Aug 02, 2017

Zacks Rank 3-Hold Merck & Co., Inc.(NYSE: MRK)

$63.92 USD ( As of 08/01/17 ) Style:Value: Growth: Momentum: VGM:

Data Overview Summary

52 Week High-Low $66.58 - $57.65 Merck’s beat estimates for both earnings and sales in Q2 mainly backed by strong sales of PD-1 inhibitor, Keytruda. Merck has made significant progress with its 20 Day Average Volume 8,449,230 pipeline and is working on bringing new products to the market. New products like Beta 0.80 Keytruda and Zepatier should continue to contribute meaningfully to the top line. Market Cap 174.83 B Keytruda is gaining strong momentum from new indication of first-line lung cancer. Dividend / Div Yld $1.88 / 2.94% The Keytruda development program also significantly advanced in the first half with several key regulatory approvals. Further Keytruda data readouts are pending in 2H. Industry Large Cap Pharmaceuticals Meanwhile, Merck will continue to focus on cost-cutting initiatives to drive the bottom Industry Rank 101 / 265 (Top 38%) line. Merck’s shares surpassed the large-cap pharma industry in the past one year. Current Ratio 1.59 However, generic competition for several drugs and pricing pressure will continue to Debt/Capital 36.89% be overhangs on the top line. Rising competition in the immuno-oncology market is also a significant concern. Net Margin 17.14%

Price/Book (P/B) 4.37

Price/Cash Flow (P/CF) 19.32 Elements of the Zacks Rank

Earnings Yield 6.04% Agreement Estimate Revisions (60 days) Debt/Equity 0.58

Value Score 100% 80% 80% 63% P/E (F1) 16.57

P/E (F1) Rel to Industry 9.13 Q1 (Current Qtr) Q2 (Next Qtr) F1 (Current Year) F2 (Next Year) PEG Ratio 2.94 Revisions: 5 Revisions: 5 Revisions: 5 Revisions: 8 P/S (F1) 4.34 Up: 0 Down: 5 Up: 1 Down: 4 Up: 4 Down: 1 Up: 5 Down: 3

P/S (TTM) 4.37 Magnitude Consensus Estimate Trend (60 days) P/CFO 19.32

P/CFO Rel to Industry 21.79

EV/EDITDA Annual 18.12

Growth Score

Proj. EPS Growth (F1/F0) 2.33% 60 30 7 Current 60 30 7 Current 60 30 7 Current 60 30 7 Current Days Days Days Days Days Days Days Days Days Days Days Days Hist. EPS Growth (Q0/Q-1) 2.12 Q1 -3.74% Q2 -3.88% F1 +0.26% F2 -0.95% Qtr CFO Growth -37.78

2 Yr CFO Growth 336.52 Upside Zacks Consensus Estimate vs. Most Accurate Estimate Return on Equity (ROE) 25.85%

(NI - CFO) / Total Assets -2.27

Asset Turnover 0.41

Momentum Score Most Accurate: 1.03 Most Accurate: 0.98 Most Accurate: 3.87 Most Accurate: 4.16 Zacks Consensus: 1.03 Zacks Consensus: 0.99 Zacks Consensus: 3.86 Zacks Consensus: 4.18 1 week Volume change 25.79% Q1 0.00% Q2 -1.01% F1 0.26% F2 -0.48% 1 week Price Cng Rel to Industry 6.36%

(F1) EPS Est 1 week change 0.12% Surprise Reported Earnings History (F1) EPS Est 4 week change 0.26%

(F1) EPS Est 12 week change 0.73%

(Q1) EPS Est 1 week change -2.99%

Reported: 1.01 Reported: 0.88 Reported: 0.89 Reported: 1.07 Average 4 Qtr Surprise Estimate: 0.87 Estimate: 0.83 Estimate: 0.88 Estimate: 0.98 Q End 06/17 Q End 03/17 Q End 12/16 Q End 09/16

© 2017 Zacks Investment Research, All Rights Reserved 10 S. Riverside Plaza Suite 1600 · Chicago, IL 60606 The data on the front page and all the charts in the report represent market data as of 08/01/17, while the reports text is as of 08/02/2017 Overview Based in Kenilworth, NJ, Merck & Co., Inc. is a global research- driven pharmaceutical products company. In 2009, Merck acquired Schering-Plough for $41.1 billion. Well-known products in Merck’s portfolio include Remicade (Immunology), Vytorin and Zetia (Cardiovascular), Januvia and Janumet (Diabetes), Isentress, Cubicin, Bridion and Zepatier (Hospital and Specialty), Temodar and Keytruda (Oncology), Cozaar/Hyzaar, Nasonex, Singulair, Fosamax, Zocor (Diversified Brands), ProQuad, Gardasil, RotaTeq, and Zostavax (Vaccines), and NuvaRing, Follistim AQ, Implanon, and Dulera (General Medicine and Women’s Health).

Merck is evaluating strategic alternatives for certain parts of its business so that it can streamline operations and focus on certain therapeutic areas. The company sold off its Consumer Care business to Bayer for $14.2 billion in Oct 2014. Meanwhile, Merck acquired hepatitis C virus (HCV) focused company Idenix Pharmaceuticals in Aug 2014. In Jan 2015, Merck acquired Cubist Pharmaceuticals Inc. and added four marketed products including Cubist’s potential blockbuster antibiotic drug, Cubicin, and Zerbaxa, to its hospital acute care portfolio. In Jul 2016, Merck acquired private pharma company, Afferent. This acquisition added Afferent’s lead pipeline candidate, MK-7264 (formerly AF-219 - chronic cough and idiopathic pulmonary fibrosis (IPF) with cough), to Merck’s portfolio.

In Jul 2017, Merck announced an oncology collaboration with AstraZeneca to jointly commercialize and develop the latter’s PARP inhibitor, Lynparza and another oncology candidate, selumetinib, both as monotherapy and in combination studies with Keytruda, for multiple cancer types.

Merck reported sales of $39.8 billion in 2016, up 1%. While the Pharmaceuticals segment accounted for 88% of total sales, Animal Health products generated 9% of total revenue.

Zacks Equity Research: MRK www.zacks.com Page 2 of 10 Reasons To Buy: Shares Outperforming Industry: Merck’s shares are up 10.9% in the past one year Cost-control, share against a decrease of 1.8% recorded by the industry. buybacks and contribution from new products should Cost-Cutting Initiatives to Drive Bottom-Line: In Oct 2013, Merck launched a strategic help combat the impact of initiative to streamline its business. The company generated net cost savings of more genericization of key than $2.5 billion in 2015 primarily by reducing marketing and administrative and R&D products. expenses.

Merck has another global restructuring program in progress, which is aimed at reducing the cost structure and increasing efficiency. It intends to reduce the number of manufacturing sites, including animal health sites, and consolidate other facilities. The company expects annual savings of about $4.0?$4.6 billion once the restructuring program is completed.

Merck also divested segments like the Consumer Care business so that it can focus on its core areas of expertise. The company is also returning value to shareholders in the form of share buybacks and dividends.

Impressive Pipeline: Merck has many pipeline candidates in advanced stages of development targeting multiple disease areas such as atherosclerosis, cancer, diabetes, and cardiovascular diseases. Merck has more than 10 candidates (including Keytruda) in phase III development. The company has prioritized its pipeline so that the candidates with the highest potential get the required support. Some of the important pipeline candidates include MK-0859 (anacetrapib - cholesterol management - phase III), verubecestat (prodromal Alzheimer’s disease - phase III), MK-8228/letermovir (cytomegalovirus (CVM) infections; under priority review in the U.S. – PDUFA date Nov 8), doravirine (HIV – NDA filing expected in fourth quarter of 2017) and MK-8835/ertugliflozin (type II diabetes, monotherapy and two fixed-dose combinations with metformin and with Januvia/sitagliptin under review in the U.S. and EU).

Pursuing Deals to Boost Portfolio: Merck, in order to build its long-term portfolio, is tapping external sources as well. The company entered into several licensing deals in the past few of years and targets more such deals in the future. The company’s acquisition of Idenix provided a significant boost to its HCV pipeline. The Jul 2016 acquisition of Afferent added MK-7264 (formerly AF-219) to its portfolio. MK-7264 is in a phase IIb study for the treatment of refractory, chronic cough as well as a phase II study in idiopathic pulmonary fibrosis (IPF) with cough.

Meanwhile, the Jul 2017 profit sharing deal with AstraZeneca adds two late-stage assets Lynparza/selumetinib) to its oncology pipeline.

Recent Product Approvals to Boost Revenues: New products are performing well. Products that should contribute significantly to revenues include Keytruda (cancer), Elonva (fertilirt drug), Simponi (treatment of certain inflammatory diseases), Dulera (asthma), and Daxas (chronic obstructive pulmonary disease) among others. Recently approved products include Zinplava (bezlotoxumab; c. difficile infection recurrence) Zepatier (HCV), Zontivity (anti-thrombotic), Belsomra (insomnia), Zerbaxa (antibiotic), Grastek, and Ragwitek.

Keytruda is the first anti-PD-1 therapy to gain FDA approval and is being studied for more than 30 types of cancer in more than 550 studies, including more than 300 combination studies. Keytruda sales are gaining strong momentum with approval for additional indications especially in the first-line lung cancer setting. In fact, Keytruda is continuously growing and expanding into new indications and markets globally. In Mar /Apr 2017, Keytruda received FDA and EU approval for refractory classical Hodgkin lymphoma (cHL) - the first Keytruda approval for hematologic malignancy indication. In May, Keytruda was approved as first-line combination therapy for lung cancer – its first FDA approval as a combination therapy.

Focus on Biosimilars & Emerging Markets: Merck aims to increase its presence in emerging markets. To fulfill its objective, the company plans to launch new products, successfully market its current portfolio of drugs and vaccines and leverage the market for branded generics.

Merck's portfolio, consisting of products such as Januvia, NuvaRing, Claritin and Zocor, can play an important role in addressing some of the major challenges in emerging markets – cardiovascular disease, diabetes and women's health.

Merck is also looking toward biosimilars to drive long-term growth. The biosimilars market represents huge commercial opportunity. Merck has an agreement with Samsung Bioepis Co., Ltd. for the development and commercialization of several pre-specified and undisclosed biosimilar candidates. The companies received tentative U.S. approval for the biosimilar version of Sanofi’s Lantus (MK-1293) in Jul 2017, though the biosimilar cannot be launched immediately. Biosimilar Lantus is already approved in the EU. Meanwhile, the companies launched a biosimilar version of blockbuster RA drug, Remicade in the U.S. in Jul 2017.

Reasons To Sell: Patent Expiry Hits Sales: Merck is facing generic competition for several drugs including Generic competition,

Zacks Equity Research: MRK www.zacks.com Page 3 of 10 Singulair, Maxalt, Propecia, Temodar, Cozaar/Hyzaar, Zocor and Fosamax. All these pricing pressure, pipeline drugs have recorded rapid and steep declines in revenues due to the presence of setbacks and negative generics. In 2016, key drugs like Nasonex, Cubicin and Zetia lost patent exclusivity, currency movement are which is hurting sales. In 2017, Merck has already lost market exclusivity in the U.S. for some of the headwinds Vytorin (in April) and sales of the drug are declining sharply. being faced by Merck.

Top-Line under Pressure: In addition to being impacted by the genericization of several products, Isentress is facing competitive pressure and is being impacted by slowing growth of the integrase class. Sales of Isentress declined 8% in 2016 and 10% in 2015. Meanwhile, biosimilar competition for Remicade in the EU has intensified, leading to pricing pressure. Remicade sales declined 29% in 2016 and 24% in 2015. Remicade sales are expected to continue declining rapidly in the coming quarters not just due to competitive pressures, but also as a result of patients switching to biosimilars.

Rising competition in the immuno-oncology market is also a significant concern.

Pipeline Setbacks: Merck has had its share of pipeline and regulatory setbacks. The company received another CRL for sugammadex (neuromuscular reversal agent) in 2015. Other setbacks include the discontinuation of vicriviroc (HIV), the termination of the development of acadesine (ischemia reperfusion injury in patients undergoing heart bypass surgery), as well as the discontinuation of the development of phase III candidates telcagepant (acute migraine), V710 (vaccine), preladenant (Parkinson’s) and MK-0431C (diabetes), odanacatib or MK-0822 (osteoporosis in post-menopausal women – Sep 2016). In Feb 2017, Merck discontinued a phase III study evaluating verubecestat for the treatment of mild-to-moderate Alzheimer’s disease due to lack of efficacy.

In July, a pivotal phase III study of Keytruda in HNSCC failed to meet the primary endpoint of overall survival. Also, three combination studies of Keytruda for multiple myeloma were placed on clinical hold following reports of death in the Keytruda groups in July. Keytruda is being seen as a key drug to drive long-term growth at Merck and such setbacks do not bode well for the company.

Repetition of such pipeline failures will weigh heavily on the stock.

FDA Warning Regarding Diabetes Drugs: In Aug 2015, the FDA issued a warning regarding DPP-IV inhibitors including Januvia. The FDA warned that the use of these medicines may cause joint pain that can be severe and disabling. A new Warning and Precaution section has been added to the labels of all medicines in this drug class. The addition of strict warnings to Januvia’s label could hurt sales. In Apr 2017, the FDA denied approval to include cardiovascular outcomes data on the labels of its diabetes drug, Januvia (sitagliptin) Janumet and Janumet XR. With death from cardiovascular disease being significantly higher in adults with diabetes compared to those without diabetes, the addition of positive cardiovascular outcomes data would have helped drive sales of these drugs. Moreover, with Lilly and Boehringer Ingelheim including the cardiovascular (CV) indication on the label of their SGLT-2 inhibitor, Jardiance, DPP-IV inhibitors like Januvia could see patients switching to SGLT-2 inhibitors. As it is, the Januvia franchise is also facing pricing pressure due to higher discounts and rebates to maintain good managed care coverage.

Global Pricing Pressures: Global efforts toward health care cost containment are creating pricing pressure on drugs and market access. The health care reforms in the U.S. have significantly increased the number of patients in the Medicaid program under which sales of drugs are subject to substantial rebates. In many markets outside the U.S., government-mandated pricing actions have led to lowering of generic and patented drug prices. All these factors are creating pressure on sales and profits of pharma companies.

Last Earnings Report Merck Beats on Second-Quarter Earnings and Sales, Keeps 2017 View Quarter Ending 06/2017

Report Date Jul 28, 2017 Merck reported second-quarter 2017 adjusted earnings (excluding acquisition and divesture related cost) of $1.01 per share, which easily beat the Zacks Consensus Estimate of $0.87 Sales Surprise 1.46% per share by 16.1%. Earnings also rose 8.6% (up 12% excluding Fx impact) from the year- EPS Surprise 16.09% ago period backed by higher sales and lower costs. Quarterly EPS NA Annual EPS (TTM) 3.85 Revenues for the quarter increased 1% year over year to $9.93 billion, beating the Zacks Consensus Estimate of $9.79 billion. Currency movement negatively impacted revenues by 1%. Excluding currency impact, sales rose 2% year over year.

Strong performance of new products like Keytruda, Bridion and Zepatier and higher sales of vaccines and animal health franchises offset lower sales of diabetes franchise and loss of market exclusivity for many drugs.

Quarter in Detail

The Pharmaceutical segment posted revenues of $8.76 billion, up 1% (up 2% excluding Fx impact) year over year mainly backed by strong sales Keytruda.

Keytruda brought in sales of $881 million in second-quarter 2017, up 51% sequentially and 180% year over year. Sales continued to be driven by launch of new indications globally.

Keytruda sales in the U.S. gained particularly from strong momentum in the new indication of first-line lung cancer. Lung cancer now

Zacks Equity Research: MRK www.zacks.com Page 4 of 10 contributes roughly half of Keytruda’s U.S. sales.

The Keytruda development program also significantly advanced in the first half with regulatory approvals for four new indications in the U.S. and an additional indication in Europe. Recent important approvals include that for advanced bladder cancer, advanced microsatellite instability-high cancers and first approval as a combination therapy with Eli Lilly’s cancer drug Alimta (pemetrexed) and carboplatin (pem/carbo), in lung cancer. For the Keytruda/Alimta combination, Merck said at the conference call that the feedback from oncologists was positive.

Outside U.S, Keytruda sales were primarily driven by the melanoma indication. Meanwhile, at the call, management said that lung cancer sales are becoming a larger contributor outside the U.S. with Keytruda now approved in first- and second-line lung cancer settings in more than 60 countries.

Zepatier brought in sales of $517 million, up from $378 million in the previous quarter, attributable to strong underlying demand trends in the U.S., Europe, and Japan. However, at the call, management warned that Zepatier uptake, going forward, may be impacted by the ongoing decline in overall patient volumes in many markets and increased competition.

Bridion (sugammadex) injection generated sales of $163 million in the quarter, up 44% year over year, driven by the continued strong uptake from launch in the U.S. as well as strong demand across ex-U.S. markets.

Meanwhile, combined sales of Remicade (lost exclusivity in Europe and facing stiff biosimilar competition in the region), Cubicin (lost patent protection in the U.S. in Jun 2016), Zetia (lost market exclusivity in the U.S. in Dec 2016) and Vytorin (lost U.S. exclusivity in Apr 2017) declined $830 million in the quarter.

Remicade sales declined 39% to $208 million in the quarter.

Cubicin sales plunged 71% to $103 million in the quarter. The Zetia/Vytorin franchise recorded sales of $549 million, down 45% due to loss of exclusivity for both Zetia and Vytorin.

Sales of Isentress and the Januvia/Janumet (diabetes) franchise also declined in the quarter. The Januvia/Janumet franchise recorded sales of $1.51 billion in the quarter, down 8% from the year-ago quarter due to lower sales in the U.S. as a result of pricing pressure and lower customer inventory levels.

Isentress sales declined 17% in the quarter to $282 million. Lower volumes/demand due to competitive pressure is hurting sales of Isentress.

Vaccine sales rose 11% to $1.1 billion, primarily driven by increases in Gardasil and Pneumovax vaccines. Vaccine sales were also boosted by the addition of approximately $70 million ($40 million from Gardasil) of sales from the terminated vaccine joint venture with Sanofi. Gardasil/Gardasil 9 sales climbed 19% to $469 million driven by strong demand in Asia Pacific and the favorable timing of sales in Brazil. Proquad, M-M-R II and Varivax vaccines, recorded combined sales of $399 million, up 4% year over year.

At the call, the company noted that it is beginning to see some impact on Gardasil/Gardasil 9 sales from the transition from 3-dose to a 2-dose regimen.

Merck’s Animal Health segment posted revenues of $955 million, up 6% (up 7% excluding Fx impact) from the year-ago quarter, primarily driven by higher sales of companion animal products, primarily Bravecto and the contribution from the Vallée acquisition.

Margin Discussion

Adjusted gross margin came in at 77.6%, up 190 basis points (bps) year over year attributable to favorable effects of product mix and lower inventory write-offs

Total adjusted operating expenses declined 2% in the quarter. Marketing and administrative (M&A) expenses increased 3% to $2.4 billion in the reported quarter due to higher administrative costs and promotional expenses to support new product launches. Research and development (R&D) spend decreased 8% to $1.7 billion in the quarter due to lower licensing costs.

Impact of Cyber Attack

Concurrent with the earnings release, Merck said that the network cyber attack in June disrupted its global operations, including manufacturing, research, and sales. Though the impact on the second- quarter results was minimal, management said that full recovery from the cyber attack will take some time, which could result in a temporary delay in fulfilling orders of some products (not Keytruda, Zepatier and Januvia) in certain markets.

2017 Guidance

Merck maintained its previously issued adjusted earnings guidance while raising its sales guidance marginally. The company expects adjusted earnings in the range of $3.76–$3.88 including approximately 1% negative foreign exchange impact (versus 1.5% previously). The guidance assumes the potential impact from the cyber attack as well as modest dilution from the AstraZeneca collaboration.

Revenues are expected in the range of $39.4 billion – $40.4 billion compared with the earlier forecast of $39.1–$40.3 billion, including negative currency impact of approximately 1% (versus 1.5% previously).

Zacks Equity Research: MRK www.zacks.com Page 5 of 10 Operating expenses are expected to increase year over year at a mid-single-digit rate compared with a low single-digit rate expected previously. The increased costs are attributable to increased investments behind the ongoing launches, remediation expenses related to the cyber attack, as well as additional R&D costs associated with the new oncology collaboration with AstraZeneca.

Recent News Oncology Collaboration with AstraZeneca – Jul 27

Merck announced an oncology collaboration with AstraZeneca to jointly commercialize and develop the latter’s PARP Inhibitor Lynparza and MEK 1/2 inhibitor, selumetinib (another oncology candidate on AstraZeneca), both as monotherapy and in combination studies, for multiple cancer types. Lynparza is presently marketed for advanced ovarian cancer. Lynparza is in different studies for a range of tumor types including breast, prostate and pancreatic cancers.

Meanwhile, Merck and AstraZeneca will independently develop combination medicines with Lynpraza or selumetinib with their respective PD-L1/PD-1 inhibitors Imfinzi and Keytruda. Merck will pay AstraZeneca up to $8.5 billion including an upfront payment of $1.6 billion, $750 million for certain license options and up to an additional $6.15 billion on the achievement of regulatory and sales milestones.

The companies will share development and marketing costs equally and also the profits from Lynparza and selumetinib.

Announces Q4 Dividend – Jul 25

Merck announced that the board of directors has declared a quarterly dividend of $0.47 per share for the fourth quarter of 2017 to be paid on Oct 6 to shareholders of record at the close of business on Sep 15.

Positive Phase III Data on Doravirine – Jul 25

Merck’s announced 48-week data from the pivotal phase III study, DRIVE-AHEAD, evaluating doravirine, a non-nucleoside reverse transcriptase inhibitor (NNRTI), for treatment of HIV-1 infection. Data from the study showed that a once-daily single tablet, fixed-dose combination tablet containing doravirine and other antiretroviral agents - lamivudine and tenofovir disoproxil fumarate (TDF) - met its primary efficacy endpoint of non-inferiority to a fixed-dose containing efavirenz, emtricitabine and TDF. The primary endpoint was based on the proportion of participants achieving viral suppression of HIV-1 RNA (<50 copies/mL), following 48 weeks of treatment in HIV-1 infected treatment-naïve adults. Merck plans to file an NDA to the FDA for doravirine in the fourth quarter.

Meanwhile, patients treated with doravirine reported fewer neuropsychiatric adverse events and had fewer abnormalities in serum with the protein profiles than patients treated with the efavirenz-containing regimen.

Launches Remicade Biosimilar in U.S. – Jul 24

Merck announced the launch of Renflexis, a biosimilar version of Remicade, in the U.S. for all eligible indications of the reference product. The biosimilar, developed in partnership with South Korean company Samsung Bioepis, was approved in Apr 2017. The biosimilar was launched at a discount of 35% to the list price of the branded version. Merck markets the branded version of Remicade outside the U.S.

Keytruda Phase III Study HNSCC Fails to Meet Endpoint – Jul 24

Merck announced that a pivotal phase III study - KEYNOTE-040 - evaluating Keytruda monotherapy in patients with previously treated recurrent or metastatic HNSCC failed to meet the primary endpoint of overall survival.

However, it will continue to market the drug for the treatment of patients with recurrent or metastatic HNSCC with disease progression on or after platinum-containing chemotherapy for which approval was received in Aug 2016. Also, a phase III study - KEYNOTE-048 - evaluating Keytruda in the first-line treatment of recurrent or metastatic HNSCC will continue.

Merck announced data from Week 96 results from the pivotal phase III ONCEMRK study at the 9th International Conference on HIV Science held in Paris, France this month.

Isentress ONCEMRK Study 96 Week Data – Jul 24

Week 96 results from the pivotal phase III ONCEMRK study were presented.

The ONCEMARK study evaluated Isentress HD, a once-daily 1200 mg formulation of Isentress (given as 2 x 600 mg once-daily), in combination with other anti-retroviral therapies, for the treatment of adults and pediatric patients with HIV-1 infection (weighing at least 40 kg).

Efficacy and safety 48-week data from the study were presented in Jul 2016.

The 96-week data reaffirmed the comparable efficacy and safety of the once-daily formulation. After 96 weeks of treatment, 81.5% of the 531 patients in the Isentress HD arm achieved viral suppression of HIV-1 RNA (<40 copies/mL) compared to 80.1% of the 266

Zacks Equity Research: MRK www.zacks.com Page 6 of 10 patients in the Isentress 400 mg twice-daily arm, each in combination therapy with Truvada

Positive CHMP Opinion for Keytruda for Urothelial Carcinoma – Jul 21

Merck announced that the CHMP of the EMA had granted a positive opinion, recommending approval of Keytruda for the treatment of certain patients with locally advanced or metastatic urothelial carcinoma, a type of bladder cancer. The European Commission will give its decision in the third quarter of 2017.

Collaboration with Corning – Jul 20

Merck and Pfizer announced a collaboration with Corning to develop Corning Valor Glass, a revolutionary pharmaceutical glass packaging solution for injectable drugs in vials and cartridges

Tentative Approval for Follow-On Basal Insulin – July 20

Merck got tentative approval from the FDA for its biosimilar version of Sanofi’s blockbuster diabetes drug, Lantus. Lusduna Nexvue (insulin glargine injection), technically a follow-on biologic basal insulin, has been developed by Merck with funding from Samsung Bioepis. Lusduna Nexvue delivers insulin in a pre-filled dosing device.

However, Merck will have to wait before it can launch the product due to an automatic 30-month stay resulting from a patent infringement lawsuit initiated by Sanofi in Sep 2016. Merck cannot launch its product before the expiry of the stay period or a favorable court ruling, whichever occurs first.

Keytruda Multiple Myeloma Studies on Clinical Hold – July 5

Merck announced that the FDA has placed a clinical hold on three combination studies (KEYNOTE-183, KEYNOTE-185 and KEYNOTE-023) being conducted on Keytruda for multiple myeloma (MM). Last month, patient enrolment in two of these studies (KEYNOTE-183 and KEYNOTE-185) was paused based on the recommendation of an external Data Monitoring Committee following reports of death in the Keytruda groups.

The FDA’s decision to place the studies on clinical hold was based on the conclusion that the available data indicates that the risks associated with the use of Keytruda plus Pomalyst (pomalidomide) or Revlimid (lenalidomide) outweigh any potential benefit for multiple myeloma patients. While KEYNOTE-183 and KEYNOTE-185 have been placed on full clinical hold, KEYNOTE-023 Cohort 1 has been placed on partial clinical hold. Moreover, patients in these three studies will no longer receive treatment with Keytruda.

Merck, which is conducting several studies with Keytruda, said that the hold is not applicable to any of the other ongoing studies.

Zacks Equity Research: MRK www.zacks.com Page 7 of 10 Industry Analysis Zacks Industry Rank: 101 / 265 (Top 38%) Top Peers

GlaxoSmithKline PLC (GSK) Sanofi (SNY) Novartis AG (NVS) Roche Holding AG (RHHBY) Bayer AG (BAYRY) Pfizer, Inc. (PFE) AbbVie Inc. (ABBV) Astrazeneca PLC (AZN) Eli Lilly and Company (LLY)

Industry Comparison Large Cap Pharmaceuticals | Position in Industry: 3 of Industry Peers 14

MRK X Industry S&P 500 GSK SNY NVS Market Cap 174.83 B 109.95 B 20.84 B 99.87 B 118.58 B 201.88 B # of Analysts 13 8.5 13.5 9 6 8 Dividend Yield 3.33% 2.87% 1.82% 5.14% 2.63% 2.68%

Growth Score - - Hist. EPS Growth (3-5 yrs) 2.33% 8.53% 7.16% 5.45 16.32 17.16 Proj. EPS Growth (F1/F0) 2.06% 6.57% 9.49% 18.29 10.82 25.39 Curr. Cash Flow Growth -3.57% 4.59% 5.44% 2.01 1.93 2.48 Hist. Cash Flow Growth (3-5 yrs) -3.53% -3.52% 6.71% 17.61 1.89 2.88 Current Ratio 1.59 1.26 1.36 11.44 19.86 16.37 Debt/Capital 36.89% 34.77% 41.73% 14.25 13.92 17.97 Net Margin 17.14% 17.14% 9.78% 2.60 2.88 4.17 Return on Equity 25.85% 26.80% 15.90% 7.03% 7.07% 5.58% Sales/Assets 0.41 0.51 0.54 2.77 NA 0.33 Proj. Sales Growth (F1/F0) 1.15% 5.36% 5.15% 4.00 4.62 4.77 Value Score - - Cash/Price 8.58 12.19 10.40 12.56% 11.67% 0.81% EV/EBITDA 18.12 14.44 12.87 2.52% 6.35% -0.04% PEG Ratio 2.94 2.13 2.00 21.33% -8.83% -3.91% Price/Book (P/B) 4.37 5.71 3.26 -3.50% -9.43% -10.09% Price/Cash Flow (P/CF) 19.32 18.51 13.51 0.57 1.62 1.01 P/E (F1) 16.57 16.37 18.98 73.48% 22.56% 24.74% Price/Sales (P/S) 4.34 4.03 2.51 6.48% 25.89% 13.52% Earnings Yield 6.04% 6.09% 5.22% 120.84% 12.54% 16.06% Debt/Equity 0.58 0.54 0.68 0.51 NA 0.36 Cash Flow ($/share) 5.80 4.31 5.41 2.63% 7.62% -0.15% Momentum Score - - Daily Price Chg 0.06% -0.19% 0.31% 0.22% -0.68% 0.16% 1 Week Price Chg 6.36% 3.86% -0.00% 0.64% 1.71% 5.21% 4 Week Price Chg -0.54% -0.58% 1.18% -5.05% -1.59% 2.09% 12 Week Price Chg 1.00% 1.21% 3.60% -3.15% -4.22% 8.69% 52 Week Price Chg 9.58% 1.11% 12.44% -10.73% 13.16% 2.87% 20 Day Average Volume 8,124,685 3,130,500 0 2,724,381 1,530,262 1,562,731 (F1) EPS Est Wkly Chg 0.12% 0.20% 0.02% 0.28% 5.63% 0.00% (F1) EPS Est Mthly Chg 0.26% 0.67% 0.33% -0.35% 6.29% 1.10% (F1) EPS Est Qtrly Chg 0.73% 1.17% 1.00% 2.81% 9.74% 0.92% (Q1) EPS Est Mthly Chg -3.44% -0.16% 0.00% -2.53% -3.16% 3.89%

Zacks Equity Research: MRK www.zacks.com Page 8 of 10 Zacks Rank Education The Zacks Rank is calculated from four primary inputs: Agreement, Magnitude, Upside and Surprise.

Agreement This is the extent which brokerage analysts are revising their earnings estimates in the same direction. The greater the percentage of estimates being revised higher, the better the score for this component.

For example, if there were 10 estimate revisions over the last 60 days, with 8 of those revisions up, and the other 2 down, then the agreement factor would be 80% positive. If, however, 8 were to the downside with only 2 of them up, then the agreement factor would be 80% negative. The higher the percentage of agreement the better.

Magnitude This is a measure based on the size of the recent change in the current consensus estimates. The Zacks Rank looks at the magnitude of these changes over the last 60 days.

In the chart to the right, the display shows the consensus estimate from 60-days ago, 30-days ago, 7-days ago, and the most current estimate The difference between the current estimate and the estimate from 60-days ago is displayed as a percentage. A larger positive percentage increase will score better on this component.

Upside This is the difference between the most accurate estimate, as calculated by Zacks, and the consensus estimate. For example, a stock with a consensus estimate of $1.00, and a most accurate estimate of $1.05 will have an upside factor of 5%.

This is not an indication of how much a stock will go up or down. Instead, it's a measure of the difference between these two estimates. This is particularly useful near earnings season as a positive upside percentage can be used to help predict a future surprise.

Surprise The Zacks Rank also factors in the last few quarters of earnings surprises. Companies that have positively surprised in the recent past have a tendency of positively surprising again in the future (or missing if they recently missed).

A stock with a recent track record of positive surprises will score better on this factor than a stock with a history of negative surprises. These stocks will have a greater likelihood of positively surprising again.

Zacks Style Score Education The Zacks Style Score is as a complementary indicator to the Zacks Rank, giving investors a way to focus on the best Zacks Rank stocks that best fit their own stock picking preferences. Value Score

Academic research has proven that stocks with the best Growth, Value, and Momentum Growth Score characteristics outperform the market. The Zacks Style Scores rate stocks on each of these Momentum Score individual styles and assigns a rating of A, B, C, D and F. An A, is better than a B; a B is better than a C; and so on. VGM Score

As an investor, you want to buy stocks with the highest probability of success. That means buying stocks with a Zacks Rank #1 or #2, Strong Buy or Buy, which also has a Style Score of an A or a B.

Zacks Equity Research: MRK www.zacks.com Page 9 of 10 Disclosures The analysts contributing to this report do not hold any shares of this stock. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts' personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market.

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