默克藥廠 (MRK) 2003 Q3 法說會逐字稿

Good day and welcome to the Merck third quarter 2003 earnings conference call.

Today's call is being recorded.

At this time, I'd like to turn the floor over to Mr. Mark Stejbach, Senior Director of Investor Relations with Merck.

Please go ahead sir.

Good morning, everyone.

Welcome to our third quarter call and webcast.

This is Mark Stejbach I work in Investor Relations.

By now, you should have seen the press release and additional financial disclosures sent out earlier today.

Also, those are posted now on www.merck.com/finance.

You'll have all of the attachments there either for the call or under financial reports.

As you may have seen the release today, also joining me on the call today will be Merck's Chairman, President, and Chief Executive Officer, Ray Gilmartin and also our Executive Vice President, CFO, and President Human Health Asia, Judy Lewent.

There is a lot to cover today, and I know this is a busy day for Pharma reporting so I will give you a brief outline of the call today.

First, I'll review the third quarter results and the P&L components, similar to our normal process.

After that, Ray will discuss the new initiatives announced today.

And also provide updated guidance for the full year 2003 product sales as well as EPS.

And also, just on the products, let me know that with the spin-off of Medco in the quarter, the product sales ranges now reflect sales to Medco as a third party, based on the net selling price from Merck to Medco.

Similarly, the EPS guidance refers to results from continuing operations.

That is Merck ex Medco or what until now we have been referring to as the core Pharma business on a stand alone basis.

He'll cover the guidance on those elements.

And following that, I'll come back and run through the usual review of individual products, buy-ins, events in the quarter.

Then we'll open up for q & a with Ray, Judy and myself.

Note that we will not be providing product or earnings guidance for 2004 today.

We plan to provide that the first week of December just as we did last year in the week ahead of our annual business briefing which is scheduled for December 9th.

Before we go on, let's review the safe harbor language.

During the call, we may discuss certain subjects that may contain forward looking information as defined in the Private Securities Litigation Reform Act of 1995 .

This may include items such as guidance of earnings, and other income statement components, same as related to growth rate expectations, product positioning, relative to competition and actual results could differ materially from those that may be projected here.

Additional information concerning a number of factors that could cause actual results to differ materially from the information that we will provide is available in our most recent 10 k on the web site.

With that as the intro, let me start with the P&L.

That's now on page 11 of your press release.

This quarter is labeled consolidated results which now refers to Merck without Medco.

This is the same basis on which we reported core Pharma stand alone in the past.

And Medco results appear solely in the line noted as discontinued operations.

I'll explain more about that in a moment.

Just a quick overview summary.

EPS on that continuing ops basis was 83 cents in the quarter, a 6% increase over last year.

Year-to-date is also 6%.

Primarily, focus is always on the quarter's results but also provides some context on year-to-date numbers as well as the patterns during the year including spending, wholesaler buying and supply sales.

So starting on P&L then, the top line $5.8 billion in sales a 6% increase over third quarter last year.

This included 2% exchange benefits.

Volume in the U.S. was up 5%.

Volume ex U.S. was up 1% and was primarily effected by the decline in Zocor following patent expirations in several markets earlier this year as we have discussed previously.

Total sales for the year-to-date are 10% through the third quarter.

Just to pause a moment on this one.

For those of you that look at other sales, that is beyond the individual products we detail, you'll see that for the quarter, those sales in the aggregate declined on a sequential quarter basis.

So as you know, the primary component of this is sales to AstraZeneca, and our supply revenues were lower this quarter than last although our guidance for the full year for Astra supply payments is unchanged at greater than 20% over last year.

Next line material and production, $1.1 billion for the quarter, up 8%.

That results in a product gross margin percentage of 81.7% for both the third quarter and year-to-date.

Please see that's been fairly consistent over the last couple of years as we've been breaking it out for the Pharma business.

In terms of marketing and add min, $1.5 billion in the quarter, up 4% over last year and brings us to 12% growth for the year.

Recall in the first half of the year, we showed much larger increases.

Actually ahead of our full year guidance, but that was driven by comparisons to the first half of last year, which was prior to the full expansion of the sales force and launch of Singulair a.r. as the primary drivers of the growth.

So what you are now seeing as we described last quarter, you are seeing the growth rate come down as we indicated it would and the full sales force expansion will be completely annualized in the fourth quarter of this year.

So no real surprise there.

In terms of R&D spending, $777 million up 15% over last year's third quarter.

Similar to the marketing and add min story here.

The growth rates were much higher earlier in the year but we indicated as we annualized the increases in last year's base, the year-over-year comparison growth rates would come down and you are seeing that.

Spending this quarter was actually at a similar level to where it was in the second quart this year, but the year-to-date growth rate has now come down to 24% and our full-year guidance remains unchanged.

R&D continues to be up this quarter across the board.

Basic pre-clinical, clinical, and external alliances.

And just a reminder that this R&D line does not include the development costs for Zetia or the Zetia-Zocor combination program since all of that flows through the equity income line.

So speaking then of equity income on the next line, you see here $183 million for the quarter.

That's down a little bit last year, 3%, and actually brings us to minus 15% for the year-to-date.

Continued to impact us of course is our share of the expenses associated with our collaboration with Schering-Plough and ZETIA and the ezetimibe [inaudible] combination which we continue to expect to be filed late this year.

Now you will see some improvement in the rate of decline this quarter versus year-to-date.

As I mentioned, minus three versus minus 15 year-to-date.

That continues to reflect in part increasing sales of Zetia however, we continue to note in our guidance that we expect the overall contribution from the JV, from the collaboration that is, to be negative for full 2003.

I'll talk more about the JV's and Zetia when I review the individual products.

Next line on the income and expense, $49 million, that is an increase of $2 million over last year.

So not much difference.

So for a moment, flip forward to the other financial disclosures page where we break that out in a little more detail.

Again, this has been posted on our web site and blasted out so I'm sure you have this.

If you walk down the lines there you'll see lower interest income as well as lower interest expense.

Both of those reflecting lower interest rates, and also then, minority interest expense is down and intangible expense is up.

Both of those as expected reflecting our increased ownership of [inaudible] from earlier in the year.

You may have also seen the announcement yesterday that we completed the second tender opt for bringing ownership to over 99%.

That will actually be a fourth quarter event.

Over all then you see in this section with these various offsets not to much difference from last year.

Again, I'll talk about the JVs when we do products.

So moving back now to page 11 and finishing off the P&L.

If you move down here to the tax rate, taxes were $749 million.

That gives us an effective tax rate in the quarter of 28.4%.

That's similar to the year-to-date number of 28.8.

And you'll see on the guidance page we've adjusted now our tax rate guidance to reflect just the Pharma business.

That is without Medco.

And that rate is now expected to be 28.5 to 29.5 for the full year.

So then moving down to net income from continuing operations.

That's $1.9 billion, up 6%.

That's up 4% year-to-date.

Note that the figure for last year, third quarter '02 in this P&L is precisely the core Pharma stand alone net income we reported last year.

So this is the apples to apples comparison we've been promising.

Next line, discontinued ops.

This is the income from Medco Health Solutions but a couple of important facts here.

This result in the quarter is only two months of Medco Health as part of Merck prior to the spin-off.

This result in our P&L also includes the cost to Merck associated with the spin-off.

Therefore, you can't really infer anything about Medco results this quarter on a stand alone basis based on this number.

Similarly, the discontinued ops for the prior period, third quarter '02, is the difference between what we reported for core Pharma last year and what was consolidated at that time.

So this is, again, not going to tie the results of Medco on a stand alone basis.

So everything related to Medco including taxes in the quarter, everything's netted out into this one line.

You won't see this line next quarter, of course, but obviously, we'll still carry it in the year-to-date.

Moving down to shares outstanding, $2.25 billion, down 1% versus last year.

We continue with the treasury buy back program and this quarter spent $617 million in that program.

That leaves us with the remaining $10.2 billion under current board authorizations.

So bringing that all down now to the EPS line, what you see here in EPS just reflects the net income lines I just reviewed.

That is continuing operations, discontinued operations and then the total.

So before I come back to review the individual products, let me turn it over to Ray to discuss some of the announcements.

Thank you, Mark.

Good morning, everyone.

I think that as many of you know that our major products are competing well in the respective categories and growing overall.

However, overall, our products have not met the challenging revenue targets that we believe were achievable.

And I'll detail with that for two of our major products this morning.

For Singulair, we've tightened the range, basically to 2 to $2.2 billion over the anchored $2 billion reflecting the fact that the upside impact of allergic rhinotics will not be as large as we anticipated earlier in the year despite a very successful launch of the new claim.

For Fosamax, we are reducing our sales guidance by $100 million to $2.6 to $2.8 billion.

Although the U.S. osteoporosis market continues to grow well it's at a rate slower than we expected earlier this year.

Fundamentally it's the opportunity we've seen of people coming off HRT and moving into basically the osteoporosis products that are directly concerned with osteoporosis.

That opportunity though there has not develop at the pace we expected it to occur.

The statin market growth is improving somewhat, we've seen that recently, but you are also seeing the slowdown of the market earlier this year and we continue to be affected by the x 2 k patent [inaudible] of Zocor.

Our guidance for the base business of Zocor remains unchanged.

However in a few minutes, I'll discuss a change to our U.S. wholesaler distribution program, which will affect Zocor sales for 2003.

Our guidance for [copsids] and our guidance for Cozaar Hyzaar remains unchanged.

As you will also see in our revised guidance, we have reduced the expectations for marketing and administration expense growth from a low double digit rate to a high single digit rate for the full year 2003.

This reduction reflects our ongoing cost control initiatives while making sure that we're still backing or fully resourcing the critical marketing and selling activity.

Now, importantly, consistent with our strategy, we've not changed our guidance for research.

We continue to expect to grow at mid to high key percentage rates over the full year 2002.

So taken together, you can see that the impact of these changes result are not achieving our expectation of double digit earnings per share growth in our business in 2003.

Now, moving on to the two new initiatives that we announced this morning.

As we have talked about in the past and in various kinds of settings, we basically see the industry operating in an environment in which should be driven by increasing competition, increasing cost containment pressures and greater customer demand for value.

As we describe that basically novel medicines that really make a difference in patients' lives but offered at a competitive price.

So in response to this and anticipating what the environment looks like going forward, we're implementing a number of initiatives that will allow us to more effectively address these challenges.

And although these actions do negatively affect our near term EPS growth, we believe they will enhance our competitiveness over the long term.

So we announce today that effective December 1 we'll implement a new distribution program for U.S. wholesalers.

The purpose of this new program is to moderate the fluctuations in product sales that are currently affected by wholesaler investment buying.

And also importantly, to improve the efficiencies in the distribution of Merck pharmaceutical products.

Now, keep in mind that our estimated wholesale inventory levels remain within the range of the customary for Merck products in the aggregate.

As a result of this new program, we expect that next year, the quarterly sales of our products will be more in line with the underlying demand on an ongoing basis.

So as a result of this change in the fourth quarter, however, we expect a negative impact to revenues in the range of $650 to $750 million.

We expect EPS as a result of that to be reduced to 18 to 21 cents for fourth quarter and a year as a result.

This is basically because of the effective of this program will be to moderate the investment purchasing in the fourth quarter.

And the largest portion of this impact will be on Zocor and the sales relative to prior guidance.

For Zocor, prior guidance was for net sales of $5.4 to $5.7 billion.

The new distribution program will reduce this expected range by $500 million approximately solely related to the impact of this program, not in any way related to the product's performance in the marketplace.

For other products, the changes in the new distribution program do not materially affect the guidance.

The second major initiative is concerned with fundamentally lowering the cost structure of the company.

So we also today are announcing head count reductions as part of our overall effort to realign resources and improve our operating efficiency.

Now, we've discussed for some time, as you're aware, the importance of responding to the market forces that shape our industry by fundamentally lowering our cost structure.

And we have over time been reducing head counts in some areas as business opportunities presented themselves.

The current changes we announce today I want to emphasize are not arbitrary, but this is a result of an ongoing bottoms up process that we've conducted throughout the entire company that we've been working at for some time, which is geared to achieving basically how effectively we do work around the company, our company's profit improvements.

At this point, we're accelerating those initiatives, basically we are at the stage where we can implement.

As a result, we expect a reduction of over 4,000 positions of which over 3,000 positions relate to our permanent workforce and over 1,000 relate to the elimination of contract or temporary employees.

As a result of this, going forward, we expect to generate $250 to $300 million in payroll cost savings.

Just payroll and benefit cost savings annually from these actions.

In the short term, however, we expect $140 million to $200 million in restructuring charges in the fourth quarter with an EPS impact of four to six cents per share in the quarter.

And we're looking at an additional $75 to $125 million in charges next year.

Now, we announced the additional reductions as we continue to improve our processes.

So as a result of the changes we're implementing that will basically enhance our competitiveness over the long term as well as the result of the impact of the product trends I just discussed with you, that our guidance for the full year 2003 EPS from continuing operations is now $2.90 to $2.95.

This guidance includes the impact of the wholesaler distribution program as well as the restructuring costs related to the elimination of positions throughout the company.

So when you step back, one of the other events -- the important events that occurred this quarter was the setting up of Medco's Health Solutions as an independent company.

The second major event that's occurred is we now have 99% ownership of bondings as a result of the second tender offer.

That puts us in a position at this point to be in a pure research based pharmaceutical company with a stronger position in Japan.

It also basically continues our emphasis on building our scientific excellence not only through what we do internally but through our external relationships and partnerships that we have become much more aggressive about in the last couple of years.

So we're focused on continuing to build our scientific excellence.

Then finally as a result of the initiatives that we've taken that we're announcing today, which is to fundamentally lower cost structure and basically improve significantly the efficiency of our distribution channel, it puts us in a position to anticipate and to be prepared for a much more challenging environment as we go forward.

And so therefore strengthening the company overall.

So at this point, I'd like to turn it back over to Mark for a detailed walk through the product trends for this quarter.

And after that, Judy, Mark, and I will be available for your questions.

Mark?

Thank you, Ray.

I'll just pick up a few comments on the joint ventures which is on your additional disclosure page.

In the quarter, you see $523 million for Merial that's a 17% increase over last year.

It's good reporting and you see across the product lines.

For Aventis S2 or MSD, the European vaccine sales those are up 14%.

Next you see for the Merck/Schering-Plough collaboration we're showing Zetia sales here $136 million for the quarter.

That brings us to $305 million for the year so far in a worldwide basis.

Now, within that, the U.S. sales were $122 million for the quarter and $275 year-to-date.

As you may be aware, there was a 5.7% price increase at the end of August.

And then just a few highlights in the quarter.

Launch continues to go well.

We're over 3.5 million prescriptions written since the launch last November.

Zetia continues to be reimbursed for nearly 90% of all managed care covered lives.

Importantly, the majority of that is in the second tier.

In terms of upcoming events, the American Heart Association meeting next month, just a couple studies to preview there, will have a study on the effects of Zetia plus [symohastatin] on C reactive protein, and that is an analysis from a larger data set fom pooled studies.

And also something called the UK harp.

That is the heart and renal protection study which was a study conducted by Oxford University looking at efficacy and safety of Zetia plus [zimphastat] in patients with chronic kidney disease.

Note this was actually the pilot study that was done for the sharp outcome study which is already under way, which we described previously.

So now turning to the individual products, net sales, which are listed on other financial disclosures, net product sales detail.

Ray described the changes we're making to our selling terms beginning in the fourth quarter.

For the third quarter, however, we were impacted by wholesaler buying patterns in the U.S.

These resulted in a net $60 million buy-in across the whole product line.

As always, I'll break those out at the individual product level.

Again, recall these figures now reflect sales to Medco in a third party basis just like any other customer.

What that means then is the rebates paid to Medco are reductions to net sales, as you would expect.

Whereas in the past, only the rebate amount subsequently passed on by Medco to its customers would have been included.

I should also say on your schedule, the third quarter sales from last year are also given on this same basis, so this really is an apples to apples comparison.

Now, the impact of this change of the individual product level is fairly small, but we have provided the historical quarterly data on this new basis back to the first quarter of '02 quarterly with year-over-year changes.

That's available on our web site in an excel file.

So if you want to update your models for these minor changes that should facilitate that process for you.

So this change in how we report individual sales again is also reflected in the guidance ranges that Ray has given.

Just stepping through the products in alphabetical order, for Cozaar/Hyzaar, sales of $622 million, up 13% worldwide.

That includes a small additional buyout this quarter of $15 million in the U.S.

That follows the larger buyout last quarter after the price increase earlier in the year.

In the U.S., mail order adjusted total prescriptions grew 7% for the quarter.

The Cozaar/Hyzaar sales continue to show stronger outside the U.S. those were up 21% for the quarter.

In fact, year-to-date, we've been granted new regulatory approvals for Cozaar in 41 countries based on the renown and 27 countries based on the life study and you'll see that in the ex U.S. sales.

Our guidance for full year net sales Cozaar/Hyzaar again is $2.5 to $2.7 billion, unchanged from previous.

Moving down to Fosamax, sales of $687 million, up 52%.

That includes a U.S. buy-in of $10 million, but also, this was an easy comparison due to a larger buy out in the third quarter of last year.

There was a 2% price increase for Fosamax in the U.S.

September 22nd, so we would expect now to see buy out in the fourth quarter as you usually do following a price increase.

Now in the U.S. mail order, adjusted prescriptions were up 7% for the quarter.

Also, highlight this quarter as you probably are aware of, last month, the patent on Fosamax once weekly in the U.S. was upheld.

That patent protects Fosamax once weekly until 2018.

That case is now under appeal.

We continue to see strong growth ex U.S. for Fosamax up 48%.

As once a weekly has now been launched in all major markets around the world except for Japan.

The guidance again for this year $2.6 to $2.7 million and that's down 100 million at both ends from previous.

Moving on to Singulair, sales of $616 million in the quarter up 80%.

That does includes a $120 million buy-in, in the quarter.

There was a 2 1/2% price increase in Singulair in the U.S. in September.

We do expect to see that buy out next quarter per the usual pattern.

The prescriptions for Singulair continue to benefit from the new seasonal allergic rhinitis claim in the fall allergy season and for the quarter, the U.S. prescriptions were up 37% versus last year.

The guidance again, $2.0 to $2.2 billion.

And that is 100 million lower at the top end compared to previous guidance.

In times of Vioxx, sales were $510 million, down 32%, but that does include the large buy out as expected as we indicated last quarter because it followed the price increase last quarter.

The buy out this quarter we estimate to be about $145 million.

In terms of prescriptions in the U.S. for the quarter, Vioxx scripts were down 3%.

That's an improvement from last quarter as we're now at a point we're annualizing both the launch of Bextra last year as well as the approval and launch of the new labeling for Vioxx based on the Viger study.

While the market hasn't shown grown, our share has been steady since that time and the year over year comparisons you are seeing improve throughout the year.

Sales growth remains strong outside the U.S. and are up 21% to $252 million.

Just briefly in terms of Arcoxia it's now been launched in 33 countries outside the U.S., and again we remain on track for filling the NVA in the U.S. later this year after we have had the results from the edge study.

Worldwide sales guidance $2.5 to $2.7 billion unchanged.

Lastly, moving onto Zocor, sales were $1.4 billion in the quarter, down 2%.

This reflects the impact of generic competition in several markets outside the U.S. where the sales were down 29%.

In the U.S., sales were up 15%, and that included a buy-in of $110 million.

Zocor prescriptions for the quarter, 3% growth improving since last quarter and the consumer advertising component for the hearts protection study just launched in the third quarter first in August and then an expanded program just in September.

In fact, that campaign has generated nearly 40,000 requests for patient information material in just eight weeks, which is more than the number of fulfillment items for all of last year.

So we continue to fell the impact of heart protection study at both the patient and physician level is important for Zocor.

Total net sales guidance $5.4 to $5.7 billion, and again that is prior to the impact of this distribution program as we described earlier.

So with that we are now ready for your questions in our usual blinded manner, first come first serve basis.

And also as I mentioned earlier our CFO Judy Lewent also joining Ray and I today.

So Pam at this point if we could have the first question.

Thank you.

If you would like to ask a question, press the star key followed by the digit one on your telephone key pad.

If you are on a speaker phone, please be sure your mute button is turned off to allow your signal to reach our equipment.

Once again, for a question, press star one.

We'll take our first question from Joe Tulie Prudential Securities.

Hi this is Tim Anderson.

Question on the language in the press release.

You talk about greater customer demand for value and cost containment pressures.

I'm wondering, you know, does this basically equate to price erosion or are you talking about lackluster volume trends here?

It seems like you are talking about pricing erosion and my question is, you know, what's your ability to take or the industry's ability to take effective net price increases in the future relative to what it's been in the past?

Then also just to clarify, on the guidance for the year, if we exclude the inventory piece and the restructuring and kind of add those back, it looks like it gives you a number that's close to around $3.22, which is operationally below where you said previously which is $3.28 or better.

Thank you.

Bob this is Ray.

I'll start basically start talking about the industry environment that we see.

And that is that, you know, and we've been saying for some time in all of our talks and communications with most of you is the fact that we see as a result of greater focus on the part of the ex payers, whether it's private companies or whether it's at the state level or whether parts of the world where governments basically are trying to deal with budget problems, that there's an increasing focus on the rate of increase of pharmaceutical spend.

As a result of that, basically in this country for example, the private sector is giving their plans much more latitude investment design things like three tier co-pay which intensifies the competition for preferred positions on formulas.

So if you look at what the experience has been over time in the industry, there's not been a lot of that opportunity for net price increases.

So we don't see any real change in that environment and we don't see that real change in that going forward in terms of what the pricing situation is like, although it will be competitive.

When I say increasing demand for value, basically, increasing demand does your drug really offer true advantage to the patient care?

And because of the competition I described, it's at a competitive price.

And as we look forward in this kind of environment and what we anticipate going forward, that this is the kind of environment that, you know, we can meet the novel requirement.

We've been able to meet the price competitive environment but we want to continue strengthen our ability to do that.

What we see is that the opportunity here proves how efficient we are internally and the opportunities we have to be more efficient that we are in the process of fundamentally lowering our cost structure.

And I think you can see from the numbers in a significant way.

This is a continuing and ongoing process.

So this is not a short-term response.

This is not something that's reacting to what's happening today.

It is really a response for the longer term.

To basically strengthen our ability to be in the marketplace as you see going forward.

Then just to follow up on part of your question, Tim, a couple of things.

One, in terms of price, you see in the quarter as well as the year-to-date on top line, really only 1% contribution and we haven't seen a net price benefit now for quite sometime.

Nothing's really changed there and nothing's really different in the results.

Also in terms of pricing pressure, you see the product gross margin for core Pharma continues to be strong and hasn't changed.

So if you are really getting a lot of price erosion, you'd see an impact there which we are not.

So it really is more the environment as Ray described and going forward those challenges.

In terms of EPS, we're not sort of doing the math and breaking things out in a particular way.

I think what the range reflects as we discussed is most of the initiatives Ray talked about as well as the fact we mentioned some of the, collectively the product sales guidance for the year isn't what we had expected or thought was achievable earlier in the year.

So really, the range reflects all three of those things.

Next question, please?

We'll go next to David Risinger, Merrill Lynch.

Thanks very much.

I have two questions.

Historically, Merck stated it hasn't allowed or encouraged buy-ins.

In that context, can you comment on the new actions that you are taking on December 1st and also discuss whether the Medco spin was a factor in the inventory work down or whether there's, you know, work down at Medco specifically?

And the second question is, in terms of the 3,000 employee cuts that are permanent employees, are any of those in sales and marketing?

And can you talk about whether there are sales force efficiencies that you are pursuing as well?

Thank you.

Yeah, well first of all, just to be very clear it has nothing to do with the Medco spin at all in terms of basically buying patterns of the inventory levels.

So that's totally unrelated.

And it is correct that we do not provide any incentives for any kind of buy-ins.

Basically, the distributors, as you know, basically do investment purchasing in anticipation of what they think will be a timing of the price increase.

And that causes the fluctuations that we end up talking about throughout the year in terms of buy-ins and buy-outs.

So what this new distributor policy is intended to do is and will do is to moderate those fluctuations.

And basically change the terms of between us and our wholesale distribution in a new type of program that will eliminate investment purchasing in effect.

And you'll see that that's the impact we talked about in the fourth quarter.

In terms of the head count, moving to the second part of your question, is that the head count activity decreases are taking place in all parts of the company, but there are important principles here.

That is the importance to continue to grow in research and to continue to build our scientific capability in the number of scientists that we have.

The other thing is to make sure that we have a sales force that is highly competitive and basically able to meet any competitive challenges.

And the benefits of our product.

So what we're talking about here in terms of how it would affect a marketing division would be infrastructure, and the kind of internal processes that we have in support of the sales utilization.

So basically, and then we, of course, continue to strive to find ways in which we bring greater value to physicians in terms of the effectiveness of our sales force.

But that doesn't have anything to do with basically numbers of people.

Thanks.

Next question, please.

We'll take our next question from C.J.

Sylvester with UBS Securities.

Ray, I'm looking for a little more granularity in terms of trying to enhance your competitiveness within the marketplace.

What type of disadvantage were you prior to this restructuring?

Secondly, it looks as though you guys are being a little more aggressive on the hiring front within Zetia.

If you look at your job postings, it looks like you've got six or seven postings for Zetia sales reps and district managers.

Is that something we should look for going forward that you will continue to higher investment behind the Zetia franchise going forward?

Speaking generally, we'll come back to Zetia.

Speaking in general, because our actions are really designed to continue to build our competitive advantage for the longer term that you'll -- and based on changes fundamentally how we get work on done within the company, you'll see circumstances where we are hiring such as additional appliance and so on.

So we're not -- this is not basically designed to in effect end up with, you know, not supporting our sales organizations are not supporting our research organizations and in a way becoming more efficient.

We don't see ourselves at any disadvantage at all relative to the rest of the industry.

You look at our product gross margins for example and Mark pointed out earlier that even in a highly competitive environment we've been able to maintain those margins, our manufacturing and productivity continues to be strong offset inflation and I think if you look at our margins in general as a stand alone pharmaceutical company, we're a pretty efficient company already in terms of what those margins look like and we maintain those kinds of margins.

What we're doing here is basically saying, we're anticipating the environment as we go forward that will continue not only as it is, but has the possibility of becoming even more competitive.

So I think that what we're doing here is moving in an anticipated kind of environment we see forward and basically, what we're doing is what has gone on in a lot of other industries.

That have been in the tougher environment than even we operate in.

And these are things that are readily available to us and will basically make us a more efficient company.

Company that's able to move more quickly to change and opportunity as well.

So this is the future enhancing competitive position for the long term.

We don't see any disadvantage at this point, and I think you can see that reflected in those kind of numbers that we had.

I'll just mention on Zetia.

Steve, I wouldn't look too much into web site postings.

People know we added 1500 sales reps in the U.S. division over the last couple of years and that's now annualized.

Nonetheless, if you go to www.merck.com, you'll find sales positions open around the country which is part of managing a large organization for typical movement, turnover, promotions, vacancies.

I wouldn't read anything specific into that.

We feel we are very competitive with the support of Zetia that we have.

The structure we have both from the JV as well as the parent.

So I think that's more an ongoing management of the business.

Next question, please.

Our next question comes from Neil Sweig Fulcrum Securities.

Good morning.

I have two questions.

Possibly you could clarify what you said before as to the information you were going to release in early December about a week before your annual business briefing.

So what else besides '04 product sales guidance are you going to offer in the early days of December?

And my second question was, Arcoxia sales for third quarter in the nine months continue to appear to be far too low for the 33 markets that you are in even though it would be only a partial number of months for this year.

And maybe you could give a little explanation there as well, thank you.

Sure.

A couple things there.

In terms of the guidance for '04, this is really what you would expect the kind of information just as we did last year.

In fact every year at the end of the year beginning of the year, we give our first guidance on the business for the following year.

So my only point on the comment earlier today is we're continuing to give guidance here for full year '03 and obviously the fourth quarter about ut any comments around '04 we'll do just as we did last year, we'll do a conference call ahead of the meeting.

We'll talk about the next year and then have a meeting for the following year so there aren't any surprising around that.

In terms of Arcoxia, relatively speaking, these sales are not huge.

It's $19 million in the quarter but the countries in which we've launched so far while numerous are not the major markets.

So I think we're, you know, on track and comfortable with the progress of Arcoxia in those markets.

As you know we are not broadly out through the E.U. yet.

There is an ongoing Arcoxia referral review going on for the whole class.

You need to negotiate individual reimbursement agreements.

So some of these are small countries.

I think most importantly we've stated again that we continue to expect to refile Arcoxia by the end of the year in U.S. based on the results of our edge study once we have those.

That obviously will be the primary drivers for that.

Next question, please.

We'll go next to Jamie Ruben, Morgan Stanley.

Thank you.

This is a question for Judy.

Just wondering if you can provide a little more detail on exactly how the changes in distribution work and why the bulk of the 650 to 700 million hit in revenues in the fourth quarter affect Zocor when buy-ins and buy outs have been a factor across the board across your portfolio?

And secondly in modeling 2004, do we model based on normalized revenues or revenues reflecting the reduced wholesaler adjustments?

And thirdly, a question for Ray is does the change in head count reduction reflect your expectations for a Medicare drug benefit bill?

Thanks.

Okay.

Let me start on some of the aspects of the program that I think you are asking.

In terms of really how we're working with wholesalers, we're really looking for a partnership and to provide fair compensation for the values that the wholesalers provide.

So we're going to be looking in the new program to put a lower existing limits on our average monthly purchases of Merck products by our U.S. customers.

In concert with that, we'll be providing fees to wholesalers for the value think provide and distribution of Merck products and we'll also include performance-based fees to keep inventories at or below targeted levels.

So it really is a new business model that we're entering into.

It is a partnership as opposed to the one Ray touched on earlier where the wholesalers are on their own doing anticipate tri buying and for their investment purposes.

So it's a transformation there.

In that regard, what you'd expect is to see the impact that of course our product geared a little more towards their anticipation of our typical pricing patterns.

So, you know, Mark just talked about the fact that we had actions on Fosamax and Singulair in the third quarter but historically, Zocor has been a candidate for price actions in the fourth quarter and he noted some buy-in, in Zocor in the third quarter already, which I think is an early signal of the anticipatory buying.

So that's really why you see that point of emphasis.

Can I follow up on the rest of that point, quickly, Jamie for terms of your question about next year.

We expect as a result of lowering this variability and taking some of this out, sales next year each quarter should be more in line with the normal demand.

What you will have to take into consideration is the base periods this year obviously each quarter still being affected by that.

So more normalized going forward then that will annualize the following year.

Again, Zocor has not had a price increase.

Each of the other products have had increases this year.

Can you go back to historical patterns on Zocor.

And we will be providing as we go into next year some information to help you get more normalized growth rates compared because we recognize that '03 will be for the first three quarters on a different basis than '04.

Jamie with regard to the question about Medicare, what we're doing in terms of workforce reduction, we're basically through most programs which the distributor, wholesaler distributor program as well as fundamentally lowering our cost structure to make us more efficient as a company.

This does not relate to Medicare in any way.

You know, we basically see positive momentum, we believe toward Medicare being passed this year.

And we see that as a plus in terms of getting that accomplished.

So these actions are unrelated.

Thanks, Pam, can we have the next question?

Yes, we go next to Howard First.

Thanks for taking my question.

You are saying that inventories are at normal levels, but at the same time, you are saying that Zocor is going to have a $500 million effect.

Can you help us understand that exactly why there is a $500 million effect for Zocor?

Sure.

In terms of the statement about inventories being within normal levels, that's across the board.

It obviously varies by product throughout the year and large part is affected by the buying patterns.

Now, what we're seeing here in terms of Zocor is the net effect of all of these changes.

So, in fact, you had a buy-in here in the third quarter.

So you're getting a buy out next quarter as well as you won't have a large buy-in, in the fourth quarter.

So it's really working through all of these things that comes out with a net effect.

But what all of this does is again puts everything then for the fourth quarter exiting the year at a more normalized basis so the next year it will be more in line.

So it is the combination of these things.

The pattern for buy-in, buy-out price increases for Zocor throughout the year and last year, the buy-in that you've already seen the third quarter which will reverse and also the effect of these changing terms on any buying that we otherwise would have expected or seen in the fourth quarter.

So collectively, we estimated that's about $500 million.

Next question?

Our next question from Glenn Santangelo with Soundview.

Mr. Santangelo, please go ahead.

May we move on and he can get back in the cue if he missed it.

We'll move on to CIBC World Markets.

Once again, Mara Goldstein, your line is open.

Please go ahead with your question.

I'm not sure if this is two sequential issues with the questioner or the line.

Pam, maybe can we try going to the next one and if Mara or the other gentleman get back in the line, try to get them back in the queue.

We move to Steve Calen.

Hi, can you hear me?

Yes, we can.

Can you provide the months of inventory in the trade now and what is your goal post implementation of this program?

And secondly, can you tell us if the substantive antagonist for depression MDA will be filed this year and mk-767 next year?

Okay, Steve, in terms of the inventory, I don't have exact levels for every product.

What we said is we're within our normal range which is always set at normal for us would be a month or less and even with buy-ins, we typically don't see more than two months on any individual products.

So we're saying all of the products are within that range two months or less.

The initiative going forward, we would expect actually to maintain inventory levels of less than a month.

So that's sort of where we are now and what we expect.

And then in terms of some other questions around filing, now we have said the filings that we expect this year and continue to expect this year are the Zetia, Zocor combination agent as well as Arcoxia in the U.S.

We're still on track for that.

The other products you've mentioned as well as other phase 3 described in the filling '04-'06 time frame.

So we haven't given any update there and again consistent with my statement and guidance for '04, any discussion around timings other programs beyond this year, we won't be giving you an update until the annuals meeting.

Next question.

We'll go to Deutsche Banc.

Barbara Ryan.

Can you explain to us, I mean, it seems as though serving your business you have extraordinary fluctuation on a quarterly basis, far beyond any of your competitors.

And there seems to have been this discussion going on for quite sometime about changing to a fee-based structure for the industry.

So is it that your programs in the past, whatever they were were just more generous than your competitor's which by definition insentive?

And it's confusing that Zocor would be so heavily influenced since about a third of that business now in the U.S. is driven by the government and therefore would seemingly be, you know, more predictable and less subject to those fluctuations.

So if you can just tell us how your plans -- are you coming in line with other companies right now and previously had allowed for more purchases than other companies?

That's the first question.

The second question on Arcoxia, when we look at obviously what's happened with prexies and FDA's attitude towards these drugs, why would Arcoxia be treated any differently and why wouldn't it wait the outcome studies broadly that are under way?

And lastly, this is Merck's third year of down earnings, and I'm wondering what the company believes will be the inflection point to driving growth in the business?

Will that be '05 when theoretically Arcoxia could be on the U.S. market or substance p?

If you could give us clarity on the three issues.

Thanks.

Okay, I try to the capture the points here.

In terms of the quarterly fluctuations maybe we've had more than others.

We've been clear all along each quarter how much of an impact the buying patterns have had and even detailing down each product level and discussing the terms of price increases.

So I can't speak for where others are in the industry, but I think we've been quite clear with what's really been going on for us, how it's impacted and giving it to you.

Importantly, I want to point out we've never had any incentives so what we're describing is actions by the wholesaler taken in their own anticipation of price increases but they are not preannounced.

There are no incentives or discounts and really what we are moving to now is where we're working more closely with them to reduce the speculative buying that causes all these fluctuations which makes it more efficient for both parties.

So again, I can't benchmark that to others but we never had incentives, it's just the way the wholesalers purchased and our terms now should normalize that kind of purchasing and bring us more in line and reduce the variablilty et cetera.

I think that should be more helpful for everybody going forward, you guys as well, in terms of modeling efforts.

In terms of Zocor, I described, I think for Steve previously, why so much the impact of Zocor in the fourth quarter, but to your point Barbara the gross--I'm sorry about the sales in the federal sector.

Those actually are much less than 30%. 30% on volume.

So when we first began discussing that as a proportion that is the nonretail sales, the federal being the biggest component of that.

It was about 30% of the total volume for Zocor.

So on a gross sales basis or total volume of business, it is a third.

Those are the most heavily discounted segments so therefore on a net basis, the actual net sales for Zocor through that is much less.

I don't have an exact percentage, less than a 1/3 as you would expect.

So that's really not part of this whole change in the buying patterns or impact for Zocor in the fourth quarter.

In terms of Arcoxia, we continue to believe the FDA reviews products product by product.

In this particular case, they've had the file for Arcoxia.

We refiled last year, they specifically asked us to do an additional study, comparing Arcoxia against [inaudible] in a large study, something that we had not done.

So on the basis for the file they had, they asked to us do that, we're wrapping up the study.

So I think we would be not comfortable inferring broadly FDA reactions to any individual product based on their application.

Obviously we don't have other companies applications and we are not privileged to the discussions.

But our expectation is that we'll file.

That's the direction we got from the FDA last year in June when we made this announcement and we still intend to refile.

Next question, please?

Yes, just a reminder, if you would like to ask a question today, press star one on your telephone key pad.

If you are in the cue and find that your question has already been answered, remove yourself from the queue by pressing the pound key.

We will go to Mario Corso with Leerink Swann.

Just a couple of quick questions.

In terms of the distribution, is the dominant factor that the wholesalers are more volatile in their purchasing or is it overall industry demand is down and therefore you feel the need to reduce overall inventories.

In terms of Singulair and Fosamax, with the Fosamax delta from your expectations, was a 70-30 split market share, was that in line with your expectations?

And Singulair falling short in AR, the delta from your expectations, do you think that was due to managed care resisting Singulair for the use or do you think it was the prescription antihistamines doing better maybe than overall was expected?

Thanks.

Okay.

In terms of demand for products relative to wholesalers, it's not involved with that at all.

Demand for the products is the demand for the products that give guidance et cetera, we really are just talking about taking out all of these fluctuations which would reduce the variability in inventory levels as well as the purchase patterns.

So it's unrelated to the demand.

It really is just bringing these practices more in line with the demand so that the sales match the prescriptions essentially over time.

In terms of Fosamax, there's two factors there.

There's share and growth of the market as Ray indicated, we feel the predominant factor here was the market growth.

You've seen the market growth slowing this year.

And also we didn't see much benefit from the osteo market from HRT.

So as we watched this class throughout the year in terms of any impact from HRT and more importantly just the overall osteo market and the class you've seen the slowing.

So that's what's led to the difference there more so than share.

As you are aware, Fosamax still has a 70% or more share of the class so we're much more highly leveraged than what happens to the market.

That growth rate has come down as you've seen.

In terms of Singulair it's not managed care restricting Singulair.

We continue to have good access to Singulair.

We worked closely with our customers in terms of understanding the demand for Singulair.

Its role in allergic rhinitis.

We don't have restrictions.

So that's not really the issue.

I guess it would be the potential upside for overall demand that affected the sales range.

That is a combination of many factors so it would be hard to tease out a contribution for what happened with antihistamines.

That's all over the board in terms of reimbursements, tiers, co-pays, other incentives, generics.

Really it's the overall pattern of demand taking all of those factors collectively but not managed care resistance.

Next question

We go next to David Moskowitz, Friedman, Billings Ramsey.

Yes, thank you.

Couple questions.

Number one, looking at the share buyback, I'm looking at the share count.

Looks to me, Judy, you only bought approximately 12 million shares in the quarter. $660 million worth at an average price of about $55.

Although you would be able to buy those shares much cheaper now.

My question is, the run rate I calculated is approximately 15 quarters for the $10 billion share buyback.

That's approximately four years, a little under four years.

Is that a fair run rate to start modeling the share count?

That's number one.

Number two, Zetia came in $123 million in the third quarter that's U.S. sales compared with $112 million in the second quarter.

You had a 5.7% price increase.

We've seen volume and gains on the product.

Clearly this is a disappointment.

Can you speak to that?

And I appreciate it if you don't pass the buck back to the joint venture.

I'd appreciate it if you guys were clear.

Then a question for Ray.

If I take the midpoint of your guidance and add back the inventory and restructuring charges, I get about $3.17 for the year, 6.4% earnings growth this year.

And you talk about value.

My question is, what rate does a company grow at that's providing value in this environment?

In other words, where can we expect growth to come off of this base?

And I'd like to hear that answer with the cost cutting as well as without.

And then double digit growth.

I haven't heard that on the call.

Can you speak to that sound bite, please?

Okay, David, let me make a point on the last thing.

You are asking about '04 and beyond.

As we said up front, we are not discussing '04 before the analyst meeting which is when we typically give the guidance.

So all of the discussion today is about the results of the third quarter and where we expect the fourth quarter to land.

And we've already described the various things that impacted the quarter.

So maybe just on t-stops maybe Judy you want to address that part of it?

Yeah, your estimates on the third quarter basically are within a reasonable range of where we've come out, but as you know, there are a couple of elements to this share repurchase program.

One, there's no specific time limit and two, that we, you know, we have modulated that based on our own views on purchasing patterns.

So I don't think you can straight line any one piece of data, but obviously, as you know, our purchasing patterns are done to be a complement to earnings per share growth but also in constant with ensuring that we have a strong balance sheet.

So we take all of those factors into consideration as we execute our plan over the coming quarters.

Also, in answer to the question about double digit earnings growth.

As I said in my opening remarks, our expectation was for double digit earnings growth in our business in 2003.

Based on the revised product guidance and also for the continued increase in R&D spending as well as even with moderation are selling administrators growth rate and so on.

What I said at the outset was as a result of all of the changes taken together would result in not achieving expectations in double digit earnings per share growth.

And David on Zetia, we're not disappointed in the performance of Zetia.

You're right, there was a price increase in August, and, you know, there may have been some impact of buying in the second quarter and third quarter as wholesalers increased purchases for the product based on its growth rate and also there was a price increase so maybe some inventory adjustment.

We think this is not a major issue and kind of washed through.

As such a new product, it would be very hard to estimate buy in and buy out so I don't have any more specific detail than that.

So I think what you'd have to look at again more so for Zetia is continued good growth in the total prescriptions.

Total prescriptions continue to grow at essentially a linear rate.

Over 3.5 million scripts.

We have a 5% sale in new prescriptions.

I encourage to you look at the growth rate for Zetia TRXs is a better measure of how well the product's doing and the sales you are seeing are somewhat affected over second to third quarter but this is sort of essentially in line than going forward.

Look at the scripts and again that should be reflected in the sales line.

Next question, please?

We'll take our next question from Tony Butler, Lehman Brothers.

Good morning and thanks very much for taking the questions.

Ray, you commented about efficiencies and marketing administrative costs, some head count reductions, et cetera, and it strikes me that the industry's never had to be terribly efficient in a very high margin business until sales softened and that's what we're seeing.

But as you looked at marketing administrative costs, is there any second guessing about the 1500 reps that were added last year because one could argue they may not be efficient this year and probably ongoing?

And secondly, R&D costs at least year-to-date are in excess of 20% substantially above overall sales growth.

The question continues to resonate in my mind that outcome studies by core protection and those you've done on Vioxx, and I could name others, really don't seem to be playing a strong tune at managed care.

I'm just questioning why one would continue to put money forward in effect where it may not be resonating at the managed care level at any, you know, sales level that can result in a very good return.

Thanks.

Okay.

Well, I'll take it in a reverse order, Tony.

First of all, we have seen the positive effects of the studies on our sales performance and market share.

It's clear that the outcome study on Vioxx basically once we were out and were promoting that fully really led to the stabilization of our are market share in the Arcoxia market.

On a protection study, you know, basically as Mark indicated on his earlier comments received a positive reaction for this position level and we're also seeing it in terms of the Zocor performance itself in terms of prescriptions.

So particularly coming around to managed care.

And it will be an immediate impact and basically, we have a predominance of preferred positions on managed care formularies with Vioxx compared to the other competition.

It's particularly managed care, I think, that right at the initial publication of the studies that's particularly sensitive whether or not these studies or any of our products have outcomes that really make a difference to the patient and are important to the physician.

As you are basically, we are benefiting clearly from that.

And also worldwide, we can see the impact of that going beyond that you can see the impact of the outcome studies on Cozaar.

You can you see the impacted outcome studies on the heart protection studies as well in those countries where Zocor's still on tap.

So they have real value.

Second thing is absolutely no second guessing on the 1500 people that we added to our organization.

I mean, they basically are in terms of pursuing new opportunities such as allergic rhinitis, which was in an absolute sense successful in terms of the result of the indication that we got.

In terms of relative to the kind of expectation that we set for ourselves as I indicated earlier that we didn't achieve all of that at this point.

But certainly, the payback on those sales reps is very, very clear.

So no second guessing on that at all.

The third thing as you said, this is an industry with the kind of profit margins that basically doesn't take the kind of initiatives that we announced today historically.

We're not talking about slowing sales growth as the reason for these kinds of initiatives.

We're talking about positioning the company for the longer term, in terms of being much more efficient and therefore much more competitive in the kind of environment that we see going forward.

One other part of your question was just on the R&D spending rate relative to sales.

You are right, it's ahead of sales as it was last year as well.

Those two aren't tied.

The R&D is driven by the opportunities in R&D.

As I mentioned each quarter this year, we see strong increases across the board from very basic, early, late stage and even the licensing.

So all of that activity's up.

It's really much more driven by what are the opportunities in R&D and obviously we see opportunities spending against that.

Next question?

Yes, we'll go next to Richard Evans, Sanford Bernstein.

Thanks for taking the question.

Sorry to get back to the inventory issue, but historically, you have had a relatively large first quarter as wholesalers burned off inventory.

So with your change as we think of first quarter '04, isn't that just a shift of $650 to $750 million for Q'03 to 1Q '04.

Second, can you discuss just strategically, and philosophically how you are looking at Zocor relative to Zocor-Zetia?

Do you intend to cannibalize Zocor in favor of Zocor Zetia or do you still intend to actively promote Zocor?

And with a joint venture, can you help us understand how you intend to maximize or optimize the balance between near-term profit and/or longer term market share on Zocor Zetia?

Are you running the JV for near term profit or trying to maximize market share before the Zocor profit?

I'll turn it over to Ray for the JV and Zocor piece.

I'll address your question about inventory.

It's really not a shift.

What you have seen historically, the last fourth quarters have been driven by the buying pattern particularly on Zocor as our largest product and price increases the last couple of years in the fourth quarter, that's when you see the big buy-in.

What we are seeing here is without that in the fourth quarter and the buyout that we're taking of some of the other products we had buy in, all of that will affect the fourth quarter.

First quarter next year should be then relatively unaffected.

We would expect sales in the fist quarter to be in line with what the demand is in the first quarter.

Year-over-year, you probably won't see that much of an effect in total because the first quarter of this year only had a total buy-in of 30 million.

While that was highly valuable at the product level, Zocor was down 150, Fosamax was up 140.

Those are the fluctuations that would come out of the system but there's nothing about a shift in the relative quarters here.

Ray, do you have the Zocor Zetia?

Yeah, with Zocor and Zocor Zetia, both basically, we're investing on those products and promoting them to maximize sort of the cash roll of the value that each of them represent independently.

And, you know, I think we can continue to be quite clear that we'll be promoting Zocor right up to the final hours, if you will, of the patent expiration because we've got a lot of opportunity as we see it as a result of the outcome studies that we've done.

This will continue to be a successful product.

So we'll promote it fully.

Now, using basically Zetia and Zocor combo with a fixed combination basically competes against all other statins, if you will, including Zocor.

So therefore, we're -- and we see this as a very important product and certainly we're going to basically invest behind that product and ways to make sure we capture the full potential of that product as well.

Thanks.

Pam, can we have the next question?

Yes, we'll go next to Carl of JP Morgan.

Thanks very much.

Couple of questions if I could.

I apologize if this was in the release because I haven't had a chance to read through every word yet but you have updated your guidance on the revenues that you get from the AstraZeneca products from originally saying they would be down in the single digits to saying they would be up at least 20%.

I'm wondering if that's still what the guide's would be?

And is it fair to roughly calculate that change adds adding anywhere from 11 to 14 cents to your earnings?

That's my first question.

Second, have you had a chance to discuss with wholesalers yet this new program?

And can you tell us how they feel about it?

And third, any plans to control distribution to Canada to try to control the importation issue?

And last, Mark, appreciate your comments about looking at prescription trends for Zetia.

We do think of new prescription market shares as the leading indicator and that's been roughly flat for five weeks.

Would you characterize that as just noise in the life of a new product or is there something going on in terms of a little bit of resistance?

Thanks very much.

I'll take a couple of those and ask Judy to comment about the wholesaler and Ray for Canada.

In terms of Zetia, I think the new prescription share continues to grow.

We're up to 5% in the most recent week but also bear in mind that share for Zetia is probably not the best measure because it's not competing head to head for shares.

It's really more positioned as an add-on therapy and in addition now, you have Crestor in the market that is also another product in the denominator.

So I view it more as looking at the demand by the total prescriptions as probably being a better measure for success there.

So I think that would be the Zetia driver and you continue to see growth there.

In terms of the supply sales, yes, we did say in the release, we reaffirmed the same guidance on the AstraZeneca which is 20% and that's the same guidance we gave at the end of the second quarter.

So our guidance is reaffirmed within that range although sequentially this year, I indicated we did see a decrease.

You'll see that as you look at the other sales.

So that's the difference here is lower in this quarter than last but the overall for the year still within the range we had previously given.

Then in terms of wholesaler discussions?

Yeah.

Clearly as I noted in my other responses this is a partnership, so we have spent quite a bit of time working with the key wholesalers to explore what makes sense for them and what makes sense for us.

So what you are seeing here is a result of a continuing dialogue.

And I think it's a program that is being well received because it really does meet both of our objectives in a very effective way.

As far as Canada's concerned in terms of reimportation of our products, we don't see that as being significant as this particular time, although, we're closely watching that situation obviously.

Okay.

I guess we have one more question in the queue so make this the last one.

Pam?

Yes.

We'll take our final question today from Glenn Santegelo with Sound View.

Thanks for taking my question.

I apologize for following up here.

But my question is does this new agreement actually lower your cost structure with the wholesalers?

I mean, it's obvious it will eliminate the revenue fluctuations at Merck, but is it a cheaper mechanism for you all to distribute your products or will it be roughly the same?

Any sort of guidance would be helpful.

It's not a cheaper mechanism to distribute our products.

What it does is help us with our own manufacturing efficiencies because of the visibility and the more moderating trends in terms of the demand pull through.

That's where we see the benefits.

Okay.

I think with that, that was the last question we had.

Thank you all for participating.

We'll talk to you soon.

Thank you.

This does conclude today's conference.

We do appreciate your participation.