默克藥廠 (MRK) 2002 Q3 法說會逐字稿

Good morning.

Welcome to the Merck & Co. third quarter earnings release conference call.

At this time all participants have been placed on a listen-only mode.

Following the presentation, the floor will be open for questions and comments.

At this time I would like to turn the floor over to your host, Mr. Mark Stejbach.

Sir, you may begin.

Thank you, Melissa and good morning, everybody.

First of all just a brief apology and explanation for some technical problems we had this morning.

Our server was down and we had trouble getting the press release out.

So, for those who were worried that you didn't have the information, it really was a challenge technically at our end of getting it out.

Where we are now, is the press release did cross about half an hour ago on the news wires.

If you are on our e-mail distribution list , which you may recall from last quarter, we moved from the fax service, those went out.

You should have two e-mails with a number of attachments, as we typically have, which we have which we'll walk through.

Momentarily for those who don't have that, they should be posted on our website.

But, in the short-term here, I'm gonna start the call as we normally do.

As we always start with a consolidated P&L, if you even have the press release, those materials are there as well.

So ,f you don't have the schedules, those should be coming but we'll be able to start anyway.

So, with that, the bottom line as you probably saw when that crossed, is EPS was 83 cents, in line with expectations in the first call mean and down a penny from last year.

As has been the case the last two quarters this year, a lot of what you're gonna hear is very much in line with expectations.

A lot of familiar themes and really no surprises so the year continues to play out as we've expected and described and we continue to achieve some important milestones.

There's no major changes to our assumptions and we'll walk through how the various products in our two different businesses, the Pharma and Medco Home Solutions divisions, how they together effect the overall results and really, for both of those you'll see continuing trends in those businesses and how they impact the total.

So, I'm also going to make some comments this year regarding some of the patterns within the year that really have been playing out as we've described earlier this year.

So, I'll do, as always, the comparisons to third quarter last year where there's some interesting things in terms of sequential pattern changes.

Again, all these are playing out as we describe but might be important color for you in terms of understanding this year.

Okay.

So with that I'm gonna start with walking through our reported earnings, that is, the P&L of Merck & Co. Consolidated and then I'll move on to the core pharma business, drill down into the results there and provide updates on the major products and then we'll review the results of Medco Home Solutions on a stand alone basis.

So, before I move any further though, I want to mention that during this call I may discuss certain subjects that may contain forward-looking information as defined in the Private Securities Litigation Reform Act of 1995.

These statements may include items such as guidance of earnings and other income statement components, statements related to our growth rate expectations, product positioning relative to competition, and I caution you that the actual results could differ materially from those that may be projected in these discussions and additional information on these factors as well as others which could cause results to differ materially from what will be provided today is available in our most recent 10-K.

So, I'll start with the P&L, if you have the PDF files click on the top, Merck & Co. consolidated 3rd quarter, this would also be the P&L that is in the press release.

So starting there at the top line, you can see sales were $12.9 billion.

That's an increase of 8% over last year.

Moving down constant expenses were $10.2 billion, that's up about a billion driven by materials and production costs of $8.1 billion up 14%.

This increase is driven by the cost of goods within the Medco business as you'll see when we look at the two of these separately.

Both of these results, the top line and the costs both in the absolute terms and change from prior year are just about the same as what we reported last quarter.

Taking these together and looking at margin, this results in a gross margin for the quarter of a little over 37%, 37.3%.

This actually is up for the sequential quarter this year.

That is the product gross margin is improving so far in 2002.

So just a quick recap since you probably don't have these materials was 34.4 in the first quarter, 35.3 in second and now 37.3.

That brings us to a year to date of 35.7 which is just below our full year guidance of 36%.

So without getting too far ahead here, since we're gonna go through the pharma and Medco business separately, it's just important to recognize that the PGM is determined really by the results in each of those business.

I know that many analysts use this consolidated PGM as a driver in their models and some of you have observed to us, how there's a great deal of sensitivity to that result.

But it's important to remember that, this PGM of consolidated is a result of margins and growth in two different businesses, it's not a driver of results.

So, I'll - I just wanted to say a little bit more about how each has contributed and we'll get to them separately as we review the independent, stand-alone P&Ls.

So as you've seen all year really the strong top line sales growth in Medco which is 14% this quarter continues and we said last quarter that the consolidated gross margin should improve somewhat in the second half of the year based on the mix and you're seeing that in fact in these results.

Looking at a little, I'll tell you that the pharma PGM continues to be stable at 82% again, as it was in each of the prior quarters this year.

So really, no change there and we'll get to that shortly.

The PGM improvement this quarter consolidated actually was coming more from improvement in the Medco business.

So, with all of that said, again, we are reiterating the guidance of 36 for the full year and that is very much following this pattern that we previously described and that you're now seeing in the results this quarter.

With that I want to move on to marketing and admin.

Again, on the consolidated, almost $1.6 billion, that's up a little bit, 2.5% versus last year.

A reminder that, at the second quarter through mid year, marketing / admin was actually down 6% year to date.

We described at that time that this is based on a spend pattern and comparisons that we expected to see an increased spend rate during the year.

You're now just starting to see that.

In fact, this quarter the expenses are up a little over $100 million sequentially from second quarter and we expect that to continue into the fourth quarter.

Now, that still puts us at minus 3.5% year to date but we now expect to end the full year marking / admin at flat versus 2002.

The pattern is the same but now we're now expecting to come in flat for the year.

Now, just to give a little bit of color on this, because obviously there's a lot of things in marketing and admin.

We've talked for some time overall about our focus on lowering our cost structure ging forward while continuing to support key franchises.

And examples include, we described global procurement initiatives.

When we typically think about those things in terms of improving bulk chemical purchases to lower your material costs in manufacturing or even consolidating your purchasing power for global lab supplies to improve the efficiency of our R&D spend and we are doing those things and have been for some time.

But, as we've described, we're also extending this approach beyond the traditional areas into our line operations.

So, overall we are lowering our SG&A by leveraging our size and our product lines and this has resulted in consolidating purchases through our vendors, for example, for a variety of things, media space, travel and meeting planning, trade shows, medical conventions.

In fact, we've even set up an internet reverse auction for the purchase of promotional reminder items.

These activities continue and I just wanted to give you some indication of what really is behind what's going on now in this line as well as in the past that's applied to other lines.

So despite the decrease in spending year to date so far, we have significantly expanded our U.S. sales force over the last couple of years.

In fact, we went a little beyond what we had previously planned as we prepare to launch new claims and products.

In the third quarter, they were reporting here and also heading into the fourth quarter you are seeing this previously described pattern of spend, that is of SG&A ramping up a bit here later in the year and expect to continue and that's based really on support for new claim launches such as SINGULAIR, allergic [rhinitis], the COZZAR/ [RUNNEL] and life studies.

We have now in the fourth quarter that full sales force expansion on board, so that's gonna effect the comparisons for the rest of the year.

Also to a lesser extent on a smaller base, Medco SG&A was also up, as we'll describe when we get there, and those increases really reflect Medco preparing to function as a totally separate company.

So, again, no surprises with things we described, but the pattern is a little different than we've seen in the year and again, reflects kind of a trend we've expected and will continue into the fourth quarter.

Moving down to the next line on the P&L, the R&D.

R&D spend was $677 million this quarter, up about 15% year over year.

Now, if you think back, you recall to the last quarter, that is second quarter of this year, R&D was up only 5% if fact, in the first quarter it was actually down slightly year-over-year.

So again, this shows this acceleration of R&D spend that we have been expecting and describing for you all year.

In fact, now you are starting to see that.

For full year we are still expecting the R&D expense to come in at $2.7 to $2.8 billion as we guided last quarter and that would represent a 10-14% increase overall for the year versus last year.

In terms of what's behind that, we previously described this acceleration expected in the second half, you're seeing it now up 15%, we expect to continue.

The timing really varies through the year based on a couple of things.

It's the timing as well as the pattern of expenses particularly for large clinical trials.

So R&D expenses will continue to grow throughout this year reflecting products in late phase three development, such as the human [papaloma] virus vaccine, the rodovirus vaccine, [APPREVITAN] for depression and also a continued expectation that KRP 297 will move into phase 3 as well as the ongoing study for [ARCOXIA] versus [DICLOFENAC].

It's both the number and size of the studies as they progress, accelerate through the year and also the comparisons to last year where we were, in fact, in a different stage wrapping up a number of studies.

None of this should be a surprise.

You are seeing a trend break, if you will.

This R&D does not include ZEDIA or the ZOCOR/ZEDIA combination since those float through our joint venture and then effect the P&L through the equity income line.

I focus mostly on the late stage clinical development but I also want to emphasize we are continuing to invest significantly in basic research, to support a strategy of focus on cutting edge science, and in fact, basic R&D in the quarter was up 16% and that's consistent with what what we saw in the first half of this year.

So let me move on now to equity income other expense.

In equity income we show $189 million.

That's up about $25 million versus last year but it's actually about the same levels as last year, that is 2Q.

The other income and expense net line came in at $71 million and that's down from the prior year.

As you know, these items fluctuate a bit each quarter based on a variety of factors.

I'll tell you that there's nothing unusual this quarter on a going forward basis.

And if you want to flip ahead a couple of slides where we break those out, I'll just point out a couple of things.

In terms of the interest income and expense, both of those were down this quarter, again, just reflecting lower interest rates as you would expect similar to what we mentioned last quarter.

The total difference in this line item, the $100 down to $70 million, most of that can be explained by about $30 million difference in the amortization of good will reflecting the implementation of FAS 142.

So no real surprises in that area - if you move down that page a little, if you look at some of the joint-venture detail, you can see the impacts there with the improvements in equity income this quarter.

You see increased sales in the Mario Animal Health business and also the [INAUDIBLE] vaccine sales.

So no surprises.

I think the differences should be pretty obvious from the detail provided.

At this point if you could flip back to the front page, back to the consolidated P&L and at this point focus on the bottom of the page which is the total sales mix.

Okay.

The total pharma sales volume, you can see an increase of 1% with the U.S. down 6 and foreign up 14%.

You can also see Medco sales up 14% similar to what we saw earlier this year and all of this blends together for about an 8% increase in total sales and of course you already saw that on very the top line of the P&L.

Similar to our early discussion on margins, I want to make a few comments here.

Just breaking down for you what is driving the numbers and we'll get into more detail when we review the products.

Okay, so first of all in the U.S., we have a number of unfavorable comparisons actually for four of our five key products due to purchasing patterns for this quarter and comparisons to last year.

I'll describe those in more detail but clearly that's having an effect on the U.S. pattern.

Patent expiration products continued to decline as one would expect.

They're actually down 26% this quarter.

But, at this point only represent less than 6% of the total net pharma sales business.

These products as a reminder, VASOTEC, PEPCID, MEVACOR, PRINIVIL, these were a fifth of our business, 21% at the beginning of last year 2001.

That dropped down to 12% beginning of this year and now it's even less than half of that.

So moving forward with very little business left in those products, this represents the,"losing the head wind" as we discussed throughout the year.

In a more positive note, pharma sales were a strong 14% and that was really led by improved performance of all the key growth drivers particularly in Europe where we saw robust growth, the fundamentals of the business there remain strong and in fact, ZOCOR, SINGULAIR and COZZAR all actually showed an acceleration in growth rates from the second quarter and you'll see that when we get to the product detail sheets.

At this point I want to point out that I believe these attachments have also been posted to our website at Merck.com.

If you go to financial statements if you haven't received these from the e-mail, they are available to you there.

So still at the bottom of the front page on consolidated, I'll move over to the right a little bit ad look at the mix on the volume, price & exchange break down that we give you every quarter.

For some time we've indicated that growth in our business is really based primarily on volume since price less rebates does not really contribute in the U.S. market.

Through the second quarter, price effect in the U.S. was in fact zero percent year to date.

So no effect in the first half of this year.

Here in 3Q, you see a price effecting the U.S. of 6% which may seem a little bit unusual.

But I just want to point out that you should bear in mind that the price component is a blend of products across many customer segments and could be affected at any given quarter by product mix, customer mix, timing of purchases, for example new customers and contracts come into place or are renewed, we are consistently reviewing our rebate assumptions.

What you are seeing is a mix effect this quarter.

One should not expect to see this kind of increase here as a trend.

If you, for instance, if you note that for the third quarter year to date the pharma business for price is only plus 2 in the U.S. and is zero or flat worldwide and overall this year to date pattern is consistent with what we've been saying for some time about pricing and the discounting dynamics within the pharma industry.

Just moving down to the last line there to foreign sales up 14% of volume very strong as I described.

We also were helped by FX by the exchange rate, plus 3 that was primarily benifiting the euro and the yen and essentially that just offset price declines outside the U.S. of similarly 3%.

Now moving back a bit on the P&Ls here and to finish off.

You can see our tax rate for the quarter was 30%, that's in line with our guidance which continues to be 30-30.5 for the full year.

The bottom line is net income of $1.9 billion and EPS for the quarter of 83 cents in line with expectations.

Shares outstanding are still roughly 2.3 billion but those are down about 2% versus last year similar to what we saw last quarter.

This past quarter we spent half a billion, that's $500 million in the treasury stock buy back program and we still have $1.8 billion remaining under the $10 billion authorization from the Board back in 2002.

We continue to work through that and you'll recall that earlier this year we reported the Board had authorized an additional $10 billion in buy back and there's no time limit on that.

We still have $1.8 under the original and authorized another $10 billion and this will continue to be a source to us for returning value to shareholders over time.

That's all I'll say for now on the consolidated.

What I'll do now is move to the core pharma.

So this is the P&L that says "Additional Disclosure Core Pharma Business."

So, as we started doing in the first quarter of the year, if you recall ,if you've been following this, we started providing this additional information on Merck Pharma as a stand alone.

And what that means is Merck & Co. ex Medco.

Of course, we'll continue to report on a consolidated basis until we've achieved a full separation of Merck and Medco.

This sheet marked "Additional Disclosure and Core Pharma" is, again as I've said in the past, not a matter of subtracting one business from another but is an attempt to look at each business as if it were independent of the other.

As it will be in the future.

This includes the effects on the sale of Merck products and rebates to Medco, certain shared services and a currently combined capital structure.

Those are all reasons why you can't just separate the two.

Reversely, if you try to add them together, you won't get completely to consolidated.

This is the Merck Pharma business.

The goal is to look at this as a stand alone.

We've cited, in fact, one of the benefits of separation will be greater transparency of the pharma business and this is to help you think about what it will look like post spend.

Since we started this in the first quarter of this year and, of course, we've always included comparisons to the prior year, you now have this Pharma business on a stand-alone basis for six of the last seven quarters.

That's first three last year and first three this year.

With next quarters reporting, you'll then have a full two years running.

Eight quarters of the core pharma business.

Again, there shouldn't be surprises.

We've been reporting on it but that will give you a really complete set there.

Okay.

So Merck Pharma, turning to this page.

On a stand alone basis pharma revenues were $5.4 billion same as previous year.

As I already described this resulted in from declines in the U.S. offset by increases ex-U.S.

Before I move down to P&L, I want to give some, a little bit of guidance for you on the pushes and pulls within that top line. 'Cause you see, on a basis [date] remarkably little change at all, a few million dollars but there's really a lot going on below the surface that I just want to talk about.

So it nets out to flat but there's a lot going on.

Of our top five products, which represent 65% of our net sales, those are up about 8% for the quarter.

But they're up 13% year to date.

As I previously indicated, most of these products, in fact, all but VIOXX have a tough comparison this quarter do to buying patterns which I'll review in a moment.

I can tell you that across the overall product line there's only a small net buy out this quarter.

About $23 million, but this is on a comparison to a relatively large net buy in the third quarter of last year which we described at the time on that call but it's just important to keep this pattern in mind.

Small buy-out this quarter compared to a large buy-in 3rd quarter of last year.

We actually had a similar effect last quarter on the 2Q call when we had a large buy-out in the current quarter compared to small net buy-in.

So again, just a difficult comparison for a number of large products that's effecting those U.S. numbers and overall the mix is flat.

Now, as you know, these buying patterns result from wholesaler purchase behavior not due to any sales incentives on our part.

And when sales are affected in this way by wholesaler orders, we provide that information at the individual product level as we describe these various impacts and as we do, I'll walk you through those as we get to the product level.

What we have observed in the past is our normal inventory levels of wholesalers out there is about or month or less overall even when there are buy-ins and we wouldn't expect to see more than two months worth on any given product.

Continuing then with the theme of what else is in that top line.

I mentioned earlier the patent expiration products were down 26% so they continue to drag but they now represent only a small portion of the business as we approach the end of the patent expiration period.

Again, hese products were over 20% of the top line early last year and are now down to less than 6%.

Also within the top line as you saw, may see in the press release, we are reiterating our guidance of an expectation of declining supply sales this year from [ESTRAZENECA]and this guidance is not changed as a result of the recent court decision with respect to [INAUDIBLE] patents.

Bear in mind again, that we receive orders for [Priosec and NEXIUM] and we record the sales when we supply them but we do not control the [INAUDIBLE] ordering, inventory practices or pricing to the end consumer and the supply sales we recognize are not based on what they sell in the quarter, it's based on what they decide to order from us.

So with all of that said, let me finally move down to the rest of the pharma P&L.

As you expect it's very consistent with what we already reviewed on the consolidated and you can see some similar patterns.

So really no surprises here.

Just like last quarter, I won't spend a lot of time but point out that SG&A is up slightly, as described, primarily driven by the changes in the sales force.

It's up 1.2%.

All of the R&D from the consolidated is here so that's up 15% as we've discussed and we've already covered the dynamics of equity income and other income and expenses.

You can see here that the net income is down 6% on the bottom line for pharma, but really that's results I just discussed in the top line, that's generic erosion, unfavorable comparisons and then you combine that with this increased investment in R&D as we continue to invest in our pipeline for the future.

And that really resulted in the decline in net income for the quarter.

Let me talk a little bit about margins for the pharma business.

The gross margin as I indicated earlier is 82% just as we reported the first two quarters this year, the net margin bottom line is 33% for the quarter.

That compares to 32% in each of the first two quarters.

All this points to a healthy stable Pharma business from a margin perspective and our ability to maintain the margins.

The with the pharma PGM holding steady, the mix in the consolidated continues to be driven by faster growth of topline sales from Medco and as I indicated more recently even some PGM improvement from Medco.

Just in summary, before I turn to some of the individual products, we're continuing to perform as expected.

We have described this as a transitional year, and I think you see that clearly in this description of pharma.

Healthy margins, continued growth in the inline products with a diminishing offset by the last phase of these older products as we begin to prepare for the next wave of launches.

And also this core data comparison to a net buy in in the quarter last year.

We continue to anticipate earnings per share for '02 on an as reported basis to be at the same level as 2001.

The '02 as reported results will be affected by the benefit from the implementation of FAS 142 regarding goodwill admortization.

Of course, most of that relates to the Merck 1993 acquisition of Medco.

So, just to clarify, this is unchanged and as reported means this consolidated results as long as Medco is still part of Merck.

For '03, we expect the core pharmaceutical business to deliver double-digits earning per share growth.

And of course, by the end of next year, assuming the spinoff of Medco as we've previously committed, at this point the core pharma will be as we report.

Now turning to the products.

Included among the financial statements is the product detail sheet which is a breakdown of the sales by product for the quarter and the year to date.

And this is a voluntary additional disclosure we've provided for some time.

What's different this quarter, as you may notice, is we're increasing the level of detail we provide to investors about these results by moving to reporting sales for individual products on a net basis as opposed to gross as was our previous practice.

For this quarter, to help with this transition, we are providing you both.

And so you should have net product sales details for the third quarter and year to date and also gross product sales detailed for these same periods.

These are included in the e-mails and as I mentioned are posted on our website.

In subsequent quarters moving forward, we'll simply move to net sales.

Other observers of our industry, many of you on the call have estimated this kind of information for some time, we think now providing this will give greater clarity into the sales figures, again, which is all voluntary disclosure.

So earlier this year we began reporting the results of the core pharma business as an additional disclosure, so this latest enhancement gives you a good perspective on the performance of the business and gives you some comparability in terms of data across the industry.

This should be obvious, I just want to state it, this change has no impact whatsoever on consolidated reported results because those revenues as well as net income have always been reported on a net sales basis in our income statement.

So just a little bit of a change at the product detail level.

As we go through these individual products, I'll give you updated sales guidance for the full year 2002 on a net basis for these major products.

So the new net sales guidance and these are in the press release for [INAUDIBLE] and Singulair on a net basis to [INAUDIBLE] underlying business fundamentals that drove our gross sales guidance which you've seen earlier this year.

In the case of ZOCOR and FOSAMAX, the guidance reflects the change to sales as well as actually some improvement in performance of those franchises that we've been seeing throughout the year.

Now with three-fourths of the year over, we are able to tighten up the ranges for full year expectations for most of the products.

Having made this change, you can expect it to continue to provide on the same net basis going forward both for reporting as well as how we give guidance.

As I move through the products, I'll be referring entirely to net sales figures including the buy-in and buy-outs on a net basis.

So, first off within the [Arcoxia], VIOXX.

Net sales for VIOXX were $755 million that's up 3%.

Now within that there was a normal buy-in of $133 million in the quarter for VIOXX.

That's in the United States.

There was a price increase for VIOXX at the end of December, 4.5%.

If you recall we have two quarters in the row of buy-in on VIOXX and now there's been a price increase.

Please keep that in mind as you model up sales for VIOXX sales for next quarter as you would expect to see some buy-out.

In terms of overall prescription performance, the [short-term] of VIOXX has stabilized since early August.

I know a number of you have been following the weekly scripts.

In effect, the new Rx share gap between CELEBREX and VIOXX has decreased from 5.5% to just over 3% during that time period through August and September..

Following the launch of our bigger study into full promotion, which happened right at the end of 2Q, as well as based on the cost advantages of being a true once a day within a managed care population, we continue to improve our positions there.

In terms of the marketing of VIOXX, in addition to being the only COX-2 to demonstrate this reduction of GI risk,against a standard [INAUDIBLE] VIOXX is the only available [coxin] with demonstrated a superiority to a standard [ensate] in osteoarthritis, that being [Wellofin] and the only COX-2 with a demonstrated superiority to narcotics both codeine and oxicodone in acute pain and VIOXX is the only [non-sulfonomide coxin].

Now, outside the U.S.

VIOXX continues to do well with growth of 24% again this quarter, same as last quarter.

Some highlights for you there.

VIOXX is the number one [coxin] outside the U.S. in terms of sales.

It's the only [coxin] approved for acute pain in Europe and VIOXX continues to be strong in the major markets such as Germany, where VIOXX has a 73% market share of [coxin] sales.

And with this quarter has now surpassed Celebrex in France.

In the U.K. where VIOXX has a 61% share, we are building on the strong position of VIOXX with the launch of ARCOXIA there, which occurred in the second quarter, and as a third product entrant based on this profile, the performance of ARCOXIA in absolute terms is actually tracking on the performance of the second entrant, that being CELEBREX, quite some time ago.

So we are actually expanding our [coxin] franchise there.

Now with the completion of mutual recognition in EU occurring early this quarter with the exception of France and Germany we look forward to introducing Arcoxia in the remaining markets throughout the EU.

Arcoxia has been launched now in twelve countries worldwide so far.

In terms of some upcoming scientific data, to note the [INAUDIBLE] ACR meeting actually starts a week from today.

As is typically our practice, we won't discuss results ahead of them being presented or published but I can give you some highlights on what will be there.

The additional continuing cardiovascular safety data for VIOXX as well as some comparative data on hypertension and edema rates versus Naproxen.

For Arcoxia, we'll be presenting results of our phase 3 [INAUDIBLE] study which was completed earlier this year.

A couple key publications recently, one in the Journal of Gastroneurology", a study on risk stratification with end stage showing really dramatic increases in ensate related GI events in patients with risk factors and the benefits of using VIOXX in those patients.

Consistent with what we are rolling out [INAUDIBLE] continues to be a major medical issue and will continue to promote the benefits of VIOXX.

For Arcoxia, a phase 3 trial in RA was published in the Journal of [Hematology].

This is a study in which Arcoxia once a day proved superior efficacy compared to Naproxen twice a day on all end points.

In fact, the only ensate ever to show this effect.

So year to date worldwide[coxin] net sales are now just over $2.2 billion and for full year were guiding to $2.6-$2.8 for the year on a net basis.

Moving on to ZOCOR.

Sales were close to $1.5 billion, an increase of 9%.

Some buy-in started this quarter, not much, only about $15 million and this is following two consecutive buy-out quarters earlier this year.

Not nearly as much buy-in as last year in the third quarter which was affected by the Bacall recall so that is effecting the comparison year over year.

ZOCOR has not had a price increase this year.

Sales were impacted by the buy-in but prescriptions were up 16% year to date.

You'll note if you've seen the September monthly data yet, the Statin market growth has rebounded with 11% growth for the month and this follows the annualization of the Bacall withdrawal in August of last year so the comparisons for the market year-over-year, you saw a nice bounce back.

We are pleased to announce, you may have seen release, the heart protection study which was published in "The Lancet' in July.

It was filed with FDA for inclusion in our label.

Recall that, in the heart protection study, it was over 20,000 high risk patients with coronary heart disease, diabetes and other cardiovascular diseases, and across the board we showed a significant 24% reduction in risk of a major cardiovascular event regardless of previous heart disease or heart attacks, regardless of baseline cholesterol levels, particularly strong data with regard to diabetic patients.

In an overall safety profile, comparable to placebo.

We have some highlights outside of the U.S.this quarter.

I mentioned we were in the early days of rolling out this data in Europe.

I mentioned that in the call last quarter.

XUS Zocor was up 24% for the quarter led by strong growth in many European markets and we are seeing improvement in penetration in the diabetic and CHD patients consistent with the HPS results.

Based on improving performance through the year, our guidance now for full year net sales for ZOCOR, $5.6- $5.8 billion.

Moving to HYZAAR.

Sales are up 8% and that's minus 8 in the United States but plus 23% ex U.S.

COZZAR not affected by buying patterns but affected by comparison to buy in third quarter last year.

Why you see the U.S. sales number down but prescriptions most recent data up 12% year-over-year for December.

The life study, I won't go into the details, a landmark reduction in CD results, that was filed with the FDA midyear here in the U.S.

Last month received a new indication to reduce the progression of kidney disease in type ii diabetics and based on the Renal study.

So we're just getting off the mark there having just received that indication last month.

Other significant events in the scientific world this quarter.

Something else is the life study on patients with isolated systollic hypertension, was published in the "Journal of the Medical Association" and this study showed COZZAR reducing stroke by 41% and cardiovascular death by 46% in this patient population compared to [INAUDIBLE], the beta blocker.

There were also results from another sub analysis of patients from the life study.

Those with [atrip fibrillation]and those were announced at the ESC meeting in Germany last month and those results showed that COZZAR reduced the risk of stroke by 49% in those study patients with [INAUDIBLE] fibrillation compared to [Atenrol].

There will be many studies at the American Heart Association on COZZAR including additional analyses from the life study.

Just one that I would highlight, there's an analysis there being presented from Life that shows the effect of COAAZR on new onset diabetes.

So we've described the [RENNAL] study in terms of the effect again, in diabetics this analysis will look at preventing the onset.

Guidance for full year net sales, COZZAR $2.1- $2.3 billion.

Next moving on to Singulair.

Sales were $350 million and that's up 11%.

That was 2% in the U.S., 38% ex-U.S.

Similar to the pattern we've described with some of the other products.

There's about $3 million in additional buy-out after a price increase in 1Q and there's also a tough comparison to a buy-in in the third quarter last year.

Again, if we look at prescriptions, total Rx's, as a better measure of demand, total prescriptions are up 23% year to date, so demand for Singulair remains strong and continues to be the number one asthma controller in the U.S.

We are as you know waiting approval for Singulair Rhaving filed in the U.S. in the first quarter and a novel approach and the first new class in over a decade.

We have gained approval ex-U.S. in five countries so far and are looking forward to hopefully having that approval in the U.S. soon.

Recall that we filed that in the first quarter of this year.

So full year net guidance for Singulair $1.4-1.6 billion.

Moving on the last of the major five products I want to talk about.

FOSAMAX, sales for FOSAMAX in the quarter were $455 million, that's up 9%.

Similar pattern again, they were minus 5 in the U.S. but 37% ex-U.S. and there's about $100 million buy-out in the U.S. this quarter which obviously affects those comparisons.

This should not be unexpected to you since this is now the buying-out reflecting the first two quarters where we had buying-in as described this year.

The once weekly version continues to drive ex-U.S. growth similar to what we saw here in the U.S. and now approved in all EU countries.

In the U.S. the one-weekly is now 90% of total prescriptions.

In terms of new studies on FOSAMAX,at the ASBMR, that's the American Society of Bone Mineral Research, just last month results of the first head-to-head study [INAUDIBLE] were presented and FOSAMAX once-weekly compared to daily [INAUDIBLE] and in that study we showed a 70% greater bone-mineral density increase in the spine and a three-time greater increase in total hip BMD after only twelve months versus [INAUDIBLE] with significant differences seen as earlier as the first measurement point of the study which is at only six months.

So that's an important study it really shows the efficacy of FOSAMAX Tolerability was similar between the two treatments.

At that same meeting ASBMR meeting, we reported the results of the longest non-hormonal osteoporosis study presented ever.

Ten-year treatment with FOSAMAX showing significant spine and hip BMD increases.

This is the only product with long-term efficacy and safety data like this and this is particularly important in light of recent results and issues relating from the Women's Health Initiative.

Full year net sales guidance for FOSAMAX $2.0-$2.2 billion and that's reflecting, again, as mentioned previously performance improvements seen throughout the year.

So moving on to the pipeline products, a couple highlights here, moving out of the pipeline as you saw yesterday, Zedia received approval in Germany.

The first market in the EU.

The first market where we had approval and the first step in the mutual recognition process.

This happened yesterday so I don't have much comment here.

We don't have pricing reimbursement but clearly a milestone and look forward to launching there soon and continuing to pursue the regulatory process in Europe .

In the U.S., of course, we're still awaiting FDA approval having submitted this application to the FDA at the end of December last year.

There was some new data on Zedia presented this quarter at the European arthro sclerosis meeting, to EAS.

A filter study was in patients taking Lipitor but who are not at goal.

In this study, we show that adding Zedia was more effective than [titraiting] Lipitor at getting patients to goal.

Adding Zedia reduced LDL an additional 22.8%.

And I think this is a profile that we've been describing for some time with Zedia.

Very strong efficacy results attainable by adding Zedia to existing statin therapy, in fact, more effective than doubling the dose of the statin.

At the ESC meeting, we announced that we are going to be doing two outcome studies for Zedia.

The first study in aortic stenosis, that is a narrowing or partial obstruction of the aortic valve and that's a study of Zedia and ZOCOR.

The second will be a ZOCOR-Zedia combination versus ZOCOR alone in the regression of athro sclerotic thickening of the corodid artery wall.

You see the impressive clinical results so far with Zedia and now we'll be moving into to an important long-term outcome studies.

The American Heart Association, just a couple of small studies there for Zedia.

Most of these have been presented already.

An interesting study there is a study on the treatment gap which is based on analysis of the published literature in this area and the conclusion really is that the treatment gap is quickly shifting from a problem of no treatment to one of under treatment.

We continue to emphasize that 60% or more of patients currently being treated for their cholesterol are not at their goal and that's where we see the opportunity for Zedia.

Now a couple of pipeline highlights for [Apepritant][INAUDIBLE].

We'll be referring to this as the NK 1 receptor antagonist and that's consistent with how the community in oncology thinks about this class of drugs in the treatment for chemo induced nausea and vomiting.

We are still planning to file that this year as we described so one more remaining milestone.

For KRP297, that's our diabetes compound, we are planning to move that from phase 2 into phase 3 this year.

For the human [papaloma] virus, we are still in phase 3.

Just one comment there, there was some phase 2 efficacy data presented recently, literally within the last week or two, at a scientific meeting and that will be published very soon so I really can't discuss it yet ahead of the publication.

The phase 3 study is still ongoing but important results will soon be out there.

In terms of Rodotech, that is the name for our roto virus vaccine, as you know, that 's also in phase 3 having entered early this year and that's already about half enrolled in a 60,000 patient phase 3 study and continuing to progress nicely.

Before we go to Medco, I just finished the key products and the net sales guidance.

Keep in mind that the net sales guidance reflects the same or slightly better business fundamentals.

We have not reduced the guidance on any product.

I see there's some wire studies out there suggesting reduced guidance, we have not done so.

I tried emphasize with FOSAMAX and COZZAR -- I'm sorry for ZOCOR and FOSAMAX, the guidance reflects improving performance this year and for the other products those net sales guidance ranges are very consistent with the guidance we've given earlier this year.

For those who will do the math anyway, if you compare the net and gross figures, your really won't see, you shouldn't be surprised by the comparisons.

So in terms of Medco, as you know the IPO for that was withdrawn earlier this year but we began providing last quarter the P&L on Medco Home Solutions on a stand-alone basis so that will be the last attachment we walk through here.

And this was similar to what was reported - how Medco had been reporting in the S-1 so again you continue to get ongoing results from the Medco business.

On a stand-alone basis, similar to the way it was done on the S-1, this is Medco as an independent company.

Medco Health net revenues were $1 billion in the third quarter, an increase 13% over the third quarter of last year.

Medco health managed over 130 million prescriptions in total this quarter, over 20 million managed through home delivery, that's an increase of 9% over the third quarter of last year.

Bear in mind when you look at some of those product details, additional disclosures, there's some rounding in there.

I want to emphasize home delivery still very healthy growth up 9%.

As we described in the past, these home delivery prescriptions represent a greater prescription size.

There's a lot of leverage there.

Retail prescriptions were flat quarter over quarter.

Moving down the Medco P&L, cost of revenues was higher in the quarter, driven by the same impacts on the net revenue, that's increases in product price and home deliver volume.

The SG&A line slightly higher in the quarter as a result of IPO related costs as Medco began also to make investments in such areas as human resources, treasury, even investor relations, all designed to set up Medco as a separate stand alone company.

We expect the SG&A to stabilize around this level moving forward but you'll see a difference in terms of what you saw in the first half of the year.

This is part of the transition to moving them forward as a stand alone company.

Net income for the quarter from Medco was a little over $90 million that's up from $79 million in the third quarter of last year.

Benefits here are from the change in goodwill accounting, net income in the third slightly lower than the net income excluding goodwill in the third quarter of last year and that's a result of this SG&A increase as I spoke about.

When disgusting the margins at the consolidated level, I mentioned that the Medco PGM this year has continued to improve.

It was 3.2 in the first quarter, 4.0 in the second, 4.3 now in the third quarter and so this trend is based on further increases in the use of home delivery and generics and further leveraging operational efficiencies in these automated pharmacies as well as investment and internet technology.

So we would expect, not necessarily continuation of growth but gross margins consistent with this moving forward, as already described actually helped on the overall as well.

In terms of drilling down a little lower into the Medco business, I mentioned the prescription volumes 20 million through home delivery, that's 16% of total prescription volume compared to 14% a year ago.

Medco Health also processed approximately 3 million prescriptions in the third quarter through it's comprehensive member website at Medcohealth.com.

That's a 52% increase over the third quarter last year.

The world's largest internet pharmacy continues to show substantial growth and that's up even at 12% sequentially from last quarter.

Finally please note that we have given you information in footnote, too, to calculate EBITDA for the Medco business.

So in summary before taking questions, the year continues to play out as we've expected and described.

This includes the product performance, margins, pipeline progress, patterns of spending.

We are nearing the end of the patent expiring ending period, continuing to grow inline promoted products, making progress in the pipeline and growing Medco's business.

We really are now nearing the end of this transition year that we described and look forward soon to no longer discussing patent expiration products and moving on to talking about new products, but you've seen that in the results.

Before I move on, I also want to acknowledge my colleague, Mary Redman whom many of you know.

She'll be moving on, this is her last call, she'll be moving on within Merck to Director of Human Resource, Financial Services where she'll be responsible for financial evaluation, measurement, overall administration of all aspects of our health and benefits plans including the development and evaluation of benefit plan design.

Certainly, I want to acknowledge the tremendous benefit that she's been to investor relations as well as me personally this year as I've transitioned in.

I know you'll join me in wishing her future success in the new position.

Also pleased to announce that I will be welcoming a new colleague to investor relations.

Graham Bell, he joined Merck in 1993 and has broad experience in several divisions in financial services across Merck.

He's a fellow of the Chartered Institute of Management Accountants and most recently at Merck, was Director of Business Process Engineering where he was responsible for the oversight of several operational excellence initiatives, some of those you've actually begun to seen the benefits of in the P&L.

Look forward to welcoming Graham and many of you will be able to meet him later this year.

So, before we move on, just a couple of highlights on events coming up.

Our CFO, June Lewent, will be presenting at on a conference October 28th.

Investor conference.

Our Chairman and CEO, Ray Gilmartin will be presenting at a conference on November 13th,and, of course, we have our annual business briefing here in Whitehorse Station on December 10th.

I mention these because, even if you don't attend, the slides from all of these are always posted on our website as soon as we use them and the business briefing will also be webcast.

So if you haven't already, anyone who signs up at Merck.com for the e-mail alerts will be automatically alerted anytime these presentations go up.

I wanted to highlight that.

With that, Melissa, we actually still do have a little time for questions.

Thank you.

The floor is now open for questions.

If you have a question or comment, press the numbers 1 followed by 4 on the touch tone telephone at this time.

If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key.

Please pick up the handset to provide optimum sound quality.

Our first question is coming from James Kelly with Goldman Sachs.

Thank you.

Good morning.

I had two questions on Zocor.

Could you discuss the period when we'll see the renegotiation of the DOD & VA contract.

Any sense of size as a percentage of the U.S. business now that we're on net sales?

Lastly on Zocor, the generic situation in Europe, the timing, the countries and the percentage of your international business.

Thanks.

In terms of overall Zocor performance, the nonretail segment, if you will, which includes the federal segment for Zocor is about 30% of the business and as I've described for some time, that's been growing faster than the retail business.

Part of that is reflected in the net sales figures.

In terms of those being renegotiated, the next opportunity for both the Department of Defense and the VA system contracts is about March or April of next year.

We'll have to see how that plays out.

Bear in mind, Zocor is the exclusive product within those health systems so we have a high share.

Even though it's a segment, we'll see how that plays out.

Certainly the growth and the strong position we have there bodes well for Zocor.

In terms of European patent expirations.

There are a few coming up in the second quarter of next year for Zocor and those are major markets would be U.K., in Germany and Holland and some Scandinavian countries.

Of the big five it's U.K. and Germany.

Each of those countries today is about 3% or a little under of worldwide Zocor sales.

In terms of the other major markets in Europe, Spain as you may know, has gone generic but Italy and France persist in fact well beyond the U.S. patent expiration in mid '06.

So it's really those two major markets next year.

Okay.

Next question please.

Thank you.

Next question is from Tim Anderson from Prudential Securities.

A couple of questions.

Priosec not going generic.

I know you were saying that that's not part of your forward guidance.

I'm wondering at what point in the future you'll revisit that when you come to the decision that maybe generics won't show up for several quarters because that increasingly seems likely.

And then, on Zedia.

You talked about a couple of trials, the outcomes trial [INAUDIBLE] and the enhanced trial, is enhanced an outcomes trial or a surrogate end point?

And I'm wondering if there's any big mega trials in the works that, in a few years, will start seeing data from that might coincide with the launch of the Zocor/Zedia?

Okay.

In terms of Priosec, your right, we haven't given guidance because there's a whole lot there that's beyond our control.

In terms of this recent outcome of the trial, there's really three parties who have to make decisions.

There's the FDA in terms of what they'll do in terms of exclusivity for generics.

There's Kudco in terms of what they'll do since they have approval now and it prevailed in the case, what they'll do in terms of coming to market and there's also [ Asrozenica] what they'll decide to do just with regard to the lawsuit itself.

So, I think again, we're not a participant there.

So, as those three parties decide how to proceed now with this new information, that will lead to a new set of conditions that [ Asrozenica] will have to make operational decisions about.

It's those operational decisions from [ Asrozenica] in terms of supply orders to us that effect our supply sales.

As I've always said, that this is a bit beyond our control, now there's a whole new set of conditions that play out beyond our control.

So.

I think until, Tim, we see exactly how each of those parties will react and what will happen as a result of this lawsuit, then we'll be in a better position to know how it will impact us.

But again, those aren't decisions that we're driving.

In terms of of the studies that we described, I'm not sure precisely in this enhanced, it's to evaluate Zedia and Zocor together versus Zocor alone, and that's looking at potential to regress [INAUDIBLE] in patients with high colesteral levels.

I don't know if that's power to look at outcomes are not.

The other is.

Those are the two long-term mega studies we are doing now with Zedia.

Also in terms of questions people have asked about, what will we see the Zocor /Zedia data, my point is you've seen that.

The data we've presented to date, which is quite a bit, on the use of Zedia along with Zocor along with other statins, you see the ability to reduce cholesterol levels beyond what you can get with Zocor alone, particularly at the high end and the idea of the combination tablet is one of convenience so you're looking to produce a tablet to give you the same effects as taking them differently.

We wouldn't expect to see a different profile for the combination tablet versus what you've seen.

That's where we are with the Zocor Zedia and we remain on track with that and filing it with the FDA late next year.

Next question.

Thank you.

Next question is from C.J.

Silverstein with UBS Warburg.

Quickly, Mark, if you could give us what's going on with the FOSAMAX patent and court hearings we need to be aware of?

Sure, in terms of FOSAMAX patent litigation, there's two issues there.

We have FOSAMAX daily and FOSAMAX weekly and legal actions going on in both of those.

In terms of the once-daily FOSAMAX, that trial has ended and we are waiting for a decision so I don't have anything new for you there.

People will keep wondering any day, any day and one day it will be here.

We are satisfied with how the trial went.

I don't have any more information than last quarter in terms of what will happen or when.

In terms of the commercial marketplace, 90% of our business is in the once-weekly, there are two trials there and neither of those have begun yet.

One trial scheduled to begin in March of next year and the other has not been scheduled yet.

Next question.

Thank you.

Your next question is coming from Mara Goldstein with CIBC World Markets.

It would seem from the numbers you've given us that there's quite a bit of excess inventory floating around for VIOXX.

I wonder if you could address that and what the situation might look like in terms of excess above what you normally stock?

I think what you see is described as the well-known and described patterns of wholesalers attempting to really time their purchases representative to price increases.

So in the case of VIOXX, the last price increase was August of last year, perhaps in anticipation, wholesalers began to buy in in the second quarter and I described that on the quarter last quarter we are seeing volume purchases beyond demand which suggests stocking up and typically revert after a price increase has occurred, that's the typical pattern.

In this case, during the third quarter there was not a price increase.

It didn't happen until the end of September.

During the third quarter wholesalers continued to build their inventories again in Vance of a price increase which occurred at the end of the quarter.

We don't preannounce these, but it's a well-established pattern and they targeted large volume drugs because that's where they can have the most impact.

As I described now with two sequential buy-ins and then a price increase, we expect to see buy-out.

The same in terms of sequential portions with Zocor last year.

We had buy-in in the third and fourth and after a price increase we saw buy-out.

I can't predict how much buy-in will occur when but now that there's been a change of price, we expect buy-out to occur.

Next question.

Thank you.

Your next question is coming from Jamey Rubin with Morgan Stanley.

Thank you Mark.

I just had a - Thank you for providing clarity on net sales versus gross sales.

I had a question on rebates going forward.

The level of rebates this quarter, the difference between net and gross, and backing out an [ Asrozenica] payment is probably on the order of 13.8% which was higher than we were assuming; although, we had no visibility on that.

Any reason why that level should move forward on that as you move through the patent expiration or if there's any change at all to the Zocor contract?

Seems the only product where there is a significant rebate is Zocor.

Thanks, first of all, for the complement for recognizing that fact.

Some had misinterpreted what we had done but we are giving you more detail.

In terms of the pattern, you're right, Jamey, you haven't had has much visibility on rebates so I can't comment on what you may or may not have had in the model and we haven't described AstraZenica sales and now you get a closer look at what's in our number.

Remember the rebate levels by product vary and within the product vary considerably across the channels.

Zocor, you see that among the top products discounted.

That shouldn't be a describe.

We described the position of the VA and Department of Defense is a discounted segment.

We are the exclusive agent.

That growth in that segment which has outpaced retail has led to higher overall rebate level for Zocor but that's consistent what what we've been talking about.

Look at some of the other larger products, you'd see less than the more differentiated products.

We've described for some time the older products tend to be the most discounted.

You see PRINIVIL and older products, end of the life cycle, lots of competition.

As you see the products go off patent, you lose the rebate.

You improve a little there but they represent less and less of the business going forward.

My last comment there in terms of how it's be affected by rebates and patent expirations, we are getting to the end of the patent expiration period we've been in for a couple of years.

Every quarter the gross margin in the pharma business continues to hold at 82%.

If there were a dramatic change or acceleration in the levels across the mixes and segments, you would have seen some delusion in the product gross margin.

I can't predict where it will go forward.

You have a good handle on what's driving it now, it shows we continue to work on protecting the margin which is a matter of improving the mix.

More gross margin incrementally coming from the newest products and less from those that are heavily discounted.

Okay, next question.

Thank you.

Next question is coming from Len Massey with Bank of America Securities.

Thank you very much.

Uhm -first I wanted to say a thank you for Mary Reddin for all the assistance she's provided in the last several years.

With regard to Zocor and the DOD/VA contracts upcoming, I believe that Medco had a significant involvement in those contracts as being the PBM that was involved, have they indicated their intention to rebid on those contracts and if the contracts aren't rewarded to Medco, to the extend they are involved, can you comment on what impact they might have through Zocor through the channels?

Len, getting back to the issue of Zocor and the D.O.D. and Department of Defense.

First of all, very important point, the formulary decisions are not Medco formulary decisions.

The government through the Federal sector, the D.O.D. and the V.A., they determine the formulary and it's through a bid process that Merck and other companies participate in and that led to the selection of Zocor some time ago.

Medco had played a role in the past in administering, I believe, some of the mail order service but that was just an administrative contract with the D.O.D.

In fact, I think that contract recently turned.

Because it was simply an administrative contract with the DOD, it was not even as profitable as some of Medco's other business where they actually do engage in active formulary management.

Again, that was purely administration.

Not even the case in that particular segment.

Going forward, the decisions about Zocor, as they've been in the past, will be within the purview of the VA and D.O.D. and if they continue to operate as they have, whatever PBM they're using, we'd simply be the administrator of the decisions.

No impact there.

Next question, please.

Thank you.

Your next question is coming from Glen Bouchet with Palentier .

Sir, your line is live.

Okay, we'll move on in the -- to the next question.

Next question is comes from Barbara Ryan with Deutsche Banc.

Mark, good morning.

I want to also thank Mary.

Mary, you've been great.

Thank you for all your help and sure I echo everyone in saying I wish you great luck in going forward.

I know you'll do a great job.

I wanted to ask on the difference between gross and net sales.

Obviously we previously were capturing that on the other pharma line.

Will you, number one, be restating previous results so you have a comparison for the new numbers and isn't it really just a question of accounting semantics whether you net the rebates and discounts out of revenues, and therefore have a higher 82% gross margin or whether you would have a higher sale and net those discounts and have a lower gross margin.

Let me classify a couple things here.

There's not an accounting issue here.

The standard accounting as you see reflected in the consolidated P&L.

The standard is net sales and that's always been the case.

Top line sales have always been net and no accounting changes related to this whatsoever.

It's always on a net basis.

The product detail that we give is not an accounting issue.

That's completely voluntary disclosure and over time we've provided this additional information so you could see the performance of individual major products that we're actively marketing.

It wouldn't improve products no longer marketing, things like the extra supply sales which we don't market and don't have control over.

This disclosure has always been to give you a better sense of the characteristics of the inline products, the ones I talk about on the call as well as others we are still promoting.

Still no effect here.

On the margin, no effect.

The margin is off of net sales.

We felt and a couple of people on the call had mentioned you would recommend a greater level of detail so we are doing that.

In terms of restatement, we don't intend to do that.

No reason to restate.

There is some sensitivity about rebates, we think we've given you quite a bit of information and moving forward would just be cleaner.

I've given you guidance on net.

As we go into next quarter, we'll wrap the year and anything into next year, we'll be on this clean net sales basis.

Okay, next question, please.

Thank you.

Your next question is comes from Mario Corsc with Lering Swan.

With the gross vs. net issue, will you be protoing ahead of time the numbers on the net basis so we can accurately forecast what the numbers will be and Arcoxia, can you give detail on what's happening there in terms of safety in the United States?

Thanks.

In terms of your first question about, I guess you may be talking about fourth quarter last year in terms of restating.

No, we don't intend to do that.

You'll get that next quarter because you'll get the net sales for the quarter as well as changes from the prior year.

If you recognize you've now got three quarters of the year in and we've redone the guidance for the year, most of the components are already there.

In terms of Arcoxia, really no update there.

I announced on the second quarterly after the FDA in June asked us to generate additional cardiovascular safety data, we began a trial at the end of June or studying Arcoxia in OA patients, that is well under way and we remain confident in our plans to complete our study and replant Arcoxia next year.

Next question is coming from Steve Ty with Merrill Lynch.

Like to reiterate my thanks to Mary.

I hate to beat a dead horse here, Mark, but clearly there is confusion.

Can we have the sales product by product and if not, why not?

And will you confirm there's about no change for any product alone given the profitabilities of these products, I think it's important.

And my second question is, you know, why are you guys giving so much money away to wholesalers.

Other firms seem to be implementing successfully tighter inventory control.

Thanks.

Okay.

In terms of the growth, having made the transition, we're not going to also do guidance again on gross but I will confirm your point that there has been absolutely not been a takedown in any of the guidance ranges as I tried to explain, not as clearly as I hoped, the new guidance ranges reflect the change to net sales alone with no change in underlying fundamentals for three of the products.

In Zocor and FOSAMAX reflect performance improvement which is the same thing you've been tracking all year in terms of prescriptions and sales.

Quite clear, no takedown on the ranges, just the move to net, tightening up the ranges.

In terms of giving business away to wholesalers, I can't speak to what other companies policies are with with regard to how they work with distributors.

I said for some time, we're not doing anything to incent the behavior and wholesalers purchase from us as they will.

We do do it as getting money away.

You're getting ahead of small price increases which as I described net for our business don't have much of an impact anyway.

Without knowing how others are managing or not, what we are doing is allowing people to order what they want and doing the best job describing to you how that has affected results as well as signaling to you what you might expect going forward as well as comparisons year over year.

That's about the best I can do on that one.

Next question, please.

Your next question is coming from Ken Milburn with A.G. Edwards.

Sir, your line is live.

Maybe Ken can get back in the queue.

I didn't put in for any question, but thanks.

Next question, please.

Thank you, your next question is coming from Greer [Tieguy] coming from Thomas Weisal.

Just going back to the market and your comment that you'd seen an uptick in the statins.

I'm wondering, given September 11th and the aftermath of that, see comparisons and reasonable, [ Inaudible ] pretty much across every category and wondering whether this is easy comps as opposed to a real underlying uptick in the statin market.

To be honest I don't know what the effect of September 11th is on the statin market.

People may have been affected.

I'm not aware of any nationwide effect on the statin market.

We certainly know there's an effect on the market of Bacall being withdrawn.

They went on to other products.

If you look at the prescription trend, it's clear that the overall total market was impacted.

For most of the last several months, you've seen all the individual statin products growing at a faster rate than the market.

That wouldn't be possible unless the base had changed and that's what happened.

It was still in the base last year when you look at total statins and this year it's out.

Individual products like Zocor continue to grow strong but the market has been affected by that charge.

As you annualized that now, it's similar to a generic.

You've seen a decrease in the prescriptions a year ago, but now that it's washed out the overall level is low but we'll continue to see growth.

It you look at a change from August to September, a pretty bad change and you really have to look at the overall class in terms of what happened there with the products in the base.

Next question, please.

Thank you, next question is coming from Steve Scala with S.G. Cowan.

Thank you.

Comparing the net and gross sales shows sizable differences in the U.S. and none in foreign markets, what should we conclude from that?

Is this an accounting issue or you don't discount in foreign markets.

Secondly should we expect action on Zedia at ten months or twelve months at the end of October or the end of December and lastly, what can you tell us about the German [INAUDIBLE] relative to [INAUDIBLE] FX?

First of all, no accounting issues.

It is not an accounting issue, it's market differences.

The prices in the U.S. as we describe as you know is very dynamic process compared to the market forces we've described.

So that is a U.S. phenomenon because prices are set during that according to the free market forces.

In the foreign markets you essentially don't see a discount because it's built-in up front.

The prices we sell in most foreign markets are discounted prices compared to prices in the U.S. because of actual price controls.

If you have a single large purchaser in the government, they've got the discount off the top and why you don't see any of this going on in the foreign markets.

There's a few things in terms of taxes but not on the product by product basis.

The discount is built into the product up front.

In the U.S. the dynamics are what they are.

You see it varies by product in ways that you would expect and, again, that's a mix of different strategies within different segments.

Different mix across and in some cases, of course, even in the U.S. legislative rebates with the Medicaid population so that's what's going on there, again, it's not an accounting issue.

In terms of Zedia, the German label, I don't have a German label yet.

Literally the approval came in yesterday and we don't have it yet.

The press release provided all the detail we have now which is it includes the major indications, the product can be used on with any statin, approved for some of the specific subpopulation of patients as well as hyper-cholesterol group.

The product is not launched yesterday so the parts are not shipped with a label yet, when we have more we can talk about it, but we don't have it yet.

In terms of the U.S., it's been our policy we won't try to predict a regulatory agency like the FDA.

Where we is there's a lot of clarity on this one, we submitted on September 27th d by law they are expected to act on twelve months.

I think we'll hear something in that window but at this point I don't have a clear indication as to when they would act.

We'll look forward to the news and hopefully we'll hear soon but I don't have anything specific on when that will happen.

Next question.

Thank you.

Next question is comes from Larry Smith from Graured Clour.

Most of my questions have been answered.

I want to thank you because I know you were one of the moving forces to get the company to report on net sales which is what we really need to look at.

When you were going through the product pipeline you didn't say anything for the protagonist for depression.

We have a number of products, what I tried to highlight were things are very late stage, soon to happen events.

Still in phase 3 trials.

Indirectly I would include that among the products in terms of effecting the R&D pattern of spend.

Up this quarter and didn't wanted to be up even more next quarter.

The ones I highlighted were a couple where we are on the hook for milestones we are committed to and KRP into phase 3, filing substance P for chemo induced vomiting and really what's going on here in terms of recent news or news to be expected on what we've said, substance P for depression still moving along and contributes to the pattern.

Next question is coming from Richard Evans of Sanford Berstein.

Two things on Zedia, can you give us an update on the six-combination tablet.

Are you yet in phase 3 clinicals and in not, when might that happen.

And can you give us an idea of the launch on the equity income line next year.

Would you expect to be spending more on sales and marketing than registering in sales.

Should you be looking for that to be a cost.

Should we be looking for a profit.

First of all, Richard, in terms of the [INAUDIBLE] Zocor tablet, yes, we've had a tablet for some time.

Among the many steps you go through in producing a combination tablet or stability studies where you have to produce tablets and put them in containers and put them on shelves and check for viability.

Yes, we have a tablet formulated.

It is in stage 3 studies.

As I've described for a combination tablet, you need to do some clinical data.

You are bridging to the data for the two drugs used together, and so there's no change to that plan.

We have a tablet in phase 3 moving forward and on the same time frame for later next year.

Number terms of the dynamics for Zedia or maybe we would call coadministration therapy using Zedia with the statin, the sales from the product would flow through the equity line, right now with no product on the market, that is a negative.

That has cost and sharing the costs, a negative impact on equity income and as you launch a product, the sales would be recognized reported that way.

At this point particularly with the product not approved, I'm not in a position to guide to.

The overall sales of Zedia let alone the specifics of how that would flow through an equity line.

Clearly we are encouraged by the launch in Germany and look for reporting sales of Zedia in the next year.

Just one follow-up, Mark, could you scale the promotional commitment, would you put that on a scale to Lipitor or the current promotion behind Zocor or the other type of add-on therapy promoted with a lesser share of voice.

Hard for me to talk about share voice, cheerly we understand this market very well and we've been in it for quite some time.

I'm not going to forecast for our competitors what we'll do.

I think certainly we'll be competitive because we have an exciting drug.

One that offers an efficacy benefit that you don't get currently as else as Zedia, it's a major unmet need in the marketplace.

The first new thing to treat cholesterol since we launched Mevacor.

I can't get into the competitiveness of it.

We'll be supporting this in several bays.

The joint-venture, we'll have dedicated sales reps supporting Zedia, and, in addition, the JV will utilize the resources of Merck and parent companies for additional support since we wouldn't be looking to replicate a major U.S.

Pharma sales force.

A combination of those resources put behind what we think will be an exciting and important launch.

Next question, please.

Your next question is coming from Neil Slide with Southgrown Partners.

Mary, my best wishes.

Thank you.

In May, Zocor in the U.S. was relabeled to include the3 various muscle warning, myopathy, now that several months have passed, can you offer insights as to what you think is happening now because lip cor, provtol have nos had to issue labels and what you expect now that several months have gone by with Zocor and the new label.

In terms of the labels change that occurred back in May, this was in our minds a minor label change because it was largely edital and not requested by the FDA.

A product like Zocor which has been on the market for ten years or so with a lat of data behind it, over time it gets more and more information.

The risk profile had not changes with Zocor but in an effort to essentially clean up the language and make it cleaner and more consistent, we reformatted it and it was stepped by the FDA but it didn't increase the prominence in any way.

The only new information was potential drug interaction we picked up with a low volume sort of intensive care hospital product and based on clinical studies we had done.

Small incidence, difficult to size but fels it was important so we added to the label.

If you wanted to take an extreme case and look at the reported incidence rates within the Zocor label now vs. in the past, you don't see a change.

In fact, the rate increased a bit from the reported trials done.

So it wasn't a requirement, it was voluntary.

No change.

So I wouldn't be in a position to say what others will do or not.

Merck consistently has a possibly of over time cleaning the labels up and felt it was the right thing to do but doesn't reflect a change in the safety profile in any way.

I think we are running over.

I apologize.

We got a late start.

We take these questions as they come.

I apologize, we are taking them in the queue.

I don't know who's in the queue but we have time for one more and then we'll let you go.

Thanks.

Thank you.

Your last question is coming from Rick Silver with Arnold Price Rhoder.

Good morning, Mark.

A couple of questions.

Firstly in reporting sales by therapeutic area to the extend the therapeutic areas are reports at the gross sales level and now revert to the net sales, secondly AstroZeneca payments, what was the year to year trend in the third and what's factored into the guidance for next year.

And then, finally, last December, basically told us there would be a VIOXX cardiovascular safety study performed.

What's the study of beginning that trial or have the plans been abandoned?

Multipart question.

The easy one on your comment about the gross vs. net, the therapeutic sales descriptions in the 10-K and Qs in the past are gross.

As we move to net, those are also in net.

We'll be consistent across all the things as we make the transition and everything on the net basis going forward.

In terms of supply sales, the guidance has been all year that the supply sales to us are declining and as I mentioned we have not changed that.

We've reaffirmed after the case that we'll continue to decline this year.

Never got into the patterns of what's going on in any given quarter.

Again that could diver by product depending on decisions so we continue with the current guidance.

Those are increasing and we expect to continue.

I can't comment on next year given this significant and recent court case as I described on the question earlier.

A number of parties involved have to make decisions and that will lead to an outcome they'll respond to in terms of operations and decisions about the products and how that effects us.

No better off now than before the trial.

As that plays out we continue to look at it.

In terms of the cardiovascular outcome studies, you're right.

We discussed doing the studies and have not abandoned them.

We are continuing to make progress on those complex areas as you know from your research in terms of looking across various patient types, drugs, aspirin use.

We continue to make progress.

We look forward to updating that by the end of the year.

Meantime we continue to building the overall safety profile of VIOXX.

As I mentioned continued update on the overall profile from the total development program.

Some of that data was updated earlier this year.

Updated at the UR meeting in June.

Some of that has been published.

We'll continue with some of the ongoing things.

We are still planning cardiovascular outcome studies and look forward to hopefully soon able to discuss that in more detail in a comprehensive manner.

With that I apologize.

We got a late start due to technical problems.

Hopefully all you on the e-mail list received the attachments.

All of those are on the e-mail site.

This call is archived for those who want to come back later.

Thanks for participating and bearing through quite a lot of information.

In summery, the net of all these tends to be as we've expected and should have expected from what we said this year as we continue to work through this transitional year.

Thanks, have a good Friday and weekend.

Thank you for your participation.

This does conclude the conference.

You may disconnect your lines at this time.