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Executives

Eva Boratto - Investor Relations

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

Kenneth C. Frazier - Executive Vice President and President, Global Human Health

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

Bruce N. Kuhlik - Executive Vice President and General Counsel

Analysts

Tim Anderson - Sanford Bernstein

Roopesh Patel - UBS

David Risinger - Bank of America

John Boris - Citigroup

Chris Schott - JPMorgan

Steve Scala - Cowen and Company

Merck & Co., Inc. (MRK) Q4 2008 Earnings Call February 3, 2009 9:00 AM ET

Operator: Good day, everyone and welcome to Merck's Fourth Quarter 2008 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Ms. Eva Boratto, Vice President of Investor Relations. Please go ahead.

Eva Boratto

Thank you, Taylor and good morning. Welcome to our call to review our business performance for the fourth quarter of 2008.

Joining me on the call today is our Chairman, President, and CEO, Dick Clark; Ken Frazier, our Executive Vice President and President of Global Human Health; 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 results contained in the release we issued at 7:30 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 these statements.

The forward-looking statements may include statements regarding product development, product potential, or financial performance. No forward-looking 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 the many uncertainties that affect Merck's business, particularly those mentioned in the Risk Factors and Cautionary Statements in Item 1A 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 your question, 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.

Earlier this morning, we announced results for the fourth quarter and full year 2008. The solid financial results we reported today reflect both the challenges we faced in 2008 and the benefit of our broad product portfolio.

In 2008, we improved efficiencies, managed through a dramatically changing industry environment and took actions designed to better position Merck for success. And we did so during a very difficult and unsettling time for the U.S. and global economies.

In terms of top line for the full year 2008, we recorded revenue of $23.9 billion, 1% lower than 2007. Excluding the impact of the loss of marketing exclusivity for FOSAMAX in 2008, revenue increased by 5% for the full year.

Our full year 2008 non-GAAP earnings per share were $3.42, which excludes certain items. While our full year GAAP EPS were $3.64, reflecting the excellent progress we've made in improving our cost structure and strong growth in key products; JANUVIA, JANUMET, ISENTRESS and ROTATEQ.

Today, we also confirmed our top and bottom line expectations for the full year 2009. Non-GAAP EPS, we expect to be in the range of $3.15 to $3.30 excluding anticipated restructuring charges, and for 2009 GAAP EPS, in the range of $2.95 to $3.17.

For full year revenue, we continue to expect to be in the range of $23.7 billion to $24.2 billion. So based on what we see at this early point in the year, we think revenues are likely to be in the lower half of that range.

Peter will be walking you through some additional details on 2009 guidance and 2008 results a bit later on today's call.

Also in a few moments, Ken will review the performance of our key products as well as our expectations for them. He'll talk about GARDASIL and the impact on revenue and the delay in the FDA approval of the adult women indication.

Now, let me make a few observations about 2008. We were pleased with the standout performance of initiative Merck medicines like JANUVIA, JANUMET, ISENTRESS and ROTATEQ in 2008. We have designed our franchise operating models to manage the entire lifecycle of our products, and they have enabled us to maximize the value of more established products such as COZAAR, HYZAAR and FOSAMAX.

Though results for SINGULAIR and GARDASIL were not where we would have liked them to be, Ken will discuss their performance and improvement actions we have underway.

Next, I'd like to share a few thoughts on the progress we've made in transforming Merck during 2008. We continue to move away from outdated commercial and business models to a new more effective and efficient of operating. We've moved forward with our new approach to customers through our commercial models and with re-engineering our basic research global operations and our new clinical development model. Those efforts are helping to make us leaner, more agile and better positioned for the long term.

By focusing on our core strengths, the new Merck we are building will maximize the value of our current product portfolio and our pipeline. That will enable us to pursue growth through initiatives such as Merck BioVentures in emerging markets, as well as take advantage of the right strategic opportunities.

In 2009, we are building on the progress we've made and taking our supply chain management to the next level using Lean Six Sigma. We are on track in the United States to implement an SAP information technology system that is the key step in fundamentally changing how we run this company.

Merck's overall financial strength, especially during these difficult economic times, is an advantage that enables us to pursue the important work of transforming our company.

Let me move next to our global restructuring efforts. More than just reducing Merck's cost structure, our restructuring initiatives are creating a leaner and more flexible company that is appropriately sized and scaled for the new pharmaceutical operating environment.

In 2008, we completed our 2005 restructuring program and we're on track to realize total cumulative savings of approximately 4.5 to $5 billion by 2010. Our 2008 restructuring plan is well underway, and we continue to expect the capital yield of cumulative pre-tax savings of $3.8 billion to $4.2 billion from 2008 to 2013.

As a result of our restructuring programs, Merck had approximately 55,200 employees at the end of the year 2008, a 10% reduction compared with the 61,500 we had at the end of 2005. We exceeded this reduction while at the same time continuing to hire employees with the new skills and expertise we need to achieve our long-term strategic goals.

We have made significant progress streamlining all management layers across the company, since we announced the effort last October. At that time we outlined plans to reduce our total number of senior and mid level executives by approximately 25%. Those plans are on track.

Let me also emphasize that lowering our costs does not come at the expense of supporting our key products in the marketplace. We are fully supportive of our key brands and are continuing to invest in our pipeline.

During 2009, we expect to file NDAs for three promising candidates in Phase 3 that address patient needs in the treatment of migraine, acute heart failure and lipid management. In fact, Merck's pipeline includes nine Phase 3 programs continuing in 2009 and nine new Phase 3 programs anticipated to start this year.

Finally, I want to comment on vaccine manufacturing. As I mentioned in December, one of our top priority is addressing supply issue for our vaccines. Merck is responsible for providing many of pediatric, adolescent and adult recommended vaccination in the United States. And we take this job very seriously.

Our vaccine manufacturing is inherently complex; we are prioritizing our vaccine production based on the public health needs. We regularly communicate with customers, public health agencies, professional societies about the status of our vaccines. We make sure they know when we are returning to normal shipment times as well as when we are experiencing shortages or delays. In addition, we routinely update our customer website to communicate comprehensive information on a timely basis.

Finally, I want to note that we are investing nearly $1 billion to help ensure we have consistent, robust manufacturing practices and processes that meet existing demands for our vaccines, as well as expand our capacity to meet demand for the next generation of vaccines under development.

While we are focused on building a company that will be a tough competitor in the environment that is very different than one we have known, we are being very careful to protect the values that have long distinguished Merck. Meanwhile, as these harsh economic times continue in the U.S. and around the world, our customers including patients, payers and healthcare providers are likely to feel the effects in one way or another.

Just about all economic forecast data, the United States is in a prolonged period of unemployment, and high unemployment means a rise in the number of people without health insurance. That's why we are already engaged with the new administration and Congress to support reform of this country's healthcare system.

And now part of the United States where most people still lack adequate access to medicine, vaccines and healthcare, we continue to work independently and in partnerships to improve access to our products.

In closing, I want to emphasize that as we move ahead in 2009, the level of determination and the energy throughout our organization remains high. Our employees are the most talented, dedicated people in this industry. They clearly understand the new era for pharmaceutical companies is here today. We strongly believe Merck has what it takes to succeed in a world that places great value on the scientific innovation that continues to be the hallmark of this company.

Now, I'd like to turn the call over to Ken and then Peter, who'll summarize our financial results. After their brief remarks, we will take your questions. Ken?

Kenneth C. Frazier

Thanks, Dick and good morning, everyone. As we move into 2009, we must overcome the lingering effects of last year's business challenges to some of our key products; capitalize our new opportunity all the while continuing to implement our new commercial model.

As we announced today, overall revenue was down 3% in the fourth quarter of 2008 and 1% for the full year. Excluding the impact of the loss of marketing exclusivity for FOSAMAX in 2008 however, revenue increased 5% in the fourth quarter and the full year.

The increase in revenue in the fourth quarter excluding the impact of FOSAMAX was driven by strong growth for a number of our recently launched products including JANUVIA, JANUMET and ISENTRESS. And we also achieved strong growth for ZOSTAVAX as we cleared the majority of the backorders.

Outside the United States, our reported revenue grew 5% with strong volume increases of 10%, thanks to continued launches of new product and strong performance from many of our inline brand.

As we saw in the first three quarters of the year, our revenue growth internationally was offset by continued challenges to driving demand for SINGULAIR and GARDASIL in the U.S. Our overall U.S. business along with that of others in our industry may have been affected by general slowdown in prescriptions for newer medicine.

In addition, the price shortfall of some of our vaccines during 2008 and the year-over-year effects of clearing VARIVAX backorders in the fourth quarter of 2007, also contributed to the sales decline.

Before I get into the details of the performance of some of our key products, I'd like to comment briefly on the current global economy as it relates to our business. At this point, it is difficult to determine whether into what extent the economy could have impacted our 2008 performance. However, many patients, providers and payers around the world are facing difficult choices about spending, which could affect healthcare utilization at the macro economic level and could also affect individual brands as well. We will continue to monitor these trends closely and factor them into our activity and our guidance.

Now, moving to performance of our key brands; beginning with GARDASIL, our HPV vaccine. Sales as reported by the Merck in the fourth quarter were $286 million, a 16% decline when compared to the fourth quarter of last year. In the U.S., sales declined 19% and ex-U.S. sales declined 2%. The ex-U.S. sales decrease was attributable to a decline in Australia because a significant portion of the female population was vaccinated in previous years as part of the publicly funded vaccination program.

In addition, sales of GARDASIL in our SP-MSD joint venture in Europe decreased by 26% versus fourth quarter '07 to 171 million. This is due to a slowdown in demand in large early adopting markets like Germany. Other later adopting markets will continue to grow and we will compete for new government tenders in 2009.

The fourth quarter decline for GARDASIL in the U.S. was affected by three factors. First, as expected, because of the broad use of GARDASIL since launch, the total number of 11 to 18 year olds who have already been vaccinated have increased. As a result, despite continued vaccination in this age group, the overall number of first dose vaccination of 11 to 18-year old has declined.

Second, also as one would expect, there were fewer second and third dose vaccinations in the fourth quarter because there were fewer first and second dose vaccine as administered during the previous two quarters of 2008 when compared to the same period in 2007.

Third, because of continuing challenges to vaccinating the 19 to 26-year old age group, we observed a decline in total vaccinations, during the past quarter compared to the fourth quarter of 2007. I'll remind you that 2007 was the first full year of launch and vaccination rates included the impact of early adopters who are not deterred by some of the barriers to vaccination for this segment.

As I mentioned in December, we learnt that OB/GYNs believed that they have vaccinated a significantly larger percentage of their patients than their actual vaccination rates indicate. As a result, we are implementing program to make OB/GYNs aware of the actual vaccination rates in their practices. Our customers appreciate this initiative as they continue to believe in the importance of this vaccine.

Here are some other examples of some of the programs we have underway. Approximately 6,500 OB/GYNs and primary care officers have enrolled in the dose replacement program which we launched in 2Q 2008 to address their reimbursement concerns.

In the first two to four months since enrollment, we've observed an 8 to 10% lift in sales at these locations versus other locations. Our in-office patient outreach program for physicians and unvaccinated women and parented eligible female has enrolled more than 8000 offices and is distributing 2.5 million patient mailers. This program rolled out in September of 2008.

Last week, more than 4 million enrollees in managed care plan have been informed about coverage of GARDASIL. We've learnt much more about the practice-relating and financial challenges affecting vaccination rates, especially for 19 to 26 year olds. The opportunity is still there. Our research indicates that most of these women maybe receptive to vaccination, in fact less than 10% have decided not to be vaccinated.

While early indications suggest that our programs are beginning to have an effect, the issues they are designed to address are complex and vary from practice to practice. We believe that is why we've not yet seen an impact on vaccination rates overall.

In the 11 to 18-year old group, where high vaccination rates have already been achieved, we continue to work with pediatricians and family practitioners to reach patients -- parents excuse me, whose daughters have not yet been vaccinated.

As you all are aware, in January, we received the second complete response letter from the FDA to our application for the use of GARDASIL in women aged 27 to 45. And based on that letter, we now anticipate responding to the agency in the fourth quarter of 2009.

As a result of delay of the approval and the declining vaccination rates among 19 to 26-year olds towards the end of 2008, we are reducing our 2009 guidance to 1.1 to 1.3 billion. This guidance takes into account both the high level of vaccination already achieved in the adolescent population as well as the challenges of substantially increasing vaccination rates among the 19 to 26-year old population, where the proportion not yet vaccinated is greatest.

These challenges, not withstanding opportunity remains for GARDASIL, the millions of women not yet vaccinated in the 19 to 26-year old population as well as the millions of males and adult women we expect to become eligible for vaccination with GARDASIL over the next two years.

I should note here that the FDA has accepted our application for use in males. We continue to believe in GARDASIL's potential to drive revenue growth. We are fully investing in these programs, and we'll invest in additional innovative programs to drive demand for this product.

Also, let me be clear that our overall cost reduction have not been and will not be at the expense of fully funding the programs needed to help GARDASIL realize its full potential.

Now, I'd like to take a moment to discuss ZOSTAVAX. Total fourth quarter sales as reported by Merck were $162 million, as we cleared the majority of backorders in December 2008. We are working with our customers to drive appropriate utilization for this novel vaccine.

For example, we've implemented a patient notification service and pharmacy-based outreach initiatives. Demand for ZOSTAVAX continues to be strong, and we currently believe we will clear all existing backorders in the first quarter of 2009, and that we will have normal shipping time sometime within the second quarter.

Once the backorders are resolved, we expect to have adequate supply to meet anticipated U.S. customer demand for the rest of 2009. We remain excited about the potential of ZOSTAVAX and we look forward to supplying this important vaccine to our customers.

Turning to SINGULAIR, sales in the fourth quarter were 1.1 billion, down 3% versus the prior year. Performance in the fourth quarter reflects the decline in the U.S. business of 11%, which was partially offset by strong 15% growth outside the U.S. SINGULAIR continues to do well in Japan, for example, thanks to the successful launch of the allergic rhinitis indication and the introduction of the oral granular formulation for pre-school aged children.

For the full year, the U.S. performance for SINGULAIR was affected by the availability of ZYRTEC OTC, a smaller allergic rhinitis season in both the spring and the fall and the FDA early communication in March 2008. Merck is pleased that the FDA has now issued its follow-up to its early communication on SINGULAIR. Our sales force is prepared to provide appropriate information to healthcare practitioners about the FDA communication.

Merck stands by the proven efficacy and safety of SINGULAIR, a medicine that has been prescribed to tens of millions of patients with asthma and allergic rhinitis for more than 10 years. We are devoting significant resources to programs designed to improve performance and drive growth of SINGULAIR in the U.S.

Our sales force had new materials for use for physicians and SINGULAIR remains the key priority as we roll out our new commercial model in the U.S. early this year. We continue to utilize multiple channels for SINGULAIR, including new trial and coupon kit for new patients, educational materials, print, TV and online DTC, in-office branded marketing programs, pharmacy programs, and adherence initiative. We have the resolve as well as the resource plans and materials to ensure SINGULAIR remains the number one respiratory product in the U.S.

We are very pleased with the performance of ISENTRESS since its global launch in the fourth quarter of '07. Sales in the fourth quarter were 130 million, up 21% sequentially versus the third quarter. In the U.S., fourth quarter sales were 71 million and continue to exceed the last five launches in TRX market share through December.

On January 30, the U.S. Food and Drug Administration granted conditional approval to ISENTRESS following review of the 48-week data from the BENCHMARK-1 and 2 clinical study. ISENTRESS was originally approved under the FDA's accelerated approval process in 2007 with 24-week data. ISENTRESS is currently approved in 70 countries on six continents including all top 10 HIV markets. Overall, uptake has been strong and we look forward to continued success in 2009.

Global revenue for JANUVIA and JANUMET grew in the fourth quarter to reach 532 million, up 11% sequentially versus the third quarter. In U.S., JANUVIA continues to be the second leading branded oral antidiabetic agent in terms of new prescription share. Despite the slowdown in the overall U.S. diabetes market last year, the JANUVIA/JANUMET franchise continues to grow in both volume and share, and is the fastest growing family of products in the oral segment of that market.

JANUVIA delivers strong once-daily efficacy in a single pill without compromising the weight gain and hypoglycemia associated with other oral diabetes therapy. JANUMET combines JANUVIA with metformin for powerful ultra fast efficacy. We have invested in new patient educational tools administered by diabetes educators around the U.S. and we have an integrated adherence program to help patients remain on JANUVIA and JANUMET therapy.

In addition, we are extremely pleased with the international performance of JANUVIA/JANUMET in the fourth quarter. In the EU, these medicines are the fastest growing family of products in the oral diabetes market. JANUVIA is the only marketed DPP-4 inhibitor that is once-daily for all indications. It is widely reimbursed and JANUMET is gaining equally strong reimbursement status. In all markets where more than one DPP-4 exist, sitagliptin is the market leader.

Finally, India, Brazil and other emerging markets have enjoyed strong growth since launch. Globally, more than 10 million prescriptions that are written to-date and as these products are major growth drivers for Merck in the short-term as well as the long-term, we are investing in them to ensure that we realize their full potential.

As we mentioned at the annual business briefing, we have one new fixed-dose combination product in Phase 3 development with pioglitazone and we anticipate starting two new Phase 3 development programs this year, an extended release for JANUMET as well as a sitagliptin simvastatin fixed-dose combination.

Now, I would like to take a moment to provide an update on the performance of our cholesterol JV. Let me start by saying, we are pleased that the FDA has completed its review of the ENHANCE study, and that their tradition (ph) remains that elevated LDL-C cholesterol is an important risk factor for cardiovascular disease. The agency goes on to say that based on currently available data, patients should not stop taking VYTORIN or other cholesterol lowering medication and should talk to their doctor if they have any questions about VYTORIN, ZETIA or the ENHANCE trial.

Our sale forces are prepared to provide appropriate information to healthcare practitioners regarding the FDA communication.

Moving to performance, worldwide sales of ZETIA and VYTORIN as reported by the Merck/Schering-Plough joint venture were 525 million and 549 million respectively in the fourth quarter. Sales of ZETIA were down 23% and sales of VYTORIN were down 29% versus the prior year.

Market share for ZETIA and VYTORIN in the U.S. appears to be stabilizing. Outside the U.S., sales of the fourth quarter were flat relative to 2007, but were up 13% after adjusting ForEx change. We continue to anticipate growth outside the U.S. in 2009, excluding the effect of foreign exchange. We will remain steadfast 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 goal.

Before I close and turn over the call to my colleague, Peter Kellogg, I just want to mention that we are continuing to progress in our global rollout of new commercial model, which are designed to respond directly to our individual customers needs around the world.

In the EU, many of our new models are already established; and in the U.S., we expect to complete a national rollout in early 2009 after strong pilot results achieved last year. We fully expect this model will help us drive revenue growth for key franchises and markets while improving efficiency and customer value associated with all of our customer interactions.

I look forward to updating you closer about our progress in this important initiative in future calls.

In closing, I assure you that the entire Global Human Health Organization is focused upon restoring growth in 2009 by continuing to address challenges with some of our key products and by capitalizing on opportunities with our customers.

Notwithstanding the overall slowdown in branded prescription growth for primary care brands in the U.S., Merck has a portfolio of medicine and vaccine that offers unique value to our customers. And we continue to believe that tremendous commercial opportunities exists to grow our established and our newer brand in markets around the world.

We are confident that our continued focus on efficiencies on the marketing and administrative lines demonstrated through 2008 will help drive overall margin improvement, and that the plans we have in place to fundamentally change our business model will enable us to better meet the needs of our varied customer base and to drive the top line for our medicines and vaccines.

So with that, I will turn the call over to Peter Kellogg.

Peter N. Kellogg

Thank you Ken, and good morning.

I will provide an update on the following; our fourth quarter and 2008 results and our 2009 guidance. Now for guidance, I will only highlight those elements of our guidance that have changed as we provide a breakdown of all the elements of our guidance in our other financial disclosure schedule attached to the press release issued earlier today.

Merck reported fourth quarter non-GAAP earnings per share of $0.87, representing growth of 9% over the fourth quarter of 2007. On a GAAP basis, EPS for the fourth quarter was $0.78. As Dick and Ken discussed, fourth quarter results reflect the blend of revenue performance, strong expense management, and a favorable tax benefit.

For the full year 2008, non-GAAP earnings per share was $3.42, representing a growth of 7% over 2007. On a GAAP basis, EPS for the full year 2008 was $3.64.

Turning to revenue, total revenues in the quarter, as reported by Merck, was $6 billion. Total revenue for the year was 23.9 billion.

Now Ken already walked you through product performance, so I'll quickly just cover the guidance. As Ken shared with you, we are reducing our 2009 guidance for GARDASIL by $300 million to a new range of 1.1 billion to $1.3 billion.

Moving in the other direction, we are increasing our guidance for supply sales to AstraZeneca by $100 million to a new range of 1.3 billion to 1.5 billion, reflecting current market trend. We continue to expect 2009 revenue in the range of 23.7 billion to 24.2 billion. However, based on current information, it is likely that revenues would be in the lower half of that range.

Our fourth quarter materials and production costs were 1.5 billion, which includes 33 million for costs associated with the global restructuring program primarily related to accelerated depreciation. Excluding restructuring costs in 2008 and 2007, material and production increased 1% in the quarter.

Reported PGM was 75.6%. Excluding the restructuring costs, PGM was 76.2%.

Just as in previous periods, these results reflect our final product mix, particularly driven by the patent expiry related decline from the Q4 U.S. COZAAR/TRUSOPT expiry and the Q1 U.S. FOSAMAX expiry.

Marketing and administrative expenses were 1.9 billion in the fourth quarter, an increase of 8% versus the fourth quarter of 2007. But let me provide you some additional perspective on that. Included in the fourth quarter of 2008 marketing and administrative expenses is an increase of $62 million to the VIOXX legal defense reserve. Included in Q4, 2007 was a gain of $455 million from insurance proceeds.

Excluding these items in both 2007 and 2008, M&A expenses decreased 17% in the fourth quarter. The lower spending for the quarter and the year is attributable to savings from our new commercial model that Ken discussed and corporate G&A efficiency programs.

We are benefiting from U.S. sales force reductions completed in July and similar European sales force reductions during the year. We are also continuing to realize reductions in our administrative expenses, as Dick mentioned earlier, particularly in some of the support functions. We have maintained a healthy amount of support behind our core and successful newer franchises.

I would also note that 2008 spending was reasonably steady throughout the quarters, highlighting consistent and steady investments. Full year M&A was 7.4 billion, down 6% versus 2007 excluding legal defense reserves in 2007 and 2008 and the $455 million insurance arbitration gain recorded in 2007.

Turning to research and development, expenses in the fourth quarter were $1.4 billion, essentially flat versus the fourth quarter 2007. When you adjust for the restructuring cost in the fourth quarter of 2008, Q4 R&D spending is down 7%. The fourth quarter year-over-year comparison is affected by the timing of research activities with third-party collaborations.

Now we continue to invest in late-stage clinical trials and in the fourth quarter, there was increased spending to support development programs for our promising new drug candidates, among which are rolofylline, odanacatib, 5-LO, anacetrapib as well as JANUVIA.

For the full year, R&D expenses were $4.8 billion. When you address the restructuring charges recorded in 2008 and the $325 million acquired research charge associated with the purchase of NovaCardia in the third quarter of 2007, R&D expenses grew 3%. We remain committed to fully funding core internal and external R&D, ensuring the continued progress of compounds in all phases of development.

Now let's turn to equity income. In the fourth quarter, Merck reported $720 million of equity income. There were two major impacts in this result. First, the equity income contribution from the Merck/Schering-Plough joint venture was down 30% or $160 million as results of ZETIA and VYTORIN market share losses in the U.S. Outside the U.S., sales in the fourth quarter were flat relative to the 2007. However, if we adjusted international Q4 results for exchange, MSP sales increased 13%.

Second, the AstraZeneca joint venture equity income was $267 million, which is $55 million higher in the fourth quarter compared to the prior year. This increase in equity contribution is attributable to the inherent timing variability of payments from AstraZeneca.

Moving to other income and expense, that line for the fourth quarter was $3 million of expense. This compares to $567 million of expense in the fourth quarter of 2007, which included a $671 million charge related to the resolution of certain civil government investigations.

Excluding that charge, other income expense was $107 million lower than the fourth quarter of 2007. The largest contributors to the year-over-year change is our balance sheet foreign exchange translational loss and lower net income, our interest income result as a result of the lower interest rate that we're all becoming accustomed to.

Now moving to the tax line, Merck's fourth quarter GAAP effective tax rate was 14.7%. Excluding the impact of restructuring charges, the non-GAAP effective tax rate was 14.5%. These rates reflect, first, the benefit of approximately 5 percentage points related to the favorable tax impact of foreign exchange rate changes during the quarter, particularly the strengthening of the Japanese yen.

And secondly, a benefit of approximately 3 percentage points related to the U.S. research and development credit, which was enacted as part of the Emergency Economic Stabilization Act on October 3rd. The resulting full year benefit is recorded in the fourth quarter.

Now, let's turn to some other financial matters, and I'd like to take a minute to speak about Merck's overall financial strength. As you know, Merck maintains a strong balance sheet and a conservative investment policy. As of December 31st, our current cash and investment portfolio totals approximately $18 billion, which includes $6 billion pledged as collateral for bank guarantees related to certain items, including the VIOXX product liability settlement from last year.

I also want to continue to emphasize that we have the financial strength to support our dividend, and we remain fully committed to maintaining it at the current level, while at the same time continuing to fund our important investment priorities.

So to summarize, in 2008, despite the loss of patent exclusivity for FOSAMAX and continued challenges in our VYTORIN, ZETIA, SINGULAIR, and GARDASIL U.S. franchises, we achieved solid EPS performance. We delivered non-GAAP EPS of $3.42 for the year through aggressive expense management and strong growth in key products as Ken discussed, JANUVIA, JANUMET, and ISENTRESS.

However, it is clear that we did benefit from foreign exchange on a full year basis and various discrete tax items. As we look ahead to 2009, we reaffirm our non-GAAP EPS guidance of $3.15 to $3.30 and this corresponding GAAP EPS guidance of $2.95 to $3.17.

Please keep in mind as we think about the quarterly patterns, the company continues to expect 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 expense and R&D expenses to be relatively equally distributed across the four quarters.

We are reiterating our longer term guidance. We continue to expect revenues will have a compound annual growth rate of 2 to 4% from 2005 to 2010, including 50% of the revenues from the joint ventures.

Merck's GAAP reported sales, which exclude the 50% of revenues from our joint ventures, is expected to have a compound annual growth rate of 1 to 3% from 2005 to 2010.

Looking at non-GAAP EPS compound annual growth rate, we continue to expect it to be in the mid to high single-digit range over the same time period, excluding certain items with GAAP EPS compound annual growth of double-digits.

Thank you very much. And I would like to turn the call back to Eva. Eva?

Eva Boratto

Thank you, Peter.

We will now open the call to take your questions. We will take your questions in the order they are received and try to get through as many as possible. Joining us for the Q&A session is Bruce Kuhlik, our Executive Vice President and General Counsel.

At this point, I will turn the call over to Taylor, who will communicate the 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 the line of Tim Anderson of Sanford Bernstein.

Tim Anderson - Sanford Bernstein

Thank you. I have a couple of questions. Just to be clear, on the revenue guidance for 2009, I am wondering if you can rank order the elements of why that maybe at the lower end of the range you gave just about two months ago.

And then, foreign exchange impact on total sales in fourth quarter was only a negative 1%, which I think was the lowest of all the drug companies reporting thus far. And I'm wondering why that might be the case.

Last question on ZOSTAVAX; can you give us the demand driven sales in fourth quarter ignoring the filling of backorders?

Peter Kellogg

Okay. Tim, it's Peter. Let me take the first two, and let me think about the ZOSTAVAX calculation here for a second. So, our comment related to the range for total revenue for the year really reflects the revision to guidance that we provided for GARDASIL, offset slightly by the AstraZeneca and then just some other trends that we are observing. And we are just kind of highlighting that as we rolled in two changes to the individual line items in revenue, we didn't change the full revenue guidance range, because we think it's actually it's very early in the year and there is a lot of... is quite a healthy range of outcome that could occur in a lot of different products.

Certainly we've gotten some good letters back from the FDA, and we've certainly gotten some instinct developments in the lifecycle management as Ken talked about. So, but we primarily indicated the lower end because of the most recent trends in some business; but most importantly, it's the GARDASIL guidance revision.

On foreign exchange, you are right. As you'll note in the attachment to the press release that our ForEx impact in the fourth quarter top line revenue was negative 1%. Now that, I really haven't actually checked all the other companies. But as you do know, we have a revenue hedging program at Merck that we roll in the hedges over time. And obviously, as we saw the foreign exchange rates peaking, I'd say in the first half of last year, we really wrapped up a lot of fairly good hedge positions. That certainly helped us.

I'd say that we have... that's not something that I would characterize as unusual or unique. We have an ongoing hedging program that we roll in the hedges over three years. It's based against the major currencies. And so perhaps that was the driver of why the foreign exchange rate impact for us as it may appear little bit less than other companies. I really can't comment on the other companies.

Finally for ZOSTAVAX, let me turn it over to Ken.

Kenneth Frazier

Thank you, Peter. As I mentioned, we are very pleased that we cleared the majority of backorders in 4Q '08 representing orders received in both 3Q '08 and 4Q '08. While we cannot estimate the amount of inventory at the provider level, we expect the volume of shipments in December will impact first quarter '09 purchases as provided resume normal order patterns.

Prescriptions, which represent a portion of the business for ZOSTAVAX showed 4Q, '08 volume at levels comparable to 4Q, '07. And while it is difficult to estimate the total demand following the extended backorder period in second half of 2008, we consider this could be a positive sign of the demand for ZOSTAVAX. Thank you.

Eva Boratto

Next question, please.

Operator

Your next question comes from the line of Roopesh Patel of UBS.

Roopesh Patel - UBS

Thank you. I've got three questions. First on the tax rate, the 500 basis points benefit this quarter due to FX, Peter, I was just wondering if you could kindly elaborate on that and clarify if this is just a one-time benefit or if there is a spillover in 2009?

Secondly, GARDASIL international sales down sequentially around 45% versus the prior quarter. Could you please elaborate on what explains this big deceleration?

And lastly, on VARIVAX, if you could also just provide some color around its performance in the fourth quarter and what we should expect in 2009? Thanks.

Peter Kellogg

Hi, Roop; this is Peter. Let me take the first one on the tax, the five points of impact from the yen strengthening. So, just summarize very quickly, I would view that, I would anticipate that to be a one-time event. We do see sometimes foreign exchange impacting our net monetary assets on our balance sheet.

And sometimes when certain movements occur, they can create a gain or loss; and some times that loss on a tax basis does create a deduction on our cash return. So it generally tends to be only in periods when the currencies such as yen, a big currency like the yen, moves back significantly in a short period time and create a noteworthy gain or loss. In this case, it's a loss that is on a tax basis is deductible.

For the performance of GARDASIL versus prior quarter, it was down 45%.

So Ken, I want to turn that over to you.

Kenneth Frazier

So I think there are a couple of things. As we mentioned, it was the fulfillment of the Australian program and the product impairs; that's one issue. The Canada program was implemented in the third quarter of '08. But I think the real issue here that we are pleased about is that we see continued strong uptake in markets across Europe as well as reasonably good uptake as it relates to the comparison of market share.

And I will remind you that in those countries, where both vaccines are reimbursed by the government and physicians have a choice, GARDASIL has a share of 90% or greater in those markets. So we continue to be pleased with that.

With respect to VARIVAX, in the fourth quarter '07 significant amount of backorders for VARIVAX, about $35 million were cleared. And when you adjust for those backorders, sales in the 4Q, 2008 were actually up 56%.

Eva Boratto

Next question, please.

Operator

Your next question comes from the line of David Risinger of Bank of America.

David Risinger - Bank of America

Thanks very much. I have operating, financial and R&D questions. First on the operations; can you discuss the SAP systems implementations? For many, many companies, they are often quite problematic. And can you explain your assumptions for being able to operate seamlessly despite the implementation?

Second, in terms of your sequential quarterly outlook for the first quarter of '09, is there anything that you'd like to call out versus what you just booked in the fourth quarter of '08 that we should be sensitive to?

And then third, with respect to ISENTRESS once daily, can you talk about the registrational trial timeline including when you'll disclose the interim look? Thank you.

Richard Clark

I'll take the SAP question. We are really confident in what we are accomplishing with SAP, probably for several reasons. One is that we have spent a great deal of time in making sure that the planning takes place, that we have line executives involved in it, that we really do our homework in making sure that we are putting the right systems in. And then quite frankly, we put a rule in place that we will do no customization, and any customization that takes place with our SAP system has to be approved by me. And a lot of the systems that haven't worked as well in the past have had a lot of customization, where it is very difficult to implement, but it is also very difficult to get the kind of savings we're talking about.

So probably most importantly, what we've been able to do so far is that we have run a significant pilot, our first pilot in Mexico, and that went extremely well. We learnt a lot from that pilot. We made improvements as we go to our next market. And we just completed at the end of last year, a major pilot in Puerto Rico, which included manufacturing and finance in our Global Human Health from Puerto Rico.

So it was a much larger project in pilot than just Mexico. And that was just spectacular. In fact, the feedback we are getting is that may have been one of the best pilots ever in SAP to go live. And Ken and I and Peter have spent a great deal of time in Puerto Rico celebrating with our team.

So I think we have enough confidence that we have done two major pilots that worked well. We've made improvements. And the fact that we have line people involved and a significant amount of line people involved to go live in the United States gives us the confidence that we need.

Peter Kellogg

So David, let me take the second question, which was your -- I think was your financial sequential quarter question. And you said -- I think you asked basically where there are any items I'd like to call out going from Q4 to Q1.

As I think about it, actually we have probably quite a few. So let me bounce you a few that I would think about. First of all, obviously last year, FOSAMAX went off-patent in February in the U.S. So we did have some sales in the beginning of Q1 last year with pre-patent expiry sales volumes and levels. Likewise, COSOPT/TRUSOPT went off our patent in October of this year. So you should look at the impact of that in the fourth quarter and think about that for the first quarter of this year.

Now that, obviously some of that was in the fourth quarter already, and I think the same could be true about FOSAMAX because if you look year-over-year that will be important to think about.

I mentioned several times that we are anticipating to see our expenses both in R&D and sales and marketing or SG&A. We also think it would be flat as we go quarter-to-quarter and through the year. In the past, we've seen some spikes in the fourth quarter and we don't anticipate seeing those, we didn't see them in 2008. We won't expect to see that again next year.

I would highlight that if you look over time, clearly, there has been seasonality in our revenue. We tend to see January as our weakest revenue quarter. So I would highlight that that would be something to factor in your thinking, although I'm sure your models already have that.

We did indicate also that we are working through the PGM trends right now. PGM is little softer in the fourth quarter. In fact, it was softer in the second half, but on a full year basis next year, we expect it to return. That may not proper our place (ph) in the first quarter, but these are all things to think about.

Then I think equally importantly, we did see tax benefits in the first half of this year as well from the fourth quarter that I just discussed. And we would expect to return to the normal tax range that we would guide to our full year basis in the first quarter. So, those are things that come to mind, I would -- I can't go through and give you specific guides, but those are things to think, factors to think about.

Kenneth Frazier

As it relates to ISENTRESS in once-daily setting the trends away, as you know it started in the fourth quarter of 2008. I can't say when we will be able to provide any data as it relates to that, at the completion on look. But we do anticipate filing in 2011.

Eva Boratto

Next question please.

Operator

Your next question comes from the line of John Boris of Citi.

John Boris - Citigroup

Thanks for taking the questions. Dick, I think you mentioned that you would like to take advantage of the right strategic opportunity going forward. Can you just give some commentary or your thoughts on your appetite for large transformative deal versus smaller strategic type tuck-in acquisitions and what you mean by right strategic opportunity? And then, your commitment based on the amount of cash flow that you are throwing off, your commitment to the dividend going forward?

And then on SINGULAIR, when do you anticipate that the FDA is going to come back to you on the review of your clinical data? And then on the litigation side on SINGULAIR, I think you will be entering the courts, litigating the patent on SINGULAIR with Teva. How confident are you that the judge will issue an opinion before the 30 months they expires? Thanks.

Richard Clark

Well John, in talking about strategic opportunities, as I mentioned over the previous few weeks, we are still very focused on strategic opportunities. Obviously, they will have to have shareholder value as we move forward, so it's not an event just from an event standpoint.

Concerning large scale transactions, as I said before, I wouldn't rule anything out. I don't think in today's world, any CEO can categorically rule out any type of transaction. There are opportunities across the whole spectrum that we look at, and it could -- a point again is, the transaction has the financial and deliver value to our shareholders. So I think we're looking at the entire spectrum and quite frankly, an important part of how we look at thing is the importance of the dividend and to make sure that we continue to support a strong dividend, which has been part of Merck's reputation.

Kenneth Frazier

On SINGULAIR, as you know, we're pleased with the FDA statements to date relating to suicidality in the absence of any real evidence of a connection based on clinical data between SINGULAIR and suicide or suicidal behavior. We can't say or speculate on when the FDA will come forward with additional analysis of the data. That's underway with respect to the entire class.

Bruce Kuhlik

So... and this is Bruce Kuhlik. With respect to the patent trial, we still are scheduled to go to trial on February 23rd. And both parties have asked for a decision from the court before the stay expires on August 20. Based on the judge's history of decisions, we've got every expectation that we'll issue a decision before then, and obviously we would not expect that would delay beyond 30-month stay. And we have contingency plans in place in case if it does.

Eva Boratto

Okay. Given the time limit, there is time for about one or two more questions. Next question, please.

Operator

Your next question comes from the line of Chris Schott of JPMorgan.

Chris Schott - JPMorgan

Great, thank you. Just a question on GARDASIL. Sequentially, should we expect a step up in U.S. GARDASIL sales relative to 4Q? So I am thinking it's relative to the patients getting their first and second doses over the summer returning for a third shot?

Second question on GARDASIL, by your estimates, roughly what percent of 11 to 18 year old to this point have received at least one dose of GARDASIL at this point? And maybe just a final question with regards to larger... within a large M&A transaction as for the space. Just two points on that: first, do you see further opportunity on the cost side as we see what appears to be an accelerating trend towards cuts across the industry? I know you've done a lot, but is there more opportunity? And then when you say large transactions, you are looking on everything. Would that include another major pharma company? Thanks.

Kenneth Frazier

Starting with GARDASIL, at the current point in time, I don't think we are in a position to give specific guidance on the quarter-to-quarter patterns that we expect to see.

As it relates to the 11 to 18 year olds, without getting specific, it is significantly higher in that population than it is, for example, in the older population. We've gotten much quicker penetration in the adolescent population with pediatricians and general practitioners than we have of the 19 to 26 year olds.

Richard Clark

From an M&A standpoint, as I said before, anything we do must make sense from a shareholder standpoint. And as you've heard me say before, I think there is overcapacity in the industry. And I think the important thing that Merck is doing is that we are recreating a new business model. And so we are not only taking costs out of the system, we are really completely looking at a different way of running the company and research and manufacturing and how we support our customers. And so, there is certainly, in my opinion, if you do that the right way, there is a lot of cost that still need to come out of this system.

Eva Boratto

Okay. We will take one more question.

Operator

Your final question comes from the line of Steve Scala of Cowen

Steve Scala - Cowen and Company

Thank you. Two questions on the cholesterol franchise. Merck said on its third quarter call that about two-thirds of patients would have access on the second tier in 2009, and that was down from 75% in 2008. That was prior to certain formulary changes and also a positive study from a competitive product late in the year. So has there been any change in that two-thirds figure that you were looking at for 2009?

And secondly, Schering said on its conference call earlier today that it was investing for future growth in this franchise. Do you think growth in the U.S. and in 2009 is likely? Thank you.

Kenneth Frazier

So, let me start by saying that the two-third figure that we anticipated continues to be what we see for VYTORIN and ZETIA. That is as you reimburse without restrictions on second tier for about two-thirds of patients in commercial and Medicare Part B plan.

As it relates to future growth, let me start by just saying that prior to last year, these were products that had been well received in the marketplace. As the result of those controversies, we have seen a slight change in how... significant change in how these products are actually used.

We continue to believe in these products. The FDA's recent statement underscores the importance of LDL, lowering the guideline that exist in the U.S. and that are online in Europe underscore those. And so I can say without predicting when the growth will resume, we fully expect that as people begin to reflect upon the importance of getting large numbers of patients to their cholesterol lowering goal, they will realize that ZETIA and VYTORIN are important ways of achieving that objective. And we continue to invest competitively behind these brands with the hope and the expectation that overtime they will be restored to grow in the U.S.

Eva Boratto

That last question concludes today's conference call. The information from today's call, both the transcript and the replay, will be available at our website for the next several months. And Carol Ferguson and I will be available to take your calls and any incremental questions.

Taylor?

Operator

Thank you. This concludes today's Merck's fourth quarter 2008 earnings conference call. You may now disconnect.

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