默克藥廠 (MRK) 2004 Q1 法說會逐字稿

Good day, everyone, and welcome to the Merck first quarter 2004 earnings conference 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.

Please go ahead, sir.

Okay, thank you, Audrey, and good morning, everyone, welcome to the call.

By now, you should have our press release, as well as the additional financial disclosures sent out and those have been posted in the finance section of merck.com.

So just a brief summary to get us started.

As you see here, the first quarter earnings per share number was 73 cents as compared to 68 cents last year, an increase of 7% and a penny ahead of the First Call [INAUDIBLE], but in line with the guidance that we gave you last month.

Now, of course, this is just for the company as it exists today as the core pharma.

You will see lower down in the press release, the corresponding number for last year, which included Medco, and all the Medco contributions have been classed as discontinued operations.

So the number for this year is 73, and the relative comparison to last year was 68.

It was a busy first quarter.

There are a number of announcements that you've already seen on actions that we've taken to enhance our long-term position.

I'll just highlight a couple of those.

There was the licensing to the U.S. market of Gaboxadal, that's a Phase III compound, Lundbeck [PHONETIC], for the U.S. market for sleep disorders.

There was the acquisition of Aton Pharma, with their Phase II cancer compound.

We completed the Banyu acquisition and now have gained 100% of the income from our business in Japan, making that now a wholly-owned subsidiary of Merck.

And, of course, we announced the sale of our equity stake in the non-prescription European business to our joint venture partner, J&J.

In addition, we have continued to make progress on two important that initiatives we started at the end of last year, namely, the new U.S. distribution program with wholesalers, as well as a worldwide restructuring program to lower our costs.

Now, the impact of all of these actions is included in our results, nothing has been excluded, and we continue our practice of citing only the bottom line GAAP results.

But as usual, I will walk through each of these to give you the transparency of each item and how they affected the quarter.

Before I move on let, me just review the Safe Harbor language.

During this call, we may discuss certain subjects that contain forward-looking information as defined in the Private Securities Litigation Reform Act of 1995, which may include items such as guidance and earnings and other income statement components, payments related to our growth rate expectations and product positioning relative to competition.

Actual results could differ materially from those that may be projected in these discussions.

Additional information concerning a number of factors that could cause actual results to differ materially from the information that we will provide today is available in our most recent 10-K, which is posted on our website.

Let's start with the P&L review, I will refer you to page 10 of the press release.

And we'll just walk through that.

You can see on the top line, sales were $5.6 billion.

That's up 1% over last year.

A couple of key drivers of that different direction: There's 11% growth of our five largest products on a worldwide basis, there is a 5% benefit from foreign exchange across the line; but an offset to the growth, really two factors that I would highlight, one, a decline in revenues from our relationship with AstraZeneca -- I will comment more on that later, but that just reflects the generic competition for Prilosec -- and also, there's and impact of about $100 million of buyout adjustments that came as a result of the new wholesaler program introduced in the fourth quarter.

Now you recall that this is a program that will moderate the fluctuations and sales from its wholesaler purchasing patterns in the U.S., as well as improving our efficiency in that for the wholesaler.

So as opposed to prior periods where the buy-in and buyouts really were purchase behavior, this buyout just reflects the -- the wholesalers, rather, taking their inventories down across the entire Merck product line as part of the program.

So the good news is, the implementation has gone very smoothly and we now see two to three weeks of inventory for each of our major products, as well as lower inventories overall for Merck and we now expect these inventories to remain in this range.

As we indicated last quarter, there might be a little bit more buyout effect through this implementation.

It's gone very well, and now we're where we want to be.

Recall that in the past, we averaged a month or less of inventory per product, but we could see build ups of up to two months on individual products, and then we would see the large buyouts after that.

So we now see these lower levels that we expect to be maintained going forward.

There will still be some lumpy comparisons to last year until this annualizes, but these quarterly sales should now reflect the actual demand for the products, as I said, with some adjustment this quarter on the inventory.

In terms of the first quarter buy-in/buyout adjustments, we are really now down to a level of only about 25 million or less for any individual product.

And this really now gets down to approaching our ability to even estimate this with any accuracy.

So at this point, we don't expect to provide buy-in/buyout adjustments any more at the product level, because we are really where we want to be.

There's some impact on the overall, but very happy with where the program is.

Now, just as a reminder, last year's first quarter had a small net buy-in of 30 million, so it's a slightly negative compare. 100 million negative this quarter, so 130 swing.

There are some bigger effects at the individual product level compared to last year, and I will go through those as we normally do, but we're seeing sales now more in line with demand, fluctuations reduced.

Next quarter sales should be more straight forward, but just keep in mind on the top line, it's a comparison to a $400 million buyout, which we had in the second quarter of last year.

The good news is, this thing is getting behind us.

We'll still have some of the base period, but well underway.

So all of that is just on the top line.

So let's just start moving ahead now.

Moving to materials and production, $1.1 billion, that's up 3%.

That gives you a product gross margin of $80.2%.

Now recall that the PGM percentage was much lower this most recent quarter, the fourth quarter; and as a result, there were a number of factors in the quarter that we described.

But we'd indicated at that time we would expect it to bounce back, as you can see it has, and in fact, is in line with our full year guidance, which we've reaffirmed, of 80 to 81% cents.

Moving to marketing and admin, the expenses were $1.6 billion, that's up 6%.

Included in that number is $34 million in the restructuring costs, and that's from the program we initiated in the fourth quarter and are continuing.

If you were to exclude those restructuring costs, marketing admin was up 4% for the quarter.

However, we're still guiding to flat growth for the full year, excluding the restructuring.

And so what we're going to see there is as we move through the year with this program completing, we'll also begin to capture some of the cost saving benefits later in the year.

So for the full year, again, as we said last quarter, the total restructuring costs for full year expected to be in the range of 75 to 125 million.

And just to be clear, these costs are included here in the results.

We have not excluded anything, but we're continuing to provide the guidance for you on the costs separately, and the ongoing marketing admin, just to help in your modeling.

Now, the R&D line: You'll notice here, a figure of close to a billion dollars, the largest we've ever had in a quarter, that's up 23%.

And that growth rate is certainly ahead of our full-year guidance.

But this quarter was affected by some significant actions that were previously announced.

So I just want to talk a little bit about this line.

First of all, of course, it includes the ongoing investment in our pipeline through our internal efforts, but there is a $70 million milestone payment, and that was previously announced, and that's associated with the licensing for the Gaboxadal, this Phase III compound for sleep disorders, that we're developing with H. Lundbeck of Denmark.

And as a reminder, we've indicated that we'll work with them on the development, and we expect to file that product in the U.S. in late '06 to early '07.

Now similar to what we were saying about the restructuring expenses, we are including the licensing milestone here rather than excluding it or breaking it, but we're giving you this detail.

However, unlike restructuring costs, these licensing milestone fees are part of our ongoing R&D strategy and part of our guidance, and it's really integral to this overall effort, so we will include these in the guidance, just as we will continue to report them as part of this line.

Now, also in the R&D expense this quarter is $125 million, and that's acquired R&D expense related to our acquisition of Aton Pharma, also previously announced in the quarter, and that's a private biotech company focused on cancer research.

Now from speaking with investors and analysts, I don't think there's quite a consistent understanding of how this acquired R&D expense works, so I just want to talk about it for a moment, because it's important in understanding what we're recording, but also how we're guiding.

In the case of a small targeted acquisition like this, most of what you are paying for, in this case is Aton's research, including a promising Phase II compound known as SAHA, that's S-A-H-A, which is being studied for cutaneous T-cell lymphoma and it's in earlier phases for other types of cancers such leukemia, [INAUDIBLE] myeloma and solid tumors.

Now out of the total purchase price in an acquisition like, this, as would you expect any assets are recorded on the balance sheet at fair value.

But the value of the research pipeline in accordance with the FAS-B rules gets expensed, and that value of the research is a valuation-based analysis.

It includes anything that is from preclinical, up through, but not including, product approval, which is where this company is at their stage.

Now, if there were any products that were already on the market or FDA approved -- and, again, there aren't any here -- those would capitalized as assets, but anything not yet approved is deemed, quote, in process R&D, that term is used and those costs are expensed, just like internal R&D is expensed and any future contingency payments based on the research and [INAUDIBLE] with Aton, will also be included here.

If we try to pull this all together, we have talked for sometime about how this external alliance activity really supplements internal R&D, and we managed in such a way that we allocate R&D against the best scientific opportunities available, regardless of where they occur.

So with that in mind, we have included the expenses for both internal R&D and external R&D in the R&D line.

It is, after all, real money spent on the research pipeline.

So while there's variability in how companies will report acquired research, including it in your GAAP results is not optional.

That's a requirement.

And we felt that we would aid the comparability to show it this way, since it reflects how we manage it and also reflects the underlying economics.

So these actions, such as Lundbeck and Aton, are entirely consistent with our strategy.

So it's all in the R&D line, but I have given you specific the breakouts.

Now as a reminder, in 2003, last year's 1Q, there was a similar kind of charge that is a $90 million expense for acquired research, and that was a value of the Banyu pipeline related to the incremental increase in our ownership of Banyu from the first tender offer in the first quarter of last year.

So that $90 million is included in the base period so that we can keep this as apples to apples, and it's all included in our guidance, and that guidance we're increasing from previously.

So for the full year 2004, we expect R&D expense to be in the high teens.

Moving down next to equity income, we came in at about $195 million.

And that's about double last year's total; although that was a low quarter last year, compared to the historical figures.

So we have an easy compare here, but recall that, again, back in the fourth quarter, the most recent quarter, this figure in equity income was only $6 million, and that was largely driven by the impact of the generic competition for Prilosec on the AstraZeneca partnership.

So we indicated that we expected total income -- or, I'm sorry, total equity income -- to bounce back this year, and of course, we continue to see improvement from our partnership with Schering-Plough.

So overall, we expect equity income this year of $800 to $900 million.

That is an improvement over the recent years, as this line benefits from the positive contributions from the Schering-Plough joint venture, which, as a reminder, was a loss in 2003, and we expect it to be positive it year.

And also as we move later in the year, we'll get the annualization of the generic competition for Prilosec and the impact that that has had on the relationship with AstraZeneca.

Now just a couple of other comments here on the AstraZeneca relationship.

Beyond equity income, you are aware that we also record sales in the top line for products which we manufacture and ship to them, and most of this is now driven by Nexium.

Now in the past, as we discussed on these calls, we have recorded these sales when we shipped to AstraZeneca.

And in sales corresponding to orders from AZN to us, but that didn't necessarily correspond in the same quarter to AstraZeneca's sales or prescriptions -- and I know this has been a modeling challenge for some of you.

But you're, of course, aware of the current dynamics of the PPI market now.

We've got multiple generics, we've got over-the-counter competition.

This has created a lot of uncertainty in that market in terms of the future volumes and pricing.

So we are now revolving our revenue recording to now better take into account inventory levels at AstraZeneca, and also their shipments out.

We're taking those things into account.

So the net result of that is that from now and going forward, our sales will now more closely align with their sales for these products.

Let's see, let me -- let me move ahead to -- well, actually, before I move down to other income, on R&D I just wanted to confirm something here, look back at my notes.

I said that the spend would be high teens.

Of course, I meant high teens growth rate.

Last quarter, we said low teens and now we're saying high teens growth rate.

So just so there's no confusion.

And again, that includes everything, this year and last.

Moving down to the next line, income and other expense: There was income here of $241 million, and that's compared to a $48 million expense last year.

So you see a pretty big difference year over year of $280 million.

Now if you want to refer to the additional disclosures page where we break that out in a little more detail, there's lower interest income and expense, that continues the trend we've had for a while.

Next line, down here, minority interests, that's down a little bit with the Banyu acquisition, and that change is now largely annualized gong forward, since if you recall at this time last year, we'd only just completed first tender offer, which took us to 95% ownership.

So there really wasn't yet much impact on minority interest at that point in the quarter last year, but now we're at 100%.

Of course, that full impact is here and that's now annualized.

So you can see the big difference versus last year is really in the "other" column, and there's two drivers here that I want to explain.

First, there's a sale of our equity stake in the European over-the-counter joint venture to our partner, J&J.

I mentioned that earlier, it was announced during the quarter, and that resulted in a gain of $177 million.

The other important contributor to other income this quarter relates to gains on securities, but most of that relates specifically to the Banyu portfolio.

Now previously, because of minority interest in Banyu, our ability was constrained in terms of managing those assets as part of an overall Merck portfolio.

Now as a reminder, that portfolio has always been included in Merck's financial statements with an offset for the portion that we didn't control.

So there's no new money here, per se.

But with the complete ownership now of Banyu, we have restructured that investment portfolio in Japan, just to bring it in line with Merck's overall investment strategy.

So we've always had those assets there on the balance sheet.

But that portfolio was held at Banyu and invested in diversified portfolio consistent with the long-term investment horizon, but now that the acquisition is complete, we have moved to centralize that portfolio consistent with our overall portfolio management.

That resulted in sales of the securities, some of which were equities held for a long period of time, and that led to gains.

So that process is complete with the Banyu integration, so I don't expect to see that type of gain going forward; but again, wanted to be clear about what's contributing in that line.

Let's just stick on the "other financial disclosures" page and move briefly down to the joint venture detail.

I mentioned the improvement we saw in equity income, and here's the top line from some of those joint ventures.

You see nice increases in sales for the Merriel animal health business, also the [INAUDIBLE] MSD vaccines and in our collaboration with Schering, Zetia sales this quarter reached $190 million.

Of that, $169 million was in the U.S.

Recall that the product was just launched in mid 2002.

So we're comparing to the first full quarter launch last year and seeing very nice growth.

Now, it was a big quarter for that partnership, I just wanted to draw out a few highlights here.

In terms of Zetia, we're now over 5% of new prescriptions in the total lipid market.

And actually, about 8% -- 7.9% -- with cardiologists.

The total lipid market growth was very healthy, 16% in the first quarter, and that continues that upward trend in growth rate since really the middle of last year.

At this point, Zetia is launched in over 40 countries, and is actually approved in even more than that, but launched in 40, and we expect some additional European countries in 2004 as we work through the local pricing and reimbursement.

Now, as you are of course aware if you followed us, Vitorin, which is the next product in that collaboration, a combination of [INAUDIBLE] or Zetia with Zocor [INAUDIBLE] was recently launched in Mexico and Germany, and it's currently under review with the FDA.

And in Europe, that product will be marketed under the brand name INEGY [PHONETIC], but it will be Vitorin here in the U.S.

Significant clinical data continues to build for these products.

So just a brief highlights from some of the data at the American College of Cardiology meeting recently reported results of something called the Ease Study [INAUDIBLE].

That was a large community-based trial, over 3,000 patients, which showed significant increased efficacy in terms of LDL and [INAUDIBLE], when adding Zetia to a broad range of statins with different doses and a wide variety of patients -- cut across age, race, gender, various risk factors.

And so that study, again in the community setting, really speaks to the broad utility of [INAUDIBLE] therapy along with Zetia, along with the statin, across a range of products and patients.

Now the profile of Zetamide and Simvastatin, which is Vitorin, was highlighted in a comparison study against Lipitor, showed significantly greater LDL reductions, significantly greater HDL increases, and no difference in the overall safety profile.

So as you know, that's at the FDA now, and we look forward to bringing that to market.

Now, at the European [INAUDIBLE] sclerosis meeting just this week, we also featured a small study looking for the first time at adding Zetia to Crestor ten milligrams.

There were -- basically, I guess for some reason, came out as exactly as we expected.

There were no drug interactions, and we saw significantly better LDL lowering incrementally, with a greater percentage of patients reaching goal by adding Zetia versus Crestor alone.

So let's move back now and finish off the P&L.

Income from continuing operations -- again that's pharma, ex-Medco, was $2.3 billion, a growth of 6%.

Moving down to taxes, $724 million; that gives us an effective tax rate for the quarter of 30.9%.

That's a little higher than usual and it's up slightly over last year's first quarter, which was 30.3%, which was also the highest rate of any quarter last year.

Now, these rates move around quarter to quarter, as you are aware, but one factor that affected both periods -- that is, this year's first quarter and last year -- is the acquired research expense -- Aton this year and Banyu last year.

Recall from last year that the acquired research is not a tax deductible expense; therefore, it lowers your overall income, because, as I have said, it's real money.

It lowers income, but it doesn't lower taxable income.

So the net of that is you get a higher effective tax rate; and also contributing this quarter was the product mix, as always, and changes in our tax reserve position.

But for the full year, however, we're still reaffirming our prior guidance, which is full-year basis tax rate, 28 to 29%.

Moving down now to net income.

Net income for the quarter, $1.6 billion.

And, again, everything related to Medco is out of that line in the base period.

Shares outstanding, 2.23 billion, that's down 1%.

This quarter, we spent $228 million in the treasury stock buyback program, and that leaves us with 9.3 billion left on the current authorizations from the Board with no time limit.

So the bottom line, again, EPS 73 cents for the quarter, in line with our guidance and a cent ahead of the First Call mean consensus.

For full year 2004, we are reaffirming our previous guidance that we first actually gave in December.

And that is 3.11 to 3.17 for full year.

And in terms of quarterly guidance, as we said last quarter, the pattern for this year is going to be affected by the buying patterns in the top line in the last year comparisons, but we see to now be past most of that with the rollout of the distribution program, in terms of this year's sales.

There's still uncertainty in the PPI market, which affects the results from from the AstraZeneca relationship.

So we're going to continue our process of rolling out quarterly EPS guidance one quarter ahead at a time.

And for the second quarter, we are comfortable with a range of 78 to 82 cents, and I'll note that that's ahead of the current first quarter -- I'm sorry, the current First Call mean for the second quarter, which is currently 77 cents.

So, again, we are guiding to 78 to 82.

Moving into the products review: Overall, the wholesaler program has gone well, as I have discussed.

Clearly, the inventory levels are down, but we will continue to be aware of these past periods.

So again, $100 million across the entire line, with only small effects in the quarter on the major products.

So these figures really represent a pretty good measure of actual demand for the quarter, as you think about run rates for these products without the distortions from the past.

I'll just state up front that I will provide them, but we are reaffirming all the product sales guidances for 2004 that I gave last quarter; and, in fact, what we originally gave at our analyst meeting in December.

Now again, keep in mind that next quarter, that is second quarter, there was a $400 million net buyout in second quarter last year, which we reviewed in detail by product last year.

So just working down, alphabetically for the major products For Cozaar/Hyzaar, sales $629 million.

That's a 1% decline.

Contributing there is 19% growth outside of the U.S,. so continued strong growth there.

The U.S. was down 24%.

And that's largely because of a $60 million buy-in first quarter last year.

So that's an unfavorable compare; but again, this year -- this quarter's number -- looks pretty good.

The full year guidance remains $2.7 to 2.9 billion.

Sales were $659 million, that's down 4%.

Similar story here.

Strong growth, ex-U.S., 39%.

In the U.S., we're down 22%; again, in negative comparison, last year there was a $140 million buy-in.

I should mention all of these buy-in/buyouts are the same numbers I gave you at first quarter last year.

I'm just reminding of you what they were, but certainly nothing has changed there.

Also a reminder that just last month [INAUDIBLE] financially launched a new oral solutions once weekly dosing form.

That gives additional flexibility to patients who prefer liquid versus tablets.

Also, there is a 4.9% increase in March, so not much effect for the quarter, but just remodeling going forward.

And the guidance for the year remains 3.0 to 3.2 billion.

Singulair: There was a buy-in last year of only $30 million -- but we're still up -- that's a buy-in -- but we're still up 34% to $623 million.

Still see strong growth in the U.S., 28%, even with that negative compare; and, of course, we're now just beginning our second full season of allergic rhinitis, having launched that at the beginning of last year and, of course, we're still growing well in asthma.

Like the other products, I mentioned growth outside the U.S. also remains strong, 48% in the quarter.

So collectively, the guidance for Singulair overall worldwide in all indications for 2004 guidance, 2.4 to 2.7 billion.

We also have a favorable -- I'm sorry, this one we have a favorable compare, because there was a $70 million buyout last year.

So sales this year is $661 million.

That's up 30%.

The U.S. growth was 28%, driven by that buyout comparison, as I mentioned.

Outside of the U.S., growth for Vioxx remains strong at 32%; and actually for full year last year, this data became available during the most recent quarter.

Vioxx became the leading instate outside the U.S. passing that [INAUDIBLE] for the first time.

Also last month, the FDA approved Vioxx as the only [INAUDIBLE] approved for the treatment of migraines.

We also had our first ex-U.S. approvals.

So we started to roll that out.

Just highlights from some of the upcoming meetings, or recent meetings this quarter.

At the American Academy of Pain Medicine, just last month, we showed data from a study showing comparable pain relief with Vioxx to Bextra, 40 milligrams BID.

As a reminder, that's two times the highest dose of that product studied in postoperative pain.

So again, reinforcing the very strong efficacy of Vioxx 50 milligrams.

And coming up next month, American Pain Society will show our first study of Vioxx 50 milligrams in perioperative pain, and that's from a gynecological surgery model.

So that data will be out next month.

For Vioxx, there was a 4.8% increase in March.

And while we're talking about the Coxhib [PHONETIC], since we've [INAUDIBLE] on that basis, just point out, our Coxhib were $30 million outside of the U.S.

And of course, as there's no change in quarter, our filing was accepted by the FDA for a broad range of indications, so we'll look forward to bringing that to market.

But no sales in the U.S.

Coming up at ULAR [PHONETIC], which is in June, we'll show some additional end point data for Arcoxia [PHONETIC] for both our [INAUDIBLE], [INAUDIBLE] and our gout program.

Those studies have [INAUDIBLE].

This is new data from the studies looking at additional end points.

Again, confirming guidance for the full year for the Coxhib. with Vioxx and Arcoxia together, 2.6 to 2.8 billion.

And just as a reminder, because of the fidufa [PHONETIC] filing on Arcoxia, while we may be improved by the end of the year, we're not including the large U.S. sales base for Arcoxia here.

We'll have to play that out based on timing.

But I want to be clear that that's not driving the guidance here.

Let's see, finishing off the major products here in terms of Zocor, also an easier compare, just as with Vioxx.

This is comparing to 150 million dollar buyout last year.

Now, you recall this is a familiar pattern with the Zocor which we faced every year -- large buy-ins in the fourth quarter and large buyout in the first quarter.

Remember with this program last quarter, in the fourth quarter, we presented all of that buy-in for Zocor -- that was the biggest impact of this new program.

So as we get down to the first quarter, we don't have that buyout.

This is precisely what we intended to do, and you see a favorable comparison year over year, sales of 1.3 billion -- that's up 10% overall.

It's 41% in the U.S. because of this comparison, but it's down 26% outside of the U.S., and that just reflects generic competition in most major markets.

With Zocor, we continue to focus on the benefits of the heart protection study; and in in fact, the American Diabetes Association recently issued new guidelines suggesting physicians consider [INAUDIBLE] cholesterol, regardless of baseline LDL in diabetic patients.

And in fact, they specifically cited the heart protection study as important new clinical data affecting that decision.

Our guidance for full year worldwide, $4.9 to $5.1 billion; and again, that's based on expectation of growth in the U.S., but declines outside of the U.S.

Just a couple of highlights on some of our other specialty products.

Proscar, just literally in the past few days -- you may have seen at announcement.

It received a new indication for use with an alpha blocker and that was based on the [INAUDIBLE] study which had been shown previously, and that was a clinical study showing that using Proscar on top of an alpha blocker gave you better clinical outcome versus either treatment alone.

And despite new competition in that category, Proscar still maintains an 85% share for the [INAUDIBLE] market.

And the AUA is coming up this next month -- that's ideal timing for us to launch this new indication.

I just wanted to draw your attention to Cancidas as another important driver in our hospital specialty segment

Sales for the quarter reached $88 million.

That's up 89% on strong growth, both in the U.S. and the ex-U.S. and that product is currently under review for paratherapy to continue to expand the label, which has really been the driver for Cancidas.

So in summary here, a very busy quarter with a number of significant actions, all previously announced, but all intended to strengthen the company over the long term.

We've bolstered the pipeline with both Gaboxadal and SAHA, and we continued our investment in R&D.

And we are still on track to move MK-431 [INAUDIBLE] into Phase III in the second quarter, heading towards 2006 filing.

We completed the integration of Banyu and the implementation of the distribution program.

The restructuring program is well underway, and we still expect to finish that program this year, and also to begin [INAUDIBLE] from that program this year.

So with that summary, I think for ready for question.

Audrey, who's up first?

Audrey?

Operator?

Yes.

I'm sorry, can we have the first question, please?

Certainly.

The question-and-answer session will be conducted electronically today.

If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone.

If you are using a speaker phone today, please make sure your mute function is turned off to allow your signal to reach our equipment.

Once again, press star one to ask a question.

We'll take our first question from Tim Anderson at Prudential.

Thanks.

A couple of questions.

The first on kind of the one-time charges in the quarter.

It's easy to see the gain of $177 million, but it seems like if you also back out, what were other one-time types of charges, like the Aton charge and the Lundbeck charge?

And the net of all of these actually worked against EPS.

So in other words, if you didn't have these charges at all, then EPS would have actually been higher than what you reported, maybe by as much as a penny or so, and I'm just wondering if that sounds right to you.

And then the second question is on Pfizer's Lipitor Norvasc [PHONETIC] combination.

They seem to think that they are on to something here.

It looks like they're going to put a lot of resources behind this, and it seems that if for no other ran than to be defensive, you guys should also be pursuing some form of Zocor combination therapy, like maybe a Zocor [INAUDIBLE] or a Zocor ARB

But I guess it depends on how much is going on in this regard.

Can you talk about this, and maybe where Merck is in potentially pursuing these sorts of things?

Okay, sure.

Thanks, Tim.

So first of all, in terms of pursuing combinations of Zocor, it's an excellent idea, and we are doing that, and we filed for Vitorin.

And I'm being a little bit cute here, but the -- our approach to this is, where we see a real meaningful clinical benefit by combining the agents, then it makes sense.

Such as Hyzaar, because of the way people treat hypertension, the ARB and diuretic make sense.

Now with Zetamide or Zetia, really the -- the first really effective companions here are being -- are co-administration for cholesterol, we see a real benefit in terms of buying Zocor and Zetamide. into Vitorin you see in the efficacy profile.

When it comes into combinations, which we see more as a matter of convenience, combining two medications that patients may be taking into one, we don't really see a strong clinical benefit to doing that.

You know, I think our research suggests that, you know, most physicians would see those kinds of products -- and we have looked at this in the past across our line -- as conveniences that they may consider for people who are already on both of those medications.

So it doesn't really seem to add a lot of incremental business or a strong incremental clinical benefit.

And in terms of it being a defensive strategy regarding patents and things like that, and generics I won't really comment.

Our position is pretty clear.

We really see the value coming from continuing to invest in the pipeline, and bringing out new products with real clinical benefit to replace the products that go away.

So there have been cases where we have introduced combinations.

It's more driven by clinical benefit, and the practice of medicine as opposed to convenience.

But that's just our approach.

In terms of your question about, you know, trying to back various things in and out, I guess our approach, as I mentioned, is all of these things were actions that we took, that made sense for the business, and the appropriate accounting treatment is to include them.

And what I have tried to do is identify each of them individually so you can think about what the drivers are, but I'm not going to try to back into what things would have been on a non-GAAP basis, by taking them all into account.

I mean, I can tell you largely that these are offsets in the quarter, because recall that the -- you know, we mentioned the gain from J&J, 177 -- the Banyu securities gains was most of the $100 million.

In terms of Aton at 125, remember that one is not tax deductible.

It actually has a bigger impact on you.

And then the 70 million on Gaboxadal.

I mean, I didn't want to categorize that.

You could say that was a one-time, but, you know, we said this is part of our licensing strategy.

So I would say, I hope it's not one-time.

I hope we do more of these, and we mentioned that, you know our guidance includes these milestone payments, and the guidance we have given for the year, you know, includes, at this point, what we expect to actually happen in the year.

Now I will update that throughout the year, because we're always looking for deals that make sense and add value to the pipeline.

So I mean, I will leave it to you guys to put in or out what you want and how to model it, but we think the only way to -- or the best way to accurately represent the economics of the business is to include the impacts of the things which we have done, and then to show you the results.

Which, I'm pleased to say, was a penny ahead of the consensus; and again, we're guiding up for second quarter, but really it's driven by each of these decisions being made under merits individually, and then giving them the appropriate accounting treatment and giving you the transparency and the breakout of what drives the results.

Next question?

Next we'll go to David Moskowitz with FBR.

Yes, thanks, good morning, Mark.

A couple of things, on AstraZeneca supply sales, I expressed concern under the certainty in the PPI market, in terms of we are seeing the growth rate slow dramatically, especially on Nexium.

On pricing and volume with respect to those two parameters, can you talk about those separately in terms of, is it pricing that you are concerned about or volumes or both?

And how do you change your assumptions or adjust your accounting for this product line.

And then just secondly, do you have an Official fidufa [PHONETIC] date for Vitorin that you can disclose?

And if you can't give us an exact date, can you revisit the filing time line again, please?

Thank you.

Sure.

The last one is easy, because we have given that out.

The fidufa date is the end of July -- I think it's 23rd or 24th, something like that.

So that's with we first submitted, and the product was accepted two months later, and, you know, so based on that timing, a 10 to 12 month review would get you here in something the third quarter.

Now we never want to try to predict the FDA or the regulatory process, but those are dates and that's why we said our best estimate is that we would launch in the second half of the year.

We'll certainly be prepared to launch when we get the approval, just as we were with Zetia.

But that's the time line we're working with.

In terms of AstraZeneca, a couple of things here.

I did mention on the call, though, and certainly in the press release, we revised our guidance on that ad we expect our revenues this year to be $1.6 to 1.8 billion, and that's a little lower than we were seeing in the last quarter.

And David, I think you mentioned all of those things that affect that -- price and volume and assumptions and accounting.

So it's -- as you are all aware, for those who try to model this for AstraZeneca, it is difficult to know exactly what will happen.

Once you factor in the generics, the ongoing competition from the branded products, the option of over-the-counter, what managed care will do, how patients will respond; and again, as you know, we're not involved in that market.

Now I think years ago, it was quite a bit easier because we could just look at the trends and it was bit easier every day.

We still have visibility on orders, but we've never had visibility on pricing.

So that's always a risk that we carry, and given the destabilization of that market and some of the dynamics there, arguably, it's even harder to predict exactly where it will come out.

So we settle that up as we -- each quarter as we see what's happened.

But the accounting change I talked to is really an attempt to account for and recognize some of this risk by now taking into account factors, not just the orders that we ship but also how much inventory AstraZeneca is holding, and also how much they're shipping out.

And so we expect now that our sales over time will come closer to what their actual sales are with the right proportions.

But, you know, the best I can say on this is, this is a tough one to forecast for us, because we're not in that market and a lot of it is beyond our control, and we're giving what we think is the appropriate accounting and continuing to revise the forecast.

I know that's been a challenge for you all over the last couple of quarters as the guidance has changed, but that's because the market is dynamic and the assumptions change.

So I guess in terms of the risk on price or volume, it's really both because we're selling now -- obviously, our sales are driven by Nexium.

So the question there is price and volume.

The impact of the generics could also affect Nexium.

There's not really an effect for Prilosec so much now, because those sales are gone for us going forward.

So I'm sorry there's not a clean answer, but those are all the factors that drive it.

And we just have to continue to monitor it, look at the orders we get, take these other new factors into account that we haven't in the past, to really give you the best assessment of the impact on us and how we're thinking about it.

Next question?

Next we'll move to James Kelly with Goldman Sachs.

Thank you very much.

I have two questions.

One, still on this AstraZeneca relationship.

It seems that the other sales, if you take out all the other pieces that you provide in the detail,, it looks like that portion has come down considerably.

I'm wondering if the major swing factor here is a change in revenues booked from that relationship for this quarter or in other items.

And then secondly, I just wanted to get an update on Gaboxadal.

When will we be hearing any sort of clinical information on this, and will it be similar to most situations with Merck, where it will be very close to the filing or even closer to launch, which I think you said was late '06 or early '07.

Thanks.

Okay, thanks Jim.

So first of all, in terms of the other -- I think what you are talking about on the product sales, is if you take your total revenues and subtract out all those individual products that we market today on the product breakout and look at the other, what's left -- yeah, the biggest driver of that is the sales to AstraZeneca.

The other components, which are smaller, are supply sales to other partners such as Merriel and J&J, and also to a smaller extent older legacy off-patent products that are now generic.

So what happens with AstraZeneca is the biggest component and that absolutely drives that line.

So you are right on.

In terms of Gaboxadal -- well, I mean, we just executed the agreement and just had the first kickoff meeting.

So I don't think we even have a good time line in exactly when we'll see data, but the product is Phase III, and my understanding -- I'm sorry, is in Phase III now.

I believe the Phase II data, some Phase II data has been shown previously by Lundbeck.

I don't have those dates, because we're sort of new to this.

But you're right, Jim, we expect to see the filing late '06 or early '07.

Exactly when this data will roll out, you know, we'll have to wait and see.

And our typical pattern, as you have seen with us, is Phase III data typically comes out between the filing and the launch, because that's when it makes sense commercially to start getting information out there, rolling out ahead of time isn't great news to our competitors. but it doesn't really do much for us in the marketplace.

You know, an exception here might be Arcoxia, where we thought at one point we'd me on the market by now.

So you've seen all of that data roll out, and we have additional data coming, as I mentioned in my earlier remarks.

But really the Phase III data is all out there.

And I think the other recent examples are pretty good proxys are products like Zetia and Vitorin, where by the time you got to launch, the product profile is pretty well established.

I think with Vitorin now, you've really got a good sense of what that product looks like.

I know some people have been trying to get labels from Mexico and things like that, but there really aren't any surprises there if you've seen all the data.

So again, with Gaboxadal, I think there are some data out from earlier studies done by Lundbeck but I don't have any -- an expectation, certainly in the near term, that we'd have any new date, since we're in Phase III and initiating new studies as well.

Next question?

Next we move to Neil Sweig with Fulcrum.

Good morning, Mark.

My questions are related to the price of Vitorin in Germany, then that price versus Zetia, and then the price of Vitorin versus the existing statin competition in Germany.

And last, but not least, which major markets, I guess in the EU, are due soon for Vitorin launch?

So it all relates to Vitorin.

Thank you.

Okay.

Thanks Neil.

So I guess my first comment about Vitorin -- and this would apply to really any product -- if you are trying to think about pricing, I would say there's not a whole lot of insight into what U.S.

pricing will be by looking at foreign markets.

And the reason is that obviously, you know, pricing decisions are made at the local levels and that pricing is based against the market competition in that market.

Now in this case, that may vary around the world.

I mean, Crestor was launched in some markets and not others, there's generic Zocor in some markets and not in other; and of course, you have you to take the reimbursement, [INAUDIBLE] reimbushment -- into account.

In the U.S., most of it is covered by managed care plans.

As you know there's a variety of pricing, there's discounting and contracting, market like Mexico where we have launched, which tends to be more of a cash market.

Germany is pay to retail, but reimbursed.

So really, have you to take all of that into account, and if you are saying, you want to try to predict U.S. pricing based on that, I just caution you that those really aren't the factors that drive it.

Having said all of that, where we are in Germany is, there's a range of prices for Vitorin from the 1010 up to the 1080 doses, and it's -- you know 1.35 to 1.95 Euros.

Its about 1.5 Euros for the most common dose.

And that price, the most common dose being the 1020, or what we expect to be the most common dose, which we are just launching.

That's priced similar to Ezetrol, as Zetia's called there, plus a generic Simvastatin.

So again, different market there, but targets similar to Ezetrol plus the generic, but that's on an ex-manufacturer basis.

Because when you get to a single tablet, it actually ends up being a slight discounted retail, because you don't have two retail markups on two prescriptions.

This price is also a slight premium to the Torvostatin 40 miligrams, which would be, how high a dose have you to go to get similar levels of efficacy.

You know, I'm not sure how much that helps you predict what's going to happen in Germany, but a good example of how we vary specifically, think about the pricing and competition in the local market.

You know, as an example, in Mexico, things are a little bit different.

The 1020 and the 1010 are the same about price as Zetia.

The 1040 and the 1080 are higher, but the pricing is really against the competition.

Now in this case, in Mexico, that means it is against the statins.

I mean, Zetia is an add-on therapy.

So the pricing for Vitorin in Mexico is, where is the lead competitor.

Now the 1010 and the 1020 are actually quite similar to Lipitor 10, which is the most common dose used there.

The 1040 is similar to the Lipitor 20 and 40, which actually is the same price.

And the 1080 is priced similar to Zocor 80, because there is no Lipitor 80 in Mexico.

So I'm not sure, again, how much you can do with that, but I guess I would as a strategy you could look at that, and say in Mexico, the price of Vitorin, the strategy was to price it comparable to the leading competitor by dose, in order to essentially remove price as a hurdle, but to deliver superior efficacy on that relative comparison.

So again, the U.S. market is entirely different and, you know, we'll face that when we get there.

But that's how we're thinking about it.

Next question?

Next we move to Tony Butler with Lehman Brothers.

Good morning, and thanks, Mark.

Really three brief questions.

One, again, on AstraZeneca and the payments here.

While you've been very clear, and I appreciate the transparency you are trying to move to a normalcy of AstraZeneca sales -- you have given full-year numbers.

Why not just simply just break it out on a quarterly basis as you do many of the other products?

That's question one.

And then second of all -- and that way it would separate from the other joint venture products.

The second question involves SG&A and sales force.

Are there additional adds this calendar year, even though I understand you're going to be flat theoretically?

And then finally in R&D.

The R&D cost increase, if you will, was similar to last year, where virtually every quarter you kept moving that number higher.

And I'm just inquiring as to whether high teens obviously becomes 20-plus percent in the back half, if you will, and you may not be able to answer that per se.

But nevertheless, what may be driving the changes in that decision even over a period of three or four months?

Thanks very much.

Okay.

Sure.

In terms of R&D spend [INAUDIBLE], think think you're referring to the change in guidance [INAUDIBLE] as opposed to the R&D spend.

So in terms 20% at the end of year, I'd say, well, no that's not our expectation.

Our expectation is high teens.

And if expectations change, we'll revise the guidance.

I think the -- you know, the thing that's changed here now in the most recent quarter is, as always, our best estimate is to what our actual spending's going to be on the internal projects we do.

Certainly now that you have projects such as Lundbeck, such as Aton, as you get closer to understanding your development costs on those products -- I mean, all of this is being factored in.

You know, if we end up finding important new things to work on and license, and it takes the R&D up, well, so be it.

But I guess what I'm saying is, the guidance of high teens includes our best expectation of all of those things.

And so just as would you have internally maybe a range of estimates on where your spending would come out, whether it's R&D or anything else, how you all do your own budgeting.

In the same way, there's a range of possibilities in terms of all the external alliance activity.

You know, at any given time, there's dozens of things being discussed.

Not all will pan out and you don't always know the timing, so we'll continue to give you our best estimate of where that's going to come out, and right now we're saying it's high teens growth rate.

So clearly, the pattern this quarter -- the 23% -- is a higher year-over-year than we expected, and that's driven by these two big transactions.

In terms of your question around SG&A, you know, there's no current expectation in terms of sales force expansion.

Really, we did that a couple of years ago.

So in 2001, and 2002, we added over 1500 representatives in the U.S., and that was really to gear us up to haft capacity to apply the details behind new products such as Arcoxia, and certainly the extent to which we also support Zetia and will support Vitorin.

So we think we've got the capacity we need, and we don't see additional increases there.

And then in terms of -- of your question on AstraZeneca, I guess I would say that we treat this the same way -- in a consistent way with everything else, which is, products that Merck is actively marketing, we break out every quarter to sales U.S., ex-U.S., worldwide, year-over-year, et cetera.

Products we're no longer marketing, such as the generics, you know, are, of course in our top line, but we don't break them out.

When it comes to supply sales, whether it's AstraZeneca or Merriel or Merck J&J or other joint ventures, we don't break those out, largely because we're not the ones selling and controlling those sales in the marketplace.

As I have indicated in the prior question, or one of the prior questions to Jim, these other supply sales that -- that is, if you take the other sales not otherwise broken out, the biggest part of it is that it's a relationship with AstraZeneca.

We increased that transparency, as you recall last quarter, by giving you the yearly number, we're guiding to it on a yearly basis.

It is the biggest driver of that change.

And also, generally, there's various components within that as well, because it's multiple products, so it's being driven Nexium.

And I think, as I said, going forward, the fact that these sales will be a closer pattern to AstraZeneca's actual sales, I think, will help in terms of that line.

Next question?

Before we take the next question, I would like to remind everyone to press star one if you have a question.

Or if you find that your questions have been answered, you may remove yourself by pressing the star two key.

Our next question comes from Greg Baskin with Luna Sales.

Hi.

Thank you for taking my question.

I'm still a little confused about this accounting change on the supply agreement with AstraZeneca.

I mean, as I understand revenue recognition, you recognize revenue when you ship the product.

Since you're now saying you are not going to -- your revenue recognition is such that it's going to more closely match AstraZeneca revenues, does that mean you are making smaller shipments so that you're still recognizing revenue when the product is shipped?

Or does it mean that you're at risk for the revenues, given the uncertainty in the marketplace, and therefore you're not able to recognize them when you ship the product?

Thank you.

Thanks, Greg.

Let me explain that a little bit more.

You're right that in the past, we recorded when we shipped based on the orders that we received.

But we always carried the risk in terms of the value of those sales, both in terms of any potential product returns, any change in pricing, which we don't have great visibility on.

So, you know, we've determined at this point that we don't have a reasonable basis to estimate their net selling price going forward, because of all of those changes in the mark place.

So we always carried the risk; but again, as I have said years ago, at steady state, it was easier to estimate where that would be.

Now we don't have visibility into it, so we don't have a good sense either on when they'll sell the products they have in the [INAUDIBLE] inventory, what prices those will be sold at, and so we will still ship to them based on orders, and we still have visibility on the order.

I think it's the risk at the other end that we carry.

And that's the kind of thing you always have to true up at the end of each quarter in this type of relationship anyway.

What we're saying is, given the greater uncertainty and lack of visibility, what we're going to do is now tie this more closely to what they actually sell.

Remember that even on the prior reporting, these were contingency sales.

So we get a percentage -- in the case of Nexium, 27% -- contingent on the net sale of those products.

So it depends how much product sold or returned, and at what price things are sold, and it gets adjusted.

What we are doing now is that we don't really have a great basis for determining all of those things, so we're going to recognize it, taking into account their inventory, and as they sell it, into the marketplace.

So, you know, that's a reasonable basis for doing that, and the right accounting treatment of it.

So again, this is complicated not by our accounting, it's by the dynamics of the marketplace, and we're now using the appropriate accounting to reflect those dynamics.

I think that's the way to think about it, and we'll update it as we go along.

Next question?

Next we move to Mark Becker with GIC.

Yes, Mark, just going back to the sale of the J&J stake and the gain on securities from Banyu, that looks to be about 11 cents in earnings.

Were those items foreseen when guidance was originally given for the or the 3.11 to 3.17.

Mark, in terms of the -- you know, what they would have been and how many cents, I don't have a number because we don't do the proformas.

It's all in there.

In terms of the guidance, I guess I would say that in our guidance, we always include our best estimate of things that will actually occur.

You may recall that we delayed giving guidance for the first quarter, and when we announced it, we said, you know, in March, there's are a lot of factors in the first quarter.

But two things that effectively would offset each other would be the closing of both the Aton and J&J deal.

So I think in terms of a fuel year, you know we had that expectation.

We didn't know exactly when it would close, and now we've reaffirmed that range of $3.11 to $3.17.

So it's hard for me to get into, you know, kind of a hypothetical.

I would say any time we give guidance, it's based on our best estimate and expectation of what things will occur and what's their probability and timing and values.

So I don't know if that's helpful or not, but, you know, that's the best I can do.

Because the same thing would apply to things like -- things like the Aton acquisition or other things under way in terms of external alliance activity.

So the decisions around those are based on the individual merits of the decision from the business standpoint, and then the guidance is our best estimate on whatever time period we're guiding, based on what we think will happen and when it will occur.

And then we'll continue, as we have in the past, to settle those up each quarter with giving you the individual impact of each of those.

Next question?

Next we'll move to Scott Hemming with Oppenheimer.

Thank you.

Just getting back to that other income question, because I do think that it's played a significant part in the quarterly earnings pattern.

Granted, unknowns are unknown, but what would you expect for the remainder of the year?

I mean, are there any events that we should be modeling in?

And additionally, just a quick question on Zocor.

We haven't heard a lot about the non-audited channels.

Have those reverted mostly to market growth rates, or is there anything going on there that we should be aware of?

Okay.

Going back, again, to the -- your question about the other.

I mean, I think you look at these on individual basis.

As I said, Banyu, this was harmonizing that portfolio with Merck's overall portfolio, and there's no more Banyu to purchase.

And that -- and of course, that gain is based on the market prices, which is, you know not in our control.

In determine terms of -- again, let's take these individually -- J&J, that's something that we and J&J have been discussing for sometime, and there's really motivation for both sides.

J&J had a strategic interest in integrating several business units that they had across Europe into one single pan-European consumer pharmaceutical company.

For us, we got cash for our fair value of the business.

Zocor OTC, as you know, we're pursuing in the UK.

We will get some royalties on that, so we've preserved some value from that going forward.

Beyond Zocor, we will earn royalties on certain other products such as Pepcid, which were part of the existing relationship, if those are launched into new markets.

And then on the Merck side, from a strategy or a flexibility standpoint, we regained the right to future switches, which gives us greater flexibility over time.

So that's something that, you know, is not a quick turn on the dime kind of transaction.

We have been discussing it for a while, and there's reasons for both partners, and it made sense, and it closed in the quarter.

We would not have done it, if it wasn't going to close -- just based on when it would close.

So sure, during the course of the year, we made an expectation around that and it closed in the first quarter, but we don't have another partnership with J&J to sell them.

As I think about the other one-times with Lundbeck, again, a milestone payment associated with licensing.

With any of the licensing alliances that we have, these over time trigger milestone payments.

And those are always in the R&D anyway.

I think it is the significance and the visibility around acquiring a Phase III compound that we want to give you, you know, even more visibility on it.

So, you know, as I said, there's dozens of things going on at any given time, and we'll make those decisions on whether they add value to the long term.

And we'll continue to update them as they occur.

Do I hope we do more transactions?

Sure.

But can I go through line by line and predict them?

No.

But we actually do have to do that with we give guidance.

We've got to make our best estimate as to what's going to happen or not.

And then similarly with Aton.

I mean, that was something that happened rather quickly.

The opportunity was presented first at the end of last year, and is a terrific opportunity for us in terms of getting -- bolstering our pipeline in oncology, which Peter Kim has said is a real focus for us, it's a great strategic fit for us with our assets at Rosetta.

It moves us ahead of where we are internally in terms of an oncology pipeline by getting us into a Phase II product.

So each of these will be taken on their merits as they come along, and we have been quite clear that we want to do these things, such as the external alliances.

So the best I can say, Scott, is that we make an estimate within the guidance, which is why I'm emphasizing, everything is in the number.

We're not saying -- we're not excluding things.

We're not reporting on a non-GAAP basis.

And we make our estimate of what's going to occur.

So we have given you the guidance.

In fact, we have guided up for the quarter, relative to consensus, for the second quarter, and we have reaffirmed the year.

So we'll continue to give guidance as we see how things play out.

Next question?

Next we'll move to Gary Tyagi with Thomas Weisel Partners.

Yeah, hi Mike, good morning.

Do you think you could give us sort of a preview for the HPD vaccine program, and more specifically, what is the next milestone we should look for?

Okay, in terms of the HPD vaccine, this is a vaccine to prevent [INAUDIBLE], the virus that causes cervical cancer, we have indicated that we're fully enrolled in Phase III.

That's a very large program, as you would expect.

The Phase II data has previously been presented and were published in the New England Journal of Medicine, and that's the study that showed 100% efficacy in Phase II with the vaccine.

So there's no additional Phase II data to present, as I said, we're fully enrolled in Phase III.

Now these kinds of studies, as I'm sure you are aware, are event-driven.

You need to collect a sufficient number of events.

So it's not based on treating people for x number of months or weeks or years.

It's how many events you gather.

The events you are looking for is not just virus but the incidents of lesions.

Syn one and syn two lesions, and that will drive the analysis.

But as we have indicated previously, we expect to file in the second half of next year.

So I think the next big milestone, you know, is the filing, and we have said second half of next year.

But we're in Phase III and we have shown the Phase II data, so that's really where we are.

Next question?

Next we move to Nigel GreIg with Bear Stearns.

Hi, this is Nigel here.

Thanks for taking my question.

I have a question to yourself [INAUDIBLE].

With regard to the relationship with AstraZeneca but looking forward to 2008, when there is certain guaranteed payments that according to filing reports come to about $4.7 billion, minus the $1.4 billion note that has to be repaid.

On the other hand, Davod [PHONETIC] Industry at the time of the AstraZeneca [INAUDIBLE] released in March suggests that this number could be as large as $24 billion.

Obviously, it is a huge discrepancy.

Do you have any comments on this, or is there any new guidance you could give us on these numbers, and is there anything that Merck will do if AstraZeneca is unable to make its guaranteed payments?

Okay.

In terms of other estimates, I'm not familiar with those and can't comment.

So I guess the best guidance I could give you is that, actually very recently, we put a note on our website to give analysts a little better understanding of how the relationship works currently and how that could change, particularly in '08 and beyond.

So if you go to the investor relations website under merck.com, under "other financial reports", you'll see kind of a [INAUDIBLE] and includes some of the events you describe, Nigel.

So there's a couple of important things to remember.

There's some -- certain things that do occur in 2008, and then there are other factors that may occur, based on our options and later options for AstraZeneca.

So there's not a specific one way this could play out; but you are right, there are certain minimums, and that's described in this handout.

So rather than trying to walk through all of that and say, we've given our best sense of how it could work, Some of the valuations, I will just tell you can't be determined today, because they have to do with things like net purchase value of future revenues from various components of that relationship, or they relate to sales over the prior year period, once you get to '08.

So you can model and project, but there are certain guaranteed minimums, but the actual value of those payments really can only be determined at that time.

But it is substantial, as you indicated.

But in terms of those other numbers, I'm not sure where those came from.

So I can't comment beyond, there's some disclosure in our annual report, but I think if you go to the website, you will get a little bit more detail that will hopefully lay that out for you.

And, you know, you can maybe ask AstraZeneca their perspective, but we don't really have a question or concern about their ability to pay, if that's the question.

Next question?

Next we move to Steve Scala with SG Cowen.

Thank you.

I may have missed this in the discussion, but I'm not sure I understand why guidance for equity income from affiliate went up from 650 to 700 to 800 to 900.

In fact, I would imagine that the AstraZeneca elements that feed into this line, such as retained GAAP earn earnings and partnership return may have actually gone down with the revenue adjustment.

You did mention the annualization of Prilosec, but, of course, we knew that previously.

You also mentioned the benefits of the Schering-Plough joint venture, so is the answer here that the Schering-Plough joint venture is performing better than expected?

I guess, Steve, to go back to, you know, how we think about the guidance, on any element is based on our best assessment at the time we give the guidance, and then we'll revise that as we go on.

In terms of the AstraZeneca equity income, you recall that that's based on the performance of the partnership, and that was impacted at the end of the year last year when the partnership earnings were down, as we described last quarter, from the partnership addressing the physical and the financial risk on Prilosec, following the entry of guidance.

In addition, those partnership earnings are affected by tax and timing issues that don't affect revenues directly.

So you're right that that there are impacts to the partnership profits from what goes on with the sales of the product, but they are not directly tied and, again, tax and timing differences.

So I guess the best way to think about it, Steve, is I'm saying that more of that impact to equity income occurred in the fourth quarter with those events occurring and with visibility on how that market would play out, but the sales piece is, as I said, even increasingly more tied to the actual sales of the products.

So one has to do with the accounting and the profitability of how an entity like a partnership records profits, and the other is more straight forward, in terms of just the sales of the product.

Now, the largest contributors to this equity income are the relationship with AstraZeneca, that -- the AZLP partnership, as well as the Merck Schering-Plough partnership.

So all I can tell you is that with each step along the way, we're giving you the best guidance that we have.

In terms of Zetia, we're obviously pleased with the performance.

The product continues to do well, you can see the market shares with [INAUDIBLE].

You see the clinical profile continues to be used across a wide range of patients, and we continue to back that up with more clinical data.

We have launched vitorin in a couple of markets and we look forward to bringing it to the market in the U.S.

We'll certainly revisit this next quarter, based on even more data on the actual performance of those products, but at this point, I can say that we're excited about it and I have indicated previously, the partnership with Schering-Plough was a loss for us last year on equity income, and for full year this year we are saying it will be a positive contribution.

So those are really the drivers, and the guidances are based on our forecasts at the time, and as we get more actual data and revise those forecasts, we'll continue to update as necessary.

Next question?

Next we move to David Risinger with Merrill Lynch.

Thanks very much.

Just a couple of quick questions.

First of all, with respect to Arcoxia, can you give us the fidufa date for that product like you have give the fidufa date for Vitorin?

Second, with respect to the gain on Banyu security sale,.

I didn't pick that up.

Can you tell us what that was?

And then finally, in terms of the AstraZeneca revenue recognition, I don't want to harp on this issue too much, but if you could just define what the revenue recognition standard is, and that is it.

Thank you.

Okay, David.

In terms of a specific fidufa for Arcoxia, the date was January 12th.

You may recall we submitted this at the end of last year to the FDA, and then a technical matter relating to some fees at the FDA, the actual fidufa date was set January 12th.

What we don't know for certain is whether then the 10 or 12 month timing is off the January 12th date or the December 30th date, but now we are down to a couple of weeks here.

But I guess the point is -- what we've said is, we expect to hear by the end of the year, and if it comes earlier, and we get approval and we can launch, we will.

And if it comes right at the end of the year, or over Christmas, we'll consider, you know the timing of that.

But I think it's clearly a fourth quarter event and, you know, if we know more, we'll know more, but we can share at that time, but that's our best expectation.

So look for that in the fourth quarter.

And as I mentioned with Vitorin, that was filed, I guess about five months ahead of when Arcoxia was submitted.

So we would ordinarily then expect to hear on that one sooner.

In terms of Banyu, what I had indicated was in the other income and expense on the additional disclosure, there was about $100 million in gains on securities, and what I said was the majority of that was the Banyu gains.

Some of that comes from our ordinary management portfolios, but specifically, there was an impact in this quarter from that transition of the Banyu portfolio, as I mentioned.

In terms of revenue recognition, I mean, I -- I can't give technical accounting terms here, but what we're saying is we now more closely match the sales in the market, because it's important for to us have that reasonable basis for to us estimate price, given the dynamics in that market.

And that's all I can say.

I mean, as I said in the past, it was simple and steady state with the products growing to just record based on when we shipped, you know, with a pretty good sense of what -- anything that could impact net sales, such as pricing returns.

You'd estimate what they would be and of course, we would have to make any adjustments for the actual at the end of the quarterly report.

What we're seeing now is, given all the uncertainty, that's not the most appropriate way to go about it, so instead, we'll continue to ship, but what we actually record is going to be tied closely to what they actually sell and at what price.

So that's the reason for the change.

It's driven by the market, and I think we'll update that as we go.

But I can't predict -- I can't predict what will happen in that market, and obviously we're not involved in decisions that AstraZeneca makes.

Next question?

Next we move to Carl Seiden with JP Morgan.

Thanks, my question was answered, though.

Thanks.

Okay, thanks Carl.

Next question?

Next we go to Martin Hall with HSBC.

Hi.

Good afternoon, Mark, I'm sorry to come back to the AstraZeneca question again, but if you actually just look at what you actually showed last year, you reported $1.9 billion of sales for AstraZeneca.

But if you did the calculation based on what we actually saw in terms of net sales themselves, this sort of figure you should have been recording was $1.2 billion.

If we did the same calculations for 2004, based on our forecasts, we would expect to have the number to come in between $1.1 and $1.2 billion, which is about a 50% difference between that and your guidance.

What are we missing here?

And also the $1.7 works out at 61% of our forecasts for AstraZeneca's net sales of those products.

So there seems to be a discrepancy that we can't reconcile.

Well, if the discrepancy is between our guidance and the forecast, I would be hard pressed to reconcile that as well, since I don't know what goes into your forecast.

I think that our, you know, difference here, Martin, is as you go last year, and this has been the case for sometime, that there were real timing differences between our sales and their end selling.

So as an example, we had described in the past that with -- with a product either growing or declining, you reasonably assume that the orders to us are for future use.

And what we ship is for future use.

So there's a lag.

So what we would record in the quarter more closely corresponds to what's going to happen in the future with that product than what actually happened in the current period, and I will remind you that that's variable by product.

There's different percentage rates applied to each of these products.

They're growing or declining at different rates -- in the case of Prilosec, very dramatically -- and there are other changes in the market in terms of volume and price.

So I think we would be surprised if there was a perfect correlation, because it doesn't function as a royalty.

So in the past, I think you'd have to go back more than one year, Martin and you would see that over time, it probably works out based on the relative percentages, but certainly the timing does not and never has.

So as I said, going forward, we're making this -- this adjustment to be, again, I think, to get closer now that we're at the end stage, obviously, with Prilosec, and given that we can't simply extrapolate trends in the PPI market.

I'm sure there's a range of forecasts out there.

But what I'm saying is that our -- our -- the sales that we record will now more closely correspond to what happens in the marketplace -- whatever happens in the marketplace.

And so we're going to continue to look at the guidance each quarter, but we're giving you that update as we go.

You know, it's not going to be a perfect match, of course.

But it is going to be closer than it was in the past.

And we'll just have to see how that plays out.

Next question?

And we'll take our last question from Mario Corso at Summer Street Research.

Yes, thanks for taking my question.

In terms of the Zocor/Zetia joint venture, should we expect the contribution to be linear for the year?

I mean, I know there launch cost associated with Vitorin, so is there the expectation that that can be relatively profitable from the get-go, given the fact that there will be probably a fair amount of conversion from Zocor?

Thank you.

Okay, sure.

In terms of how to think about Vitorin, I can't give you an exact pattern in the profitability here.

So I guess just to think about a little bit of what's going on with the components.

So R&D is ongoing.

Promotion for Zetia is ongoing, and clearly, Zetia's sales are rising.

So we have said that this line, just the components that exist today, has been improving.

So I mean, I think it makes sense if you think about a product life cycle.

Now, stepping forward into Vitorin, we have said while we certainly will have launch costs, the incremental cost to launch the second product is not as great as the incremental cost of going from zero to being in the marketplace with Zetia.

For example, the representatives in the joint venture can handle more than one product.

So it's easier to add a second product to the bag, than to start a sales force from scratch.

So let me be clear, we will fully support the launch of Vitorin and all forms of promotions consistent with the potential of that product.

So we're not skimping here.

But I'm just saying, adding a second product to an existing organization is easier than starting from scratch.

So there will be launch costs, of course.

You will also get the launch stocking sales, and then where the sales go after that is just going to be based on the demand.

We think the profile is pretty attractive, and the market growth clearly has picked up, which is a positive for us.

I know all of you were very worried last year with the trends in the HMG and the overall cholesterol market, and we were concerned as well, given the substantial potential that remains in terms of people not treated or not treated to goal.

That has improved, and certainly that's a good sign for Zetia and Vitorin, and we expect a positive contribution.

So I think, you know that's about the best I can do as to how to think about that, and I think it will be driven more by the actual performance that you see.

So just in closing here, I, you know, I guess I just want to say that we have spent an enormous amount of time in the Q&A dealing with the specifics of things like the AstraZeneca relationship, and the accounting for these various transactions, but I think what I will remind you, and come back to is, these transactions are not surprises.

We announced all of them.

They all made sense.

We're reconciling the math here at the end of the quarter.

We came in a penny above the consensus for the quarter, again with no surprises in terms of the transactions.

We hadn't given guidance for the second quarter, but we are guiding you up from where the current consensus is.

And we've reaffirmed the range.

So I think overall, we're quite happy with the things that we did in the quarter that are all important for the long-term, and with the results for the quarter.

So with that, we'll look forward to discussing this more in the future next quarter, but appreciate your interest and participation.

Have a good day.

And that does conclude today's conference.

Again, thank you for your participation.