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Merck & Co. (NYSE:MRK)

Q1 2011 Earnings Call

April 29, 2011 8:00 am ET

Executives

Kenneth Frazier - Chief Executive Officer, President, Director and President of Global Human Health

Adam Schechter - Executive Vice President and President of Global Human Health

Peter Kellogg - Chief Financial Officer and Executive Vice President

Alex Kelly - IR

Analysts

David Risinger - Morgan Stanley

John Boris - Citigroup Inc

Tim Anderson - Sanford C. Bernstein & Co., Inc.

Jami Rubin - Goldman Sachs Group Inc.

Steve Scala - Cowen and Company, LLC

Seamus Fernandez - Leerink Swann LLC

Michael Tong - Wells Fargo Securities, LLC

Christopher Schott - JP Morgan Chase & Co

Gregory Gilbert - BofA Merrill Lynch

Marc Goodman - UBS Investment Bank

Charles Butler - Barclays Capital

Operator

Good morning. My name is Arnika, and I will be your conference operator today. At this time, I would like to welcome everyone to the Merck First Quarter 2011 Earnings Conference Call. [Operator Instructions] Mr. Kelly, you may begin your conference.

Alex Kelly

Thank you, Arnika, and good morning everyone, and welcome to Merck's 2011 First Quarter Conference Call. Before I turn the call over to Ken, I wanted to point out a couple of things. First of all, I really want to thank Joe Romanelli for his contributions to the Investor Relations team over the last 4.5 years. He's been a great asset to our team, and I really thank him for this time with us. Some of you may know that this is Joe's last day in the Investor Relations team, as he begins the next chapter of his career at Merck, where he'll be working as the Executive Director of Global Human Health Operations, supporting Adam Schechter in his leadership team. So, Joe, good luck in your new role.

Second, as usual, there are a number of items that I need to remind you of before we begin. First, if you look at our GAAP results, there are some items such as purchase accounting adjustments, merger-related expenses, restructuring costs and other charges such as the arbitration settlement. We've excluded those items from our non-GAAP results so that you can get a better sense of the underlying performance.

Next, we've also provided tables to help you understand the trends in the business. There are 3 tables in the press release. Table 1 is the GAAP results. Table 2 reconciles our GAAP P&L to non-GAAP P&L for the second quarter -- excuse me, for the first quarter and year-to-date period. Table 3 is a supplement to our non-GAAP results, which provides the sales performance for the company, the business units and products. During the call today, we'll be referring to Table 2 and Table 3.

Finally, I'd like to remind you that some of the statements we make today might 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 current beliefs of Merck's management and are subject to significant risks and uncertainties.

Our SEC filings, including Item 1A and the 2010 10-K identify certain risk factors and cautionary statements that could cause our actual results to differ from any forward-looking statements we make today. And we undertake no obligation to publicly update our forward-looking statements that we make. The company's SEC filings are available on the company's website at www.merck.com.

Now I'd like to announce our speakers this morning. Ken Frazier, our President and Chief Executive Officer; Adam Schechter, our President of Global Human Health; and Peter Kellogg, our Chief Financial Officer.

Now I'd like to introduce Ken Frazier.

Kenneth Frazier

Thank you, Alex, and thank you, Joe, for your contributions. Good morning, everyone. We are pleased to report strong results for the first quarter of 2011. Our performance underscores that we are successfully delivering on our stated intent to grow both the top line and the bottom line. This is really an execution story. We are executing on our plans and we believe we're off to a good start this year.

The quarter was characterized by growing revenues and double-digit EPS growth. Our performance was largely driven by double-digit growth of key products such as JANUVIA, JANUMET, SINGULAIR, REMICADE, ISENTRESS and NASONEX, combined with deliberate cost control measures across all areas as we continue our work to create a more effective and efficient operating model within Merck.

In addition to the significant contributions of our Human Health portfolio this quarter, our Animal and Consumer Health businesses grew 7% and 6%, respectively. We are pleased with the assets we have in Animal Health and Merck Consumer Care and believe they complement our Human Health business. We remain focused on executing our growth strategy, which includes these businesses.

Just a year ago, we were facing a significant patent cliff for our $3.6 billion COZAAR/HYZAAR franchise. Clearly, patent expirations are a fact of life in our industry, and going forward, we believe a company's ability to consistently grow through patent expiries will be an important differentiator and measure of success. I am pleased to say that over the past year, we grew earnings while at the same time, overcoming the loss of exclusivity for our COZAAR/HYZAAR franchise and performing as we did under the integration.

Overall, this underscores the strength of our Human Health, Animal Health and Consumer businesses and the benefits of this mix of businesses. Looking at the quarter's results, it is clear that our business momentum is building as we enter the accelerate phase of our growth strategy, and we continue to demonstrate the ongoing value of the merger. We made progress in our robust late-stage pipeline and are leveraging the benefits of our expanded portfolio. Indeed, the steps we are taking are paying off and enable us to increase the midpoint of our 2011 guidance range despite the $0.08 to $0.09 second-half impact of the J&J arbitration resolution.

We know that given the long lead time nature of this industry, in many ways, we are still reaping the benefits of actions and decisions that were taken as long as a decade ago. Therefore, we are taking decisions now that will position us for sustained growth well into the future. We will improve all aspects of our operations, prudently invest for growth and most importantly, deliver value through innovation. A key part of our growth strategy is to maximize revenue from our current products while launching new ones, and this quarter's results clearly demonstrate that we're delivering on that front.

During last quarter's call, we mentioned that we are increasing disciplined investments in our best growth drivers, new product launches, select in-line products and Japan and the emerging markets expansion opportunities. While still early, our first quarter results reflect positive underlying trends that support these investments. Going forward, we will complement the growth of our in-line products with contributions from the 12 launches currently underway across the spectrum of our therapeutic portfolio.

Turning to R&D, while delivering a strong financial performance, we also are maintaining our focus on advancing the late-stage pipeline. So far this year, we've achieved multiple approvals, including SYLATRON, our injectable cancer therapy for the treatment of stage 3 malignant melanoma after surgery. Also on the cancer front, our investigational mTOR inhibitor being studied to treat sarcoma achieved its primary end point in a Phase III clinical trial. We plan to file it for approval this year.

On Wednesday, we had an FDA advisory committee meeting to review boceprevir now known VICTRELIS, our protease inhibitor for the treatment of hepatitis C infection. The vote was a unanimous 18 to nothing. We anticipate approval later this spring in the U.S. and shortly thereafter in Europe. The advisory committee both underscores the fact that VICTRELIS represents a significant advance for patients living with hepatitis C.

I recently traveled to Germany to meet with scientific leaders at the EASL meeting, where data from the pivotal VICTRELIS Phase III studies were shared with physicians in various international markets. In the conversations Adam Schechter and I had, it was clear that the enthusiasm for VICTRELIS is commensurate with the potential we see.

We have 5 additional filings accepted for review by regulatory authorities. Among these are tafluprost, known outside the U.S. as SAFLUTAN, which was submitted in the U.S. for glaucoma. JANUVIA plus simvastatin in the U.S. and an extended release formulation of JANUMET. And there is more on the way in 2011 and beyond. We are also excited about several other candidates in our late-stage pipeline that has a potential to address major unmet medical needs including TREDAPTIVE, Odanacatib, Suvorexant, our novel orexin inhibitor for the treatment of insomnia, vorapaxar and most notably, in the longer term, anacetrapib, which begins the large outcome study this year.

While there are many good things happening in the pipeline, a few recent events remind us that pharmaceutical and vaccine innovation is not without challenges. That was exemplified by the recent announcement of the suspended enrollment of our staff vaccine V710. On balance, we remain committed to bringing medical innovations to patients and physicians in ways that also deliver a return on investment in R&D.

Since our fourth quarter earnings announcement, I have had many discussions with investors and others about the position we've taken to continue making disciplined and focused investments in research and development. Let me take a moment to share how we are thinking about innovation and balancing the risks that are inherent in it.

Over the longer term, we firmly believe that the predominant driver of growth and sustainable value creation for Merck will continue to come from discovering and developing new and differentiated products that address unmet medical needs. In this regard, Merck has had a long history and recent success of bringing first-in-class and best-in-class medicines and vaccines to the market, and we continue to see this as a cornerstone of our research strategy.

We do, however, recognize that first and best-in-class products offer a higher-risk and higher-reward value proposition. To better balance the risk-reward equation, we are actively managing our overall R&D portfolio and allocating our investments across R&D segments that reside at different points on the risk-reward continuum in a way that positions us to win in each segment.

This includes life cycle management such as new indications, new formulations and new combination products, biosimilars and innovative branded generics. This will enable us to better balance risk and timing within our overall portfolio and maximize the value of our pipeline and in-line product assets.

To be clear, while Merck's commitment to innovation is unwavering, we are not in a business-as-usual mode when it comes to managing our investments in R&D. Peter Kim, working along with Adam Schechter, Peter Kellogg and me have been improving the decision processes by which we either commit to or discontinue projects. We are being more aggressive about prioritizing the program in therapeutic areas where we will place our biggest bets. Our decision to return the rights of betrixaban to Portola underscores this disciplined approach.

An example of how we are allocating investments at different points along the risk-reward continuum is our JANUVIA franchise. It now includes approved and investigational combination products, including JANUVIA plus simvastatin, JANUVIA plus pioglitazone and JANUMET XR. By building on our prior innovation, we create the equivalent of launching multiple new products that have a significantly higher probability of success.

Another example is our recent announcement of a new joint venture with Sun Pharma, which capitalizes on the best of the 2 companies. The JV combines Sun's track record and rapid innovative product development and its outstanding low-cost manufacturing capabilities with Merck's clinical development and registration expertise and broad geographic commercial footprint.

Through the new JV, we plan to develop, manufacture and commercialize differentiated combinations and formulations of branded products for the emerging market. All of our R&D investments, including those in life cycle management, have rigorous ROI and NPV hurdles in place. This helps to ensure that the returns justify the investments. Additionally, our company-wide internal incentives are directly aligned with the creation of shareholder value. In addition to actively investing for growth during the quarter, we also make several decisions that I believe illustrate the business and financial discipline we are exercising as we make capital allocation decisions.

For example, we discontinued pursuit of the Animal Health joint venture with Sanofi-aventis, and we reached agreement with Johnson & Johnson regarding marketing rights for REMICADE and SIMPONI. This resolved a major area of uncertainty while retaining approximately 70% of our 2010 revenue from these products.

Of course, while investing for growth, we still have the financial strength to return significant cash to shareholders. Our strong dividend and recently increased share repurchase program show confidence in our business and the balance we stive to provide attractive total shareholder returns.

In closing, we are very pleased with the first quarter results we reported today. We've demonstrated our ability to advance the pipeline, grow our key brands and leverage the benefits of our expanded and diverse portfolio. Moving forward, with our growth strategy, a company-wide focus on innovation, actions to create a more efficient and effective operating model and ongoing cost control measures, we are well positioned to deliver sustained results and value in the remainder of 2011 and over the long term.

Thank you for your attention. I'd like to turn the call now over to Adam.

Adam Schechter

Thank you, Ken, and good morning, everyone. It is a pleasure to speak with you today and provide you with an overview of the performance of Global Human Health in the first quarter of 2011.

The year is off to a strong start with reported sales of $9.8 billion. This represents 2% growth compared to the first quarter of 2010 or 6% growth if you exclude the impact of generic COZAAR and HYZAAR. The performance was primarily driven by the double-digit growth of our key brands, including JANUVIA, JANUMET, SINGULAIR, REMICADE, ISENTRESS and NASONEX and also the solid regional performance in the United States, Japan and the emerging markets.

In all of our markets, we are executing on our commercial growth strategy. Our strategy includes the following: first, to grow the core; next, to expand the core; and then, also accelerate new launches. We will do this while relentlessly focusing on the needs of our customers. I'll use this strategy framework for my discussion today.

So first, let me discuss growing the core. The first critical part of our growth strategy is to maximize the growth of our key products and our COD business in our largest developed markets. That is the core focus. We have to ensure we're supporting these opportunities that provide the foundation for our growth platform.

Let's start with the United States where sales declined 4% year-over-year. If you exclude the impact of COZAAR/HYZAAR, sales increased 2% driven by the diabetes, respiratory and neuroscience franchises. Our Vaccine business was largely in line with the previous year once you exclude the impact of CDC stockpiling and customer inventory fluctuations in the first quarter of 2010.

Leveraging our strong commercial presence is paying off in the United States. The United States remains the largest market in the world. There are still significant unmet medical needs, and our team is focused on ensuring broad access to our products for patients and physicians. We have a very strong managed-care presence and high ratings with pharmacy and medical directors. And we've continued to build our relationships with the larger primary care audience, which ranks Merck #1 on customer trust and value.

Moving to the EU, sales were down 3% this quarter, excluding the impact of COZAAR/HYZAAR. The sales decline was due to a number of factors. The factors included generic erosion of TEMODAR, the return of SUBUTEX and CAELYX rights and the effect of EU austerity measures, which remains in line with previous guidance. Despite this, we continue to drive the growth of our key brands including JANUVIA, REMICADE, ISENTRESS and SIMPONI. The EU remains a core part of our business, and we are ensuring we have the right level of resources to take advantage of the unique opportunities in each of these markets.

Now let me highlight some of the brands that make up the core and contributed to the positive performance in the quarter. First, the JANUVIA and JANUMET franchise continued its strong performance with global quarterly sales growing 47% and surpassing the $1 billion in sales for the first time. The franchise is growing in all regions, and JANUVIA now has a 24% market share in the global branded oral diabetes market. Regionally, sales increased 23% in United States and over 50% in the EU. In Japan, demand remained strong and sitagliptin has a 26% combined market share.

Around the world we saw opportunities to invest in JANUVIA and JANUMET at the country level as a result of the Avandia market event, and we moved quickly, we moved decisively in each market where it made sense to do so. These investments are already paying off.

As Ken mentioned, innovative product cycle management projects create lower-risk growth opportunities to drive our key brands. And this has been our strategy for the JANUVIA franchise. If approved, we plan to launch our once-daily version of JANUMET, and fixed-dose combinations of JANUVIA with simvastatin in 2011.

Moving now to SINGULAIR, SINGULAIR had a strong quarter as sales grew 14% to $1.3 billion. We're seeing significant growth for SINGULAIR in the emerging markets in Japan where we will have market exclusivity until 2016. SINGULAIR was a key contributor to the 12% growth in our Respiratory portfolio this quarter, which benefited also from purchases in advance of the spring allergy season. Looking at the prescription trends in the United States, you can see that the allergy season is off to a slow start. We will continue to monitor that very closely.

REMICADE sales grew 12% in the quarter, led by the strong growth in UC and Crohn's disease indications. We are enthusiastic about the opportunities ahead for REMICADE as we leverage our strong life cycle management platform. Now that the arbitration is behind us, our teams in Europe, Russia and Turkey can focus on the broad opportunities to improve penetration rates and drive growth for the immunology franchise.

Combined sales of VYTORIN and ZETIA grew 5% in the quarter with growth from all regions, including the United States. The international growth was driven by sales in Japan, 41% growth, and the emerging markets with approximately 20% growth. We are encouraged by the volume-driven growth of ZETIA in Japan, as well as other growth in other Asia-Pacific markets. We are looking forward to continuing momentum as we seek to include the Sharp data, which showed a medically important outcome benefit, albeit in a relatively small population, and our approved labels for markets around the world.

Now I'd like to briefly discuss expanding the core. A key part of expanding the core strategy is growing our business in the fastest-growing markets, the emerging markets and Japan. Let me start with the emerging markets. The emerging markets grew 10% in the quarter and contributed 18% of our total Global Human Health sales. The growth was driven by the top 6 markets, which grew 18%. Our performance in China this quarter was strong. Sales grew 40%, driven by the Respiratory portfolio and diversified brands.

We continue to see a lot of opportunity in the emerging markets, and our goal remains to have 25% of our pharmaceutical and vaccine sales coming from these countries by 2013. We are approaching each of these markets differently. Our primary focus is to maximize the more than 150 brands that we already have approved in markets today. Then we look for opportunities to leverage partnerships that give us access to additional customers, products and life cycle management platforms.

Lastly, we look for inter-brand opportunities where it makes sense to do so. So let me mention one of our new partnerships, the formulation of a joint venture with Sun Pharmaceuticals. This is an exciting opportunity for us to partner with a proven leader to introduce incrementally innovative products into the emerging markets and to ultimately give our sales force additional brands to complement their portfolios.

While we're also expanding the core in Japan. Japan grew 44% in the quarter or 31% excluding foreign exchange. Sales were driven by strong growth of JANUVIA, NASONEX, SINGULAIR and ZETIA, as well as solid contributions from new launched brands such as BRIDION. Thanks to the extraordinary effort of our team in Japan, patients and physicians had access to our medicines during the devastating natural disaster. There was a slight inventory build of approximately $40 million to $50 million in the quarter, and we anticipate inventory will be reduced over time as the supply chain gets back to normal.

Lastly, in expanding our core, we have recently implemented a key initiative we call the Next 10. The Next 10 is designed to help our team's focus on the brands after the top 10 in a given market and to maximize those other brands. It's a very specific call to action to find additional growth opportunities by allocating greater focus and resources beyond the top brands. As an example, we have just launched the diversified brand sales forces in markets including Brazil, Mexico, Germany and Colombia. We believe the allocation of resources to these brands will provide incremental growth opportunities in these markets, and we will closely monitor the success market-by-market around the world.

The third component of our growth strategy is to accelerate new launches. We now have 12 products launching around the world, which together contributed about $300 million to this quarter. I'd like to highlight a few key contributors to the top line growth in the first quarter.

First, SIMPONI sales were $54 million, driven by the strong growth in Germany. As part of the life cycle management, we received approval for the structural damage claim for SIMPONI, which will help us position against other anti-TNF therapies. We're also planning additional launches of SIMPONI in Europe in 2011 and 2012 including the U.K., France, and Portugal.

Another brand that continues to grow is DULERA, our combination treatment for asthma in the U.S. We're seeing a steady increase in volume growth in DULERA, which now has roughly 2% new Rx market share in the combination category. Two of our neuroscience brands, BRIDION and SAPHRIS, continue to make positive gains, contributing about $65 million to the top line this quarter. We are allocating time and resources to make each of these launch brands as successful as possible. Some may take longer than others, but we are confident that we have the right plans in place, and we will support growth opportunities to maximize these brands.

As we think about future launches, we see an opportunity to regain a foothold in the Ophthalmology segment with a preservative-free formulation of tafluprost for the reduction of intraocular pressure. Tafluprost is marketed outside the U.S. as SAFLUTAN. The NDA was accepted by the FDA in March, and we anticipate approval later in 2011. We look for an opportunity to gain critical mass in the commercial organization in this market. We found that with Inspire Pharmaceuticals. This was a great opportunity to accelerate our launch preparedness and give our teams a greater platform for success. The sales force from Inspire have strong relationships with existing customers and very good knowledge of the ophthalmology area.

Now let me take a moment to talk about VICTRELIS, a brand that we look forward to launching soon for the treatment of hepatitis C. We were pleased to receive a positive recommendation from the FDA advisory committee this week as the committee recognized the benefit that VICTRELIS will have for patients. I have spent a lot of time with the team to ensure that we are ready for the launch. I am confident that VICTRELIS will offer an excellent value proposition for both physicians and patients.

As Ken mentioned, we spent time with many of the key scientific leaders last month in Germany, and we were extremely encouraged by the feedback, especially the positive feedback from physicians, who have already had an opportunity to utilize VICTRELIS in early patient access programs. While I'm not going to provide details of our launch strategy, I will tell you this. We are ready to launch.

In summary, we had a strong first quarter, and it is clear that we're achieving growth while continuing to improve our cost structure. We will continue to evaluate our resource needs to ensure we're funding the right growth opportunities and cutting costs where possible and appropriate. Our focus in Global Human Health is on delivering top line revenue growth. We will look forward to updating you on our progress and performance throughout the year.

Now I'd like to turn it over to my colleague, Peter Kellogg.

Peter Kellogg

Thank you, Adam, and good morning. As you heard from Ken and Adam, we had great performance in the first quarter of 2011. We performed well on all fronts. Sales were strong, and operating expenses were down across the board in marketing and admin, R&D and product costs. And we grew non-GAAP EPS by double digits.

We continue to demonstrate our commitment to driving out inefficiencies in our cost structure while making appropriate investments in growing the top line. My comments today will be about the quarterly performance and how that translates into the rest of the year, so let me start with our results.

To streamline my comments today, I will speak to our non-GAAP results, which exclude purchase accounting adjustments, merger-related costs, restructuring charges and the onetime arbitration settlement charge that we previously announced. On this basis, we reported strong first quarter non-GAAP earnings per share of $0.92, 11% growth compared to the same period last year. Total revenue for the quarter was $11.6 billion, 1% above a year ago. The strong performance of our key brands and launching products offset more than $600 million of headwinds that we experienced in the quarter, including generic erosion, the impact of health care reform and continued pressure from EU austerity measures.

Excluding just the largest item, the impact of generic COZAAR/HYZAAR, total company sales were up 5%. Now let's talk about expenses. This quarter, you can see we reduced our operating expenses by more than $350 million versus the first quarter last year while still making additional investments in emerging markets of over $140 million. The savings this quarter are on top of more than $2 billion in savings that we generated through the end of 2010. So you should have no doubt about our commitment to achieve our $3.5 billion synergy target.

As Ken mentioned, we have taken smart, across-the-board cost control measures that have enabled us to accelerate the realization of these savings. Our non-GAAP product gross margin of 76.8% was slightly higher compared to a year ago, as well as last year. There are 2 things contributing to this improved rate, product mix in the current quarter and manufacturing efficiencies. While the main driver of PGM tends to be product mix, we anticipate that you will see some of the manufacturing efficiency benefit in future quarters.

Now let's talk about marketing. On a non-GAAP basis marketing and administrative expenses in the quarter were $3.1 billion. As you can see from these results, we achieved cost reductions while also making additional investments in key growth areas such as the 12 products that are currently being launched in major markets and the emerging markets.

Moving on to R&D, a research and development expense of $1.8 billion was approximately $200 million lower than last year. Ken described our investment philosophy and how we strive to have a balanced R&D portfolio across the risk-and-reward continuum. I would like to iterate that we have rigorous ROI hurdles in making these decisions. In fact, we anticipate that our focus and financial discipline in this area will translate into a slightly lower R&D expense than we had anticipated in early February. As a result, we are reducing our R&D targets for 2011 to a range of $8 billion to $8.4 billion.

Moving to tax, our non-GAAP tax rate was 25.5% for the first quarter. However, we continue to anticipate that our full year non-GAAP rate will be in the 20% to 22% range. While our balance sheet and cash flow statements for the quarter is not yet realized, we ended the quarter with a strong financial position. We had around $15 billion in cash and investments and roughly $18 billion in debt.

As you look forward to Q2, remember that the Inspire purchase price of $430 million and the $500 million arbitration settlement will come from our cash balance. So in summary, we're off to a great start in 2011, and we are well positioned to achieve our growth targets for the year. So let me cover those next.

I've already touched on our targets for R&D and taxes, so I will now focus on revenues and EPS. We are very pleased to maintain our prior top line target for 2011. We are confident in our ability to build on the top line performance that we drove this quarter and overcome the challenges that we face this year. We continue to target low to mid-single digit revenue growth in 2011.

Our performance this quarter puts us on the right growth trajectory for the year, and we have now lapped the full 12-month impact of the COZAAR/HYZAAR patent expiry, as Ken mentioned earlier. In fact, Merck has maintained the top line to a loss of several major patent expiries over the last 5 years: ZOCOR, FOSAMAX and now COZAAR/HYZAAR. In an industry where investors worry about patent expiries and ask the question, "Can pharma companies replace their lost revenue?" Merck has now done it 3x in a row.

On the bottom line, our new non-GAAP EPS range of $3.66 to $3.76 raises the midpoint of the range to $3.71. This guidance reflects our new R&D range and absorbs the $0.08 to $0.09 EPS impact from the arbitration settlement in the second half of the year. This quarter's strong performance and the focused steps we've taken to grow the top line and achieve continued cost savings have positioned us well to achieve our sales and EPS targets.

The new 2011 GAAP EPS target range of $2.04 to $2.39 also reflects the new R&D guidance and includes, among other items, the entire impact of the arbitration settlement. Given the strength of our results and our expectations for strong free cash flow earlier this week, we announced the board authorization of a $5 billion stock buyback program. This is in addition to the $1.4 billion we have remaining under the current authorization. This authorization is consistent with our intent to remain one of the best pharma companies in terms of cash distribution to shareholders.

Last year, we bought approximately $1.6 billion in treasury shares. This demonstrates our desire to actively buy back shares at the right time and at the right market conditions. And, in fact, over the past 5 years, we have returned greater than 85% of free cash flows to shareholders. Only one other pharma company can claim this. Over the same 5-year period, we've been in the top third of our peers in terms of dividend payout ratio. In 2010 alone, we returned $6.3 billion to shareholders. We have done this while continuing to invest in key growth drivers and maintaining a sound capital structure and an appropriate credit rating.

This authorization of $5 billion should confirm that Merck is confident in our strategy and accordingly, has taken this action. So in summary, we are very pleased to kick off 2011 with such a strong performance; growth on the top line despite many challenges, double-digit growth on the bottom line, advancing the late-stage pipeline with 5 products under regulatory review, increasing investment in key growth areas such as emerging markets and our 12 product launches, making strategic deals in support of future growth such as Sun Pharma and Inspire, while also demonstrating the financial discipline to only make investments that meet our rigorous prioritization and financial criteria.

We are confident in making thoughtful resource allocation decisions to drive future growth and at the same time, maintaining our history of returning cash to shareholders.

Thank you. Now I'll turn the call back to Alex.

Alex Kelly

Thanks, Peter. Now we'd like to open up the call to take your questions. [Instructions] Operator, we're ready for the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Greg Gilbert with Merrill Lynch.

Gregory Gilbert - BofA Merrill Lynch

I have 2. I'll ask them upfront. First for Ken, you mentioned that Animal Health and Consumer are core to the strategy just curious how you ensure that each business gets the management attention, the internal funding and as well as access to business development capital that they require? And secondly, on both on boceprevir, I know you said that you seem very ready, or you said you are ready to launch. But would it be reasonable to expect at least a 90-day delay based on the data on drug-drug interactions that you just recently provided the agency?

Alex Kelly

Okay, Ken?

Kenneth Frazier

Okay. On the first question, again, I feel that we have greater assets in both Animal Health and Consumer Care. As I mentioned, that complement our Human Health business and can help contribute to our top line and bottom line growth objectives. From a standpoint of focus in resources and management oversight, we see these businesses as being very complementary to what we're doing. We have strong leaders in both businesses. We're developing the right kinds of plans going forward to ensure that those businesses can contribute to Merck in the right way, subject to the way we run the entire business, which is to have strong growth on both the top line and the bottom lines. So we're pleased to have those businesses.

Alex Kelly

I'll turn he boceprevir question over to Adam.

Adam Schechter

Yes. For boceprevir, we believe that we've completed the studies required for approval, and we anticipate to launch in May.

Operator

Your next question comes from Chris Schott with JPMorgan.

Christopher Schott - JP Morgan Chase & Co

Just had a couple of questions on capital deployment priorities now that we're about 18 months post the Schering deal. I guess, first, how should we think -- or should we think about Merck's net debt levels remaining in your current levels over time? Second, on business development, obviously, you saw Inspire deal this quarter. But what is Merck's interest in larger transactions that would bring in-market assets to the company? And then finally, why not a higher dividend versus share repo as a cash flow return vehicle at this point?

Kenneth Frazier

So let me start by talking about the overall strategy we have for capital deployment. As we said all along, we believe that what's important for us is to focus on driving total shareholder return and to provide attractive total shareholder return. So for us, that means when we're in the business development field, we want to look for those assets that will complement our franchises, help drive our business over the long term. But we're only going to be disciplined in how we use capital to go after business development opportunities. For example, in the emerging markets, I think we've shown that approach to how we're going to grow our business. We're going to look for the kinds of partnerships that actually are beneficial to our business in the long run. We're not going to overspend. So we're going to be disciplined in spending. As it relates to the dividend and the share repurchase, I would just say before turning it over to Peter, we think we have a strong dividend right now. We also think that this increase in the share repurchase program signals that we have confidence in our business going forward. So we have a history of being shareholder friendly, returning cash to shareholders, and we're going to continue with that. Peter?

Peter Kellogg

Yes, thanks. I would reiterate actually what Ken just said, that there's no question that we had an absolute desire to be as shareholder friendly as possible, with returning cash to shareholders as part of the formula of total shareholder returns, and we certainly appreciate how important that is. We do look at our net cash, net debt level over time, and so we do forecast that out. We don't give guidance on it, obviously, but we have been very focused on returning a lot of the cash that we do generate to shareholders. And I think that's certainly has been some of the facts and perspectives that I provided during my discussion. Relative to the dividend versus the share repurchase, obviously, that's the trade off that we think about. At this point, we think as we look at the opportunity to create shareholder value, we felt that the share repurchase was a great opportunity. That's not to discount any other options for the future.

Operator

Your next question comes from Jami Rubin with Goldman Sachs.

Jami Rubin - Goldman Sachs Group Inc.

Ken, question for you. Your definitive statements about the importance of Consumer Health and Animal Health does suggest that you would not consider strategic alternatives to this business. I think at our conference in January, you had signaled that for Consumer, which is primarily a domestic business don't have scale, but this will be a business that you might consider for future strategic activity, i.e. spin-off or make future acquisitions. So I'm wondering if you could talk about that a bit more? And also, Peter, if you can give us a sense of the timing of when you might take advantage of your $5 billion buyback program?

Kenneth Frazier

Thanks for your questions, Jami. Let me just say that we are pleased with the assets that we have because we believe they complement our Human Health business. As we go forward, we will be looking for opportunities to grow our presence in the consumer space if that's what we believe will create long-term shareholder value. But strategy has multiple dimensions. And what I am saying is, we think these businesses are good. They provide us with, in effect, buffers on some of the issues that I think that the core Pharma business provides us. They're helping us to grow right now. We like the fact that we're seeing 6% growth in Consumer, 7% growth in Animal Health. And going forward, we're just going to have to look at those, just figure out how those assets can help us maximize shareholder return, and I'm not ruling anything out. I didn't mean to rule anything out. I'm simply say that we like those businesses, and they're performing well as a part of our portfolio. Again, I'll report that Consumer Health is tied directly to Global Human Health, particularly in the emerging markets, where we use the same channels, we reach the same patients, if you will. So we like those businesses, and we'll continue to look at how the entire portfolio can perform to maximize shareholder value.

Peter Kellogg

So Jami, on the second part, about the share repurchase timing, we don't obviously give guidance relative to when we'll be in the market and so forth. I would highlight that last year, our purchases of $1.6 billion were done primarily in the second and third quarter. And then just due to a variety of factors, the earnings time schedule, vorapaxar news and the J&J settlement, we've actually been blocked out of the market from being able to go into the market for quite some time, number of months. So I think going forward, we will see some windows, and we'll see what we'll do. But we really don't forecast going forward.

Operator

Your next question comes from Tony Butler with Barclays Capital.

Charles Butler - Barclays Capital

Two questions, first, for Adam. Adam, could I get you to flush out the Sun Pharma relationship? For example, is this relationship in all emerging markets? What's the exact brand or subsidiary brand? Is it a Sun pill or product or is it a Merck product? And how do you think about the sales force to Merck reps or specialty reps market Sun products or is it this all just within one bag and both companies are marketing each other, and then one follow-up please.

Adam Schechter

Yes, so, Tony, if you'd look at Sun Pharma, we've spent a lot of time with the companies working together. And we're taking a look at all the potential opportunities for our novel innovative combinations and formulations, and we have quite a long list of potential possibilities. What we're now doing is we're going to put a General Manager in charge of that joint venture. The General Manager will work with the board that's made up of equal employees from both Merck and from Sun Pharma. That General Manager will come with a recommendation on the priority of the different opportunities that we have that will be based upon how quickly we can get them to market, what the probability of success is, what the market needs are and how these products will meet those market needs. So ultimately, the revenue potential of the products. We anticipate that the formulation work, the low cost manufacturing work will be with Sun pharma, that commercialization will be done by Merck. And we would look to launch those products in whatever emerging markets we believe there'd be significant opportunity in for each of those products. We'd use the regulatory capabilities in those markets from Merck. So there's still a lot of work for us to do to go and make sure that we've got it all washed out. This deal is for all the emerging markets with the exception of India. And we don't have the exact product list. We're going to wait for the General Manager to make the recommendation. So there's still work for us to do there. But we're very excited about this opportunity because we believe it gives us the capabilities and the opportunities to bring novel, innovative branded generics to these markets, which we think are going to help with the innovation platform that we're launching in the emerging markets.

Kenneth Frazier

Yes, I'd just underscore Adam's last point. We've always been focused as a company on innovation and differentiation. We want to participate up and down the segments of the markets in the emerging markets, but we want to play to our strength as a company. And that is really around science and innovation and differentiation, and that's why we've entered into this agreement with Sun Pharma. We think they are able to help us develop a brand -- a line of brands that actually meet the Merck standard in term -- when it comes to patient value, innovation and differentiation.

Charles Butler - Barclays Capital

Thanks very much for that commentary and as my follow-up, Ken, you made a great deal of -- or you created a great deal of discussion around making decisions. And one of the decisions that you and Merck made was to give back an asset Portola in a therapeutic area that one could argue is potentially quite large. And so the question is, is there some consideration to either engage in a later-stage asset in that same therapeutic area or maybe enter into agreement with a non-encumbered asset, that may even be more later stage or even on the market? Or is Merck just simply saying, this was a large cardiovascular area that we just therapeutically and scientifically missed.

Kenneth Frazier

The decision that was made about betrixaban really reflected, as I said, our approach to looking at the high ROI and NPV hurdles that we think we want to have before we go ahead and make big bet. Going forward, in this area as well as all other areas, we are really focused on finding the best science available externally, bringing it into Merck and being able to work with molecules and in partnership with other companies to drive growth going forward. So I would say, it wouldn't just be an issue around Factor Xa. It's a factor about each one of our franchises, and our franchise leaders both on the commercial side and the scientific side are actually charged with bringing in the best external science.

Operator

Your next question comes from John Boris with Citi.

John Boris - Citigroup Inc

First question for you Ken, I think in your previous press release you -- at least, on the J&J arbitration, you indicated that you'd retain the assets, but you had to give up 30% of the sales. And I think you indicated $0.08 to $0.09 of earnings. Can you articulate why you had to give up 30% and why within the negotiation you felt compelled to do that? And then for Adam, on emerging markets, you have or had a target of 25% that you wanted to hit at a specific time frame. The 30% that you give up, obviously, was largely in emerging markets. Are you still reiterating that target of 25% in emerging markets?

Kenneth Frazier

So I'll start with the J&J question, John. I think that we had a strong position going into that arbitration. I think the 70-30 split reflects that we had a strong position, and as to why we ended up where we ended up here, it was because both parties agreed that given the merits of the case, this will be a good place for the 2 parties to come out and remove all the uncertainty that exists in any arbitration proceeding.

Adam Schechter

And to answer the question regarding emerging markets, we are committed to a target of 25% in 2013. And if you look at the emerging markets and the strong growth that I mentioned, for example, China of 40%, we never had REMICADE or SIMPONI in China. We also retained Russia and Turkey. So, overall, our performance in emerging markets is very strong. We believe there's very significant opportunity, and we continue to reinforce the 25% that we've said before.

Operator

Your next question comes from Tim Anderson with Sanford Bernstein.

Tim Anderson - Sanford C. Bernstein & Co., Inc.

My guess is you're going to resist answering this, but I'm hoping you can share your thoughts. On R&D spending, if you could potentially keep it flat or slightly down in 2011, is it possible that R&D spend might contract further beyond 2011? Just looking for a directional answer on this. On SINGULAIR, is it possible you might be able to take that product over-the-counter as part of a life cycle management strategy? Then on betrixiban, going back to Tony's question, asked a different way, are there still creative ways that Merck might be able to enter this oral anticoagulant market in a reasonable time frame?

Alex Kelly

Okay. Ken, you want to start with the R&D?

Kenneth Frazier

Yes. On the R&D question, I would say that as I've tried to say all along, the R&D spending that you see at this time in Merck is a function of the assets that we have at various stages of development in the pipeline. I don't think you should consider it to be a number going forward. I think it will all depend on what we have. We're pleased to have the assets that we have in late-stage development inside our company. And going forward, we are going to be looking for ways to produce efficiencies in our R&D, including prioritization decisions. We've been reducing the number of R&D sites. So we are committed to ensuring that whatever we spend on R&D going forward is about quality, not about quantity. So we have no dogma about an $8 billion spend in R&D. It's really about making sure that we maximize the assets because we're committed to growth long term, and we believe that R&D is the predominant driver of long-term growth in this industry. On the SINGULAIR OTC issue, I'll turn it over to Adam.

Adam Schechter

Yes, and first, I'll start by saying I mentioned with SINGULAIR that we think there's tremendous opportunities in Japan, and also the emerging markets, we expect there to continue to be strong growth even after the patent expiry in the United States and Europe. We had looked at the possibility of all of our Rx brands to go OTC, and we always evaluate and look at those opportunities. And of course, we'll do the same with SINGULAIR.

Kenneth Frazier

And I'm sorry. I know your last question was on betrixaban, Tim. I seem to have not remembered it is exactly.

Tim Anderson - Sanford C. Bernstein & Co., Inc.

Yes, the question was, are there creative ways that Merck might be able to enter the novel oral anticoagulant market in a reasonable time frame?

Kenneth Frazier

So I just said a few minutes ago, we are looking at opportunities across the broad spectrum of therapeutic areas. If we find opportunities that we believe provide value for us to enter into that space or any other space in which we've actually determined we want to be a party going forward, we will look for those opportunities.

Operator

Your next question comes from David Risinger with Morgan Stanley.

David Risinger - Morgan Stanley

A couple of questions. First, you obviously had a very strong quarter, which is annualizing at $3.68. The midpoint of your annual guidance is $3.70. So I'm just wondering if we should take away that your guidance is quite conservative given your projection for accelerating sales growth over the course of the year? Or are you expecting results to weaken in the second half after a seasonally strong second quarter due to the REMICADE and SIMPONI step down? And then second, the betrixaban cancellation, obviously, is going to help lower R&D costs. But I was just wondering about that decision whether you were aware that rivaroxaban was going to have a bleeding issue in the MAGELLAN trial before you dropped it shortly before that release?

Peter Kellogg

David, this is Peter. Let me take the first part. So, yes, we do have a strong first quarter. I think as we commented, we do anticipate about $0.08 and $0.09 impact in the second half of the year from the arbitration settlement. So I think when we factor that in, and I think the guidance probably makes a lot of sense. And I would remind you also that in the second half year as we go through the balance of the year, we're going to be investing against some very important launches that we intend to plan to win or play to win for. So I think our guidance right now reflects that what we think is a realistic range of outcomes for the year, and we feel very good, quite frankly, about how we got started this quarter. We made a real focus on getting a fast start this year, and we're very happy to be able to hold the top line and bottom line guidance. And, in fact, despite the arbitration impact, it actually increased the midpoint of our bottom line guidance range. So we're feeling very good about kind of the total package at this point from a guidance standpoint.

Kenneth Frazier

On the last question on betrixaban, I won't comment specifically on the specific decision. I will say that we looked at the totality of public information, about the various molecules in the space and decided that it was not going to meet our ROI standards to enter into sort of large scale study that we thought we would be required to enter into.

Operator

Your next question comes from Steve Scala with Cowen.

Steve Scala - Cowen and Company, LLC

I have 2 questions. Will CORDAPTIVE be refilable in 2012 even if the HPS2-THRIVE's trial does not achieve its efficacy endpoint given that the FDA questions are related to safety? Or will CORDAPTIVE not be an opportunity in the U.S. should HPS2-THRIVE not achieve its end point? So that's the first question. And the second question is can you remind me whether the $3.5 billion in cost savings should be viewed on a net or gross basis.

Kenneth Frazier

So I'll say that we intend to file CORDAPTIVE in the United States in 2012. That is our intention, and I think that's what our expectation is going forward. On the synergies, we've said that we intend to achieve the $3.5 billion in net synergies going forward. We are focused on that, but as I try to say early on, our visions go even well beyond that in terms of how do we position this company to have a model that will be successful in a tough future environment. So we are committed to achieving the $3.5 billion in annual cost synergies by 2012 as we've said. But we're also looking at having the right kind of models going forward to allow us to succeed long into the future.

Operator

Your next question comes from Marc Goodman with UBS.

Marc Goodman - UBS Investment Bank

Just first question is, Peter, can you talk about the tax rate a little bit, just what was going on this quarter, and how should we think about it on a quarterly basis the rest of the year? And then second question is, can you give us an update on vaccines, what was unusual in the quarter, and what we can expect kind of to playback? It's a little unusual as far as the lumpiness quarterly or the rest of the year.

Peter Kellogg

Marc, it's Peter. So first, on the tax rate. I think you got it exactly right. In other words, the first quarter, we highlighted that we had a couple of discrete items. And sometimes, you have -- basically, your whole tax structure and the tax rate, they're sort of running on a full year basis and then from time to time, you have discrete items that hit in a particular single quarter. So in this quarter, we had a couple of items that pushed our non-GAAP tax rate up to 25.5%. But we are comfortable as we look forward on a full year basis, seeing the rate end up at about -- its guidance range. In terms of how that plays out quarter-by-quarter, I won't break that out specifically, but I think that in general, you should see based on that guidance, you should see it being lower than 25.5% as we go forward quarter-to-quarter, for sure. In terms of vaccines, Ken, you want to take it?

Kenneth Frazier

Sure. So as you know, we continue to experience intermittent back orders with respect to ZOSTAVAX. We were able to make some shipments in last couple of weeks for orders placed in February. We expect to have additional shipments in May, June for orders that we placed from April 18 or later. We expect to ship things in August. So we are intermittent backorder situation. I think with respect to vaccines, overall, if you strip out ZOSTA supply and you strip out the buy-in that we had last year, we performed pretty much on plan.

Operator

Your next question comes from Michael Tong with Wells Fargo Securities.

Michael Tong - Wells Fargo Securities, LLC

First was question for Ken. You devoted quite a bit of time talking about risk diversification in your R&D bucket. So if I could get your color on at least what you're looking at different ROIs for your different R&D buckets, namely branded generics, biosimilars, new products or fixed combos. And then a second question for Adam, as you're getting ready to launch boceprevir, what's your message to clinicians to encourage adoption into what, at least to me, seems a bit more complicated dosing regimen than the competitor product?

Kenneth Frazier

And on the first question, I can speak to it generally. I think if you look at the history of Merck, we've been really good at first-in-class innovative products. That's been our history, but we think that's sort of at the high-risk end of the spectrum. It's also at a high-reward part of the spectrum. So what we've tried to do is we thought about our research strategy, if they have specific programs that go first-in-class, that focused on the best-in-class life cycle management in terms of new indications, biosimilars, new combinations, formulations and in the emerging markets, what we call differentiated branded generics. Now they all, I think, have a different probability of success. They have a different level of investment that's required. And what we want to do is we want to be able to spread our risk across that spectrum and be able to participate in all those segments of the market.

Adam Schechter

I'd add I think that in all those areas, we hold the same standard that the return on investment are the positive. All these actually have a nice return on investment profile. Obviously, as Ken said, some have different POS's or different commercial rollouts. But in general, we shoot for strong returns in all those areas.

Adam Schechter

And Michael, with regard to boceprevir, the first thing I say is, we know this market. We've been in this market for quite some time. We know the physicians. We've worked with these the physicians for quite some time. I don't want to give the specifics of our strategy right now. I'm sure our competition would love to hear that. But I really do look forward to talking about our strategy and talking about how we're implementing that strategy once the product is approved.

Operator

Your final question comes from Seamus Fernandez with Leerink Swann.

Seamus Fernandez - Leerink Swann LLC

Just a couple of things. This is for Peter. Maybe you can just remind us how you're dealing with the accounting on the Inspire acquisition and whether or not that's in non-GAAP guidance. The second question is for Ken and Adam, as you think about the Consumer business and Tim's question on SINGULAIR OTC. How can you -- I guess, what I'm a little bit wondering is how can you ring fence the former Schering Consumer business from the J&J joint venture so that you can effectively execute or how have you effectively execute any business development transactions? And then can you just give us an update on your timing expectations, if any, for vaccine manufacturing coming back online so you can execute a full launch of ZOSTAVAX?

Alex Kelly

Ken, you want to start that?

Kenneth Frazier

Yes. We don't publicly discuss the terms of our J&J agreement around consumer products. I will say that we like the Consumer business that we have. We see opportunities again to have it complement what we're doing in our Human Health business, and that's about all that I can say right now. I'll turn it over to Peter.

Peter Kellogg

So relative to the Inspire acquisition, obviously, that includes that, but it hasn't been announced. We will use our normal protocol so the specific purchase accounting elements, we would exclude from our non-GAAP performance. But, obviously, all the operational elements, all the ongoing business expenses and trends of that business would be part of our ongoing business.

Adam Schechter

Yes. With regard to ZOSTAVAX, I can tell you we're working our -- manufacturing team is working very hard on that. Now we've made some shipments in the last 2 weeks of April for orders that were placed back in February. We're expecting to have some more shipments in May and June. But we're going to continue to be in backorder situations intermittently. So we don't have an exact timing for that to be fully resolved.

Seamus Fernandez - Leerink Swann LLC

I guess just as a quick follow-up, the timing, I guess, that had previously been disclosed may have been the back half of this year for North Carolina coming online? Can you just maybe update us on any views along the lines of when the North Carolina facility will come online?

Kenneth Frazier

So I'll remind you that the North Carolina facility is a fill and finish operation at this point. It's not ready for a bulk. We hope to get the bulk supply through that facility later, okay?

Well, let me just say again in closing, I want to thank you, all, for your participation this morning, as well as your important questions. If you have further questions, I encourage you to reach out directly to Alex or any member of our Investor Relations team. As we move ahead, we really look forward to updating you on our progress in executing our growth strategy and our plans to deliver shareholder return through the continued progression of our pipeline and the continued growth of our products. We are very much committed to growth, and we think we're off to a terrific start in the first quarter. And I look forward to speaking to you -- with you in the future. Thank you very much.

Alex Kelly

Thank you, and goodbye, everyone.

Operator

This concludes today's conference call. You may now disconnect.

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