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

Financial Guidance Call

December 4, 2007 8:30 am ET


Graeme Bell - Head of IR

Richard Clark - Chairman, President and CEO

Peter Kellogg - EVP and CFO


David Risinger - Merrill Lynch

Tim Anderson - SanfordBernstein

Jami Rubin - Morgan Stanley

Barbara Ryan - Deutsche Bank

Tony Butler - Lehman Brothers

Chris Schott - Banc of America

Roopesh Patel - UBS

James Kelly - Goldman Sachs


Good day everyone, and welcome to Merck's Financial GuidanceConference Call. Today's call is being recorded.

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

Graeme Bell

Thank you Taylor,and good morning. Welcome to our call this morning to review our 2007 and 2008financial guidance. I’m Graeme Bell, Head of Investor Relations. Joining me onthe call today with prepared remarks is our Chairman, President and CEO,Richard Clark, and Peter Kellogg, our Executive Vice President and ChiefFinancial Officer.

Before we get into the details, I'd like to go through somelogistics. On this call, we will review the 2007 and 2008 guidance release thatwe issued at 7:00 AM this morning. You can access this in the InvestorRelations section on, and I would remind you that you thisconference is being webcast live, and recorded. A replay of the event will beavailable later today via phone, webcast and, as usual, our pod cast.

As we begin, let me remind you that some of the statementsmade during this call may discuss certain subjects that may containforward-looking statements, as that term is defined in the Private SecuritiesLitigation Reform Act of 1995. These statements are based on management'scurrent expectations and involve risks and uncertainties that may cause resultsto differ materially from those set forth in the statements.

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

Forward-looking statements on this call should be evaluatedtogether with the many uncertainties that affect Merck's business, particularlythose mentioned in the risk factors and cautionary statements set forth in item1A of Merck's form 10-K for the year ended December 31, 2006, and in itsperiodic report on form 10-Q and Form 8-K, which the company incorporates byreference and that are all posted on our website.

We will begin with brief remarks from our senior management,then open the call for questions and expect the call to last approximately onehour.

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

Richard Clark

Good morning, and thank you, Graeme.

As we have done for the past couple of years, we are hostingtoday’s call to update you on our financial performance for 2007 and to providenew financial guidance for 2008. Today’s guidance call confirms that many ofour topline and productivity goals are making great progress, and we remain ontrack to achieve our 2010 targets.

As we wrap up 2007 and enter 2008, our guidance reflectsnumerous successes already in our ongoing agenda of product launches around theworld. We are pleased with their strong performance in 2007, and we are proudthat we have positioned Merck for growth in 2008, a year where we are losingmarketing exclusivity for one of our largest products.

Let me start with the current year. Despite challengingeconomic and healthcare environments, 2007 has been a remarkable year forMerck. The Company built off the new products' momentum that was generated in2006, due to the continued market penetration and global roll-out of GARDASIL,JANUVIA, ROTATEQ and ZOSTAVAX.

In addition, we have successfully completed the US regulatory processfor JANUMET and ISENTRESS. And our customers are recognizing the value of theseproducts as evidenced by the early prescription data.

Since 2005, we have been changing every aspect of ourbusiness in order to position Merck for sustained revenue and earnings growth.The company continues to re-engineer many of its processes across the divisionsto ensure that we strive towards operational efficiency, and maintaindiscipline around marketing, selling and general and administrative spending,while ensuring we fully fund research and development.

Many of our current operating and R&D investments willhelp us succeed in 2008, and more importantly, also position us to success in2010 and beyond. Our business decision, together with our ability to successfullyexecute on our business plan, has given us the confidence to raise ourfinancial guidance several times over the last twelve months.

In 2007, we have made strides to remove the significantamount uncertainty related to legal concerns to the US VIOXX product liabilitysettlement agreement announced on November 9, 2007, as well the anticipatedresolution for the other litigation.

For the full year 2007, we reaffirm our non-GAAP earningsper share range of $3.8 to $3.14, excluding certain items and anticipate a fullyear 2007 GAAP EPS range of $1.45 to $1.51.

All the details are contained in today's press release, andin a couple of minutes Peter Kellogg will take you through the reconciliation,explaining the adjustments for certain items.

In 2008, the company anticipates that many of our in-lineand newer franchises will continue their strong performance, and then we willfurther extend the success of the Zetia and Vytorin franchises, as well as the launchof additional new products.

Taken together, all of this should help us offset the lossof marketing exclusivity for FOSAMAX, our second largest product in the United States.

In addition, during 2008, we planned to file two NDAs for productscurrently in Phase III MK-0524B for atherosclerosis, and MK-0364 for obesity.To position ourselves for commercial success in 2008 and beyond, we will beginto prepare for their prospective launches.

Worldwide revenue will also be driven by additionalindications for the company's in-line products, and a continued marketingup-tick and global rollout of new products such as GARDASIL, JANUVIA, JANUMET andISENTRESS, as well as other potential new products.

I'd like to draw your attention to two specific line itemsin the 2008 guidance.

First product gross margin: Based on our stated 2008financial guidance of 77% to 78%, we anticipate return in PGM to pre-ZOCOR levelsin 2008, a year earlier than we initially projected. Our new manufacturingsupply strategy and our cost-reduction initiatives have not only enabled us tomaintain PGMs while managing the ZOCOR and FOSAMAX patent expiries, but we havealso increased manufacturing efficiency and flexibility.

When we initially provided long-term guidance on PGM in2005, we knew that our target was aggressive, yet achievable. This is atestament to the hard work and dedication of Merck employees that we nowanticipate, and that we will accomplish this goal a year earlier than initiallycommunicated.

The second line item I'd like to address is marketing andadministration. While our 2008 guidance points to a higher level of spend thanour long-term commitment indicates, a significant portion of this increasedspending is attributable to fluctuation in the exchange rates. As you know,while foreign exchange has a negative impact on marketing and administrationspending, overall the company continues to benefit from the prevailing exchangerates.

That said, we continue to maintain a strict discipline inour operational spending, while providing the necessary resources to supportour inline product and the A product's launch during the past two years.

To help drive market and administrative savings to 2010, weare deploying similar tools and techniques used to realize our improvement onPGM. For example, we've identified and started implementing a number ofinitiatives including: our regional headquarter consolidation, global supportfunction rationalization, SAP implementation, Merck segment and sales forceproductivity. While this is not an exhausted list, when combined, we areconfident that our business reengineering, improved productivity and ongoingcost management initiatives will allow the company to fully capitalize on thepromise of our expanding project portfolio, ensuring that marketing andadministrative expenses return to the 2006 level in 2010.

On earning-per-share, the company anticipates a full year2008 non GAAP EPS range, from $3.28 to $3.38, excluding certain items. In the2008 GAAP EPS range was $3.96 to $4.06. Regarding our long-term performancetargets to 2010, when we established the long-term objectives, we knew that itwould require outstanding execution on our new strategy to achieve these goals.

In 2007 and 2008, guidance that we are providing representsthe company's objectives to ensure we meet these long-term performance targets.To date, our strategy is progressing and is on track. I want to you know thatwe remain fully focused on continuing with research, and regulatory andcommercial execution, so that we can deliver sustained revenue and earninggrowth beyond 2010 as well.

And as we continue to implement fundamental changes to ourbusiness model, our current and recently launched products, as well as ouranticipated new product introductions gives us confidence to reaffirm thatrevenues will have a compound annual growth rate of 46%, including 50% of the revenuesfrom our joint ventures from which we derive equity income.

This performance, combined with the company wide cost savingsinitiatives, is helping to position Merck to deliver compound annual double-digitearnings growth, excluding certain items by 2010 from the 2005 dates.

Having provided a few details on anticipated performance, Iwant to a say few words about its fundamental meaning for me as the CEO,because when we see the financial results, the only purpose of our work cansometimes fade away with the numbers.

Globally, healthcare is enjoying a greater profile than everbefore. This is encouraging, and we welcome policymakers' and payers'increasing focus on the linkage between health and economic development. On aglobal basis it is also reassuring to see that international funding forhealthcare continues to grow, and that there is renewed interest in publichealth solutions that medicines and vaccines can be [provided].

I am optimistic about the future of Merck. Although thehealthcare market continues to be challenging, we are confident that ourbehavior sets us apart from the rest of the industry, and that our customerswill increasingly find value in our products and respect our responsibility andcapabilities as we approach R&D and commercialization, ensuring we haveprograms to further broaden our assets.

As always, I look forward to sharing with you additionaldetails at our Annual Business Briefing for investors here in WhitehouseStation, on December 11, on the progress that we have made-to-date on our plansto lead the industry, and some of the incremental opportunities that we have.

With that, I'll turn the call over to Peter who will commenton the details of the company's 2007 and 2008 financial guidance. Then we willtake your questions. Peter?

Peter Kellogg

Thank you Dick, and good morning. I will spend the next fewminutes reviewing the elements of our guidance in a little more detail. And Iwould refer you to pages six through eight of today's press release, whichcontains Merck's financial guidance for 2007 and 2008.

As Dick said, we are extremely pleased with our 2007year-to-date business results and are confident in reaffirming our full year2007 non-GAAP EPS guidance range of $3.08 to $3.14, excluding certain items. Wenow anticipate a 2007 GAAP EPS range of $1.45 to $1.51.

The company is providing information on earnings-per-sharein 2007, adjusted for certain items. Because of the nature of these items andthe impact they can have on the analysis of underlying business performance andtrends, management believe that providing this information enhances investors'understanding of the company's performance. This information should beconsidered in addition to, but not in lieu of, earnings-per-share prepared inaccordance with GAAP.

In summary, we have adjusted for the following four items.First, the $4.85 billion pre-tax charge for the US Vioxx product liabilitylitigation settlement that was previously disclosed on November 9. As areminder this is separate from the company's existing reserve for future legalexpense costs related to the Vioxx litigation, which was previously disclosedat $720 million as of September 30, 2007. The company continues to evaluatethat reserve.

Second, as previously disclosed pre-tax, we have a pre-taxcharge of approximately $700 million associated with the ongoing globalrestructuring program at Merck. Third, there is a pre-tax charge of $670million in connection with the anticipated resolution of investigation, thefirst of which was disclosed beginning in 2002, of civil claims by federal andstate authorities relating to certain past marketing and selling activities,including nominal pricing programs and samples.

This charge represents an accrual based on our bestestimates of the likely outcome. The resolution of these matters is stillsubject to execution of definitive agreements. And fourth, an anticipatedfourth quarter pre-tax gain of approximately $450 million relating to insuranceproceeds, which the company was awarded in the previously disclosed arbitrationwith the company's upper level access product liability insurance carriers,related to coverage for cost incurred in the Vioxx product liabilitylitigation.

Now, excluding these items, our core business performancecontinues to be very strong. As you will see from the details in today'srelease, all of the guidance elements that support our full year 2007 EPSranges remain unchanged.

Now, turning to the main focus of this call, I'llconcentrate largely on 2008 guidance, as it represents the next step in ourjourney to reach our stated 2010 top and bottom line goal. In 2008, despite losingUSmarketing exclusivity for FOSAMAX, the company anticipates solid earningsgrowth. The details of the important underlying drivers are as follows:Starting with top line revenue, Dick mentioned several of the highlights amoment ago, so I'll build on those just to recap.

In 2008, we anticipate continued strong performance frommany of our inline products, continued growth of our newer franchises and thelaunch of additional new products. Worldwide revenue will also be driven byadditional indications for the company's inline products and the continuedmarket uptake in global roll-out of new products.

Taken together, this growth will offset several significantpatent expiries in 2008. I just mentioned FOSAMAX, but we also anticipate theloss of marketing exclusivity for COSOPT and TRUSOPT, and both of those are inOctober 2008 in the US andfor PRIMAXIN and VASOTEC in Europe.

Now, moving to some of the specific revenue contributors,you'll find contained in our press release that there are specific ranges onkey revenue contributors. I'd like to spend a moment talking about several ofthese. I'd like to begin with SINGULAIR. Worldwide product sales for SINGULAIRare anticipated to be in the range of $4.6 to $4.8 billion.

This anticipated performance reflects continued leadershipin the USrespiratory market, driven by the products' superior efficacy profile and thelaunch of incremental indications around the world. The growth in thisfranchise reflects continued strengthening of the brand's efficacy perceptionand increased market share in all geographic regions.

Moving to vaccine revenue, asrecorded by Merck, given the increasing importance of the vaccine business onour overall results, I would like to provide additional color and context inour guidance for this area. We recognize that investors have difficulty inforecasting the vaccines business, because script and share data are notreliable.

Our 2008 vaccine guidance of 4.8billion to 5.2 billion reflects the significant opportunities and the complexdynamics of the marketplace for our vaccines in 2008. Please note that thisvaccine guidance is only for vaccine sales recorded by Merck, and excludes end-marketsales by the Schering-Plough, MSD joint venture for which the company drivesequity income.

While we do not provide guidanceon specific vaccines products, I wanted to provide you with some of ourassumptions for our vaccine business in 2008. First, to optimize the available varicellabulk across our varicella-containing vaccines, we have prioritizedmanufacturing of VARIVAX. Our financial guidance assumes that we do notreintroduce ProQuad in the USor launch ZOSTAVAX or ProQuad in ex-US markets in 2008.

This prioritization was based onmeeting public health needs related to VARIVAX. In particular, we are committedto supporting the implementation of the final ACIP II for varicellarecommendation. We continued to focus on resolving the varicella supply issueas quickly as possible, and we have restarted manufacturing in the second halfof 2007, and anticipate that we will be able to meet the anticipated demand forvaricella-containing vaccines in 2008.

Second, regarding ZOSTAVAX in the US,we continue to have supplies available and are focusing our promotional effortson customers in the USwho are currently stoking ZOSTAVAX. We will increase our promotional efforts inthe latter half of 2008.

Currently, we are educating physicians about the seriousnessof shingles as a painful and debilitating disease, and the recentrecommendation on CDC, ACIP adult immunization schedule for zoster immunizationfor all adults over 60 years of age. In addition, our educational effortstargeted to consumers will focus on the risks and severity of shingles.

ZOSTAVAX is covered by both commercial insurance andMedicare Part D for over 90% of lives. Educational efforts for all audienceswill continue to help patients and physicians understand that Zostavax iscovered for the vast majority of the eligible population.

Now, let’s move to ROTATEQ. For ROTATEQ, we anticipate thatwe will maintain our market leadership position in the US, despite thepotential launch of a competitor’s vaccine. ROTATEQ has become thestandard-of-care in the USmarket, and we are very confident that customers will continue to value itsadvantages over other potential rotavirus vaccines.

ROTATEQ is the only antiviral rotavirus vaccine designedspecifically to cover the most common serotypes that cause 90% of disease. Ithas demonstrated consistent efficacy, regardless of serotype population orseason, and provides the convenience of a ready-to-use formulation. We alsohave considerable USpost-marketing experience that gives customers confidence and a safety profileof our vaccine.

For forecasting purposes, it is important to note that weachieved rapid and significant update in the US in 2007, with some of our salesresults driven by the development of a CDC stockpile. In 2008, we are focusedon driving continued market penetration for RotaTeq, successfully defending ourUSmarket position, and executing successfully on global launches, includingsecuring policy recommendations and funding to support rotavirus vaccination,which often takes a few years post-vaccine introduction. ROTATEQ is approved in59 countries and has launched in 30 countries around the world.

Now, let's turn to GARDASIL. During 2007,the product has experienced unprecedented launch update for vaccine. Thisgrowth has been driven by many factors including additional internationalregulatory approvals; government recommendations and reimbursement program;broad managed care acceptance; increased market penetration rates; andprofessional society endorsements.

Immediately following the launch ofGARDASIL, we saw rapid and high uptake across all indicated age cohorts. Morerecently, initiation and penetration rates among 13 to 18-year-olds isreflecting even stronger, and underlying demand and higher utilization over thepast 11 months than previously observed.

In 2008, we anticipate continued growthin all cohorts. From a competitive perspective, if a potential competitorlaunches in the USin 2008, we are extremely confident in the differentiated profile of GARDASIL,based on its exceptional cancer coverage, demonstration of long-term durationof efficacy, additional disease and cancer protection, and considerablepost-marketing experience.

Merck recognizes that it is important for girls and womenwho receive GARDASIL to comply with the recommendedthree-dose regimen. Currently, more than 5 million 9 to 26-year-old females inthe UShave received their first dose of GARDASIL. Third-party data has shown that todate, approximately 75% of vaccine recipients have received their second dose,and that approximately 50% have completed the full course of three doses.

We have achieved exceptionally highcompliance with GARDASIL, especially considering the time since launch. Forreference, vaccines such as our own hepatitis B vaccine took many years toreach the same level of compliance.

In accordance with our life-cycle management strategy for GARDASIL,we expect action on a number of sBLAs in 2008. As we have previously mentioned,Merck will commit data to the US FDA before the end of 2007 to seek anindication for women, aged 27 to 45. We anticipate FDA action on this sBLA in2008. Studies to evaluate the ecstasy of GARDASIL in males up to age 26 arealso underway, and we plan to submit an sBLA for males in 2008.

We also anticipate FDA action on two other sBLAs in thefirst quarter of 2008, including the application across protection. Overall, weare extremely proud of the performance of our vaccines business to date, and welook forward to its increasing contribution in 2008.

Now let's turn to FOSAMAX. For FOSAMAX, we anticipate fullyear 2008 revenue to be in the range of $1.1 billion to $1.4 billion. Revenueexpectations for FOSAMAX reflects the loss of US marketing exclusivity forFOSAMAX, as well as the continued impact of non-FOSAMAX alendronate in thenumber of European modules. Regarding Merck's strategy for managing theworldwide patent expiree for FOSAMAX in 2008, as you can appreciate, it is acompetitively sensitive area to discuss, and so we won't be getting intospecifics.

We are prepared for a number of different potentialscenarios to ensure that we maximize the value of the FOSAMAX franchise. And wewant to highlight the following: Merck recently launch a multi-channel positioncampaign, using, direct mail, general ads and web banners to driveposition traffic to the microsite, initiative highlights the potential to Save Now and Save Later with FOSAMAX.

Save Now refers to the fact that FOSAMAX has the highestnumber of lives in Tier 2 co-pay. And Save Later refers to the fact thatgeneric alendronate would be available at Tier 1 in Q1 of 2008.

Now just for clarification, FOSAMAX Plus D is 70 milligram/2800IU, as an additional two months of marketing exclusivity, because of theregulatory data exclusivity period. So that's carried out to April of 2008. The5600 formulation has data exclusivity to 2010. Please note that our 2008financial guidance is not dependant on any potential authorized generic forFOSAMAX.

Now, moving to other promoted medicine guidance, sales ofother reported products are expected to be $7.5 billion to $7.9 billion in2008. This range reflects the continued worldwide growth of our recentlaunches, including ISENTRESS, JANUMET and JANUVIA. It also includes theresidual worldwide revenue associated with ZOCOR, and potential revenuecontributions from CORDAPTIVE in the US.

Also, contributing to our top line, our revenues from ouralliances, primarily AstraZeneca LP, in 2008 Merck anticipates that theserevenues would be approximately $1.5 billion to $1.7 billion. A decision on thenon-PPI asset option that Merck holds has not been made. However, it is nowanticipated that a decision will have a material impact on this AZ LP guidance.The company intends to make that decision in the first quarter of 2008.

As always, the AZ LP guidance is an update based on recentresults, as well as future expectations, and reflects the dynamics of the PPImarket, which includes multiple generics and OTC products these create withregard to future volume and pricing.

Also, please keep in mind that our reaffirmed guidanceincorporates the expectations of the non-PPI products, such as Atacand, Plendil,Lexxel, and Entocort. As a reminder, Merck receives revenue at predeterminedpercentages of the USsales of the certain products by AstraZeneca, most notably Nexium.

Now let's move to PGM guidance. Dick covered this earlier,and as he mentioned, given the strength of our recent results, the company isfocused on continuing to look for opportunities to further improve PGM through2010 and beyond.

Our product gross margin percentage for next year isestimated to be approximately 77% to 78%. This also reflects our changingproduct mix, driven in part by the loss of marketing exclusivity for FOSAMAX.This guidance excludes the portion of the restructuring cost that will beincluded in the product loss, and will effect reported PGM in 2008.

Now moving to marketing and administrative guidance: Throughout2007, where appropriate, deliberate choices were made, in response to evolvingcompetitive dynamics, to provide additional advantages for our first in classproducts. In particular, we made incremental investment decisions to betterposition JANUMET in the marketplace to more aggressively support the ZOSTAVAXlaunch, and to continue fully supporting our other end-line products.

As you see from our product specific financial guidance, weare increasing earning guidance on many of our elements year-over-year, tocapture the anticipated benefits of these choices. The commercial teamcontinues to have a very full agenda. We are beginning to launch ISENTRESS, andwill continue to drive the momentum of the previous seven launches of the last24 months.

As we look at trends and opportunities in 2008, weanticipate marketing and administrative expense to be approximately $7.8billion to $8 billion. A significant portion of the increased spending isattributable to fluctuations in foreign exchange rates, which, as you are allaware, have increased significantly during the last 12 months.

Now, we do see this as a benefit on our top-line revenue,but as you're all aware, this does increase our marketing and administrationdollars, and dollar growth. But regardless of Forex, we are maintaining ahealthy amount of support behind our growing core and successful newfranchises, many of which are continuing their global launch effortsmarket-by-market in 2008.

Specifically, we anticipate continued DTC efforts forSINGULAIR and JANUVIA as well as appropriate promotional support for GARDASIL,ROTATEQ and ZOSTAVAX. We will also be supporting our ongoing launch agenda atMerck. For CORDAPTIVE and ISENTRESS in the US, and continue to support theinternational roll-out of GARDASIL and JANUVIA.

Finally, we are comfortable with the focus of thisinvestment. It has been very well managed. It is important to note that wecontinue our increased focus on cost-management, and we're seeing positivebenefits of practical ongoing cost management initiatives, including theredesign of many of our critical business processes.

Moving on to research and development, in 2008 we anticipatespending in the range of $4.7 billion to $4.9 billion, to fully fund the coreinternal R&D and ensure the continued progress of compounds in all phasesof development. Now internal R&D growth remains quite strong. We continueto invest in late-stage clinical trials and I'll mention a few here, ISENTRESSand MK-524A; MK-524B for atherosclerosis; MK-364 for obesity; MK-822 forosteoporosis; and MK-974 for migraine, as well as our recently acquired anin-license late stage compound.

In addition, as part of our compressive life cyclemanagement program, we will conduct additional studies to further expandindications for GARDASIL, ISENTRESS, JANUMET, JANUVIA and ZOSTAVAX, as well asother marketed products.

Beyond that, the company continues active externalcollaboration and business development agenda funding clinical grant programs,third-party scientific collaboration, and continuing ongoing licensing programsfor transactions outside the company.

Moving to restructuring guidance, as part of the company'srestructuring of its operation, additional costs related to site closing,position elimination and related costs will be incurred in 2008. The aggregate2008 pre-tax charge associated with our global restructuring program will beapproximately $100 million. With this funding in place, we do remain on trackto eliminate 7,000 positions by the end of 2008.

Now let me move onto JV equity income. As always, our 2008guidance for equity income from affiliates includes the results of the Merck andSchering-Plough collaboration, AstraZeneca LP, the Sanofi Pasteur MSD, theJ&J Merck and Merial joint ventures. In 2008, we expect this line will beapproximately $3 billion to $3.3 billion.

Regarding AstraZeneca, the impact on equity income in 2008is based on known events of the restructuring. So we included the financial impactof those known events in our equity income guidance for 2008. Specifically, theequity income priority return will be reduced from $300 million to $218 million,in April.

In addition, Astra will buy out Merck's share of the AstraUS variable return. That's the 10% royalty on Pulmicort, Rhinocort, Symbicortand Toprol-XL. The income contribution related to Merck Schering-Plough isexpected to increase in 2008, based on the continued growth of Zetia andVytorin in the US and in Europe.

Now let's turn to tax guidance. The consolidated 2008 taxrate is estimated to be approximately 24% to 26%, reflecting assumptions of ourproduct mix and geographic mix of sales. This guidance does not reflect the taxrate impact of the anticipated gain and distributions from AstraZeneca orrestructuring costs. The effective tax rate to be applied to the AstraZenecagain or the company's restructuring costs, is higher than the underlyingcompany effective tax rate guidance.

Now, let's turn to net income and earnings-per-shareguidance. In translating all of this into EPS, I will discuss some level ofdetail here regarding the drivers of our anticipated performance. But I wouldalso direct you to the details of our financial guidance contained in today'spress release.

Given these guidance elements, the company anticipates afull year 2008 non-GAAP EPS range of $3.28 to $3.38, excluding certain items,and the 2008 GAAP EPS range of $3.96 to $4.06. The 2008 GAAP guidance includesa pre-tax charge of approximately $100 million associated with this globalrestructuring program that we discussed a minute ago, and an estimated minimumgain from distributions associated with the AstraZeneca Limited Partnership.

As previously disclosed, pursuant to the provisions of thecompany's agreements with AstraZeneca, the company expects to receive certainpayments from AstraZeneca in the first half of 2008. The resulting pre-tax gainfrom those payments is estimated to be a minimum of $2.5 billion. Thisresulting minimum gain does not reflect the potential gain associated with thenon-PPI asset options that Merck hold. The company intends to make a decisionon the non-PPI asset option in the first quarter of 2008, as I mentionedearlier.

All of this guidance should be viewed in the context thatthe company is committed to providing quality full-year guidance and updatingit during the year. We believe that there is value in providing qualityfinancial guidance. This is because, first it assists investors and promotesstrong capital market, and second, we recognize that our business is complex,and we serve our investors well by being transparent regarding our financialperformance expectations.

We also recognize that our business has potential variablesthat may have an impact on individual quarters. And given the extent of our newproduct launches, the number of reengineering initiatives and our expandingpipeline, the exact timing of these events can be difficult to predict.

As management, we are focused on maximizing shareholdervalue over a multi-year time horizon. And accordingly, we feel our financialguidance reflects our strategy, and we manage the business that way. As we moveinto 2008, we will continue to focus our guidance on full year and multi-yeargoals, and we’ll only comment on mid-year or quarterly outlook as necessary.

We will not be providing a regular quarterly guidance.During our routine updates, we will talk about the drivers of our performanceand how they may affect certain quarters. In addition, as we think about providingthe most meaningful guidance for investors, going forward, we want to beexplicit about our assumptions regarding non-GAAP performance.

As a principle, going forward, Merck’s non-GAAP EPS willexclude certain items, if and when they are material and have a significantimpact on the business results, such as restructuring costs and in-processR&D charges or amortization of intangibles related to any acquisitionactivity should that ever arrive.

As I mentioned earlier, management believes that providingthis information enhances investors’ understanding of the company’sperformance. The company monitors and manages itself on this adjusted basis,and the company’s management incentive programs are tied to these non-GAAPmeasures. Given these factors, this information should be helpful for investorsand should be considered, in addition to, but not in lieu of earnings-per-shareprepared in accordance with GAAP.

So in summary, and most important of all, the companyremains on-track in terms of both strategy and performance to deliver long-termdouble digit earnings-per-share growth from 2005 to 2010, excluding certainitems.

As the company disclosed 24 months ago, Merck's new andin-line pharmaceutical products and vaccines are expected to drive revenue at acompound annual growth rate of 4% to 6%, from 2005 to 2010, including 50% ofthe revenues from the joint ventures from which Merck derives equity income.

We also expect that we can fully support our expandingpipeline with mid single-digit compound annual growth, and research fundingover the same period. And the productivity generated by our ongoing costmanagement initiative will allow Merck to fully capitalize on the promise ofour expanding product portfolio, while we expect to manage marketing andadministrative expenses at 2006 levels.

We have the financial strength to support our dividend, andwe remain fully committed to maintaining our dividend at the current level. Wealso expect to continue to provide some opportunities for share repurchases. Atthe same time, we continue to fully invest in our key strategic priorities.

With our 2007 and now 2008 guidance, it is clear that ourproducts are driving a healthy top-line, despite lapping the significant ZOCORexpiry and the upcoming FOSAMAX expiry. We are very pleased as we move out of2007 and into 2008, as we anticipate continued strong performance from our keyfranchises.

Our course is tough, and we are progressing towards 2010 intothe next decade. So indeed, Merck is quite busy with its successful productlaunches worldwide. And behind the scenes, we continue to reengineer thecompany into a lean and effective competitor for the future.

Now, I'll turn the call back over to Graeme, who willintroduce the question-and-answer portion of this call. Thank you for yourtime.

Graeme Bell

Thank you, Peter. We appreciate the prepared remarks. Wewill now open the call to take your questions. We will take the questions inthe order that they are received, and try to get through as many as possible inthe remaining time.

We ask that you keep your questions focused on itemsrelating to today's announcement and we will not be previewing anythingpertaining to our scheduled annual business briefing on December 11.

And just a reminder on that, if you do plan to attend inperson, but have not yet signed up, we encourage you to do so because you needto register electronically for security purposes. So at this point, I wouldturn the call back over to Tyler, who will communicate instructions in theQ&A format, and then introduce the first question.



Thank you. (Operator Instructions). Your first questioncomes from David Risinger of Merrill Lynch.

David Risinger -Merrill Lynch

Thanks very much. I have three questions. First, could yougo into some more detail about your GARDASIL growth assumptions for 2008, andthe variables we should think about that could drive GARDASIL stronger orweaker than expected? Second, could you discuss your external R&D dealassumptions for '08 versus '07? Obviously, you took some expenses in yourR&D line in '07, and I was just hoping that you could help us think aboutyour assumptions for '08 versus '07? And then third, if you could comment onZOSTAVAX and your outlook for ZOSTAVAX, whether that revenue will grow in 2008,or whether it's not much of a growth opportunity yet, until you are able tobuild out the manufacturing or fix the manufacturing and ramp it up more longerterm? Thank you.

Richard Clark

Starting with ZOSTAVAX, certainlyit's important for us to make sure that, as we said, we started upmanufacturing, and that we were able to resolve the potency issues and we'll beable to ramp it up. And although ZOSTAVAX will continue to grow in 2008,particularly in the US,we really want to make sure that we have the production issues behind us beforewe continue launching outside of US, so that will continue to grow past 2008.

We don't get specific assumptionsaround external R&D. It is a critical part of our strategy, and I thinkwe've been able to convince you that we're very aggressive in some of therelationships we built. We've even not only helped from the technologystandpoint, but a Phase III, as well. So we do have activities built into theplan for our continuing external R&D assumptions. That being said, if theright acquisition or licensing bill comes along, and it's a benefit from ourshareholder standpoint, it's attune or not in our plan, then I think we have tobe aware with everything so we can accomplish it.

Peter Kellogg

So, I'd like to take question onGARDASIL liquidated. Clearly, GARDASIL has gone through an excellent launchthis year and the team has done a great job of driving penetration in theprimary 9 to 18 year-old female group, and obviously, they have done quite wellin the first year of launch, and they'll continue to drive that as our labelexpands, and as we kind of set our sights to other groups, GARDASIL will seesome expansion in those other areas as well.

We don't break our guidance, obviously, for individualproducts, but I think one of the things that’s true for GARDASIL, and justgenerally for all vaccines, if you obviously have to model it, which you allare well aware, based on cohorts in penetration, and then continuing labelexpansions that really allow you to move further. We did talk a lot about thedifferent sBLAs that we're submitting next year, and over a number of yearsthat obviously will drive further penetration in other areas such as those.

So, I think you have to look at the vaccines business, bothin the context of cohort penetration, but also you have to see it as amulti-year growth program to work your way through the populations initiallyand then settling on the continuing flow of populations into the indicatedareas. So, as we pull all that together, we do recognize that GARDASIL just hada phenomenal year in 2007 and we also have set kind of very appropriate targetsfor next year, given all those factors.

Graeme Bell

Taylor,could we have the next question, I believe it's from Tim Anderson, and we atMerck certainly welcome Tim back onto the sell-side. We know you initiatedcoverage recently on Merck, so Tim please go ahead.

Tim Anderson - Sanford Bernstein

Thank you very much, a couple of questions. So, the companyis now two years into the five year guidance that you laid out in December '05.I think during those first two years, it's safe to describe Merck asessentially crushing the numbers on the upside, probably above your ownexpectations. At the same time, you are keeping those five year figures thesame.

So, either Merck is continuing to be a little bitconservative or is there something in future periods that's come up that yousee, that could erase those big gains you had in the first two years? Anycomments on that would be appreciated. And then Dick, with your background ofmanufacturing, I am hoping you can give us some specific answers on the grossmargin line. Tell us exactly what it was that's kind of led to this upsiderelative to how you originally saw it unfolding?

Richard Clark

Thank you, Tim. Certainly, we are very pleased with theresults that we have had in the two years. As you know, we've adopted afive-year goal and we are conservative. I am going to make sure that we don’tover-promise and I want to make sure the company continues its focus. And eventhough we've made great strides for the first two years, I want to make surethat we keep that focus and ask that we don’t declare victory. As you know, wehave either large patent expirations coming our way, and in [10] as well, so wehave a [9, 10], which are important.

But the underlying business is very strong, and quitefrankly, I am not sure exactly how good we are yet, and we want to make surethat we keep our focus to be able to accomplish that. One thing that I'velearned Tim, in going through this process and setting that bar in December of2005, is that you do not underestimate the Merck organization with thededication of its employees.

So, we are on this journey and hopefully it continues notonly in 10, but I spent a little bit of my time now looking at 11 to 15, tomake sure that what we are able to put it in place. By 10, I can sustain thatthrough the 11, 15 periods, but also put a model together for that. So, we arestill very optimistic and there are no underlying issues, other than wanting tomake sure that we continue to focus and execute against that.

On the GM line, I have been in manufacturing over 25 yearsof my life and I have never seen anything accomplished like the way the PGMimproved that I've seen in manufacturing. Over the last two years, literallyit’s been breathtaking, with their ability to really take a look at every partof their business, and it's not just closing plants and outsourcing.

That’s an easy part of it, to take the fundamental part ofthe business and put a production system in place using Lean and Six-Sigma insupply chain management and improved process capability throughout the world.So, they have been leading supply chains and I had high expectations when Itook over manufacturing in 2003.

But each year, they continue to exceed the capabilities thatare in place, and I think they will continue to do it. But it's just aremarkable accomplishment, and I think some day it should be in the Harvard Businessfor UKstudy. That's how good this is.

Graeme Bell

Next question, please?


Your next question comes from Jami Rubin of Morgan Stanley.

Jami Rubin - MorganStanley

Hi, thank you. A couple of clarification questions, Peter,for you. On the AstraZeneca payment of $2.5 billion, I recall the companydisclosing previously a minimum payment of $4.3 billion debt revolved aroundthe non-PPI assets. And when you adjusted for the $1 billion loan toAstraZeneca, that would be a $3.3 billion payment, is that part of the $2.5billion? I'm just trying to put the pieces together. Is that a part of it? Ifnot, would you expect an additional $3.3 billion in the first quarter, if youdecide to call your option on non-PPI assets, so if you could clarify that?

And secondly, I think on vaccines, did I hear you correctlysaying that we should expect no ProQuad sales in the US until the varicella manufacturingissues are resolved? Thanks.

Peter Kellogg

Hi, Jami, it's Peter. So, taking the second question first,yes, you did hear that correctly, that's right. That's just as I discussed, andthat's all about the allocation of the varicella.

On the AstraZeneca LP, all the things you said are somewhatcorrect, so let me just clarify. The first number that you were quoting wasmore about the cash received based on the formulaic elements of the contract.What I am highlighting is, what would be the gain on the P&L that we'd bebooking. And so, I would to just highlight that there is many moving parts inhere, but generally, it starts with the buyout that is formulaically driven,which does generate a very high level of cash payment coming to us.

We then, obviously, look at after-tax, [gain] and so forth.But also we have investment balance in the AZ LP piece already, so the numberwe gave is the minimal gain that we would anticipate in 2008. Obviously, we arenot yet addressing the option that we have on the non-PPI products.

Graeme Bell

Next question, please?


Your next question comes from Barbara Ryan of Deutsche Bank.

Barbara Ryan -Deutsche Bank

Good morning and thank you for taking my question. I guessmy question is also probably for Peter. You gave gross margin guidance in arange and you gave SG&A, as well as R&D in sort of explicit dollar terms.I'm just wondering, as we move through the year, and variability versus targetson revenues, specifically on products like GARDASIL, I'm just wonderingirrespective of where you come on with revenues, if revenues are better, wouldthat take you out of that range for gross margin, number one? And number two,how would you view the spending targets in that light as well.

Peter Kellogg

Okay. Thanks, Barbara. So, I think you articulated it prettywell, which is obviously the way we intend to think about and give guidance. Sowe look at PGM as a percentage, because that tends to be adapting to whateverthe volume trends are. Whereas, with our SG&A and R&D spending, we setmore budgetary targets and really try to drive productivity within those budgetsto do as much as we can to support the business.

Obviously, if our volumes change during the year, the PGMguidance, as a percentage, can flow right with that. We don't really anticipateany volume changes or mixed effects. If we take that as our guidance range,actually in that arena, that’s a pretty healthy range to work with. And so, wehave looked at that pretty carefully and think about where there may be someupsides or risks on the volume, and we try to factor that in, to make sure ourguidance covers those eventualities.

Now, of course, if we ever started to see that we areshowing that it is above or below that range, we would certainly highlight thaton a quarterly earnings call, and let everybody know. But we don’t anticipatethat being a likely outcome.

Relatively, to have volume would impact our R&D orSG&A spending, and we don’t really anticipate that being a big factor, aswe spend a lot of time putting together the budgetary numbers for the year. AsI mentioned last year, we did aggressively support the product launches, and wehad a number of competitive dynamics that, if you will, opened up windows ofopportunity for the company to establish ourselves in the market, ahead ofcompetition, perhaps even better than what we ever envisioned originally whenwe put the plans together.

And what we did is we were able to allocate fundsappropriately in the right areas and make sure that we really seized theopportunity, and I think you will see that in the results, quite frankly. Theseare pretty big budgets, and quite frankly, we don’t veer with a number of setassumptions. As we work through the year, we work very dynamically with boththe commercial team and the R&D team to really find the right formula.

I think the one thing that is always a little bit ofchallenge is you have to, in the R&D world, make certain assumptions aboutwhat’s going to be happening to your clinical trials. I mean, I think we wouldall agree that if every trial we ran succeeded in the pipeline, it was justbarreling ahead, and we have to deal with that on the R&D side. But we tryto make pretty good estimates of what we think we'll be likely to be spending.

And again R&D is a long-term gain. So really, within thenext year, we feel very comfortable with the range of guidance we give onR&D. Probably that eventuality will only be sort of a multi-year question.

So, I think you articulated appropriately, Barbara. But wefeel pretty good about the PGM guidance as a percentage, and we wouldn’tanticipate going outside the SG&A or R&D dollar ranges within the next12 months. Certainly, we feel pretty good about the guidance there.

Graeme Bell

Next question, please, Taylor?


Your next question comes from Tony Butler of LehmanBrothers.

Tony Butler - LehmanBrothers

Yes. Good morning, and thank you very much. I just wanted toexplore the varicella manufacturing, once again, to make sure I understand. Andwould you ramp manufacturing back in the second half of 2007? Where are we inthis exact process, as the FDA reviewed batch cultures to date or batches todate? And can you provide any anticipation of when you'll be back on the marketwith varicella to the satisfaction of the regulatory agencies? Thank you.

Peter Kellogg

As you know, Tony, from the varicella standpoint, we areable to the supply varicella for everything, except the ProQuad, which is thefrozen part and or ZOSTAVAX.

Now, varicella is a part of MMR, measles, mumps, rubella andVARIVAX, and particularly for children who hit the second dose of VARIVAX isokay, because the potency levels that you need there is different.

It's too early to say yet, because we're just back in themanufacturing. It's a long process. We're very encouraged by the results we'reseeing and the filings that we have to put together. But it's too early to beable to commit yet. We need a few more months to be able to sharesustainability, and if the processes have been validated, and if the filingwith the FDA are the right ones.

Graeme Bell

Next question please, Taylor.


Your next question comes from Chris Schott of Banc ofAmerica.

Chris Schott - Bancof America

Great, thank you. I just had two quick questions. Just acouple of additional comments on the gross margin drivers, it certainly seemslike you had a lot of success hitting your targets.

It's just a matter of executing sooner than expected oryou're actually seeing greater than anticipated benefit year? I guessspecifically, when we look at beyond 2008, should product mix be the biggerdriver, or do we see some additional opportunities from some rationalization?

And then just within your expectations on internationalGARDASIL in '08. Should we expect to continue to see strong performance inmarkets like Australia?How sustainable was that or it was some one-time nature to that business, andthen some other key markets which we may be should watch for that betterinternational business outside of the JV in '08? Thanks.

Richard Clark

Just to your second and your first question on gross margin,its not only the ability to accelerate some of the activities that’s takingplace in manufacturing, but the result that we are getting out of that havebeen above our expectations. I consider only about half way through the plan towin, which we want achieve by 2010, for any good manufacturing organization youshould see increased productivity and efforts. So, I have high anticipationthat will continue to see great efforts on the business.

The Merck production system, which is Lean Six Sigma that weare putting in place, have so much upside potential that are yet still to beachieved. So, I am very optimistic and really it is around rationalization, andas you know, we've closed facilities.

It's more about robust fixed input processes globally thatwe put in place, building strategic partnerships with our vendors and beingable to drive PGM. PGM is not only a manufacturing issue, it really depends ona good relationship between the commercial organizations and the researchorganizations, as you've developed in processes, as you developing packagingcapabilities and containers for your product.

And I think one of the things we've been able to do is toalign the entire organization around PGM, so then, the entire organization isour own business. And quite frankly their bonuses are a function how low PGMsdo. So, I see potential continued on the upsides, and our ability to be anoutstanding manufacturing organization. A lot like Toyotahas done with the Toyotaproduction system. I mean that’s engraft and that's where we are headed.

Peter Kellogg

On the GARDASIL question. Regarding GARDASIL status outsidethe US,if I understood that correctly, I had a look at that going forward, so just torecap, GARDASIL has been improved in 86 countries at this point, and has beenlaunched in 72 of those countries. Envisioned through our third quarter of '07,over 13 million doses of GARDASIL have been sold worldwide and 10.5 million ofthose are in the US.

So, the balance is outside the US. So, I think the US isin early days still, although we are making very good progress in the approvalsin the launches and I think that, at this point, it's a little bit early tohave conclusive comments really. I think it's all ahead of us, but we are quitepleased with the response to date from patients, physicians and the regulatoryauthorities and payers.

We are very excited to be leading the charge in the fightagainst cervical cancer worldwide, and so we really do think the internationalbusiness will be an important part of total GARDASIL franchise as we moveforward. I really don't have the whole lot also than that too add per se atthis point. I think it's relatively earlier days.

Chris Schott - Bancof America

One other comment about GARDASIL, because there were someconcern earlier on, do you have the ability to supply and that’s why I want toreiterate that there are no supply issues with GARDASIL now or in the future.So, there are plenty of products, to be able to support the launches, and theincreased volumes that we are seeing in coming years.

Graeme Bell

Thank you. So, Taylorgiven the time, we will take two more questions. So, could we have the nextquestion, please?


Thank You. Your next question comes from Roopesh Patel ofUBS.

Roopesh Patel - UBS

Thanks I have few questions. First on SG&A, I justwanted to clarify if the long-term guidance of $7.44 billion in 2010 is atconstant exchange rates or is it regardless? And if it is later then thatimplies 5% to 7% cut in 2009 and '10 relative to your guidance for 2008. I wasjust wondering if you could offer a little bit of color on what factors willdrive that. Secondly, on gross margins I wanted to also just clarify if aweaker dollar has a positive or a negative impact on gross margins? Thank you.

Peter Kellogg

Hi, this is Peter. Let me take it. We are getting intoForex, so let me take these and then Dick you can add any color on, that willbe great. So, on SG&A, that's correct. And in my talk I commented on thefact that clearly Forex, overall, helped the bottom line and the top line forMerck, but it does increase the cost lines above SG&A most notably. And so,we have had quite a surge in the Euro versus the US. I don’t think you can turn on aTV today without hearing about that.

I think, going forward, and targeting 2010, I don't knowthat I've got my crystal ball any better positioned than anybody else's. So tobe able to pick exactly what the foreign exchange rate will be as we wrap up2010 is a tough call. So I don't think we would be willing to say at this pointthat we know exactly what the implications of that are.

But I do think it is important to recognize, that in theSG&A area, we are right now moving forward on lot of initiatives, both inthe sales and marketing side and the new commercial structure, and so fourth. Andin the G&A side. in terms of systems and restructuring and so forth, manyof which we are in the investment mode or we in a change mode right now, weanticipate driving some benefits as we go through the backend of this decade. Andof course we are working with a pretty precise set of numbers that we areshooting for, relative to 2010. And we do believe that we can driveproductivity in that world.

However, obviously based on where the foreign exchange ratefalls, I can't really predict exactly the amount, as the Euro continues to strengthen.From here, we have to take them into account. On the other hand, perhaps thedollar will come back and will be looking something more in the 120s, or something,by the time it gets 210. So, I don’t want to be conclusive of what the impactof Forex is, relative to our 2000 target at this point.

On the PGM impact of foreign exchange on our P&L. Dick,I know that you want to comment on that, but I believe it's a lesser impact,quite frankly. Obviously, the workers into our PGM, it does have multiplecurrencies than that which are received, I think predominantly 10 time more USdollar denominative type factors.

And obviously, if foreign exchange does drive certain supplyelements, we can always move supply between suppliers and (inaudible) moderatethat. But we don’t tend to see quite as much of a Forex impact on the PGM linein general. I wouldn’t want to be absolute about that, because obviously thereis some foreign exchange flowing through there. But I wouldn’t look to the PGMline and we don’t tend to talk about Forex on that line quite as much.

Graeme Bell

But Taylorgiven the time, could we have the last question please.


Your final question comes from James Kelly of Goldman Sachs.

James Kelly - GoldmanSachs

Thank you very much and good morning. I have two quickquestions. First on GARDASIL, many of the qualitative comments focus on thepatients up to 18-year-olds. And I don’t know if there is any qualitative coloryou can probably provide for us in that group from 19 to 26, and what adoptionlooks like there. And then secondly Peter, in your comments on the program thatare included inside the R&D growth, I don’t believe you mentioned the CETPinhibitor, and I just wondered if there was anything we should think aboutregarding that product.

Richard Clark

Great, thanks.

Peter Kellogg

From a CETP standpoint, we have not made any final decisionson the CETP program yet, and certainly we will give you more updates on dataand positioning of that in the next week and our ABB [meeting].

Richard Clark

Great. And then relative to the GARDASIL cohorts, I thinkdifferentiating between the cohort group of 9 to 18 year old versus 19 to 26year old.

Now, I would just highlight, obviously, they are very differentpopulations and have very different outlooks for using this product, you know,sometimes you find that. I think that it's no question that the penetration ofthe 9 to 18 year old has been our biggest driver so far. And quite frankly, Iwould applaud the vaccine group and that whole franchise for just doingactually a fantastic job in that area.

In the 9 to 26 year olds or the other cohort groups thatover time may come into the label, I think that there is still more work aheadof us, now that sounds to be quite as fast a penetration rate. And that's beenour expectation and that's what we're actually seeing. So I think that's moreof a steady process and it is a little different than the 9 to 18 year old.

So I think you're correct in kind of differentiating thetwo. I do think that we've done a superlative job with the 9 to 18 year old. Inthe 19 to 26, I think you're seeing the firepower start to move into thatreally nicely. So that will be a driver for us going forward, I think.Obviously, both of these cohorts will be drivers for us going forward.

Graeme Bell

So that last question concludes today's conference call. Theinformation from today's call, both the transcript and the replay, will beavailable on our website. And as always [Mike Nally] and I will be availablefor the rest of the day to take your calls.

So, I'd now like to turn the call back to Dick Clark forsome concluding remarks.

Richard Clark

Thank you, Graeme, and thank you all for joining us on ourcall today. 2008 represents the halfway point towards our long-term guidance.As I stated earlier, many of the investments that we're making today to growour pipeline and to engineer our business are enabling us to deliver sustainedrevenue and earnings growth beyond 2010. We look forward to discussing ourprogress at our business briefing next week.

So, thank you. We appreciate your interest and yourparticipation. Operator, thank you very much for your assistance.


Thank you. This concludes today's conference call. You maynow disconnect.

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