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Executives

Alex Kelly -

Kenneth C. Frazier - Chairman, Chief Executive Officer, President and President of Global Human Health

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

Peter N. Kellogg - Chief Financial Officer and Executive Vice President

Analysts

Charles Anthony Butler - Barclays Capital, Research Division

Seamus Fernandez - Leerink Swann LLC, Research Division

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Jami Rubin - Goldman Sachs Group Inc., Research Division

Catherine J. Arnold - Crédit Suisse AG, Research Division

Tim Anderson - Sanford C. Bernstein & Co., LLC., Research Division

John T. Boris - Citigroup Inc, Research Division

Mark J. Schoenebaum - ISI Group Inc., Research Division

Steve Scala - Cowen and Company, LLC, Research Division

Marc Goodman - UBS Investment Bank, Research Division

Christopher Schott - JP Morgan Chase & Co, Research Division

Michael K. Tong - Wells Fargo Securities, LLC, Research Division

Merck & Co. (MRK) Q4 2011 Earnings Call February 2, 2012 8:00 AM ET

Operator

Good day, everyone, and welcome to Merck's Fourth Quarter 2011 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Alex Kelly, Senior Vice President of Investor Relations. Please go ahead.

Alex Kelly

Thanks, Brooke, and good morning, everyone, and welcome to Merck's 2011 Fourth Quarter Conference Call. Before I turn the call over to Ken Frazier, I want to mention a few housekeeping items. First, there are a number of items in the GAAP results such as acquisition-related charges, restructuring costs and certain other items. We have excluded those items from our non-GAAP results, and you can see our reconciliation tables in the press release and also in Table 2 that accompanies the press release. That will help you get a better understanding of the underlying performance.

Next, we've also provided tables to help you understand the sales of our key products around the world. There are 3 tables in the press release. Table 1 is the GAAP results. Table 2 reconciles GAAP, P&L items to non-GAAP. And the third table provides the summary of our product sales. During the call we will be referring primarily to Tables 2 and Table 3.

Finally, I'd like to remind you that some of the statements we make during today's call may be considered forward-looking statements within the meaning of the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. The statements are based upon the current beliefs of management and are subject to significant risks and uncertainties. And I invite you to refer to our SEC filings including our 10-K, especially Item 1A which identifies certain risk factors and other cautionary statements which could cause our actual results to differ materially from any forward-looking statements we make today. You can see our SEC filings as well as our press release and other tables on our website, which is merck.com.

This morning I'm joined by Ken Frazier, our President and Chief Operating Officer and Chairman of our board; Adam Schechter, our President of Global Human Health; and Peter Kellogg, our Chief Financial Officer.

Now I'd like to introduce Ken Frazier.

Kenneth C. Frazier

Thank you, Alex. Good morning, everyone, and thanks for joining us on the call today. As we close out 2011, we remain as committed as ever to our mission of translating cutting-edge science into medically important products that make a real difference in people’s lives. During the course of this last year, I had the opportunity to meet with many of our customers, including leading physicians, large health plans and health ministers around the world. What I consistently heard reinforced 2 points to me. First, there is still a progress agenda. The world will reward those companies that can create and deliver innovative medicines and vaccines that address unmet needs. Second, there is a productivity agenda. In the face of rising health care costs, those companies that can drive significant productivity gains, both for their customers and within their own operating models, will be the ones who survive and thrive. That is why doing great science and delivering customer value both in a sustainable manner remain the broader context for everything we're doing at Merck. Having said that, I'd like to now turn to our fourth quarter and 2011 results.

We closed out the year with a high-quality fourth quarter growing the top line 2% and the bottom line 10%. Our overall performance in 2011 confirms our ability to deliver strong operational results in the short term while investing for growth over the longer term. In addition, it gives us confidence that we can achieve our ambitious plans for 2012 and beyond.

One of the differentiating success factors that allows companies to succeed over the long term is their ability to respond to the challenges they continue to face. I'm pleased with the way our teams responded to and overcame the challenges we encountered in 2011. In fact, we grew full year 2011 sales by 4% and leveraged our cost base to drive a 10% increase in non-GAAP EPS. This performance is an early indicator that we are on the correct path with our strategy, which focuses on executing on our plans to optimize our core business, expanding in key markets around the world extending our presence in complementary businesses like Consumer Care and Animal Care, and accelerate -- excelling at operating our business for maximum efficiency so that we can invest for future growth. We fully intend to execute this strategy well, which will lead to strong and sustainable cash flow and increase shareholder return. I outlined the fundamentals of this strategy during our recent R&D day, and today I will talk about how we executed against it in the fourth quarter and the full year.

Our results this quarter and for the full year were driven by broad strength across our in-line portfolio with double-digit growth from our key brands. This growth underscores the benefits of maximizing our portfolio and has allowed us to maintain or begin building a leadership position in selected therapeutic areas. For example, JANUVIA is now the #1 oral antidiabetic medicine globally. As always, Adam will discuss our product performance in more depth.

Among our major accomplishments in 2011 was protecting the value of one of our key franchises by successfully resolving the arbitration with J&J. As you will recall, the agreement allows us to maintain the majority of the REMICADE and SIMPONI value. We believe these products will make important contributions in 2012 and beyond.

In addition to driving growth in our key products, we remain firmly committed to translating cutting-edge science into medically important medicines and vaccines. Perhaps the most notable R&D accomplishment of 2011 was the approval and launch of VICTRELIS in North America, Europe and Latin America ahead of our competition. For the quarter, we had 3 additional developments: The approval and launch of JUVISYNC in the U.S., the first drug to be approved to treat both diabetes and high cholesterol; the affirmative vote from the ACIP on the routine use of GARDASIL in boys and young men; and the FDA approval for ISENTRESS in children age 2 years and older.

As we told you in November, we continue to focus on advancing the pipeline. Looking ahead, we plan to file 5 major products in the U.S. between 2012 and 2013 including: BRIDION, a first-in-class neuromuscular reversal agent; V503, a vaccine for the prevention of certain HPV-associated cancers; odanacatib, a once-weekly oral compound with a unique mechanism of action for the treatment of osteoporosis; TREDAPTIVE, our proprietary extended release niacin plus laropiprant; and Suvorexant, our new first-in-class treatment for patients with insomnia.

We also have several important events this year in addition to our regulatory filings including FDA action on JANUMET XR, completion of the HPS2-THRIVE study and initiation of Phase III studies for our once-weekly DPP-4 inhibitor.

Last year, we also made progress expanding in key markets around the world through targeted investments. In December, we announced the $1.5 billion R&D initiative in China, including a new Asian headquarters for innovative drug discovery and development located in Beijing. Overall, our emerging markets represented 18% of our pharmaceutical sales in 2011 and grew 7%. Many of the products that are driving our emerging market growth are products that are off patent in mature markets. Once again, this demonstrates the benefit of Merck's broad portfolio. As we launch and receive reimbursement for newer products in our portfolio, we see additional growth opportunities in the emerging markets.

Consumer Care and Animal Health contributed to our full year performance, demonstrating that our strategy to extend these complementary businesses creates value. Animal Health grew 11% this year. Notably, nearly half of this growth was from new products. The strength of our portfolio in Animal Health and anticipated launches and companion and production animal products positions us to perform well going forward.

Consumer Care grew 1% for the year but was down 5% for the quarter. CLARITIN, our largest consumer brand, remains the market leader despite significant OTC competition. The decline in the quarter is also due in part to a softer fall allergic rhinitis season. We have strong brands that are well positioned in their respective segments.

Turning to cost management. I'd like to reinforce the point that I've made on several previous occasions. Our intense focus on decreasing fixed cost and realizing synergies gives us the flexibility we need to make appropriate investments for growth. This past year, we made the necessary investments while also achieving synergies. In fact, we have largely realized our original synergy target and as planned are on course to achieve the full target this year.

Moving forward, we will continue to make the right investments to operate our business, and we continually actively look for growth-driving opportunities. As I've said before, we are very focused on accessing innovation, both internally and externally. This includes business development, licensing and targeted acquisitions that bolster our existing portfolio and therapeutic areas where Merck is a leader or in areas that we are targeting for leadership.

In 2011, we signed more than 50 agreements involving a broad array of partners. Once we have funded business operations and made targeted investments for growth, a key priority for us is returning cash to our shareholders. The 11% increase in the dividend payment last month shows the confidence we have in our business and in our pipeline and is a concrete example of our focus on shareholder value.

As we begin 2012 and look ahead, we are optimistic about our underlying business, our current momentum and the early success of our growth strategy. And we continue to set high expectations for ourselves. New and innovative products are the main driver of value in this industry, so we intend to advance and augment our pipeline. We have a strong late-stage pipeline with nearly 20 programs in Phase III, and we expect to have many pipeline opportunities between now and 2013, including the 5 major programs I mentioned earlier.

Again, we are committed to delivering strong operational performance this year despite the known challenges such as the U.S. SINGULAIR patent expiration. We intend to maintain our revenues in 2012 at or near 2011 levels. If currency rates stay where they are today, they will put some downward pressure on our revenues. But on a constant currency basis, we are still aiming for revenues at or near the 2011 levels. We are also committed to continuing to reduce our cost base in order to deliver a leveraged P&L. Peter Kellogg will discuss our 2012 guidance in more detail in a few minutes.

In closing, we had a good quarter and an overall strong year. As we begin 2012, we are positioning Merck to perform well by advancing our innovative pipeline, meeting the evolving needs of our customers around the world and achieving a more efficient cost structure, all of which will allow us to deliver shareholder value over the long term. Thank you for your attention.

I'd like to now turn the call over to Adam Schechter.

Adam H. Schechter

Thank you, Ken, and good morning, everyone. It is a pleasure to speak with you today and to provide you with an overview of Global Human Health results. Let me begin with 2011 full year results where sales grew 5% to $41 billion. This performance demonstrates our strong execution of our 3 strategic priorities of growing the core, expanding the core and accelerating new launches. We consistently delivered growth each quarter and we overcame many external challenges. We contributed nearly $1.5 billion in growth to the top line once you exclude the impact of ForEx and the sales of REMICADE and SIMPONI from the relinquished territories in 2010.

We also ended the year with another solid quarter. Human health sales grew 3% in the quarter or 5% excluding the sales from relinquished territories. Our performance was driven by growth from key in-line brands, new launch brands and important markets such as the U.S., Japan and China. So let me share with you how we did on each of the 3 parts of our growth strategy.

I'll begin with our core business, which includes our largest markets and our core brands. In the United States, sales grew 5% and were driven by growth from JANUVIA, JANUMET, ISENTRESS, GARDASIL and VICTRELIS. Overall, our solid performance in the U.S. reflects our continued strong execution and our customer focus around our portfolio of innovative brands.

Moving to Europe and Canada. Sales on these markets declined 5% in the fourth quarter. However, if you exclude the products relinquished to J&J, sales were flat year-over-year. This was due to double-digit growth from JANUVIA, JANUMET, ISENTRESS and SIMPONI, as well as the launch sales of VICTRELIS. We have a strong portfolio of brands, and we're launching products that will enable us to grow volume in the EU. But we continue to anticipate a tough business environment, and we estimate a negative mid-single-digit impact from pricing pressure in 2012.

Now I'd like to discuss the performance of several of our large core brands. I'll start with JANUVIA and JANUMET, which continued to have very strong performance, growing 40% to $1.3 billion this quarter. Despite multiple competitors in the market, JANUVIA and JANUMET have retained 76% share of the global DPP-4 market. The JANUVIA family is #1 in worldwide sales in the oral diabetes market. We are now launching JUVISYNC in the United States, and we anticipate hearing from the FDA shortly on JANUMET XR. Adding these brands to the JANUVIA family of products is expected to enable us to maintain a strong leadership position.

Sales of SINGULAIR increased 8% in the quarter. SINGULAIR will lose exclusivity in the United States in August, and we expect a significant decline in sales. However, SINGULAIR will retain exclusivity in the EU until February of 2013 and in Japan until 2016. We also expect to see continuing growth for SINGULAIR in many of the emerging markets. Japan and the emerging markets contributed about $1.1 billion to overall SINGULAIR sales in 2011.

ISENTRESS continues to be a strong core brand for Merck and it's a valuable treatment option in the fight against HIV. ISENTRESS grew 24% in the quarter and now has a 14% patient share in the United States. Combined sales of VYTORIN and ZETIA declined 6% in the quarter. ZETIA growth in the international markets most notably Japan was more than offset by VYTORIN declines in the United States. We announced last week that the FDA has approved an updated label for VYTORIN that includes results from the SHARP study in the clinical trial section.

REMICADE sales in the retained territories, Europe, Russia and Turkey, grew 3% in the quarter. While REMICADE's market share remains relatively stable, the market growth this quarter was less than prior quarters. This was due to austerity measures in Europe and in Turkey. We anticipate that these pressures will continue in 2012.

SIMPONI remains a strong launch brand and had over $60 million of sales versus $35 million for the same quarter last year in Merck's territories.

Now moving to vaccines. GARDASIL maintained its strong performance this quarter, with 24% growth over the prior year. This was due to continued uptake of the male indication.

ZOSTAVAX, sales for the quarter were $78 million. We are pleased that customer backorders have been filled, and we have resumed normal shipping times in the United States. We are building inventory to ensure a stable supply, and we are ramping up our promotional efforts for this important vaccine.

Now I'd like to discuss how we're expanding the core. As part of the expanding the core strategy, we continue to make targeted investments in the fastest-growing markets, the emerging markets and Japan. In the fourth quarter, emerging markets reached sales of $1.9 billion, which were in line with the previous year. If you exclude the sales from the relinquished territories, the emerging markets grew 6% this quarter or 13% if you exclude exchange. China continues to be a key growth driver in emerging markets with approximately 30% growth this quarter. Our growth in 2011 consistently exceeded market growth, and we continue to invest significant resources in China.

Japan had another strong quarter. In Japan we had 23% growth or approximately 15% excluding exchange. The performance in Japan was driven by continued strong sales of JANUVIA, which is now our #1 selling product in Japan. We plan to continue to see growth in the Japanese market with JANUVIA as well as other launch brands, including BRIDION, GARDASIL and RotaTeq.

Now I'll move to the third part of our strategy, accelerating new launches. We are launching many products around the world, which together contributed more than $500 million in revenue this quarter and over $1.1 billion in incremental revenue for the year. The launch of VICTRELIS, SIMPONI, BRIDION, SAPHRIS, DULERA and JANUVIA in Japan all contributed significantly to our growth this quarter.

Now I'd like to give an update on VICTRELIS. Global sales in the fourth quarter were $87 million. In the U.S., we grew share 10 out of the last 12 weeks. We ended the quarter with approximately 36% TRx share. This is an overall increase of about 10 share points in the quarter. Internationally, VICTRELIS is now launched in 19 markets, including France, Germany, U.K., Canada and Brazil, and it maintains a greater than 50% patient share in many of these markets. We continue to believe that a significant opportunity exist for VICTRELIS for the following reasons. First, many treating physicians, about 40%, have not yet prescribed either protease inhibitor. Next, we still have a significant opportunity with the VA in the United States. And we're only just beginning many of our international launches.

So in summary, Global Human Health had a strong operational performance throughout 2011. We execute on our growth strategy by growing our core launch brands and expanding into the fastest-growing markets. We believe this momentum positions us well for success in 2012. We know that 2012 will include its share of challenges, including continued EU austerity measures, annualization of the transition of REMICADE and SIMPONI in some markets, and the loss of SINGULAIR exclusivity in the United States. However, Merck has a long history of overcoming major patent expiries and we are ready to manage this SINGULAIR as well.

Our base is strong, it's diverse and it continues to grow. I believe we can deliver results in 2012 through our key growth drivers such as JANUVIA, ISENTRESS and other core products, with our launch brands and with our continued growth in the emerging markets and Japan.

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

Peter N. Kellogg

Thank you, Adam, and good morning. As you heard from Ken, we delivered another high-quality quarter by continuing to execute on our strategy to drive top and bottom line performance, and we achieved this performance while continuing to make strategic investments necessary to fuel future growth. The actions we have taken and our performance in 2011 have established a strong foundation for 2012. We leave the year with strong business momentum that will help us succeed in 2012 and beyond.

This year I will -- this morning rather I will briefly talk about our performance in the fourth quarter and full year 2011, and I will discuss our financial targets for 2012. But first, let me start with a comment about our capital deployment.

In addition to the operational performance we drove this quarter, we continued to generate cash and execute on our capital allocation strategy. We continued to return a high level of our free cash flow to shareholders in the form of our dividend and share repurchases in 2011. Given our strong operational performance and market conditions, we continued repurchasing our stock during the fourth quarter. And our confidence in the future of our business led us to increase the dividend 11% as of January 9. In total, we returned $4.7 billion in dividends and repurchased nearly 58 million shares at a price of $1.9 billion in 2011.

Now let me turn to the operating results. My remarks will focus on our non-GAAP results, which exclude acquisition-related charges, restructuring costs and certain other items. Ken and Adam discussed the revenue performance, so let me begin with our expenses.

Total operating expenses were about $120 million lower in the fourth quarter despite making growth driving investment. These reductions, combined with our top line performance, demonstrate the financial discipline we have instilled throughout the company while maintaining our commitment to growth.

On product costs, our cost of goods were nearly $250 million lower this quarter, resulting in a non-GAAP product gross margin of 76.5%. The gross margin was higher on a year-over-year basis due to product mix and manufacturing efficiencies in addition to a benefit from foreign exchange.

Moving on to marketing and administrative. This quarter, M&A expenses were $3.6 billion, an increase of about $200 million over the fourth quarter of 2010. This increase was partly due to targeted investments in product launches like VICTRELIS and in fast-growing markets like Japan. The remainder of the increase was mostly due to U.S. health care reform fees and other corporate expenses such as legal defense reserves.

Moving on to R&D, this quarter we continued to invest in our most promising opportunities and advance the late-stage pipeline as discussed in November. We also made strides to improve our efficiency and incrementally reduce our R&D spending. Research and development expense this quarter was $2.1 billion, which is about $100 million lower than the fourth quarter of last year mainly due to savings from site closures.

Moving to tax. Our non-GAAP tax rate was 19.9% in the fourth quarter, bringing our full year non-GAAP tax rate to 23.4%. There was a slight benefit in the fourth quarter from product mix and other items, but we still ended the year in the middle of our expected tax range. Our non-GAAP EPS for the fourth quarter was $0.97 per share, up 10% over the same quarter in 2010. Throughout 2011, we consistently delivered top line growth and a leveraged P&L, resulting in a non-GAAP EPS of $3.77, an increase of 10% over 2010.

Now let me provide some commentary on our 2012 guidance. As you know, there are 2 well-characterized headwinds in 2012: The U.S. SINGULAIR patent expiration in August and the annualization of the J&J settlement. In addition, there are some external factors that affect our revenue guidance as follows. First, we assumed mid- single-digit pricing pressures across Europe as well as from the biannual price reductions in Japan. Second, we assumed that we will retain revenue and equity income from the Astra JV for at least half of 2012, although AstraZeneca remains the -- or retains the ultimate decision about this option.

Now despite these headwinds, the underlying momentum of Merck's business and the growth of our key products enable us to maintain our 2012 revenues at or near 2011 levels on a constant currency basis. However, we should talk about ForEx. So far, in 2012 the euro exchange rate as well as most other currencies are well below the level seen throughout most of 2011. At today's exchange rates, sales would be adversely affected by about 2% to 3%.

Now let's discuss how the revenues will be spread throughout 2012. Based on the items I just discussed, we would expect sales in the first half to be stronger than the second half of the year, with the second quarter probably being the strongest quarter and the fourth quarter being the weakest.

On R&D expenses, we expect to maintain our non-GAAP R&D expenses at about the same level as in 2011 on a full year basis. Now, individual quarters may vary based on the timing of clinical trials and grants, and we continue working to improve the efficiency of our R&D spending.

As Ken mentioned, we intend to be active in business development to augment our pipeline and maximize our business opportunities. However, it is hard to predict which deals may be consummated, their size or their timing, but we will let you know if any deals we complete affect our financial targets.

Regarding tax, we expect our 2012 non-GAAP tax rate to be pretty similar to the 2011 rate, and it provided a range of 23% to 25% in 2012.

Finally, at current exchange rates, we expect our non-GAAP EPS to be between $3.75 and $3.85. As with revenues, we expect the second quarter to be the strongest quarter from an EPS perspective, and the fourth quarter the weakest. On a GAAP basis, we expect EPS to be between $2.04 and $2.30.

So to wrap up my comments, 2011 was a very good year. We grew the top line by more than $1 billion. We delivered a leveraged P&L to grow the bottom line even faster. We increased our share repurchase activity and raised the dividend to return more cash to shareholders. And as a result of the underlying momentum that we've established in 2011, the growth of our core products and the promising R&D projects we highlighted in our pipeline, we are optimistic and confident about our outlook for 2012. Thank you.

Now I'd like to turn call back over to Alex.

Alex Kelly

Thanks, Peter. Now we'd like to take the time to answer your questions. [Operator Instructions] So with that, Brook, we're ready to begin the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Tony Butler with Barclays Capital.

Charles Anthony Butler - Barclays Capital, Research Division

Two brief questions. Number one is, Peter, you've made some comments about revenue and earnings for '12. But I'm curious if you could comment a bit about gross margins. I'm making assumptions that you have some modest leverage in order to have some additional earnings per share. But the question really remains about pacing, would it be similar to what you said about Q2 versus Q4 on weaknesses. I'm making that assumption. But moreover, how do you think you might be able to end the calendar year '12 relative to '11? And then the second question is about VICTRELIS. And I'm just curious how Roche may be helping you, if at all, as it relates to the rollout, especially in the 19 regions outside the U.S.?

Kenneth C. Frazier

Peter, you want to start?

Peter N. Kellogg

Tony, so as you know we haven't given guidance on PGM, but I think the one thing I would say is that in general, PGM follows our revenue performance with obviously adjusting for product mix and manufacturing productivity and so forth. So I think that I don't think there's any big story. However, I would say -- I would highlight that, as you know, SINGULAIR goes off patent in the -- over the summer and so as you go from there on, that will be a slight shift in mix clearly as SINGULAIR becomes a much smaller part of our mix, and that's a good PGM product. But in general, we haven't given guidance, so I can't give you the details on that.

Kenneth C. Frazier

And Tony, with regard to VICTRELIS, the good news is that we do have an agreement with Roche that is worldwide wherever we're able to do it legally in any part of the world. And in those markets, they are detailing VICTRELIS and doing education with physicians and so forth. So the partnership has gone well, and I think that they've been able to help us in all markets around the world where legally we're able to do it.

Operator

Our next question comes from Seamus Fernandez with Leerink Swann.

Seamus Fernandez - Leerink Swann LLC, Research Division

So Peter, I'm just wondering again when I kind of look at the numbers, we've got about -- I'm guessing maybe $500 million kind of still in there from AZLP. Can you just help us understand what kind of a profit contribution that might represent as we go from the first half of the year to the second half? And then maybe for Adam, thanks for the details on SINGULAIR, particularly o U.S. and in the emerging markets. But can you give us a sense of the growth rates that we were seeing in Japan and the emerging markets with SINGULAIR? And then also, when we expect the patent to come off in Japan?

Alex Kelly

Okay, once again, Peter, do you want to start?

Peter N. Kellogg

Sure. So on AZLP, the joint venture, I don't really give the detailed P&L for AZLP, the relationship. But obviously, there's 2 parts. There's revenue and there's equity income. And really you could think of the equity income as going straight down, that's really income going right through. And then the revenue is just product sales, so it's pretty good margin. And again, I think that you got it right. We've assumed that we'll get a little over half of the year this year, but obviously that's just an assumption and we're pretty clear about that. And so it's up to AstraZeneca who will make that decision on their own.

Alex Kelly

Okay, Adam?

Adam H. Schechter

And, Seamus, with regard to the patent expiry of SINGULAIR in Japan is 2016, but it's also important to note that in Japan even after products go off patent, there's typically room for them to continue to do well. And if you look, Japan remains a very important growth driver for us this year but as we move into the future. We don't give specific product information for the emerging markets. We do give it for outside the U.S., but I would be careful because that includes Europe. If you look at the emerging markets and Japan, I would say that we're showing good growth for SINGULAIR, and we expect to continue to have good growth moving forward.

Operator

Our next question comes from Greg Gilbert with Bank of America Merrill Lynch.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

First on Hep C, curious whether you're seeing any warehousing behavior given some recent developments in the space from an R&D standpoint? And what's the likelihood Merck is open to making an acquisition in the HCV space soon and how would you balance strategic desire and financial discipline on that front?

Alex Kelly

Ken, you want to start?

Kenneth C. Frazier

Let me start by trying to address how we look at the overall Hep C opportunity that we have in front of us and our strategy. First, we've tried to say very clearly that we are taking steps to maximize our VICTRELIS opportunity and we're pleased with the growth that we see in the U.S. as well as outside the United States. And beyond that, we're also aggressively pursuing new and more convenient interferon-free therapies focusing on MK-5172, our pan- genotypic protease inhibitor. Beyond that, I think what I would say is looking to expand on that, we would continue to look at this marketplace to try to find opportunities to create shareholder value creating partnerships or acquisitions. But we are going to always maintain financial discipline in this area as we have in every other area. And just going back to MK-5172, we see a number of opportunities with that drug because we think it can in fact be a very strong anchor for an all oral therapy. So we intend to study that drug with other drugs in our own pipeline that are at early stages. We’re also again interested in partnering to study with other drugs in the hope of developing an all oral regimen that maximizes SVR and shortens duration of therapy and minimizes side effects. And if we're not able to reach the kind of partnership or accommodation and someone else reaches the market first, we don't think the game is over. We'll study MK-5172 with whatever drugs make it to the market to see if we can improve on the regimen. So we have a number of approaches, but at the end of the day, I want to just underscore that Merck has always tried to be financially disciplined in doing any kind of deal or arrangement, and will remain so in Hep C.

Adam H. Schechter

And then with regard to your question on warehousing, the first thing I'd say is typically there's a slowdown of new patients that occurs during the holidays, Thanksgiving and the end of the year holidays. And we think we saw that this year as well. With VICTRELIS because of the 4-week lead in, you had expected that to be extended a little bit into the beginning part of January. I think the key is that if you look at a product like VICTRELIS, it can help double the cure rate today. And physicians understand that, and they're still working through the patients that they’ve warehoused, waiting for a product like VICTRELIS. At this point, we're not hearing of significant warehousing. There may be some people that say it anecdotally, but it may occur later. But right now, we don't think it's a significant impact.

Operator

Our next question comes from Jami Rubin with Goldman Sachs.

Jami Rubin - Goldman Sachs Group Inc., Research Division

Peter, just a guidance question. I'm a little bit confused because you talk about revenues being negatively affected by 2% to 3% if exchange stays where it is today. But guidance of $3.75 to $3.85 is also based on the current exchange rate. Can you just clarify that for me? And if you were to assume that the euro stays where it is today, should we assume then that the low end of the range is more realistic given that a 2% to 3% negative impact on the top line would take your revenues down to about $46.5 billion?

Alex Kelly

Peter?

Peter N. Kellogg

Yes, Jami, so everything you said by the way leading into the question is correct, you’ve got it all -- that's absolutely right. And the EPS, we gave a range of $0.10, so that we have -- we can adopt -- we can fit in that range with a lot of different factors, one of which is foreign exchange obviously, but many other things that could be going on in the business. So I think it's not a bad assumption to think that perhaps the current exchange rate is a little bit lower than the range or not. But quite frankly, there are quite a few factors that move our EPS one way or the other. So I wouldn't -- even though in the guidance we pointed to ForEx to help you understand some of the moving parts, there's many different moving parts in the business, launches, competitive activity and so forth. And so likewise we're very oftenly exceed our expectations in our own execution of the business. So I think that at this early point in the year, I think the 10-point range, I would think of it as the full range and it's hard to kind of pin it down to any one factor if that's okay.

Operator

Our next question comes from Catherine Arnold with Crédit Suisse.

Catherine J. Arnold - Crédit Suisse AG, Research Division

I wanted to ask you guys about the DPP-4 category. I guess, Adam, is there any reason why it can't double in the next 5 years with or without a positive outcome study from JANUVIA? And then on ZOSTAVAX, now that the manufacturing issues are resolved, what are you doing differently or incrementally on promotion in the U.S. or outside the U.S., and do you think we'll see 2012 as an inflection point on sales or will it take longer?

Alex Kelly

Adam?

Adam H. Schechter

Yes, so the DPP-4 category, it continues to show impressive growth. And I think it will continue to show impressive growth. But still only about 20% of patients are treated with DPP-4 inhibitors. With that said, many patients in this market takes multiple medications. And on average, they're on somewhere between 1.8 and 2.4 medicines for a diabetic patient and as disease progresses they end up on more medications. But the bottom line is we expect the DPP-4 class to continue to show strong growth moving forward. And we also are very excited about the once-weekly DPP-4 that we have in Phase II and looking forward to go into Phase III. We think that can be a tremendous contributor both on the convenience side as well, which is important by the way when you have issues around diabetics who sometimes are not as compliant as other people could be. We think that's a really useful thing for us to do, and we think that's a great opportunity for us, too.

Kenneth C. Frazier

With regard to ZOSTAVAX, we -- before we started significant promotion in the United States, we wanted to make sure that we had supply and that we'd be able to have continuous supply. We will begin increasing our promotional support through personal promotion and also nonpersonal promotion very significantly as we move through this year. With regard to outside the U.S., we've made significant progress in the existing facilities. We expect both products to be available out of our new manufacturing plant in Durham in late 2012 or early 2013, and that will allow us to make the product more broadly available internationally.

Operator

Our next question comes from Tim Anderson with Bernstein.

Tim Anderson - Sanford C. Bernstein & Co., LLC., Research Division

I know you'll probably resist talking about Merck's financials beyond 2012, but can you at least say whether 2013 earnings are likely to be higher than 2012 or will the SINGULAIR patent expiry spill over into '13 and compressed performance? And second question is on IMPROVE-IT and the upcoming interim look. How will you be informing investors once it's occurred or has it already occurred? Quite a few investors seem nervous that this trial is going to blow up VYTORIN further, and I'm wondering if you can give us some idea how you’re thinking about the different potential outcomes and whether the trial might have a better chance of successfully showing what it was intended to show than what some are expecting?

Alex Kelly

Okay, Peter, would you like to start?

Peter N. Kellogg

Yes, sure. So you're right, we haven't given 2013 guidance. I mean I think the one thing I would just take away from the 2012 guidance that we've talked about today is really every company has years in which they have a patent expiry or some sort of impact like that. And really the secret or the trick to this is to make sure that your underlying momentum is strong so that when you end up having the one impact of a patent expiry, the rest of your business is really growing nicely. And obviously, we've highlighted kind of how we see 2012 and how we've come through '11 with great momentum. And so as we go into '13, it's going to be all about the growth of that underlying business, how well the key products do, how well our emerging markets do, different pieces of what we're talking about. So we really haven't given guidance. But that is clearly the answer is that as you go through '12, you can watch our underlying business performance and you can pretty much gauge, is that strong enough to overcome the impact of a patent expiry? For '12, it certainly was.

Kenneth C. Frazier

I'll just add that from the very beginning, we've been very clear about the profile of the company that we'd like to be, and that involves driving top line growth and making prudent investments to ensure that we do have top line growth but growing the bottom line faster to leverage P&L, and that's still very much our intent and our ambition as we go through '12 and into the future.

Alex Kelly

And Tim, on the IMPROVE-IT trial, you're right, we do have the 75% interim look as planned for later this quarter. Obviously, the full -- if the trial goes to completion, that's more like a 2013 completion period. And if there are any changes in the trial as a result of the interim look, we'd communicate that pretty promptly. If there are no changes, we'll probably try to find the right communication vehicle for that information as well. So with that, we'll take the next question.

Operator

Your next question comes from John Boris with Citi.

John T. Boris - Citigroup Inc, Research Division

First question has to do with the 5 assets, Ken, that you'd mentioned and outlined. Two of those assets you currently sell in x U.S. markets, BRIDION and TREDAPTIVE. Can you give any color on the performance or revenues for those 2 assets in x U.S. and why you think or why we might be missing or why those assets, at least you believe, are significant or material assets for you going forward? And then a question for Adam, the $500 million on accelerating new launches, VICTRELIS, DULERA account for a little over $100 million of that. Can you give some granularity on what else is contributing to the $500 million of incremental revenue on the new launches?

Kenneth C. Frazier

I'll start on the 2 launch brands, BRIDION and TREDAPTIVE. I would say, first of all, BRIDION, we think has a terrific profile and it can be very useful in helping people in their postoperative setting. We think -- we've seen in Japan, for example, pretty strong uptake. We are hoping that we can get this drug approved in the U.S., and we really think it has a unique positioning because of its value and its innovation. I think on TREDAPTIVE, going forward, a lot of that will have to do with the outcome of HPS2-THRIVE, and we think if we can launch this drug in the United states and in effect, relaunch it outside the United States, accompanied by these kinds of outcomes, we think it can be a very significant contributor. But I'll turn it over to Adam at this point.

Adam H. Schechter

Yes, and the other thing I would add is that if you look at TREDAPTIVE, the sales are not significant outside of the U.S., but niacin sales have never been significant outside of the U.S. I believe that once we have outcomes data that shows on top of a statin you can get additional cardiovascular benefit, which is the hope of the HPS2-THRIVE study, that would increase the utilization not only for the United States but also outside of the United States. With regard to new product launches, SIMPONI in the retained markets, BRIDION in Japan, which continues to do very, very well, had $60 million of sales in the quarter. VICTRELIS, which had $87 million in the quarter, as well as SAPHRIS and DULARE are primary drivers of our global launches and to the $500 million that I talked about. In addition to that, we have JANUVIA in Japan, which continues to be large and fast-growing, Remeron in Japan, and we have GARDASIL that's just launching in Japan. So those are the product launches that are driving the majority of the dollars that I talked about.

Operator

Our next question comes from Mark Schoenebaum with ISI.

Mark J. Schoenebaum - ISI Group Inc., Research Division

Number one, if I could maybe push you a little bit on a prior question, I think we got a partial answer but perhaps not a complete answer, and that is what might, to Adam, what might the commercial impact be roughly speaking if IMPROVE-IT were to actually show an outcomes benefit that was unambiguous? And then number two, Pfizer made some comments on their call several days ago that emerging market trends were actually below their expectations in terms of price reductions and secondarily volume. And I was just wondering in general, are you seeing the same things or are you seeing something different?

Alex Kelly

Okay, Adam, would you like to start this?

Adam H. Schechter

Yes. So let me start with commercial impact of IMPROVE-IT. Obviously, we're expecting that the IMPROVE-IT trial show benefit for VYTORIN. I think that it will reinforce what many physicians believe, which is the LDL cholesterol hypothesis, which says that as you lower cholesterol, LDL cholesterol more and you get patients to their goal, the better the outcomes and the better the benefit. So I think that it will prove to be something that physicians believe inherently anyway. With that said, we would have significant promotional support and we’d put even additional emphasis behind the outcomes, and I think that there would be a positive impact assuming that the product -- that the trial is positive as you stated, and that's what our assumption is. So we hope to have that data as soon as possible. And once we do, once it's positive, we'll promote it very strongly and there will be an impact positively from it. With regard to emerging markets, we're pleased with our performance in the emerging markets. We are investing significantly where it makes sense to invest and we believe there'll continue to be significant growth. I've said before that in the emerging markets, there's always ups and downs, and you can't look at any one country as representative of all the emerging markets. So for example, in Turkey, there's significant pricing pressure at the end of last year and going into this year. And in many of the markets just pricing pressure that I believe will continue. The good news is that we have a very broad portfolio of products. And if you look at what we've been able to do is to grow 13% ex ForEx and when you account for the relinquished territories of REMICADE and SIMPONI. I believe we've been able to offset the pricing pressures that we've been under, which will continue by increases in volume. And we launched a campaign, which I spoke about before, called the next 10 brands. What we're doing is we're focusing on not only the brands that you typically think about, the brands that we talk about often, but we're going down to the next 10 and the next 10 after that. And in some of these markets, we have 130 products that are available to us and we have to find ways to maximize each and every one of those products and the opportunities that exist. So I believe there still remains significant opportunity in emerging markets. It will continue to be a difficult environment, there's no doubt about that. There will be pricing pressure that will continue, but I believe that we can be successful with our products and with our volume. And the last thing I'll say is if you look at China, I mean 28% growth in the fourth quarter, if you look at our volume growth, our evolution index is well over 120 in terms of volume in China and we're growing significantly faster than the market. So that's the type of performance we expect to continue in Global Human Health for Merck.

Operator

Our next question comes from Steve Scala with Cowen.

Steve Scala - Cowen and Company, LLC, Research Division

I have 2 questions. First, I don't recall Merck providing revenue and EPS guidance on a constant currency basis in the past. Is this the first time? If so, why is there a change in practice and will it be continued? And secondly, will HPS2-THRIVE be presented at the AHA? I know this is hair-splitting but in November I thought Merck said that HPS2-THRIVE was expected to end in 2012, and I thought today it was said it would end. So it appears something has changed, and I'm wondering if that moves up presentation as well.

Alex Kelly

Okay, Peter, you want to start with the first comment?

Peter N. Kellogg

Sure. Thanks, Steve. So no, there's no change in policy or approach, whatever. But I think what's happened is you've all seen obviously in the fourth quarter is the exchange rates have moved around a lot and none of us can actually sit here and forecast ForEx that well. So all we want to do is to highlight to everybody that in fact, at last year ForEx rates, there’s one level of performance, but with the current ForEx rates, that's what we have worked with. That's the impact we would see. But importantly, Steve, just to make sure it's clear, we only talked about that at revenue. So at EPS, we have given you the EPS range at the current rates. So really I don't think there's any change in policy at all. We're just trying to help investors understand how ForEx impacts the numbers.

Kenneth C. Frazier

And just as a revenue matter, our goal is to try to be at or near our 2011 levels on revenue, notwithstanding the clear headwinds of SINGULAIR and other patent expiries on an operating basis. And what we're really trying to say and what we said back in November, that's what we intended to do is to be essentially level with 2011 on an operating basis, and I think we're clarifying that as that gets translated into dollars, obviously, there's some impact to foreign exchange.

Adam H. Schechter

And Steve on your HPS2-THRIVE question for TREDAPTIVE, the trial itself is expected to end this year. It's unclear at this point if it will end in time to have data presented at the American Heart Association meeting later this year. But our intent is certainly to have this drug filed in 2013. So with that, we'll take the next question please.

Operator

Our next question comes from Marc Goodman with UBS.

Marc Goodman - UBS Investment Bank, Research Division

Yes, Peter, you gave us a sense of fourth quarter '10 to fourth quarter '11. You went through some of the changes in the big deltas. Can you talk about SG&A in 2012 versus 2011, and kind of go through the key deltas there and tell us how much FX placed into SG&A?

Alex Kelly

Okay. Peter?

Peter N. Kellogg

Sure. So I think what you'll see in the SG&A for 2011 is that we did have a number of different things going on obviously in addition to just the commercial activity. I think people often think of SG&A as just Adam's promotion and selling resources, but obviously we have all of our corporate costs, legal fees, other things to go through there. So in 2011, there was an increase overall in non-GAAP marketing and administrative for the full year, and part of that was launch investments, investments in fast-growing markets like Japan, and we talked about those 2. Of course as you all know, health care reform came in so there were some fees that were increasing. All 3 of those factors were kind of equal amounts, roughly in the neighborhood. And then of course, we had some other corporate expenses that come along, and they’re hard to always to predict. So some of them may have been legal expense reserves for different situations we're dealing with or other kinds of items. So those are the main drivers for this year -- for 2011. For 2012, you've seen we've done a lot of restructuring announcements during the year, this year as well, 2011. And obviously, we've known exactly what 2012 would look like, so I think we've planned very carefully what -- how to manage the year. A lot of the announcements we've done this year will give us a full year benefit in all parts of the company for 2012. So I think that will help us on SG&A. And I think that we're well prepared for exactly how to work through a year like 2012 and 2013. Adam, I don't know if you want to add any other comments or Ken.

Kenneth C. Frazier

Well, I'll just say again, I just want to reaffirm our goal is to have a leveraged P&L and you're seeing some positive impact on this in terms of foreign exchange, but we don't expect to see a significant increase in promotion, in selling dollars next year. We're continuing to work through our synergies to create the kind of operating model that will allow us to succeed in this kind of marketplace going forward.

Operator

Our next question comes from Chris Schott with JPMorgan.

Christopher Schott - JP Morgan Chase & Co, Research Division

A question on VYTORIN. Just maybe on the type of impact you're expecting for the product from generic Lipitor as we go through 2012. And specifically, are you kind of seeing or feeling any incremental managed care pressures on VYTORIN given the generic? And then second, a broader question on the R&D budget. Merck is currently running a significant number of large outcome studies. I guess is this type of outcome study investment, particularly the number of studies you're running kind of a normalized number for Merck? And should we expect that some of these studies wrap up over the next couple of years that are going to be replaced by other programs? Or should we think about the outcome study investment and the number of trials you're running as something that could be declining over time?

Alex Kelly

Okay. Adam?

Adam H. Schechter

Yes, let me start off with VYTORIN and impact of Lipitor. We've been focusing our promotion of VYTORIN on the severely hypercholesterolemic patients. In general, the patient that has cholesterol levels that can't get to goal on a statin alone or would have to be titrated to a very, very high level of a statin prior to treatment. So I think that the positioning that we've been focusing on for the past couple years should help us because even if a physician were to use generic Lipitor, they probably would not be able to get that patient to goal and they would need to look at something else. Therefore, they'd either be able to switch to something like VYTORIN or they could think about adding ZETIA. And we believe that ZETIA in the marketplace will continue to do well. As more patients move to the generic statins, there'll be harder to get some of those patients to goal. And therefore, they'll have options to either move to VYTORIN or to add ZETIA. We are increasing our promotional effort behind ZETIA. We think that there is an opportunity for ZETIA in the marketplace particularly with generic Lipitor. We have not seen any impact on ZETIA since the launch of Lipitor generic, but we'll be watching that closely. And it's too early to see any impact on VYTORIN as well. But we believe that this franchise can continue to do well throughout the launch of the generics.

Kenneth C. Frazier

And on the R&D spend, Chris, I think we've tried to say all along that what we spend in a particular time is really a function of the assets that are moving through the pipeline at that time. Right now, we seem right now to be experiencing a bolus of big trials right now. And we also believe that these kinds of large trials, while they do cost a lot, can help differentiate these products when they come to the market.

Operator

Our last question comes from Michael Tong with Wells Fargo Securities.

Michael K. Tong - Wells Fargo Securities, LLC, Research Division

Two questions. Number one, just follow up on the IMPROVE-IT study, and I assume you guys are all risk managers here. What if IMPROVE-IT shows no benefit or maybe under the worst-case scenario some directionally very ambiguous results, what's your strategy on the VYTORIN franchise ex-U.S. as well as within the U.S. at that point? And then secondly, can you comment on what you're seeing in terms of patient enrollment for anacetrapib?

Alex Kelly

Okay, Ken.

Kenneth C. Frazier

So on the IMPROVE-IT question, I just would reiterate that we're very confident in the value of ezetimibe and we're also confident in what we see in every study, which is that lowering LDL seems to have a positive benefit. I think the SHARP study was another indication that lowering LDL in that particular population seems to have had a benefit. And so we continue to be confident that IMPROVE-IT will be a positive outcome study for us. Without giving any detail, we obviously look at a range of scenarios all the time in trying to run the business, and that's what we're trying to do.

Alex Kelly

And in terms of anacetrapib, that trial started enrolling patients in May 2011. And remember it's a 30,000-patient trial and we're right on track with our enrollment right now. So with that, Ken, I don't know if you had any closing remarks.

Kenneth C. Frazier

Well, just briefly, I want to thank you all again for attending and listening and for all your excellent questions today. So to wrap up, 2011 was a very good year in which we grew the top line by more than $1 billion. We delivered a leveraged P&L to grow the bottom line even faster than the top line, and we increased our share repurchase activity and raised the dividend to return more cash to shareholders. Thank you very much for your listening today, and we look forward to seeing you down the road. Bye-bye.

Operator

This concludes the Merck's Fourth Quarter 2011 Earnings Conference Call. You may now disconnect.

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