Merck & Co. Inc. Q2 2009 Earnings Call Transcript

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Merck & Co. Inc. (NYSE:MRK)

Q2 2009 Earnings Call

July 21, 2009 8:30 am ET


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


Tim Anderson – Sanford Bernstein

Chris Schott – JP Morgan

Jami Rubin – Goldman Sachs

John Boris – Citigroup

David Reisinger – Morgan Stanley

[Quyeor Purique] – UBS

Tony Butler – Barclays Capital

Seamus Fernandez – Leerink Swan

Steve Scala – Cowen and Company


Welcome to Merck's second 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, ma'am.

Eva Boratto

Welcome to our call to review our business performance for the second 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 Global Human Health, and Peter Kellogg, our Executive Vice President and Chief Financial Officer. Also here on the call to participate in the Q&A is Bruce Kuhlik, Executive Vice President and General Counsel.

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 7:00 am this morning. You can access this through the Investor Relations section on and I will remind you that this conference call is being Webcast live and recorded. The replay of this event will be available later today via phone, Webcast and Podcast.

As we begin our review let me remind you that some of the statements made during this call may discuss certain subjects that may contain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and involve risks and uncertainties which may cause results to differ materially from those set forth in the statements.

The forward-looking statements may include statements regarding product development, product potential or financial performance. No forward-looking statement can be guaranteed and any actual result may differ materially from those projected. Merck undertakes no obligation to publicly update any forward-looking statements 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 and for the year ended December 31, 2008, and any risk factors or cost sharing 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 with brief remarks from our senior management and then open the call for all your questions and expect the total call to last approximately an hour. With that, I'll turn the call over and we will begin with remarks from our Chairman, President and CEO, Mr. Clark.

Richard T. Clark

This morning I want to comment on our second quarter performance and update you on the good progress we are making in planning for our proposed merger with Schering-Plough. This past quarter saw continued volatility in the worldwide economy, as well as fast moving developments in U.S. health care reform.

Against this backdrop Merck delivered a solid second quarter. As you saw in our news release this morning, our top line came in at $5.9 billion for the quarter. Excluding the impact of foreign exchange our total worldwide revenue grew 3%.

With this top line performance and improvement in gross margins and continued diligence against expense management, we produced second quarter non-GAAP earnings per share of $0.83 which excludes certain items. Excluding the impact of foreign exchange, non-GAAP EPS would have increased 4%. Our second quarter GAAP EPS was $0.74.

We are particularly pleased with the strong double digit growth of key products such as Singulair, Januvia, Janumet and Isentress, especially in light of the challenging global economic environment. And speaking of Isentress we recently received good news from the FDA. We now have approval to market Isentress for all adult patients diagnosed with HIV and other such approvals are pending around the world.

During the second quarter we continued to invest in strengthening our pipeline both internally and externally. We closed the three important collaborations that we announced last quarter, Cardiome Pharma for cardiovascular disease, Santen Pharmaceuticals for the treatment of glaucoma and with Medarex and Massachusetts Biological Laboratories for infectious disease.

In addition, earlier this month we announced an exclusive global collaboration with Portola Pharmaceuticals for a promising anticoagulant, currently in Phase II clinical development for the prevention of stroke in patients with A fib. We believe this is a medically significant compound with great commercial potential.

We are confident in the near and long-term actions that we are taking at Merck and we believe our performance in the second half of the year will reflect that. In a few moments, Ken will review our sales performance for the quarter and then Peter will provide additional details on the quarter's underlying financial results and comment on our outlook for the remainder of the year.

As you continue to see in daily news reports health care reform efforts in the United States are accelerating. Unlike the health care reform push of the early 1990s this time our industry has a seat at the table, and I believe our voice is being heard. We are convinced that we need to be part of the process and that health care reform can be accomplished. Merck's overall goal has been, and continues to be, that every patient that has been prescribed one of our medicines or vaccines has access to it.

Now let me take a few minutes to speak of our pending merger with Schering-Plough. With our broader portfolio and stronger pipeline, the new Merck will be in a better position to meet our customers' health care needs with the best that medicine has to offer.

Post merger we will have doubled the number of potential medicines and vaccines in late stage development, more diversified portfolio across important therapeutic areas, including the combination of our biologics efforts with Schering's own capabilities, a more global and diversified revenue base and a dramatic acceleration of Merck's international expansion, particularly in key emerging markets.

Incremental cost savings with approximately $3.5 billion annually beyond 2011, which are expected to be generated though efficiencies realized across the company. These savings are in addition to the previously announced ongoing cost reduction initiatives at both companies. But most importantly, the combination of the two research based organizations will strengthen the customer-focused collaboration, innovative thinking and scientific excellence already occurring inside each company.

In the past three months we have reached several key milestones needed to complete this important merger. The U.S. Securities and Exchange Commission completed review of the companies' joint merger proxy statement which was mailed to shareholders. And we will vote on the proposed merger at separate special shareholders' meetings on August 7.

Merck successfully completed a $4.25 million public debt offering at attractive rates given our strong balance sheet. The company received and responded to an anticipated second request for additional information from the U.S. Federal Trade Commission. And both Merck and Schering-Plough will continue to cooperate fully with the FTC and other regulators around the world to obtain all necessary approvals as expeditiously as possible.

Turning to the animal health businesses as we said we are continuing to explore all of our options given that these are very strong businesses. I don't have anything new to add at this point, but let me reiterate that we will communicate our decisions at the appropriate time.

Our integration planning process is well underway, and I feel good about the excellent progress we are making ensuring that the combined companies begins its first day of business in the strongest possible position continues to be one of my top priorities.

We have carefully analyzed and identified the key factors that determine whether or not a pharmaceutical merger achieves its promise. As a result our planning is sharply focused on these key success factors, maintaining momentum in the current business in the late stage pipeline, launching the new combined company in a way that ensures that smooth transition for our customers, launching new products exceptionally well, capturing both revenue growth and cost savings opportunities and ensuring we have the right people in the right jobs in the right culture.

As for our timeline it remains the same. We expect to complete the merger in the fourth quarter of 2009. Before I turn things over to Ken, I want to emphasize that my leadership team and I, as well as the many dedicated employees who work with us, are focused both on building Merck's business today and laying the necessary foundation to position the new Merck for tomorrow.

Now I'd like to turn it over to Ken.

Kenneth C. Frazier

Merck's field and marketing organization remains focused on our day-to-day, driving 2009 revenue and advancing our longer term commercial strategy, and I believe our second quarter results reflect this focus.

Revenue for the second quarter of 2009 was $5.9 billion down 3% compared to last year. As Dick mentioned, though, excluding the 5 percentage point unfavorable impact on exchange, sales increased 3%. This performance was driven by continued strong growth for our newest pharmaceutical brands and for Singulair.

Looking at the results geographically, we generated 11% volume growth outside the U.S. This growth was offset by exchange and a decline in our U.S. business of 3% due to the impact of the loss of marketing exclusivity for various products and also due to lower back theme sales.

In the second half of the year, we expect continued improvements in our top lines because of the normal seasonality of vaccines, stable supply and increased promotional efforts for Zostavax, and continued growth for Januvia, Janumet and the launch of the recently approved treatment-naïve indication for Isentress. We are also increasing our promotional efforts to continue to drive growth for our other key brands, including back-to-school opportunities for pediatric and adolescent vaccines.

Now turning to individual product performance, starting with Singulair, sales in the second quarter were $1.3 billion, up 16% versus the prior year in the U.S., and 17% outside the U.S. Outside the U.S., excluding exchange, we generated strong growth of 32%.

Japan continues to be the greatest growth driver and we recently achieved market leadership based on the continued strong performance of our new indications. Additionally, in Europe, we are seeing strong growth in key markets, including the U.K., Spain and Poland.

This was clearly a quarter in which the performance for Singulair strongly rebounded, and we will continue to invest to drive growth for this important brand. We are pleased that physicians and patients continue to recognize the unique benefits of Singulair.

Moving on to Januvia and Janumet, global revenue grew to reach a combined $617 million in the second quarter. The Januvia-Janumet franchise remains the fastest growing family of oral diabetes products in both the U.S. and the E.U. In all European markets where more than one EPP 4 exists, sitagliptin is clearly the market leader. We also lead the branded diabetes market in Latin America and we are growing rapidly in emerging markets such as India, where the disease burden is extremely high.

We are continuously introducing new, relevant efficacy and safety data to bolster physician and payer acceptance of these innovative medicines, and to strengthen our position versus competitive products around the world. We also are implementing other types of programs to drive growth.

In the U.S. for example, we are leveraging our already favorable formulary position for these products, by helping physicians and their patients better appreciate and understand how Januvia and Janumet fit into their medical coverage and by offering coupon programs to help address potential cost barriers. We're also piloting innovative programs with physicians and payers to support improved patient care.

Next, Isentress continues to perform well, with strong, steady growth since its launch in late 2007. Sales in the second quarter were $172 million, up 16% sequentially versus the first quarter of 2009. In the U.S., second quarter sales were $88 million and we continue to exceed the prior five HIV launches in new prescription market share. Outside the U.S. we achieved $85 million in sales thanks to the strong 2008 launches including France, Spain and Italy.

The recently improved expanded indication for Isentress which now makes this medicine available for HIV patients, whether they are new to treatment or treatment experienced, means that Isentress is a very important option for physicians and patients to consider at each stage of the treatment continuum, particularly as HIV continues to be treated as a longer term, chronic illness.

I will now move to our vaccine business. Starting with Gardasil, sales as reported by Merck in the second quarter were $268 million, an 18% decline when compared to the second quarter of last year. In the U.S. sales declined 28% versus second quarter 2008. Performance continues to be affected by the saturation of the 13 to 18-year-old cohort due to rapid, early uptake and ongoing challenges to vaccinating the 19 to 26 age group.

While we are by no means satisfied with the current performance, we are executing on our recently initiated programs and remain firmly committed to achieving greater vaccination rates for Gardasil in the 19 to 26 age group. And as we move into the third quarter, we expect sequential growth as we leverage the opportunity with the back-to-school season.

Ex-U.S. sales increased 18% attributable to strong sales in Mexico and Poland due in part to new public sector tenders. We continue to expect our sales for Gardasil to achieve $1.1 billion to $1.3 billion in 2009. We are confident that Gardasil's differentiated profile, as the only quadrivalent vaccine for HPV infection, will allow us to address any potential competition in the U.S., should it arise.

Moving to Zostavax, second quarter sales as reported by Merck were $42 million down 36% versus second quarter 2008. The sales decline reflects lower purchases by health care providers working through inventory built after we fulfilled back orders in 4Q '08 and 1Q '09, at which time I point out we were not fully promoting this product. We believe inventory in the channel is now approaching normal levels.

At the end of the third quarter, we are increasing our promotional effort, now that we are confident in our ability to adequately supply this important vaccine. We are rolling out new marketing programs in physicians' offices and pharmacies to help providers integrate Zostavax into their routine standard of care.

In addition, last week we launched our first branded consumer campaign for Zostavax. These new programs coupled with increased patient origination during the fall flu season positions Zostavax for strong growth in the second half of this year.

Moving to RotaTeq, second quarter sales as reported by Merck were $126 million down 29% versus the second quarter of 2008. This comparison includes the impact of the second quarter 2008 CDC stockpile purchase of $13 million. We maintain a significantly greater share of the market than the competition, and recent data suggests that we have been able to slow the rate of erosion since our competitor's launch.

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 $514 million and $520 million, respectively, in the second quarter. Sales of Zetia were down 8% and sales of Vytorin were down 12% versus the prior year.

The rate of prescription market share decline for Zetia and Vytorin in the U.S. is slowing. Outside the U.S. sales in the second quarter were down 11% relative to second quarter 2008 and were up 5% after adjusting for exchange. While growth has slowed over the recent quarter, we continue to expect to see positive growth for the rest of the year, excluding the effects of foreign exchange.

We remain committed to investing in Zetia and Vytorin, while prudently managing our expenses. For many patients, statins alone are insufficient to get them to their LDL goals. Given this, we believe these products will continue to be valuable treatment options for physicians by helping to get more patients to their LDL goals.

Let me close by saying that across our organization we are encouraged by the momentum of many of our key brands especially Singulair. We are now preparing for the back-to-school season for Varivax

and Gardasil, and the return of full promotion of Zostavax, and are excited about the other near term opportunities ahead of us including launches in markets outside the U.S., this year, for Tredaptive and Taflotan which we recently licensed from Santen Pharmaceutical.

We believe that we have transitioned to a commercial model that is more flexible, efficient and customer focused. That model combined with our existing portfolio, which will be expanded by the proposed merger, will allow us to offer our customers a broad array of medicines and vaccines that produce unique value.

Even as we plan for the merger, the vast majority of the people in our organization remain focused on driving 2009 performance. So with that I'll turn the call over to my colleague, Peter Kellogg.

Peter N. Kellogg

Thank you, Ken, and good morning. I will provide you an update on our second quarter result and why we remain confident in affirming our 2009 guidance. Let me remind you that our non-GAAP results exclude restructuring costs as well as pre-closing costs lay to the merger, including interest, commitment fees and external integration costs. With that said, let's get into the results.

Merck reported second quarter non-GAAP earnings for share per $0.83, representing a 3% decline versus the second quarter of 2008. Our GAAP EPS was $0.74 per share. For the first six months of 2009 non-GAAP EPS was $1.57 and GAAP EPS was $1.41 per share. Excluding the impact of foreign exchange we grew the top line 3% and the bottom line 4% as Dick and Kenneth pointed out.

This solid operational performance puts us right on track for delivering within our full year guidance. The key drivers to performance versus the same quarter in 2008 were first, strong growth from our key pharmaceutical brands and our international markets, second, an improvement in gross margin versus prior year and prior quarter, and third, continued expense management from marketing and administrative expenses.

Please note that some of the second quarter spending reduction reflects our decisions to prioritize promotional spending against Q3 opportunities. This performance is offset by two items, a higher tax rate. Although we benefitted five points from tax settlements this quarter, we are lapping in even larger benefit last year. And the negative effects of foreign exchange which had an impact of 5% on the top line and 7% on the bottom line this quarter.

Additionally, there were litigation related expenses and higher research and development investments in the quarter. Total revenue for the quarter as reported by Merck, was $5.9 billion. Ken walked you through product performance, so I'll move directly to guidance. We are reaffirming our revenue guidance of $23.2 billion to $23.7 billion for the full year. We are also reaffirming the guidance ranges for our major products, which you can find on the guidance page of our press release.

Second quarter materials and production costs were $1.4 billion. When you exclude restructuring costs in both years this represents a 5% decline in cost and a 77.9% gross margin in this quarter. Importantly, this is a significant improvement over our first quarter 2009 PGM.

The quarter-over-quarter improvement in PGM rate was due to product mix, an increase in vaccine production volume and lower to street cost versus the first quarter. Given this second quarter performance and our continued expectation that production lines will increase in the second half of year, we reaffirm our PGM guidance of 77% to 78% excluding restructuring costs.

Marketing and administrative expenses were $1.7 billion as reported. Excluding merger related expenses of $44 million, M&A expenses declined 13% versus the second quarter of 2008. The current quarters expenses also benefitted by exchange but were offset by a $25 million increase to the Fosamax legal defense reserve.

If we adjust for these two items, M&A expenses decreased 8%. The lower spending for the quarter is attributable to savings from our new commercial model and corporate G&A efficiency programs. Some of the reduced M&A was just a timing delay and in fact we're seeing promotional spending ramp up for Zostavax, Gardasil and our key brands in the third quarter, as Ken commented on.

For the full year we reaffirm our 2009 M&A guidance range of $6.9 billion to $7.2 billion. Research and development expenses in the second quarter were $1.4 billion, an increase of 19% versus the second quarter in 2008. When you adjust for the restructuring costs in the second quarter this year research and development spending is up 10%.

This increase is primarily driven by $120 million of upfront payments associated with our previously announced licensing activity with Cardiome Pharma, Medarex and Massachusetts Biologic Laboratories. We are reaffirming our 2009 R&D guidance range of $4.7 billion to $5 billion.

We continue to invest in internal and external growth opportunities. We expect our recently announced licensing transaction with Portola Pharmaceuticals to close in the third quarter. Now that has a $50 million upfront payment which will be expensed upon closing.

Now let's turn to equity income. In the second quarter, Merck recorded $587 million of equity income, an increase of $64 million. Most of the variance is attributable to the AstraZeneca LP joint venture. In terms of guidance we are reaffirming our full year guidance range for equity income of $2.3 billion to $2.6 billion.

Moving to other income and expense, for the second quarter 2009 other expense is $4 million. When you adjust for $50 million in merger related costs, other income on a non-GAAP basis is $46 million. Now this is a decline of $66 million over the same quarter in 2008.

Interest income was lower than in the second quarter of last year by $73 million as a result of lower interest rates and a change in our investment portfolio mix towards cash and shorter dated securities driven by the liquidation of some securities in anticipation of the upcoming Schering-Plough merger closing in the fourth quarter.

Moving to tax, Merck's second quarter GAAP effective tax rate was 19.3%, excluding the impact of restructuring charges and costs related to the Schering-Plough transaction, the non-GAAP effective tax rate was 20.4%. This non-GAAP rate reflects an approximately five point favorable impact from tax settlements in the quarter that reduced our FIN 48 reserves.

Turning to guidance we continue to expect our full year non-GAAP tax rate to be approximately 21% to 24%. Now I'd like to give you an update on our financing activity. As Dick said earlier, we completed a $4.25 billion public offering of senior unsecured multi-year notes. The average interest rate on the debt was approximately 4%.

Proceeds from the notes we'll be used for general corporate purposes and/or to fund a portion of the Schering-Plough merger consideration. As a result the company's $3 billion bridge loan agreement has been terminated and the commitment of lenders under the revolving credit faculties entered into in May was reduced by approximately $360 million.

We continue to have access to approximately $5.1 billion under these revolving credit facilities. Given the merger agreement we will not initiate Treasury stock purchasing until sometime after the deal closes. Finally, we are committed to maintain our dividend at the current level.

So to summarize our second quarter operating performance was solid, as Dick mentioned and Ken reviewed, and it supports our full year guidance. Our sales performance, improved gross margins and continued expense management was offset by higher R&D investments, the affects of foreign exchange and lapping of a higher tax benefit in 2008.

Turning to the full year we continue to anticipate that sales will be stronger in the second half of the year given normal seasonality of vaccines, a strong back-to-school season for Gardasil which we did not fully benefit from last year, the re-launch of Zostavax and continued growth of our key brands. On the expense side beginning in Q3 we expect higher marketing expenses, particularly focused on seasonality and the back-to-school season for vaccines.

We expect continued investment in R&D for items such as Portola, we also expect lower interest income as we approach the merger closing and we expect our tax rate to return to more normal levels from the reduced level of the second quarter.

While we're happy with our second quarter solid operational performance and we continue to anticipate stronger sales in the second half of the year, we do need to make the necessary investments and we do not expect our second quarter performance to change our full year results. We are therefore reaffirming our non-GAAP EPS guidance of $3.14 to $3.30 per share and our GAAP EPS range of $2.84 to $3.09.

Please remember this guidance excludes any contributions by Schering-Plough as a result of the merger and any cost incurred upon closing. Thank you very much, now I'd 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 that they are received and try to get through as many as possible. At this point I will turn the call over to Cynthia who will communicate instructions for our Q&A format and introduce the first question.

Question-and-Answer Session


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

Tim Anderson – Sanford Bernstein

Thank you. A few questions, can you frame out ARBITER 6 in terms of potential outcomes and what that might mean commercially to the franchise? Your cholesterol partner had surprisingly little to say on the subject.

And then Vytorin growth beyond 2009 outside the U.S., it seems like you're on a trajectory to turn negative which would imply an impact from Enhance, which I think is something you said previously would not likely impact ex-U.S. markets.

And then the last question on the Singulair court ruling, can you just give us your best sense of timing for this?

Bruce Kuhlik

As you know, the 30 month stay expires at the end of August 22nd, and we still fully expect a ruling from the court in advance of that date. And we remain very confident in our position.

Kenneth C. Frazier

As it relates to Vytorin sales outside the U.S., as we mentioned in the earlier comment, we have seen a slowing of our sales outside the U.S. in recent quarters, but we see sales improving and we expect to see growth for the rest of the year on a next exchange basis.

As it relates to ARBITER 6 as you know, according to this was a study sponsored by Abbott and Walter Reed. It was not sponsored by us. We don't know the results of ARBITER 6 or the reason why it was stopped.

We've seen, as you have, several people's speculations about multiple reasons that could explain that. But we have really essentially no new light to shed on that. I do want to say that because we don't know those results, all we really can say is that we don't see any impact of ARBITER 6 on sales as we currently look at the product.

But again, all we really know is what the Web site said which is that the trial was not stopped for safety reasons.

Eva Boratto

Next question, please.


Your next question comes from Chris Schott – JP Morgan.

Chris Schott – JP Morgan

Great, thanks. Just two questions on the vaccine business. First on Zostavax, I know we've had a wide range of results last few quarters given inventory. Can you just help us better understand right now what the underlying demand for the product is to the best of your ability, and can I just maybe quantify a little bit of the inventory moves we saw this quarter.

And then beyond Zostavax, can you just update us where you are as it relates to addressing some of the manufacturing challenges with some of your other vaccine businesses? Thanks.

Kenneth C. Frazier

Okay. First of all, Zostavax as we've said earlier, our sales have been impacted this year. As health care providers have been working through inventory this quarter, after the fulfillment of significant back orders, we do see the inventory levels coming back to normal right now. So going forward, we would think that that would be less of an issue.

Eva Boratto

And in terms of vaccine supply?

Richard Clark

Yes. We're making great progress with our vaccine supply issues and some of the other vaccines. And the targets that we've established in the past are targets that we're still committed to as we move forward.

I think it's also important to just remind everyone that from a vaccine standpoint, we continue to make strong investments in our vaccines. We've invested over $1 billion in new manufacturing capabilities to increase capacity and create redundancy from a standpoint in West Point, Pennsylvania as well as in our Elton, Virginia and in our French facility as well. And as you know, we're building new facilities in Durham, North Carolina and Carlow, Ireland at the same time.

In Durham, it's a $750 million facility and we are on track with that to be able to take product and supply in the first half of 2010. So there's a lot of positive things that are going on from an investment standpoint and the organization with [Dakta] and [Reconovax] HP are on target to meet the established dates that we've put forth.

Eva Boratto

Next question please.


Your next question comes from Jami Rubin – Goldman Sachs.

Jami Rubin – Goldman Sachs

Thank you. I've got a few questions. First on the equity income line, with respect to Gardasil sales in Europe, they were $145 million, down substantially from a year ago and sequentially. Can you tell us what’s happening there? Is this the impact of competition from Cervarix or is this reduced demand? And how do we think about that opportunity going forward?

And my next question relates to just the overall performance of equity income. I just noticed that Merck-Schering-Plough equity income was relatively flat, despite down sales. What’s happening with cost-reduction programs there?

And can you remind us why the comparisons were so much easier with AstraZeneca, LP this quarter and how we should think about that going forward? Thanks.

Kenneth C. Frazier

Let me start with a couple of comments about the ex-U.S. sales, particularly the SPNSD sales, which as you pointed out, Jami, did decline the second quarter versus 2008. So I'd make a couple of comments.

First of all, we have seen those sales declines due in part to first of all, exchange, but also due to a slowdown after we saw very strong and quick uptake in large, early adopting markets like Germany, France and Belgium. In addition to that, there was a substantial amount of media discussion around safety of the vaccine, following the batch suspension in Spain.

Beyond that though, I do want to point out that Gardasil maintains greater than 85% overall market share after the first quarter of 2009 vis-à-vis our competition, and in reimburse markets where physicians actually have a choice, more than 9 of 10 prescriptions are for Gardasil, which I think, illustrates the choice being made by physicians, as well as the parents of girls and young women. So any sales issues that you see overseas right now, I think, are really related to the fast uptake last year, and not related to competition.

Peter N. Kellogg

Let me take the next two parts. First, related to the Merck-Schering-Plough joint venture and, just to remind you, and I think you probably remember this, but the second quarter of last year we included a $43 million expense related to termination of the respiratory joint venture. If we exclude that on a year-over-year basis, I think the Merck-Schering-Plough joint venture equity income reflects the continuation of the trends we saw in second half of last year and is pretty much in line with what we would’ve expected.

For the AstraZeneca joint LP, you may recall that last year we talked about second quarter that sometimes the number can be a little bit – have some inherent variability, on the timing of payments, and in fact last year we had a weak second quarter. So if you run across the different quarters over last year and this year I think you will see pretty clearly that our second quarter result this year was pretty much in line with where expectations would be, but probably second quarter last year was a little bit light, and I think just under that is the timing of the payments that we have received.

Eva Boratto

Next question please.


Your next question comes from the line of John Boris – Citigroup.

John Boris – Citigroup

Thanks for taking the questions. My first question is for Peter. I don’t know if I missed this on the call, but can you just quantify the impact of foreign exchange on your earnings?

Second question, for Ken, just on your antiviral product, Isentress, if you actually look at most of your peers that compete in this marketplace, it seems as though partnerships are very, very important and largely because of the use of combination therapy. Can you just help us think how you are going to compete in the market place with the naive indication, at least going forward and how you are thinking about partnering with a player that could potentially improve your competitive positioning?

And third question for Dick, traditionally Merck likes to be a dominant player in businesses that it plays in. You will be inheriting some consumer assets from Schering-Plough, some very good assets. Historically, you’ve always had a position of potentially joint-venturing things such as that with a stronger player. Can you just help us think through how you are planning on managing consumer assets and your overall focus – relative to your focus, which has always traditionally been on the pharmaceutical side of the business, and how you think about managing that and the need potentially for a JV partner there? Thanks.

Peter N. Kellogg

John, this is Peter. So let me start off with the foreign exchange impact. So the impact of the foreign exchange on our P&L this quarter, and I'll just cover both, it was a 5% impact on the top line and a 7% impact on the bottom line. And that’s pretty much as we had anticipated when we set up the year from a guidance standpoint. I don’t think we've been surprised by the foreign exchange movements. But that’s pretty much what I think everybody was anticipating. Ken?

Kenneth C. Frazier

On Isentress, as we look at the future opportunities for this brand, I think it's useful to note that after just 1.5 years after launch, Isentress is already being used in 10% of HIV patients. And once you recognize that although we have been promoting Isentress consistent with our current labeling, a number of physicians have been already been prescribing Isentress for patients outside of our initial treatment experience indication, and excluding nuclear side backbone therapy, Isentress is the fourth most prescribed medicine in this crowded market.

The expanded indication provides us with an opportunity to accelerate growth for Isentress because of that fact that many physicians recognize its favorable safety and tolerability profile. It also makes available to physicians another important treatment option. And I think begins to unlock the potential of the product as patients are being on these drugs for a longer period of time and are looking for the tolerability advantages, although we do recognize that there's more to be done.

So in that same vein, we are looking forward to the once daily dosing regimen which we have had the FDA accept the file for, I believe. Is that right?

Eva Boratto


Kenneth Frazier

We filed that. Certainly – I'll back up a minute – our study has been initiated in that area, thank you. And we're also looking forward to the fixed dose combinations that we have in development with other ARBs to simplify dosing every [DS] co-pays and until burden. So I apologize for that issue around the once daily dosing. That is something that we've initiated a study for, and we do plan to move forward with that.

Eva Boratto

Next question, please.

Richard T. Clark

John, concerning the consumer business, I agree, I think Schering-Plough has built a very powerful brand with the consumer businesses, particularly in the United States and they're starting to grow externally as well. I think it would be a very important part of our business moving forward from a diversification standpoint in building the brand, particularly in the emerging markets and what we need to do to support them, you know, countries like China if you take the brand that Schering-Plough has.

Your questions about how you do it strategically is something we actually have the team looking at today. Certainly there's going to have to be an investment in the consumer health business. Do we do it as a standalone? Do we do it with a partner and how do we move that forward? But I can tell you there's a great deal of excitement around the consumer health business from a Merck standpoint and if you look at some of our products that have recently come off of patent or will be coming off patent, they are excellent candidates from RX to OTC switch, will make it even more powerful in the future.

Eva Boratto

Next question, please.


Your next question comes from the line of David Reisinger – Morgan Stanley.

David Reisinger – Morgan Stanley

Thanks very much. I have a couple of questions. First, could you just comment on that flattening of Januvia and Janumet franchise new prescription trends in the last three months? It seems like they're just flat and not growing sequentially anymore.

Second, obviously you did a lot of due diligence on Schering-Plough's TRA and just wondering if you could provide some comments on comparing and contrasting Schering's TRA to [Aside] since [Aside] is going to be reporting Phase II TRA data shortly. And then finally, if you could please provide some more color on the Cordaptive outlook ex-US? Thank you.

Kenneth C. Frazier

So I'll start with the Januvia question, thanks David. We're continuing to, as I said before, introduce new and relevant efficacy and safety data to strengthen our position and we're also implementing a number of programs to drive growth. I mentioned the fact that we're continuing to work with physicians and patients to help to improve the understanding and awareness of the key efficacy and safety attributes of these medicines through this data.

We continue to leverage and improve on our favorable managed care position with recent improvements in Medicare Part D coverage. In addition, we are working to enhance awareness and understanding of our very favorable formulary position for Januvia and Janumet with physicians and patients. And we're beginning to see, with our new commercial model and the work that we're doing with various patient offering programs, we're actually starting to see better receptivity in the physician's offices.

So we continue to believe that there's significant growth potential for this medicine as we move forward. As it relates to Tredaptive, we are in the process, as you know, in the third quarter, of continuing to launch this medicine in important markets around the world including Mexico, the U.K. and Germany and into the fourth quarter into 2010.

We began launching it in the third quarter in countries like Ireland, Norway and Finland. And we don't provide specific product guidance for Tredaptive. We have continued to state that this is a product that we intend to move forward with and we have a great deal of excitement about its potential.

Richard T. Clark

And concerning that TRA, as we said in the past, we continue to be excited about TRA, and at this point, we are not going to comment here on that.

Eva Boratto

Next question, please.


Your next question comes from the line of [Quyeor Purique] – UBS.

[Quyeor Purique] – UBS

Hi, good morning. Thanks for taking the question. My question is actually related to a pipeline compound MK0633. Could you please elaborate further on the reasons behind this decision to not continue the valuation for use in asthma, specifically were there any safety concerns that you saw with this drug. Thank you.

Kenneth C. Frazier

Well Merck decided not to continue with the Phase II B study that was designed to evaluate the efficacy and safety of MK633 in asthma. It was based on our assessment of the efficacy safety profile observed within the population in that study. So after careful consideration we have discontinued clinical development efforts for that compound in asthma. We will focus our future clinical development program and effort on the treatment of chronic obstructive pulmonary disorder, COPD.

Eva Boratto

Next question, please.


Your next question comes from the line of Tony Butler – Barclays Capital.

Tony Butler – Barclays Capital

Thanks very much. Dick, last week Novartis characterized what they believe the impact of health care reform would be as a moderate impact on their overall P&L. While it still remains amorphous, you have spent some time in the White House with the Chief of Staff and I'm curious today how you might actually characterize what you see as potentially coming down the road, potentially a bill signing and coming out of Congress as the overall impact to the pharmaceutical business. Thank you.

Richard T. Clark

Well as you know, as an industry, pharma and Merck continues to echo the sentiment shared by President Obama and members of Congress that it really is critical for all Americans to have access to high quality, affordable health care coverage and with this whole [mantra] I think we're very happy that we're supporting a comprehensive health care reform bill, and that we've been very active, as you said, in this dialogue. And I think it's important for us to have a seat at the table this time around to make sure that we can add value.

Certainly we're continuing to evaluate the impact of these various proposals on our business. We cannot be definitive about the impact at this point. I think we do, as an industry, have an obligation to contribute, to provide resources. Certainly it isn't going to be easy and from a standpoint as you know, the $80 billion that has been reported and certainly our potential liabilities included expanded rebate payments in Medicaid and Medicare and additional tax liability.

So we're still evaluating it but we still think it's the right thing to do. It's important to do, to participate and contribute and now is the time to reform health care.

Eva Boratto

And given the time we have about time for one or two more questions. Go ahead Cynthia.


Your next question comes from Seamus Fernandez – Leerink Swan.

Seamus Fernandez – Leerink Swan

Hello, thanks very much. So just a couple of questions, van you update us on the magnitude of wholesaler stocking and destocking in the quarter and which products were potentially impacted? I realize that you do have IMA agreements, but last quarter you stated that roughly there was a $75 million negative impact and I'm just wondering if there was a positive impact in the quarter.

Second question, can you just update us on the timing of the interim look that's planned on your staph Aureus vaccine V710 and if it is possible to file based on that interim look?

And then just a very last quick question, in terms of Singulair, do you see Singulair as a product that has a potential opportunity to be brought OTC or are the challenges of this product as an asthma product simply too difficult to manage over the counter such that perhaps – I was just wondering if it's possible to split the asthma indication OTC versus the allergic rhinitis indication. Thanks.

Kenneth C. Frazier

So starting with the last question, we're not in the position today to declare where we see Singulair OTC being, but it's something that we are looking at very carefully. It is a brand that has had broad acceptance for allergic rhinitis and asthma. We believe it is a safe, effective product and so that's something we will evaluate along with the FDA and others to decide what's the best way to bring that forward in the context of DTC – I mean OTC rather.

The second question was the staph vaccine. We don't have any updates on the staph vaccine as of this time. And I believe the first question had to do with the current status of wholesaler inventory. And what I can you is that in the U.S. in the second quarter there's been minimal change in wholesaler inventory levels as compared to the first quarter.

After the end of the second quarter, wholesaler inventory levels remained approximately $75 million to $100 million lower than in 2008, year-end levels across our entire portfolio including MSPJB. We're still finding inventories to be within a reasonable range and consistent with our inventory management agreements in the U.S. to meet customer service levels. Still, current inventory levels do remain below historic norms.

Eva Boratto

The last question, please Cynthia?


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

Steve Scala – Cowen and Company

Thank you. I have two questions. First, when does the Frontline patent expire and how does Merck and Sanofi seek to sustain the franchise post that patent expiration? It's not clear to me why Sanofi would want to buy Merck's half of Meriel given this patent expiration, but perhaps I'm missing something.

And secondly, Schering said on his call that the single event look at the IMPROVE-IT trial would not occur for some time. I'm wondering if sometime it's expected to be some time in 2009 or some time thereafter. Thank you.

Kenneth C. Frazier

So I'll start with the interim look. As you know there is an interim efficacy analysis that's to be conducted by the independent DSMB when 50% of the expected total primary events become available. Since this analysis is in fact event-driven, timing of the interim analysis is dependent on the accumulation of events, and it would be appropriate at this point to speculate on that timing. Of course when there's something significant to report, we will communicate it.

Also I apologize, I recognize that that question was asked by one of the previous questioners and I did not respond to it. From our perspective on the Frontline patent, the Frontline spot patent, as we understand it, runs until September 2016 and the Frontline plus patent runs to 2017.

Eva Boratto

Okay, that concludes our call. As always, [Carol Ferguson] and I will be here to take any additional questions that you have.


Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect.

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