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Merck (NYSE:MRK)

F1Q09 Earnings Call

April 21, 2009 8:30 am ET

Executives

Eva Boratto - Vice President of 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 - Chief Financial Officer, Executive Vice President

Bruce N. Kuhlik - Executive Vice President, General Counsel

Peter S. Kim Ph.D.- Executive Vice President and President - Merck Research Laboratories

Analysts

Tim Anderson - Sanford Bernstein

David Reisinger - Morgan Stanley

Jami Rubin - Goldman Sachs

Roopesh Patel - UBS

Tony Butler - Barclays Capital

Chris Schott - J.P. Morgan

Steve Scala - Cowen and Company

Barbara Ryan - Deutsche Bank Securities

John Boris - Citigroup

Seamus Fernandez - Leerink Swan

Operator

Good day everyone and welcome to Merck’s First Quarter 2009 Earnings Conference Call. (Operator Instructions) At this time I would like to turn the call over to Miss Eva Boratto, Vice President of Investor Relations. Please go ahead.

Eva Boratto

Thank you and good morning. Welcome to our call to review our business performance for the first quarter of 2009. Joining me on the call today are, as always, 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. We recognize there continues to be a high level of interest in the merger we announced on March 9, so also here on the call today to participate in the Q&A portion are Bruce Kuhlik our Executive Vice President and General Counsel and Dr. Peter Kim Executive Vice President and President of Merck Research Laboratories who may be met with [Dori Morbrocha].

Before we get into the details I would like to go over some logistics. On this call we will review the results contained in the release we issued at 7:00 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 web cast live and recorded. The replay of this event will be available later today via phone, web cast, and pod cast.

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. Such statements may include, but are not limited to statements about the benefits of the proposed merger between Merck and Schering-Plough including future financial and operating results; the combined company’s planned objectives, expectations, and intentions, and other statements that are not historical facts. Statements about the merger are based upon the current beliefs and expectations of Merck and Schering-Plough’s management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in these forward-looking statements.

In connection with the proposed transaction, Schering-Plough will file a registration statement, including a joint policy statement of Merck and Schering-Plough with the NPC. Investors are urged to read this registration statement and joint prophecy statement because they will contain important information.

Merck undertakes no obligation to update any forward-looking statement whether it is the 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, 2008 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 questions and expect to complete the call in approximately one hour.

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

Dick Clark

Thank you Eva and good morning everyone. This morning I want to comment on our first quarter, give you an update on planning for our proposed merger with Schering-Plough, and talk briefly about our ongoing efforts to strengthen our existing operations and businesses and transform our company into a leading global healthcare company.

Our first quarter results in part reflect the impact of the difficult economy on patients, providers and payers, but we remain on track to meet our full years’ earnings guidance. We saw continued growth during the first quarter in our newest medicines JANUVIA, JANUMET and ISENTRESS. The first quarter also reflects the visual effects of the loss of marketing exclusivity for FOSAMAX in 2008, softness in the performance of SINGULAIR and GARDASIL, as well as constraints in our vaccine supply.

In terms of top line for the first quarter we recorded worldwide revenue of $5.4 billion. Our first quarter non-GAAP earnings per share were $0.74 which excludes certain items and GAAP EPS was $0.67.

As we said back in January, we expected the first quarter to be our most challenging in 2009. Looking ahead we continue to believe our performance in the second half of the year will be stronger. It is still early, but we are seeing some encouraging signs in the weekly US market share data for SINGULAIR and for ZETIA and VYTORIN where trends appear to be stabilizing.

In a few moments Ken will review our sales performance for the quarter and then Peter Kellogg will provide the additional details of the underlying financial results. He also will comment on our 2009 guidance. Following these comments we will be available to answer your questions.

Last December I promised you at our company’s annual business briefing that 2009 would be a time of fundamental transformation at Merck: a time that establishes the company as a different competitor for the next decade and beyond. Even before we announced our pending combination with Schering-Plough last month our goal was to emerge from our transformation as a new Merck for the pharmaceutical industry of the future. One that would stand out among our peer companies by delivering sustainable growth from a portfolio of innovative products, products distinguished by the value they provide to patients and payers.

Our planned merger with Schering-Plough will celebrate that transformation. That is because of this unique opportunity for us to create a new leader of global healthcare by combining the best programs, processes, and people in the industry. We will have an even more talented group of employees and be able to offer a more diverse product portfolio to more customers worldwide. That will especially be the case in emerging markets that help generate our future growth. Markets like Brazil, Russia and Poland. Just as importantly we will have an extended pipeline with more promising candidates in all stages of development.

With that context let me update you on the progress we are making with our planned Schering-Plough merger and the key steps we’ve taken since our March 9 announcement.

The syndication of financials has been completed. We have made the appropriate balance with regard to the Hart-Scott-Rodino Antitrust Improvements Act. We expect to plough our preliminary proxy balance towards the end of next month so that both company’s shareholders can vote for the transaction. To enable the majority of our people to focus on business continuity and deliver on 20098 results we have established an integration management organization led by Adam Schechter who is our President of Global Pharmaceuticals. This group of key executives will handle the heavy lifting of planning for the integration of Merck and Schering-Plough.

Adam already has our newly created integration management office up and running. Adam and his team are working closely with his counterparts at Schering-Plough and the parallel integration team he leads. Top Merck leaders, including myself, have participated in the series of town hall meetings with employees through out Schering-Plough. We have met more than once with our counterparts there and their leadership teams. We have been very encouraged by these meetings and the enthusiasm we see among Schering employees for the benefits of the merger.

As we announced last month, we expect the merger on a non-GAAP basis will be accretive in the first full year after the deal closes and then significantly accretive there after with the opportunity to have $3.5 billion of incremental synergies beyond 2011. We remain committed to maintaining Merck’s dividend at the current level following the close of the transaction, and we remain on track to complete the merger in the fourth quarter of 2009.

That is the merger update, now let me mention an update to our pipeline.

As you know, as you have seen in our early news release this morning, we are delaying the US filing of telcagepant a potential treatment for migraine. We believe this is the most appropriate course following recent findings from an exploratory study in which a small number of patients taking telcagepant for the prevention of migraine were found to have a significant elevation in liver enzymes. The daily dosing regimen and prevention study was different than the dosing regimen used in Phase III studies for the acute treatment of migraines. Other studies with telcagepant for the acute treatment of migraines continue while we are doing the work to further understand the overall safety profile of telcagepant.

With planning for the merger in full swing this is an exciting and transformational time for Merck, however we are committed to the here and now and very focused on meeting our 2009 goals. My entire leadership team and I are communicating frequently to ensure that everyone at Merck remains focused on the business of Merck. We are determined to avoid any interruptions in our efforts to improve our operations and we are moving forward with our more effective commercial and other business models. To that end we are now operating our new commercial selling models in the United States and other markets around the world.

In our labs we are continuing ahead with the reengineering of Merck’s basic research operations and our clinical development model and we continue to seek out the best science where ever in the world it may be and bring it to Merck. Just in this month, for example, Merck announced three collaborations to broaden our portfolio. Together with our partner Cardiome Pharma we announced the collaboration for the development and commercialization of the investigational candidate for the treatment of heart disease.

Santen Pharmaceuticals and Merck announced a worldwide licensing agreement for a compound under investigation in the United States for the treatment of glaucoma. In addition, Merck signed a worldwide license agreement with Medarex and Massachusetts Biologic Laboratories for an investigational combination antibody therapy for the treatment of serious intestinal infection that has completed Phase IIb clinical studies.

We are also continuing to provide strong support for our biologic division by completing the purchase last month of Insmed’s biologic portfolio and manufacturing capabilities.

These are all exciting additions to our pipeline and highlight our strategy moving forward with the Schering-Plough merger while at the same time continuing to identify and invest in targeted, strategic opportunities. This is the benefit of Merck’s overall strong performance, astute financial management, and the transformational work we have done over the past five years to enable us to invest in our future growth.

Before I turn the call over to Ken, let me assure you that all of our dedicated employees are working hard to position Merck for the long-term success.

Now I would like to turn the call over to Ken.

Kenneth Frazier

Thank you, Dick, and good morning to everyone on the call. As you have already seen revenue for the first quarter of 2009 was $5.4 billion down 8% compared to last year and down 4% excluding the impact of exchange. Our overall results were driven by a combination of factors. We generated strong growth for our newest brands in markets around the world and saw volume increase by 6% outside the US, although this growth was more than offset by foreign exchange.

In the US the continued impact of the loss of marketing exclusivity for some of our brands, challenges to our vaccine business, and a reduction in wholesalers inventory levels led to a 10% decline in the US sales despite strong performances for JANUVIA, JANUMET and ISENTRESS.

As we move through the year we expect improvements to our top line relative to the first quarter because of the normal seasonality of vaccines and SINGULAIR, improvement to the supply for ZOSTAVAX and continued growth for JANUVIA, JANUMET and ISENTRESS.

I do want to take a moment to speak to how the global economy is affecting our business before I get I get into further detail on the quarter.

As you know, patients, providers and payers around the world are making difficult choices about spending. This is evident based on decreases in physician visits and lower treatment initiation and compliance rate for patients with chronic conditions such as diabetes. In the US wholesalers too appear to be responding to the challenges in the economy. Wholesalers have reduced their inventories of some of our most widely used brands including VYTORIN and ZETIA by about $75 to $100 million which puts inventories for our products at the lowest levels we have seen in recent years.

Now moving to performance of our key brands, I will begin with our prescription products. Starting with SINGULAIR sales in the first quarter were $1.1 billion down 4% versus the prior year and down 2% excluding exchange. Performance in the first quarter reflects a decline in the US business of 4% compared to the first quarter of last year which included nearly three months of sales prior to the FDA’s early communication. We are encouraged by the most recent weekly market share data and we continue to invest to restore growth for this important brand.

Outside the US we generated strong volume growth of 4%. Japan continues to be the strongest growth driver thanks the success of the allergic rhinitis indication we launched last spring and the lifting of the two-week prescription limitation of the oral granules formulation for preschool aged children.

Global revenue for JANUVIA and JANUMET grew to reach %540 million in the first quarter reflecting the high value physicians, patients, and payers are placing on these medicines. Our marketing efforts continue to focus on the compelling attributes of these medicines. JANUVIA provides 97% DPP-4 inhibitor over 24 hours and delivers strong once daily efficacy in a single pill without the compromises of weight gain and hypoglycemia associated with other oral diabetes therapies. JANUMET combines JANUVIA with Metformin for powerful efficacy.

In the US JANUVIA continues to be the second leading branded oral anti-diabetic agent in terms of new prescription share. The JANUVIA/JANUMET franchise continues to outperform the market and grow in both volume and share and is the fastest growing family of products in the oral diabetes market. In addition, we are extremely pleased with the international performance of JANUVIA AND JUNUMET in the first quarter.

In the EU these medicines are also 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 in Europe where more than one DPP-4 exists sitagliptin is clearly a market leader.

Finally, India, Brazil and other emerging markets have enjoyed strong growth since launch.

Globally more than 12 million prescriptions have been written to date and as these products are major growth drivers for Merck in the short term and the long term, we are investing in them to ensure that we realize their full potential.

Through life cycle management Merck is working to establish JANUVIA and a family of combination products including JANUMET and other products in development, JANUMET XR, MK-431C, MK-431D as key components of therapy. In the first quarter the sNDA were expected for JANUVIA for use in initial combination with pioglitazone and its triple therapy with Metformin and PZD in the US. Additionally, JANUMET has been filed for use as an add-on to insulin in the EU.

We are very pleased with the performance of ISENTRESS since its global launch in the fourth quarter of 2007. Sales in the first quarter were $148 million up 14% sequentially versus the fourth quarter of 2008. In the US first quarter sales were $75 million and continue to exceed the last five launches in total market share through March.

Outside the US we achieved $73 million in sales reflecting the strong performance of our 2008 launches including France, Spain and Italy.

Overall, performance has been strong and ISENTRESS has been embraced by our customers around the world as an important option for their patients with HIV and we look forward to regulatory action in the second half of the year on our Treatment-Naïve sNDA.

I will now move on to our vaccine business.

First I will talk about GARDASIL. Sales as reported by Merck in the first quarter were $262 million a 33% decline when compared to the first quarter of last year. In the US sales declined 39% in X-US sales declined 14%.

Focusing first on X-US, when one excludes the impact of exchange sales increased 5% despite the continued impact on year-over-year declines in early adopting countries such as Australia where so many in the 12 to 26 year-old population have already been vaccinated. For example, we achieved strong sales in Mexico due in part to new public sector tenders and we continue to pursue tenders in markets around the world.

The first quarter US sales performance for GARDASIL continues to be affected by the factors we’ve discussed previously including continued challenges to vaccination the 19 to 26 year-old age group. We are not satisfied with this performance and we continue to develop and implement programs to drive use of this important vaccine. For example as part of our efforts to increase vaccination of 19 to 26 year-olds the reimbursement program we launched earlier this month provides real-time visibility into individual patient coverage for physicians and for patients a patient rebate program is available to provide financial support for out of pocket costs above $30.00.

While we recognize it has been a challenge to grow GARDASIL we still believe a significant opportunity remains for GARDASIL. There are millions of women not yet vaccinated in the 19 to 26 year-old population and our research indicates that most women in this population may be receptive to vaccination. Very few, in fact less than 10% have decided to not be vaccinated and we are working towards increasing vaccination rates of this important vaccine in indicated groups as we plan for potential indication in other groups including male.

Globally, it is important to keep in mind that where physicians have a choice of HPV vaccines GARDASIL is selected the vast majority of the time which speaks to the unique value and broader coverage of this vaccine.

ZOSTAVAX, first quarter sales as reported by Merck were $75 million up 2% versus first quarter 2008. The first quarter performance was affected by the clearing of significant back orders at the end of 2008 and the continued limited supply. In the first quarter we were able to clear all remaining back orders that existed at the end of 2008 and the shipping delay times are getting shorter. Demand for ZOSTAVAX continues to be strong and we continue to expect that we will return to normal shipping times in the middle of 2009.

We remain excited about the potential of ZOSTAVAX. Customers including super markets and pharmacies around the country are marketing vaccination programs and we look forward to fully supplying and more fully promoting this important vaccine to our customers.

Now I will talk about ROTATEQ. First quarter sales as reported by Merck were $134 million down 29% versus first quarter 2008. The first quarter comparison, however, includes the impact of the first quarter 2008 CDC stockpile purchase of $41 million. We are seeing moderate impact from competition in the US with the greater impact in the public sector.

Now I would like to take a moment to provide an update on the performance of our cholesterol JV. Worldwide sales of ZETIA and VYTORIN as reported by the Merck/ Schering-Plough joint venture were $479 million and $466 million respectively in the first quarter. Sales of ZETIA were down 18% and sales of VYTORIN were down 28% versus the prior year. Market share for ZETIA AND VYTORIN in the US appears to be stabilizing. Outside the US sales in the first quarter were down 9% relative to the first quarter of 2008, but were up 5% after adjusting for exchange.

Growth in the X-US markets have slowed over the recent quarters due to a number of events including competitive, economic, and market events, however we have extensive actions in place and we continue to anticipate growth outside the US excluding the effects of foreign exchange. We 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 goals, especially if physicians observe LDL levels for their patients rising as a result of switching their products with less LDLC efficacy.

In closing, I assure you that the entire global human health organization remains focused on driving revenue this year and building a portfolio and commercial models that will enable us to succeed in the long term in markets around the world. We have a portfolio of medicines and vaccines that offer a unique value to our customers and we continue to believe that tremendous commercial opportunities exist to grow our established and newer brands in markets around the world and we will capitalize on those opportunities.

We are now operating in our new commercial model as they expand in the US and in other markets around the world and we continue to invest in growing our presence in emerging markets and in the last few weeks we’ve announced four business development deals for drug candidates that have the potential to expand Merck’s portfolio in important therapeutic areas.

Finally, as Dick mentioned, Merck and Schering-Plough are making progress in planning for the integration of our respective organizations and that is true for our commercial organizations as well where we have assigned a team to work on the integration. I want to be clear, however, that the vast majority of global human health people remain focused on our day-to-day business, driving 2009 revenue, and advancing our longer-term commercial strategy.

With that I will thank you and turn the call over to my colleague Peter Kellogg.

Peter Kellogg

Thank you, Ken, and good morning. I will provide an update on the following, our first quarter results, and our 2009 guidance.

Now regarding guidance I will only highlight key elements of our guidance as we provide a break down of all of the elements on the Guidance page of the press release issued earlier today. Please note that all of our guidance given today excludes any contributions by Schering-Plough as a result of the merger and any costs incurred upon closing which is expected to occur in the fourth quarter. Finally I will also provide an update on our merger financing.

Before we jump into the results I would like to give you some perspective on how we are reporting non-GAAP results given the merger. Our non-GAAP results will exclude restructuring costs as well as costs related to the merger including interest, commitment fees and external integration costs. Please note we will only exclude large, discretely identifiable items related to the merger. We won’t exclude every cost incurred by the company.

In accordance with Regulation G we provide a reconciliation of GAAP to non-GAAP EPS in our press release every quarter. This provides investors a breakdown of what is included in GAAP versus non-GAAP earnings as well as our [inaudible].

With that said, let’s get into the results.

Merck reported first quarter non-GAAP earnings per share of $0.74. On a GAAP basis EPS for the first quarter was $0.67. When you look at this quarter as compared to the prior year the drivers of the change were first missed performance across the portfolio of products and the lapping of the FOSAMAX and COZAAR true stop losses of marketing exclusivity in 2008.

Second, external factors such as the unfavorable affect from foreign exchange and the wholesaler inventory reductions in the US.

Third, lower product gross margin.

Fourth, higher tax benefits in the first quarter of 2008 than we enjoyed last year.

Lastly, these four negative impacts were slightly offset by continued strong expense management through out the P&L.

We previously signaled that this would be the weakest quarter of the year and as you will hear, when I discuss guidance, we expect to see improvement in the second half of the year.

Let’s turn now to revenue. Total revenue for the quarter as reported by Merck was $5.4 billion. Ken walked you through the product performance [so also the current value].

First you will note on the guidance page of our press release that we are reaffirming the guidance range for our major products, however we are reducing overall revenue guidance to $23.2 billion to $23.7 billion. The change in guidance reflects that trends we are seeing across the broader part of our portfolio driven by both performance and economic factors, and the effects of our vaccine supply situation. Specifically, we have made updates to the guidance ranges for our Other Reported Products and our Other Vaccines.

Now let’s turn to materials and production.

First quarter materials and production costs were $1.3 billion, which include $22 million for costs associated with the global restructuring program primarily related to accelerated depreciation. Excluding restructuring costs in 2009 and 2008 material and production costs increased 7% in the quarter. As you know, this yields a gross margin below our full year guidance range.

Recording prior gross margin was 75.2% excluding restructuring costs PGM was 75.6%. Now of course this compares to 79% in the first quarter of 2008. Let’s look at this in two ways. First compared to last year and then let’s look at the balance of the year in our guidance, starting with our comparison of last year.

The year-over-year lower PGM rate experienced in the first quarter is primarily attributable to three factors: first our fixed cost base in the vaccine production area was spread over lower ration unit volumes during Q1. Second, we had higher discrete costs such as discard. Third, we are seeing an impact from product mix due to the patent expiries of higher margin products FOSAMAX and COSOPT, TRUSOPT in 2008.

Now let’s turn to the balance of the year, in our PGM guidance. For the full year we are confident in maintaining our PGM guidance of 77% to 78% as we expect Russian volumes to increase and we do not expect the discrete costs seen in Q1 to continue.

Now let’s turn to marketing and administrative. M&A expenses were $1.6 billion in the first quarter, a decrease of 12% versus the first quarter of 2008. Let me provide you some additional perspective on that.

First off exchange is benefiting M&A expense versus the first quarter last year. Excluding other unique charges in both years and this foreign exchange impact M&A expenses decreased 6%. The lower spending for the quarter is attributable to fading from our new commercial model and corporate G&A efficiency programs. We are realizing reductions in the US and European sales forces and we are also continuing to realize reductions in our administrative expenses. So, turning to M&A guidance, these lower spending trends and the benefits of our 2008 restructuring program allow us to reduce our 2009 M&A guidance by $100 million to a range of $6.9 to $7.2 billion. We continue to maintain a healthy amount of support behind our core brand.

Let’s turn to R&D.

Research and development expenses in the first quarter were $1.2 billion, an increase of 14% versus the first quarter of 2008. When you adjust for the restructuring costs in the first quarter 2009 R&D spending is up 5%. As you are well aware we are making a lot of investments in our late stage clinical trials including a number of large outcome studies. That leads us to our R&D guidance.

We are reducing our 2009 R&D guidance by $100 million to $4.7 to $5 billion. Our guidance for 2009 enables us to fund both the internal pipelines as well as general collaborations, such as the four deals we have already announced this year.

Moving now to equity income, in the first quarter Merck reported $586 million of equity income. There were two major impacts from this result. First, the equity income contributions in the Merck/Schering-Plough joint venture of $291 million reflect a continuation of the trends that we saw in the second half of last year and is in line with our expectations.

Second, the AZN joint venture income was $168 million which is $37 million higher than the first quarter of the prior year. This increase in equity contribution is attributable to the inherent timing variability of payments from AZN.

Now I will talk about equity income guidance. We are increasing our full year guidance by $100 million $2.3 to $2.6 billion reflecting our current expectation.

Looking to Other Income and Expense, for those of you who haven’t been following this event too closely FAS 150 was recently adopted in the first quarter of 2009. FAS 150 changed the presentation of the NARDI shareholder earnings and preferred stock dividend on the face of the Company’s income statements and you’ll see the impact of the face of our P&L this quarter.

In the past our preferred stock dividend obligation to AstraZeneca was included in Other Expenses. As a result of this new standard you will now see this separated on the face of our income statement below net income. Now of course this standard has no impact on our EPS.

For the first quarter 2009 other income was $67 million. When you adjust for $12 million in merger related costs other income on a non-GAAP basis is $80 million. It is challenging to make a comparison in other incomes to prior year given that we had a number of unusual items last year, including the gain for the AZ limited partnership in 2008.

There are two important things to note, though, about the current quarter. As anticipated, interest income is lower than in Q1 2008 as a result of the lower interest rate and we recorded a gain in this quarter related to the recently announced divestiture of Timoptic in the US.

Now let’s turn to tax rate.

Merck’s first quarter GAAP effective tax rate was 18.4%. Excluding the impact of restructuring charges and costs related to Schering-Plough transactions the non-GAAP effective tax rate was 19.4% reflecting the benefit of approximately 4 percentage points relating to the favorable tax impact of the previously announced Canadian tax settlement. We had previously established FIN 48 reserves for this matter.

Moving to tax rate guidance, given the benefit of this Canadian tax settlement recorded in the first quarter and other factors affecting our tax rate, including the mix of our business, we expect our full year tax rate to be approximately 21% to 24% and we are adjusting our guidance accordingly.

Now I would like to give you an update on our financing activities related to the merger.

The company has received commitments for the syndication of $8.5 billion of new and amended credit facilities associated with the transaction including a new $3 billion bridge loan, $4 billion of new revolving credit facilities, and a $1.5 billion amendment to existing revolving credit facilities. The syndication will be complete upon execution of the documents.

As we have said previously, we are evaluating our opportunities to term out the bridge loan through a term debt issuance. We are pleased to confirm that the rating agencies have maintained Merck’s strong credit rating post the announcement of the merger. Given the merger agreement and the financing activities that are ongoing, we will not initiate stock-by-treasury stock purchasing until sometime after the deal closes.

Finally, we are committed to maintain our dividends at the current level.

To summarize, our first quarter results are characterized by the following: First, missed performance across our portfolio of products has been reviewed. Second, external economic factors including the unfavorable affect from foreign exchange. As you recall, we indicated on our December 4 guidance call last year that we anticipated foreign exchange to impact 2009. Indeed, foreign exchange had a 3-percentage point unfavorable impact on our top line and a 4-percentage point impact on the bottom line of the quarter. Third, lower than usual product gross margin. Fourth, continued strong expense management and fifth, a favorable tax benefit from the Canadian tax settlement.

As you look ahead in 2009 we reaffirm our non-GAAP EPS guidance range of $315 to $330. We reduced our GAAP EPS range to $2.84 to $3.09 solely as a result of merger related costs. Please remember this guidance excludes any contributions by Schering-Plough as a result of our merger and any costs incurred upon closing.

In 2009, as we discussed, the Company expects sales and GAAP and non-GAAP EPS for the second half of the year to be stronger than the first half. In addition, the company anticipates marketing and administrative expense, and research and development expenses to be more equally distributed across the remaining quarters than in previous years.

Now, given the first quarter financials, I would like to discuss how we anticipate this year to go. Several factors should cause our second half result to pick up nicely versus the first half. First we expect a return to normal shipping times for ZOSTAVAX in midyear. Accordingly, we intend to ramp up promotion.

Second, we anticipate returning to a strong back to school season for GARDASIL which we did not fully get benefit from last year.

Third, our second half should benefit from the continued strong performance for JANUVIA, JANUMET, and ISENTRESS.

Fourth, you should also note that we saw a wholesale inventory reduction and a lower profit margin in the first quarter. We are going to see these continuing the balance of 2009.

Finally, we are also adjusting guidance for our expense items to reflect the steps that we are taking to adjust our cost structure in line with the trends that we are seeing.

In conclusion, these factors should cause 2009 quarterly results to improve very nicely. With this perspective we are maintaining our full year 2009 non-GAAP EPS guidance.

Thank you very much and now I would like to turn the call back over to 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. At this point I will turn the call over to Amanda who will communicate the instructions for our Q&A format and introduce the first question.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tim Anderson from Sanford Bernstein.

Tim Anderson - Sanford Bernstein

I have three questions. Can you say with confidence that your CGRP program will be kept alive? You’ve mentioned moving the back up into Phase III, but I am wondering if that is realistic.

My second question is what is going to be the competitive message with JANUVIA as sitagliptin enters the market.

My third question is when can we expect to hear an update on the whole Remicade J&J issue. I am wondering how those discussions would change [inaudible].

Dr. Peter Kim

With regard to the CGRP, just to reiterate, the issues that have arisen were from a Phase IIa exploratory study in which we were looking at the prevention of migraine, dosing patients twice daily for three months. In that study, unfortunately, we found that there were a small number of patients that had elevated levels of liver enzymes greater than 3x the upper limit of normal. That study has stopped, however other studies with MK-974 for the acute intermittent treatment of migraine continue at this time.

We are currently conducting additional analyses and reviewing data from a separate long-term study in which we had dosed patients for up to 18 months in a migraine treatment paradigm and at this point in time we’re really in the midst of analyzing this data and obviously we’ll need to discuss this with the appropriate agencies as we move forward.

With regard to your question on the back up, the back up is continuing in Phase IIb of development at this point and remains on track.

Kenneth Frazier

I will take the JANUVIA question. As you know JANUVIA was the first DPP-4 inhibitor market in Europe and is the only one on market in the US. Physicians look at a number of factors in determining treatment decisions including evidence of longer-term efficacy tolerability, safety dosing, and convenience. Our data has shown that once daily JANUVIA and JANUMET do provide significant efficacy and safety and tolerability advantage. We have more than 12 million prescriptions dispenses worldwide since these products were launched. Our post marketing experience continues to show both the generally favorable safety profile as well as good treatment experience from an efficacy standpoint from physicians.

There are obviously no head-to-head data available comparing our products to alogliptin or saxagliptin, however the published data of DPT-4s including saxagliptin currently under regulatory review suggest no advantages in clinical profile versus JANUVIA.

I would also note that in nearly all markets where we have gone head-to-head with them, we maintain the vast majority of the market share. So, that would be my response there.

Dick Clark

In response to your Remicaid J&J question, we are not prepared to make any additional comments on that at this time.

Operator

Your next question comes from David Reisinger with Morgan Stanley.

David Reisinger - Morgan Stanley

I have three questions. First on the financials could you just explain what the price impact was on the top line in the quarter and also the FX impact on earnings per share?

Then, in terms of Improve-It can you comment on the Improve-It study progress; in particular whether protocol changes are possible if there is limited separation between the two arms?

Peter Kellogg

Let me take the first couple, which is the price impact on the financials.

On our total first quarter results for revenue pricing was only 1% and on top line foreign exchange was a -3%, but at the EPS line for foreign exchange it was a -4%. We can get into that more, but that is basically the top line set of numbers. So, obviously foreign exchange did adversely impact our results as we anticipated for the quarter. On Improve-It?

Peter Kellogg

Thank you. David, this is Peter. With regard to Improve-It, this year our academic partners at TIMI, at Harvard and the Duke Clinical Research Institute we will review both the event rates and the lipid levels in the two arms of the study, but they will not be unblended to the results of the outcome of the results, but they will be able to look at the overall event rates and the difference in the lipid levels.

The purpose of that review is to determine if a sample size adjustment is going to be needed. That review has not occurred yet. It will occur this year. Should that review suggest that we need an adjustment in the sample size then obviously we will communicate any new plans. I want to emphasize that they will not be a look at the efficacy there, it is simply to look at the difference in the lipid levels in the event rates.

Operator

Your next question comes from Jami Rubin with Goldman Sachs.

Jami Rubin - Goldman Sachs

These questions are directed to Ken. Ken if you can drill down a little bit deeper in US GARDASIL sales, $179 million. It is the lowest level we have seen of any quarter of GARDASIL and while we understand that it is difficult the older 19 to 26 year-old cohort, can you tell us what is going on with the 11 to 12 year-olds? If you could sort of tease out where that’s going. Are you seeing states sort of reduce their vaccine inventories because of the difficulty in paying or if you could just talk about that?

Also, European sales of GARDASIL were also way down this quarter. Could you talk about what dynamic you’re seeing there? Is this competitive pressure from Severix or if this is government sort of pushing back on reimbursement issues?

Kenneth Frazier

First starting with the 11 to 18 year-olds, as you know, as we said in recent quarters, there have been strong penetration since launch in the 11 to 18 year-old group and as a result despite new vaccination in that age group the overall number of first dose and corresponding second and third dose vaccinations of 11 and 18 year-olds have declined.

I think as it relates to the 19 to 26 year-old group in particular, as you know, we have had our issues there and we are working closely with customers to learn more about the various practice related and financial challenges that are affecting vaccination rates, but if you look at the two areas the performance that we’ve seen in the last couple of quarters with first dose vaccinations in the 19 to 26 year-old group and also the fewer ones in the 11-18 year-old group are leading to fewer second and third dose vaccinations now, and so you are now starting to see that impact.

As I was trying to say, we are working on implementing programs, particularly in the 19 to 26 year-old cohort to drive more patients to show up in the office and then also at the same time importantly to help those physicians make real time decisions about coverage in which people are eligible, because what we are seeing is that there is some origination, but the patients are not being captured and physicians are willing to partner with us to help them capture those patients. So that is the issue as it relates to the two cohorts in the US.

As it relates to the Sanofi Pasteur territories in Europe, we’ve also seen sales decline in the first quarter of 2009 due in part to exchange, as I said, but also due to a slow down from the strong and quick uptake in some of the large early adopting markets like Germany and France.

Operator

Your next question comes from Roopesh Patel with UBS.

Roopesh Patel - UBS

First on telcagepant I was just wondering if you could clarify the dose used in this Phase IIa prevention study versus those used in the Phase III treatment studies.

Then just on US sales, they are down 10%. That seems to be well below, at least, my forecasts and the weakness seems to be across the portfolio. I am wondering if this is in any way impacted by the new commercial model and Dick I was wondering if you could just give us your thoughts on that.

Peter Kellogg

The dose that was used in the Phase IIa exploratory study for the prevention of migraine was either 140 mg twice a day or 280 mg twice a day. As I said, that was every day for three months. In our treatment paradigm we are also studying each of those doses, 140 mg or 280 mg, but in the treatment study these are administered intermittently with either one or two doses to treat an individual migraine attack and a limit on the number of doses that are given per month to the patients.

Kenneth Frazier

I will take the new commercial model question. We think unquestionably that the results that we’re seeing in the US are not related to the roll out of the new commercial model in the US. What we see is in addition to the impact of marketing exclusivity for some products we have seen continued challenges, in particular, to our vaccine business, as well as wholesaler destocking.

The most important thing to note is that we’ve looked very carefully at the performance in our new commercial model pilots versus similarly situated regions around the US. For example, if I would take JANUVIA and JANUMET which we look at very closely in terms of the growth and the up tick of these new brands, we see no difference of any magnitude between the performance of those brands or other brands like SINGULAIR in the Paris region versus other regions of the country that have equivalent access and managed care control. So we are quite sanguine that the new commercial model is working the way we intended both from the standpoint of customer relations, as well as the efficiency goals that have been outlined in our plan to win.

Operator

Your next question comes from Tony Butler with Barclays Capital.

Tony Butler - Barclays Capital

Peter, the back up compound for telcagepant is it just simply for potent? That is to say it has greater binding kinetics, and if so, is that really substantially better than what you currently have in clinical development in later stages?

Peter Kellogg

The back up compound is more potent. It also is a different chemical structure from telcagepant. We are of the impression that the liver enzyme elevations that we’re seeing with telcagepant are molecule specific and so therefore the fact that the back up compounds have a different chemical structure is promising to us.

As I said, the back up compound MK-3207 continues in Phase IIb of clinical development and beyond that there is really nothing more to report at this point.

Operator

Your next question comes from Chris Schott with J.P. Morgan.

Chris Schott - J.P. Morgan

I have two questions. First, on your longer-term tax rate, obviously you don’t have a lot of details right now, but we’ve seen an increased focus in Washington about increasing tax revenue and potentially altering tax codes that relate to the deferral of tax on international profits. Can you just talk about your expectations on longer-term changes to tax policy and how that relates to your longer-term assumptions on tax rate?

Second question, you were talking about your initial 2013 post merger guidance in light of the MK-974 delay. I believe you previously stated you were comfortable having low end of the range, even if you were to lose rights to Remicaid. Does that statement still hold given this delay thing?

Peter Kellogg

First of all on the long-term tax rate, obviously we don’t have any clarity on where the long-term cash policy would be related to deferral. I think one of the nice things is that the administration has talked about having everybody take a seat at the table and so all parties would be involved. Obviously, our business over time evolved, but nonetheless we don’t anticipate anything draconian or dramatic that would change our competitiveness on a global basis. Therefore, we assume that we have a somewhat conservative set of assumptions for our long-term tax rate planning, but nonetheless we really aren’t planning to see a dramatic fall out from the policy changes and we will just have to play it by ear. But, we will certainly be actively contributing to the thought process there.

On the 2013 merge company guidance, your assumption is exactly right, which is that those are pretty high single-digit kager over that time period. It is a fairly healthy range, but it is very important that we will be growing that level throughout. We did indicate that with our without Remicaid we would be fine and we are able to confirm that we’re comfortable with range with any of the new events coming on right now. So, we are definitely comfortable with that range and that guidance.

Operator

Your next question comes from Steve Scala with Cowen And Company.

Steve Scala - Cowen and Company

I have two questions regarding that tax rate. The Canadian tax dispute resolution was cited in the 10-K, but Merck said at that time there was no change in the 2009 tax rate guidance, so what has changed in the past two months that lowered the guidance?

Secondly, I believe Merck paid $300 million and interest of $350 million, so since Merck made a payment I’m not clear why the tax rate is lower than expected and guidance going down. Is it because of prior reserves or this quarter did you get a US tax offset to the Canadian penalty?

Peter Kellogg

Let me go in the first sequence if I can. The first thing is that, yes, as we settled with the Canadian Tax Authorities we certainly did make some payments, but those payments are measured against what we already reserved on our FIN 48 reserves, the funded assumptions. So, you are right, there are left sides relative to the full year reserve for this quarter, so that is what you saw.

Relative to our full year tax rate your point is also correct in that as we evaluate it into our forecast for March for the full year, we do see a number of different affects coming through our tax rate not just the one. I think in my comments earlier I commented that that business mix, other tax topics that we’re looking at and so forth have all been updated and so in effect it is quite a portfolio of tax topics that lead us to our guidance and the change in our guidance. It is only a one-point change.

So, one, yes we are making payments, clearly, to the Canadian Tax Authorities, but those are recovered by our FIN 48 reserve and secondly we view the whole portfolio when we do our quarterly updates on an earnings call like this.

Operator

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

Barbara Ryan - Deutsche Bank Securities

I know, Dick that you had made some changes, but really just specific to specialty products on your distribution. I am wondering if you are looking at the company as a whole on a broader level about changes to the distribution model.

Dick Clark

Yes, we have made some changes just from a distribution in the United States, but it was really the back room activity and have outsourced some of that, but we’re not planning any other distribution changes at this time.

Operator

Your next question comes from John Boris with Citigroup.

John Boris - Citigroup

My question is for Ken Frazier and it relates to the top line lowering it by the $500 million. I think you did indicate that there was some wholesaler destocking on VYTORIN 75 to 100 million in vaccines, but can you maybe give us some better granularity, especially this early in the year, when you have just gone through your planning process late last year, as to why you would have this $500 million lowering of your top line?

Then secondly with competition on the horizon how confident are you that with the new commercial model that you’re rolling out how confident are you that you’re going to be able to send off competition against GARDASIL and against JANUVIA/ JANUMET that you could face in the back half of the year?

Then I have a question for Dick on vaccines. Can we just get an update as to how confident you are that your vaccine production will be kicking in, in the back half of the year and how validation of the new North Carolina facility is progressing?

Dick Clark

I will start with the last question. We are on track with the validation and certification of our new facility for the later part of this year and we’re excited about that. As you know that project was approved in 2003/2004 so for vaccine and for sterile facilities it takes quite a bit of time, but we’ll be moving towards final validation and then release a product by the end of this year and early next year.

We are making slow and steady successes in the vaccine parts of the West Point. So, for example, as you heard on the call from a ZOSTAVAX standpoint by midyear we will be back to a supply inventory level where we will actually start relaunching ZOSTAVAX in the United States and obviously with GARDASIL we have no inventory problems and with HID products, we’re also making progress on that so that by the end of this year some of those products will be back in business. It is important to get some of these processes updated. It is important to get some of the equipment updated. We continue to put more and more resources on it so that the steady progress we’re making is very reassuring that hopefully in a very short period of time we’ll be out of these issues.

Kenneth Frazier

As it relates to the overall issue around revenue guidance, as I said earlier, we are looking at a mixed performance across our portfolio of products. We are seeing some challenges to our vaccine business, but you remember that we originally took GARDASIL down towards the lower end of what we originally envisioned there. We continue to see challenges to the vaccine business. We see some positive trends on JANUVIA, JANUMET and ISENTRESS.

Also, I wanted to clarify on the wholesaler destocking, that $75 to $100 million included all of the product lines, also including VYTORIN and ZETIA, not just VYTORIN and ZETIA so it was across our entire product line. So, as we look at all of those issues, the product trends, the wholesaler approaches to say the broader economy, it led us to the conclusion that we should lower our overall top line revenue guidance.

I would point out that as it relates to most of our major products, or our major product, we maintain those ranges. I think that that goes to a point around the new commercial model. We continue to see that new commercial model work and one of the benefits to the new commercial model is that we’re able to flex and to put the attention behind certain products when we have to, either because of the competitive threat or because of an indication change or whatever may be happening in the market place. So, we are confident that that is the right model going forward.

We haven’t yet had competition against GARDASIL and JANUVIA in the US, but we have had it overseas and we again, as I mentioned, as it relates to JANUVIA in those markets where we’ve gone head-to-head with Zaxa we maintain the vast majority of the market share in nearly all of those markets. In fact the only market where we see any inroads is [gufill].

Operator

Your final question comes from Seamus Fernandez with Leerink Swan.

Seamus Fernandez - Leerink Swan

Peter, I was hoping you could clarify a point in the paper that was published on Improve-It there is specifically cited in the Improve-It paper a look at efficacy that will occur when 50% of the events have accrued in the Improve-It study. I was hoping you could give us an update on when that look is actually going to be taking place or if the protocol has changed in some way.

Separately, Ken or Peter Kellogg if you could give us a little bit more color on the wholesaler destocking levels. What is the current number of weeks of inventory that you have currently and do you expect this to change under the new IMA? I would have thought that you would have had some level of consistency on the number of weeks of inventory.

Dr. Peter Kim

You are correct, in the Improve-It design paper there is a reference to an interim efficacy analysis that will take place once 50% of the expected events occur. By definition, therefore, this is an event driven timing and we are not in a position, at this point, to provide any additional information on that timing for the Improve-It analysis.

Peter Kellogg

Let me take the question on the wholesale inventories. You are right, the inventory levels did come down and they are at a lower level than we’ve seen in quite some time actually, as we come to the first quarter, but they are at the low end of the range that we expect and so your question is a good one, but it doesn’t really trigger any concerns on our part relative to the agreements that we have in place.

While it is a fairly tight range and it doesn’t measure in a big way, it does have a big dollar impact when you are measuring growth year-over-year and so forth and obviously the US market is a big part of our market, so it doesn’t trigger anything relative to what we would expect. We are comfortable with the range, it is just at the low end of the range that we have ever anticipated, and certainly it is lower than we’ve seen over the last year or two.

I think that covers it.

Eva Boratto

That concludes today’s conference call. The information from today’s call, the transcript, and a replay will be available at our web site for the next several months. Cal Ferguson and I will be available to take your calls and any incremental questions through out the day.

Operator

Thank you for participating in today’s conference call.

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