Merck & Co., Inc. Q3 2009 Earnings Call Transcript

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Merck & Co., Inc. (NYSE:MRK)

Q3 2009 Earnings Call Transcript

October 22, 2009 9:00 am ET


Eva Boratto – Vice President of Investor Relations

Dick Clark – Chairman, President and CEO

Ken Frazier – EVP and President of Global Human Health

Peter Kellogg – EVP and CFO

Bruce Kuhlik – EVP and General Counsel

Peter Kim – EVP and President of Merck Research Labs


Chris Schott – J.P. Morgan

David Risinger – Morgan Stanley

Catherine Arnold – Credit Suisse

Eric Clough [ph] – Banc of America Merrill Lynch

Steve Scala – Cowen

Jami Rubin – Goldman Sachs

Keyur Parekh – UBS

Tim Anderson – Sanford Bernstein

John Boris – Citi


Good day, everyone; and welcome to Merck's third quarter 2009 earnings conference call. (Operator instructions) At this time I would like to turn the call over to Ms. Eva Boratto, Vice President of Investor Relations. Please go ahead, ma'am.

Eva Boratto

Thank you, Cynthia; and good morning. Welcome to our call to review our business performance for the third quarter of 2009. Joining me on the call today are Dick Clark, our Chairman, President and CEO; Ken Frazier, our Executive Vice President and President of Global Human Health; and Peter Kellogg, our Executive Vice President and Chief Financial Officer. Also here to participate in the Q&A session are Bruce Kuhlik, Executive Vice President and General Counsel; and Dr. Peter Kim, Executive Vice President and President of Merck Research Labs.

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 7:30 this morning. You can access this through our Investor Relations section on and I would remind you that this conference call is being webcast live and recorded. The replay of this event will be available later today via phone, webcast and podcast.

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

The forward-looking statements may include statements regarding product development, product potential, or financial performance. No forward-looking statement can be guaranteed and actual results may differ materially from those projected. Merck undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise.

Forward-looking statements in this press release should be reviewed 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 the total call to last approximately one hour. With that, we will begin with remarks from our Chairman, President and CEO, Dick Clark.

Dick Clark

Thank you, Eva; and good morning, everyone. This morning, I'm pleased to discuss our company strong third-quarter performance, update you on our readiness for the pending transformational merger with Schering-Plough, and highlight how we continue to plant the seeds for sustainable future growth and innovative partnerships that will position us as a leading global healthcare company for many years to come.

If I continue to concentrate on the fundamentals and growing key global pharmaceutical brands, we realized topline revenue performance of $6 billion in the third quarter, delivering worldwide revenue growth of 2% on a year-over-year basis. If I continue to concentrate on lowering our cost and streamlining activities throughout the organization, we recorded third-quarter non-GAAP earnings per share of $0.90 and GAAP earnings per share of $1.61 per share. Our strong third-quarter is evidence that Merck has maintained our focus on business performance and overcome a challenging economic environment, while continuing to ensure our operational readiness for the pending merger.

Sales of few products, particularly SINGULAIR, JANUVIA, JANUMET, and ISENTRESS during the third quarter, will strengthen the base that we are building upon to create a new Merck for the new era in global healthcare. And that day is just around the corner, as we continue to expect to close the merger this quarter. We have made significant progress in our planning zone [ph] in the past two months, and have achieved a number of key milestones during the third quarter. Perhaps most importantly, shareholders of both companies voted overwhelmingly to approve the proposed merger this past August.

In addition, we announced a global leadership team for the new Merck. They will include executive committee level positions for consumer healthcare and animal health, as well as the addition of a chief medical officer and a chief compliance officer. About 40% of Schering-Plough's senior leaders will be part of the newly combined company in executive roles.

We completed the $4 billion sale of Merck's interest in our animal health joint venture Merial. And we filed with regulators and the European Union seeking approval of our merger with Schering-Plough. Both Merck and Schering-Plough are working diligently and cooperating with the regulators in other countries to obtain all necessary approvals. When all the necessary approvals are in place, I am confident we will be ready to hit the ground running on our first day of business as a new Merck because of the quality of our integration planning and the strong momentum we are building. Out of the gate, we will hold a leadership position as the new era in global healthcare dawns.

As such, we will continue to focus on critical areas, such as health care reform, anticipating customer needs, and growth leaders, such as emerging markets, biologics and vaccines.

Before year-end, I'm positively optimistic that the US will finally pass major healthcare reform. Merck and the pharmaceutical industry stepped up earlier to support real change. Throughout, we have supported health care reform that improves quality to market-based competition, encourages innovation, and ensure that every patient that has been prescribed one of our medicines or vaccines have access to it. Our participation in health care reform in the US demonstrates that in response to a rapidly changing operating environment, Merck has taken the bold actions necessary to adapt to the future environment.

That is why in the new Merck, we plan to take advantage of our broader and deeper inline product franchises when their merger is completed. We will pursue the significant growth opportunities we have identified in three key areas; emerging markets, biologics, and vaccines. The cross-divisional approach we are taking will allow the company's commercial, research, and manufacturing divisions to dedicate the necessary focus and resources to take and sustained leadership positions.

As we have built the foundation of the new company in recent months, we have been guided by four underlying principles; we must ensure a smooth transition for our existing customers. We must have the right people in the right jobs in the right culture. We must (inaudible) in the form of cost savings and revenue growth opportunities and we must stay focused and maintain momentum in our later-stage pipeline.

One thing is certain; with the opportunity for a pending merger with Schering-Plough, we are more externally focused than ever. We are listening even harder and gaining a deeper appreciation for what healthcare solutions our customers around the world, patients, physicians, and public and private healthcare providers alike are saying they need. To this end, we are busy cultivating new scientific discovery and delivery opportunities, (inaudible) for our economy, by seeking out the best science and the best innovation to improve health care.

In the past quarter alone, we have added a seasonal flu vaccine to our US vaccine portfolio, developed by our long-term partner, CSL Limited; which now means that Merck will market eight of the 10 vaccines on the recommended schedule for adults in the US.

We have launched the Hilleman Laboratories, a first of its kind research and development joint venture between a leading pharmaceutical company and a world-renowned research charity, Wellcome Trust. With a nonprofit mission to focus on developing affordable vaccines to prevent diseases that commonly affect low income countries.

We have closed an exclusive global collaboration and license agreement with Portola Pharmaceuticals for the development of a potential novel new medicine to treat cardiovascular disease.

All of which is part of the reason why the plans we are making for the future are so exciting and holds so much promise for so many.

Now, I would like to turn it over to Ken.

Ken Frazier

Thank you, Dick; and good morning, everyone. As Dick mentioned, revenue for the third quarter of 2009 was $6 billion, up 2% compared to last year, including a 3% negative impact from foreign exchange. Overall, a combination of factors drove our growth in the quarter. We continued to generate strong growth for our newest brands in markets around the world. ZOSTAVAX sales were bolstered by the return to full supply and increased origination linked to the start of the fall flu season and SINGULAIR continued its sales momentum.

Looking at the results graphically, we saw volume growth of 6% outside the US, which was offset by foreign exchange. In the US, we achieved sales growth of 4%, despite continued impact of a loss of marketing activity for some of our brands.

We are pleased with the continued momentum of the business and the focus of our team as we move toward the planned merger with Schering-Plough.

Now, coming to individual product performance.

Starting with SINGULAIR, sales in the third quarter were $1.1 billion, up 5% versus the prior year. Outside the US, excluding exchange, we generated strong growth of 11%. We recently issued leadership in Japan; and in Europe, we are seeing strong growth in key markets including France and Spain.

Moving to JANUVIA and JANUMET, global revenue grew to reach a combined $664 million in the third quarter, up 39% versus the prior year. The JANUVIA JANUMET franchise continues its strong performance in markets all around the world. In the vast majority of markets, where more than one DPP-4 exists, Sitagliptin is clearly the market leader.

In the US, JANUVIA and JANUMET have achieved a new milestone as the number one branded family of products prescribed by endocrinologists. We are positioned well to address the competition entering the market. More than 16 million prescriptions have been written in the US alone since our launch in 2006, and we have favorable formulary positioning. We have invested in the continued success of these brands by making them a top priority of our sales and marketing organization and frequently introducing new data to offer physicians and patients new treatment choices in managing this progressive disease.

I would like to share with you some recent examples. JANUVIA was approved for first-line use for the treatment of Type II diabetes in the EU this past August. This is the only DPP-4 in the EU to have their indication. JANUVIA and JANUMET are under regulatory review in the US and the EU for use as an add-on to insulin, and in September, we received a positive opinion from the CHMP for this indication.

In the US, we continued to implement patient programs through direct to patient advertising, revision of this program, and policy initiatives to address potential cost sensitivity, including the impact the economy has had on certain patients.

Lastly, we are extremely pleased with the recent approvals of JANUVIA in Japan and China. As you know, Japan is the second largest pharmaceutical market in the world, and JANUVIA is the first introduction of a new class of agents to treat Type II diabetes there in 10 years. During a recent trip to Japan, I had an opportunity to review the launch plans with the team and I'm confident that the brand will be successful in that critical market. Also as you know, we are very focused on growing our emerging markets business. The JANUVIA approval in China is an important milestone.

Next, ISENTRESS continues to perform well, with another quarter of strong, steady growth. Sales in the third quarter were $197 million, up 14% sequentially versus the second quarter of 2009. In the US, third quarter sales were $95 million, and market share continues to exceed the last five HIV launches a new RS market share. Outside the US, we achieved $102 million in sales, thanks to strong uptick in markets including France, Spain, and Italy. The recently approved expanded indication for ISENTRESS in both the US and now the EU makes ISENTRESS available for patients who are new to treatment and patients who are treatment-experienced. This means that ISENTRESS is a very important option for physicians and patients to consider at each stage of the treatment continuum.

I will now move to our vaccine business.

Stronger GARDASIL sales as reported by Merck in the third quarter of $311 million, a 22% percent decline when compared to the third quarter of last year. In the US, sales declined 20% versus third quarter 2008, but increased 19% sequentially versus second quarter 2009. Performance in the quarter was in line with our expectations, driven primarily by increased vaccination of the 13 to 18 year olds during the back-to-school season. We also saw mild increase in the 19 to 26 first dose vaccination. While this year there is some confidence that our programs are beginning to have an effect, we remain focused on addressing the barriers in this challenging age group.

Ex-US sales as reported by Merck decreased 27%, attributable to the high penetration rates in early adopting countries such as Australia, where so many in the 12 to 26 years old population have already been vaccinated, and the initial adoption of school-based programs in all Canadian provinces in the third quarter of 2008. Growth in less mature or later-adopting markets such as Korea is partially offsetting the decreases.

Looking now (inaudible) the news regarding the use of GARDASIL in the US. The ACIP voted to recommend permissive use of GARDASIL in boys nine to 26 years of age and the ACIP recommended vaccines for children funding for males. The recommendation for VSV funding for males will enable access and importantly remove the potential barrier to underserved populations. However, we expect the uptake in males to be much lesser than uptake for females, due to the differences in the strength of their respective ACIP recommendations and the lack of a cancer claim in males.

I will remind you though that only GARDASIL is indicated for use in males. And in a separate vote, the ACIP was clear yesterday in recognizing the clinical differentiation of GARDASIL. The proposed language for the revised HPB recommendation explicitly states that the quadra-valent vaccine GARDASIL is recommended to prevent vaginal and vulvar cancers, general warts, as well as cervical cancer. The recognition of the unique value of GARDASIL further supports our strong positioning in the marketplace. In countries where physicians have a choice, GARDASIL is the clear market leader.

Moving to ZOSTAVAX, third-quarter sales as reported by Merck were $84 million and were more generally reflective of underlying demand, now that supply is stable. We have been rolling out new marketing programs in physicians offices and pharmacies to help providers more easily integrate ZOSTAVAX into their routine standard of care. We are continuing the consumer campaign for that initiated in July. These new programs, coupled with full supply and increased patient originations during the fall flu season should position ZOSTAVAX for strong growth.

In the other vaccines category, I want to take a moment to discuss PNEUMOVAX 23, our vaccine for pneumococcal disease. Third-quarter sales were $130 million and reflects an acceleration of demand, as more patients originated earlier in the adult immunization season, due to additional media attention on the H1N1 pandemic and seasonal flu.

Looking ahead to 2010, we are pleased to expand our adult vaccine portfolio in the US to include a seasonal flow vaccination, Affluria, which we recently licensed from CSL. As Dick said, with the addition of Affluria, Merck will market eight of the 10 vaccines on the recommended immunization schedule for adults in the US.

Now, finally, let us discuss the performance of our cholesterol JV. Worldwide sales of ZETIA and VYTORIN as reported by the Merck Schering-Plough joint venture were each $514 million in the third quarter. Sales of ZETIA were down 4% and sales of VYTORIN were down 9% versus the prior year. The rate of prescription and the market share decline in the US however appears to be stabilizing. Outside the US, sales in the third quarter were down 1% relative to third-quarter 2008 and were up 9% after adjusting for exchange.

We remain committed to investing in ZETIA and VYTORIN while prudently managing our expenses. For many patients, particularly high-risk patients, (inaudible) alone are not sufficient 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. The MFP joint venture is prepared to engage in dialogue with scientific leaders at the upcoming AHA meeting in November. Our goal is to provide fair and balanced scientific information to the medical community and other constituents.

Looking forward, we are excited by our combined strong cardiovascular portfolio and pipeline after the (inaudible). Across the organization, we are encouraged by the momentum of many of our key brands and are excited about the other near-term opportunities ahead of us. As we look forward to the new Merck, there are a number of near-term launch opportunities in major markets around the world across both companies' portfolios that have significant potential. We are focused on ensuring successful launches, continued momentum from our inline brands and maintaining strong and productive customer relationships as they prepare for the integration with Schering-Plough.

So with that, I will turn the call over to my colleague, Peter Kellog.

Peter Kellog

Thank you, Ken; and good morning, everybody. I will provide an update on our third quarter results and our full-year 2009 guidance. I was also comment on what you can expect from us in the first half of 2010. And as I said previously, our non-GAAP results exclude restructuring costs as well as pre-closing costs related to the merger, including interest, commitment fees, and external integration costs. With that said, let's get into the results.

Merck reported third-quarter non-GAAP earnings per share of $0.90, representing a 13% increase versus the third quarter of 2008. Our GAAP EPS was $1.61 per share, including a gain from the sale of our share of Merial. We are pleased with the strong performance this quarter. The 13% increase in non-GAAP EPS over the same quarter last year reflects strong operating performance, including; growth for our newest brands in markets around the world, an improvement in gross margin versus prior year, and continued expense management of marketing and administrative spending.

There are a couple of other items that I would also like to mention. These are the foreign exchange negatively impacting the top line by 3% and the bottom line by 2%. We increased our legal differences reserves by $55 million. Now these two negative impacts were roughly offset by a third item. We benefited from a $127 million in portfolio gains this quarter, as we liquidated securities in advance of the merger closing.

Now on revenue, our total revenue for the quarter as reported by Merck, was $6 billion, and Ken walked you through our strong product performance, so I'll move on to other lady is in our P&L.

Third quarter materials and production costs were $1.4 billion. When you exclude restructuring costs in both years, this represents a 1% decline in cost and a 76.8% gross margin in this quarter.

Now, on a guidance basis, we continue to anticipate PGM at a 77% to 78% rate for the year, excluding restructuring costs.

Now let us turn to marketing and administrative expenses. M&A expenses were $1.7 billion as reported. Excluding merger related expenses of $56 million, M&A expenses declined 3% versus Q3 in 2008. The current quarter's exchange benefit was entirely offset by the aggregate $55 million increase to the VIOXX and FOSAMAX legal defense reserves.

As I said previously, we expected higher marketing expenses, particularly focused on seasonality and the back-to-school season for vaccines in the second half of the year. We did increase promotion this quarter in support of our international launches in vaccines, especially ZOSTAVAX, and we are seeing the benefit in our top line. The cost of this increased support was more than offset by the continued benefits from our new commercial models and corporate G&A efficiency program. We do expect to continue the emphasis on promotion of our key brands and new launches in Q4, and as a result, we expect to see higher spending relative to prior quarters. In particular, we will be supporting the continued launch of the (inaudible) in the EU, and the launch of JANUVIA in Japan.

Now turning to R&D, our research and develop with expenses in the third quarter were $1.3 billion. When you exclude restructuring costs in this year and 2008, research and development spending is up 6%. This increase is primarily driven by $15 million of upfront payments associated with our previously announced licensing of Factor 10A program from Portola Pharmaceuticals.

Now let us turn to equity income. In the third quarter, Merck recorded $688 million of equity income, an increase of $23 million. This increase is attributable to income from the AVLC [ph] joint venture, partially offset by a decline in Merial equity income. Now remember that the sale of Merial to our partner Sanofi was finalized on September 17, and therefore, income from the last couple of weeks in the quarter was not recorded by Merck. Likewise, given the divestiture, you will not see Merial equity income in Merck's fourth-quarter results.

Now let's talk about other income and expense. For the third quarter of 2009, other income net is $2.8 billion. This includes a $2.8 billion gain on the sale of Merial. When you adjust for this gain and $88 million in merger related costs, other income, on a non-GAAP basis is $117 million, compared to other expense of $31 million in the third quarter of the prior year.

There are a few items driving this year over year change; first, in the third quarter of 2009, Merck realized approximately $127 million in portfolio gains from liquidating securities in anticipation of the Schering-Plough merger closing as I mentioned earlier. Second, as we anticipated, interest income of $33 million was $110 million lower when compared to the prior year as a result of lower interest rates and a change in our investment portfolio mix towards cash and shorter day securities, again in anticipation of the merger closing. Third, in the same quarter of last year, Merck recognized $88 million of portfolio losses and $52 million of exchange losses. So if you take these three factors, I think that pretty well explains the change year over year in that area.

Now let us turn to the tax rate. Merck's third quarter GAAP effective tax rate was 31.9%. Excluding the impact of the Merial sale, restructuring charges, and costs related to the Schering-Plough transaction, the non-GAAP effective tax rate was 24.7%. While this rate is similar to the rate that we saw at this time a year ago, it is higher than the first two quarters of 2009. We anticipated this, as the tax rate in the first half of this year included benefits from various tax settlements. Returning to guidance, we continue to expect our full-year non-GAAP tax rate to be approximately 21% to 24%.

So overall, a very successful quarter. Now I would like to discuss what this means for our guidance in 2009. And before I begin, let me remind everyone that this guidance is Merck's stand-alone guidance. It excludes any contributions by Schering-Plough as a result of the expected merger and any costs incurred upon closing.

We continue to expect the merger with Schering-Plough to close in the fourth quarter. And once this closing occurs, the stand-alone guidance for Merck will no longer be applicable, as the combined company's fourth-quarter reported results will include Merck results for the full quarter and Schering-Plough results from the closing date through the end of the year.

With that, let us get into our guidance.

We are pleased with our operating results this quarter and expect that our key products will continue to perform well for the rest of the year. In structuring our guidance for the year, we did consider a few other items. First, we do not expect any further significant portfolio gains, based on our current levels of cash and investments, and anticipate our cash flows between now and the expected close of the merger, we do not anticipate needing significant additional funding to close the merger.

Second, fourth-quarter results will exclude equity income from Merial as I mentioned earlier, which contributed approximately $50 million to equity income in the fourth quarter of 2008.

Third, we expect that fourth-quarter M&A spend will be higher, as we support our key brands and new launches, in line with the guidance we have provided throughout the year.

Given our year-to-date performance and these factors, we are raising the bottom end of our non-GAAP EPS guidance to $3.20. This results in a fully year Merck standalone non-GAAP EPS guidance range of $3.20 to $3.30 per share. We are also decreasing our M&A guidance range to $6.8 billion to $7.1 billion. All other guidance elements remain the same. You will find a breakdown of these on the guidance range of the press release issued earlier today.

We are also adjusting our GAAP EPS guidance range to $3.69 to $3.89, which includes the gain on our sale of Merial.

Our merger guidance is still applicable. We continue to target a high single-digit non-GAAP EPS compound annual growth rate from 2009 to 2013 for the combined company. We continue to anticipate that the transaction will be modestly accretive to non-GAAP EPS in 2010.

Now, as we look ahead to the first quarter of 2010, which we anticipate being our first full quarter of the new Merck, we want to emphasize that EPS expectations should be moderated relative to the full-year outlook. As we have already seen in Merck's 2009 trends, our first-quarter non-GAAP EPS was less than the second and third quarters as we had expected. We expect to see this pattern in the new Merck due to the seasonality of our business, specifically our respiratory franchise and vaccine sales.

Other factors that you should keep in mind that will be specific to the new Merck include; first, as Ken said, there are a number of upcoming launch opportunities for the new Merck. A substantial amount of motion effort is planned in the near term to ensure the success of these launches. Second, the synergies we expect to capture, while substantial, will not be immediate, but rather will be achieved more heavily in the second half of the year.

Now with that said, I would like to look ahead for a moment and share our thinking about the timing of 2010 communications. Given the anticipated fourth-quarter close off our merger, we expect to hold our fourth-quarter and full-year 2009 sales and earnings call during the second week of February, which will be about two weeks later than our normal timings. I am sure you can appreciate the need for the additional time, given the additional complexity of our combined financials, the added requirements to develop purchase accounting for the first time, and additionally, we will use this time to double up and tested financial statements that are most useful for investors to understand the trends of the combined businesses.

In addition, we expect to hold our annual business briefing during the second quarter of 2010, rather than in early December as has been Merck's practice in the past. We believe this will make the breaking most useful for you, because it will enable us to speak to the products, the pipeline, and the strategy of the combined company. Accordingly, we expect to provide annual guidance around the timing of our first-quarter 2010 sales earnings call, ahead of the ABB.

We really look forward to an exciting future as a new Merck and thank you very much.

Now I would like to turn the call back 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 Cynthia, who will communicate instructions for our Q&A format and introduce the first question.

Question-and-Answer Session


(Operator instructions) Your first question comes from the line of Chris Schott with J.P. Morgan.

Chris Schott – J.P. Morgan

Great, thanks. A couple of quick questions, maybe first on the R&D side. For ISENTRESS QD, can you provide an update on that program, where are we in enrollment, when we can anticipate data?

Second, on the R&D side, with the Portola end licensing, when can we have that program moving into Phase III. I know a number of your competitors have data releases expected over the next year, should we expect that Merck is going to wait to see outcomes of some these studies before moving forward?

And maybe finally, it is just a big picture question, (inaudible) environment, we are seeing co-pay assistance programs meaningfully boosting usage of products in certain therapeutic categories, do you think there is something that Merck could share more broadly employing some of your products, (inaudible) something about your products or categories, I mean specifically something like a JANUVIA? Thanks.

Peter Kim

Thanks, Chris. This is Peter Kim. With regard to ISENTRESS QD, that program is moving forward, we have not made any announcements in terms of additional developments there. The (inaudible) date for that remains 2011.

With regard to Portola, that program is in Phase II of clinical development and we are actively engaged in discussions with our new partners to move the program forward and we are not making announcements about when that will go into Phase III.

To answer your question about economy and co-pays, we are very mindful that the impact of the economy really does make a difference, particularly to certain lower income or middle income patients, and among diabetics, as you know, they are off and on most medications. So, we do in fact have programs that are coupon programs, that are discount programs that are aimed at helping patients to be able to absorb some of the economic impact of their co-pays. We actually target those programs, we are very cognitive of the differential impact that has had across geographies within the US as well as certain patient demographics. And so we really do try to target those programs, where we think it will create the greatest good.

Eva Boratto

Next question please.


Your next question comes from the line of David Risinger with Morgan Stanley.

David Risinger – Morgan Stanley

Yes, thanks very much. I have two questions. First, could you just comment on the sequential trends in JANUVIA prescriptions? It seems like the IMF data suggests that JANUVIA has stopped growing and new Rx in the last several months.

And then second, with respect to the cholesterol joint venture, I believe that Merck management has commented that you expect revenue growth for that cholesterol joint venture in 2010. Is that correct? Thank you.

Ken Frazier

On the JANUVIA question, we have continued to see growth for JANUVIA. I think fortunately, we are continuing to see growth as we mentioned on the earlier part of the call, and we have a number of programs in place to continue to drive the future growth of the brand, including making it now our top priority for sales and marketing organization. We continue to introduce new data. We continue to add on, for example with the long acting Metformin as well as (inaudible). So, we continue to implement a number of patient programs, direct-to-patient advertising, we have physician office programs and pharmacy initiatives to address as I mentioned a few minutes ago the potential cost barriers on patients. And so, we continue to believe that we should drive additional growth. It is now the focus of our efforts now in particularly our US sales force.

On the cholesterol sales force, I mentioned earlier in the call, we do expect growth. We have not said exactly when. We will try to continue to grow outside the US, and we continue to believe that VYTORIN and ZETIA are important treatment options, particularly as people try to treat to the newest treatment goals around LDL lowering and particularly for high-risk patients.

Eva Boratto

Next question please.


Your next question comes from the line of Catherine Arnold with Credit Suisse.

Catherine Arnold – Credit Suisse

Thanks very much. Two topics, one for Peter, in terms of the staph vaccine, I am wondering if it is reasonable to think your second quarter briefing you might have an update in terms of your go/no-go decision; and if you could give us any sense in terms of what the hurdle rate would be in reduction of instance of staph.

And then, as far as the upcoming ARBITER 6 HALTS state, I know you guys aren't in control of that, but you no doubt from a marketing perspective have to be thinking about various outcomes of that meeting. And I'm wondering at the next stage if the study is favorable to Niacin, which given the patient population, isn't a crazy thought. What are your sales reps going to say in reaction to doctors asking about that, you know, what your medical information folks say to the same? Thanks.

Peter Kim

Thanks, Catherine. With regard to the staph vaccine, there is nothing to update you. As you know, last time I told you that we did anticipate a delay in the proof of concepts decision due to slower enrollment as well as significantly lower event rates that were occurring in that trial.

With regard to ARBITER 6, I would just like to – a few points. One is that, obviously, ARBITER 6, we don't know the results of that study. I do think as you know, it is a IMT study, it is not an outcome study. And we certainly think it is important to not that IMT studies have had inconsistent results in the past.

One notable example that you are probably familiar with is the Kashlinger Study [ph], which was a 12-month study comparing 80 mg of atorvastatin to placebo and in that IMT study comparing 80 mg of atorvastatin to placebo, there was not a statistically significant difference between the two groups when measured by IMT and as all of you are very well aware, that result stands in marked contrast to multiple large clinical outcome studies that have shown clear benefit of atorvastatin on reducing cardiovascular disease.

That said, as you pointed out, Catherine, the ARBITER 6 study was conducted in patients that had been extensively pretreated with statins had well-controlled LDL, but relatively low HDL. And so therefore, it is a study designed that would likely favor Niacin. In addition, there was no placebo control. So even if there were a difference to be observed between two arms, one couldn't determine in effect either treatment approach versus placebo.

And finally, it is a small study, there are fewer than 400 patients in this study, and so therefore, we think again, not knowing results, it would inappropriate to draw conclusions about outcomes from this study, regardless of the result. The way to stay this question, of course is to do a true outcome study, and as you know, that is what we are doing, we are doing Improve-It. And indeed, I am happy to announce now that Improve-It through extensive efforts on our hardball investigators to expand to a number of countries as well as sites is now doing very well and I am pleased to announce that the enrollment has now increased to over 15,000 patients. So we fully expect that this study, Improve-It will answer the question in the way it should be answered, which is an outcome study.

Ken Frazier

So from a commercial standpoint, Catherine, I want you to know that we have a proactive plan in place for AHA and both companies will have a strong presence there. We also know how important it is not only to provide fair and balanced scientific information at that meeting but to also have the right outreach to the medical community and other key constituencies including the media; and also to communicate directly with our consumers, including patients, providers, and payers. So, our chemists engage all those constituencies, including key scientific leaders to ensure that the results of this study are put in the appropriate scientific context that Peter just discussed.

Eva Boratto

Next question please.


Your next question comes from the line of Eric Clough [ph] with Banc of America Merrill Lynch.

Eric Clough – Banc of America Merrill Lynch

Hi, good morning, guys. Question on the animal health business with Sanofi and just in exercising the option to combine the Merial business with Intervet. What is the willingness for the company to divest assets in order to ensure the combination will actually pass regulatory hurdles?

And a question on GARDASIL. What do you think the market potential is for a male indication for GARDASIL? And what is the marketing strategy for a new indication and can you also provide some update in terms of improvements in the second and third dose compliance rates for female vaccination?

Bruce Kuhlik

Well, thanks; it is Bruce Kuhlik. With respect to your question about the animal health business, if Sanofi does exercise the call option following the completion of our merger with Schering-Plough, we would work closely with them and we would be in a trust and competition authorities as needed to determine what sorts of the divestitures would be required in order to close the transaction.

Ken Frazier

And as for GARDASIL, as we have mentioned, the ACIP did closely recommend permissive use in boys age 9 to 26, but did provide vaccine funding to the VSV program. We think that is an important development in that as enables access and what we will be doing is working with public health authorities, state and local health authorities as well as with pediatricians to ensure that people understand the very real medical burden associated with general warts. So, I would say that, as I have said in the earlier remarks, we see this as an opportunity, we think it is a real opportunity, we do not think the uptick will be like it was for female. It is very early again after what we heard yesterday, but we are eager to get out there and help people understand the importance of this vaccine from then.

As it relates to the compliance issues, the compliance rates for GARDASIL among women remain high compared to historical norms for vaccination. Private compliance rates remain at approximately 75% from the second dose and about 50% from the third dose. We should know that we do have ongoing efforts to further increase the compliance levels of programs that focus on those various stage loops.

Eva Boratto

Next question please.


Your next question comes from the line of Steve Scala with Cowen.

Steve Scala – Cowen

Thank you. I have two questions. First, for Peter Kim, what is the total enrollment of HPS2-THRIVE to date? And would the results of the pre-specified safety analysis at 25,000 patients be something that Merck would seek for approval upon and that would presumably be well before 2012?

And second question is on SINGULAIR. Merck has said in the past it would look at a new TC opportunity. The question is, would that automatically go through J&J Merck or could that be retained by Schering-Plough OTC and perhaps more broadly, does J&J Merck have rights to future Schering-Plough Rx-ed OTC switches? Thank you.

Peter Kim

Thank you, Steve, I will take the first one. With regard to HPS2-THRIVE, which is our clinical outcome study with CORDAPTIVE, I am pleased to say that enrollment is going very well and the current enrollment is now over 20,000 patients.

With regard to your question about the interim analysis, the interim analysis as you said was a safety interim analysis. But that study design has been modified by Oxford, which is the group that is conducting this trial, as well as Merck, and the two groups decided that that interim safety analysis was not necessary at this point, because the safety of CORDAPTIVE has been assessed by an independent data safety monitoring board on a regular basis, that reviews un-blinded as this goes on. And based on these reviews, the DSMB has confirmed that the study should continue as planned and so we are just continuing to move forward with this trial, which as I said is progressing very well in terms of enrollment.

Bruce Kuhlik

This is Bruce Kuhlik. With respect to your questions about the OTC business, obviously, we do have a joint venture with Johnson & Johnson to develop and market certain non-prescription medicines. That will continue to operate as a separate business from the OTC business in the combined Merck Schering-Plough company following the merger. The specific criteria that we have for our obligations to offer products to the J&J joint venture in the US and Canada are confidential and we cannot disclose those terms. And it does relate only to the US and Canada.

Eva Boratto

Next question please.


Your next question comes from the line of Jami Rubin with Goldman Sachs.

Jami Rubin – Goldman Sachs

Thank you. Peter, I have a couple of questions for you. First on Betrixaban. Just curious to know if you think that the results from the rely trial this past summer races the efficacy bar for the other Factor Xa's and if you could again remind us how Betrixaban compares to the other Factor Xa's, which do appear to be ahead of yours.

And then the other question relates to ISENTRESS. Just any signal for capturing front-line uptakes since the label expansion and can you make this a fixed dose combo with an RTI? Thanks.

Peter Kim

Thank you, Jami. I will take the first one and this comment very quickly on the very last part of the second question, which is that we have not disclosed anything on combination products with ISENTRESS, but it is something that is certainly of interest to us.

With regard to Betrixaban, which is the Factor Xa anticoagulant that we licensed from Portola, the rely results are certainly very interesting and it needs to be considered with regard to development of any anticoagulants moving forward. That said, the reason why we are so excited about the Portola molecule is that we believe that it is clearly the best – has the potential to clearly be the best in class Factor Xa out there. It is a once a day dosing, it has a very well peak-to-trough ratio as compared to the competitors, and it has minimal renal clearance, which would indicate or suggest that we can develop that without a dose modification for patients with renal impairment, which is very important in this patient population.

So while acknowledging your point that we are behind competitors with this molecule, the reason why we did this license was because we think that this molecule has the potential to be by far the best in class Factor Xa.

In ISENTRESS, act as far as moving to the first line indication in effect the treatment population, Jami, we are not in a position now to give any data about the change in the first line uses of the drug, but I will say that we are pleased with the addition of this and that expanded indication does provide us an opportunity to accelerate the growth for this product because a number of physicians recognize it has really got a terrific safety and tolerability profile. So this expanded indication makes available to physicians another treatment option and really enables us to begin to unlock the product's full potential. So while I'm not able to give a specific answer, I do say it is early days and that is something that is very much in our focus.

Eva Boratto

Next question please.


Your next question comes from the line of Keyur Parekh with UBS.

Keyur Parekh – UBS

Good morning, and thanks for taking my question. The question actually was on PNEUMOVAX 23 and (inaudible) for some of the numbers that you spoke about earlier, in sands of the $130 million in revenues this quarter. Do you expect that run rate to continue and kind of where there any kind of stock file sales that was part of the $130 million? Thank you.

Ken Frazier

The current quarter does reflect, first of all, an acceleration in demand. Sales were up from $72 million in the third quarter of 2008 to $130 million and a lot of that has to do with the focus that physicians and patients have on the H1N1 pandemic and the prevention of pneumococcal pneumonia. But I also should point out that third-quarter sales did benefit to some extent from government agencies purchasing quantities of pneumococcal vaccines, probably a pandemic flu preparedness strategy. So I think we are in a unique area now with respect to the pandemic flu concerns and we continue to work with many government agencies and health authorities around the world to help them address their needs. I will say that as far as stock piles go, to date, the orders for stockpiles that we have received have been relatively modest.

Eva Boratto

Next question please.


Your next question comes from the line of Tim Anderson with Sanford Bernstein.

Tim Anderson – Sanford Bernstein

Thank you. Maybe a couple of questions for Ken and then Peter. Question for you, Ken, you continue to talk a bullish thesis behind VYTORIN and ZETIA, but it has been almost two years since you have been out of the market with DTC, VYTORIN and ZETIA and I'm wondering why that is still the case and when that might restart?

And second question is, on ISENTRESS, international sales were greater than US sales for the first time, and am wondering if you can give us some idea of how big you think the ex-US market can be relative to the (inaudible) market for this product?

The question for Peter is, I guess with the analyst day coming until sometime in the next year, can you highlight the one or two novel Phase III pipeline drugs that you are most excited about?

Ken Frazier

So on the ISENTRESS questions, we are pleased with the ex-US uptake. It is really reflecting the strong launches that we have had in France and Spain and Italy, as I said, and I can't really comment on how big the ex-US would be lower to the US. I just think that it has gotten a very strong reception in the EU countries and we continue to see, as I said, an opportunity to accelerate growth outside the US and inside the US.

As it relates to VYTORIN and ZETIA and DTC, the JV continues to evaluate the opportunities for direct-to-consumer advertising. We continue to look at what is happening in the outside world in the communications environment, and we will continue to monitor those things and to make decisions as to where we think the right investments should be behind those two products.

I should also point out that just because we are not into the broadcast of marketplace for DTC, it doesn't mean that we are not continuing to strongly lead those.

Peter Kim

Thank you, and with regard to the pipeline, I guess the products that I would highlight here are first of all, our osteoporosis drug, ODANACATIB, or MKA-22. As you know, this is a novel mechanism inhibitor and we have been conducting an outcomes study, a fracture study, and I'm pleased to say that that enrollment is going very well and we actually anticipate that study enrollment will be complete by the end of this month. So that trial is moving forward very well and we presented three-year data in bone marrow density increases at a recent scientific meeting and what we're seeing is that those bone marrow density measurements continue to increase over time, even after three years. But also importantly that if you stop the drug, that you see the bone marrow density comes down, indicating that the drug effect does not persist long after the physician chooses to stop treating.

And moreover, the bone turnover continues even while you are on drugs. So we think that this drug has really tremendous potential not only in terms of increasing bone marrow density, but also allowing for healthy bone development during treatment and we obviously are (inaudible) to wait the results of the outcome study as we move forward, but are pleased with the situation with regard to enrollment.

The other drug that I would highlight is ANACETRAPIB, which is our CETP inhibitor. As you know, we started the Phase III trial in April 2008. This is being studied in patients with coronary heart disease. That study continues to move forward, it is now fully enrolled and we anticipate completion by the end of 2010 for that study and we also continue to anticipate that we will start the cardiovascular outcome study from the CETP drug in 2010.

Eva Boratto

Next question please.


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

John Boris – Citi

Thanks for taking the questions. For Peter, just on R&D and integration planning. Do you have an opinion for it or provide any commentary on what percent of the R&D personnel that you might be able to retain. I think also Dick has referred to the productivity of R&D as being a critical thing and a potential case study in the making in that most large mergers have obviously failed in that arena. But can you give us some color as to why this maybe a case study in the making?

And then, on HIV treatment guidelines for ISENTRESS, can both you and Ken provide some color on how that might shape the US market, both positive and negative for ISENTRESS going forward?

Peter Kim

Thanks, John. With regard to R&D integration planning, what I would say is that this is moving forward very well. We have a team that is working very hard on both sides to put in place what we call portfolio cards, which outline the key attributes of each of the molecules that are in the pipeline, starting with preclinical development and working all the way through to post marketing studies. Those cards, as we call them, are being sold out in detail, such that on day one, we will be in a position to rapidly move to a prioritization process by which we look at the portfolio in detail. And actually, I think it is fair to say the clients are quite excited about the looking forward to being able to do that prioritization.

With regard to the personnel and the retention of the personnel, this is something that has been very much on my mind. I had gone around and visited with all of the Schering-Plough and indeed many of the Merck sites as well, and the message that I am putting out there is that in research, that we are going to take a staged approach to how it is that we evaluate things and that approach is going to begin with the people. The first thing we need to do is understand that people, the talent that we have, the capabilities that we have.

The second thing we need to do is understand the programs and how it is that the programs between the two companies should be brought together, where are there overlaps, where are there redundancies and where are there potential complementarities and potential benefits to enhance programs that are ongoing in one company or the other. Then, and only then, are we going to turn to net worth consideration. And that is going to take us some time. And so, the point of research, it is really right now a critical component to focus on retaining our key talent – identifying and then retaining our key talent, identifying the key opportunities for programmatic positive effects, and also where there are redundancies, and then to deal with the issues around the net worth.

And then finally I would say, and I have talked about this before that I think that the franchise strategy that we have put in place, the franchise structure that we have put in place is really going to be critical in terms of allowing us to cross the franchises, make the key prioritizations that we need to do. We are going to do this on a research franchise by research franchise basis, not on a site by site basis. And so, for example, in our cardiovascular disease, we are going to look across the entire spectrum of everything in both companies in cardiovascular disease, and we're going to prioritize according to those priorities within that disease area across both companies. And I think the fact that we spent the last two years putting in place this franchise structure – with a franchise, a research franchise head as well as a research franchise structure will allow us to approach this in a way where we will be able to not only maintain, but enhance productivity moving forward.

Ken Frazier

And as far as the question about the impact of the – evolving HIV guidelines on ISENTRESS, of course we continue to evaluate that as well as what is happening in terms of clinical practice in the marketplace, we can't specifically give a comment about your question, but I will say that we continue to be pleased by the fact that physicians continue to adopt it. It is now the fourth most-prescribed medicine in a very crowded market and we are continuing with (inaudible) to work on the product going forward to get the kinds of product profile modifications that we will have, for example, combination products as well as a once daily dose of ISENTRESS on which we began a Phase III study last September.

Eva Boratto

Okay, that is the last question and concludes today's call. The information from today's call, both the transcript and replay will be available on our website for the next seven months and Cal Ferguson and I will be available to take any incremental calls throughout today. Cynthia?


Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.

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