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

Q1 2007 Earnings Call

April 19, 2007 9:00 am ET

Executives

Graeme Bell - Executive Director, IR

Dick Clark - President and CEO

Judy Lewent - EVP & CFO

Analysts

Chris Shibutani - J.P. Morgan

Tony Butler - Lehman Brothers

Timothy Anderson - Prudential Equity Group

Jamie Rubin - Morgan Stanley

David Risinger - Merrill Lynch

Bert Hazlett - BMO Capital Market

Chris Schott - Banc of America Securities

George Grofik - Citigroup

Steve Scala - Cowen & Company

John McCoy - Natexis

Seamus Fernandez - Leerink Swann

David Merris - Balyasny Asset Management

Joe Tooley - A.G. Edwards

Roopesh Patel - UBS

John Boris - Bear Stearns

Presentation

Operator

Good day, everyone. And welcome to Merck’s First Quarter 2007 Earnings Conference Call. Today's call is being recorded.

At this time, I would like to turn the call over to Mr. Graeme Bell, Executive Director of Investor Relations. Please go ahead, sir.

Graeme Bell

Thank you, Taylor and good morning. Welcome to our call this morning to review our business results for the first quarter of 2007. We know it's been a busy morning for you already and you may have participated in two calls. Joining me on this call today is our CEO and President, Dick Clark and Miss Judy Lewent, our Executive Vice-President and Chief Financial Officer.

Before we get into the details, I would like to through the logistics. On this call, we will review the results contained in the release we issued at 7:30 this morning. You can access this by the Investor section of Merck.com and I would remind you that this conference call is being webcast live and recorded for replay later via phone, webcast and our podcast.

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

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

Forward-looking statements on this call should be evaluated together with the many uncertainties that affect Merck's business, particularly those mentioned in the risk factors and cautionary statements set forth in Item 1A of Merck's Form 10-K for the year ending December 31, 2006 and in its periodic report of Form 10-Q and Form 8-K, which the company incorporates by reference and then are posted on our website.

We will begin with some brief remarks from senior management and then open the call for questions and expect the call to take approximately hour and conclude around about 10 am.

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

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Dick Clark

Thank you, Graeme and good morning everyone. As we announced last week, our first quarter earnings for 2007 were $0.84 per share, excluding restructuring charges related to site closures and position eliminations. Our reported EPS for the first quarter were $0.78, certain one-time gains from asset sales and product divestitures accounted for increased revenue in that quarter.

We exceeded our own expectations for the first quarter, as a result of strong market performance, across all product lines and as a result raised our full year EPS range to $2.75 to $2.85. Excluding restructuring charges and our full year reported EPS range to $2.60 to $2.75. We anticipate second quarter EPS of $0.67 to $0.71, excluding restructuring charges and reported EPS of $0.62 to $0.68 for the same quarter. Judy will speak to this in more details in a few minutes.

Our newly launched products, combined with our inline product portfolio, led us to realize strong gains across all markets. Worldwide sales reached $5.8 billion for the first quarter, an increase of 7% from the same period last year.

Let me summarize some of the product performance highlights. SINGULAIR continues to be the number one prescribed product in the U.S. respiratory market, with year-over-year sales growth of 25%, reaching $1 billion this quarter.

Both ZETIA and VYTORIN, which we market in partnership with Schering-Plough, also performed very well this past quarter. They posted a combined $1.2 billion in sales, a 47% increase from the first quarter of 2006.

GARDASIL, the first and only cervical cancer vaccine approved, is being quickly accepted by patients, physicians and traders. First quarter sales were $365 million and included initial purchase, by many states, the vaccine for children program.

JANUVIA, our first in class treatment for type 2 diabetes, also experienced impressive sales of $87 million in the first quarter. And now that it has been joined by the approval earlier this month of Janumet, we expect that Merck's ability to meet the needs of growing population of people with type 2 diabetes will continue to grow as well.

With each of these products, we are continuing to look for new opportunities, strengthen their value to patients and to Merck. The recent FDA approval of SINGULAIR, by patients aged 15 years and older, who suffer from exercise-induced bronchoconstriction, is expected to further increase the strength of this product in the marketplace.

It is estimated that exercise can trigger an episode of EIB in 80% to 90% of people with asthma. We announced an agreement last month with Schering-Plough to begin development of a new medicine that we combine ZETIA with the atorvastatin once marketed exclusivity for atorvastatin expires.

We are very pleased to have submitted the supplement biological license applications to the FDA and GARDASIL's cross protection data. It shows that GARDASIL provides some protection against additional HPV types, it cause more 10% of cervical cancer worldwide.

And the FDA accepted two supplemental new drug applications, to expand the U.S. label for JANUVIA. These actions reflect our commitment to maximizing the value of all of our inline products; from the day they are launched until the day their patent expires. While we are taking advantage of opportunities like these to drive our future growth, we remain focused on controlling expenses.

Our performance in the first quarter is we believe, further evidence the path we have chartered to return Merck to a leadership position in our industry, is the right one. We still have a long road to travel to realize our long-term goals, but we are executing on our plan with confidence.

And while we were disappointed by the recommendation last week of the FDA advisory committee regarding ARCOXIA and by the decision we reached with Lundbeck to discontinue our joint development program for gaboxadol. Our overall pipeline continues to advance and grow.

By building on the strong foundation we established in 2006, we remain confident that we will continue to progress toward the goal, we set to delivering double-digit compound annual EPS growth, excluding one time items and restructuring charges, by 2010 from the 2005 dates.

Before I turn the call over to Judy Lewent, for what will be her last sales and earnings call at Merck, I want to take just a minute to express to her and to all of you, my deep appreciation for the enormous contribution she has made during her course of her career here at Merck. For 27 years Judy has been an indispensable quite a Merck's leadership team. Her vision, expertise and her integrity have made her one of the most respected incredible people in the field of American business. I will miss her as a colleague and Merck will miss her as a leader.

And certainly when I took over as CEO of the company in May of 2005, it was Judy's support and partnership that really helped us put a strategic planning process together for the company and her leadership really developed the strategic planning initiatives and activity that you see that we are executing against. So as a company and a shareholder, there is a tremendous amount that we owe to Judy.

So, Judy for one more time I'm pleased to turn the call over to you. Thank you.

Judy Lewent

Thank you, Dick. And maybe on this very special occasion and thank you for the kind words, everyone listening on the phone will just pass all the difficult questions over to Dick and I will enjoy my last call.

So thank you and good morning, everyone. As Dick said, we are extremely pleased with our reported results for the first quarter of 2007. And we are working toward insuring sustaining growth in 2007.

The first quarter reported EPS growth was driven by top-line revenue that reflects strong performance of our inline franchises, as well as the rapid early uptake of our first in class DPP-4 inhibitor JANUVIA and a continued strong growth of GARDASIL. Another notable contributor was the outstanding performance of our partnerships and alliances, resulting in improved equity income, along with the benefits from gains from certain product and asset divestitures.

Dick mentioned several of the highlights of the quarter results, a moment ago. So to build up that in the first quarter we saw revenue of $5.8 billion. That represents a 7% increase over the same period last year, including in the aggregate, an overall 0.5% decrease from price, offset by 6% growth in volume and 1.5% positive impact of foreign exchange.

Collectively, worldwide revenue was above our initial expectations and we saw encouraging sales performance from our newer and in line franchises.

Within the quarter, we saw the anticipated decline of ZOCOR and PROSCAR in the U.S. as well as a decline in FOSAMAX in several international markets where there is access to other alginate sodium product.

However, these declines were more than offset by the positive performance of SINGULAIR that showed strong global growth as it continues to experience robust demand driven by continued strength in the asthma and allergic rhinitis market as well as our other inline product and the early success of our newly launched products JANUVIA and GARDASIL.

A major contributing factor to our top line growth came from our vaccine business. Collectively vaccine revenue is recorded by Merck with $903 million for the first quarter representing a 233% increase when compared with the same period in 2006.

Driven by the continued uptake of GARDASIL, ROTATEQ and ZOSTAVAX in the first quarter, our three new vaccines collectively accounted for close to $0.5 billion of revenue and to assist in your modeling, we provided a breakdown of the product revenues with our other financial disclosures.

As Rick mentioned, we are extremely pleased that global sales as recorded by Merck for GARDASIL continued to grow and reach $365 million of which $312 million was recorded in the United States. This quarterly figure includes initial purchases by many states through the CDC's Vaccines For Children program.

Total sales of Merck's other promoted medicines were collectively $1.4 billion for the first quarter, representing a 13% increase as compared with the same period in 2006.

As you know, in the fourth quarter we launched JANUVIA, which is currently approved in 42 countries and now available in every region around the world as the only DPP-4 Inhibitor available for use in the treatment of type 2 diabetes when diet and exercise are not enough.

In its first full quarter, global revenue of JANUVIA reached $87 million of which $83 million was in the U.S. Also contributing to our top line revenues from our alliances, primarily AstraZeneca LP, in the first quarter, revenue recorded by Merck from the company relationship with ADLP was $534 million.

As always, keep in mind that there is inherent variability relating to this revenue given that Merck is not actively managing these products. Our revenue recognition takes into account inventory levels at ADLP for PPI and non-PPI products as well as their product shipments.

Taking the first quarter revenue announced today and adding 50% of the revenues from the Merck Schering-Plough, Merial, Sanofi Pasteur MSD and Johnson & Johnson Merck joint ventures and partnership revenue was $6.8 billion. If you do the same adjustment in the base period, the revenue growth rate was 10%.

Regarding 2007, given the first quarter performance, we are revising upwards, full year revenue guidance for three of our product guidance elements by $900 million to support the higher full year EPS guidance that we initially provided on April 12.

Regarding SINGULAIR, we are increasing the full year range by $200 million to $3.9 to $4.2 billion. Regarding vaccines, we are increasing the full year range by $500 million to $3.3 to $3.7 billion. And regarding other reported products we are increasing the full year range by $200 million to $5.4 to $5.8 billion. And we were reaffirming guidance for COZAAR HYZAAR, FOSAMAX, ZOCOR and AstraZeneca.

Again, as always the AZLP guidance is an update based on recent results as well as future expectations and reflects the dynamics to the PPI markets, multiple generic, OTC products and the uncertainty these create with regard to future volume and pricing.

Also keep in mind that our reaffirmed guidance incorporates the expectations of the non-PPI products as ATACAND, PLENDIL, LEXXEL and ENTOCORT.

Moving down to P&L, materials and production came in at $1.5 billion for the quarter. The quarter includes $118 million for costs associated with the global restructuring program primarily related to accelerated depreciation and asset impairment costs.

Excluding these costs, materials and production increased 24% for the quarter. The gross margin in this quarter was 73.6% reflecting a 2-percentage point unfavorable impact relating to the restructuring cost.

Excluding restructuring charges, the first quarter PGM of 75.6% was within our disclosed guidance range and just as in previous periods these results were affected by the final product mix.

Given this result, we are comfortable with our full year 2007 guidance range and we are reaffirming that our product gross margin is estimated to be approximately 74% to 76%. This guidance excludes the portion of the restructuring cost that will be included in product cost and will affect reported PGM in 2007.

On marketing and administrative, first quarter expense came in at $1.8 billion, which is an increase of 5% over the same period last year. Once again, the primary driver of the marketing and administrative increase was promotional spend for GARDASIL and continuing efforts to more aggressively support the JANUVIA, JANUMET launch.

Again, these were choices made in response to the evolving competitive dynamics to fully support our first-in-class products. These incremental investments are reflected in the strong revenue performance reported this quarter as well as in the higher full year product guidance provided this morning.

Reflecting our commitment to realizing efficiencies throughout the company and optimizing our cost structure, the component of M&A consisting of selling administrative and general administrative costs, which support our core operations, was down year-over-year.

Even as we launch additional new products as they anticipated this year and continue building on the momentum of our successful 2006 launches, we expect that our cost containment efforts and initiatives will allow us to meet our guidance on M&A spending in 2007 and our commitment to maintain flat M&A expenses in 2010 relative to the 2006 base excluding charge taken to increase the legal defense reserves.

Regarding guidance, we’re continuing to provide it on the change in marketing and administrative expense relative to the base period excluding one-time items to help your modeling and we are reaffirming our full year 2007 guidance. That is we anticipate marketing and administrative expense to increase between 0 and 2 percentage points over the full year 2006 level.

The 2006 marketing and administrative expense level referred to, excludes the charges taken during 2006 related solely to future legal defense costs of VIOXX and FOSAMAX litigation.

During the first quarter, the company did not increase the reserve relating solely for future legal defense costs of VIOXX litigation and the company has not established any reserves for any potential liability relating to the VIOXX lawsuits and the VIOXX investigations.

We continue to believe that every case contains unique set of facts and the appropriate strategy is to defend these matters on a case-by-case basis.

Regarding research and development, expenses were $1 billion for the quarter, an increase from the comparable period in 2006 of 9%. R&D growth in the first quarter was driven by an increase in both basic and clinical R&D spend.

Basic research spend increased as a result of the integration and underlying operating expenses of the Sirna, GlycoFi and Abmaxis acquisitions. In addition, clinical research expenses were higher in support of Phase III trial for MK-0524A and MK-0364, Incretin and other late stage products.

During the first quarter of ’06, Merck entered into several agreements reflecting our strategy and let me correct that during the first quarter of ’07, Merck entered into several agreements reflecting our strategy of establishing strong external alliances to drive both near and long term growth.

And currently, Merck is in discussions with more than 35 companies regarding potential transactions and is also actively monitoring the landscape for a range of targeted acquisitions that meet the company's strategic needs.

We are reaffirming our 2007 guidance for research and development expense and anticipate it to increase at a low to mid single digit percentage growth rate over the full year 2006 level.

The 2006 level we are referring to includes the $296 million acquired research charge relating to GlycoFi that occurred in the second quarter, but excludes the impact of the acquired research charge relating to the Sirna acquisition.

The full year 2006 level also excludes the portion of the restructuring costs that are reported in research and development expense.

Moving on to restructuring, total costs associated with the company's global restructuring program were 186 million for the first quarter. As I just mentioned, $118 million of those were for asset related charges and are included in the materials and production.

So, in our first quarter results, the restructuring cost line reflects $65.8 million of costs related to the global restructuring program for employees separation and other related costs associated with approximately 230 positions eliminated, bringing the total to 5100 today, and then remaining, keeping us on track, to eliminate 7000 positions by the end of 2008. However, the company does continue to hire new employees, as a company's business requires it.

Accordingly, we are reaffirming the guidance associated with our global restructuring program for 2007. Additional costs related to site closings, position eliminations and related costs will be incurred in 2007 as part of the company's restructuring of its operations.

The aggregate 2007 pre-tax expense related to these activities is estimated to be $300 million to $500 million. In reviewing equity income from affiliates, roughly $653 million of income in this quarter, related to the contributions from all of our joint ventures.

This result reflects the continued success of the Merck Schering-Plough cholesterol franchise in the U.S. and Europe, and the performance of the Merial animal health business. As always, I would remind you that there are several components to AZLP equity income, which make it inappropriate to draw significant conclusion just based on PPI products.

There are complexities that involved at a minimum timing and tax differences. That said, the first quarter equity income contribution from Merck share of the partnership with AstraZeneca LP with $212 million.

Regarding the Merck Schering-Plough partnership. The first quarter combined MSP cholesterol franchise global revenue, as reported by the Merck Schering-Plough partnership, continued to grow to $1.2 billion.

In the quarter, revenue of VYTORIN and ZETIA were $624 and $544 million respectively. Within Merck's quarterly income results, the Merck Schering-Plough partnership contributed $347 million. And that reflects an 85% increase over the prior year.

The balance of equity income comes from other joint ventures, namely Merial, Sanofi Pasteur MSD and Johnson&Johnson Merck. Again, Merck's 50% of the revenues from the Merck Schering-Plough, Merial, Sanofi Pasteur MSD and Johnson&Johnson and Merck joint ventures and partnership, totaled $1.1 billion in the first quarter, up from $800 million in 2006.

Given this result, we were reaffirming our guidance for full year 2007, and continue to expect equity income from affiliates to be approximately $2.6 to $2.9 billion. Turning to other income in the quarter, you see we recorded $256 million of income as disclosed in our other financial disclosures.

And then in another gain, you will see of $188 million. This primarily reflects the favorable impact of gains on sales of assets and products divestitures. During the quarter, it wasn't disclosed that the company divested the U.S. prescription pharmaceutical rights to tested oral suspension entire oral suspension to Cerus Pharmaceuticals Limited and divested the worldwide rights to Ambrilia tablets and INDOCIN capsule, the pain relief capsules, suppositories and oral suspension to a local pharmaceutical LLP.

Now for the quarter, income before taxes was $2.3 billion. Taxes on income in the period were $550 million, and the reported tax rate was 24.4%. This reflects in general the changes in foreign and domestic mix and currency fluctuations, and as you know these elements changed throughout the quarter.

Effective January 1st, 2007, the company adopted FIN 48 accounting from certainty and income factors. This adoption resulted in increasing retained earnings of approximately $80 million.

Of course, this does not affect net income. We are reaffirming our full year 2007 tax rate guidance range, and I would direct you to today's press release for the details. Moving to net income and earnings per share.

Net income for the first quarter of 2007 was $1.7 billion, compared to $1.5 billion in the first quarter of 2006. And that represents growth of 12%. During the quarter, we spent $240 million in treasury stock, and we now have $6.3 billion under the current authorization from the board with no time limit.

And in summary, earnings per share for the first quarter were $0.84, when one excludes a $0.06 charge for site closures and positions eliminations primarily associated with the global restructuring. Our reported first quarter EPS was $0.78.

Now let me turn briefly to our guidance. I have mentioned it several times as part of the results review. But, as you will see in today's release, with the exception of our upward revision to SINGULAIR vaccines and other reported products, we are reaffirming all the elements of our 2007 guidance. And all the details of the guidance are provided for you in the earnings release.

Given these guidance elements, Merck anticipates second quarter EPS of $0.67 to $0.71 excluding restructuring charges. And anticipates reported second quarter EPS of $0.62 to $0.68.

In the second quarter, the company anticipates that revenue will be comparable to the amount reported in the first quarter of 2007. In addition, it's worthy of note that research and development expense excluding restructuring charges, is anticipated to be higher than the amount reported in the comparable period of 2006.

The company reaffirms full year 2007 EPS of $2.75 to $2.85 excluding the restructuring charges related to site closures and position eliminations, and anticipates reported full year 2007 EPS of $2.60 to $2.75. While we were pleased with our performance in the first quarter, it is important to note that we are still only three months into the year, and we need to continue to execute on our business plan.

Based on our current full year guidance, we anticipate that earnings per share excluding restructuring will grow in the range of 10 to 16% in the last three quarters of the year, versus the last three quarters of 2006, excluding Sirna and restructuring.

There are many factors that impact the variability within the given year that needs to be considered when modeling. For example, in the first half of 2007, we are still facing the annualization of the loss of marketing exclusivity for simvastatin and finasteride.

In addition, while we were very pleased with the initial successes of the recent launches, you all know there is inherent variability of a continued uptake of new product launches.

As part of the full year guidance, we anticipate the promotional spend will moderate. That is decline particularly when we think about the pattern last year and the fourth quarter 2006 levels, and decline across divisions as products move out of early launch phase and commercialization efficiencies are realized.

We also expect efficiencies to be delivered from new initiatives and provide savings within our general administration costs structure. As stated, this guidance does not reflect the establishment of any reserves for any potential liability related to the VIOXX litigation.

And in addition as Dick noted, the company remains on track in terms of both strategy and performance, to deliver long-term double-digit compound annual earnings per share growth from 2005 to 2010, excluding one-time items and restructuring charges.

I also want to continue to emphasize, that we have the financial strength to support our dividends, and we remain fully committed to maintaining it at the current level, while at the same time continuing to fund our investment priorities.

With that, I will turn the call back over to Graeme.

Graeme Bell

Thank you, Judy. We will now open the call to take your questions. As usual, we will take the questions in the order, in which they were received, and try to get through as many as possible.

And at this point, I will turn the call back to Tiler, who will communicate instructions about Q&A format and then introduce the first question.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Chris Shibutani of J.P. Morgan.

Chris Shibutani - J.P. Morgan

Thanks very much. Could you provide us with an update on GARDASIL, obviously good uptake from the state, what percentage of the state do you expect we’ve already seen that and the timeline for additional state?

And also what do you are seeing in terms of the actual compliance for the second and third dose at any given patient or process?

And then finally, could you provide us with an update on your cardiovascular pipeline at 524B anything to know incrementally there and also sometime better -- commented on their commitment?

Dick Clark

Thank you, Chris. Just to, there was an audio problem, just so I understand your questions. You had two with regard to GARDASIL, one with regard to compliance in terms of second and third dose and another one with regard to the build of the revenue in terms of how much has been consumed.

And then there was a question with regard to the pipeline in the cardiovascular profile. So let me start with the last question first in terms of the cardiovascular pipeline. As we’ve indicated, and we remained committed to our 524 program in the form of 524A and 524B and we remained on track with both of those products.

And as we previously disclosed it indicated there was an expectation that we file 524A in the calendar year 2007. And we will file 524B in the calendar year 2008. With regard to GARDASIL.

Judy Lewent

Peter, I think it's too early yet to talk about the uptake for the second and third dose for GARDASIL. However, we have worked with the payers and physicians to put reminders programs in place and be able trigger from a compliance standpoint that we have more success and will be able to monitor that.

Just another comment around the CDC contract. To date, 53 out of 55 projects have adopted GARDASIL. Each of the 50 states and project in five cities until we are happy with that.

And from an uptake on the state standpoint, it’s going take the time it takes to get through the committee, the vaccine committee in each state and then the uptake and discussion with the state within the legislature. So, it's hard for the timeframe on all of that.

Graeme Bell

Next question, please.

Operator

Your next question comes from Tony Butler of Lehman Brothers.

Tony Butler - Lehman Brothers

Thank you, very much. First, Judy, thank you very much and certainly all the best. Second, if we can expand upon the GARDASIL commentary, when we think about the fraction of states you mentioned that, Dick.

Does this just simply imply that we’ve got a fair inventory build on GARDASIL currently that we have to work through based upon the state legislation, legislators throughout the remaining part of the year?

That's really the first question. The second question is, Graeme, if I'm not mistaken was 524A to be filed in Q2 of this year, was that the previous guidance. And moreover, could you comment about the integration inhibitor 0518 again, the timing on that project. Thanks a lot.

Dick Clark

Thank you Tony. I’ll take the last part of the question first. So, we have always said and remain committed to the 524A being filed in the calendar year 2007. We have not been specific on the exact timing.

And with regards to the ISENTRESS question, on that particular NDA, we have indicated that we will file the NDA with the FDA in the second quarter of 2007.

Judy Lewent

I think regarding GARDASIL, we obviously know that the initial purchases by many states has and is affected. Now the pipeline is full and we have to get it to the children. But there is also vaccine and there are also for second and potentially third dose.

So, we feel comfortable with where the future pipeline is. But there are obviously some initial stockings. I think the other good news is that, the managed care plans representing about 97% of privately insured life U.S. more than 140 insurance plans have implemented coverage for GARDASIL.

And that even better news I think approximately 75% of the plan members have first dollar coverage for GARDASIL which essentially means no co-pay. And I think when you put those combinations together with the fact that there’s a 118 million girls and women in the U.S. and EU and at highly developed markets, so the appropriate age we feel very comfortable with the future forecast.

Graeme Bell

Thank you. Next question, please.

Operator

Your next question comes from Timothy Anderson of Prudential Equity Group.

Timothy Anderson - Prudential Equity Group

Thank you. I have a couple of questions. Can you talk about the company's inclination to do corporate acquisitions that are bigger in size than what you have been doing over the past few years?

And second question is, kind of a another general question, which is that revenues for Merck and I think almost all of the drug companies have thus far have come in well above forecast in the first quarter.

And I'm wondering if there is seasonality to this purchasing now that Part D is in full effect. My question is whether these very strong trends you think, will they continue unabated throughout the rest of 2007, or is there some new structural dynamic that could reverse these trends later on? And the reason I ask you is because of your big beep this quarter, but not really raising full year earnings as much as would otherwise be suggested?

Richard Clark

I think I am answering your first question, the issue around corporate acquisitions. We have said in the past that we are interested not only in science and technology acquisitions, which obviously we did in 2006, but acquisitions that would help build the top line from a revenue standpoint and at the same time hopefully aligned with our therapeutic areas that our research organizations focused on. Having said that, when we look at those potential acquisitions, we also have a responsibility from a shareholders standpoint to make sure that there is long-term value there.

And that as we go through that process and as other companies are going through their process, that it's appropriate that value is there for the long-term. And so we were focused on that, but we are not going to do an acquisition just to do an acquisition. It really has to strengthen where we are today in the future and quite frankly where we are with our pipeline and where we are with some of our results, have to be taken into the equation because the internal growth, the organic growth of the company right now is pretty positive.

Judy Lewent

I think just relative to some of the questions on the top line. Just a couple of thoughts, first of all, for Merck, I will speak to Merck. What you are seeing here is really just successful uptake of our new product launch, that's fundamental. That's not a structural change per se in the marketplace. That's the result of the performance that we just discussed with you about the vaccine and the stellar performance of the vaccines, the new vaccines as well as JANUVIA. And then the excellent performance of SINGULAIR, which as you know has doesn't really have that kind of seasonality to it, except perhaps as we go into the allergic rhinitis season, which doesn't start until late in the first quarter. And so that's something that unfolds during the year.

And in terms of the guidance, we increased our guidance $900 million and that is for the full year. So we are driving that increase in our earnings per share guidance based on taking up the revenue element. But as we noted, we are continuing to fund R&D and stay in line with all of our guidance on our expense elements. We think a combination of that those factors lead you to the range that we guided to today and then starting on April 12th.

Richard Clark

One other point is one thing I'm pleased about is that when you see the results of the first quarter and the growth as Judy said earlier, it really is across all regions of the company.

So it's not just in the United States. Every region has performed and why we feel confident in that and many of the new products even though we launched GARDASIL and JANUVIA obviously in the United States and other countries, there is still a substantial amount of countries where it 's even approved then we have to get ready for launch and then in some countries have approval and a launch. So we are still in a very launch growth pattern from a company standpoint with our new products. Globally.

Graeme Bell

Thank you. Next question, please.

Operator

Your next question comes from comes from Jamie Rubin of Morgan Stanley

Jamie Rubin - Morgan Stanley

Thank you, and again, Judy, you had a remarkable career and you’ve got huge shoes to fill. So congratulations. Just a couple questions. First related to the gross margin, the guidance this year is you have kept the guidance at 74% to 76%. Yet this quarter your gross margins excluding restructuring was 75.6% and what would arguably be your toughest comparison with U.S. ZOCOR sales up the strongest first quarter last year and I would also think that GARDASIL margins are probably at its lowest as you continue to launch that product, so 75.6% seems to be a good start for the year, yet you are sticking to your 74% to 76%. So maybe you could speak to that a bit?

Secondly, my question relates to FOSAMAX and the newly issued EU patent. Just wondering how we should think about our modeling of international or European FOSAMAX sales 2008 and beyond, as I think most of us assumed patent expiration.

And then my third question relates to the integrase inhibitor. If you could talk about the profile, what you are planning to include in your initial filing? If you are planning to include front line results and where you are with your once a day version? And just so if you could also comment on what you see in terms of the competitive dynamics of Gilead. Thanks.

Judy Lewent

So thank you, Jamie. Let me start with the question on gross margin. Basically, you do need to think about the evolution of sales over the year. So where as yet GARDASIL had a major impact in the first quarter, we increased our guidance on the vaccine -- total vaccines per year, $500 million.

As you know, GARDASIL carries with it a royalty obligation of 24 to 26%. So, we continue to factor in our annual guidance sort of the dynamics of the product mix. In addition, bear in mind that COZAAR continues to be a strong contributor, and as you know because of our relationship with DuPont has a lower product gross margin than some of our other inline products.

I think again we were factoring in our view of how the year evolved, and some of the uncertainty in these dynamics of the product mix that just continue to give us comfort with the 74 to 76% ex restructuring.

Dick Clark

Jaime, regarding FOSAMAX, as you stated, we have done the filing of our lawsuit and the new patents effectively needling 23 countries in Europe. And the patent expires on July 17, 2018 now. And obviously for this reason the filing of the suits against these manufactures is an effort A to recoup our financial losses caused by these infringement activities.

And then I have these products removed from the market. It's hard to say the impact of this and what it is going to be in the future. The outcome of Merck's legal actions may not be realized for several years. And so obviously we are studying it hard that it's very difficult to have any answer to that.

Graeme Bell

And Jaime, I will take your question with regard to ISENTRESS. So, as previously stated we remain on track and are committed to ensuring the NDA has filed with the FDA in the second quarter for treatment experience indication for which we have received the fast track designation.

We therefore anticipate action on 518 by the end of 2007, and if approved, we plan to launch ISENTRESS in 2007. In addition, there is a phase III program underway in treatments naïve patients.

And with regard to the clinical data in the profile on February 27 of this past year, at the CROI meeting, we presented interim Phase III, 16 weeks data for two of the ongoing studies for ISENTRESS in treatment experienced patients whose HIV was resistant to at least one drug in each of the three classes of oral antiretroviral therapies.

And the investigational drug ISENTRESS was generally well tolerated in all of the studies and would be happy to share that CROI data with you. With regard to what is happening in the program, on August 17 of last year, we announced the establishment of the worldwide-expanded access program for ISENTRESS, for HIV and AIDS patients with limited or no treatment options. And that program is enrolled, and we are seeing that patients are using the product.

Next question, please.

Operator

Your next question comes from David Risinger of Merrill Lynch.

David Risinger - Merrill Lynch

Yes, thanks very much. I have three questions. First, and I apologize if maybe have been asked before because I have been on and off the call. First question is in terms of other net; the number in your press release was 187.7 million in the first quarter of '07 versus 47 million in the first quarter of '06. If you could explain that and tell us what type of anomalies were in there and whether we should expect that figure to decline sequentially in the second quarter of '07?

And then second, in terms of revenue, the revenue came in impressively at three -- I'm sorry, at $5.8 billion in the quarter. Looking forward over to the next three quarters, is there any reason why that revenue figure should go down?

And then the final question is, in terms of ex-U.S. FOSAMAX; I understand that it's generic in the U.K., but that the generic penetration is very low. However, generics have launched in other countries and if you could just walk through where the patent had been broken in other countries.

And if it hadn't been broken yet there have been generic incursions into other countries, if you could just help us explain why Merck wasn't able to stop the generic launches in other countries where the patents hadn't been invalidated? Thank you.

Judy Lewent

So, let me start with the question on other net income. As I noted earlier, that $188 million reflects certain one-time items from asset and product divestitures such as our sale of Pepcid Oral Suspension as well as ultimate some of andesine products. So, as you can appreciate those are one-time events, and therefore they are not going to recur in the second quarter.

We, as you know, don't forecast when those other opportunities might occur. We always re-assess our product line, and a lot of these particular transactions are linked to our network strategy in terms of how we are leaning on our supply chain and so on.

So, we continue to evaluate our product line in that regard, but I can't really forecast what if anything might happen other than what happened in the first quarter of '07. And therefore you sort of need to take that as a one-time event.

Last year, in the first quarter there was really nothing of note. There were the normal pushes and pulls of, you know, again, some other income and other one-time adjustments, but nothing really worth calling out. So, I think that provides some of the perspective there.

Dick Clark

I think in the question also around the guidance for the remainder of the year where we are in the first quarter, you know, and Judy and I spent a lot of time talking about this. Although we are pleased with the first quarter obviously, we also know that we were only three months into the year and we need to execute against the business and do it flawlessly to continue that growth pattern.

And as Judy said, the base of our current full year guidance, we anticipate that EPS ex restructuring will grow in the range of 10 to 16% in the last three quarters of this year versus the last nine-months of the base period, which is very important.

And with that said, there could be a lot of variabilities around business profiles for the year as we launch our new products, continue to launch our new products. And we still have the issue with first half of '07 with the loss of the Simvastatin, ZOCOR patent.

So there is still a lot to do and there is obviously variability in the continued uptake in new product launches and potential competition. And we also want to make sure with the quality our full year guidance and we maintain our credibility. And as we see changes, we will obviously react to them.

But I think that 10 to 16% growth range for the last nine months compared to -- for the next nine months compared to last year is significant for us.

Graeme Bell

Dave, with regard to your question on FOSAMAX, I would point you back to our 10-K filing in that we state the following and it hasn't been updated since then. So, it basically indicates that Merck's basic patent covering the use of the alendronate sodium has been challenged in several European countries.

And the company has reviewed adverse decisions in Germany, Holland and the United Kingdom. So the decision in the U.K. was upheld on appeal and you know the situation there.

We have appealed the decision in Germany and Holland, and yet company expects a significant decline in European sales of FOSAMAX after the loss of exclusivity period. So, the countries where there is current generic penetration predominantly are in Germany and Holland and obviously the United Kingdom. So, I refer you back to that section in the 10-K. Next question, please.

Operator

Your next question comes from Bert Hazlett of BMO Capital Market.

Bert Hazlett - BMO Capital Market

Thanks. I have couple of product questions. First on ROTATEQ, do you expect any impact as a result of the MTES assumption, discussions earlier this year? CANCIDAS saw some pressure in the U.S. Should we expect that to continue?

And last on ZOLINZA, again a modest rollout initially, but there seems to be a considerable amount of interest in this product. Can you discuss the timing and rollout of the data? What should we expect and what additional indications are being sought? Thanks.

Judy Lewent

So, let me just start on CANCIDAS. As you may recall, there was a price reduction last year and of over 20% on one of the major dosage strengths there and that really had the impact on the product profile. So that really stole dynamic, which we must take into consideration as you look at how Cancidas is progressing.

Dick Clark

And with regard to your question on ZOLINZA, our novel HDAC which we acquired through the acquisition of Aton, October the 6th, marked the approval for the treatment of Cutaneous T-cell Lymphoma, and that initial indication as you can see has began to roll out by virtue of the fact that we recorded revenue this quarter. And ZOLINZA is Merck's first targeted cancer therapy for quite sometime.

With regard to incremental studies, we have studies on going in hematological melanoma, solid tumor types including acute myelogenous leukemia, multi-Mellamias. I believe we’ve got ongoing studies in Non-Small-Cell Lung Cancers. In addition, ZOLINZA is being evaluated broadly across a wide range of solid tumor types. So, we have an extensive program underway and we are certainly committed to the HDAC program and oncology generally.

Graeme Bell

Thank you. Next question, please.

Operator

Your next question comes from Chris Schott of Banc of America.

Chris Schott - Banc of America Securities

Great, Thank you. Just two quick questions. First on MK-859, your CTP, following the recent to your subscripted data, anything you took away from that. I guess specifically have you made decision whether to move forward into Phase III. If so are you expecting you have run imaging studies before the larger morbidity mortality study?

And then a second question, ARCOXIA following the recent panel review, can I know what’s your next step here assuming the FDA request for additional data? Is this a product you would run further studies if they were required to get on the U.S. market. Thank you.

Dick Clark

I think the question on 859 is its still under evaluation by us based on the limited information that was provided. And what we are looking at internally and it's interesting to note that in addition the product development criteria that we have for 859 that we established previously increase in HDL greater than 50%, reduction of LDL of greater than 20% and the important affect on blood pressure that was similar to placebo, that 859 really hit those end points.

And so it's important that we take that good information that we have and relate it to the issues that may exist or may not exist for the class. It's early for us to be able to talk about that yet. Certainly, when you talk about ARCOXIA, we are disappointed in the outcome. We continue to believe that ARCOXIA has the potential to become the valuable treatment option for many Americans suffering from osteoarthritis. And the anticipated date for the action by the FDA is April 27 for the six-month timeframe.

And we are going to continue to work with FDA on that. Obviously, we are continuing to market ARCOXIA outside the U.S. where it has been approved where broadly with some indications and where they have seen this data that we submitted to the FDA. So, it's too early to tell for the next steps.

Graeme Bell

Well, we will continue on. We still have many questions in the queue. We have inquisitive group this morning. So let's keep ongoing. Next question, please.

Operator

Your next question comes from George Grofik of Citigroup.

George Grofik - Citigroup

Thanks for taking my question. On GARDASIL, can you comment on what kind of off label uptake you may have had in the mid adult female population? And secondly, if you can give us an update on the timing and venue of the presentation of enhanced study results for VYTORIN? Thank you.

Dick Clark

With regard to enhanced, as we have indicated the analysis that's good ongoing, we are still going with that information and we will pick an appropriate scientific forum in order to disseminate the enhanced data when we are ready to do that. With regard to GARDASIL…

Judy Lewent

Think we can't comment on that. I just don't know that information.

Dick Clark

I think what we have seen anecdotally, is this within the age range that is approved, we have seen broad uptake across all of that age cohort, whether it's 9 all the way through 26 at this stage. But again we don't have any off label specifics. Next question, please.

Operator

Your next question comes from Steve Scala of Cowen

Steve Scala - Cowen & Company

Thank you. I have two questions. First on the Q4 call, Judy, you mentioned that GARDASIL sales were demand-pull and not inclusive of stocking in clinics and so forth. I assume this is still the case. But, perhaps you can confirm. And secondly, when will we get visibility on whether Merck will exercise its 2008 option on AZLP, or should we assume that Merck will not exercise that option? Thank you.

Judy Lewent

So, you know, whereas I don't have my transcript in front of me, Steve, I do have a recollection that the fourth quarter of '06 was noteworthy in terms of getting approval for the VFD contract. So there was uptick in the fourth quarter for the VFD contract. And that's really consistent with my comments in the first quarter of '07.

As far as the 2008 options, as you know, it's too early to call that. We do not have to really declare anything on that until really into the first quarter of 2008. I will say that part of the transition, I am working both internally and with our partner Astra just to ensure that there is a smooth hang off there so that we are all aligned on the process and we understand what needs to be done in the months ahead.

Graeme Bell

Next question, please.

Operator

Your next question comes from John McCoy (Ph) of Natexis.

John McCoy - Natexis

Yes, thanks for taking my call. Did you guys see any affect from the so-called doughnut hole in the Medicare plan, in that or did people buy into January trying to avoid hitting that doughnut hole in December towards the end of last year? Thanks.

Dick Clark

That data really isn't available to us. That's really hard to make a prediction based on that.

Graeme Bell

Next question, please.

Operator

Your next question comes from Seamus Fernandez of Leerink Swann.

Seamus Fernandez - Leerink Swann

Thank you. Can you hear me?

Dick Clark

Yes.

Seamus Fernandez - Leerink Swann

Okay, great. I just wanted to get an update on the timing of the first VIOXX appeal, when we might see that? Second, can you verify for us that the trials that have started with 524B are with the single pill combination? Third, can you also update us on the potency efforts regarding the Varizella based vaccines and where you are in that process?

And then, just finally in terms of this suit that you have filed versus Teva and Barr, which is a manufacturing suit on FOSAMAX in the U.S., is there a possibility that this suit could allow generic exclusivity? And if so, is there some form of an agreement that you have for an authorized generic that we could possibly see with FOSAMAX in the U.S.? Thank you.

Dick Clark

Lets take them in reverse order. With regard to the FOSAMAX situation, we are a party by name only in that ongoing discussion, by virtue of some intellectual property that was licensed. So we are not integrally involved in that ongoing discussion and dialogue.

And then, jumping to your first question, if I may, Seamus, with regard to the appeals process. In terms of where we are on that, as you know, the first case, which was Ernst in Texas, the appeal brief in that case was filed on April the 5th. So at this point we are still in the very formative stages of that appeals process.

And today that is the most advanced of the appeal. So again, we are appealing and in the process of appealing Ernst, Garza, Conna/McDarby, Plunkett, Barnett and Humeston and we will progress and continue to provide you updates. But as I say, even the most advanced of those is Ernst and appeals briefs were only filed on April 5th.

Dick Clark

Your question concerning Varizella potency. We were making excellent progress on the issue. We certainly have narrowed it down to three variables and we are looking at these variables and validating the variables and at then taking it into full production to see the impact. So the progress is being made. We were in validation stage now to see whether the probable cost is where we think it is and we should know that very shortly.

Graeme Bell

Next question, please.

Operator

Your next question comes from David Merris (ph) of Balyasny Asset Management.

David Merris - Balyasny Asset Management

Good morning. Just a follow-up on, is this the most extensive oncology program that you have on going? And then is there going to be any data at the upcoming ASCO and if so what data should we expect?

Dick Clark

All right, thank you. I’ll take that quickly. The answer is yes. It is the most advance program that we have in terms of the HDOT program within oncology at this time and its extensive in nature with many on going studies. And as you know, oncology is certainly a focus of area.

And with regard to when and where, we have not disclosed this point in what forum we would be disseminating the next round of the data. And with regard to the prior participant's question, I just want to be very clear, with regard to 524B; at this moment in time that trial is being run co-administering 524A with Simvastatin.

So at this moment in time, none of the participants are ingesting the triple combo. Next question, please.

Operator

Your next question comes from Joe Tooley of AG Edwards.

Joe Tooley - A.G. Edwards

Hi. Good morning. I just want to follow up on the earlier pipeline questions with one on the CB-1 antagonistic MK-0364. It's my understanding you may be looking at lower doses than were originally studied for the drug and given FDA's long-term follow-up requirement for obesity compounds.

I was wondering if you could confirm your 2008 filing guidance or the potentially lower dosage range could result many filing delays?

Dick Clark

I think it's something that we can't comment at - comment with right now from a statement on what’s going to happen in 2008 with that product. You know, it's an important study for us. We've initiated a focus Phase III program in fourth quarter of '06 and we still anticipate filing in this drug in 2008 but we aren't ready nor do we know a lot of the details around the particularly around Phase III outcomes.

Graeme Bell

Next question, please, Taylor.

Operator

Your next question comes from Roopesh Patel of UBS.

Roopesh Patel - UBS

Thank you. Just couple of questions, first on GARDASIL in terms of the first quarter GARDASIL sales, can you give us a rough sense as to what proportion the sales were first dose versus second or third dose on GARDASIL.

And then separately if I look at the total vaccine sales reported this quarter approximately $900 million, you’ve raised the guidance for total vaccines for the full year to between 3.3 to 3.7 but that implies that sales in subsequent quarters relative to the first quarter will be flat to down looking forward.

And I was wondering if you just offer a little more clarity as to what are the dynamics that could influence the trend in that direction? Thanks.

Dick Clark

Well, certainly. Your first question, it is early for us to be able to give statistics around the uptake in the second and obviously the third dose. And that data really isn't available other than you know some dialogues with physicians.

So that we’ll have to wait until we get much more experience and much more uptake. And as I said earlier, we have programs in place to help reminder down from both from the physician and the patient. But it is a good question. It's just too early to answer it.

Graeme Bell

Thank you, so given the time, we have one or two more questions. So Taylor, please.

Operator

Thank you. Your next question comes from John Boris if Bear Stearns.

John Boris - Bear Stearns

Good morning, and thanks for taking my questions. I just have three; first one, just as or is more related to cost of goods. Dick, can you just talk about vaccine yields and I think this year's pretty important year for improving vaccine yields.

The type of progress you are making there? And then secondly it seems like there were a fair amount of asset sales going forward. I guess, while all of a sudden are we seeing more asset sales and should be anticipating asset sales of the smaller products going forward.

Secondly, I think, this question relates more on the acquisition side. I think earlier in the year you did mention that you were interested in a Biotech acquisition that was aligned from a research therapeutic standpoint with your R&D operations. But would have inline revenues that are actually approved and sold and marketed and have a P&L.

Can you just comment on for that type of acquisition what Merck's defined internal rate of return would be for that type of acquisition? And then third on ISENTRESS, I think you wanted to file it in the second quarter I think this is one of your important projects for compressing cycle times.

Can you comment as to whether the product has been filed already and you are just waiting for the FDA to indicate that they have accepted the filing. So any type of insight there would helpful? Thank you.

Dick Clark

On your last question, we cannot comment on filing and the timing of it. Other than what we have been already stated publicly. So that is our information we are very comfortable with it.

Your question about cost of goods in biologics and vaccines, the good news is that we are making progress there and I think the manufacturing organization is doing a great job of looking at the cost of goods line and trying to focus all the efficiency and effectiveness that we need to be able to accomplish that and obviously when you see the increase in the forecast of vaccine and biological is a part of that is, is productivity and throughput to be able to support that.

So it is a major initiative for us, not only for this year, but for the five year plan that we have and that we are making the progress in manufacturing to be able to accomplish that, so I feel good about that.

And I would say on the asset sales, there is no integrated focus on selling assets of those types. It was just an opportunity, it was the right thing for the company, and the other companies who are interested in it. So it was a one-time impact.

Obviously, from an asset standpoint, as we look at the manufacturing strategy moving forward, there are going to be assets and available based on potential plant closings and when you do that you really step back and look at those assets and see what kind of values they brings to other partners that we have that would be help, but nothing more specific than that.

Graeme Bell

So, with that last question, it concludes today's call. The information on today's call both in transcript and replay will be available on our website for the next seven days and as always we and IR remain available for the rest of the day.

We certainly appreciate your interest in participation. So with that operator thank you very much.

Operator

Thank you. This concludes today's first quarter 2007 earnings conference call. You may now disconnect.

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