Merck & Co., Inc. Q4 2009 Earnings Call Transcript

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

Q4 2009 Earnings Call Transcript

February 16, 2010 8:00 am ET


Alex Kelly – VP, IR

Dick Clark –Chairman, President and CEO

Ken Frazier – EVP and President, Global Human Health

Peter Kellogg – EVP and CFO

Bruce Kuhlik – EVP and General Counsel


Chris Schott – J.P. Morgan

Jami Rubin – Goldman Sachs

Tim Anderson – Sanford Bernstein

Marc Goodman – UBS

David Risinger – Morgan Stanley

John Boris – Citi

Eric Lo – Bank of America

Seamus Fernandez – Leerink Swann

Robert Hazlett – BMO Capital Markets


Good day everyone and welcome to New Merck's fourth quarter 2009 earnings release call. Today's call is being recorded.

At this time, I would like to turn the call over to Alex Kelly, Vice President of Investor Relations. Please go ahead.

Alex Kelly

Thanks, Cynthia and good morning everyone and welcome to the 2009 fourth quarter conference call for the new Merck. This is our first quarter combined operation, so there are a number of items in the GAAP results such as gains associated with the controlling interest in the cholesterol joint venture, purchase accounting adjustments, there are merger related expenses and also restructuring costs. And so as a result of having those many items, we have excluded those items in our non-GAAP reconciliation tables so that you can get a better sense of the underlying performance of our business. Also, since the merger was completed on November 3rd, the GAAP quarterly results only include two months of combined operations, so we've also provided tables to help you understand the revenue trends as well.

So, in the press release there are five tables. Table one is the GAAP results. Table two and three, reconcile our GAAP P&L to our non-GAAP P&L for the fourth quarter and also for the full year 2009. Table four is a supplemental non-GAAP table which provides the sales performance for the company, the business units and the products as if the company had been combined for the full year and also for the full fourth quarter of 2009. Table five is a supplemental non-GAAP table which provides sales for the major products and businesses as if the company had been combined in 2008. That will help you make some growth comparison in the 2009 period.

During the call, we will be referring to tables two and three when we discuss the P&L and table four for the revenue performance. So you may want to have those tables available.

In addition, I would like to remind you that some of the statements we make during today's call may be considered forward-looking statements within the meaning of the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are based upon the currently management and are subject to significant risks and uncertainties. The company's SEC filings including Item 1 A in the in the 2008 10-K identifies certain factors and cautionary statements that could cause the company's actual results to differ materially from any forward-looking statements we make today. Merck undertakes no obligation to publicly update any forward-looking statement. You can find our SEC filings as well as today's earnings release and tables on

This morning I'm joined by Dick Clark, our Chairman, President and CEO; Ken Frazier, the President of our Global Human Health business; and Peter Kellogg, our Chief Financial Officer.

Now, I'd like to turn it over to Dick Clark.

Dick Clark

Thank you, Alex, and good morning everyone. It was a little less than a year ago last March when we announced our plan to merge Merck and Schering-Plough. At the time, I told you that the combination made great strategic and financial sense and held exceptional promise, thanks to our stronger pipeline, more diverse product offerings across our broader range of businesses and an expanded global reach. In other words, our merger was and is about science and the increased relevance we now have to our customers. While this merger is about more than just cost, we stand firmly behind the financial targets we set last March.

Today, we are pleased to report solid fourth quarter and full year 2009 results for the combined company. These results demonstrate the strong business focus each company maintained the last year. That is a significant accomplishment considering that the results were achieved in the midst of uncertain global economy, a never shifting healthcare landscape, extensive merger planning and then the start of integration once the merger was completed.

In terms of top line, the company had sales of $10.1 billion for the fourth quarter and full year 2009 revenue of $27.4 billion. The combined company had fourth quarter non-GAAP earnings per share of $.79 and GAAP earnings per share of $2.35. Full year 2009 non-GAAP earnings were $3.25 per share which excludes certain items and GAAP earnings of $5.65.

Our fourth quarter results were driven in part by the inclusion of legacy Schering-Plough sales in our result as well as just strong sales from JANUVIA, SINGULAIR and ISENTRESS. Peter Kellogg will provide you further financial details as well as some thoughts on our outlook for the future.

Since the merger closed in early November, we have moved quickly around the world to integrate our operations and begin taking advantage of the opportunities that come with the new Merck. Thus far, we are quite pleased with the pace of our progress in adopting best practices from each company, integrating the commercial organizations, planning our network strategy and consolidating the pipeline.

In fact, since the merger's completion our combined pipeline has been a top priority. I spent a considerable amount of time with Peter Kim and other senior Merck leaders to conduct a thorough review of the new combined pipeline so we may better prioritize our efforts by franchise, phase, cost and geographic importance. I'm very enthusiastic about the work we've done on our powerful R&D pipeline with more than 20 late stage programs. We look forward to talking with you about that soon.

By advancing the highest potential pipeline candidates, accelerating product development and launches and maximizing the value of our medicines to full life-cycle management, we're focused on driving sustained innovation and revenue growth. We see three ways of new product opportunities over the near and long term that should contribute to our growth.

Wave one is happening now with products that are already in launch mode such as SIMPONI, SAPHRIS and JANUVIA in Japan. Wave two focuses on near-term approvals. Just in the last two weeks we had two key approvals, BRIDION and ELONVA and we have four other key products under review as we speak.

Wave three highlights our long-stage pipeline opportunities which we believe are the best in the industry. Our strategy also includes continuing to tap into external sources of innovation to compliment the work that is under way in our labs. We completed 51 licensing deals in 2009 with more to come this year, all of which could further our shareholder value.

On the commercial side, we are building our capabilities and growth potential in vaccines, biologics and emerging markets and they are sources of real focus and excitement within the new Merck. We are working hard on the strategy to advance up to the next level in each of these growth areas. Here is a recent example. The acquisitions of Avecia Biologics will allow Merck to build upon the biological expertise and manufacturing capability acquired within the past three decades at Schering-Plough.

The new Merck's healthy and diversified product portfolio includes offerings from A to Z in a wide range of therapeutic areas from animal health to women's health. Each of our top 10 selling brands from Merck's expanded product portfolio exceeds $1 billion in annual sales in 2009. In a few moments, Ken will talk about the performance of our key brands and how we're positioned the companies full portfolio of healthcare offerings for near term and future growth.

Since late last year, we've built up the senior ranks of our new company with the best executives from both companies as well as respected leaders with new capabilities in external experience. We're proud to welcome two now vaccine leaders, former CDC Director, Dr. Julie Gerberding, as a leader of vaccine franchise and Dr. Michael Kamarck, previously President of Product Supply at Wyeth will lead vaccines and biologics manufacturing. We're also pleased to welcome two Merck Executive Committee, former Dean of Tufts School of Medicine, Dr. Michael Rosenblatt as Merck's new Chief Medical Officer and Bridgette Heller as Head of our Consumer Health Care business.

Moving forward, we must realize the enormous value of our merger for patients, customers and shareholders. That includes gaining the benefit of fully integrating all aspects of the two formerly separate companies.

We remain absolutely committed to our previously announced target of realizing merger synergies of $3.5 billion in annual savings in 2012. As part of these plans, we unveiled today a new multi-phased global restructuring program designed to integrate and further optimize our operations and cost structure to support the more nimble, customer focused and diversified health care leader Merck is becoming. We expect to complete the first phase of the program we announced today by the end of 2012. Additional phases of the merger restructuring program are expected to be announced later this year. We also expect to realize our savings through priority initiatives in areas such as procurement.

Building on earlier work that had begun in 2005, we're making progress and putting in place a best-in-industry cost structure. It will take time before we fully integrate all factors of the two companies. The restructuring and integration process is complex and includes changes that require hard choices and difficult decisions, especially those that affect our colleagues throughout workforce reductions. But as we said all along, the majority of our colleagues from both legacy companies will be part of the new Merck going forward.

Looking ahead into 2010 and beyond, we remain enthusiastic about our goal of becoming the best healthcare company in the world. We continue to be committed to our long-term financial targets but the real value driver of our merger will be the science and innovation because Merck's long-term strength will come from our ability to develop critical medicines and vaccines. What will set this merger apart is not just a what but the how, the clarity of our vision, our ability to hit the ground running and the thoughtfulness which we will manage through the integration of our businesses, our operation and our people.

Now I'd like to turn the call over to Ken.

Ken Frazier

Thank you, Dick and good morning everyone. As Dick mentioned, in the fourth quarter we drove solid performance across the Global Human Health portfolio thanks to the strong growth of many of our key brands in markets around the world.

As a newly combined company, we are off to a great start following the merger and we will continue to focus on driving top-line performance in 2010, especially for our new and faster growing brands. Overall, Global Human Health delivered a solid quarter with recorded sales of 9.1 billion. When you include all three months of Schering-Plough sales, our non-GAAP sales were 10.8 billion which represents 9% growth from the previous year. The growth was broad based with eight of our top 10 product families growing in the fourth quarter. These eight franchises accounted for more than half of total sales and grew a combined 15% over the previous year.

We drove this growth across a diverse base of markets. Sales outside the U.S. increased by 13% which includes the favorable impact of foreign exchange and inside the U.S., we generated growth of 3% compared to the previous year. In the U.S., sales in the fourth quarter were aided by approximately 100 million of wholesaler inventory buy in, stock comp purchases of certain vaccines by the CDC and the initial stocking for the SAPHRIS launch.

Overall, I believe our fourth quarter performance is a good indicator that we are maintaining strong focus and momentum while we integrate our teams. Before I discuss the performance of individual brands, I want to update you on the progress we have made since the completion of the merger. We will be integrating our businesses in markets around the world at different times taking local considerations into account. As we do so, we will be leveraging the new commercial models that we had already implemented in nearly 30 Markets.

In the U.S., our experience with implementing Merck's new commercial model over the past two years prepared us to make critical staffing decisions quickly with three very specific goals in mind, retaining top talent, maintaining business momentum and minimizing disruption to our customers. In fact, by late January, we've completed the design and blending process to stand up the entire U.S. sales organization. Our U.S. sales force is now fully operational and completely focused on meeting customer needs.

Our broader primary care offerings were ideally suited to the portfolio based selling approach of the new commercial model because the merger enables us to be more relevant to our customers across key franchises such as cardiovascular, respiratory, women's health and other franchises.

I want to emphasize one additional point about our integration efforts. While we focus on delivering the synergies that the merger creates, we are also making conscience, explicit decisions to invest to grow our business. So, while we are reducing the size and cost of our commercial operations in more developed markets like the U.S., we are also making resource allocation decisions to grow our presence in major emerging markets. In fact, despite the economic volatility that we saw in these markets, our business grew by double digits in key emerging markets like China and Brazil during the fourth quarter.

Also, as we indicated on the third quarter call, we made strategic investments to maintain and grow our key in-line growth drivers through additional promotional spending in the fourth quarter and we'll continue to do so this year.

For JANUVIA, ISENTRESS and SINGULAIR, for example, we made strategic investments in the fourth quarter to grow these brands. We also invested in our new product launches this quarter. These investments contributed to strong top line performance for many of our key brands.

Now, as I turn to individual product performance, I'll refer you to table four from our supplemental financial package provided with our press release so you can follow along.

Starting with SINGULAIR, sales in the fourth quarter were $1.3 billion up 12% versus the prior year. We saw double-digit growth in key markets, including the U.S. where we grew by 14% versus the fourth quarter of 2008. Moving to JANUVIA and JANUMET, global revenue grew to a combined $760 million in the fourth quarter up 43% versus the prior year.

Now, in the fourth year since its launch, we continued to drive strong performance with the JANUVIA, JANUMET franchise in markets around the world. JANUVIA and JANUMET remain the most prescribed products in the DPP-4 class.

We continue to invest in JANUVIA and JANUMET to maintain our leadership position in the diabetes markets and to grow this franchise. In the U.S, where we have recently seen the first DPP-4 competitor, we generated 24% growth versus fourth quarter 2008. We believe we can grow the franchise by taking share from the Sophany areas as second line treatment for appropriate patients. In addition, we are continuing our coupon program which has been a success to date.

In the EU, we also have a labeling advantage. JANUVIA is the only DPP-4 approved for restricted first line use and for use as an add-on to insulin.

In Japan, which is a fast growing oral diabetes market, we are in the early stages of the JANUVIA launch. JANUVIA has an extremely strong value proposition and is being reimbursed at a premium price to ACTOS. Despite Japan's practice of limiting new medicines to only a two week patient supply in the first year, the initial tracking shows that the JANUVIA launch is going very well.

We are building this franchise for the long-term, indication-by-indication and country-by-country. We've submitted three sNDAs for Sitagliptin in the U.S, to allow use with insulin which would make Sitagliptin the only DPP-4 approved for use with insulin, for initial use with pioglitazone and for use of add-on therapy with PPAR agonist and metformin. As you can see, there are many reasons why we expect that this franchise will continue to be a growth driver for Merck.

I'd like to turn to REMICADE and our newly launch biologic SIMPONI. We believe Remicade and SIMPONI offer two great options for patients, Remicade for rapidly progressing RA patients and SIMPONI, the only once monthly subcutaneous anti-TNF available in the EU.

In our first quarter of combined operations, Remicade delivered another quarter of double-digit sales growth and reached a new quarterly high with sales of 635 million$, an increase of 29% over last year. The growth was broad based as we saw increased utilization across all six indications. We're maintaining our market share in rheumatoid arthritis despite new entrants to the market and we continue to see solid performance in growth from the gastro indications, especially ulcerative colitis.

For SIMPONI, we now have launched in five countries. To date we have full reimbursement in Germany and Denmark. We plan to launch in many of the other large EU Markets in the second half of 2010 as we gain reimbursement for SIMPONI from both public and private payers.

In infectious disease, ISENTRESS continues to perform well and had another quarter of strong growth. Sales in the fourth quarter were $234 million, up 80% year-over-year and 19% sequentially. The continued growth of ISENTRESS reflects the unique efficacy and safety profile of this product which has been widely embraced by physicians, patients and health organizations. ISENTRESS has become the new benchmark for an HIV launch and with the new treatment naive indication – ISENTRESS is now approved for use across each stage in the treatment continuum.

Turning to ZETIA and VYTORIN, sales were $1.2 billion this quarter which represents 6% growth compared to the fourth quarter last year, driven primarily by a 10% increase in the sales of ZETIA.

For the franchise, sales in the U.S. declined 5%. However this was more than offset by the strong growth of the brand outside the U.S. with the two brands grew by 23% including the favorable impact of foreign exchange. The unique value proposition for these brands remained strong and we continue to see growth opportunities in many markets around the world.

I will now move to our vaccine business starting with Gardasil.

Sales reported by Merck in the fourth quarter were 277 million, a 3% decline when compared to the fourth quarter of last year. In the U.S, we had about 70 million of favorability due mostly to a CDC stockpile purchase. Keep this in mind as you model Gardasil sales in subsequent quarters.

Ex-U.S. sales of Gardasil as reported by Merck decreased 15%, attributable to the high penetration rate and impact of large orders in 2008, in early adopting countries such as Mexico, Canada and Australia. Globally, we continue to outperform the competition achieving an ex-U.S. market share of 77% in dollar terms in the fourth quarter and a global share of 87%.

Sales of ProQuad, M-M-R II and VARIVAX combined increased 13% in the fourth quarter due to a CDC stockpile purchase of $64 million. If you exclude this favorability, sales would have decreased 9% year-over-year largely due to the saturation in the Varicella, second dose catch up cohort.

Now, moving to ZOSTAVAX, fourth quarter sales as reported by Merck were $76 million, down 53% from the previous year largely due to the release of a very significant number of back orders in the fourth quarter of 2008. While we anticipate that ZOSTAVAX will be available in 2010 in the U.S, customers may experience back orders throughout this year.

International launches of ZOSTAVAX will be delayed until 2011. Now, I'd like to make a few comments about Cozaar/Hyzaar which grew 8% year-over-year. As you know, Cozaar/Hyzaar will lose marketing exclusivity in the U.S. in early April and Cozaar/Hyzaar will lose exclusivity in most major EU markets in the first quarter of 2010.

In the U.S, we anticipate that multi-source generics will be available immediately following the patent expiry, which we believe will lead to rapid erosion of sales from the current levels. And because internationally rose in rates have accelerated in recent years, we expect that the generic uptake in the EU will also be rapid.

As we head further into 2010, I want to share with you how we are prioritizing our work in GHH, Global Human Health.

First, we are focused on driving in line brand performance and we will continue to make the necessary investments to grow as we integrate our operations. Second, we are focused on the launches of our new products. In addition to SIMPONI, which I've mentioned previously, we have recently put more promotional resources behind the SAPHRIS launch in the U.S.

Other opportunities we have this year in markets around the world include the launches of SAFLUTAN, TREDAPTIVE, ELONVA and BRIDION. Finally, while we focus on these opportunities, we are also creating a leaner, even more customer focused organization that builds on the best of the Merck and Schering-Plough commercial organizations.

I look forward to sharing more with you as the year progresses and now, it's my pleasure to pass it over to my colleague, Peter Kellogg.

Peter Kellogg

Thank you, Ken and good morning. As you've heard from Dick and Ken, our merger is off to a great start. We generated good sales and earnings results while making a lot of head way on the integration.

Today I'd like to cover three items with you. First, I will cover what is included in our results. Second, I will provide an update on our fourth quarter performance and third, I will comment on our outlook for 2010. So let's go to the results.

We recognized that there are a lot of moving parts this quarter. The merger closed in the middle of the quarter and therefore there are only two months of Schering-Plough included in the results. Our results also included the added complexity of purchase price accounting adjustments and restructuring charges and a joint venture that is being unwound and reported in the combined companies results rather than inequity income.

As Alex discussed in the opening, we included new tables in our press release and supplemental charts to help you navigate through the accounting. To make it easier for you to follow I will speak mostly to the non-GAAP results in our remarks. Our non-GAAP results exclude restructuring costs, purchase price accounting adjustments which included a $7.5 billion gain on the step up of Merck's share in the MSP partnership to current market value, merger related costs and a $400 million gain related to the sale of Merial in the third quarter.

On this basis the new Merck reported fourth quarter non-GAAP earnings per share of $0.79. There are a number of factors that are reflected in our performance this quarter. First we drove operational sales growth in many markets around the world, in part to higher promotional spending in support of our key brands and new launches. Second, we continued investing in our strong late stage pipeline. Third, we had lower equity income from partnerships and finally we benefited from a lower combined company tax rate.

In addition, as a result of the merger financing, our interest expense is higher and our interest income lower. And the number of common shares outstanding has substantially increased.

Let's get into some of the individual items beginning with revenue. Total revenue for the quarter as reported by Merck was $10.1 billion with about a 1% benefit from foreign exchange. On a supplemental combined non-GAAP basis, which assumes Schering-Plough was included for all three months of the quarter in 2009 and 2008, sales were $12.2 billion up 7%. You can see this in table four provided today in our financial supplement.

Ken just walked through the Human Health business results, so let me touch for a moment on our Animal and Consumer Health businesses. Animal Health sales totaled $759 million for the fourth quarter of 2009 on a supplemental combined non-GAAP basis, reflecting continued growth among companion animal and poultry products.

Consumer Health Care sales were $232 million for the fourth quarter of 2009 on a supplemental combined non-GAAP basis reflecting solid demand for OTC CLARITIN and foot care products.

Now, moving on to the expense items on the P&L, first let's look at materials and production.

The gross margin in the fourth quarter was approximately 74% versus 76% in the same quarter of the prior year. The decline is primarily attributed to the inclusion of results from Schering-Plough which has historically had a lower gross margin due to some major partnerships. Foreign exchange also had an unfavorable impact on the gross margin from Schering-Plough.

Turning to marketing and administrative costs, M & A expenses in the fourth quarter were $3.2 billion on a non-GAAP basis. The majority of the increase over the fourth quarter of 2008 is attributable to the addition of Schering-Plough expenses and an inclusion of expenses from the Merck Schering-Plough JV in the P&L and the impact of foreign exchange.

Additionally as we had anticipated, Merck had higher marketing expenses during the fourth quarter than in the first three quarters of 2009. We increased promotion in support of our key brands and we are also investing to insure the success of our new launches around the globe including JANUVIA in Japan and TREDAPTIVE in the EU.

As Ken mentioned, we have a number of launches in major markets underway today and we have more on the way. We want to insure the success of these launches by supporting them with the right level of promotion in 2010.

Now let's turn to R&D. Research and development expenses for the new Merck in the fourth quarter were approximately $2 billion. On a non-GAAP basis R&D spending is up approximately $700 million this quarter. This increase is primarily driven by the addition of Schering-Plough R&D costs and the continued investment in late stage opportunities such as TRA, boceprevir, CORDAPTIVE in our CETP inhibitor. Now let's move to equity income.

In the fourth quarter, Merck recorded $374 million of equity income, a decline of $346 million over the prior year. The decline is attributable to three factors which you can derive from table six in the financial supplement.

First, equity income in the quarter includes only one month of results from the MSP joint venture versus three months in the prior year. Post closing of the merger, these results are reflected in sales and expenses of the new Merck.

Second, a $75 million decline in the income from the AZ LP joint venture is due to the timing variability of payments from AZ LP.

And third, the sale of Merial to our partner Sanofi in the third quarter. Now, let's talk about other income and expense. For the fourth quarter of 2009, other expense on a non-GAAP basis is $92 million compared to other income of $27 million in the fourth quarter of the prior year. There are a few items driving this year-over-year change.

First, most notable is the inclusion of interest expense from the Schering-Plough debt and merger related debt post closing.

Second, interest income of $11 million was $137 million lower when compared to the prior year as a result of lower interest rates and lower cash and investment balances.

Third, in the same quarter of last year, Merck recognized $74 million of exchange losses, which did not recur this quarter. That helped to offset a portion of the negative interest expense and interest income comparisons.

Now, let's turn to the tax rate. The new Merck non-GAAP tax rate is 15% for the fourth quarter. This reflects two dynamics

First, on the Merck side there was some one-time benefits that aren't likely to recur. Second, we had the benefit related to the inclusion of legacy Schering-Plough during the two month stub period. In this stub period had a much lower tax rate than legacy Merck.

For 2010, we don't anticipate a significant change to the rate that we saw in 2009 on a full year basis excluding discrete items. Our full year 2009 rate was approximately 23% when you exclude the discrete items in the first and second quarters. Okay, so that's the fourth quarter. As you can see there are a lot of moving parts. Here is how I think about our performance this quarter. We had strong growth in sales of key brands at the same time we continued investment in the future success of our newest products and our late stage pipeline, so overall a solid start for the new Merck.

Now, let's talk about where we're going beginning with 2010. As we already indicated, we will provide 2010 financial guidance around the timing of our first quarter earnings call. Today, I'd like to provide you with some perspective that I believe will be helpful. As we step back and look at new Merck, we are pleased with our many opportunities ahead. We continue to target a high single-digit, non-GAAP EPS compound annual growth rate from 2009 to 2013 for the combined company when compared to Merck 2009 non-GAAP EPS.

Looking ahead over this next four year period, we do anticipate to some years will be stronger than others. For example, 2010 has several factors that will be challenging. During 2010, we will begin to realize synergies from the merger, however we also face the loss of patent protection for Cozaar/Hyzaar and TEMODAR, products that contributed $3.1 billion in revenue in the U.S. and Europe last year and we will continue to invest in launch brands. So as we think about 2010 there are four areas that I'd like to specifically call to your attention.

First, let's start with the sales line. The merger has improved our longer term patent position and we are launching many new products like SAPHRIS and SIMPONI. However, we do face significant patent losses in 2010. The biggest is Cozaar/Hyzaar, so how should you think about that in 2010?

Well, first -- in the first quarter we expect a pull back in the Cozaar/Hyzaar trade inventory levels to below normal levels as the patent expires data approaches. Second, as Ken mentioned we believe that the erosion rate will be fast as multiple generics enter the market after the patent expires.

The second 2010 patent issue, while not as large is TEMODAR, one of our high margin products. In the U.S., we were disappointed by the recent District Court judgment and have filed an appeal and a motion for preliminary injunction to allow the court time to hear our appeal. In addition, TEMODAR lost patent protection in Europe in 2009 and we expect continued erosion. Despite the impressive number of new product launches in 2010, they will not be able to compensate for these two patent losses.

Now, second let's talk about synergies. We are committed to merger related cost synergies of $3.5 billion annually in 2012. The first phase of our merger restructuring program that Dick told you about is expected to contribute 2.6 to $3 billion to this annual target. As we said additional phases will be announced by the end of 2010. We expect to see significant synergies mostly on the M&A line in 2010. As a result we expect the M&A line to be down on a full year basis in 2010 versus what the two companies spent individually in 2009.

Please keep in mind that these synergies build over time. Very importantly, we expect the synergies in 2010 to be back end loaded with about two thirds of the synergies coming in the second half of the year. This will cause the shape of the earnings curve during 2010 to be quite back end loaded.

Now, let's talk about the third area, which is R&D, where we have two dynamics underway. On the one hand, we are investing in our late-stage pipeline. On the other hand, we are driving efficiencies through the combined R&D infrastructure. Coming into the merger Schering-Plough and Merck each had strong and growing R&D pipelines and on a standalone basis each company expected to significantly increase its level of R&D investment in 2010 due to the richness of its late-stage pipeline and the many ongoing large outcomes trials.

Let me give you a sense of scale. In cardiovascular disease alone, we had more than 80,000 patients currently in our clinical trials and that number is expected to grow to more than 100,000 patients before those trials end. So therefore, based on this level of Phase III project activity, we expect that the level of R&D investments in 2010 will be similar to slightly higher than the level seen in 2009 for both companies on a combined basis. We believe that making these 2010 investments by the best way to drive shareholder value.

Lastly, let's talk about the timing of certain items this year. There are a number of items that will affect the early part of the year and specifically Q1. First, Q1 is typically the softest quarter of the year due to the seasonality of our respiratory and vaccine franchises. We saw this in the first quarter of 2009. Second, we had the expected pull down in Cozaar/Hyzaar trade inventories in Q1 that I mentioned earlier.

Third, it was approximately $135 million of favorable vaccine revenue in Q4 primarily due to a number of CDC stockpile purchases and these will not recur in the first quarter. Fourth, we had a low tax rate in the fourth quarter that we do not expect to recur this year. Also aside from seasonality, these items related to Q1 but obviously they will have a similar impact on the full year results, so let me summarize.

As I mentioned earlier, we expect that non-GAAP earnings in the second half of 2010 will be considerably higher than non-GAAP earnings in the first half of 2010 due to the phasing in of synergies. In fact, we believe our non-GAAP EPS run rate in the second half of this year will provide strong evidence that we are heading towards our long-term EPS goal.

We are on track to have a good first full year as a combined company. We will continue our business momentum for key brands and launch products. We remain very excited about the future of the new Merck and we continue to target high single-digit non-GAAP EPS compound annual growth rate from 2009 to 2013 for the combined company.

As Dick emphasized, this is a company that will build its long-term strength through science and innovation. We look forward to speaking with you about the products, the pipeline and the strategy of the new Merck during our second quarter R&D and business update meeting. Thank you.

Now, I'll turn the call back to Alex. Alex?

Alex Kelly

Thanks Peter. Now, we're ready to open up the call to answer your questions. In order to get through as many callers as possible we ask you extend the courtesy to the other callers by only asking one or two questions. We're not plane to take any follow-up questions but if you have other questions, please join in the queue again. Cynthia?

Question-and-Answer Session


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

Chris Schott – J.P. Morgan

Great. Thanks. Maybe the first question on the R&D budget, kind of reaching this 8 and 8.5 billion kind of level on a pro forma basis in '09. Obviously, it's a much larger number than you've had in the past and can you elaborate what you're doing to manage an organization this large and avoid maybe some of the pitfalls that some of your competitors have run into as they've scaled their R&D organizations to this size. And maybe a follow-up on the R&D side, on an absolute basis how do we think about the R&D budge as going beyond 2010?

Is this a budget that kind of remains on that flat level or above current levels or will some of these efficiencies in program cuts you've targeted with the restructuring push that down over time? I guess especially as you think about some of these big outcome studies starting to wrap up looking out two or three years? Thanks.

Dick Clark

Yeah. Thanks, Chris. This is Dick Clark. I think to answer the first part of your question, what we've been focusing on from a research standpoint is our prioritization really beginning with the portfolio so as we said we're spending a great deal of time understanding the portfolio and making decisions by phase, by values, by job and by unmet medical need of what we need to do to put a portfolio together for the new company.

We're also spending a great deal of time now focusing in on talent and scientific capabilities to the people that we need to be able to run this research organization. And obviously the last thing we spend time on then is the site so once you have the portfolio, the projects and people beside you, then you can look at price.

I think one of the advantages we have and how we are running the entire company not only in research but in Global Human Health as well is that we really have franchise heads and so having the General Manager for franchise in the commercial side and one on the research side, allows us to think about franchises both in the commercial and research standpoint allows better focus and allows us to make portfolio decisions even though the research capability has expanded as we move forward.

Peter Kellogg

So if I can take some of the financial perspective, so you're right. As I highlighted 2010 is in many ways a very exciting year for us, because we have a lot going on the late-stage pipeline and some very exciting trials that offer a lot of potential for us in the near-term future. And so clearly, while we're going to the portfolio prioritization, we made sure these really high priorities pipeline get full resource and full attention.

Secondly, we haven't really given R&D launch and guidance yet and obviously that's something we'll do when we get out towards the first quarter earnings call. But I do want to remind everybody that our long-term perspective on the company is that we will have high single-digit, non-GAAP EPS growth over the time period that we talked about and that we are going to see a price pre-tax margin improvement as we go from today to that time frame.

We highlighted on the time of the merger we're shooting for something that begin to approach the 40% level and it's obviously based on the current expectations and what we know at this point, but that implies there will be productivity in all to the line we will go to P&L and that will be something you'll be seeing particularly as all of the different integration steps are going on in our R&D organizations come to bear.

But I do think as Dick said in the beginning, this is about science and innovation and global expansion and having really world class organizations in every function. And so we are going to be making sure that we make the right investments in all the areas and yet still drive great productivity throughout the company.

Alex Kelly

Okay. Next question, please?


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

Jami Rubin – Goldman Sachs

Thank you. Dick and Peter, maybe you could help to clarify that 3.5 billion in integration synergies. Is that a gross number or a net number and if it is a gross number could you help us to -- could you quantify the level of reinvestment spending and a question to Dick. There's not a whole lot of focus on the consumer business you just announced a new executive hire to run that business. It's only about 3% of total sales, obviously subscale compared to your competitors. What is your strategy with this business and would you consider spinning it off similar to what Bristol did with me Johnson? Thanks.

Peter Kellogg

Hi, Jami, it's Peter. So let me start with the synergy piece. So let me just begin by saying nothing in our guidance has changed. We are definitely focused and targeted and confident about achieving the $3.5 billion of synergies. This announcement today is just the first phase and obviously it has a dramatic significant portion of the benefit against that $3.5 billion and there will be other phases that we'll be announcing as other plans are finalized and concluded on and those will also contribute to the $3.5 billion goal that we have.

Obviously, as we've highlighted with an improving operating margin and particularly as you go out to that timeframe, if we have an operating margin that goes from where it is today pre-tax to approaching 40%. We're going to be putting a lot of this synergy to the bottom line. And so while we don't necessarily talk about gross or net -- us, we will make sure that we get the benefit at the bottom line. Dick, do you want to add anything to synergy perspective?

Dick Clark

Jami, as you know me, gross isn't in my vocabulary. So it's net that we're looking for to the 3.5 billion. Concerning your question with consumer health, we're excited about having a leader now of consumer health. We think it is a very good business. We think it's a global business. We think Schering-Plough has done an outstanding job of building the business within the U.S. and starting to look at it globally. We think it's a very important part of our emerging market going forward, examples of China and Brazil and other countries and obviously we need to grow the business and we're looking forward to putting the strategy together to do that.

Alex Kelly

Okay. Operator, next question please?


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

Tim Anderson – Sanford Bernstein

Thank you. On 2010, it seems like you kind of paint a cautious picture on the outlook, because of the few different factors and I understand complete guidance will come a little bit later but directionally can you just tell us whether 2010 will be a positive growth year in terms of earnings relative to 2009 and second question is can you give us an update of where we are in REMICADE and when we might hear something with Johnson & Johnson? Do you expect this will have to go to arbitration and get resolved?

Peter – Kellogg

So Tim. It's Peter. We haven't really -- we will have to hold off until 2010. Sorry, until around the first quarter call to talk about the P&L and so forth. We did obviously around the time of the earnings indicated. We thought 2010 would be an accretive year so it's a positive year but we really want to hold off until we get to the complete portfolio work done, all decisions finalized and we have the profit plan put together which will be happening over the course of the next month and then the way we always like to do it is to make sure we have the complete profit plan put to bed and then we come out with our guidance based on that.

Bruce Kuhlik is here with us, so I'd like to ask Bruce if he could comment on REMICADE.

Bruce Kuhlik

Just on the arbitration, the panel has been selected, we've met with the panel, a hearing is scheduled for September of this year and we're working towards that.

Alex Kelly

Okay. Next question, please.


Your next question comes from the line of Mark Goodman with UBS.

Mark Goodman – UBS

Yes. Hi. I was wondering if you could give us a flavor for the level of resources that you're putting behind the VYTORIN, ZETIA franchise relative to the way the JV had the spending levels and then second question is, could you just talk about the resumption of supply for some of the other Vaccines you didn't mention? Thanks.

Ken Frazier

Okay. So I will take those questions. On VYTORIN and ZETIA, we are looking across our commercial operations for opportunities to do two things. At a high level we're obviously achieving synergies when you put together the sales forces that supported Merck for VYTORIN and ZETIA, Schering-Plough for VYTORIN and ZETIA and the JV for VYTORIN and ZETIA so there are synergies across those groups.

At the same time we continue to invest behind the products from a promotional standpoint to insure that they're competitively resourced and as I said earlier we feel very optimistic about the stabilization of trends as well as the continued growth outside the U.S.

On the vaccine issues around supply, we mentioned earlier on that we are continuing to make ZOSTAVAX available in 2010 but customers may experience some back orders throughout the year as our both vary sell of product continues to be prioritized for use in manufacturing VARIVAX.

So that will delay our launches outside the U.S. RECOMBIVAX pediatric became fully available in the U.S. as of early December. Feedback here became fully available in the U.S. market as of January. Beyond that we continue to make significant investments in our vaccine manufacturing capabilities.

We've recently invested over a billion dollars in new manufacturing resources and we expect our North Carolina facility to begin operations by the middle of this year. So we have some issues with respect to our Varicella vaccines which we continue to work diligently on to minimize any disruption.

Alex Kelly

Okay. 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 please highlight the top three to four pipeline events to watch in 2010 and then second Dick, I was hoping you could talk about CEO succession process and timing? Thank you.

Dick Clark

Well, from a CEO succession planning process, David, as I have said many times, it's probably the most important priorities I've given since I've become CEO in 2005. So working with the board I feel very confident we have an excellent process in place.

As you know putting the management team together that we have has really been a focus of mine and I think with the leadership team that I have today and that we've recently announced there's excellent leaders within the company and obviously, the process will continue to evolve throughout this year but I think we're in pretty good shape from a planning process as well as internal candidates.

Alex Kelly

Ken, do you want to answer the pipeline question?

Ken Frazier

I think here is what I would say. I think the things to keep in mind this year would be obviously the continued progress of boceprevir, the IMPROVE-IT interim, disclosures that will happen as well as our TRA enrollment and I think we're very pleased on the last issue that our secondary prevention study is fully enrolled and we continue to work on the Tracer study where we have more than 9,000 patients enrolled in the study with a target enrollment of 12, 500. I think you expect to see four filings this year so it's going to be a very strong year for advancing our late stage pipeline.

Alex Kelly

Okay. Next question please?


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

John Boris – Citi

Thanks for taking the questions. Just a two part question. First, on cash flows Peter can you just identify or provide us with an idea of what cash flows were in the quarter and Dick if you can just give us some color on your focus on shareholder value and how you'll be allocating cash going forward towards business development and share repo dividends and then a broader macro question for you Dick, obviously Billy Tosen has indicated he's stepping down in pharma.

Can you just provide some color on healthcare reform where you see healthcare reform going and what's currently on the table negotiated by Billy Tosen. How you see that potentially being impacted by his successor.

Dick Clark

Well, taking your second part, talking about pharma, I think the process that we utilized as an association with Billy as our leader was to involve the entire pharma Board and so the position that we've taken early on to be proactive with the President Obama's administration in Congress is to build the strategy we have and I think it's important that we continue to be proactive. We continue to come up with the right solutions are to make sure that everyone in our country is insured and so that strategy that we put together with Billy's help will continue in the future.

Billy is staying on as a consultant with us as well and I think that's important and the CEO's of the association are really committed to making healthcare reform work and working with Congress in the Obama administration, so even though we'll have some change in leadership as the association level the focus will remain the same.

Peter Kellogg

So John. This is Peter. If I can just take the cash flow question and first let me just say I applaud the focus on cash flow. As you know, I'm a cash flow believer totally as well. However, I will have to ask that if you can wait until the 10-K will be out in a couple weeks and the balance sheet and cash flow statements because until they are final in the 10-K. I want to be careful since we haven't put them in the earnings release, I want to hold them until we publish the 10-K but we focus on that tremendously and I just want to go through the normal steps and process.

Alex Kelly

Okay. Next question, please?


Your next question comes from the line of Eric Lo with Bank of America.

Eric Lo – Bank of America

Hi guys. May be a couple housekeeping questions. What were your SAPHRIS sales in the quarter? And how much are your GARDASIL sales came from the male indication? And also can you provide a status update on katchapent [ph] and the bit of discussions with the FDA on that front?

Ken Frazier

So on the SAPHRIS issue, the sales were $40 million almost all of that is stocking. I will take a second on SAPHRIS to say that we continue to be extremely strong in our belief that SAPHRIS has the potential to really make a difference to patients who have schizophrenia and bipolar disease without some of the metabolic issues in that, I think we view this from our standpoint as being a launch that started on January 25th when we were able to provide full promotional support to our representatives who before that were essentially detailing with just the product inserts.

So I think we view this launch as being a new one. On the GARDASIL issue, we look forward to growth opportunities for males but right now, I think the males have not been a very significant contributor to our GARDASIL sales although we continue to look forward to that as well as to the adult women indication.

Alex Kelly

Okay. Now Operator, we're waiting for our last two questions please?


Your next question comes from the line of Seamus Fernandez with Leerink Swann.

Seamus Fernandez – Leerink Swann

Thanks very much. So a couple of quick questions. Just wanted to verify the comment on the second TRA study. Ken, you had mentioned that 9,000 patients were enrolled and there's a target enrollment of 12, 500 patients. To my recollection that may be approximately an increase of about 2,500 patients and I'm just wondering what the reasons are for that increase? I know that you may not know that off the top of your head but just wanted to verify that that actually is an increase and then separately, what -- can you estimate the currency contribution to costs?

Again at least historical Merck costs in the quarter just wondering if we can at least have a historical look at that and if you have an estimate of what the contribution to the cost lines were for Schering-Plough that would be very helpful. Thanks a lot.

Ken Frazier So I'll take the first comment about the Tracer study. You are correct that it was an increase of about 2,500 patients and while I'm not a scientist I understand that when you have an event driven study, the people who are running the study try to model what it takes to make sure that you have a robust sample to get the event rate that you're looking for and that's why it was increased.

Alex Kelly

And if I can just note on that, this is Alex. That was updated previously. That's not a new disclosure about the 2,500 patient increase. That's been out for a few months.

Ken Frazier

So if I can take the foreign exchange question on the P&L, so as I mentioned in my talk, we felt that the revenue benefited from about 1% from foreign exchange. Now, Merck's year-over-year benefit from foreign exchange is not as pronounced as you might see in other pharma companies and recall we have the benefit of a hedging program in the fourth quarter of last year when the currencies were really moving rapidly.

We had nice gains from the hedging position that we had so that moderates the year-over-year benefit but net-net, what I can say is that the EPS benefit on the bottom line is moderately better than what you see in the top line but not really dramatic so really in some ways probably net-net foreign exchange didn't benefit our P&L in the fourth quarter versus last year as much in part of that because we had a nice hedging program that made the prior year stand up a little better.

Alex Kelly

Okay. Operator, ready for our last question please?


Your final question comes from the line of Robert Hazlett with BMO Capital Markets.

Robert Hazlett – BMO Capital Markets

Thank you for taking the question. May be for Ken was there any wholesale or stocking benefiting the U.S. results and could you comment on the specific Marketing increases that you made in the fourth quarter and then regarding ISENTRESS which is a growth driver for the company, clearly, there's some competition and actually some news out regarding Gilead this morning, could you comment on the relative positioning of ISENTRESS compared to Gilead therapy upcoming in the HIV market? Thanks.

Ken Frazier

So working backwards, I have not seen the latest news on Gilead but we continue to be confident in the profile of ISENTRESS and its growth prospects, we continue to work very hard on insuring that we have a once daily version of that drug. We continue to look for it to fixed dosing which we believe will put it in a position where it will continue to be successful and all I know that I can say about the Gilead pill is obviously we're talking about an experimental pill with an anticipated launch that's many years away.

We said earlier in the U.S. that we did see some wholesaler stocking this quarter. I think we view that as being reasonable in terms of comparing the fourth quarter '09 to the fourth quarter '08 although it was up from the third quarter of '09 and your general question about marketing expenditures, I can just summarize by saying we continue to put money behind our growth drivers.

We're very pleased for example with the recent trends around JANUVIA and we mentioned before that we were really going to focus on JANUVIA before we had put the focus on messaging the importance of maximizing DPP-4 inhibition to try to blunt the introduction of in class competition, we've expanded our approach.

We've now started to focus on the ability to work competitively against Sophany areas and we have been encouraged by the focus on the resources that we put behind JANUVIA in terms of the increased volumes in December and January. So we continue to view JANUVIA and JANUMET as well as some of our other in line products as key growth drivers in the U.S. market and beyond.

Alex Kelly

Okay. Thank you, Ken. And if I can just amplify on something like Ken, mentioned earlier that we have four filings under review now with regulatory authorities around the world. So with that I think that's the end of our Q&A and we thank you all for listening to the call. Have a good day. Goodbye.


Ladies and gentlemen, this concludes today’s new Merck's fourth quarter 2009 earnings release conference call. You may now disconnect.

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