默克藥廠 (MRK) 2003 Q4 法說會逐字稿

Good day and welcome to the Merck 2003 quarter earnings results call, today's call is being recorded.

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

Thank you, and good morning everyone and welcome to our call.

By now you should have seen the press release, as well as the additional financial disclosures which were sent out this morning.

If you don't have those, they are posted on our web site.

So if you go to Merck.com/finance, in the section labeled Financial Reports, you will see the elements there which we'll review in the call.

Before I jump in, I will give the quick summary as many of you have seen.

The fourth quarter earnings per share was 62 cents and for full year brought us to $2.92, both in line with the first call means and consistent with the guidance that we gave you last quarter.

And in terms of the in-line business all of the major products that we guided on finished within those sales ranges provided so no surprises there.

So a quick summary here is that the overall results for the year finished where we expected but I will spend sometime reviewing the specific details which affected the fourth quarter results in particular.

You recall the last quarter we announced a couple of major initiatives.

One, an effort to lower our worldwide cost structure and also a new distribution program, with the U.S. wholesalers.

Both of those are successfully underway.

The impact from each of those is at the higher end of our guidance and as a result had a major impact on the quarter results.

But one that was expected and, again, guided to.

So first just a reminder as you are reading the release on accounting when we use the term "continuing operations" here this is referring specifically to the exclusion of Medco results.

Medco of course was spun off in the third quarter so there's no contribution in this quarter.

The contributions from earlier in the year are collapsed into discontinued operations line, which you will see in the full year results.

Therefore, just to be clear, this continuing ops has the same very specific meaning that we've been using now for the last couple of years, namely ex-Medco.

There are several other specific guidelines all from previously announced actions all of which I will review in detail as we go through the P&L in the respective lines.

Just to be clear all of these other items have been included in continuing operation results since they all relate to the ongoing pharmaceutical business.

Nothing has been excluded, everything is in these GAAP results and note that the press release has no Reg G reconciliation of the reported results back to GAAP.

It is all in there as we guided and similarly as we talk about guidance for next year, we'll be treating all of this the same way.

So before I move on, let me just mention the Safe Harbor language that during the call we may discuss certain subjects that contain forward-looking information as defined in the Private Securities Litigation Reform Act of 1995.

This may include guidance, earnings and other income statement components and statements related to growth rate expectations and product positioning relative to competition.

Actual results could differ materially from those that may be projected in these discussions and additional information on a number of factors that could cause actual results to differ materially from the information that what we provide today is available in our most recent 10K and also on our website.

It is available in our most recent 10K and also on our web site.

So I'm going to start with the P&L, the income statement, which appears on page 10 of the press release, and that's labeled "Consolidated Results" which, of course, now of course refers to Merck without Medco.

I will focus mostly on the quarter but also make some comments on the full year which appears on page 11.

Just starting at the top line there sales were $5.6 billion in the quarter.

That's down 7% from last year.

And that includes the impact of $700 to $750 million from the new wholesaler program introduced in the fourth quarter.

We previously said $650 to $750.

You can see it came in at the higher end of that.

Now this is a program that we expect to moderate the fluctuations in sales from wholesaler purchase patterns in the U.S. and improve efficiency both for us and the wholesaler.

Full year sales obviously include that impact and came in at $22.5 billion that was plus 5% for the year.

Now, these buying pattern effects and the implementation of the new program resulted in a net for the year of $250 million buyout -- I'm sorry, $250 million buyout for the quarter and $565 million net buyout for the full year.

Now you recall when we first talked about this program we said most of the impact of the new program is to prevent buy-in.

Therefore, this $700 to $750 million impact includes a portion of the net $250 buyout for the quarter but the majority of the impact was actually the avoidance of buy-in.

There are a lot of parts to that, so I will review these later when I get into product sales and go product by product as we normally do.

But of course as a result of this program, as we said in 2004, we expect the sales to be more in line with the demand and then these fluctuations will be reduced going forward so we are well underway and happy with that.

Next, moving to materials and production.

The product gross margin percentage, if you calculate it is 78.2%.

Now, that's low by our historical standards the last couple of years.

But that's caused in part this quarter by the effects of the wholesaler program, which obviously reduces sales in the U.S. and therefore led to a greater percentage of foreign sales in the mix, which had a depressive effect on PGM.

But also you will notice that materials and production were up 9% to $1.2 billion for the quarter.

So that's up 9%, which also for PGM and it may be surprising since the volume is down but this effect is due to product mix and a couple of other factors in particular.

One is a mix shift within the AstraZeneca, supply sales.

That's recorded in the top line and with the shift from Prilosec to Nexium, that increases the cost since Nexium has a higher product cost us than does Prilosec.

Also contributing in this quarter specifically is a write-off of inventory of mk-869 which was discontinued in the fourth quarter following the Phase III trials.

Having said all of that, note that the PGM percentage for the full year was 80.8%, in line with what you have been seeing for the last couple of years and we're guiding to a similar 80-81% amount for 2004.

So clearly this quarter was affected by a number of factors but we expect the PGM to bounce back from those specific effects as we head into next year.

Moving down into marketing and admin that came in $1.8 billion and finished up 17% for the quarter and 13% for the year, but notice as it says in the footnote, that includes the $195 million from the restructuring cost.

If you were to exclude that cost, the M&A finished up 10% for the year or slightly higher than our guidance of high single digits.

We are for next year guiding to flat growth next year.

Again, excluding restructuring, and that's the result of continued investment behind our products and also capturing some of the cost benefit from the restructuring program and, again as we told you last year the restructuring cost in 2004 is expected to be $75 to $125 million as we indicated but, again, the guidance we gave on marketing and admin excludes those restructuring costs.

So, yeah I should be careful here.

I'm looking at my notes here.

When I say this year's guidance, I was talking about 2004.

From an accounting perspective, some people say we are still in '03, until we finish the call.

So the '03 guidance was up single digits excluding the restructuring we came in at 10%.

For 2004 we expect flat year over year again excluding the restructuring.

So we'll continue to -- as we go through the year guide on those two elements to help in your modelling but it's all being included in the appropriate line.

Moving now next to R&D.

R&D spending was $895 million in the quarter.

That's up 7%.

Now that's a modest percentage relative to our recent past but that's really just due to a high fourth quarter '02 number.

If you look at the run rate sequentially, that continues to be very strong.

And, in fact, the full year R&D expense was up 19%, to $3.2 billion, again, consistent with, but actually at the high end of our mid to high teens guidance for 2003.

Included in here is across-the-board increases in basic preclinical and clinical but also increasingly the expanded external alliance activity is included here. 47 deals completed in 2003, and as I think we mentioned last month, a significant number of deals currently under detailed review about 70 or so.

You will also see again in this line, as you saw the second quarter an acquired R&D charge that's $11 million.

That's related to the second tender offer for Banyu which was completed in October.

We previously announced that.

This factor is just like the $90 million in the second quarter from the first tender offer.

It's a one-time after-tax charge associated with acquiring the increased stake in Banyu, that now stands at 99.4%.

So, again a one-time and after tax and you will see that came out to $100-$102 million for the full year.

That represents the effects from each of the two tender offers.

Reminder again, this R&D line does not include the development costs for Zetia, or Zetamide/Simvastatin combination program.

All of that flows through equity income.

We expect R&D next year, that is excluding the JV, the R&D line will increase low teens percentage in 2004.

Moving down to equity income, you will see here this dropped quite a bit down to $6 million which was down from $94 million 4Q last year and the full year was also down quite a bit, down 26% to $474 million.

You recall this line had actually been fairly steady in prior years around $640.

So I want to talk a little bit about what's going on in that line.

The impact to equity income in the quarter was in the pickup of the partnership with AstraZeneca.

As a reminder, the equity income is all joint ventures and partnerships but the impact in this quarter was from AstraZeneca.

Now we're all aware of the situation with Prilosec.

Prescriptions are down.

There's increased generic competition.

There's still risk to future sales and pricing and as a result of that, the AstraZeneca partnership earnings were down as the partnership addresses the physical and financial risk on Prilosec.

That's reflected in equity income.

Now you notice in the guidance, however, we are guiding on this line and we expect equity income to increase for 2004 to $650 to $750 million.

Back in line with or even a little bit better than you have seen in recent years, as this line benefits next year from the positive contribution from the Merck Schering-Plough corroboration, which generated a loss in 2003.

So that's what's going on in the quarter.

The same factors that affected the AstraZeneca partnership obviously impact the Prilosec supply sales as well and there was a greater impact in the fourth quarter than we previously expected on the Prilosec supplies and recall that all the supply sales from Prilosec and Nexium, in particular, that's all captured in the top line, not in equity income.

So equity income is just the partnership profited.

The supply sales are in the top line.

So to help you out with that, the total AstraZeneca supply sales were $1.9 billion for full year 2003.

That was up 28% over the prior year, and in line with our guidance, which you recall was greater than 20% increase.

Now this was driven by the increases in Nexium, while Prilosec declined.

Recall that you can't take the timing of the supply sales relative to retail sales because we are shipping orders to AstraZeneca.

So as Prilosec has gone down, we absorbed that during the year and continue to but Nexium continues to grow.

We expect that will continue next year but we are actually guiding to approximately the same supply sales in 2004.

That is approximately $1.9 billion in AstraZeneca supply sales in 2004.

Now, just to remind you, if you go back to the third quarter, our previous guidance was that the supply sales would be down 15 to 20%.

I want to just make sure you are aware of this.

New guidance is not necessarily upside versus what we were expecting to see in the 2004 sales, but rather reflects what I described about the decline in Prilosec in 4Q.

So a greater decline than expected in the fourth quarter which we then expect will result in being $1.9 billion next year, and, of course, this continues to be driven ever more by sales of Nexium.

As always, uncertainty remains.

We are not involved in the marketing or pricing of those products, obviously.

We have about a six-month visibility and we'll continue to update you with guidance as we go, but I think the clarity around the actual number of the guidance for next year should be very helpful in your modeling.

Next line is 'Other Income and Expense'.

That came in as income of $56.5 million, versus $70 million expense in last year's fourth quarter.

So if you want to now refer to the 'Other Financial Disclosures' page, you can look at some of the details there.

There was lower interest and income expense.

That continues because of interest rates.

But really the biggest difference here is in the 'Other' column.

So there's two major factors you should be aware of in this quarter.

One is the comparison to last year, which is actually an unusually high quarter in terms of expense if you go back and look at the quarters.

And this year's fourth quarter, the income was driven really by the sale of the U.S. marketing rights of Agristat to Gilford Pharmaceuticals, that was announced earlier in the quarter and that resulted in and upfront payment to Merck of $84 million.

So that one-time payment in the fourth quarter is really what drove the year over year change.

Now as you look down the rest of the disclosure page at the joint venture sales detail.

You see increases in sales for Merriel the animal health business, and also the Aventus-Pasteur MSD vaccine business in Europe.

The sales growth there, obviously also led to increases in equity income from these joint ventures.

Clearly the AstraZeneca decline in equity income was the driver for the quarter.

Looking down to the Merck Schering-Plough collaboration.

As I mentioned previously we had expected a loss for the full year which was true, but you can see here, actually Zetia sales continued to do very nicely. $164 million in the quarter and Zetia finished it's first full year at $469 million.

That's worldwide.

The respective U.S. numbers are $144 million for the quarter, and $419 million for the full year.

There was a price increase on Zetia of 5.7%.

That was on December 31st.

So that didn't affect the quarter, obviously, but one should be aware of that coming into '04.

Now, just a little bit of review here then on Zetia's first full year in the market.

It became the leading non-statin in the marketplace with over 5% new prescription share.

And we had a number of important successes over 5.4 million prescriptions were written since its launch in mid-November of the prior year.

It 's reimbursed in over 90% managed care lives in the U.S.and in about 65% of those covered lives appears in the second tier which is actually among the highest in the entire lipid lowering market so very impressive for the first year.

And in terms of thought leader support, it is very strong.

The new prescription share with cardiologists in particular is 7.5%.

So well ahead of the general market and we think that bodes well for Zetia's future success, as well as the introduction of the new combination agent which will feature the dual inhibition mechanism of action in one tablet.

Outside of the U.S. we recently launched in Holland which becomes the fifth European country after Germany, Switzerland the UK and Sweden.

We also launched in Canada in June of 2003 and we expect some additional launches of Zetia or Ezetrol in Europe as we head through 2004 as we work through the local regulations and reimbursement issues market by market.

As you are aware we filed the Eze/Symba combination in the U.S. in September and we expected to launch it then in the second half of 2004.

Just a preview for those attending the American College of Cardiology meeting which is in March, there you will see a fuller profile shared for the first time of the new agent, including the first head-to-head study against the Torvostatin.

That will provide a nice context for the clinical profile and also we'll be presenting a study at the ACC, which is a study of physicians attitudes and behaviors in treating hyperlipidemia including titration both what they think and what they do.

So between these two things in particular there will be other data but those two factors I think will really give you a good sense of this exciting profile as well as a good look at the market opportunities.

So now I am move back to the release and finish off on the P&L, again, on page 10.

We're down to the tax rate, the effective tax rate for the quarter was 20.8%.

And that brought us to 27.2% for the full year.

Now that ends up being a little bit lower than our last guidance for full year.

So let me explain that.

That the lowered tax rate in the quarter was affected by the mix of U.S. and foreign sales.

You can imagine some of the contributors there.

So included in that mix we have lower income in the U.S. because of the restructuring costs, the reduced U.S. sales from the implementation wholesaler program, and also the lower contributions from AstraZeneca that describe open supply sales and equity income.

On the other side, the foreign sales were helped by further declines in the U.S. dollar.

So the FX essentially pushed up foreign sales and again that contributed to the mix.

Because of that we showed a lower tax rate in the quarter but note that our guidance for full year 2004 is 28 to 29%.

So, again, another example of something in the quarter that may have been out of the ordinary but we have given you guidance heading into 2004.

So that all resulted then in net income of $1.4 billion in the quarter.

There was no discontinued ops contribution in the fourth quarter of course with the Medco spin in the third quarter.

Shares outstanding are now 2.24 billion, that's down 1% versus last year.

This past quarter we spent $645 million in treasury stock buyback program and that brought us to just over $2 billion, $2.03 billion for the year and we still have $9.5 billion remaining under the current board authorizations with no time line.

That, again, comes down to the bottom line EPS, as I mentioned at the top of the call, 62 cents for the quarter, down -- minus 23% due to the significant factors I've mentioned, $2.92 for the year.

Again, both in line with our guidance and the first call [inaudible].

Looking ahead for full year 2004, we are reaffirming our previous guidance which we gave in December for full year EPS of $3.11 he to $3.17.

In terms of the quarterly guidance, we can't quite give that yet.

Clearly the pattern for 2004 will be affected by the buying patterns and the comparison of the base year in 2003.

Now we're just in the early stages of the rollout of this new distribution program and we're working through that.

So while we can't provide quarterly guidance now, we So while we can't provide quarterly guidance now, we expect to give you guidance on first quarter EPS sometime next month when we get a little clearer picture and then we would expect to provide quarterly guidances one quarter out at a time as we progress through the year.

So as a number of these things roll through, we will continue to keep you updated.

At this point, let me turn to the individual product reviews and talk a little bit more again about some of the buying patterns in the new program.

So if you want to look at your other financial disclosures on the net product sales detail, I will refer both to the quarter but also the year as well as guidance for '03 and '04.

We're pleased, as I mentioned with the implementation of the program, and the wholesaler program, and the impact came in at the higher end, as indicated, which is clearly reflected in the U.S. sales numbers this quarter.

As a result of this, inventory levels are also down, although we can't, at this point rule out the possibility there could be some additional buyout in the first quarter.

But as always, you know that's something we can only calculate or estimate really, once we've got the full quarter of the results in, in terms of both the actual sales and prescription demand.

So sales in the quarter, including this negative impacting the U.S. of $700 and $750 in aggregates from the new program and that effect includes the prevention of buy-ins as well as the impact of buyouts that otherwise would not have occurred had we not done this.

As I said last quarter, Fosamax and Singulair buyouts were expected because there were buy-ins in the third quarter and price increases.

You can think of that as a normal pattern for those two products.

There was likely some additional buyout from the program as wholesalers reduced their inventories In aggregate if we just look at the buy-in and buyouts that occurred in the quarter, there was a $250 million buyout in the quarter, that again includes both the normal buyout, as well as the impact of the program, which was greater buyout on some products and prevention of buy-in primarily.

Before I go into the individual products, also just for convenience, we are reaffirming all the product sales guidance ranges for 2004 that we first gave you in early December.

So going product by product, we'll start with Cozaar/Hyzaar.

There's no net buy-in and buyout effect for Cozaar in the quarter.

That's because there was I price increase in early December.

So the effects of buy-in buyout in the program were all washed out within the quarter.

It is essentially a clean quarter.

Sales of $690 million in the quarter that brought to us $2.5 billion for the full year.

A strong 14% growth worldwide and consistent with the guidance range of $2.5 to $2.7 billion.

This quarter Cozaar/Hyzaar became the fourth most prescribed branded hypertensive agents and that as based on the proven outcomes worldwide.

At this point, 44 countries have given regulatory approval or licensing for now and 30 countries for life.

Within the U.S., Cozaar/Hyzaar are available in over 90% of managed care lives and we are guiding 2004 sales of $2.7 to $2.9 billion.

Moving to Fosamax, as I mentioned some buyout was expected following the buy-ins and price increases last quarter.

The buyout was $60 million in the quarter.

Sales were $650 million in the quarter, and $2.7 billion for the full year.

That's a strong 19% growth worldwide and, again within the range of our guidance which was $2.6 to $2.8.

We have now stabilized our share of fosomates in the U.S. at about 70% since late August and we are actually still increasing share of asfosfonates[ph] in Europe and you see that reflected in the foreign sales growth.

For 2004, the Fosamax guidance is $3.0 to $3.2 billion.

For Singulair, again buyout is expected following a buy-in and price increase in the third quarter before this program was put in place.

The total buyout for the quarter was $90 million.

Sales were $507 million in the fourth quarter and $2.0 billion or plus 35% for full year consistent with the guidance which was $2.0 to $2.2 billion.

With prescription growth of 35% in the fourth quarter in the U.S., Singulair became the number two product in the overall respiratory market defined as both allergy plus asthma so we are continuing to experience strong growth in asthma worldwide and, of course the first year of the seasonal allergic rhinitis marketing in the U.S.

We expect that to continue next year and the 2004 guidance is $2.4 to $2.7 billion.

Moving to Vioxx, there was a little buy-in for Vioxx in the quarter but that was due to the large buyout in the third quarter this buy-in actually would have been bigger if we hadn't put the new program in place but the buy-in was $40 million.

Sales were 731 for the fourth quarter.

Now you will notice a very high comparison in the U.S., but that's due to the fourth quarter of last year where there was a significant buyout.

Sales for the year were $2.5 billion.

In terms of the U.S. coxhib, the market was flat and continues to be flat about 1% growth and the shares are pretty stable but Vioxx continues outside of the U.S. to grow very nicely, 24% growth and continues as the leading coxhib XUS with a 52% share of coxhib sales XUS.

In terms of our guidance we guided to total coxhib sales of $2.5 to $2.7 billion.

We came in right in the middle of that range, $2.6 billion.

At the ACR this past quarter we presented the Cox-2 inhibitor in juvenile rheumatoid arthritis which confirmed the efficacy and safety of Vioxx of this extremely painful condition in children and adolescents.

And as you may know we filed a supplemental MDA with the FDA for that indication in the fourth quarter and we are also still awaiting approval of Vioxx for acute migraine.

Arcoxia as you know was resubmitted to the FDA in late December, seeking broad range, seven different indications.

Outside of the U.S.

Arcoxia has been launched in 38 countries so far.

We expect additional launches this year.

The 2004 for coxhibs is $2.6 to $2.8 billion.

Lastly in terms of the products, moving to Zocor, there was $135 million buyout in the quarter and that was following buy-in in the third quarter and a price increase which occurred at the end of October.

Now this $135 million is included in the $500 million impact of the wholesaler program on Zocor sales and this $500 million impact was noted when we gave you the guidance on full year Zocor sales in the last quarter.

So sales in the fourth quarter for Zocor were $1.2 billion and $5.0 billion for the full year.

Again, that's consistent with the guidance range of $4.9 to $5.2 which includes that $500 million impact.

So the actual guidance from earlier in the year didn't change with the exception of the $500 million impact and Zocor came within that range.

Now in the fourth quarter we saw a 30% -- 31% decline outside of the U.S.

Now in the fourth quarter we saw a 30% -- 31% decline outside of the U.S. in Zocor sales and that's due to the patent expirations, which you are well aware of, and the availability of generic Simvastatin also appears to be slowing the growth of the remaining branded statins in those markets.

In the U.s. however, we continue to promote the benefits of Zocor 40 milligrams from the heart protection study.

And we are seeing response in the market place.

The 40 milligram dose reached 35% of prescriptions for Zocor in December which is an all-time high which is a sign that the message and the implementation of this program is getting through to physicians and they are responding.

The price increase was effective November 1st, that was a 4.4% increase.

Our 2004 guidance is $4.9 to $5.1 billion and that's based, as this year on growth in the U.S. business, but declines outside of the U.S..

So just to put a little bit of closure then after having reviewed all the details, as we look back at 2003, certainly there are a couple of setbacks in R&D in terms of late-stage products but nonetheless we continue to advance the early pipeline.

We saw three major vaccine trials fully enrolled and continuing and we expect to file those next year, that is in 2005.

We've continued significant R&D investment, up 19%, supplementing our internal research with expanded external lines activity.

We now have Zetamide Simvastatin as well as Zircoxy at the FDA.

Zetia had a terrific first full year on the market and we expect it to continue to perform well next year.

We, earlier in the year, successfully spun off Medco and completed the two successful tender offers from Banyu thereby increasing our presence in Japan.

And now most recently in the fourth quarter the two major initiatives the restructuring to lower our cost structures as well as the wholesaler program are well under and we are pleased with those results and I'm sure many of you are pleased as I am that in the future all of our discussions of buy-in buyouts will be moderated somewhat as that program get into full gear.

So with that I think we are ready for questions.

Thank you, Mark.

Today's question-and-answer session will be conducted electronically to ask a question, press the star key followed by the digit one on your touch-tone phone phone.

Please make sure your mute button is turned off.

Again star one if you would like to ask a question.

Our first question, Mara Goldstein, CIBC World Markets.

Thanks.

Hi, Mark.

In your comments you refer to inventory levels when you were discussing the new wholesaler program that was implemented in the quarter.

I wonder if you can provide us with a bit maybe greater understanding of what kind of inventory levels Merck is actually targeting so we can get a better sense of Lou to model the quarters through 2004.

Okay, sure.

As you described the -- part of the result we're looking to acleave with this program is a more consistent inventory levels across all of our products.

We can't give you a specific product by product right now.

In the past we said that our typical inventory levels were a month or less and however -- however with the buy-ins you could get up to two months and then that had to be worked back down.

In terms of the new program, we see them being targeted at less than a month.

I can't give you a specific number on that because essentially what we are providing to the wholesalers is an opportunity to earn, in a sense, fees based on several factors, which is controlling the level of inventory, maintaining that at an even level, but also ensuring the right levels of customer service.

We obviously don't want them to be encentive to drive it so low that we end up with partial orders filled or stockouts at the end customer level.

So I think it's fair to say less than a month, and overall, the average will certainly drop from where we were.

On average, but also because you are not going to have those big spikeups during the buy-in period.

As we get a little more gran ewe larity on.

This, ourselves.

The wholesalers will be reporting their inventory to us on a regular basis, we will have a better picture that we can share with you.

I think the important thing for us is a lot of this is now out of the system, we hope, and certainly as we go through the year, we shouldn't really see those impacts.

You will still get it in the year over year comparison but we expect this year to be more in line and we'll update you when we're I little bit more more into the program.

Okay.

Thanks.

Next question.

Our next question, Tim Anderson Prudential.

A couple of questions on two different products.

Arcoxia, usually aseems like you guys only announce filings once they have been accepted by FDA but this time you announced it earlier with Arcoxia.

The language in the press release seems cautious on whether the FDA will accept the MDAs currently submitted.

As I understand it with the edge trial, there were maybe two components of this trial, edge one and edge two and it appears you only submitted the edge one data and not yet the edge two portion and I I'm wondering if it could impinge on the 60-day period on whether FDA accepts it or not or is the bigger issue related to the Melo trial and do you think, like many seem to that they will be required to get full approval.

And then the second question is on eze syndroL.

Thanks system in terms of Arcoxia, first of allW regard to your question about us having announced the submission to the FDA, that's not unprecedented.

In fact if you go back with Vioxx, we actually did the same thing.

We announce the submission and then the acceptance and later at proveal.

We actually followed a similar pattern with Zetia.

It was right at the end of the year literally within the last couple of days of December, and then it was approved at the end of October, ten months later.

So there have been cases where we have done that and I think particularly in this case,or -- you know, obviously we talked a lot with Arcoxia and the refiling thing and we would do that by the end of the year.

We thought it was important to make sure that we did that.

The kaushness in the press release, don't infer anything -- cautiousness in the press release, done infer anything about.

That that's going by the FDA.

They have 60 days to review T. so we can't say filed.

So it's really because of where this fell in the calendar year, of the previous commitment that we wanted to be clear where we were.

We were no more cautious around Arcoxia or Zetia or Vioxx when you go back and look at the press releases.

We are following the regulations in terms of that.

In terms of your questions about various ongoing studies for Arcoxia, again, I think I have addressed the issue on what we have described in trms of the acceptance -- or, I'm sorry the submission of the filing and the FDA 60 days to accept it.

But that's -- we don't believe at all contingent on the metal results.

Metal is this long-term cardiovascular outcome study that we started sometime ago and it is independent.

The edge study is the specific study that last year the FDA asked us to conduct in order to generate comparisons of Arcoxia to another drug.

As you recall, we went back to refile Arcoxia with the corresponding data and asked us to complete some additional work, in particular the edge study.

There a few other requests which we had from either existing or ongoing studies but the issue was edge so from our perspective, we submitted it.

The FDA gave us a very specific request.

We have acted in response to that request and we have resubmitted Arcoxia.

We made no secret the fact that the metal study is ongoing.

It will take sometime before we have the full results but in terms of the Frances about the FDA, I can only say I think the people making those -- for instances about the FDA, I can only say that the people making those statements are not involved in the process with FDA and Merck.

Now I will be the first to admit, I don't certainly know about the praxseze but a number of products requested, including the pain studies and additional RA study and additional data in O A. I think have you to look at this case by case.

The FDA is looking at applications giving the sponsoring company's response and from our perspective, we have responded to their question and as always, with all products we can't ultimately predict the FDA process or outcome of any regulatory submission.

But we're comfortable with where we are and we kept you apprised and we'll continue to do that.

In terms of easy simva and the profile.

I will try not to predict the labeling for the same reason we don't try to predict the FDA but I think what I would say is, you know, we don't expect to see head-to-head studies on the label.

The FDA tends not to like to do that to hut head-to-head studies directly into the label.

So, yeah we always have to be cautious of making comparisons across labels from different studies particularly if you look at hypercelestialemia.

It's highly dependent on the patients studied, their background rate, how high they were coming in level of disease.

Having said that we're very confident in the profile of this product and I think it will be fully competitive with anything out there.

And, again you will start to get a better sense of that at the ACC as we show the head-to-head study against Lipitor and more data will roll out as we get closer to the launch.

Our next question, Leerink Swann.

I want to get a little bit better handle on Zocor sales.

When we look at the fourth quarter should we be adding in the amount of buyout to get a good handle on the going forward level?

Because obviously if you added $500 million back in, you would get a level that seems unrealistically high in terms of the sales guidance that's given or is it somewhere in between those two levels.

Thanks.

It is a good question.

I know this is challenging as we phase in this program which is partially why I'm so excited about going forward because we won't have all the comparisons.

I guess what I have to remind you is overtime the buy-ins and buyouts don't really have an impact but there's no guarantee that within any 12-month period that will all wash out and certainly any 12-month calendar period.

So you have to be careful about adding things back in.

I can tell you for the year for Zocor, there was a cumulative net buyout of $320 million, but that's just the way the quarters played out which was large buyouts in the beginning of the year, some buy-in and then, of course we triggered buyout and avoided a lot of buy-in.

So I think the best I can say is I would go back and maybe adjust longer than that, go back to row two to make your adjustments but then figure that going into next year it should inbound line with demand and that's reflected in the guidance we gave you.

So I think as you start to get the quarters this year, which should be cleaner in terms of being free from these distortions you will get a better sense of the run rate but essentially in a lot of ways we're in the same position as you are.

These distortions affect our patterns as well.

And greater visibility for you as well as for us is an important benefit of this program.

Next question.

Our next question CJ Sylvester UBS.

All right, thanks, Mark.

Just touching on Zocor real quick.

You guys gave a lot of visibility in terms of form ewe lary wins that were occurring for Zocor in the U.S.

Is there any way -- have been any increases in the formulary wins and is there any visibility that AstraZeneca is giving you on agzanta.

That one is easy.

No.

We're a passive partner in that one.

We're cheering from the sidelines but we have no more information than what AstraZeneca has supplied all of you, which is I think it was submitted at the end of the year and therefore knowing nothing else, we would expect approval maybe the end of the year.

For Merck that could be a contributor in 2005.

We haven't included anything related to agzanta in the '04 guidance if that is where your question is going and if it came sooner that would be nice.

We're not counting on that in '04 in terms of the question on Zocor, we gave that update in December and I'm not aware of any new clangs.

As we described in the U.S. in managed care, there are 31 plans that cover something like 90% of the managed care lives in this country.

So that's really the -- HMO and PPM.

That's really the target for contract accounts.

And what we descrabed in December is that we've got very strong formulary position for Zocor and in the second half of the year we did have -- we did pick someone additional wins.

There we renewed a contract with a major HMO through 2006 with one of the major carriers we renewed Zocor and actually they put a step in place that patients have to titrate up to Zocor 80 to being switched over to another statin.

They took a little bit stronger stance and then in terms of another couple of plans we added as a formulary.

There are only 31 plans here.

I don't know that anything has happened in the last four weeks or so but I think the dynamics are still the same, which is Zocor is well-positioned.

That positioning is reinforced by new clinical data in terms of the heart protection study.

We enjoy, I guess what I will call the valium of incouple Benzy is with a strong position and a lot of share in some of these beings it makes it much more diflg to move.

And, again particularly within an enhanced clinical profile, there's really no imperative to do that and of course the managed care pharmacy directors ar ware of the pation status with Zocor with a generic being available in a couple of years I think that factors into maintaining a strong position for Zocor.

So I don't think any new news necessarily that we talk about, but continued strong position and we haven't lost any of these major accounts.

You know, since we launched heart protection study in the middle of the year.

Next question.

Our next question Barbara Ryan, Deutsche Banc.

Good morning, Mark.

Thank you for taking my question.

I just had a couple of financial questions related to the quarter, just to try to understand.

Number one, the $195 million restructuring charge that's included in SG&A expenses.

Is that something that would have influenced your tax rate south in the quarter or was it simply mix?

Okay.

And I have a couple of follow-ups.

Go ahead, throw the other ones out too, and we'll try to get through all the questions.

Okay.

The second was the same on the $84 million gain which at your current tax rate was about 3 cents a share on the sale of Agristatin in the quarter and the last was if I add back the $250 million net buyout in the quarter to your revenues, leaving everything the same, I come up with a gross margin of $79.1%.

And since you are trying in the future to avoid buy-ins to the magnitude that you had in the past, that would seem appropriate.

So I'm just wondering what the influences versus that baseline would be on gross margins moving up over 80% as per your guidance in 2004.

So those are the three questions.

Thanks.

Okay.

Sure.

Thanks bash rax so let's just kind of walk through those. -- thanks, Barbara.

So let's just kind of walk through those.

First of all with the $195 million restructuring sure that affects the mix of the U.S. and foreign income.

That came in at the higher end of the range which we had guided to.

So relative to our expectations it was within those expectations but at the higher range.

So clearly that was a contributor of income being down.

Much in the same way the wholesaler program came within the range but at the higher end of where we guided so that drives U.S. income down.

In terms of Agristatin we already knew that.

It occurred in October.

So it occurred in the fourth quarter after the third quarter close T. wasn't part of that call.

We obviously knew of that factor so that was already considered in the guidance.

And then in terms of product gross margin -- well, if really is mix.

It can be michbl of products within the quarter and then in this quarter when the wholesaler program essentially pushing down the U.S. dollars and foreign sales being helped even more by exchange and prices being lower, in foreign markets.

You know, those two factors all together depressed PGM.

And in addition you've got the effects that I described with als Tra Zdenek, awhich is only -- AstraZeneca which is only a U.S. business, with decline in sales and the equity income also being down.

So when you take it all together, the mix, the ex U.S. sales were 44% in this quarter and they he have been running more like 39 or 40 earlier in the year.

That really gives you a sense of what is driving the tax rate.

And then also PGM.

Now in terms of talking about product gross margin into next year I think what I would point to more there is you had a lot of moving parts this quarter, which I just described both on the cost line, the ship from -- the shift from Prilosec to Nexium, the effect of the wholesaler program and the top line in the U.S., FX pushing up foreign sales so a lot of that together, you know is the impact on PGM.

Thinking about next year, I guess I would encourage you to just look at -- as we head into next year, PGM earlier in the year was in that 80 to 81% range also I failed to mention the inventory right off.

That was an inventory cost in the PGM that clearly won't be there and then as we head into next year we'll expect things to resume more of where we are and contributing to that alz always is the ongoing efforts in manufacturing productivity and improvements.

That's helped somewhat by the restructuring and also the new distribution program with wholesalers which will create more efficiencies in terms of manufacturing inventory.

So I think what I have tried to do is say there's a lot going on in the fourth quarter.

You can't just add back a sale but a lot of the factors won't be present and so we expect to resume more to the run rate that we've been at really over the last two years actually.

Next question.

Our next question Neil Sweig Fulcrum Partners.

More than.

Thank you.

What are Merck's foreign exchange '04 expectations.

Second, in the fourth quarter, because it came in different pieces, could you summarize the key drugs that had price growth?

I may have missed a few.

That would be just for the fourth quarter.

And within that price growth, what was across the line the average U.S. price increase.

And third, what is the company's take on cresta's launch and expectations for that product in '04.

Thank you, Mark.

Sure.

Okay.

A lot of moving parts.

First of all on foreign exclang, you know we never guide on that.

You know -- exchange, you know we never guide on that.

You know it affects our business because we have a substantial ex U.S. business but we are not going to try to forecast where that will go.

We'll do the best we can to report on what effect it had in the quarter this quarter was a 5% -- a 5% benefit and that brought to us 4% for the year.

So we'll keep you informed of that as we go through.

In terms of -- I think you mentioned -- oh, the price increases.

I mentioned a couple already, but let me run through those for you.

November 1 Zocor 4.4, Primazia and there was an increase on some of the vaccines also right at the end of the year so it did impact the quarter but it would impact next year.

Aptttenuvac, meriuvac(ph)2 mmr 2, mumps vacs all 6.5%, petevac (ph) 6%, veravac 4.5%, numevac 23-20% and then looking at some of the pharmaceutical products on December 3rd, Cosup(ph) 4.5, Cozaar/Hyzaar 4.8, Invans(ph) 3.0, max up 4.8, Propecia 4.9, pros car 3.0, and Trusup(ph)3.0. so in terms of what impact that had in the quarter, you know it would be difficult to say.

Some of these came right at the end of the year and, of course this is just the retail price, which doesn't necessarily reflect a net price.

But those are the prices and we can only give you in the aggregate how much they impacted the quarter or not.

And on that basis, in the -- in the U.S., there was a total 2% price contribution in the quarter, as well as for the overall year.

So that's net of discounts and rebates.

So you have about 2%.

And I think as we have looked at this over the last number of years, there's really not a whole lot of benefit for the top line for the company, we had 1% price for the quarter and for the year.

And that just reflects the competitive nature of the market place.

In terms of the creditor.

We try to give you pretty big guidance on our products.

In terms of guidance or expectations on other company's products, you know, you will have to talk to them.

I think one thing we did say we thought was a reasonable expectation with crestor coming in is the market could resume growth one the B acal withdrawal, it was a negative message to the market and pulls a lot of tidzing and studys out of the market.

And we said with crestor coming in with a lot of promotion and new information and also for aus launching the heart protection study which is an improved message with physicians as well as patients in term of patients today who might not even consider for drug then, Zocor 40 milligrams and certain high risk patients showing a reduction no cardiovascular events we thought all of this together could contribute to market growth.

We did see.

That the HMG market concerned all of you in the quarters -- the beginning of the year as that growth rate inexplicably declined.

I think the launch of crestor, that market has resumed growing.

Now it's back up around -- I think it was 8% in the quarter.

That's probably 6 or 7 for the yoor but, remember back in the second quarter it was very low, single digits.

Low single digits.

So the growth rate has resumed and part of that was crestor.

I think we feel comfortable with a comtive plan with Zocor and the managed care plans and the new study and then, of course we look forward to launching through our joint venture with Schering-Plough the combination product, which really brings something new and different to the market that you can't get today really with any HMG.

Next question?

Our next question, David Moskowitz of Friedman, Billings, Ramsey.

Good morning, Mark.

A couple of questions.

Number one, would you like to quantify that writeoff in the gross margin on MX-869.

That would be helpful if you have it.

Number two you had a price increase on Zetia.

You mentioned 5.9%.

Can you talk about the policies of the JV, you know I see you guys are matching inventory.

Can you tell us how the JV is handling Zetia and if, in fact there was a buy-in in the fourth quarter.

And then, three, can you talk about your guidance as it relates to Arcoxia.

Are there expectations for revenues this year as well as in your flat SG&A guidance, costed associated with the product's launch?

Sure.

Okay.

For the -- in terms of Zetia, no, I can't speak on behalf of trade terms for the joint venture.

That's not specifically part of this program.

But I have no indication there was actually a large -- really any substantial buy-in, in the fourth quarter.

This he actually had a price increase earlier in the year as well and I think there could be a buy-in in the second quarter in anticipation.

I don't think there was really any in the fourth quarter but I don't have true transparency on that but just going from what we know.

In terms of Arcoxia, because we filed right at the end of the year and you are looking at a 10 to 12 month window, we haven't assumed a whole lot of contribution in terms of an Arcoxia launch in the U.S.

I will be clear, that has to do with the timing of T. it has nothing to do with the filing of Arcoxia or the filing of the application or the FDA or any of Tim Anderson's questions.

So in terms of the flat SG&A for the year, one, recognize this year it was bumped up, about a 10% increase, so that reflects the launches of singular AR, and the DTC, the launch of Emend and Arcoxia is rolling out worldwide.

So we bumped up the race there after holding it steady for a couple of years.

So we think with that base, as well as the sum -- some some savings contributions from the restructuring program in SG&A, we're in a good position to fully promote these products.

But in terms of Arcoxia, at this point, since it's so early we have not made aggressive assumptions on timing in terms of either launch or sales.

So as we get closer to the end of the career and greater visibility, that may be something we have to revisit.

But we're not assuming -- year and greater visibility, that may be something we have to revisit but we're not assuming much.

The next question.

JB Reuben.

I'm concerned about the guidance for 2004.

There have been no clang to any of the revenue components except there were changes to R&D which is now expected to be in the low teens verse su low to midhigh teens and the als Tra Zdenek, apayment which is expected to be down.

If you look at the swing factor that should add about 400 to 450 million in profit or more than 12 cents to the bottom line in '04 and I know you explained earlier in the call that the change in AstraZeneca guidance doesn't affect guidance and I just don't understand.

That if you could explain, that with be great.

Okay.

Sure.

As you mentioned Jamie, in terms of a number of the -- the major product components we did not change the -- we did not change the guidance ranges on the products.

In terms of some of the other components, in terms of the AstraZeneca, the guidance changes reflect just greater visibility on where we finish this year.

Okay?

So at the time we first gave that guidance, we -- we had to, of course, forecast where we finished this year and then we're saying we expect to be down 15 to 20% next year.

What we're seeing now, as I mentioned, we described it in the supply sales being down, actually.

There's a larger decline in Prilosec as we finished out the year which ended up taking us to the same level.

So we in a sense have had that effect in the same quarter.

So year over year, the AstraZeneca dollar guidance didn't change.

Nouf I recognize I didn't have dollar guidance before and that's why we're giving it to you.

We finished at $1.9 billion and we expect $1.9 billion next year.

At the time we gave you that guidance we were expect maybe $1.9 billion for full year '03 and then we would have had a decline.

So really we're driven by Nexium going forward and not Prilosec.

So there's not a net boost from that, just greater clarity on that, begun given all the caveats that go with guiding on that line which we'll continue to update.

In terms of your statement on R&D spend, actually that -- that did not change.

The guidance for full year 2003 was mid to high teens and we came in at 19%.

But the guidance that we gave on December 3rd for 2004 said R&D of Lee he teens percentage and we reaffirmed low he teens percentage.

That's not a change.

It still represents a healthy increase and in absolute dollars, you know we finished at the high end of our range but we're carrying the same guidance into next year.

And then in terms of -- you know as we mentioned SG&A, again reiterated flat and that's a combination of investment behind the products, as well as savings from the restructuring program.

And as we work through the rest of that program, I know we still give it a range this year, for the 75 to 125 million dollar impact.

That's not part of the SG&A guidance but clearly whatever savings we're getting in the year from this program could also be recalculated as we move through the year.

So we've given the best view that we can at this point but I think from December to now, there hasn't really been a lot of net change in where all of these components are, maybe just a little bit more granularity where etch un is and we'll update that throughout the year.

Next question.

Our next question comes from Steve Scala of SG Cowen Securities.

Could you, I have a question of income guidance of 650 to 750.

I assume this includes the pretax priority return and pretax accretions to 580 and if so, why will the equity income from operatingenities be so low in 2004 of 70 to 170 million.

It would appear to be fairly modest and relatedly could you run through again the Astra ZdenekA partnership profits impact on equity income?

I understand Astra U.S. is included in equity income but why some Prilosec and Nexium affect this line?

What else is going on at Astra U.S. that is has impacted Merck beyond Prilosec and Nexium?

Okay.

There's a couple of factors here.

We have this partnership with AstraZeneca, as you know, Steve, resulting from the restructuring of the -- of the former joint venture.

As a part of that restructuring of the joint venture, we contributed certain assets and so did AstraZeneca and the proceeds of that partnership show up in the equity income pickup line.

There are several components to it and this is all laid out in our -- in our annual report, but just in brief there's a fux priority return of about $300 million.

That's the only fixed component.

The rest is variable.

There's a portion that comes from Astra U.S.A product royalties.

There is a small share of partnership returns and then the biggest piece is what's called our share of retained GAAP earnings.

So there's a lot of complicated accounting behind that but aasided from the fix amount of 300, the vest are variables.

It may have been developtively stable because that line was about -- the contribution from AstraZeneca, in fact, to equity income was 640 the last several years but only 300 is fixed.

Really the sweet factor here was the retained GAAP earnings.

So if you think about the partnership, you know, a couple of those products in there being Nexium and Prilosec, the dynamics at play that affected our supply sales also affect the profitability of the partnership and there were therefore lower profits from the partnership so that affected equity income.

Without trying to confuse it, you can think of this also as, you know, maybe a cleaner example is meriall animal house.

It is a joint venture and if it generated a profit we split that profit.

Now separately from that, we also are the supplier of certain products to the animal health business and in that case we capture certain supply sales.

It just happens with AstraZeneca the dynamics of this are are much larger in terms of absolute numbers but it is the very same thing.

So it is our share of partnership profits came down, as a result of the dynamics in the PPI.

That affected the equity income, just as it affected the supply sales.

As you head into next year, what we're expecting then is the AstraZeneca situation is what it is and we'll have to obvious monitor that throughout the year, both what happens with the market place and the supplys and how it affects the partnership but it is rebounding.

The rebounding you see the 495 or so, up to a guidance of 650 to 750 is also reflecting a positive contribution next year from Merck/Schering-Plough partnership.

That partnership was negative.

We've been around 640 a year and I guess you could say that it netted out to about where the Astra ZdenekA equity income payments were but then you had various offsets like the cost of setting up the JV partnerships but heading into this year as I said in a lot of detail earlier the impact in the year and particularly the quarter from the AstraZeneca piece.

So that hit.

That hit equity income.

That will continue it play out next year but we'll also get the benefit from continued growth of Zetia through the partnership with Schering-Plough.

So I know there's a lot of complexity to that and a lot of moving parts but that's why we felt it appropriate to give you guidance on that line specifically which is the 650 to 750 and reflects all of those components.

Next question.

Our next question Ken Kulju Credit Suisse First Boston.

We have higher co-payment costs going into effect on January 1st.

I wonder if you quantify your view on where you saw the co-payment increases go into place for the first quarter, and has that created some of the uncertainty in terms of the your quarterly guidance?

Should we expect some relative downtick in overall prescription activity, similar to last year, or is the inventory situation just sill largely working through your first half numbers?

Sure.

Okay.

Thanks, Ken in terms of the co-payment, I mean, it's a very interesting question, and I think, you know, all of us saw a decrease of slowing overall growth rates early last year and I think a lot of people attributed all of that to rising co-pays.

I don't think that was our perception.

There may have been some of that as co-pays go into effect.

At this point I don't have that specifically on what has happened to co-payments.

You know in the first three weeks of this year.

There's some data and a publication recently that was published by Medco and Harvard showing that there can be unintended consequences in terms of rising co-pays clearly that's not what payers and healthcare plans want.

They want to create some elasticity in terms of choice between products and driving the preferred products, which is why it is so important to have the preferred positions on formulary but if people just stop taking it, it's not the right outcome for anyone.

It will continue to be looked at very carefully by all parties involved.

It's clearing an unintended consequence but I can't tell you specifically what happened this quarter.

So I would say to your point as a macro question, is a macro environmental risk for this industry.

That it makes it all the more important that you have products that, you know, have the clinical profile, as well as the competitive pricing that your cost structure allows in order for you to be positioned very well with managed care, a co-pay can be a factor.

So that's acontributing to an overall macro.

But in terms of the guidance on 1q.

That has nothing to do with the macro but that's really the micro question.

We're just getting through this program.

Buy-in and buyout is always estimated anyway.

As we're starting to get better information from the inventories we'll inbound a better position to predict where that is.

We're not ready to go there and the comparison year over year could be very lumpy depending on what happened last year.

So I can't give you a quarterly pattern for the year but as I said as we get from each quarter and we have a sense of where those products are and then how their inventory and sales compare to the prior year time period then we're able to tighten up guidance but I expect next month, sometime the middle of February, ray month from now or so we'll be able to give -- a month or so from now, we'll be able to give you a better picture on the snapshot.

There were a handful of analysts estimating the first quarter as it is.

And I suspect they are struggling with some of the same complexity.

We look forward to giving that guidance but that has nothing to do with the co-pay issue.

Next question?

As a reminder, star one on your touch-tone phone.

If your question has been answered, press the pound key to remove yourself from the queue.

Our next question Scott Henry Oppenheimer.

Good morning.

On the modeling end, you know one-time events are playing a larger and larger role in terms of the disclosure of operational earnings.

I was hoping that you could give some guidance in '04 in regards to your expectations for restructuring costs as well as asset sales and any milestone payments with regards to milestones I believe your agreement with Schering-Plough called for about $152 million with $20 million already being paid and I was wondering if any of that was going to fall in '04.

Okay.

In terms ever -- I guess what you are calling operational earnings, what we report is earnings.

So it's pretty simple, continuing operations for us just means no Medco and it's GAAP and everything is in there and whether it hurts us or helps us in the quarter or year over year and you have seen that consistent pattern, such as the second quarter this year when a lot of people didn't expect the end process of R&D from Bonu, and we'll continue that practice of reporting strictly with GAAP and guiding that way, but what we'll do is each quarter, you know, go through these details and even guide for it.

So we've described the impact of the wholesaler program and that's largely behind us.

The restructuring program is something that will affect us next year.

Now for your -- for your purposes in terms of modeling, I mean, I can't tell you what to include or exclude, but just for some analysts who are posting, the company's guidance is always going to be to be an a GAAP basis which I think is how most people are doing their models now which is appropriate generally but certainly for Merck.

In terms of the milestone payments I don't have anything specific there for you, but, of course that will be embedded in the guidance that we give if there are expected milestone payments N. terms of things like asset sales, you know, it's not something that we can guide to.

I mean we announced in early January, maybe predicted the timing or the size of the Agristat investment.

So there can be these one-off events.

There's no particular pattern to them, our, which is a challenge that I realize.

But in all of these cases even though there are one time they are all previously announced we announced the Agristat divestiture.

It was released by our partners.

So we're capturing it in the quarter that it occurred.

Bonu tender was offered and then announced.

I realize they're tough to model.

So we're just going to continue with that practice of giving you the clarity when we can, giving you the advance on these things when we know them.

And then settling them up each quarter.

Next question?

Our next question Carl Seiden JP Morgan.

Thanks a lot.

Mark of my questions have kind of been asked but I'm not crystal clear on the answers.

One is a follow-up on Steve Scala's question about the equity income.

I also had thought that there was a fixed element to that, which was this $580 million per year, we should run at $145 million benefit per quarter and I guess my specific question would be if that's roughly right, the fact that you showed only a $6 million gain there implies that your share of partnership profits in the quarter was very, very negative to the tune of, you know, down 140 million.

What you described relative to Astra, I can understand why there's nothing Po positive there.

I can't understand why there's something negative there.

What I come out is that that's roughly reflective of the run rate loss on the Schering-Plough JV.

So that's my first question.

The second, if I could is really a follow-up on Barbara Ryan's question.

I understand your philosophy about GAAP reporting, but as you know, many of peers do have a less purist approach, something that would help us do an apples to apples comparison if you could.

On $195 million restructuring, can you just tell us what that was after tax?

And on the $84 million gain on Agristat, what that was after tax.

Thanks a lot.

Okay.

In terms of the equity income piece, it -- as I mentioned in the question to -- the answer to Steve's question, the 580 is not fixed.

In fact the numbers going back for the last three years, 2001, 2002, the total was 368, 343, 640 that's been pretty steady and only 300 is fixed and the other pieces are variable returns on the Astra U.S.A products and a 1% share on profits and then our share of retained GAAP earnings and that has to do with the difference between partnership GAAP earnings and schedule M tax earnings.

It is complicated in terms of partnership distribution.

What you are seeing here in the quarter, also reflects, obviously, the effects of all of the joint ventures.

It would include the joint venture of the partnership with Schering-Plough.

On that line in particular, as we said during the year, I don't know that you can think about run rate on that one.

Because that will be affected by the timing of spend by the JV, by the clinical trials that they are doing and that flows through the equity income.

We still saw a loss for the year we have given greater quantity on what we think AstraZeneca will be on supply sales.

The same factors drive equity income.

So all other things being constant, it would behave similarly.

Although since it's variable and includes other are parts I can't guide to that completely specifically.

And I think most importantly we have given you guidance on where the total is going to be.

When we get to the annual, as we always have, break these down, and you will see a decrease in the year over year for the equity income for AstraZeneca but if you look at the total income line we expect it to be 650 to 750.

In terms of the -- I guess your point on the purity of guidance and, you know apples to apples, in terms of both the restructuring as well as the Agristat we won't guide to all of these things individually.

We think of them as generally U.S. items.

Tax accounting is extremely complex for a large multinational such as us.

So I can tell you that those things were primarily U.S.

The wholesaler is entire U.S. and so those are the things that the restructuring and the wholesaler program, again that decreased income in the U.S. and that had the effects with the tax rate.

But I can't give you a specific item and that would clearly move around quite a bit.

So we just get through the quarterly and the year and, again the guidance and you see the guidance for next year is slightly lower for next year at 28 to 29%.

Next question?

Our next question James Kelly of Goldman Sachs.

Thank you.

My question is -- my question has to do with the statin OTC meeting in the UK last week.

I think was on Friday.

And I was inned if there was any outcome from that, that you -- interested if there was any outcome from that, that you could share with us.

No, to be honest, Jim, I don't have anything recent from the meeting last week.

I can tell you generally this is something that we have been supportive of and pursuing our joint venture, the J & J Merck healthcare consumer division.

Zocor is off patent in the UK and given its track record, the efficacy and that so many people continue to be untreated or undertreated.

The UK authorities have been receptive just as the FDA signaled an increase willingness to consider over-the-counter status for these products.

In the case of the UK, it's a behind-the-counter product, as they call T. it is a hybrid.

You have to ask for it from the pharmacy but it's no prescription required.

So that's something that we are pursuing there and I know they have been receptive but I don't have the proceeds from what happened last week.

We have said that we will also continue toe pursue that option in the U.S. with Mezzocor going over the counter and in both of those cases it represents track records and safety combined with the people not being treated but we see this as a different market from the prescription market because you are talking about lower doses and as the market has clearly gone to high efficacy standards and higher doses, it's important to those with established heart disease, those people need to be under the care of a physician and on Zocor 40 milligrams for example.

But in the case of, you know, patients who don't go to the doctor or self-medicate or go untreated or use other over-the-counter or health food supplement type of approaches, you know this is something that we, the medical community and the health authorities are all agreeing, you know may be a better option.

So we're pursuing it but I don't have the specific update on what happened last week.

As you guys -- it was a pretty busy week for me last week.

Thanks.

Next question.

Our next question, Jennifer Pearlman.

Hi, Mark.

I'm wondering if you could -- this is again more of a macro question.

I'm wondering if you could comment a little more on the company's ration nal and the process behind your having taken this industry-leading roll in terms of negotiations for these new distribution contracts under the just in time model.

Okay.

In terms of the overall program with the distributors, this is tough because companies individual policies with their distribution customers, you know tend to be contractual and proprietary so we can't necessarily say exactly what everybody else is doing.

I can just speak in terms of what we are doing in terms of the customer response.

In the past, we have not placed really much in terms of the restruckion on what they could order and that led to a system where they would increase in anticipation of price increases, which were never preannounced and there were no incentives but they would increase their inventory levels ahead of the anticipation of an increase and once the increase occurred, their orders would drop off as the inven tore Is came in and it would lead to the buy-in and buyouts and lead to fluctuations this is not really efficient for Merck and the zrks.

We have less transparency for ourselves and the respective shareholders.

So we worked with them to come up with a system that would be basically income neutral for both parties but take all of that inefficiency out of the system and the response has been very good.

I know shortly after we announced it or actually put it in place one of the major wholesalers called our chairman and thanked and congratulated him on taking an industry-leading role and in the wholesalers mind reflecting the way of the future.

So we think it's a system that will work well for us, as well as for the wholesalers and I can't speak to what other companies either do or are contemplating doing.

We thought it was the right thing for our business and certainly I think for financial analysts as well as the guy that has to communicate the financial analysts, this whole area of transparency and clarity about what is driving the business really gets a lot better.

So those are really the benefits we see.

Mostly on the efficiency and then the transparency for IR is a nice side effect.

Next question.

Our next question Tony Butler Lehman Brothers.

Thank you, good morning Mark.

The questions around price increases that awe lewded to before, and specifically on Zocor.

You alerted to about a 5.something price increase in November and I'm simply asking has -- have price increases for Zocor actually been sticky?

That is to say, has there been a change such that the amount at which Merck may be needing to rebate is exceeding the price increase, especially as of late?

Thanks.

Okay.

In terms of pricing, it was actually 4.4%, not 5.

So 4.4 is the -- I guess announced on October 31st so effective November 1.

Now, obviously for competitive reasons I won't go into pricing strategy, product by product, but I guess remind everyone that the catalogue price is just one factor in the overall prices.

In Zocor, in particular, you know there would be a range out there considering that we're the exclusive branded statin on the VA Department of Defense formulary it's a highly discounseled mark but one that we have a high market share because it's a closed system.

It makes sense T. generated income for the company and those prices are not part of the Medicaid Bev price rebate calculations since it's a separate government agency.

So there's one example where price is quite different.

As you move into managed care, it's also highly variable because essentially with HMOs and PPMs these are performance-based contracts.

That is in the form of a percentage discount in the form of a rebate, but it is tied to performance.

So as you can imagine in terms of the variety of managed care plans out there, the old standby you see one managed care plan, you've seen one.

There's a variety of plans in terms of their willingness and aublt to control or shift share and the more they are able to do in terms of the high control plan they are able to increase rebate which for that plan effectively lowers the price but for us generated income.

It is really a mix across the board.

At the macro level you can see for Merck we break it out each quarter.

We don't really generate much out of price after the discounts and rebates, as I said about 1% on the top line.

A couple of percent in the U.S. this year.

I think it's more like 1% in recent years.

So -- so that's really where we are.

Primarily volume driven with this variability in pricing across the different segments.

Next question, please.

Our next question comes from Ken Reinke.

Thank you, my question is the relationships with medical situations.

Have you seen any sort of change in the contracts and the relationships with medical and Merck?

In terms of -- I'm sorry, could you repeat it.

I'm sorry -- sure.

Yeah.

Last year you completed the spinoff of medical divisions.

So since spinning off, have you seen any significant contract change with medical?

Oh, okay with Medco contract changes?

No, no significant changes, as we have talked for a long time, we always had dealt with Medco at arm's length from the pharmaceutical business and had to, you know, negotiate terms with them just as we does with other PPMs even they are part of Merck and similarly Medco negotiated with Merck, the sway it did with other manufacturers.

We have actually had a managed care contract in place, since the middle of '02.

Back when we first started talking about the IPO and so estnlly the spinoff happened last year and the contract is in place.

Now as we got to the spinoff, there were a few changes which were are part of the regulatory requirements, which was tightening up and improving a little bit after we had a year's worth of experience and knowledge with it.

Fundamentally no change but, again it was already done and had operated independently.

Were running out of time here.

I've been told there aren't many questions left.

We don't have visibility on this, but due to timing and respect for people's schedule we'll take the last question.

Steve.

And our final question, David Moskowitz.

Friedman, Billings, Ramsey.

Yes.

Just one follow-up.

I want to take issue with the AstraZeneca supply guidance.

You told us that you achieved $1.9 billion in sales.

That's 28% growth.

And that sounds to me like you more than met expectations which were set at more than 20% growth even with a a disappointing 4q T. looks like the raised growth expectations is an uptick and should affect guidance, and this line item is already hard enough to model.

So, you know I would like to try to get more confidence in the guidance going forward.

Can you talk about that.

First of all, when we said it would come in AstraZeneca supply sales would be greater than 20% for the year AstraZeneca supply sales would be greater than 20%, there's a broad range.

We never guided to 20 and it came in at 28.

Again, remember we have -- we can't forecast this one with the same granularity that we can with the other products where we are managing the promotion and the pricing and talking to customers.

We have visibility on our inventory we are working with the wholesalers.

We don't have any of that.

We have some visibility on the orders.

We're always at risk on pricing, or trade terms that AstraZeneca has put in place.

What we have done is updated that as best we could throughout the year.

Now we had earlier in the year said double digit.

I think a lot of people said it would be more than 10.

We knew it would be more are than 10 and we said north of 20 and, in fact it came in north of 20.

What I said is the fourth quarter is less than expected and therefore it would have been more than 28.

If you want to take exexception with that I guess I will take exception that it's troubling to model this because what I have said this quarter is we have given you an explicit number $1.9 billion, we said it will be aprx matly the same level.

As our visibility has increased on what is actually going to come in at, as well as recognizing this is tough to model and we have the different moving parts, I think it has gotten much cleaner.

Prilosec is basically out and Nexium is growing.

And as I mentioned earlier, we'll cheer from the sidelines for Agristat for next year.

And then we'll continue to update that in the out years.

With that, we're running close to 10:30 here so I want to thank everyone for your patience and participation.

It's been a long call and a complicated quarter but, again we brought closure to a number of important things and got some new initiatives underway and look forward to updating you on our performance from 2004.

This does conclude today's conference.

Thank you for your participation.

You may now disconnect.