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Executives

Graeme Bell - Head of IR

Richard Clark - Chairman, President and CEO

Peter Kellogg - EVP and CFO

Analysts

David Risinger - Merrill Lynch

Tim Anderson - Sanford Bernstein

Jami Rubin - Morgan Stanley

Barbara Ryan - Deutsche Bank

Tony Butler - Lehman Brothers

Chris Schott - Banc of America

Roopesh Patel - UBS

James Kelly - Goldman Sachs

Merck & Co., Inc. (MRK) Financial Guidance Call December 4, 2007 8:30 AM ET

Operator

Good day everyone, and welcome to Merck's Financial Guidance Conference 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 2008 financial guidance. I’m Graeme Bell, Head of Investor Relations. Joining me on the call today with prepared remarks is our Chairman, President and CEO, Richard Clark, and Peter Kellogg, our Executive Vice President and Chief Financial Officer.

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

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

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

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

So with that, I'll turn the call over, and we will begin with 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 hosting today’s call to update you on our financial performance for 2007 and to provide new financial guidance for 2008. Today’s guidance call confirms that many of our topline and productivity goals are making great progress, and we remain on track to achieve our 2010 targets.

As we wrap up 2007 and enter 2008, our guidance reflects numerous successes already in our ongoing agenda of product launches around the world. We are pleased with their strong performance in 2007, and we are proud that we have positioned Merck for growth in 2008, a year where we are losing marketing exclusivity for one of our largest products.

Let me start with the current year. Despite challenging economic and healthcare environments, 2007 has been a remarkable year for Merck. The Company built off the new products' momentum that was generated in 2006, 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 process for JANUMET and ISENTRESS. And our customers are recognizing the value of these products as evidenced by the early prescription data.

Since 2005, we have been changing every aspect of our business in order to position Merck for sustained revenue and earnings growth. The company continues to re-engineer many of its processes across the divisions to ensure that we strive towards operational efficiency, and maintain discipline 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 will help us succeed in 2008, and more importantly, also position us to success in 2010 and beyond. Our business decision, together with our ability to successfully execute on our business plan, has given us the confidence to raise our financial guidance several times over the last twelve months.

In 2007, we have made strides to remove the significant amount uncertainty related to legal concerns to the US VIOXX product liability settlement agreement announced on November 9, 2007, as well the anticipated resolution for the other litigation.

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

All the details are contained in today's press release, and in 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-line and newer franchises will continue their strong performance, and then we will further extend the success of the Zetia and Vytorin franchises, as well as the launch of additional new products.

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

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

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

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

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

When we initially provided long-term guidance on PGM in 2005, we knew that our target was aggressive, yet achievable. This is a testament to the hard work and dedication of Merck employees that we now anticipate, and that we will accomplish this goal a year earlier than initially communicated.

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

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

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

On earning-per-share, the company anticipates a full year 2008 non GAAP EPS range, from $3.28 to $3.38, excluding certain items. In the 2008 GAAP EPS range was $3.96 to $4.06. Regarding our long-term performance targets to 2010, when we established the long-term objectives, we knew that it would require outstanding execution on our new strategy to achieve these goals.

In 2007 and 2008, guidance that we are providing represents the 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 that we remain fully focused on continuing with research, and regulatory and commercial execution, so that we can deliver sustained revenue and earning growth beyond 2010 as well.

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

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

Having provided a few details on anticipated performance, I want 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 can sometimes fade away with the numbers.

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

I am optimistic about the future of Merck. Although the healthcare market continues to be challenging, we are confident that our behavior sets us apart from the rest of the industry, and that our customers will increasingly find value in our products and respect our responsibility and capabilities as we approach R&D and commercialization, ensuring we have programs to further broaden our assets.

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

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

Peter Kellogg

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

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

The company is providing information on earnings-per-share in 2007, adjusted for certain items. Because of the nature of these items and the impact they can have on the analysis of underlying business performance and trends, management believe that providing this information enhances investors' understanding of the company's performance. This information should be considered in addition to, but not in lieu of, earnings-per-share prepared in accordance 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 liability litigation settlement that was previously disclosed on November 9. As a reminder this is separate from the company's existing reserve for future legal expense costs related to the Vioxx litigation, which was previously disclosed at $720 million as of September 30, 2007. The company continues to evaluate that reserve.

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

This charge represents an accrual based on our best estimates of the likely outcome. The resolution of these matters is still subject to execution of definitive agreements. And fourth, an anticipated fourth quarter pre-tax gain of approximately $450 million relating to insurance proceeds, which the company was awarded in the previously disclosed arbitration with the company's upper level access product liability insurance carriers, related to coverage for cost incurred in the Vioxx product liability litigation.

Now, excluding these items, our core business performance continues to be very strong. As you will see from the details in today's release, all of the guidance elements that support our full year 2007 EPS ranges remain unchanged.

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

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

Taken together, this growth will offset several significant patent expiries in 2008. I just mentioned FOSAMAX, but we also anticipate the loss of marketing exclusivity for COSOPT and TRUSOPT, and both of those are in October 2008 in the US and for 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 on key revenue contributors. I'd like to spend a moment talking about several of these. I'd like to begin with SINGULAIR. Worldwide product sales for SINGULAIR are anticipated to be in the range of $4.6 to $4.8 billion.

This anticipated performance reflects continued leadership in the US respiratory market, driven by the products' superior efficacy profile and the launch of incremental indications around the world. The growth in this franchise reflects continued strengthening of the brand's efficacy perception and increased market share in all geographic regions.

Moving to vaccine revenue, as recorded by Merck, given the increasing importance of the vaccine business on our overall results, I would like to provide additional color and context in our guidance for this area. We recognize that investors have difficulty in forecasting the vaccines business, because script and share data are not reliable.

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

While we do not provide guidance on specific vaccines products, I wanted to provide you with some of our assumptions for our vaccine business in 2008. First, to optimize the available varicella bulk across our varicella-containing vaccines, we have prioritized manufacturing of VARIVAX. Our financial guidance assumes that we do not reintroduce ProQuad in the US or launch ZOSTAVAX or ProQuad in ex-US markets in 2008.

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

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

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

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

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

ROTATEQ is the only antiviral rotavirus vaccine designed specifically to cover the most common serotypes that cause 90% of disease. It has demonstrated consistent efficacy, regardless of serotype population or season, and provides the convenience of a ready-to-use formulation. We also have considerable US post-marketing experience that gives customers confidence and a safety profile of our vaccine.

For forecasting purposes, it is important to note that we achieved rapid and significant update in the US in 2007, with some of our sales results driven by the development of a CDC stockpile. In 2008, we are focused on driving continued market penetration for RotaTeq, successfully defending our US market position, and executing successfully on global launches, including securing policy recommendations and funding to support rotavirus vaccination, which often takes a few years post-vaccine introduction. ROTATEQ is approved in 59 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. This growth has been driven by many factors including additional international regulatory approvals; government recommendations and reimbursement program; broad managed care acceptance; increased market penetration rates; and professional society endorsements.

Immediately following the launch of GARDASIL, we saw rapid and high uptake across all indicated age cohorts. More recently, initiation and penetration rates among 13 to 18-year-olds is reflecting even stronger, and underlying demand and higher utilization over the past 11 months than previously observed.

In 2008, we anticipate continued growth in all cohorts. From a competitive perspective, if a potential competitor launches in the US in 2008, we are extremely confident in the differentiated profile of GARDASIL, based on its exceptional cancer coverage, demonstration of long-term duration of efficacy, additional disease and cancer protection, and considerable post-marketing experience.

Merck recognizes that it is important for girls and women who receive GARDASIL to comply with the recommended three-dose regimen. Currently, more than 5 million 9 to 26-year-old females in the US have received their first dose of GARDASIL. Third-party data has shown that to date, 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 high compliance with GARDASIL, especially considering the time since launch. For reference, vaccines such as our own hepatitis B vaccine took many years to reach 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 an indication for women, aged 27 to 45. We anticipate FDA action on this sBLA in 2008. Studies to evaluate the ecstasy of GARDASIL in males up to age 26 are also underway, and we plan to submit an sBLA for males in 2008.

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

Now let's turn to FOSAMAX. For FOSAMAX, we anticipate full year 2008 revenue to be in the range of $1.1 billion to $1.4 billion. Revenue expectations for FOSAMAX reflects the loss of US marketing exclusivity for FOSAMAX, as well as the continued impact of non-FOSAMAX alendronate in the number of European modules. Regarding Merck's strategy for managing the worldwide patent expiree for FOSAMAX in 2008, as you can appreciate, it is a competitively sensitive area to discuss, and so we won't be getting into specifics.

We are prepared for a number of different potential scenarios to ensure that we maximize the value of the FOSAMAX franchise. And we want to highlight the following: Merck recently launch a multi-channel position campaign, using Fosamax.com, direct mail, general ads and web banners to drive position traffic to the microsite, goinggeneric.com. This initiative highlights the potential to Save Now and Save Later with FOSAMAX.

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

Now just for clarification, FOSAMAX Plus D is 70 milligram/2800 IU, as an additional two months of marketing exclusivity, because of the regulatory data exclusivity period. So that's carried out to April of 2008. The 5600 formulation has data exclusivity to 2010. Please note that our 2008 financial guidance is not dependant on any potential authorized generic for FOSAMAX.

Now, moving to other promoted medicine guidance, sales of other reported products are expected to be $7.5 billion to $7.9 billion in 2008. This range reflects the continued worldwide growth of our recent launches, including ISENTRESS, JANUMET and JANUVIA. It also includes the residual worldwide revenue associated with ZOCOR, and potential revenue contributions from CORDAPTIVE in the US.

Also, contributing to our top line, our revenues from our alliances, primarily AstraZeneca LP, in 2008 Merck anticipates that these revenues would be approximately $1.5 billion to $1.7 billion. A decision on the non-PPI asset option that Merck holds has not been made. However, it is now anticipated 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 recent results, as well as future expectations, and reflects the dynamics of the PPI market, which includes multiple generics and OTC products these create with regard to future volume and pricing.

Also, please keep in mind that our reaffirmed guidance incorporates the expectations of the non-PPI products, such as Atacand, Plendil, Lexxel, and Entocort. As a reminder, Merck receives revenue at predetermined percentages of the US sales 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 is focused on continuing to look for opportunities to further improve PGM through 2010 and beyond.

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

Now moving to marketing and administrative guidance: Throughout 2007, where appropriate, deliberate choices were made, in response to evolving competitive dynamics, to provide additional advantages for our first in class products. In particular, we made incremental investment decisions to better position JANUMET in the marketplace to more aggressively support the ZOSTAVAX launch, and to continue fully supporting our other end-line products.

As you see from our product specific financial guidance, we are increasing earning guidance on many of our elements year-over-year, to capture the anticipated benefits of these choices. The commercial team continues to have a very full agenda. We are beginning to launch ISENTRESS, and will continue to drive the momentum of the previous seven launches of the last 24 months.

As we look at trends and opportunities in 2008, we anticipate marketing and administrative expense to be approximately $7.8 billion to $8 billion. A significant portion of the increased spending is attributable to fluctuations in foreign exchange rates, which, as you are all aware, 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 administration dollars, and dollar growth. But regardless of Forex, we are maintaining a healthy amount of support behind our growing core and successful new franchises, many of which are continuing their global launch efforts market-by-market in 2008.

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

Finally, we are comfortable with the focus of this investment. It has been very well managed. It is important to note that we continue our increased focus on cost-management, and we're seeing positive benefits of practical ongoing cost management initiatives, including the redesign of many of our critical business processes.

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

In addition, as part of our compressive life cycle management program, we will conduct additional studies to further expand indications for GARDASIL, ISENTRESS, JANUMET, JANUVIA and ZOSTAVAX, as well as other marketed products.

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

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

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

Regarding AstraZeneca, the impact on equity income in 2008 is based on known events of the restructuring. So we included the financial impact of those known events in our equity income guidance for 2008. Specifically, the equity 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 Astra US variable return. That's the 10% royalty on Pulmicort, Rhinocort, Symbicort and Toprol-XL. The income contribution related to Merck Schering-Plough is expected to increase in 2008, based on the continued growth of Zetia and Vytorin in the US and in Europe.

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

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

Given these guidance elements, the company anticipates a full 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 includes a pre-tax charge of approximately $100 million associated with this global restructuring program that we discussed a minute ago, and an estimated minimum gain from distributions associated with the AstraZeneca Limited Partnership.

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

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

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

As management, we are focused on maximizing shareholder value over a multi-year time horizon. And accordingly, we feel our financial guidance reflects our strategy, and we manage the business that way. As we move into 2008, we will continue to focus our guidance on full year and multi-year goals, 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 performance and how they may affect certain quarters. In addition, as we think about providing the most meaningful guidance for investors, going forward, we want to be explicit about our assumptions regarding non-GAAP performance.

As a principle, going forward, Merck’s non-GAAP EPS will exclude certain items, if and when they are material and have a significant impact on the business results, such as restructuring costs and in-process R&D charges or amortization of intangibles related to any acquisition activity should that ever arrive.

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

So in summary, and most important of all, the company remains on-track in terms of both strategy and performance to deliver long-term double digit earnings-per-share growth from 2005 to 2010, excluding certain items.

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

We also expect that we can fully support our expanding pipeline with mid single-digit compound annual growth, and research funding over the same period. And the productivity generated by our ongoing cost management initiative will allow Merck to fully capitalize on the promise of our expanding product portfolio, while we expect to manage marketing and administrative expenses at 2006 levels.

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

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

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

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

Graeme Bell

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

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

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

Question-and-Answer Session

Operator

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

David Risinger - Merrill Lynch

Thanks very much. I have three questions. First, could you go into some more detail about your GARDASIL growth assumptions for 2008, and the variables we should think about that could drive GARDASIL stronger or weaker than expected? Second, could you discuss your external R&D deal assumptions for '08 versus '07? Obviously, you took some expenses in your R&D line in '07, and I was just hoping that you could help us think about your assumptions for '08 versus '07? And then third, if you could comment on ZOSTAVAX 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 to build out the manufacturing or fix the manufacturing and ramp it up more longer term? Thank you.

Richard Clark

Starting with ZOSTAVAX, certainly it's important for us to make sure that, as we said, we started up manufacturing, and that we were able to resolve the potency issues and we'll be able 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 before we continue launching outside of US, so that will continue to grow past 2008.

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

Peter Kellogg

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

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

So, I think you have to look at the vaccines business, both in the context of cohort penetration, but also you have to see it as a multi-year growth program to work your way through the populations initially and then settling on the continuing flow of populations into the indicated areas. So, as we pull all that together, we do recognize that GARDASIL just had a phenomenal year in 2007 and we also have set kind of very appropriate targets for next year, given all those factors.

Graeme Bell

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

Tim Anderson - Sanford Bernstein

Thank you very much, a couple of questions. So, the company is 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 as essentially crushing the numbers on the upside, probably above your own expectations. At the same time, you are keeping those five year figures the same.

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

Richard Clark

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

But the underlying business is very strong, and quite frankly, I am not sure exactly how good we are yet, and we want to make sure that we keep our focus to be able to accomplish that. One thing that I've learned Tim, in going through this process and setting that bar in December of 2005, is that you do not underestimate the Merck organization with the dedication of its employees.

So, we are on this journey and hopefully it continues not only in 10, but I spent a little bit of my time now looking at 11 to 15, to make sure that what we are able to put it in place. By 10, I can sustain that through the 11, 15 periods, but also put a model together for that. So, we are still very optimistic and there are no underlying issues, other than wanting to make sure that we continue to focus and execute against that.

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

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

But each year, they continue to exceed the capabilities that are in place, and I think they will continue to do it. But it's just a remarkable accomplishment, and I think some day it should be in the Harvard Business for UK study. That's how good this is.

Graeme Bell

Next question, please?

Operator

Your next question comes from Jami Rubin of Morgan Stanley.

Jami Rubin - Morgan Stanley

Hi, thank you. A couple of clarification questions, Peter, for you. On the AstraZeneca payment of $2.5 billion, I recall the company disclosing previously a minimum payment of $4.3 billion debt revolved around the non-PPI assets. And when you adjusted for the $1 billion loan to AstraZeneca, that would be a $3.3 billion payment, is that part of the $2.5 billion? I'm just trying to put the pieces together. Is that a part of it? If not, would you expect an additional $3.3 billion in the first quarter, if you decide to call your option on non-PPI assets, so if you could clarify that?

And secondly, I think on vaccines, did I hear you correctly saying that we should expect no ProQuad sales in the US until the varicella manufacturing issues 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, and that's all about the allocation of the varicella.

On the AstraZeneca LP, all the things you said are somewhat correct, so let me just clarify. The first number that you were quoting was more 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 be booking. And so, I would to just highlight that there is many moving parts in here, 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 number we gave is the minimal gain that we would anticipate in 2008. Obviously, we are not yet addressing the option that we have on the non-PPI products.

Graeme Bell

Next question, please?

Operator

Your next question comes from Barbara Ryan of Deutsche Bank.

Barbara Ryan - Deutsche Bank

Good morning and thank you for taking my question. I guess my question is also probably for Peter. You gave gross margin guidance in a range 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 targets on revenues, specifically on products like GARDASIL, I'm just wondering irrespective of where you come on with revenues, if revenues are better, would that 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 pretty well, which is obviously the way we intend to think about and give guidance. So we look at PGM as a percentage, because that tends to be adapting to whatever the volume trends are. Whereas, with our SG&A and R&D spending, we set more budgetary targets and really try to drive productivity within those budgets to do as much as we can to support the business.

Obviously, if our volumes change during the year, the PGM guidance, as a percentage, can flow right with that. We don't really anticipate any 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, we have looked at that pretty carefully and think about where there may be some upsides or risks on the volume, and we try to factor that in, to make sure our guidance covers those eventualities.

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

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

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

I think the one thing that is always a little bit of challenge is you have to, in the R&D world, make certain assumptions about what’s going to be happening to your clinical trials. I mean, I think we would all agree that if every trial we ran succeeded in the pipeline, it was just barreling ahead, and we have to deal with that on the R&D side. But we try to 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 the next year, we feel very comfortable with the range of guidance we give on R&D. Probably that eventuality will only be sort of a multi-year question.

So, I think you articulated appropriately, Barbara. But we feel pretty good about the PGM guidance as a percentage, and we wouldn’t anticipate going outside the SG&A or R&D dollar ranges within the next 12 months. Certainly, we feel pretty good about the guidance there.

Graeme Bell

Next question, please, Taylor?

Operator

Your next question comes from Tony Butler of Lehman Brothers.

Tony Butler - Lehman Brothers

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

Peter Kellogg

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

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

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

Graeme Bell

Next question please, Taylor.

Operator

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

Chris Schott - Banc of America

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

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

And then just within your expectations on international GARDASIL in '08. Should we expect to continue to see strong performance in markets like Australia? How sustainable was that or it was some one-time nature to that business, and then some other key markets which we may be should watch for that better international 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 taking place in manufacturing, but the result that we are getting out of that have been above our expectations. I consider only about half way through the plan to win, which we want achieve by 2010, for any good manufacturing organization you should see increased productivity and efforts. So, I have high anticipation that will continue to see great efforts on the business.

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

It's more about robust fixed input processes globally that we put in place, building strategic partnerships with our vendors and being able to drive PGM. PGM is not only a manufacturing issue, it really depends on a good relationship between the commercial organizations and the research organizations, as you've developed in processes, as you developing packaging capabilities and containers for your product.

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

Peter Kellogg

On the GARDASIL question. Regarding GARDASIL status outside the US, if I understood that correctly, I had a look at that going forward, so just to recap, GARDASIL has been improved in 86 countries at this point, and has been launched 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 of those are in the US.

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

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

Chris Schott - Banc of America

One other comment about GARDASIL, because there were some concern earlier on, do you have the ability to supply and that’s why I want to reiterate 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 the increased volumes that we are seeing in coming years.

Graeme Bell

Thank you. So, Taylor given the time, we will take two more questions. So, could we have the next question, please?

Operator

Thank You. Your next question comes from Roopesh Patel of UBS.

Roopesh Patel - UBS

Thanks I have few questions. First on SG&A, I just wanted to clarify if the long-term guidance of $7.44 billion in 2010 is at constant exchange rates or is it regardless? And if it is later then that implies 5% to 7% cut in 2009 and '10 relative to your guidance for 2008. I was just wondering if you could offer a little bit of color on what factors will drive that. Secondly, on gross margins I wanted to also just clarify if a weaker 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 into Forex, so let me take these and then Dick you can add any color on, that will be great. So, on SG&A, that's correct. And in my talk I commented on the fact that clearly Forex, overall, helped the bottom line and the top line for Merck, 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 a TV today without hearing about that.

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

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

However, obviously based on where the foreign exchange rate falls, 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 the dollar 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 impact of 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 multiple currencies than that which are received, I think predominantly 10 time more US dollar denominative type factors.

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

Graeme Bell

But Taylor given the time, could we have the last question please.

Operator

Your final question comes from James Kelly of Goldman Sachs.

James Kelly - Goldman Sachs

Thank you very much and good morning. I have two quick questions. First on GARDASIL, many of the qualitative comments focus on the patients up to 18-year-olds. And I don’t know if there is any qualitative color you can probably provide for us in that group from 19 to 26, and what adoption looks like there. And then secondly Peter, in your comments on the program that are included inside the R&D growth, I don’t believe you mentioned the CETP inhibitor, and I just wondered if there was anything we should think about regarding that product.

Richard Clark

Great, thanks.

Peter Kellogg

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

Richard Clark

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

Now, I would just highlight, obviously, they are very different populations 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 of the 9 to 18 year old has been our biggest driver so far. And quite frankly, I would applaud the vaccine group and that whole franchise for just doing actually a fantastic job in that area.

In the 9 to 26 year olds or the other cohort groups that over time may come into the label, I think that there is still more work ahead of us, now that sounds to be quite as fast a penetration rate. And that's been our expectation and that's what we're actually seeing. So I think that's more of 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 the two. I do think that we've done a superlative job with the 9 to 18 year old. In the 19 to 26, I think you're seeing the firepower start to move into that really 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. The information from today's call, both the transcript and the replay, will be available on our website. And as always [Mike Nally] and I will be available for the rest of the day to take your calls.

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

Richard Clark

Thank you, Graeme, and thank you all for joining us on our call 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 grow our pipeline and to engineer our business are enabling us to deliver sustained revenue and earnings growth beyond 2010. We look forward to discussing our progress at our business briefing next week.

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

Operator

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

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