ASCO most likely, and we know they're pushing into Phase 3. And so I'm wondering, how is this not going to be a continual variable for American investors? As part of that, if you can just update us on your own TIGIT program which I know is earlier.

Ken Frazier, Chairman and Chief Executive Officer

I think we'll start with Rob and then turn it over to Roger for TIGIT.

Rob Davis, Chief Financial Officer

Thanks, Tim, for your question. So if you look at why we lowered guidance, and understand, again, the profile of our business, I think it's really important that we just really hit this home. It is the fact that we are seeing reduced access is what's driving the reduction in guidance. Because of the fact, as Frank said, two-thirds of our products are physician-administered, and that is probably somewhat unique and is causing the impact. And as we said, while we expect to get back to normal by the time we get to the fourth quarter, because we're going to see a large impact mainly in the second quarter, a little bit in the third, that second-quarter impact largely carries to the year and it's really what's driving it. The other thing to point out is our Human Health reduction is only a little over half of what's driving the reduction in our guidance. It's actually almost half of it is coming from foreign currency, and the fact that we have the impact in Animal Health. And if you look at it, the impact in Animal Health is actually more significant than it is in the Human Health business. So that is also a little bit of a differentiation relative to some of our peers. And if you look then at how does that translate down to the bottom line, what you see is actually for the full year, we're actually bringing down OpEx more than what is the impact of just COVID-19 reductions in spend. Some of that is also due to the way currency is flowing through our operating expense line, but then there is a little bit of incremental savings we also were assuming. I would say we didn't go harder at OpEx primarily because we don't see this as a demand-driven issue and we want to be in a position that as the market normalizes we can come back fully with our products. So we're expecting to continue to invest in research and development, R&D will continue to grow and we will continue to make selective investments to be prepared to come back strong, as we see the market normalize. And that's why we've not pulled down OpEx further. But you shouldn't read anything more into this than the mix of our business and the fact that the access is impacting our ability to deliver what we originally expected for the year. Roger on TIGIT?

Roger Perlmutter, President of Merck Research Labs

Let me discuss the combinations with KEYTRUDA more broadly. Since I started working with the KEYTRUDA program in 2013, we have explored a variety of combinations with different agents. This exploration led us to partner with AstraZeneca on Lynparza and with Eisai on Lenvima. We have also developed a number of internal programs that use KEYTRUDA in various clinical studies, including those involving TIGIT and several other advanced biologicals. I have previously mentioned that we have impressive data for some of these combinations, particularly with Lenvima, which has received registration for endometrial cancer, and we have already shared data for the combination in renal cell carcinoma. Additionally, we are seeking meaningful effects with the biologicals that can significantly enhance efficacy while maintaining the favorable profile that KEYTRUDA has shown. We are making good progress and look forward to the development of these agents as they unfold. We will also be monitoring the actions of others in the field. Overall, I believe we are in a strong position.

Peter Dannenbaum, Vice President of Investor Relations

Next question please?

Operator, Operator

Your next question comes from the line of Mara Goldstein from Mizuho Securities. You may now ask your question.

Mara Goldstein, Analyst

Just a little bit more on currency, if you don't mind. And I'm just curious as you think to how you made these adjustments for currency, can you possibly give us some more granularity on what is a contracted issue versus what is actually a country-by-country swing in currency? And then secondarily, can you just confirm the timing of the split-off given everything that's going on from a COVID perspective?

Rob Davis, Chief Financial Officer

On a currency basis, the reduction we are seeing is solely due to changes in exchange rates observed in mid-April. We used those mid-April rates for our projections for the entire year. The dollar has strengthened significantly against nearly every currency, as investors have sought the dollar for its perceived stability and safety, which is affecting our results across all currencies. Additionally, we are facing challenges in hedging as much as we typically do because of substantial impacts in emerging market currencies, which we are not currently hedging. This situation is fully responsible for the $750 million reduction we mentioned in our guidance. Regarding the timing of the spin-out, as Ken noted earlier, we still anticipate completing the spin-out in the first half of 2021, which aligns with our guidance from last quarter.

Peter Dannenbaum, Vice President of Investor Relations

Great. Next question please?

Operator, Operator

Your next question comes from the line of Navin Jacob with UBS. You may now ask your question.

Navin Jacob, Analyst

Navin from UBS. Roger, I have a question regarding your COVID-19 vaccine program. It was interesting to hear you say that you've opted for proven platforms. Could you share your views on some of the newer platforms like mRNA and why you may or may not consider them? Additionally, I would like your perspective on using neutralizing antibodies as a treatment or preventive measure. Related to that, how do you view the potential impact of mutations in the spike protein in terms of selective pressure, and how does that influence your choice between proven and novel platforms? Thank you.

Roger Perlmutter, President of Merck Research Labs

Thank you very much for the question. We are exploring all possible methods to mitigate the impact of the COVID-19 pandemic and are in discussions with various organizations engaged in diverse approaches. This includes both passive immunization using antibodies and alternative methods for active immunization that can be rapidly deployed in clinical settings, such as nucleic acids, particularly mRNA. We have a strong history of collaboration with those working in these areas. However, we believe that creating a vaccine that effectively stimulates the immune response and produces neutralizing antibodies, ideally from a single dose, is a significant challenge. Safety is paramount, as this vaccine would need to be distributed to a large portion of the global population. Given that we believe nearly everyone is susceptible, these requirements set a high bar. Therefore, we prefer to rely on proven vaccine platforms that meet these criteria. Over time, we anticipate that a combination of vaccines will be necessary to protect the population against SARS-CoV-2. Regarding neutralizing antibodies administered as passive vaccination, we are investigating this approach, especially for individuals at high risk due to age or underlying health issues. However, using this method as a widespread solution may be logistically challenging. That said, we are open to collaborating with others to advance it if it becomes essential. Lastly, while there is currently limited variation in the SARS-CoV-2 virus, we must be cautious about the potential for emerging variants when we apply selective pressure through antiviral treatments or vaccines. It is something we are monitoring closely.

Peter Dannenbaum, Vice President of Investor Relations

Thank you. Next question please?

Operator, Operator

Your next question comes from the line of David Risinger with Morgan Stanley. You may ask your question.

David Risinger, Analyst

Yes, thanks very much. I have two questions for Roger please. To follow on to your remarks regarding COVID, could you please comment on the potential to; one, inject disinfectants; and two, to use UV rays inside the body to cure COVID. No, I'm just kidding, I'm sorry. So on a more serious note, could you discuss Merck's novel I/O agent readouts to watch in 2020? And second, could you discuss your conviction in the profile of Merck's 15-valent pneumococcal conjugate vaccine and your disclosure in adult filing plans? Thank you.

Roger Perlmutter, President of Merck Research Labs

Yes, David. Regarding novel immuno-oncology agents, I have mentioned this before in response to an earlier question, but we have several of them. We are looking at our own CTLA-4 molecule, which we have been exploring for some time in combination with KEYTRUDA. We are also investigating LAG-3, TIGIT, and various other agents. We have approximately 20 agents that have been tested in the clinic, and all of these are being evaluated both as monotherapies and in combination with KEYTRUDA. However, I want to emphasize that KEYTRUDA is quite exceptional. We haven't encountered anything that possesses similar characteristics to KEYTRUDA. If we did, it would change the narrative significantly. This isn't surprising, as we and many other researchers, including those at universities, have searched for such options for decades without success in finding anything resembling KEYTRUDA. It's unlikely that we'll suddenly discover something now that we haven't found in the past. That said, combinations of these agents with KEYTRUDA could potentially be advantageous, and we are observing early indications that suggest this is possible. We will provide more information about this in the coming year. The second question was about our confidence in our 15-valent molecule V114 for invasive pneumococcal disease. We have a strong belief in it. We have already shared our Phase 2 data, which everyone has had the opportunity to review. The Phase 3 data will be available to us very soon. Once those data are available, and assuming the Phase 3 results reflect what we observed in Phase 2, which is our hope and expectation, we will announce the top-line results and provide more details about our filing plans. We anticipate that the filing could happen soon thereafter. We are very optimistic about this vaccine because of the important new serotypes it covers and the immune response balance we observed in our V114 Phase 2 studies.

Peter Dannenbaum, Vice President of Investor Relations

Great. Thank you. We have a number of questioners still in the queue. We're going to stop at 9:15, but we're going to keep going for now. Next question please?

Operator, Operator

Your next question comes from the line of Andrew Baum with Citi. You may now ask your question.

Andrew Baum, Analyst

So a question for Roger on TIGIT, you've clearly seen efficacy signals from your trial activity. Genentech has noted is seeing strong efficacy signals in a PD-L1 High. So is the central reason before accelerating any Phase 3 program, whether TIGIT is additive or synergistic to chemo in patients with low PD-L1 expressing tumors, or is there some other hurdle which is holding you back? And on the same note, I mean how do you view the commercial risk/reward of taking further time optimizing the patient population at the expense of potentially disadvantaging yourself by giving Roche more lead time should that Phase 3 program in first-line non-small cell lung in combination with chemo pans out? That's first question. And the second question very quickly to Frank, you've discussed the fairly obvious impact of delayed presentation to healthcare providers for third-party administered pharmaceuticals. Could you talk to how you think about in the U.S., the commercial impact associated with rising insurance rates associated with unemployment? I realize that you have far less exposure than some of your peers, but I'm interested in your thoughts generally, but obviously it does relate to things such as Diovan as well, which, you tell have commercial exposure. Thank you.

Ken Frazier, Chairman and Chief Executive Officer

Great, Roger, first on TIGIT, and then we'll turn it to Frank.

Roger Perlmutter, President of Merck Research Labs

Thank you for the question, Andrew. Regarding TIGIT, different companies may have varying views on this topic. Our perspective is straightforward, and I wouldn't overthink it. We are looking for clear evidence that demonstrates benefit when combined, ensuring that both components, which in our case are KEYTRUDA and the anti-TIGIT antibody, are contributing. This principle also applies to LAG-3, CTLA-4, and others. We aim for at least an additive effect, with the possibility of achieving more than that if feasible. It's essential for us to confirm this and also to ensure we are targeting the appropriate patient populations. Additionally, we need to maintain the positive adverse experience profile of KEYTRUDA. Ultimately, we need to reach a conclusion on this matter. We might decide that the results are not sufficient for various reasons, or conversely, we could determine that this is significant enough to proceed. We have several programs under evaluation, and while we are finding some intriguing data, we currently lack enough evidence to feel confident. Others might interpret the data differently and advocate for immediate action. We are committed to doing what we believe is right in this context.

Frank Clyburn, Chief Commercial Officer

And Andrew, I think we're all concerned obviously about what we're seeing in the U.S. with regards to rising unemployment. As I mentioned earlier, for us, we'll have to see the shift potentially from our commercial business over to higher discounted segments like Medicaid. But just to reiterate again, Medicaid is a very small portion of our business currently, and as we look going forward, our business and payer mix is more geared toward Medicare, and in particular, Part B Medicare.

Peter Dannenbaum, Vice President of Investor Relations

Great. Next question please?

Operator, Operator

Your next question comes from the line of Seamus Fernandez with Guggenheim. You may now ask your question.

Seamus Fernandez, Analyst

Thank you for the question. I'd like to address a couple of points. First, could you provide insight into Merck's current 340B exposure? We know this is a hospital-based program and it could potentially shift to Medicaid-based pricing, so it would be helpful to understand your views on this exposure. Secondly, Roger, can you explain what makes Lenvima unique or special that has led Merck to undertake such an extensive effort when others with similar TKIs have not? This is particularly interesting given the relatively short patent life of Lenvima. Thank you.

Frank Clyburn, Chief Commercial Officer

Yes, Seamus, if you look at 340B, the majority of the exposure is for products like JANUVIA and also KEYTRUDA. For KEYTRUDA, about a third is within that 340B segment currently. It has been growing slightly year-on-year, and we'll need to see how things continue to develop in the environment. It's something we are closely monitoring.

Ken Frazier, Chairman and Chief Executive Officer

Great, Roger, on Lenvima?

Roger Perlmutter, President of Merck Research Labs

We are quite data-driven in our approach. Initially, we were optimistic about Lenvima based on the monotherapy data from our colleagues at Eisai, and we believed there was potential for a beneficial combination with KEYTRUDA. We conducted some experiments in collaboration with them and proceeded to sign our agreement. Upon doing so, we decided to conduct a signal detection study across a wide array of tumors. This study revealed several intriguing signals. While we explored other combinations with multi-kinase inhibitors, the results we've seen with KEYTRUDA have been particularly impressive. It's important to note that each multi-kinase inhibitor operates differently, affecting various molecules in distinct ways. Consequently, it's challenging to pinpoint the reasons behind these effects, whether they relate to VEGF receptor antagonism or FGF receptor interactions. Nevertheless, what is clear is that the outcomes we have achieved with Lenvima are very promising. We are very enthusiastic about moving forward with this program, especially in areas like endometrial cancer, renal cancer, and several others.

Peter Dannenbaum, Vice President of Investor Relations

Great. Thank you all for your questions and apologies to those we didn't get to. I'm going to turn it over to Ken for closing remarks.

Ken Frazier, Chairman and Chief Executive Officer

Thank you everyone for joining us today. Our mission to save and improve lives will continue to drive the Company in the coming days and months in the midst of the coronavirus pandemic. Merck is committed to doing everything in its power to ensure our medicines and vaccines reach patients around the world and we expect to contribute to the global pandemic response efforts today and also to prepare for the next potential crisis. The underlying demand for our products remains strong and our fundamentals remain very sound. In the near term, I reiterate, our portfolio is different, and as a result, our near-term guidance takes into consideration what's really happening in the outside world in an attempt to be realistic about physicians and their ability to access patients. But in the final analysis, we believe that our underlying business fundamentals are very sound going forward, and we look forward to providing updates on the business as we continue to navigate through these challenging times. And until then, we hope that you and your families stay safe and healthy. Thank you.

Peter Dannenbaum, Vice President of Investor Relations

Thank you.

Operator, Operator

Thank you, presenters. And thank you, ladies and gentlemen, for joining Merck & Company first quarter sales and earnings conference call. That concludes this conference. Thanks all for joining. You may now disconnect.