默克藥廠 (MRK) 2004 Q3 法說會逐字稿

Good day, everyone.

Welcome to the Merck third quarter 2004 earnings conference call.

Today's call is being recorded.

At this time, Id like to turn the call over to Mr. Michael Rabinowitz, Executive Director of in Investor Relations with Merck.

Please go ahead, sir.

Thank you.

Good morning, everyone.

Thank you for joining us today.

Hopefully, you all have had a chance to review our press release and our other financial disclosure pages sent out to our investor distribution list this morning.

Given the Vioxx announcement, we have gone to significant lengths to try to break out its impact within those disclosures, which will be discussed during the call.

I'll remind you this information has also been posted on www.Merck.com within investor information.

As a first matter of business, I want to review with you the safe harbor language.

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

These statements involve risks and uncertainties, which may cause results to differ materially from those set forth in the statements.

The forward-looking statements may include statements regarding product development, product potential or financial performance.

No forward-looking statement can be guaranteed, and actual results may differ materially from those projected.

Merk undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.

Forward-looking statements in this call should be evaluated together with the many uncertainties that effect Merck's business, particularly those mentioned in the cautionary statement in item 1 of Merck's form 10-K, for the year ended December 31st, 2003, and its periodic reports on form 10-Q and form 8-K, if any, which the company incorporates by reference.

Now, let's talk about the third quarter.

During the September 30th conference call to announce the voluntarily worldwide withdraw of Vioxx, we stated that we had been comfortable with the $3.11-$3.17 full year 2004 earnings per share guidance prior to the withdrawal, and estimated a cost of 50-60 cents per share for the specific impact of the Vioxx withdrawal as a result of the announcement.

We did not guide whether the third or fourth quarter would bear most of these costs, as that analysis had not been completed, and as you know, we withdrew third quarter guidance.

Absence of guidance, we recognize that several of you put most of these costs within fourth quarter.

We are now at a point to better estimate the costs.

And also to explain what has been recorded in the third quarter, and what we expect the remaining costs to be in the fourth quarter.

Third quarter earnings per share were 60 cents, which incorporates impacts of the worldwide voluntary withdrawal of Vioxx, including anticipated product returns, write down of the Company inventory and costs of withdrawal.

The cost of the withdrawal of Vioxx is approximately 25 cents per share in third quarter.

An important take away from the quarter that needs to be highlighted up front is that our core franchises including Cozaar, Hyzaar, Fosamax, Singulair and Zocor continue to perform well, and that we are reaffirming guidance for all of our major franchises.

We continue to report top line and bottom line results, including everything, in accordance with GAAP.

Although, we'll provide breakouts on the impact of the withdrawal of Vioxx as additional disclosure to aid in your understanding and subsequent modeling of the underlying business.

Before we specifically address those withdrawal-related expenses, I think it is important to reinforce that the decision to voluntarily withdraw Vioxx was made as a result of new data from the three-year placebo controlled study called APPROVe, in which, beginning after 18 months, the risk of cardiovascular event did increase among those on Vioxx.

The conference call on September 30 subsequently explained why we felt this action served the best interests of patients, which ultimately drove our decision-making.

There have been media conferences that have gone over this decision and associated time lines, and I refer you to our website where replays and supporting materials are still available for your further review.

I'd like to next detail the specific impacts of the worldwide voluntarily withdrawal within the third quarter before presenting the overall results, as I think this will prove helpful of your understanding of the quarter.

Please refer now to Page 16 of the press release, within the P&L review, where this detail is broken out.

The withdrawal of Vioxx has negatively effected third quarter revenues by approximately 492 million, which was made up of an estimated anticipated customer returns of product previously sold, whether in the distributor supply chain or held by patients.

As you recall, we estimated during the September 30th analyst call, that distributors worldwide held approximately one month of inventory.

We are also anticipating some return of products by patients, and that is factored in here as well.

The actual reimbursement algorithms differ per customer type, although the principal of reimbursing for unused product is consistent throughout.

For example, we have worked with managed care and PBM customers in the U.S. to assess most recent Vioxx purchases.

For patients, we have asked that they mail to us their unused tablets and documentation of purchase and we will reimburse them for their out-of-pocket expense.

The process is similar in Europe, and the rest of the world, although pharmacies will be more directly involved overseas for consumer product reimbursement.

Moving down the P&L, the impact of the withdrawal on cost of goods sold were determined to be $93.2 million, which reflects a write down of inventory currently still held at Merck, in all its forms, whether raw materials, work in process, or finished product.

Keep in mind when you look at the revenue impact and the impact on COGS, that these two charges reflect product at different stages of the supply chain.

The revenue impact is for product already sold and expected to be returned.

The cost of goods sold impact is for what Merck still held in the manufacturing chain.

Therefore, you should not try to calculate the PGM rate here and assume in any way it reflects the PGM of Vioxx.

The lines were determined independently and don't refer to the same material, unlike when a sale is booked and the revenue and cost of goods sold relate to exactly the same tablets.

In thinking about PGM going forward it, is worth noting that Vioxx had an above average PGM for Merck.

For marketing and administrative, there was a $141.4 million impact reflecting, for example, shipping, incineration, and administrative costs associated with the withdrawal.

Marketing costs for Vioxx for items that could not be redeployed are also in this number.

The simple math of these numbers results in a negative impact to 3Q income from continuing operation before taxes of $726.2 million dollars.

The tax benefit on this loss was determined to be $173.6 million, which simply reflects the geographical mix of Vioxx and the cost of the withdrawal.

Keep in mind, as you know, that tax rates vary by market, so that is what you see effecting the tax calculation here.

That led us to the 25-cent EPS impact in the quarter for the withdrawal of Vioxx.

We initially estimated on September 30th withdrawal costs of 50-60 cents of EPS impact for full year 2004.

We are refining that estimate to guide that Merck's full year EPS will be negatively affected by 50 cents to 55 cents per share by the impact associated with the withdrawal.

This impact includes the 25 cents that I just cited earlier.

In addition, in the fourth quarter, we continue to expect, as we had previously guided, approximately $700-750 million in foregone sales for Vioxx on a global basis, and potential additional fourth quarter costs for the withdrawal of Vioxx.

Many of you have asked about the litigation liability to Merck, and no litigation costs or reserves are included in these estimates.

The company has not established any reserves for any potential liability relating to Vioxx.

As we have stated previously, the company has mayortoreous defenses, and will continue to vigorously defend the lawsuits.

We do not comment further on our litigation strategy.

Related to this issue as we disclosed in the press release, the company has product liability insurance for claims brought into the Vioxx personal injury lawsuits of up to approximately $630 million after deductibles and coinsurance.

I won't be making any further comments on litigation or insurance coverage, as you know it is Merck's policy not to comment on ongoing litigation.

I refer to you the press release for additional information.

I know that these withdrawal breakouts are helpful in your modeling and wanted to walk you through them upfront so we can focus the remainder of our discussion on the core Merck ongoing business, which we will do next.

Even with the Vioxx announcement, there were other major events for Merck in the third quarter, including the Merck Schering-Plough approval and launch of Vytorin, the continued advancement and enhancement of our pipeline, and the presentation of results of a head to head study showing that Fosamax demonstrated significantly greater increases in bone mineral density and reduction in markers of bone turnovers in Actonel.

I will discuss these in more detail as we discuss the product.

We also continued to make important progress on a number of programs, which have been previously discussed.

For example, the new U.S. distribution program with the major wholesalers is working well.

As a result, there are not any material buy-in or buy-out effects in this quarter, and product inventories remain approximately in the two to three-week range.

Product comparisons versus the prior year do have buying effects, which I will remind you of during the product details.

So, the impact of these actions are included in the results that I will discuss.

Nothing has been excluded.

And we continue our practice of citing only bottom line GAAP results.

To help with transparency and with your modeling, I will comment on the various components I mentioned individually as we go through our third quarter review.

So, if you refer back to Page 14 of the press release, with the P&L review, you see that sales were $5.5 billion, that's down 4% from last year, reflecting approximately 492 million from the withdrawal that we just discussed.

Included in the revenue comparison is a 1% benefit from price and 2% benefit from foreign exchange across the top line.

Year to date, Cozaar, Hyzaar, Fosamax and Singulair continue their solid double-digit growth rates led by Singulair at 26%.

Consistent with our expectations as a result of U.S. wholesaler program that was introduced in the fourth quarter of last year, sales this quarter were not effected by buy-in or buy-out behavior.

Therefore, sales levels for the major products in this quarter reflect actual demand, and we expect that to continue.

However, of course, the year over year comparisons are affected by a net buy-in that was discussed during the third quarter a year ago.

As a reminder, that buy-in was $60 million, which includes a 145 million buy-out for Vioxx, and I'll discuss the impact of the buy-in of our other major products as I detail the results for those products later.

We will now go into the product review.

Remember, we've provided a detailed breakout of products actively managed by Merck under our other financial disclosures, which you either received by e-mail or can look up on our website.

Working through the major products alphabetically, so that it is easy to track versus our disclosures worksheet, we start with Cozaar and Hyzaar.

Net sales there were 706 million, up 14% in the quarter, this includes a small buy-out of $50 million in the third quarter last year.

Year to date, Cozaar and Hyzaar net sales are up 15% worldwide.

Cozaar continues to be the second most frequently prescribed [angiosensotoit antaganist] in the U.S. and the largest selling A2A in Europe.

U.S. mail order adjusted prescription levels for Cozaar Hyzaar were up 4% versus third quarter 2003 and U.S. sales were up 13%.

ExU.S. sales grew 14% in the quarter.

For 2004 full year, we're reaffirming the net sales guidance of 2.7-2.9 billion.

Moving next to Fosamax, net sales within the third quarter were 778 million, that's up 13%, including a slightly unfavorable compare of 10 million in buy-in.

ExU.S.

Fosamax was up 22% for the quarter.

U.S. mail order adjusted prescription levels for Fosamax were in line with third quarter 2003 levels, and U.S. sales were up 7%.

There are a few important updates for Fosamax.

First, as expected, the European patent office followed up on its oral decision with its written decision to revoke our patent in Europe that covers Fosamax once weekly.

We filed our notice of appeal on September 16th, and plan to offer our written statement in evidence supporting the once weekly patent by the due date of December 29th.

Based on all-- based on other patents, all forms of Fosamax are protected in most European markets until at least 2007.

Second, in data presented at the American Society For Bone Mineral Research in October, Fosamax once weekly increased bone mineral density, or BMD, more than Actonel once a week with similar tolerability, according to results of the Fosamax Actonel comparison trial or fact trial.

This is the first U.S. head to head study comparing FDA approved once weekly osteoporosis treatments and postmenapausal women with osteoporosis.

In this study, Fosamax provided greater increases in BMD at all sites, measured as early as six months, and lowered levels of biochemical markers of bone turnover further within the normal premenopausal range than Actonel within three months.

Reducing and stabilizing bone turnover, which leads to increased bone density are important factors in improving bone strength in patients with osteoporosis.

A 12-month extension of this double blind study, and a second similarly designed study, are currently underway.

Fosamax remains the only medicine approved by the FDA for the treatment of osteoporosis, to reduce the risk of both spine and hip fractures in postmenopausal women.

Year to date, sales of Fosamax are up 15% will worldwide.

For full year 2004, our net sales guidance for Fosamax is reaffirmed at 3-$3.2 billion.

Moving next to Singulair, net sales were 626 million for the quarter.

That's up 2% worldwide and includes an unfavorable comparison due to a buy-in of $120 million in 3Q '03.

Net sales in the U.S. were down 2% as a result in the quarter.

U.S. mail order adjusted prescription levels for Singulair increased by approximately 18% for the quarter as compared to the third quarter of last year.

Growth for Singulair was fueled by the use of Singulair in children and adults with asthma, the allergic rhinitis indication in addition to the strong body of evidence supporting the use of Singulair in treating both pediatric and adult patients who suffer from asthma or allergic rhinitis.

Singulair continues to be the second most prescribed product in the overall respiratory market in the U.S. Ex-U.S. sales growth in the quarter was 26%.

Year to date, Singulair net sales are up 26% worldwide.

For full year 2004, we're reaffirming net sales product guidance of 2.4-$2.7 billion.

For Zocor, net sales were 1.2 billion for the quarter, down 13%.

Remember, we had an unfavorable compare given the $110 million buy-in last year.

Total mail order adjusted prescription growth was up 2% for Zocor in the quarter.

Net sales in the U.S. includes higher non-retail purchase growth than retail or prescription trend growth.

The decline ex-U.S. continues to reflect generic competition and is moderating somewhat now that we have annualized many of the major market expirations.

In August, the A-Z study was presented at the European Atherosclerosis Society meeting in which there was an 11% relative risk reduction in the primary composite end point of cardiovascular death, miocardioinfarction, readmission for acute cornea syndrome, and stroke with Zocor 40--80 milligram, compared to Placebo and Zocor 20 milligram.

However, the results did not achieve statistical significance.

Likely, in part, because the over all event rate was lower than expected.

A posthock analysis of data from months 4-24 revealed a significant 25 relative risk reduction in the primary end point.

Year-to-date net sales for Zocor are up 2% worldwide.

We are reaffirming full year net sales guidance of 4.9-$5.1 billion.

You could review additional product detail as disclosed on our net product sales detail sheet.

Of note, we have continued growth in several products, including over 40% for both Cancidas and Proscar in the quarter.

Additionally, ARCOXIA, which is currently approved in 48 countries worldwide, achieved $61 million net sales in the quarter, and at ACR this week, the results of EDGE were presented.

I refer you to our recent press release on EDGE for further details.

We continue to work with regulatory authorities in the countries where ARCOXIA is approved on how to appropriately reflect the approved data in the label for ARCOXIA.

In the U.S. we filed ARCOXIA for several indications last year, and the 10-month [padu] goal date is October 30th.

At this point we will not be providing guidance specific to (indiscernible).

As in the product release -- or press release I should say, in support of the call to action issued on October 19th by the U.S. department of Health and Human Services that emphasizes the importance of pneumococcal vaccine, Merck is increasing its available supply of PNEUMOVAX 23.

Typically, Merck sells 6-7 million doses in the United States annually.

The company is increasing its supply of PNEUMOVAX 23 by 11 million doses.

So, in summary on the product guidances, we've reaffirmed what had we have communicated last quarter for our major franchises.

Now, also within the top line, alliance revenue from AstraZenica was up in the quarter versus last year as the compare is aided by the annualzation of the impact of generic [Esomeprazole] whose availability in the U.S. began in 3Q '03.

However, this line continues to be significantly influenced by the underlying dynamics of the very competitive and complex TPI market.

As you know, our revenue recognition has to take into account inventory levels at AstraZenica, their shipments out, and, as always, carries a risk around pricing and future volume given that we are not actively managing those products.

Given our review of recent results and expectations of the fourth quarter, we are reducing full year AstraZenica revenues of 1.4-$1.6 billion.

The guidance reflects our best understanding to date, including the dynamics of the PPI market, which has multiple generic OTC products and multiple branded competitors, and the uncertainty this creates with regard to future volume and pricing, which many of you follow quite closely.

We next move down the P&L where materials and production came in at $1.4 billion.

That's a 26% increase in the quarter, and includes the withdrawal costs of $93 million.

Changes in product mix versus last year were Cozaar and Hyzaar, for example, grew 14%, and Zocor decreased 13%, helped to explain this quarter's increase.

This product mix change, and the underlying product margins, also explain why cost of goods sold growth this quarter was greater than sales growth.

For example, you know that Cozaar and Hyzaar have a lower PGM than Merck overall, given the split with DuPont.

To help in the understanding of our business, and provide greater disclosure, we calculate the PGM to be 79.1% year to date, excluding the impacts of the withdrawal of Vioxx.

Recognizing that Vioxx had an above average product gross margin, and the resulting change in product mix, we are estimating fourth quarter PGM to be 74.5%-75.5%.

We are reducing full year PGM guidance, excluding the impact of the withdrawal of Vioxx to 78%-79% as a result of changes to sales mix.

Moving next to marketing and administration, which came in at $1.8 billion, that's up 20% versus last year and includes 141 million from the withdrawal of Vioxx.

The compare versus last year is a difficult one, as you probably remember that Q3 '03 had 1.5 billion in marketing admin, lower than the 2003 run rate given timing of programs.

As you recall last year, we also announced the elimination of 4,400 positions, as part of an overall effort to realign resources and improve operating efficiency.

When complete, we expect to generate annual savings of payroll and benefits of 250-300 million starting in 2005, although, some of that benefit is currently being realized.

We have made significant progress on this initiative.

And through continued assessment of this original initiative, we have added 100 total positions to what have been eliminated since we started the program, resulting in 4500 positions eliminated through the third quarter.

Included in this quarter is about $34 million in the restructuring costs, which total 90 million year to date.

We are increasing our guidance on the full year restructuring costs, as announced last year, to be 90 million to 95 million to be concluded by the end of 2004.

We had previously guided that marketing and administration expenses would be flat, excluding that restructuring, and confirm that full year guidance excluding the impact of the Vioxx withdrawal and the restructuring costs.

So, in summary, no change in guidance.

Keep in mind that going forward we also will not be incurring costs to promote Vioxx.

Just a reminder, the costs associated with the withdrawal of Vioxx and the restructuring costs I've just described, they are included in this line as required by GAAP, they are not excluded, but we're continuing to provide the guidance on the cost and the underlying marketing and admin separately to help in your modeling.

Moving down the P&L to R&D.

R&D was $919 million.

Research and development expenses increased 18% in this quarter versus last quarter, reflecting Merck's ongoing commitment to both basic and clinical research, as well as the impact of the Company's external collaboration, such as with DOV and Nasdaq.

Even though we are up 22% year to date, we're still guiding to high teens for the full year in R&D.

We continue to strongly support investment in R&D, as evidenced by a recent opening of the state-of-art research facility in Boston, which will focus on new medicines for cancer, obesity and Alzheimer's Disease, and the advancement and enhancement in our pipeline as seen in our recent 10-Q filings.

Hopefully, you've had a chance to review our 10-Q filed in early August, where you saw our updated pipeline disclosure.

Most importantly, we have six treatments in Phase III studies.

We'll talk more about the pipeline at our December business briefing.

We continue to guide that ProQuad, the combination vaccine of our M-M-R II and Varivax vaccine will be filed in the U.S. this year.

As you may recall, we showed at the recent National Immunization Conference that a single dose of ProQuad provides similar anti body response to two vaccines given separately.

Additionally, we have 3 Phase III vaccines that we expect to file in the second half of 2005.

These include RotaTeq for the prevention of Rotavirus, a virus that results in the hospitalization of tens of thousands of children under five years old in the U.S. alone.

Our HPV vaccine, to reduce the incidence of HPV infection, and the associated development of cervical cancer and genital warts.

The Zoster vaccine, to help prevent the pain from shingles, which afflict approximately 1 million Americans each year, and all our continuing enlarged phase three trials.

We are pleased to present at a late break (indiscernible) ICAAC, the Interscience conference of antimicrobrial agents and chemotherapy in November, additional results from our HPV vaccine program.

In addition to the vaccines, we have three compounds in Phase III studies.

From our collaboration with Bristol Myers Squib, Reglitazar, the first in class dual P-par agonists for type two diabetes, we have targeted to file in the U.S. during the fourth quarter of 2004.

From our collaboration with Lundbeck, Gaboxadol, for insomnia, it also continues in Phase III trials with expected filing in late 2006 or early 2007.

Finally, as we announced last quarter, our DPP 4 inhibitor, MK-0431 has moved into phase three trials, and we expect to file it in 2006.

In the third quarter we continued our aggressive licensing and targeting acquisition strategy, as evidenced by our updated total of 41 significant deals year to date.

Included within that figure is the agreement with DOV Pharmaceuticals to develop and commercialize novel depression compounds.

In this agreement, Merck licensed exclusive worldwide rights to DOV 21-947, a novel triple uptake inhibitor being developed for depression and related psychiatric disorders.

The initial cash payment of 35 million is reflected in this quarter's R&D expense.

Also this quarter, Merck and Nasdaq Pharmaceutical company formed a collaboration for [PYY3-36] nasal spray in Phase I for the treatment of obesity.

The initial cash payment of $5 million is also reflected in this quarter's R&D, as all of the expenses a external alliances are appropriately included here in the R&D expense.

Our view is that R&D strategy includes licensing, includes alliance, and so our reporting here reflects not only how we manage R&D, but also the underlying economics of these investment decisions.

So, whether it's internal or external it's all included here and the guidance we provide include these R&D expenses.

So, again, just to recap for the full year, we continue to expect a high teens growth rate year over year.

Moving down the P&L.

In terms of equity income, you'll see $307 million in income, which is up 67% from last year.

And 54% year to date.

Now, you recall that we indicated last year we expected to see total equity income bounce back this year from being down last year.

Not only did we expect that the Merck Schering-Plough partnership would be positive this year, but the continued emulization of the impact of generic Esomeprazole has also helped contributions for the AstraZeneca limited partnership, or AZLP, in the third quarter relative to last year.

As you know, there are several components to AZLP equity income, which make this inappropriate to draw significant conclusions just based on [PPI] product sales.

I will refer you to our March disclosure posted on our website that goes over this in significant detail.

This complexity involves minimally timing and tax differences.

Regarding the Merck Schering-Plough partnership, the sales of (indiscernible) continue to grow on track with expectations, and the strong launch of Vytorin is underway.

More on these products in a moment.

Given additional clarity of all the drivers of equity income, we are revising the range of full year guidance upwards 50 million to 900 million to $1 billion.

Please refer to other financial disclosures page to see the next line of the P&L, other income expense.

We have $4 million in income this quarter versus an expense of 17 million last year.

You'll see the breakout we provided in various components, including interest income and exchange and other, which, together produce the small positive change versus last year.

While still on the same disclosure page, you will find the joint venture detail you see consistent with past trends, some continued increases in top line sales for the Merial animal health joint venture and also Aventis Pasteur MSD vaccine business in Europe.

The next line is, obviously, where there has been a lot of interest lately, and we're quite excited about it.

In our collaboration with Schering-Plough Zetia and net sales reached 293 billion in the third quarter.

Of that, 256 was in the U.S..

Zetia has captured a 6% total prescription share of the U.S. lipid-lowering market based on IMS monthly reporting for September, and as it approaches its two-year anniversary on the market, it remains one of the fastest growing products in that market.

The growth of Zetia since launch, with over 12 million prescriptions filled, reflects the significant additional LDLC reduction that Zetia provides when added to a statin, compared with doubling the statin dose.

We continue to see the percentage of patients new to Zetia grow for both co-administration and model therapy with slightly faster growth in co-administration.

Vytorin net sales for the quarter were 52 million.

Of that, 42 million was in the U.S..

As you recall, the FDA approved Vytorin on July 23rd.

The first and only product to reduce LDL cholesterol through dual inhibition of the two sources of cholesterol in a single tablet.

Since the product was widely available, Vytorin has gained 2% of new prescriptions in the Lipid-lowered market in the short period since launch, based on weekly prescription reporting from IMS as of week ending October 8. [Brandex energy] ex-U.S. it is launched in Mexico and Germany and has recently been approved in Singapore as well as several other in Latin America.

While it is too early to have significant insights on the source of business for Vytorin in the U.S., we believe that the positioning of Vytorin has led to prescribing for both newly diagnosed patients, as well as treated patients.

As you probably read within the approved label for Vytorin, head to head studies demonstrate that Vytorin has superior LDL reductions as starting dose, and across the dosing range versus Lipitor and Zocor, which will help drive Vytorins continued acceptance.

Now, just moving back and finishing off the P&L, we come down to income from continuing operations.

That, of course, means pro forma excluding [MetCo] in the base period.

For the third quarter, income from continuing operations before taxes was $1.8 billion, including the impact of the withdrawal of Vioxx.

Taxes on that income were 487 million, which reflects, or which give you an effective rate for the quarter of 26.9% and 28.5% year to date, including 174 million in tax benefit from the Vioxx withdrawal.

We are comfortable with our previous guidance on taxes, and are reaffirming that guidance, excluding the impact of the Vioxx withdrawal of 28-29% for full year.

Moving down to net income and EPS, net income for the quarter was 1.3 billion and 4.7 billion for year to date.

Shares outstanding were 2.22 billion, that's down approximately 1% from last year.

In treasury stock this quarter we spent 244 million, which still leaves us $8.8 billion under the current authorizations from the board, with no time limit.

This detail leads you to an EPS of 60 cents for the quarter per share, which incorporates the impact of the withdrawal of Vioxx.

Merck anticipates fourth quarter earnings per share of 48 cents to 53 cents which includes the impact of approximately 700-750 million in foregone sales for Vioxx, and potential fourth quarter costs for the withdrawal of Vioxx.

The guidance for the fourth quarter, when added to the actual results for the first nine months of 2004, results in full year EPS guidance of $2.59-$2.64.

Keep in in mind this guidance includes the expectations that the impact of the withdrawal will negatively effect full year EPS by 50-55 cents.

You already saw 25 cents of that impact in the third quarter.

The rest will fall in the fourth quarter and is incorporated in our guidance of 48 cents to 53 cents.

Please, also keep in mind, that there is ongoing business variation and risk within the fourth quarter EPS guidance and spread, and the variability in our guidance is not just dependent upon the fourth quarter Vioxx withdrawal assumption.

I know I covered a lot of information, but hopefully this disclosure pro actively answers some of your questions and provides clarity on the quarter.

With that, I would like to open the call to questions.

As usual, we'll take them in the order received.

Felicia, please remind everyone the instructions for questions.

Thank you.

The question and answer session will be conducted electronically.

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, please be sure your mute function is turned off to allow your signal to reach our equipment.

Once again, that's star-one if you would like to pose a question, at this time we'll go to Craig [Vaskin] of Loomis Sales.

Sorry.

I have no question.

Thank you.

And that is star-one if you would like to ask a question.

Next question, please.

We'll go to David Risinger of Merrill Lynch.

Thanks very much.

I have a couple of questions.

First, do you expect the EPS impact of the Vioxx withdrawal in '05 to be higher or lower than the EPS impact you're talking about in '04?

And second, with respect to the $2 billion tax dispute with the IRS, can you update us on that, please.

Thank you.

Thanks for your question.

First, continuing our practice, we are not providing, at this point in time, any guidance concerning 2005.

Concerning our discussions with the IRS, concerning the $2 billion in taxes, there is no update at this current time.

Next question, please.

We'll go to Timothy Anderson of Prudential.

Thanks.

Couple of questions.

Will the impact of the Vioxx withdrawal, in terms of things like inventory write downs, and product returns, but excluding any sort of legal impact, largely be washed through the P&L in '04, or will there be kind of a substantial tail of this still spreading into '05?

And then just so I understand on the gross margin stuff that you have given us to kind of help us assess the impact, correcting for the withdrawal of Vioxx, looks like underlying gross margins would be about 77% for the rest of the business.

I'm wondering if this is correct, if there were any other one time charges in there, or if this, you know, if this is it.

Thanks for your question.

First, just to go over PGM, and I think we talked about the product mix change that has resulted in a lower PGM for this current quarter.

Again, to help in the understanding of our business and provide greater exposure, we calculated the PGM to be 79.1% year to date, excluding the impact of the withdrawal of Vioxx.

We have already-- we have also disclosed that Vioxx has an above average product gross margin, and with the resulting change in product mix we, are estimating fourth quarter PGM to be 74.5%-75.5%.

In giving you guidance for the full year, we, we are excluding the impact of the withdrawal of Vioxx to 78-79% as a result of the changes in mix.

You know, I can't comment concerning the calculations you made, but I think, hopefully, that provides you a little more understanding of how we have thought about PGM and how we're providing additional disclosures for you.

Concerning the actual costs of the withdrawal, we have not forecasted 2005, as I commented on in the last question, but we have tried to determine, in great detail, the costs within the third quarter, and book everything that we, we know about to date, so that, that is recognized.

Now, in the fourth quarter, you know we are going to have the foregone sales of 700-750 million, that we've already discussed.

Additionally, there are other potential additional costs that we're not aware of at this current time that could also be booked in the fourth quarter.

Hopefully, that guidance and disclosure has proved helpful in your modeling.

Next question, please.

We'll go to Carl Seiden of UBS.

Thanks very much.

Mike, I think, [Rakel] Martin's comments following Vioxx withdrawal relative to whether or not there were any fundamental implications to Merck's strategy, were generally that whether it be relative to significant cost cuts or a change in attitude about M&A, for the most part were no, that is was really, that's one of the things that you have to get past, but the strategy stays intact.

I'm wondering, to what degree you think it's fair to think about those comments, those were the comments at that time, and you need a little bit of space after this thing, can you describe whether or not there's any kind of explicit strategic process underway right now at Merck, relative to what the implications might be relative to strategy, if there is, when we could expect any kind of comment on that?

Thanks.

Thanks for your question.

Essentially, there is no change in strategy.

Understandably, the impact of the withdrawal of Vioxx is significant, and we've done our best to disclose that impact.

And we are doing everything we can to redeploy research and development and marketing and sales personnel, formerly dedicated to Vioxx, to areas where additional growth opportunities exist, including other research programs, support of in-line products and upcoming product launches.

We are not going change our fundamental strategy.

We believe, that long-term, as was before the Vioxx withdrawal, as is today, that the strength of our company is in the discovery, development and marketing of novel medicines, and that is where we have put our emphasis, and we continue to.

Going forward, we will continue to look for additional opportunities to enhance efficiencies throughout the organization, as well as accelerate growth.

Next question.

We'll go to Scott Henry of Oppenheimer.

Thank you.

Just a couple quick questions.

One, are you seeing any -- or what kind of impact are you seeing on the prescription trends for Arcoxia O U.S., if you're seeing any at this point in time?

And another question, just on the Pneumovax increase in vaccine there, is that mostly in elderly vaccine?

Thanks for your question.

As you know, Arcoxia is marketed in 48 countries worldwide.

I think it's too early to give any specific comment concerning trends for prescriptions as a result of the withdrawal.

In regards to your other question, on Pneumovax.

Pneumovax 23 has significant business in the elderly.

We don't have specific information right here on the call, but, clearly, that is a significant patient target for this vaccine, and one in which, one of the key reasons that we're making it available.

Next question.

We'll go to David Moskowitz of Friedman, Billings, Ramsey.

Yes, thanks, and good morning.

Just a couple of things.

Looks like the Vytorin-Zetia franchise is doing pretty well, Zetia holding up extremely well, much better than expected.

Can you talk about the percent of coadministration versus what our previous expectations were, whichI think was about 60-70%.

Is that changed, or can you talk about that dynamic?

Then also, with respect to Arcoxia outside the U.S., if you can't give us trends, can you talk to us about what your sales reps are saying to physicians with regard to the COX-2's?

Thank you.

Yeah, thanks for your questions.

First in, regards to Arcoxia sales rep messages, we don't disclose specific marketing tactics or promotional messages, so, I don't think it would be appropriate for me to comment on that at this current time.

In regards to Zetia, we are very pleased with the performance of Zetia.

And we continue to see that percentage of patients new to Zetia grow for both coadministration and monotherapy was slightly faster growth with co-administration.

This dynamic is consistent with our view that, while our initial growth included a cohort of patients needing an option to Statin, the brand would continue to grow significantly more by generating more coadministration usage.

So I don't have a specific numbers to guide you, in terms of the relative level of co-administration versus monotherapy, but, coadministration does continue to be slightly greater than monotherapy.

Next question, please.

And as a reminder, if your question has been address, you may remove yourself from the queue by pressing star-two.

We'll go to Tony Butler of Lehman Brothers.

Yes, good morning.

Thank you, Mike.

You alluded, again, to the additional output of Pneumovax.

I would like to ask whether or not that additional cost of goods has already been incurred, will it be incurred in the fourth quarter, or is it something that lingers into 2005?

Secondarily, did the government ask you to actually make the additional 11 million doses, and I'm asking with respect to, is the government prepared to help you if you need to eat 11 million doses were it not to be sold?

Thanks.

I-- thanks for your question.

First, in support of the call to action, as was in our press release, on October 19th by the U.S. department of Health and Human Services, that emphasizes the importance of Pneumococcal vaccine, we are working to triple the available supply of Pneumovax 23.

We feel it's the right thing to do, and we are making that product available.

We expect to have an additional 15 million doses available in the United States for the 2004-2005 season.

We believe that this additional quantity will meet the anticipated demand.

The government has not made any deal with us, in terms of guaranteeing a supply, and we do not guide, in any way, where the sales of Pneumococcal vaccine will be, given that inheriently, there is, you know, this is a new event in terms of understanding how the demand will be for this product, given what has happened with the flu vaccine, there's a lot of uncertainty around that.

However, within 2004, Pneumococcal 23 vaccine production and sales have been included in the guidance.

Next question.

We'll go to Mara Goldstein of CIBC World Markets.

Yeah, just two things.

You mentioned, right at the end of your formal remarks, that the fourth quarter is not just dependent on Vioxx.

I'm just wondering if that was a general disclaimer or there are other business issues that you would like to disclose right now?

Then secondarily, with respect to the release of HPD data next month, what data are we talking about here?

Okay.

First, let me comment on my last remark concerning the guidance.

What I was really responding to was, as we guided fourth quarter EPS of 48 cents to 53 cents, you'll notice that's a 5-cent spread.

Also, the negative impact concerning Vioxx has been better defined as 50-55 cents, which is also a 5-cent spread.

There is no correlation, there is no direct dependency between those two numbers.

So, I wanted to highlight to people is, that the ongoing business has risks and variability all around it, just a normal business variation, and, so, it's a very general statement.

And, I did want people to draw a conclusion that you can get to one number for fourth quarter EPS by just looking at the Vioxx withdrawal.

It's much more variable than that.

As you do in your normal modeling for EPS, you take into account many factor across the business, and so it is a very general statement.

Concerning the presentation at ICAAC, we were pleased that at a late breaker, that our HP vaccine will be presented, and I don't want to give additional details to that presentation, as we are embargoed by ICAAC.

But, the title of the late breaker abstract has been posted their website, and will be presented on November 1st, and it's-- it discusses the prophylactic human papillomavirus, HPV16 virus like particle vaccine, preventing HPV16 related cervical enteral epithelial neoplasia.

That is the title of the actual study that will be presented as part of our Phase II program, and I really don't have anyl details given the embargo.

Next question, please.

Steve Scala, SG Cowen.

Thank you.

Have I two questions.

First, you have addressed the gross profit margin impact a couple times already, but could you provide M&A and tax rate guidance with the Vioxx withdrawal included.

Secondly, regarding the Fosamax patent litigation, is there any update on the timing of the EPO decision in Europe?

I think a written decision was expected last month, so maybe you could tell us if it was received and was it consistent with Merck's expectations?

Yes.

Thanks for your questions.

First, regarding the Fosamax decision, I tried to mention that in my opening remarks, but let me quickly review those in case it did not register with folks.

As we expected, the European patent office followed up on its oral decision with its written decision to revoke our patent in Europe, that covers Fosamax once weekly.

We filed our notice of appeal on September 16th, and plan to offer our written statement in evidence supporting the once weekly patent by the due date of December 29th.

Based on all-- based on other patents, all forms of Fosamax are protected in most European markets until at least 2007.

Then, in regards to your comments concerning M&A and tax, without the inclusion, or with the inclusion, I'm sorry, of the Vioxx withdrawal, we feel it's more appropriate to really think about the business excluding the Vioxx impact.

Clearly, you have a fair number of information that you can make whatever calculations you wish to, and we're pleased to provide that disclosure to help in your modeling and your understanding of our ongoing business.

But, I would like to stick to the guidance that has already been provided, in terms of the tax rate estimated to approximately 28-29%, which excludes the adjustments related to the withdrawal of Vioxx, and then materials and administration.

Again, we provided all of that information, and I will refer people, as part of the press release, there is financial guidance that is summarized within that page, and I think that give as good summary if people want to refer to it instead of trying to write down notes during the call.

Next question, please.

We'll go to Jami Rubin of Morgan Stanley.

Thank you, Mike.

Can you hear me okay?

Yes, thank you.

Great.

Quick question regarding Vytorin.

You posted 42 million in sales this quarter.

I imagine the bulk of that is pipeline, but you might want to clarify that.

Second question relates to the milestone payment still outstanding to Schering-Plough of 120 million.

Can you give us a sense for when those payments will be made?

Frankly, we were surprised that payment wasn't made this quarter, given the approval of Vytorin, but if you could put a little more color around that.

Thirdly, the upward guidance on the equity income line from the Merck-Schering joint venture has now been moved up.

I think this is the second quarter in a row.

Can you give more color bed that as well?

Is that tied to the revenue outlook for the combined franchise, or is it related to your resource allocation?

I'm just wondering if you could give more color on that, please?

Thanks.

Okay.

I'll try to remember the questions that you asked.

In terms of any milestone payments to the JV this quarter, there were none.

And we, we have disclosed information as relevant, that all goes into the Merck Schering-Plough joint venture line anyway, and so, we, we report that and we disclose that within that line, but there are no milestone payments made this quarter.

In terms of the equity income, and a way to think about that, we have said, previously, that we expected the Merck Schering-Plough joint venture to be positive in 2004.

And, we continue to have good, you know, progress to date concerning that area.

However, you know, one of the things we want to keep in mind, that it's not just Merck Schering-Plough that is driving equity income, there is a significant piece from AZLP, and that, overall we provided guidance for equity income, and that one should not just assume that all of that or any increase is coming from Schering-Plough, that joint venture.

As you know, there are many components with AZLP that make it difficult to model, and difficult to judge, just based upon one aspect of the business such as [PPI] growth.

But, I think, collectively, we try to provide guidance by, you know, signaling that we thought the Merck Schering-Plough joint venture would be positive, and then, also providing a full year guidance concerning that number, which, again, we move up this quarter to 900 million to $1 billion.

In regards to your question on, our Vytorin performance, in terms of the sales and a little more information concerning how that is performing, you know, [NRX]market share for Vytorin right now is 2%, based on week ending October 8th, and versus [comparetors], we feel very good, versus the Crestor and Zetia [comparetors] that many of you are tracking against.

We also, you know, cannot at this point in time, really provide a lot of clarity concerning the sourcing in that business.

We look forward to future quarters, in which we will be able to provide much more clarity for you, but ,really when you think about Vytorin and its profile, you know, it's a significant new treatment for a very growing market.

That market quarter grew 15%, you know, with a profile that has stronger LDL reductions than the market leader, Lipitor, at starting dose, and across the dosing range, and also versus ZOCOR, and to have that within the label.

We really are excited about the possibility of Vytorin to really capitalize on a market that still has significant unmet need, and is a very large population that needs to be served.

So, hopefully, that information provides a little more clarity concerning the Merck Schering-Plough joint venture and also equity income overall.

Next question.

Al Rauch, AG Edwards.

Thank you for taking my question .

Do you have any concerns about your PPAR joint venture with Bristol Myers, with AstraZeneca delaying their launch because of safety concerns, and you're at a point right now where you're expected to file in the fourth quarter.

Has anything come up, or are you still very confident about filing this product?

Thanks for your question.

We're very pleased with our relationship with Bristol Myers Squib, and this collaboration.

As you know it, is the first in class dual PPAR agonist, and, I really can't comment on AstraZeneca's statements.

However, we have passed that threshold in which the talks data was needed so that you could go ahead and move forward with human trials.

And so, we announced in this call, and continue to support that we target a filing of fourth quarter this year, and really look to [mereglidizar] to be, you know, an exciting new opportuniity.

As you know, it's being developed for the treatment of both, blood glucose and lipd abnormalities in patients with type two diabetes.

And type two diabetes effects an estimated 40 million people in major markets throughout the world, and is growing significantly.

So, we're very pleased to date with our relationship with Bristol Myers Squib and the associated collaboration.

Next question.

We'll go to Barbara Ryan of Deutsche Bank.

Good morning.

Thank you for taking my question.

Just following up on the comments that you did make about the base business, and grosss margins at 74-75% in the fourth quarter, based on the comments you made about the lost revenues being in there for Vioxx, but any additional costs not being theoretically in there, that they would come on other lines.

What would-- why wouldn't that be the base level then from which we should be thinking about 2005?

That's the first question.

Second question is, if you assume a gross margin for Vioxx of 90-plus percent of sales, you still come up with that 74-75% being well lower than just the impact of that one item, so, whatever mix shift is occurring to the downside on the base business, is that likely to continue to be the case going forward?

Thank you.

Thanks for your question.

I did not understand all parts of it, but I think there's a couple of different things that we need to just go over in better detail.

We have not guided on 2005 PGM, first off.

Again, we're not going to guide anything on 2005 at this call.

However, in, in looking at the product mix, you know, recognizing that there are products that have higher gross margin than others, and I drawn one illustration of Cozaar/Hyzaar, which, for the quarter grew 14%, and ZOCOR which has a higher PGM than average, actually decreased 13%.

So, you know, basically you have mix changes that are driving this PGM separation, and I don't want to go over product by-product because we don't disclose that information in terms of the PGM mix, but, I think it's important, as you model PGM going forward, and also think about the product mix, which products are growing fastest.

When you look at the products that have double-digit growth year to date, you have Cozaar/ Hyzaar, Singulair and Fosamax, double-digit growth year to date.

So, you have to model, take into account your understanding to date.

I think that's, that probably addressing your PGM question.

Again, we provided guidance of 78-79%, excluding the impact of the withdrawal of Vioxx.

Now, I'll take the last question.

We'll go to Jim Kelly of Goldman Sachs.

Great.

Thank you, very much.

I just wanted to ask one question aboute HPV presentation, just to make sure I heard you correctly.

This is part of the Phase II program, and is it just in one of the four strains?

Thank you .

Yes.

Thanks for your question.

As I went over the abstract title, I think it gives a good sense that it is for the HPV 16 virus-like particle vaccine, and it is part of the Phase II program.

We are currently enrolled in our Phase III program, and looking forward to ultimately presenting those results.

But, as you can see on ICAAC website, we are a late breaker, and excited to present that at that very important meeting.

Okay.

With that, I would like to bring this call to a close.

In summary, there was a lot of important events in this quarter.

We continue to advance our pipeline as disclosed in our August 10-Q, and our comprehensive licensing and external lines program has significant activities again in the quarter.

In addition to the Vioxx announcement, there were several other product events for Merck in the third quarter, including the Merck Schering-Plough approval and launch of Vytorin, and the presentation of results of a head to head study showing that Fosamax demonstrated significant and greater increases bone mineral density, or BMD, and reduction in markers of bone turnover than Actonel.

We recognize that, as a result of the withdraw of Vioxx, we continue to look for additional opportunities to enhance efficiencies and reduce our cost structure.

It is not just a business as usual here.

As we continue to make significant progress in this area, we will disclose that information to you, and we look forward to that opportunity.

So, with that, I know people still have a very busy day ahead of them.

We thank you l for your participation and look forward to seeing many of you at our analyst day on December 14th.

Have a great day.

That concludes today's conference call.

We thank you for your participation.

You may disconnect at this time.