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Executives

Eva Boratto - Vice President of Investor Relations

Richard T. Clark - Chairman, President and Chief Executive Officer

Peter N. Kellogg - Executive Vice President and Chief Financial Officer

Bruce N. Kuhlik - Executive Vice President and General Counsel

Analysts

Chris Schott - J.P. Morgan

Tim Anderson - Sanford Bernstein

Jami Rubin - Goldman Sachs

Richard Beleson - Capital World Investments

Roopesh Patel - UBS

Barbara Ryan - Deutsche Bank Securities

David Risinger - Merrill Lynch

Merck & Co., Inc. (MRK) Financial Guidance Call December 4, 2008 8:00 AM ET

Operator

Good day, everyone, and welcome to Merck's guidance conference call. Today's call is being recorded.

At this time, I'd like to turn the call over to Eva Boratto, Vice President of Investor Relations. Please go ahead.

Eva Boratto

Thank you, [Amanda], and good morning. Welcome to our call to review our 2008, 2009 and long-term 2010 financial guidance.

Joining me on the call today, as always, is our Chairman, President and CEO, Dick Clark, and Peter Kellogg, our Executive Vice President and Chief Financial Officer.

Before we get into the details, I'd like to go over some logistics. On this call we will review the guidance contained in the release we issued at 7:00 a.m. this morning. You can access this through the Investor Relations section on Merck.com. And I would remind you that this conference call is being webcast live and recorded. The replay of this event will be available later today via phone, webcast and podcast.

As we begin our review, let me remind you that some of the statements made during this call may discuss certain subjects that may contain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and involve risks and uncertainties which may cause results to differ materially from those set forth in the statements. The forward-looking statements may include statements regarding product development, product potential or financial performance. No forward-looking statements statement can be guaranteed and actual results may differ materially from those projected.

Merck undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise. Forward-looking statements in this press release should be evaluated together with many uncertainties that affect Merck's business, particularly those mentioned in the risk factors and cautionary statements in Item 1(a) of Merck's Form 10-K for the year ended December 31, 2007 and in any risk factors or cautionary statements contained in the company's periodic reports on Form 10-Q or current reports on Form 8-K, which the company incorporates by reference.

We will begin the call with brief remarks from our senior management and then open the call for all your questions and expect the total call to last approximately an hour.

With that, I'll turn the call over and we will begin with remarks from our Chairman, President and CEO, Mr. Clark.

Richard T. Clark

Thank you, Eva, and good morning, everyone. As we have in previous years, we are hosting today's call to talk briefly about our 2008 performance expectations, reaffirm our 2010 long-term guidance, and then give our financial guidance for 2009.

Let's start with the current year. Our view remains unchanged from when we last spoke to you on October 22. There's no doubt that 2008 has been a challenging year for Merck. We ended the year with significant momentum following the research and development, regulatory and commercial successes of 2006 and 2007.

In 2008, we faced an unusual set of challenges, some of the expected and others unexpected, some of them unique to Merck and others affecting many in the pharmaceutical industry. As we have progressed through the year, we have made a number of changes at Merck to respond to the rapidly evolving business environment and ensure that we are able to bring our innovative products to market to address our customers' unmet medical needs. We believe these changes will help position the company for future success.

While we've had our share of challenges in 2008, we've also had a number of successes. Two great examples are our JANUVIA, JANUMET and ISENTRESS, which continue to perform extremely well in the marketplace. That speaks to the value these products are bringing to patients, physicians and payors. The impressive launch trajectory for these critical products indicate substantial future market opportunities.

Our franchise models that focus on the entire life cycle of our products have enabled us to maximize the value of more established products such as COZAAR, HYZAAR, and FOSAMAX. We remain excited about a number of delayed and midstage opportunities in our pipeline, and we look forward to sharing more about the innovation in our labs next week at our annual business briefing.

Financially, we continue to expect adjusted full year 2008 non-GAAP EPS to come within our previously disclosed range of $3.28 to $3.32, excluding certain items, and we continue to anticipate reported GAAP full year 2008 EPS of $3.45 to $3.55.

Turning to the long term, we continue to expect revenues will have a compound annual growth rate of plus 2% to plus 4% for the 2005 to 2010 period, including 50% of the revenue from our joint ventures and plus 1% to plus 3% on a GAAP basis.

We expect non-GAAP EPS compound annual growth to be in the mid to high single-digit range over the same period, excluding certain items. On a GAAP basis over the same time period, we expect double-digit compound annual growth for EPS.

In 2009 we expect strong product line growth from key products such as JANUVIA, JANUMET, ISENTRESS, and ZOSTAVAX. However, that growth will be offset by the effects of the volatile global economy, fluctuations in the foreign exchange rates, as well as continued challenges for certain key products, including GARDASIL and SINGULAIR.

As we have discussed, in 2008 we continued to make progress to resolve the manufacturing issues that have limited supply for some of our key vaccines. In the United States we continue to receive and fill orders for ZOSTAVAX and will clear most current backorders before the end of 2008. We are working to meet the underlying strong demand for this important vaccine and expect to return to normal shipping times in early 2009.

Additionally, we are pleased that as of December 1 we are accepting orders for [VACTA] pediatrics and we expect availability of VACTA adult in the second quarter of 2009. Finally, we continue to expect availability of our [inaudible]-containing vaccines in mid 2009.

This will be a crucial execution year for Merck as we fully implement the key initiatives that are enabling the transformation of our company into a more effective, lean and flexible business. These programs will further reduce our cost structure, enabling us to strongly support our key products and growth opportunities.

We continue to expect the 2008 restructuring program announced in October to yield cumulative pre-tax savings of $3.8 billion to $4.2 billion from 2007 to 2013. While the vast majority of the savings will occur after 2010, next year we'll continue to focus on implementing the crucial changes that are so important to our long-term success.

We also continue our pipeline investment. During 2009 we expect to file NDAs for two promising candidates in Phase III that address patient needs in the treatment of migraines and acute heart failure. To position ourselves for commercial success in 2009 and beyond, we will begin to prepare for these prospective launches.

In addition, we're beginning to work on opportunities for expansion into new patient populations for key products such as GARDASIL and ISENTRESS. And we will of course keep making the necessary investments to fully fund our research and development opportunities, including outcome studies for key products such as JANUVIA and VYTORIN and promising candidates such as MK-0524A and MK-0822.

On earnings per share we anticipate a full year 2009 non-GAAP EPS range of $3.15 to $3.30, excluding certain items, and a 2009 GAAP EPS range of $2.95 to $3.17.

You can refer to today's news release for all of the details of our guidance. In a couple of minutes, Peter Kellogg will take you through some of the key variables that we expect to affect our outlook for 2009.

While 2008 brought us some tough challenges, I remain as confident as ever that we have the right strategy in place for Merck, focusing on our core pharmaceutical business. We have a broad portfolio of products that include many first in class products with marketing exclusivity that extends well into the next decade. We have a best in class R&D capability, with an early and late-stage pipeline that includes potential breakthrough investigational candidates that address critical unmet medical needs. Our track record in R&D makes Merck a desired partner with new external scientific collaborations and important new therapies.

Lastly, we are moving forward on several immediate and long-term steps designed to accelerate our revenue growth and we'll be talking about the next week at our annual business meeting here in Whitehouse Station on December 9.

With that, I'll turn the call over to Peter, who will fill in several details regarding our 2008 and 2009 financial guidance, then we'll take your questions.

Peter?

Peter N. Kellogg

Thank you, Dick, and good morning.

As Dick mentioned, I will provide some details regarding our 2009 guidance. Please refer to Pages 5 through 6 of today's press release, which contain Merck's financial guidance for 2008 and 2009.

As Dick discussed, we are in a position to reaffirm all elements of our 2008 guidance, including our full year 2008 non-GAAP EPS guidance range of $3.28 to $3.32, excluding certain items, and our 2008 GAAP EPS range of $3.45 to $3.55.

Additionally, Dick reconfirmed our longer-term trend guidance for the period 2005 through 2010. This is clearly an important gauge of our ongoing performance. The company expects to deliver non-GAAP compound annual revenue growth of 2% to 4% for this period, including 50% of the revenues from the joint ventures from which Merck receives equity income. Now, as Dick mentioned, the corresponding expected GAAP compound annual growth rate is 1% to 3%.

During this period, our Plan to Win program has carefully executed a cost re-engineering effort that has returned our PGM level to pre-ZOCOR patent entry levels as 77% to 78%, and it has also driven M&A productivity globally and it has allowed for solid R&D investments that are driving our pipeline forward. The net P&L leverage provided from these efforts should allow us to grow our non-GAAP EPS for the period of 2005 to 2010 in the mid single to high single-digit compound annual growth rate range. On a GAAP basis, as Dick mentioned, we anticipate double-digit EPS growth over the same period.

So turning to 2009, this will be a year in which we are making investments in our operations and our pipeline. We also anticipate 2009 to be a year where global economic conditions will dampen unit growth, where foreign exchange fluctuations will meaningfully impact our P&L, and where we are rapidly implementing many of our transformational initiatives.

Dick provided the key top line and EPS guidance ranges for 2009, so I'd like to highlight three major drivers impacting our year-over-year P&L performance.

First, let's start with the top line. We anticipate that our revenue will benefit from the continued strong growth in many of our recently launched brands, including JANUVIA, JANUMET, ISENTRESS and ZOSTAVAX. However, this growth will be offset by a foreign exchange headwind and the annualization of the 2008 patent expiries for FOSAMAX and [inaudible] in the U.S. Additionally, we anticipate two of our major brands - GARDASIL and SINGULAIR - will combine to contribute only modest growth next year.

Second, we are lapping the impact of the favorable 2008 discrete tax items seen in Q1 and Q2, as we expect our non-GAAP effective tax rate to return to historical levels. On the bottom line, this will reduce our 2008 to 2009 EPS growth rate by approximately 5 percentage points.

And third, of course, exchange - this has seen unprecedented volatility, with movements in the euro of approximately 20% over the last four-month period. As noted in our press release, exchange is expected to have a negative 3% impact on our top line and a negative 6% impact on our bottom line.

So with that set up, let's talk through the line items of our 2009 P&L, beginning with our top line revenue guidance. And I'd like to start with total revenue because for the first time in recent history we are providing overall GAAP revenue guidance.

We anticipate total sales as reported by Merck to be in the range of $23.7 to $24.2 billion. At constant exchange rates, Merck's total sales are growing 2% to 5%. At recent exchange rates, however, foreign exchange is expected to have a 3 percentage point unfavorable effect. Thus, we anticipate total sales as reported by Merck to be in the range of negative 1% to positive 2% versus 2008.

Now, as we've previously disclosed, the company has revenue hedging and balance sheet risk management programs to provide short-term protection against the volatility of future foreign currency cash flows and changes in fair value caused by the volatility in foreign exchange rates.

Now, taking the first one, the revenue hedging program, the objective of this program is to reduce the potential for unfavorable foreign exchange changes to decrease the U.S. dollar value of foreign currency denominated revenue and cash flows. Essentially, our hedging program delays the impact on the company of FOREX shifts, allowing us to deliver on commitments and then adjust to more permanent foreign exchange shifts as necessary.

Now, critical components of this revenue hedging program include, first, the company will partially hedge anticipated third-party sales that are expected to occur over the next three years. The portion of sales hedged is based on assessments of the cost-benefit profiles that consider, first, our natural offsetting exposures - essentially, the net FOREX exposure that we have  revenue and exchange rate volatility, and the cost of hedging instruments. The company uses put options, which provide the company with the right but not an obligation to sell foreign currencies in the future at a predetermined price.

As you think about the impact of this program, it is critical to look at the movement in rates over the last three years as that is the period in which the company built up its hedges for the yen and the euro exposure, and these are the currencies that we focus our hedge program on.

So with that established, let's turn to the product details for 2009, beginning with SINGULAIR.

Worldwide product sales for SINGULAIR are anticipated to be in the range of $4.4 to $4.7 billion. This anticipated performance reflects continued leadership in the U.S. respiratory market despite recent challenges and strong volume growth outside the U.S. We remain confident in the overall safety and efficacy of SINGULAIR.

In the U.S., our sales force has new materials to use with physicians, including very specific patient profiles, messaging on efficacy and safety, new trial and coupon kits for new patients, and educational material for patients. We are using a multi-channel approach with consumers which integrate our traditional print and TV vehicles with newer technology tools such as online GTC, which includes such things as digital banners and e-coupons. It also includes in-office branded marketing programs, pharmacy programs, and adherence initiatives.

Additionally, we expect to continue to have excellent managed care unrestricted second tier access of approximately 80%. We also anticipate continued growth in Japan as a result of the addition of the AR indication.

For COZAAR and HYZAAR, we anticipate full year revenue to be in the range of $3.4 to $3.7 billion, reflecting a significant unfavorable impact of exchange. Now just for perspective, in 2008 approximately 65% of COZAAR and HYZAAR sales were international. We expect continued growth in Japan due to the removal of the two-week prescription proscription. 2009 will be the last full year of sales for these products with marketing exclusivity in the U.S. Our 2009 plans ensure that we continue to maximize the value of these brands.

Worldwide product sales for JANUVIA and JANUMET are anticipated to be in the range of $2.4 to $2.7 billion. This anticipated performance reflects strong growth in the U.S. as JANUVIA continues to be the second-leading branded oral anti-diabetic agent in terms of new prescription share. We expect strong growth despite the continued slowdown in the overall U.S. diabetes market and the potential for new competition. Additionally, we expect strong international growth as JANUVIA laps a number of major 2008 European launches and will benefit from a potential 2009 launch in Japan.

In addition, we expect strong international growth from JANUMET as it continues to be launched in major EU markets. We continue to invest strongly behind these key growth products in both physician and consumer programs to ensure our success.

For GARDASIL, our 2009 guidance of $1.4 billion to $1.6 billion as recorded by Merck reflects the following: First, while cumulative penetration continues to increase, we expect a continued decline in the overall number of first dose vaccinations in the 13 to 18-year-old girls as we lap the early success in vaccinating this age group following launch. Considering the strong cumulative utilization amongst this age group since launch, continued growth would require substantially higher rates among the remaining eligible population. The vaccination rate for GARDASIL among adolescents already is higher than the average vaccination rates for MENACTRA and Tdap at comparable points in life cycle.

Second, our guidance reflects expansion of the eligible population for GARDASIL through approval of the mid-adult women and male indications. Regarding the mid-adult women SBLA, we responded to the FDA's July complete response letter and the agency has informed us that the response was a Class 2 response. Additionally, we remain on track to file the SBLA for males prior to year end.

Now finally, we expect cumulative penetration to continue to increase among 19 to 26-year-old women in 2009, but ongoing first dose vaccinations may be flat or slightly lower. Now, as Ken Frazier has discussed on previous conference calls, while we have implemented many programs to increase vaccination in this age group, it will take time to address the issues facing physicians and consumers.

The net effect of these cohort dynamics is that we expect sales to be relatively flat year-to-year and future growth will require increased penetration in newly approved cohorts of older women and males, greater penetration of 19 to 26-year-olds, and/or increased uptake in international markets.

From a competitive perspective, if a potential competitor launches in the U.S. in 2009, we are confident in the differentiated profile of GARDASIL based on its exceptional cervical cancer coverage, demonstration of long-term duration of efficacy, additional disease and cancer protection, and considerable post-marketing experience. As of December 30, for example, more than 36 million doses have been distributed globally, with 20 million doses distributed in the U.S.

Our 2009 other vaccine guidance of $2.8 billion to $3.1 billion as recorded by Merck reflects an improvement in supply of key vaccines including ZOSTAVAX, VACTA, and HIV vaccines and the continued benefit of the second dose varicella catch up. While we do not provide guidance on other specific vaccine products, I wanted to provide you with some of our assumptions for our vaccine business in 2009.

ZOSTAVAX represents a significant opportunity in 2009. This opportunity is supported by a recommendation on the CDC ACIP Adult Immunization Schedule for zoster immunization for adults over 60 years of age. ZOSTAVAX is covered by both commercial insurance and Medicare Part D for approximately 95% of lives. Educational efforts for all audiences will continue to help patients and physicians understand that ZOSTAVAX is the only vaccine for the prevention of shingles, a frequently painful and potentially serious disease. And ZOSTAVAX is covered for the vast majority of the eligible population.

In 2008, as we often discussed, we experienced a period of constrained supply, so we focused our marketing efforts on reducing many of the logistical and reimbursement barriers to vaccination with ZOSTAVAX. We expect that these efforts will enable uptake in 2009.

In the U.S., we continue to receive and fill orders for ZOSTAVAX and will clear most current backorders before the end of 2008. We are working to meet the underlying strong demand for this important vaccine and expect to return to normal shipping times in early 2009. We remain extremely excited about the potential of ZOSTAVAX and plan to have enough supply to support substantial growth in 2009.

For ROTATEQ, we anticipate that we will maintain our market leadership position in the U.S. ROTATEQ has become the standard of care in the U.S. market and we remain confident in the clinical profile of this vaccine. More than 75% of U.S. infants are currently being vaccinated annually with ROTATEQ. ROTATEQ is the only pentavalent rotavirus vaccine designed to specifically cover the most common serotypes that cause 90% of disease. It has demonstrated consistent efficacy regardless of serotype population or season and provides the convenience of a ready to use formulation. We also have considerable U.S. post-marketing experience that we believe give customers confidence in the safety profile of our vaccine.

For forecasting purposes, however, it is important to note that in 2008 we achieved high penetration rates early in the year and benefited from the expansion of the CDC stockpile in Q1 and Q2. And as you'll recall, that expansion was estimated to about $58 million in revenue.

In 2009, we are focused on defending our U.S. market position by differentiating on key product attributes and driving continued penetration. Uptake outside the U.S. continues to be modest, as many countries have not yet made policy or funding decisions, which is consistent with the timing of uptake of many previously launched pediatric vaccines.

Now, sales of other reported products are expected to be $6.6 to $7 billion in 2009. This range no longer includes JANUVIA and JANUMET given that we are providing separate product guidance. It continues, however, to include worldwide growth of ISENTRESS, the residual worldwide revenue associated with ZOCOR and FOSAMAX, and other marketed products.

Also contributing to our top line are revenues from our alliances, primarily Astrazeneca LP. In 2009, Merck anticipates these revenues will be approximately $1.2 to $1.4 billion. The AZLP guidance is an update based on recent results as well as future expectations and reflects the dynamics of the PPI market, which includes multiple generics, OTC products, and the uncertainty these create with regard to future volume and pricing.

So now let's move down the P&L, beginning with PGM guidance.

Product gross margin percentage for next year is estimated to be approximately 77% to 78%, maintaining PGMs at pre-ZOCOR expiry levels. This guidance excludes the portion of the restructuring costs that will be included in product costs and will affect reported PGM in 2009. We will report the net impact of those restructuring costs in reported PGM during 2009 as incurred.

Moving to marketing and administrative guidance, in 2005 we began our efforts to optimize our cost base and improve Merck's effectiveness and efficiency. Throughout 2008 we discussed with you the progress that we're making to evolve our commercial model and optimize our administrative and corporate cost base to better position Merck for top and bottom line growth.

Our changes to date and other planned changes, as well as the benefit from the movements in exchange rates support our 2009 marketing and administrative expense guidance of $7 to $7.3 billion. We are achieving these reductions while we continue to fully support our key products, and we continue to invest in emerging markets. Areas of investment for our key products include continued DTC efforts for SINGULAIR, JANUVIA, and GARDASIL, as well as appropriate promotional support for our portfolio, including ISENTRESS and ZOSTAVAX.

Now moving on to research and development, in 2009 we anticipate spending in the range of $4.8 to $5.1 billion, excluding the portion of the restructuring costs that will be included in R&D and will affect reported R&D in 2009. This will fully fund core internal R&D and ensure the continued progress of compounds in all phases of development. In addition, we will be installing several critical elements of the future R&D strategy in 2009. One outcome of the strategy is the previously announced closure of three basic research sites. The savings from these closures and other elements of the strategy will largely be realized post-2009.

Key investments in 2009 include the following: First, strategic investments in the late-stage clinical trials for MK-0822 for osteoporosis, MK-0974 (telcagepant) - for migraine, MK7418 (rolofylline) for heart failure, and MK-0524A and D foratherosclerosis. In addition, the company is investing in life cycle management for its most recently launched products - JANUVIA, JANUMET, ISENTRESS, ZOSTAVAX and GARDASIL. Beyond that, the company continues an active external collaboration and business development agenda.

Now let's move to restructuring guidance. As part of the company's restructuring of its operations in October, we announced a restructuring program with total estimated costs of $1.6 to $2 billion with an estimated cumulative savings of $3.8 to $4.2 billion by 2012. This program will enable efforts to transform our business model, lower our fixed costs, eliminate redundancies, and increase the speed at which we make decisions, especially when it comes to taking advantage of growth opportunities. The aggregate 2009 pre-tax charge associated with the global restructuring program will be approximately $400 to $600 million.

Now let me move to JV equity income. As always, our 2009 guidance for equity income from affiliates includes the results of the Merck-Schering-Plough AstraZeneca LP, Sanofi Pasteur MSD, J&J Merck, and Merial joint ventures and collaborations. In 2009, we expect equity income to be approximately $2.2 to $2.5 billion.

Starting with AstraZeneca, equity income in 2009 will include the full year effect of the events resulting from the restructuring in April of 2008. When you model year-over-year performance, remember Q1 2008 results were prior to the restructuring. In other words, we had a priority return of approximately $75 million in Q1 compared to a new quarterly level of $55 million. Also in Q1, we received a 10% royalty payment from the Astra USA products. Also note that this line has demonstrated inherent variability due to the timing of payments from AstraZeneca.

The income contribution related to MSP is expected to decrease in 2009 based on declines in the U.S. of ZETIA and VYTORIN sales, partially offset by continued growth in Europe. Market share for ZETIA and VYTORIN in the U.S. appears to be stabilizing following the ESC and AHA meetings.

Although we have seen an approximately 9% decline in new Rx volume since the initial release of the [seize] rates, the rate of volume and share decline for the JV has slowed throughout the year. And while we expect that the JV brands will remain competitive in terms of managed care positioning in 2009 at approximately two-thirds Tier 2 reimbursement without restriction, this is a reduction from formulary coverage from 2008 levels, which was about 75%.

We remain focused in our support for ZETIA and VYTORIN, which continue to be valuable treatment options for physicians by helping to get more patients to their LDL goals.

Now let's turn to other income and expense. Now, we do not provide specific guidance for other income and expense normally, however, given the current interest rate environment, we do expect to see a reduction in interest income versus historical levels. Based on the environment and the mix of our investment and debt portfolios, we anticipate Merck's effective 2009 interest rate to be approximately 30% to 40% below 2008 levels. Because our investment portfolio exceeds our debt balance - in other words, we're in a strong net cash position - this change in interest rates adversely affects net interest income.

Additionally, given the decline in U.S. interest rates relative to foreign currency rates, we anticipate an increased cost of our translation hedging program, and this is the hedging program related to our balance sheet recorded as exchange gain or loss. And we think this increased cost will be in the range of $50 to $100 million.

Now let's turn to tax guidance. The consolidated non-GAAP 2009 tax rate is estimated to be approximately 22% to 25%, reflecting assumptions about product mix and geographic mix of sales. This guidance is higher than the 2008 effective tax rate as the 2008 rate benefited from the realization of foreign tax credits and the favorable settlements of various tax disputes in the first half of last year. This tax rate guidance excludes the tax rate impact of restructuring costs.

So in translating all this into EPS, given the guidance that we just reviewed, the company anticipates a full year 2009 non-GAAP EPS range of $3.15 to $3.30, excluding certain items, and a 2009 GAAP EPS range of $2.95 to $3.17. The 2009 GAAP guidance includes a pre-tax charge, as I mentioned earlier, of approximately $400 to $600 million associated with the company's global restructuring program.

So based on everything I've covered in this discussion, it's pretty clear that 2009 is a complicated year. Let's take a minute to put this in perspective.

It is important to remember that our 2009 non-GAAP EPS growth rate of negative 5% to plus 1% versus 2008 has been negatively affected by approximately 6 percentage points of foreign exchange and 5 percentage points for the discrete tax items that benefited our P&L in 2008. When you exclude these two items - foreign exchange and tax benefits - from our non-GAAP EPS, the anticipated year-over-year growth rate would have been 7% to 13%.

Now let's talk about the quarterly pattern for 2009. The company expects GAAP and non-GAAP EPS in the first quarter to be less than one-fourth of the full year EPS.

In addition, the company anticipates marketing and administrative spend and R&D expenses to be more equally distributed across the four quarters than in previous years.

Finally, as you think about the yearonyear comparison, recall that in the first quarter of 2008 sales included the last full month of marketing exclusivity for FOSAMAX in the U.S. The first quarter also included prescription share for the MSP JV in the U.S. that was at higher levels. And finally, Merck benefited from a discrete tax item worth approximately $0.09 per share.

So let's turn to long-term guidance and, in summary - and perhaps most important of all - the company continues to expect to deliver mid to single-digit non-GAAP earnings per share from the 2005 to 2010 period, excluding certain items. On a GAAP basis, as we mentioned early, we anticipate double-digit earnings per share over the same period.

Additionally, Merck's new and inline pharmaceutical products and vaccines are expected to drive revenue in the compound annual growth rate range of 2% to 4% from 2005 to 2010, including 50% of the revenue from the joint ventures. On a GAAP basis, we anticipate compounded annual revenue growth of 1% to 3%, as we discussed upfront.

We have the financial strength to support our dividend, and we remain fully committed to maintaining our dividend at the current level. We also expect to continue to provide some opportunities for share repurchases. At the same time, we continue to fully invest in our key strategic priorities.

So, in summary, Merck believes that providing GAAP and non-GAAP guidance information enhances investors' understanding of the company's performance. And the company monitors and manages itself on an adjusted non-GAAP basis when the company's management incentive programs are tied to non-GAAP metrics. Given these factors, this information should be helpful to investors and should be considered in addition to but in lieu of earnings per share prepared in accordance with GAAP.

So that concludes my discussion. Now I'd like to turn the call back over to Eva, who will introduce the question-and-answer portion of this call.

Eva?

Eva Boratto

Thank you, Peter. We will now open the call to take your questions. Also joining us for the Q&A session is Bruce Kuhlik, Executive Vice President and General Counsel.

We will take your questions in the order they are received and try to get through as many as possible. We ask that you keep your questions focused on items relating to today's announcement, and we will not previewing anything pertaining to our scheduled annual business briefing on December 9.

At this point, I will turn it over to Amanda, who will communicate instructions for our Q&A format and introduce the first question.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Chris Schott - J.P. Morgan.

Chris Schott - J.P. Morgan

Just two quick questions. First, on GARDASIL, can you just talk a little bit more about the geographic mix of your consolidated sales? Given the flat year-over-year guidance and some of the comments you made about the U.S. business, should we be thinking about a U.S. business that's down year-over-year for GARDASIL in 2009?

And then secondly, can you just elaborate a little bit, also, on your comments on the volatile economic environment that you referenced in the press release and some of the comments? Just to be clear, is this something you're currently already seeing in your business starting to play out or is this in anticipation of kind of a deteriorating economic environment impacting the pharmaceutical industry?

Peter N. Kellogg

On GARDASIL, you asked first how much of the business is in the U.S., and about threequarters of the business for GARDASIL is in the U.S. at this point. So you'd have to play that into kind of the U.S. versus international growth, but basically our mix is about three-quarters U.S., one-quarter ex U.S.

And regarding the volatility of the economic conditions in the markets, I'd say that we are already seeing some of the impact ex U.S. particularly of that, but also in the U.S. I think that pertains primarily to just scrip numbers and industry numbers as well. I don't know that it's disproportionately hitting our product as much as we're just seeing industry unit volume slow as we've come through the second half of this year.

Operator

Your next question comes from Tim Anderson - Sanford Bernstein.

Tim Anderson - Sanford Bernstein

On VYTORIN and ZETIA formulary position relative to late October when you and Schering held your earnings calls, have you lost any additional ground that you didn't anticipate at that time?

On GARDASIL, in your guidance how much of that is due to Glaxo's product capturing share? They claim they've won more than half of the tenders in ex U.S. markets.

And on SINGULAIR, can you update us what you expect on the pending FDA safety update and safety review?

Peter N. Kellogg

So let me take the GARDASIL one first. I think our guidance primarily is based on the penetration of cohorts and approval of new cohorts and the evolution of that growth. We obviously have factored in some thinking relative to having competition, but we actually think we're fairly well positioned competitively.

Regarding the tender programs with GARDASIL, basically we can look at it a couple of different ways but I believe that in the major countries around the world we've won 7 out of 10 of the tenders, but when we look at it in terms of covered lives, we have earned the majority of lives but perhaps some of the bigger markets actually were lost, so it's not as much as 70%. I'd just say it's more than half at this point.

Regarding VYTORIN and ZETIA, let me turn that over to Dick from a competitive position standpoint.

Richard T. Clark

From a formulary standpoint, I think we anticipated it. The fact is that 66% on the second tier is extremely competitive against our competition, so going from 75% to 66% is still a very competitive position. So that's to be expected.

And from a [inaudible] standpoint, we know that, as in the past, we remain confident in the overall clinical benefits of the product and we stand behind the safety [inaudible] SINGULAIR.

Operator

Your next question comes from Jami Rubin - Goldman Sachs.

Jami Rubin - Goldman Sachs

Peter, I'm still trying to work out the [FOREX] hit. I don't think that anyone should be surprised about the top line hit, but the disproportionate bottom line hit is still - I'm grappling with working that out. To help us with that, can you walk through on the expense line what organic growth is and how much of the hit is on the expense line, which I would have thought would have been a positive, and how much of the hit is actually just on the balance sheet with respect to the net other line, which you referenced in your comments.

And then my follow up, too, is I just was wondering, in your equity income line - just so I heard you right - did you say that you expected equity income from Merck-Schering-Plough to be up in 2009?

And secondly, you didn't talk about Sanofi Aventis. I was wondering if the equity income from that would be up or down.

Peter N. Kellogg

Okay, so let me see if I can help you out, first, on the FOREX. So as we run our P&L, I mean, I think basically about 45% or so of our revenue is earned in currencies outside the U.S. And, you know, if you think about that, that's probably about half euro and then the next largest currency is the yen, but we still have a very healthy amount of many other currencies. But that's how you should think about our top line revenue mix related to FOREX.

As we go through our expenses, we do tend to have expenses much more heavily based on the U.S. dollar because of the size of our operations here in the U.S. for R&D and, to some degree, manufacturing, but certainly sales and marketing and corporate. So when you think through the mix of revenue that is U.S. dollar versus international, when you take the expense base, the currency mix of that, you tend to have a higher percentage of our earnings outside the U.S. than you might ordinarily think given our revenue mix.

Hopefully that will help. I can come back to that point later if that's necessary.

On the second point, related to Merck-Schering-Plough, actually I said that we expected the Merck-Schering-Plough revenue to be down next year, not up, so we do not expect that. And that's just reflecting the fact that many of us, I think, already know. I think I mentioned that we recognized the declines in the U.S. of ZETIA and VYTORIN have to be rolled into our numbers. Now, obviously, we do have continued growth in Europe and outside the U.S., but the U.S. declines have been more significant.

And also, we think that the YTORIN and ZETIA market shares have stabilized, but I think that, nonetheless, Merck-Schering-Plough is down.

Let me now, if I can, turn to Sanofi Pasteur MSD. You know, we really don't provide specific guidance on the Sanofi Pasteur MSD joint venture, but in 2009 we do anticipate that the contribution from that joint venture will grow. As the joint venture continues to navigate the regulatory and country recommendation and reimbursement process for new vaccines, it's done very well and we expect that will be growing nicely. GARDASIL's performed extremely well in Europe and sales as recorded by MSP, our Schering-Plough MSD joint venture, were $220 million in the third quarter of 2008, so it's been very, very strong.

Eva Boratto

Jami, I think your last question was on other income and expense and around the balance sheet, the translation.

Peter N. Kellogg

I can take a shot at that if you want, Jami. Basically what we do is we hedge the P&L, the revenue, through hedges that I talked about on the call here. On the balance sheet, because we're a U.S. dollar functional accounting system, we actually do record the translation effect of currency on our balance sheet. We hedge those with forward contracts. Those forward contracts basically, the cost of those are represented by the difference in U.S. interest rates related to foreign currency rates, and the expense of those programs go through our other income and other expense line.

What I commented on was that we anticipate that, given the decline in U.S. interest rates relative to foreign currency rates, we anticipate an increased cost of our translation hedging program in the range of $50 to $100 million. So that was what I was referring to.

Operator

Your next question comes from Richard Beleson - Capital World Investments.

Richard Beleson - Capital World Investments

I have two questions. The first is given your comments about possibly anticipating competition in GARDASIL in 2009 in the U.S., are your sources suggesting that it's likely that CERVARIX will get approved in the United States some time in 2009?

Richard T. Clark

I don't think we can comment on whether it will be approved or not. I think the issue that we're talking about with GARDASIL, first, as the remaining number of unvaccinated adults become more saturated, therefore that sales volume will be declining. And second, as you know, a continued growth opportunity exists for 19 to 26-year-olds, but we're trying to drive behavior change there. That'll have a significant impact, but it's going to take us time to do that.

And then on the more positive side, if we get the expanded indication for adult women approved in 2009, we anticipate that'll be new business growth. And we do have a potential indication for use in males, but that may not come until the later part of 2009, which will not provide significant product growth in 2009.

So it's the balance of those four factors that really drive us to our numbers.

Operator

Your next question comes from Roopesh Patel - UBS.

Roopesh Patel - UBS

First, just going back to FX, I'm curious what the rationale is for having a hedging program that protects the top line more than it protects the bottom line. Maybe I'm not understanding something here, but Peter, if you could just elaborate, that'd be helpful.

And then separately, on GARDASIL, if a launch in adult women and boys doesn't materialize in 2009, what would be the impact on guided numbers?

Richard T. Clark

To answer your first question, we won't make comments on expectation of not launching and what impact it has on our numbers. That's something that we won't make comments on.

Peter N. Kellogg

And then on the foreign exchange part, I would just caution to say that I don't know that we're hedging to protect our top line more than our bottom line. Let me just go back and maybe restate it so it's - maybe I didn't quite get it clear enough the first time.

So we really have two hedging programs. One is we hedge revenue that's earned in currencies outside the U.S. dollar, and we focus those hedges on the euro and, to a lesser degree, the yen. That doesn't cover all of the currencies we earn revenue on, but it picks up the big portion. And we roll those hedges in over three years, and those are truly options. Those are things that if the currency helps us, they don't kick in, but if the currency goes against us, it protects us.

That is basically not an unusual program and I think it's what slows down the impact of foreign exchange, but it doesn't really eliminate overall the risk. It just delays the impact over time because, in the short term you have the hedge, but over time, if the currency stays down, then eventually it will roll into your P&L.

The second hedging program we have relates to the balance sheet - I wouldn't describe it necessarily as the bottom line - and that is just simply based on the mix of assets and liabilities we have around the world. We have a net exposure on our balance sheet.

Now, Merck is perhaps in the minority of companies, but it actually does its accounting based on U.S. dollar functional currency so, when foreign exchange rates move and the value of the assets on your balance sheet get translated to the new currency rates, they actually run through our P&L in our case. And so we actually take out forward contracts to protect us on the exposure of those balance sheet movements.

So that's really what we're talking about. And the cost of those balance sheet forward contracts are captured in our other income and other expense lines.

I think what happens in terms of how foreign exchange hits the top line and flows through the bottom line is purely a mix of your business, both at the revenue line and then in the expenses, and we tend to have more expenses in the U.S. than we do outside the U.S.

I think the other question you might be asking is do you hedge your revenue or do you hedge your net contribution by local currency. And we obviously look at it from the standpoint of future revenue flows, but we calibrate such that the amount of hedges that we take out relates to the contribution from those currencies that we have on our P&L, and maybe that was the question you were asking. Hope that helps.

Operator

Your next question comes from Barbara Ryan - Deutsche Bank Securities.

Barbara Ryan - Deutsche Bank Securities

I just had a couple of question, I guess one for Peter and maybe one for you, Dick.

The first one just - for Peter - is on the JV. In your early comments you did say that the U.S. sales decline would be partially offset by the growth overseas which, you know, obviously implies the later comments, which is the JV would be down. And I'm just wondering if you can comment on the equity income piece in light of, obviously, there have been restructurings there, too, and how will that play out? Would the business be increasingly managed for profit and JV equity income may be more stable rather than down or do you expect that that, too, would be down?

Peter N. Kellogg

Okay, so I think on that question - I'm just thinking through - you're really basically is, as you think about the economy, I suppose, and how we manage the business for our core products as opposed to products that are contained in the JVs, would they be managed differently. And then I think you're also asking perhaps given the mix of business that we have in the equity income businesses, would they be more stable perhaps than some of the others.

That's a hard one to call. I don't know that we manage the businesses that differently. Strategically, we're trying to grow the value of the franchises and so I don't think that's quite the effect.

I think really what we were describing more on the equity income line is that we have different joint ventures, moving in different directions. We have MSD perhaps down a little bit next year. We expect Sanofi Pasteur to be up. AstraZeneca, of course, is reflecting the impact of the restructuring. And, of course, there's other JVs in there as well, Merial and J&J and so forth.

So I'm not sure that I could comment as to whether or not I think it would be more stable, but I do think that the equity income line is very stable going into 2009. We feel good about the range that we have, and therefore we're very comfortable with our guidance.

I hope that answered your question.

Operator

Your next question comes from Richard Beleson - Capital World Investments.

Richard Beleson - Capital World Investments

You've been talking about the longer-term guidance with the 2005 to 2010. Obviously, now we're just talking about 2009 and 2010. Given that in 2010 you have the patent expiration on COZAAR and HYZAAR, don't you think it would be extremely challenging to reach a figure above mid single-digit growth for the 2005 to 2010 period?

Richard T. Clark

Well, if I understand your question, certainly, given our 2010 EPS guidance of mid to high single digit compound annual growth rate, we're still very confident in that. And our inline brands really have the solid foundation - you know, JANUVIA, JANUMET and ISENTRESS will continue to grow. And as I mentioned earlier, the expansion of new patient population for our key products with GARDASIL and ISENTRESS will continue to grow in 2010.

And we also continue to anticipate substantial contributions from equity income as the performance of ZETIA and VYTORIN appear to be stabilizing. So we have our continued focus on that and in 2010 we're going to see more efficiencies and effectiveness of our operation to support our financial profile.

Peter N. Kellogg

If I can add a couple of points to that as well. You know, when we reissued our guidance for 2010, we obviously adjusted the EPS growth range. And at that time, obviously, the foreign exchange rate movements were already visible to us, so we factored in the exposure and possible ranges for foreign exchange in our guidance for 2010 and that was obviously one of the factors that drove our revision to our growth rate in the 5 to 10 time period.

The other thing I'd mention is that actually I think that 2009 is a year of a lot of implementation, both of the restructuring as well as a lot of our Plan to Win initiatives, and we'll start to see some of the benefits in 2010. Now, admittedly, as I mentioned earlier, two-thirds of the restructuring benefit will come after 2010, but a good portion still will come through in 2010.

So I would say we're quite comfortable, actually, with our outlook for 2010. And we do recognize that COZAAR and HYZAAR will be an impact, but we've seen those impacts before in prior years and we've driven through them pretty well. So we feel quite good about the organic growth in our business.

You know, we do recognize that we're in 2009 getting a big impact from FOREX, but we think that's going to hit a new level and then we'll kind of grow back from there. So we feel pretty good about our guidance for 2010 at this point at EPS.

Operator

Your last question comes from David Risinger - Merrill Lynch.

David Risinger - Merrill Lynch

I have a couple of questions. First, in terms of 2008 hedging gains, can you comment on whether there were any meaningful hedging gains in '08?

Second, with respect to GARDASIL winning only, it sounds like, a little bit more than half of the tenders in terms of the population base ex U.S., can you explain why that's the case when GARDASIL was best in class since it covers genital warts and CERVARIX does not?

And then third, in terms of COZAAR ex U.S. patent expirations, COZAAR and HYZAAR, can you walk us through those?

Peter N. Kellogg

Related to our 2008 hedging gains, yes, we have benefited from some hedging gains in the second half of 2008. Obviously, 2008's been quite a year, a rollercoaster relative to foreign exchange, so in the first half of the year, of course, we watched the euro and a number of other currencies grow relative to the dollar significantly kind of through the June time period. The euro actually got up around $1.60 at one point. And then in the second half, as it fell, obviously some of our hedges did kick in.

I think, you know, perhaps the best way to answer that question is to slip back and say, okay, so net of hedges, how did foreign exchange affect your P&L? And I guess that might be the easiest thing to kind of factor in.

So in 2008, in fact, foreign exchange we anticipate on a full year basis will likely have benefited our revenue line by about 3 points of growth, so that's been a tailwind, quite frankly, for 2008 that we're going to be lapping as we go into 2009 and that converts into a headwind, if you will. And clearly, the hedging gains that we've seen have helped stabilizing Q3 and Q4, and yes, we have seen pretty significant gains from that.

Related to GARDASIL and the comment you made related to the international tender program, I think two things are important. One is, obviously, the tenders are an economic way of doing business and it does challenge us, but nonetheless we are being as competitive as we can be in those tenders. I think that very importantly, though, for GARDASIL, we still have enormous support from the physician groups. So while we may have lost some tenders, in the future we're going to try and fix that. Nonetheless, where physicians have a choice between GARDASIL and our competitors' products, we enjoy the vast majority of prescriptions in those environments.

So I think the efficacy profile, the breadth of GARDASIL, and the amount of usage relative to how well it's been established in the U.S.-international markets all really point in our favor going forward, and we intend to be very competitive in those tender markets in the future.

And the last question related to COZAAR and HYZAAR. Dick, do you want to take that one?

Richard T. Clark

Yes. The patent for COZAAR and HYZAAR is anticipated to expire in a number of major European markets in September 2009, but we are pursuing the pediatric indications for COZAAR, which, if granted, may provide an additional six months of marketing exclusivity.

Eva Boratto

Thank you, Dick. Before I turn the call over to Dick Clark for some closing remarks, I want to remind you that the information today - on today's call - both the transcript and the replay will be available at our website for the next several months, and Mike Nally and I will be available to take your calls and any incremental questions.

Additionally, you will have the opportunity to ask remaining questions on December 9 at our annual business briefing.

Dick?

Richard T. Clark

In closing, I want to note that our Plan to Win initiative has driven enormous change at Merck since 2005, allowing us to deliver solid financial performance while re-engineering every aspect of the company. Next year will continue to be a period of fundamental transformation that established Merck as a different competitor for the next decade. We will emerge leaner and more responsive to our customers' needs and have a pie plan that offers significant potential thanks to the scientific innovation that will continue to be the hallmark of this company.

However, as we complete 2008 and look ahead to 2009, we are in the midst of extraordinary times for the business world and the world economy. There is uncertainty in all areas of the market and the pharmaceutical markets are no exception. We must deal with the fundamental economic impacts along with most other industries, but we also face several specific industrial challenges to our industry as well.

In the midst of this complex landscape, I have full confidence in the fundamentals of Merck's business, our strong balance sheet and cash flow, our product portfolio, our deep strengths in research and development, our great people, and an excellent management team across the globe. The changes we have made are making us really succeed in the near future as well as for the long term.

We look forward to discussing our programs, our strategy, our progress for growth and our exciting opportunity at our annual business briefing next week, so thank you. We appreciate your interest and participation. Operator, thank you for your assistance.

Operator

Thank you for participating in today's conference call. You may now disconnect.

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