默克藥廠 (MRK) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Merck & Co. fourth quarter 2002 earnings teleconference.

At this time all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation.

I will now like to turn the floor over to your host, Mr. Mark Stejbach, Senior Director of Investor Relations.

Please go ahead, sir.

Thank you.

Good morning, everybody.

Welcome to our earnings call and web cast.

We're starting a little late because a number of folks are just dialing in after finishing another call.

You should have the press release that was out this morning, as well as a number of the standard financial attachments, and if you don't have those, those are posted to our website.

Go to merck.com under financial information, under the financial reports there, you'll see all the PDF files with the attachments.

Just a reminder, you can also sign up for the email alert there so that any time when any of this information is posted, you will receive an email alert, so go ahead a fill that out.

Just a quick summary.

Earnings per share came in at 83 cents for the fourth quarter in line with expectations in the first call.

That's up two cents in last year, bringing us to $3.14 for the full year, same as last year.

As you've heard, during the last year, a number of my comments are going to talk about being in line with expectations with a lot of familiar themes.

However, we continue to achieve a number of important milestones in terms of the products.

I'll highlight those as we go through the details.

Before I go any further, I want to mention that during this call I may discuss certain subjects that may contain forward-looking information as defined by the Private Securities Litigation Reform Act of 1995.

The statements may include guidance of earnings and other income statement components, statements related to growth rate expectations, product relation relative to competition and I caution you actual results could differ materially from those projected in these discussions, and additional information on the number factors that could cause actual results to vary different materially from what we'll provide today is available in our most recent 10-k.

Before we jump into it, a high-level summary is all the items we provided guidance on in 2002 came in line with the guidance.

For 2003, we first provided guidance just last month, early December, and there are no changes to any of that guidance today, but I would reiterate each of those as we work through details of these results.

I'll focus on the fourth quarter, but also provide comments on the full year results, so, you may want to look at both pages as we walk through these.

Patterns for the fourth quarter, and within last year, played out as previously described, and I'll describe some of that, in particular when we get into the spending patterns.

And we'll walk through the reported earnings, the P&L of Merck & Co. Consolidated, as usual, then we'll look at the core pharma business on a stand-alone basis, drill down into the results and update major products, then review the results of Medco Health Solutions also on a stand-alone basis.

If you want to turn to your attachments, labelled consolidated, we've got a fourth quarter and a full year.

Starting at the top, sales were $13.9 billion, an increase of 11% over last year.

Total cost in expenses were $11.2 billion, up 13% with materials and production costs of $8.7 billion, up 14%.

As you know, the bulk of this cost relates to Medco's cost of revenues.

Product costs were up for the pharma business too, consistent with the top line growth in pharma, which we will go into in detail.

We will look at the businesses separately.

Before I get too much further, let's talk about gross margin.

That resulted in a gross margin of 37.5% for the quarter, and this is up against sequentially this year, so just as a review for the four quarters of 2002, gross margin percentage, starting the first quarter was 34.4, then 35.3, 37.3, and as I just said, 37.5 For the full year result, that takes us to 36.2% and that's in line with our full year guidance, which was in fact 36%.

Without getting too far ahead, since we'll go through Medco and pharma separately, it's important to recognized that the PGM is determined by each business and the consolidated PGM is a result of the margins and growth rate of the two businesses, not a PGM that is a driver of the results.

So for those of you who model starting with the consolidated PGM, be aware of the starting figure used would have embedded in it the assumptions about the margins and growth rates of each business in it.

The total PGM, percentage improved this quarter as result of improving sales growth rate in the pharma business as the effect of the off-patent products diminishes throughout the year, as we've discussed.

There were strong top-line sales in Medco this year, 13%, similar to what Medco's shown all year.

In fact they're 14% for the year.

Therefore, the PGM difference this year is really driven by growth in pharma sales versus prior quarters this year.

As expected, better growth in pharma with entire margins obviously driving the total PGM.

The Pharma PGM for the entire year was 82 percent, although it fluctuates quarter to quarter based on product mix.

For 2003 we expect our manufacturing productivity will off-set inflation on product costs within the core pharma business, and I think that gives you a lot of detail around gross margin, but I wanted to cover that in some detail.

Also contributing to higher costs this quarter were increases in marketing and Admin and R&D expenses.

Let's move this end down to the next line.

Marketing and Admin was almost 1.7 billion in the quarter.

That's up 8% versus last year.

And it continues this trend of increasing spend that we've been describing all year.

That brings us to essentially flat for the year as was our guidance.

For the full year, marketing/admin was down slightly, less than 1%.

A reminder that through mid-year, if you think back, we were actually down 6% in the first half of the year.

At that point, but we had described it, based on the spending pattern and comparisons, we expected to see this increased spend rate.

We started seeing that in the third quarter and continuing here and bringing us from full year in line with our guidance.

The increase in the quarter, similar to previous quarter, reflects the expansion of U.S. sales forces over the last few quarters, and you've seen that ramp up in the year over year comparisons this year.

Now, keep this pattern in mind as you model 2003, since the sales force expansion won't annualize until later in the year, but essentially we're not expecting continued expansions.

Everybody's on board, it's just a matter of the comparisons until it annualizes.

For the full year of 2003, we expect to see mid-single digit increases, in the total marketing/admin for Consolidated Merck.

Okay.

Next line, R&D.

R&D spending was $839 million, up about 17% in the quarter, again, reflecting a trend all year.

In the first quarter, if you recall, R&D was down slightly year over year, but then grew 5% and then 15% in the second and third quarters respectively, and now this 17% increase this quarter continues to demonstrate this acceleration of R&D spending that we've been describing for you all year and has been our expectation.

For the full year that brings the total to $2.7 billion, in line with guidance, again.

Now, as we've discussed in the past, the timing of the R&D expenses varies during the year, in part based on timing and the pattern of expenses for large clinical trials and our expenses are being driven by the base three products, as you would expect, including a [prepetin] for depression, three large vaccine programs, the human papilloma virus or the as we call it, the anti-cervical cancer vaccine.

Also the rotavirus and [zauster] vaccines.

Also in the fourth quarter, MK767, our alpha gamma for diabetes entered phase three as expected, and also factoring into these costs for the quarter were the on-going study for Cosamax and a large CV outcome study we've began.

As a result of all of that, the overall clinical study spending was up 25% in the fourth quarter versus last year.

Basic research increased 13% for the quarter, similar to the pattern throughout the year and basic was up 14% for the full year.

Excuse me, it was up over 25%, clinical study spending in the fourth quarter.

This pattern of R&D in the past year, driven by the variable costs and clinical trials continue to play out as the pipeline advances and for the full year came in line with guidance.

For 2003 we expect the R&D growth to continue due to continued advancement of the pipeline and investments in basic research and for full year we're guiding to a 10% to 12% increase over 2002.

Just a reminder, this R&D line in the P&L does not include the development costs for Zetia and the Zetia/Zocor combination program, since they flow through equity income, and there are a number of ongoing studies that would not be reflected in this number.

Okay, moving down to the next line on equity income.

Speaking of joint ventures, we see here $94 million, down from $128 million last year, and for the full year brings to use a 6% decline.

Included in here, of course, are Merck share of all the expenses associated with our collaboration with Shering/Plough on Zetia.

Notably all the launch expenses in the fourth quarter -- promotion, the joint venture welling effort, trade promotion -- really everything except for the Merck sales force directs selling expenses, this includes all the on-going R&D flowing through here.

While equity income is an important source of income overall, over $600 million in the last couple years, the decline this year is really attributable to the increase in costs of the Zetia collaboration.

We noted in our guidance that we expect the Merck share cooperation to be net-negative in 2003.

Moving to other income expense net that there was a cost there of $92 million, down a little bit from $120 million, finishing down 11 percent for the full year.

These items fluctuated, but each quarter as you've seen is nothing too unusual to suggest a pattern going forward in this quarter.

If you flip briefly to the next page, where we have the other financial disclosures, I'll point out a couple of the factors.

Not surprising, you can see that interest expense was down, reflecting lower interest rates.

Also the minority interest expense was down primarily reflecting bond U. Moving down the page with some of the JV details, you see the Merriel revenues finishing the year slightly down in the fourth quarter, but up 4% in revenues for the full year.

There is improvements in sales in the events vaccine business for the quarter and for the year.

And a new line you're seeing here for the first time, the reporting of Zetia sales, $25 million in the fourth quarter.

You can see then how we're treating this collaboration at the same as earlier jv's, giving the total sales number on the original disclosure page, while the share of the income or expense relate to that joint venture is recorded in the equity income as I described earlier.

Pretty straight-forward there.

Now, going back to the front page, on the P&L, let's go down to the bottom, towards total sales and talk a bit about the sales mix.

Total sales for the company were up 11%.

Pharma sales up 8 percent overall, 9% on a volume basis.

Foreign pharma sales continue to be strong, are up 14%, continuing to be strong, as each of our large products showed strong growth.

As you see, favorable exchange offsets the price in the quarter.

Medco sales growth of 13%, similar to each of the previous quarters.

Medco sales were up 14% for the full year and remember, Medco sales are sales other than Merck products, not the same as Medco on a stand-alone basis, which we will get to later.

Similar to the earlier discussions on margins, I want to break down what's driving the numbers in the patterns that you see sequentially in the past year.

In the U.S., pharma sales were down slightly in each of the last two quarters, the second and third quarter, in part due to unfavorable comparisons on buying patterns and a decline in the patents for products.

This quarter were favorable on buying patterns, as we'll discuss, but that's contributing here and importantly, the patent expiration period is largely over.

These products we've been discussing for a long time, they represented only 4% of sales in the quarter and they continue to decline.

So, now just moving up a little bit, finishing off with P&L, the tax rate for the quarter was 30%, in line with our guidance.

Guidance for 2003 continues to be 29.5 to 30.5.

The bottom line then is income of $1.9 billion.

That's up 2%.

And EPS for the quarter of 83 cents as I mentioned, also up 2 percent and in line with expectations.

Shares outstanding are still roughly $2.3 billion, but down a cent and a half from last year similar to reduction we have seen in previous quarters.

The past quarter we did spend approximately $250 million in the treasury stock buy-back program and that brought our total for the year to $2.1 billion.

We still have $1.6 billion remaining under the $10 billion authorization from 2000 and recall that earlier the share over the Summer, we announced our Board authorized an additional $10 billion buy-back with no set time limit.

So, for full year 2002: EPS was $3.14, same as last year, for 2003 we expect to return to growth and our guidance in EPS range $3.40 to $3.47 and this guidance is based on how we currently report as you know, on a consolidated basis, reflecting a full year of results from core pharma and Medco health bi-businesses.

It consists of generally quarter growth of 2003 with a slightly lower rate in the first quarter, based primarily on three things we discussed today or previously.

First, the sales force expansion I mentioned, that's in place, annualizing later in the year.

There's an expected buy-out, as we'll discuss in the product section as I already mentioned, we had a buy-in this quarter.

Then of course, the economics of Singulair AR, as you would expect with the recent approval, we're experiencing the launch expenses now and we'll see the sales from the allergy season starting a little bit later.

Overall, our stretch remains unchanged since we announced a year ago our intent to separate Medco in mid-2003, but for now we're providing guidance as we continue to report today.

As you know, once we separate the businesses, we will adjust our consolidated guidance as appropriate, but until then, we'll continue to give guidance, assuming the businesses are together for the full year.

As I mentioned last quarter, after the separation has occurred, Medco Health historical results up through the separation date will be presented in our consolidated financial statements as discontinued operations, and Merck will adjust our 2003 consolidated earnings expectations to reflect that separation as appropriate.

So, that finishes up consolidated.

And we now move to the disclosure on the core pharma.

This is, as you recall, starting the first quarter, we started giving additional information on Merck pharma as a stand-alone.

That's Merck, minus Medco.

We'll continue reporting on consolidated for the full operation, but then, we'll provide the supplements.

As I mentioned, the past, it's not subtracting one business from the other, but an attempt to look at each business as if it were independent of the other, including effects on the sale of Merck products and rebates to Medco, certain shared services and current bi-capital structure, but the release is to provide each business on a stand-alone basis, a little transparency on each of those, and this will also continue to help you think about what Merck would look like post-spin of Medco as the adjustments are the same we would make post-spent.

Let's turn to the page describing the results, marked "additional disclosure, core pharma basis on a stand-alone basis." on this basis, pharma revenues were up 9% over last year $6.1 billion.

With that, sales outside of the U.S. increased a healthy 14%, just as last quarter.

The difference in the last quarter is really in the U.S.

Last quarter we had a number of difficult comparisons and U.S. pharma sales were a negative 6%, bringing us to flat for the quarter, as the negative in the U.S. off-set the foreign.

In this quarter, that actually reversed, and now U.S. pharma is up.

So, across the product line there is a net buying of $240 million.

This compares to a net buying of only about $15 million in the fourth quarter last year.

So just as we face these difficult comparisons in each of the last two last quarters, we see a benefit this quarter.

As always, I'll review this individually for the major products, but just wanted you to be aware of that.

Also remind you these patterns result from the wholesaler purchase behavior, not due to any sales incentives, and when our sales are affected we provide that information on individual products as well as the totals as we described this impact of buying a buy-out, but we continue to observe our normal inventory levels of wholesalers typically a month or less, and even with the buy-in's, we don't expect to see more than two months on any given product.

Moving down the rest of the pharma P&L.

We reviewed some of the items as we talked before about consolidated, but marketing was up 8 percent and R&D increased 17%, as I discussed.

You can see the net income is up 1%.

So the difference compared to the top-line growth of 9% is driven by the higher marketing/admin and the R&D expenses as well as a little bit less favorable product sales in the quarter.

These same factors also affected margins slightly for the quarter, though for the full year, it's pretty consistent for the full year.

For full year margin 82 percent and net margin of 32%.

On the next page for the full year, you'll see the net income for the pharma business was $6 billion.

So in summary now, before I turn to the individual products: While this was a flat year overall in terms of earnings, we have seen a number of trends now including the continued growth of the in-line product, investments in the sales force and R&D, all to prepare us for 2003 and beyond, and also the decline in patent products have affected us less throughout the year.

Since we started this in first quarter and including comparisons to prior year, you now have this business on a stand-alone business for eight consecutive quarters.

That is all of 2001 and 2002.

For 2003, we continue to expect double-digit growth in the core pharma EPS for the past year.

Of course, I said earlier in the year, with watching a number of factors as we go forward, double-digits for pharma continues to be our expectation.

So, now turning to the individual products, including in the financial statements, as always is the net product detail sheet, and that's a break-down of sales by product, again, for the quarter and the full year on a net sales basis.

Just a reminder, we began last quarter reporting individual products on a net sales basis, rather than gross sales basis, so that continues this quarter.

In all of the sales figures for the quarter and the year as well as on , buy-in and buy-out everything is on a net sales basis.

Starting with the net sales of Vioxx for the quarter equals 385 million, down 25%, driven by the as-expected buy-out, following the large buy-in we saw last quarter.

As I mentioned, last quarter's call, that preceded a price increase at occurred the end of September.

We estimate the buy-out in the fourth quarter to be about a $220 million negative effect.

And as I mentioned, we expect to see that reverse this quarter because we had had two consecutive quarters of buy-ins due to a price increase.

This is also an unfavorable comparison for the quarter.

There was a buy-out last year as well, though not as great.

For the full year, the cost of franchise finished at $2.6 billion, in line with guidance.

In terms of prescription performance in the U.S., I mentioned last quarter that the share trend for Vioxx had really stabilized since early August for Vioxx and the new prescription shared gap between Celebrex and Vioxx decreased from 5 1/2% to 3.2% and in the 4th quarter the gap continued to narrow, down to 1.6 percent in the recent week.

In fact, we have not lost share in this class since August, and in recent weeks we've actually picked up a bit.

Following the launch of our bigger study in promotion, which was mid-year, as well as based on the cost advantages we have as a true once a day for all indications, we continue to improve positions in managed care and as we announced in our business briefing last month, of 93 managed care plans, Vioxx is the preferred and exclusive in more than 50, while fewer than 10 have Celebrex preferred over Vioxx.

In addition, the recent market research continues to confirm the effective pain relief image of Vioxx physicians and continue to do good with a growth of 27 percent for the quarter, similar to the last few quarters and exit sales are up 24% for Vioxx on the year, remaining the top in sales dollars and it's the only approved drug for acute pain in Europe.

Brief update on Arcoxia, it's been launched in 19 countries worldwide, including Mexico, Brazil, UK, Ireland, Sweden, New Zealand, and Singapore.

We expect additional launches throughout the year.

In terms of recent or up-coming scientific data and presentations at the ACR in October, that's the American Research for Cosmetology, it combined data from 20 clinical trials and over 17,000 arthritis patients, showing Vioxx significantly reduced, had about a 62% reduction, the incidence of upper GI perforation ulcers and bleeds, compared to four widely-used non-selected NSAIDs.

This analysis, the result is consistent with a significant reduction in important GI events we saw in the bigger study.

Also in October for Vioxx, a study published demonstrated the superiority of Vioxx over Celebrex in acute dental pain.

At the ACR for Arcoxia, we had the results of the [Angolos/Spondolitis] study that showed superior efficacy of Arcoxia over a placebo and [Nuproxin].

Also in the 4th quarter, a second study of Arcoxia versus other methods 3 times a day, for treatment of acute gout was presented, outside of the U.S.

This study confirmed the early results demonstrating comparable efficacy for Arcoxia, and with a more favorable safety profile.

In the first quarter coming up, for those of you attending the American Pain Society Conference in March, this study will also be presented there.

Also the American Pain Society will present studies for Vioxx comparing it once a day to Percoset, a narcotic for acute pain and in a large study in comparing Vioxx to Celebrex for acute osteoarthritis.

So, a lot of recent and upcoming activity there, for 2003, we are guided to worldwide Coxic net sales of $2.6 billion.

Okay, moving next to Zocor.

Sales were $1.4 billion for Zocor, including an 18% increase outside the U.S., a decrease of 5% in the U.S.

There was a buy-in of $200 million this quarter, as wholesalers increased orders in advance of an anticipated price increase.

This is the same pattern we saw last year and in fact, there was a 4% price increase on Zocor at the end of December.

So as we could expect with this pattern, we would see the buy-in reversed in the first quarter.

We've had the buy-in, the price increased occurred, and as I mentioned, that will be something affecting the first quarter.

For the full year, Zocor worldwide sales finished at $5.6 billion in line with guidance and that was an increase for the year of 6%, but we were affected by as you recall, two buy-out quarters in the first and second.

Trx's, that is, total prescriptions for Zocor were up 13% for the year in the U.S.

Zocor had another strong quarter outside the U.S., 18% growth for the quarter, finishing up 14% for the year.

This really reflects the benefit of being able to promote the heart protection study in some markets in Europe.

Now as you know in the U.S., we're awaiting a label change to promote the benefits seen in the study, most notably a significant reduction in the risk of major cardiovascular events in patients with risk factors such as diabetes, regardless of their base-line cholesterol levels.

For 2003, a little bit of a mixed story, we expected continued growth in the U.S., however outside of the U.S. we expect flat to declining sales due to the patent expirations worldwide.

Our guidance for the full year net sales of Zocor is $5.6 to $5.billion.

In terms of Zocor and Hyzaar, up 52%.

In U.S. sales, we benefited from a buy-in and favorable comparison with a buy-in of $55 million in the quarter, compared to a buy-out in the fourth quarter last year.

But for the full year, Cozaar/Hyzaar showed strong growth of 21%, achieving net sales of $2.2 billion in line with our guidance.

We saw continued strong growth ex-U.S. for Cozaar, similar to last quarter, and we continue to leverage the results outside the U.S. of the life outcome study.

As you recall, life is the landmark study in patients with hypertension and LBH, which showed a significant reduction in cardiovascular events, particularly stroke for Cozaar compared to a beta blocker.

That was filed in the U.S. and earlier this month, an FDA advisory panel recommended a label change to reflect the results of the life study.

We look forward to getting that, and our guidance for full year net sales is $2.4 to $2.6 billion for 2003.

Moving to Singulair, sales were $510 million for the quarter, due to a buy-in and favorable comparison for Singulair.

U.S. sales reflected about a $90 million buy-in for the quarter.

For the full year, Singulair sales reached $1.5 billion, in line with guidance, a 19% increase over 2001.

In the U.S., Singulair continues to perform well in the asthma market, total prescriptions up 19% for the year.

Of course, as you're aware, the big news with Singulair is the recent approval of Singulair to treat seasonal allergic rhinitis in adults and children as young as two, the first approach in more than a decade to treating allergies.

That is a large and highly dissatisfied market.

Singulair is well accepted already for its use in asthma by primary care as well as specialists such as allergists and pediatricians.

In clinical trials, Singulair is similar to a placebo.

In fact, it's been studied in children as young as six months in many markets and down to 12 months in the U.S.

So, based on the continued performance of Singulair in asthma as well as new opportunity in seasonal allergic rhinitis, we're guiding to full year net sales of $2 to $2.3 billion.

Finishing off the last of the large products that we break out, Fosamax, sales of $695 million, up 62% to the quarter, in part due to a U.S. buy-in of $62 million compared tie buy-out last quarter last year.

These results reflect strong underlying demand with total sales for the year of $2.25 billion, slightly ahead of the high end of our guidance range of $2.2 billion, representing a 38% increase for the year.

Fosamax remains the number one osteoporosis treatment worldwide and now it's over 13 million patients use behind it.

It's been launched in markets worldwide, except for japan.

Recently, a UK court found Merck's patents on weekly Fosamax were invalid, however, the company believes they are valid and therefore we sought and already received a leave to appeal the case and the company's now proceeding with the appeals process in the UK.

Full-year net sales guidance for Fosamax for 2003 is $2.6 to $2.8 billion.

Just mentioning a couple other products for Zetia, I already mentioned sales.

The roll-out of Zetia continues in the U.S. through our partnership with Schering-Plough following the launch in mid-November.

In the first six weeks on the market, it's already achieved more than a 2% share of new prescriptions in the $13 billion U.S. cholesterol-lowering market.

In the fourth quarter there were three studies with Zetia previously presented at cardiology meetings that were all published.

Since we discussed it earlier as well as the studies, I won't repeat all the data, but I'll quote from an accompanying editorial in the American Journal of Cardiology, where one of these studies was published.

That editorial said that "many physicians may choose to employ Zetia in combination with standard dose of statons to achieve the ATP3 goals for LDL cholesterol without the necessity of using high doses the statons." and summary of our positioning is Zetia is the ideal companion therapy to any staton at any dose to achieve more effective lipid lowering.

Just a word on Cancidas.

We received FDA approval for the treatment of candademia and other cadida infections, such as abdominal abscesses, periotinitus and other infections.

Also for Cancidas, we launched an EU through the third and fourth quarter, bringing sales to $100 million worldwide over the year.

That's all I'm gonna say on the individual products.

Now referring to the sheets with Medco on a stand-alone basis, fourth quarter and full year.

On a stand-alone basis, the net revenues were $8.5 billion in the fourth quarter, 11% increase over last year.

For the full year ending December, net revenues were $33 billion, an increase of 13% over last year.

During the year, Medco Health renewed more than $8 billion in drug spending, including significant clients, such as General Motors, Blue Cross/Blue Shield of Michigan and South Florida, NEPC, GE, as well as others.

Within the business, Medco continues to expand the home delivery business, home delivery prescriptions for the year grew 9% to $82 million prescriptions.

And in the fourth quarter, 21 million prescriptions were managed through home delivery, now representing 15% of the total prescription volume, an increase of 14% over last year.

Retail prescriptions were flat at $117 million for the fourth quarter and were $467 million for the year.

Medco Health managed over 138 million prescriptions in total, that's retail and mail order for the fourth quarter, the total being 548 million during the year.

So, as you've seen earlier this year, as a result of an increase in home delivery, as well as the use of generics and further leverage of operational efficiencies in the automated pharmacies and investments in internet technology, gross margins for Medco improved in each quarters, previously in the year and stabilized in the fourth quarter.

Just a reminder on the gross margins there, it started at 3.2% in the first quarter, 4 percent, 4.1 in the second, 4.3 in the third and 4.2% in the fourth quarter now.

As I mentioned, contributing to margins was a continued increase in overall generic utilization.In 2002, generics were 33.4% of retail, up from last year.

I'm sorry, that's total prescriptions.

In retailer percentages were 41.

Compared to 49.6 in the prior year.

Finally, Medco processed over 11 million prescriptions in 2002 through its comprehensive member website, at medcohealth.com, which is a 51% increase over the prior year.

So, the trends that have supported the improvement in margin, or you can see in the results and that's expected to continue.

For Medco on a stand-alone basis again, net income for the quarter was $107 million, up 55% from the fourth quarter last year.

Part of that is the benefit in the changing good-will of accounting.

Net income for the year was $361.6 million, up 41 percent increase.

If you were to exclude the good-will amortization, net income was up 12%.

A result of most significantly Oxford Health.

Medco's net income on a stand-alone basis is estimated to grow 20% to 25% for the full year, 2003, primarily by improvements in margin for the full year, in terms of the factors I've already described, increase in use of generics and continued efficiencies from home delivery as well as their internet technology.

Finally, as we have previously noted that in the footnotes too, we've provided the additional information for those who wish to calculate the EBITDA results for Medco.

To summarize, we came in as expected for the year, and while it's flat earnings on the year, a number of trends that we have expected have at least played out as expected, the increase in R&D from the pipeline, the expansion of the sales force, growth of in line products, and so we enter this year looking forward to renewed growth.

So, I'm going to wrap it up there, open up the line for questions.

Thanks everybody for being patient as we walk through these important results and I'll be happy to take questions.

Thank you.

The floor is now open for questions.

If you do have a question, please press the number 1 followed by 4 on your touch tone phone.

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

While you pose your question, please pick up your hand set to provide optimum sound quality.

Once again, that is 1, followed by 4 on your touch-tone phone.

Thank you.

Our first question is coming from Scott Kay of Bank of America Securities.

Please go ahead with your question.

Good morning.

Thanks for taking my question.

I just wanted to touch base a little bit on the buy-back program.

It's obviously a significant amount of cash is spent.

Give us a little more information as far as what you guys are looking for in 2003 and obviously you have a significant additional $10 billion that was signed on as well.

Thanks.

Sure.

We don't guide to it specifically, Scott, as you know, it's been something that's been part of returning value to shareholders over time.

We still have remaining room available on the current authorization and the Board simply gave us an additional authorization without a time limit, so in fact we could continue that program.

But over the last five years, I think if you looked at our net income, 100% of that has been returned in terms of dividends or treasury buy-backs, and I think it's over 95% over the last ten years.

So really no change there.

We continue to use that as a way to return value and use cash.

So, no particular plans or guidance there, but we expect to continue that program.

Next question?

Thank you.

Our next question is coming from Tim Anderson of Prudential Securities.

Go ahead with your question.

My question actually, just, two of them.

One quick question, Arcoxia guidance for U.S filing in 03, The second question has to do with the core pharma business, gross margins in the quarter they were down versus prior quarters.

You have a line in your press release mentioning inflation in product cost in core pharma.

What's driving there?

You also mentioned an off-set of manufacturing productivity.

The net of that, does that imply the gross margins will be in line with the core pharma margins as we see them today?

Guess I'm wondering why you're breaking this out for us?

In terms of your first question, Tim.

No change on Arcoxia.

We are completing the studies requires a re-file and still expect to file that in the second half of the year in the U.S.

So no change there.

In terms of core pharma and the gross margins, a couple of things here.

While we're not guiding on it specifically, I think as we've broken out core pharma and reported it to you that way, you've seen the healthy margins of the pharma business.

Even this year's sequential quarters, that fluctuates a bit, up or down within the year, and it's based really on product mix.

You've got a variety of different products, different margins, rebates, buying patterns.

So all of that affects that number.

I think importantly, we came in again, about 82% for the full year, and that really has been pretty consistent.

So, it can be affected by the product mix, for example a large buy-in on a product with heavier rebates, such as Zocor, as you've seen, would affect it.

In terms of Cozaar, this quarter we had a large buy-in, compared to a buy-out last quarter.

Now in the U.S., we share operating income with DuPont, so that would have a negative effect.

So there's nothing particular on a going-forward basis, but looking at comparisons quarter to quarter on something that fluctuates around, but it's been stable for the year.

That's where we are.

In terms of the statement in the press release about manufacturing, that's been a practice for many years, which is to continue to seek operational productivity gains to really work hard at preserving that margin and to off-set the affects of inflation on product costs.

That's been a long-standing policy and we felt it important to reiterate.

Nothing fundamental going on there with the margins.

Next question?

Thank you, our next question is coming from Mario Curseo of Leering Company.

Please go ahead with your question.

The other sales category, I noticed an up-take from the third quarter to the fourth quarter.

Can you talk a bit about what you saw there in terms of shipments in light of the generic and are you now seeing those fall off in the first quarter?

Thanks.

Okay, the product detail sheet we give is detailing all the products that we are currently involved in controlling the active marketing of.

I think what you're getting to is you know, you're looking for something we don't actually report that way, but if you're talking about Astra/Zenica supply sales, as you know we supply Prilosec and Anexium those are reported and supply sales, not a royalty, it's based on our shipments to Astra/Zenica.

We think for the year, the total Astra/Zenica supply sales will decline for the year, but as we've described earlier in the year, we had been seeing a decrease in supply sales throughout 2002, and that really reflects the decline of Prilosec sales in the marketplace, but more importantly, reflects Astra/Zenica's orders to us, that reflect their outlook.

I can't forecast or give you the specifics on that, since it's their product, we don't report it, but again, we reiterate the guidance that we gave previously.

We do receive orders with about a 6-month lead time, so we have our history of the shipments as far as firm orders for about a 6-month outlook, but when you roll that together, including the continued growth in Anexium, although at a slightly lower percentage -- all of that together, we've said was down during this year of '02 and we expect a mid to single digit decline in '03.

Our next question is coming from Mary Ann Goldstein of CIBC World Markets.

Please ago ahead.

Yes, thank you.

Hey, Mark, I'm wondering if you could comment.

With a fair amount of movement in buy-in and buy-out in this quarter.

In the past, the company discussed trying to smooth out some of those patterns and what that might bring in '03, and also, give us the status of what your expectation is on the Department of Defense contract and when that will -- the answers to those rebids will come out?

Sure, thanks.

First of all, in terms of the buy-in, buy-outs, I think there is some this quarter, just as there is every quarter.

I wouldn't say there's anything unusual.

I think as I described the second and third quarter, we had a net buy-out across the line.

This quarter there's a net buy-in.

Some of those precisely as you would have expected, the pattern on Zocor, similar to what we saw last year.

For Vioxx, we had the buy-out, as I said we would expect.

So nothing unusual there, I think, we do our best to describe them quarter to quarter.

I do want to correct one thing you mentioned.

Our attempts to smooth the buy-in, buy-out pattern, that's not something we've done or suggested we would do.

As I mentioned, these are the buying patterns that result from wholesaler purchasing behavior.

It's not because we are incenting the sales or otherwise trying to smooth them, as you said.

So wholesalers, place orders trying to anticipate price increases to buy before the price increase.

Typically once the increase has occurred, you see the buy-out, and so I think that's just what we're seeing this quarter.

Quarter to quarter you see fluctuations because the actual price increases occur at different times throughout the year for different products.

It's sometimes important to keep in mind those patterns because it could affect the comparisons quarter to quarter, as you saw in some of the products that I mentioned.

But again, no attempts to smooth it or change to our policy.

In terms of Zocor, you asked about the DOD and the BA.

I don't have a specific update for you there, other than to say as people are aware, the DOD and BA indicated an interest in combining their contracts, but as far as we're aware, there has not been a joint solicitation at this point, but we are expecting them to put out the bid or present the solicitation some time probably in the March-April time frame.

It hasn't occurred yet, but that continues to be the assumption.

I think the important thing to remember there is that currently Zocor is the exclusive HMZ therapy as you are aware of.

We'll see how that plays out moving forward, but in terms of the variation options, if another staton were added and Zocor maintained, we would expect that would off-set some of the growth rate, but not exactly affect the current business.

We'll have to see what happens, but no action at this point.

Our assumption on timing is unchanged.

Next question?

Thank you.

Our next question is coming from Barbara Ryan of Deutsche Banc, please go ahead with your question.

Hi, Mark, just going back to the earnings range, I guess I'm like a dog with a bone here, but if we go back to some of the guidance that you've given us, the core pharma business earned $298 in 2002 and the Medco business earned 16 cents.

So assuming Medco grows 20%, which is the low end of your range, that's 19 cents.

Therefore, pharma, if it was up only 10%, that would get you to $3.47.

Are you basically saying that within -- at $3.47, core pharma would be up double digits, but at every other point, it would be up single digits, so you're targeting that $3.47?

Can you clarify that now that we have the full numbers for the year?

I think what we've said today is really no different than what we said last month.

So, I guess we are dealing with the same bone here and as you mentioned, you now have the full-year results.

What we've said in what we continue to say is that our assumption, our expectation for the core pharma business is the double-digit growth, however, it's very early in the year and we've given a range on EPS we're comfortable with.

We've also tried to guide you on Medco on a stand-alone basis.

They're not necessarily the same as it contributes to consolidated, but fundamentally, we have reconfirmed essentially the same range that we gave, a range we're comfortable with at this early point in the year.

There's a lot of factors across both businesses that contribute to it.

We'll continue to watch those, but there's no change to the guidance.

It's $3.40 to $3.47 on the consolidated.

Next question?

Thank you.

Our next question is coming from David Risinger of Merrill Lynch.

Go ahead with your question.

Thanks very much.

Mark, can you just please update us the various government investigations with respect to Medco and provide sort of a you know, some sort of outlook for when you think some of those investigations and inquiries will be resolved?

Thank you.

Sure, well part of what's tough there, Dave, is you're asking me to speculate on the actions of others as well as speculate on litigation and outcomes, and that's pretty tough to do.

If you're referring to the recent reports in the media about States Attorney General's investigations into Medco and PBM practices, I don't have anything specific to report there.

We have not been contacted.

So while there has been reports in the media, Medco has not been contacted, so there's no "investigation" going on there.

We did announce recently we had reached agreement with five of six plaintiffs in the so-called Arriso lawsuits that, was private litigation, and we hope to wrap that up, although we can't exactly predict when that would occur.

So, in terms of government investigations, there have been reports of inquiries, but we haven't actually seen anything.

In terms of broader on-going investigations of so-called Sheehan investigation from the District Attorney in Philadelphia, that's been something that's been open for several years.

As we updated mid-year, we had received an update in terms of his investigation for Medco showed no new issues from our perspective at all.

So there's no particular action at this time.

Medco continues to believe in all of its practices in accordance with the law and the mission of the PBM, which is to help control and manage costs, and in fact just recently the government accounting office gave a report on PBM's within the federal employee health benefits plan, specifically reviewing a couple of plans that are in fact administered by Medco and concluded that in fact the PBM's are effective at increasing access and controlling costs.

So it's an interesting time since we're expecting movement or at least discussion on ways to extend Medicare to include prescription drug benefits.

Many of those proposals discuss modeling things off the federal employee sector, which in fact, uses PBM's, specifically Medco, and the government accounting office said yes, in fact it does work.

So that's how they continue to operate in terms of going forward to what could happen, I really won't be able to speculate.

Next question, please?

Thank you, our next question is coming from Ken Koulu of Credit Suisse First Boston.

Go ahead with your question.

Good morning.

Just a couple questions.

First, can you go over the price increases for Fosamax, Singulair, Cozaar/Hyzaar, and I had a second question on Zocor, what quarters of '03 does is roll off pan protection in the UK and Germany?

And then just finally, for Mevacor and Primivil in the U.S., since they're now off patent, should we basically take the U.S. sales out of our summations for '03, '04?

Thanks.

I'm trying to hit all those.

A couple things.

In terms of pricing, the only major product that had a price increase in the quarter was Zocor, that was 4%.

So in terms of the others, in kind of in terms of the buy-in you're seeing, this is speculative purchases by wholesalers to increase their inventories prior to a price increase, but we in fact have not had one.

So, again, the only major product this quarter was Zocor, and you know, that's where we are on the pricing.

In terms of Mevacor and Primivil, you are talking about U.S. sales are down as off-patent products and are gone .

In fact, I think for the patent products in total, they had $255 million in sales in the quarter and $210 of that was [Vasatex] ex-U.S..

Other than that, there's little to no sales left of the products.

On [Vasatex], basically, it's a mixture outside of the U.S. of a patent protection as well as generic erosion rates. [Vasetex] was down year over year.

In fact, as I mentioned in the U.S., [Vasetex], there were virtually no sales, but in the foreign markets it was down 14% for the year.

We would expect that to decline at a similar rate into next year.

So, that collection of products, it's really [Vasetex], the only one left with meaningful sales.

It's declining and we would expect it to continue to decline.

I think that was it in terms of questions.

I'm sorry, you had Zocor, another question on the patents.

Sorry.

Outside the U.S., patent recently expired in Canada.

And as we talk about Europe, we're looking at the UK, Germany, the Netherlands and parts of Scandinavia all happening in the second quarter of '03, and so it's when we roll all of that up collectively outside of the U.S. for Zocor, we've guided the flat to decline outside the U.S., while of course we still would expect growth to continue in the U.S.

I think I caught all parts of that.

Next question, please?

Thank you.

Our next question is coming from Steve Scalia of SG Cowen.

Please go ahead with your question.

Thank you.

Relative to Zetia, can you provide an update in how it's being prescribed, the percent of time as a combination treatment versus stand-alone and when used along with a staton, which ones is it used with most frequently?

Sure, as you're aware, Zetia, it's pretty early dates here.

We've only been launched a couple of months, so I can't break it down too finally for you, but I can give you general descriptions.

At this point, about half the patients taking Zetia are taking it with another cholesterol-lowering medication, about half are taking it alone.

Of those people taking it with another medication, as you expect, the majority is statons.

And as expected, they're using it with all the Merck and statons, consistent with how we are promoting it.

It's co-administered, when used with a staton, most frequently with Lipitor, followed by Zocor and generally in the same ratio you'd expect, based on the sale numbers, so the goal is the companion therapy to statons, all statons, any dose, and so far that's what's happening, it's used with statons proportional to the overall staton market, so we're happy about that.

It's a little too early to assess how they will play out in terms of the overall market, but clearly it's a very strong launch just based on the prescription curve from an execution standpoint.

We're very happy and pleased with the partnership and the joint selling efforts of Merck, Shering/Plough as well as the joint adventuring.

We having seen anything in terms of major barriers in fact in manage care, we current lay estimate that is being reimbursed for close to 70 percent of manage care lives.

That's a little update.

Again, it's very early in the process, but things seem to be going well and we'll continue to give you updates as we start to get a little bit more of a trend.

Next question?

Thank you.

We're showing time for one last question.

Our last question is coming from Jamie Reuben of Morgan Stanley.

Go ahead with your question.

Thank you.

Mark, can you remind us where else in the world, what other countries there are patent disputes going on with Fosamax and the size of Fosamax sales in the UK?

Thanks.

Okay, in terms of Fosamax, I think the only descriptions that we've discussed are obviously the U.S., which you're familiar with, and in the U.S. recently in fact we won the case that gives us exclusivity for both daily and weekly Fosamax through August of '07.

There are separate patents protecting the weekly until 2018, all in the U.S.

There is litigation there, however, those court cases have not begun.

You can see there, a difference you know, in the U.S.

Versus the UK case recently, which again makes it difficult and in fact inappropriate to extrapolate the patent laws from the court systems varying by country.

So in the UK, we recently lost the case, but we have been granted the leave to appeal and we're doing that.

I think the other one that we described last year was in Israel, where we lost a case and more recently the Supreme Court there had not overturned, I say turned that over to a new hearing, so we'll see some continued litigation there.

But I think as you've seen, these things can occur from generic companies at any time across various markets, so I can't predict, but those are the ones we have discussed.

In terms of sales in the UK, and as you know, we don't break out our products by sales other than the break-down we've given you, which is for the U.S. and ex-U.S. but there aren't any things in terms of the Fosamax that would trip you up.

Hopefully that gives you a little sense of the overall landscape.

I think at this point we're showing no more questions, so pleased to have been able to address the ones that were presented.

Thanks again for participating.

Talk to you again next quarter.

Thank you ladies and gentlemen.

This does conclude today's teleconference.

You may now disconnect and have a wonderful day.