默克藥廠 (MRK) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to Merck's second quarter 2005 earnings conference call.

Today's call is being recorded.

At this time, I'd like to turn the call over to Mr. Graeme Bell, Senior Director of Investor Relations with Merck.

Please go ahead, sir.

Thank you, Luanne, and good morning, everyone.

Thank you for joining us on Merck's second quarter earnings conference call.

I'm Graeme Bell, Senior Director of Investor Relations.

This morning, as always I will review each line of the income statement and highlight important drivers.

Our earnings press release and supporting material were issued at 7:30 this morning and provide details of all our major products.

Let me remind you that this information can be accessed under Annual and Other Financial section on the Investor Information tab on merck.com.

An internet-based replay of this conference will be available on the home page until the July 28th.

Let me begin by reviewing the Safe Harbor language.

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

These statements involve risk and uncertainty which may cause results to differ materially from those set forth in the statement.

The forward-looking statement 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.

Merck 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 business particularly those mentioned in Merck's most recent 10-K and 10-Q, which are posted on our website.

So this quarter was relatively straight-forward with the exception of a one-times tax charge for discreet elective events.

The results were in line with expectations.

Today we announced 2Q '05 worldwide revenue of 5.5 billion and 10.8 billion year-to-date, as Merck's newer franchises continue to grow.

Earnings per share came in on a GAAP basis at $0.33, and this result, when considered with prior results, means that the year-to-date EPS on a GAAP basis was $0.95.

Merck will repatriate $15 billion of foreign earnings in accordance with the American Jobs Creation Act of 2004, as well as implement certain tax planning strategies, resulting in a net tax charge of $640 million in this quarter.

Excluding this net tax charge of $0.29 for these discreet events, earnings per share for the quarter and the first half of the year was $0.62, consistent with expectations, and $1.24 effectively.

In terms of guidance, Merck anticipates full-year 2005 EPS of $2.44 to $2.52, excluding the net tax charge of 640 million, and we are guiding in this fashion to help you to continue to model the underlying business fundamentals that remain unchanged.

We anticipate reported full-year earnings per share of $2.15 to $2.23.

Regarding 3Q '05, we anticipate earnings per share in the range of $0.61 to $0.65.

All guidance elements remain unchanged except equity income and SG&A.

And I'd like to explain why that is in a moment.

In addition, as we have said in the past, this guidance does not reflect the possibility of the establishment of any reserves for any potential liability relating to the VIOXX litigation.

Now before progressing to the details of the second quarter, let me comment on two items that I know you'll be interested in -- the status of VIOXX matters, and our new CEO, Richard T.Clark.

So with regard to VIOXX, in the second quarter, the Company did not increase the VIOXX legal defense reserve.

Each quarter we re-evaluate the appropriateness of the reserve balance based on various factors, such as levels of spending to date, the number of cases filed, and other relevant information.

Based on our evaluation at the end of the second quarter, we continue to believe that the estimated amount of 675 million, net of payments, incurred through June 30th, continues to be the appropriate reserve amount based on the best judgments of the Company together with advice received from our outside counsel.

The Company has not established any reserves for any potential liability relating to VIOXX lawsuits and to VIOXX investigations.

The Ernst vs.

Merck product liability trial is currently ongoing in Texas.

And the Company currently anticipates that one or more additional VIOXX product liability lawsuit may go to trial in the second half of 2005.

As stated in the press release on Page 8, as of June the 30th, 2005, the Company has been served or is aware that it is being named as a defendant in approximately 4,100 product liability lawsuits, which include approximately 7,500 plaintiff groups alleging personal injury resulting from the use of VIOXX, and in approximately 120 punitive class actions alleging personal injury and/or economic loss.

Certain of these lawsuits include allegations regarding gastrointestinal bleeding, cardiovascular risk, thrombotic events, or kidney damage.

As of June 30th, 2005, the VIOXX withdrawal process was substantially complete, and the costs associated with the withdrawal were in line with the original amount estimated by the Company.

Now given the ongoing nature of VIOXX legal matters, I will not be able to comment further on any aspects of VIOXX on this call.

Instead I would refer you back to page 8 of the new -- news release for an update.

On May the 5th, the Board of Directors of Merck and Co., Inc., announced its election of Richard T. Clark as the Company's Chief Executive Officer and President and member of the Merck Board.

Mr. Clark has 33 years of experience at Merck, both in manufacturing and, importantly, for six years our former pharmaceutical benefit management subsidiary, Merck-Medco.

On becoming CEO, Dick Clark stated the he wanted to meet the needs of patients and build shareholder value, as they are cornerstones this Company.

He believes that Merck's performance and outlook is not what it should be and is committed to enhancing Merck's current and future performance.

To address current performance, the Company must gain approval from the launch of four investigational vaccines in the pipeline.

The Company must expeditiously file four, and gain approval of the next wave of promising late-stage pipeline products, and increase efforts to reduce Merck's cost structure over and above what has been achieved to date.

With regard to enhancing future performance, Mr. Clark has identified several priorities for Merck, which include -- prioritizing therapeutic areas that provide the best prospect for success, creating a future selling model for our products, improving ways of demonstrating the value of our products to customers, and instill a mindset and set of capabilities about managing cost and increasing productivity here at the Company.

Dick has always made it clear that he recognizes the importance of the Company's financial strength and its commitment to shareholder value.

He has stated many times, but it's worth repeating here for all of you, that management and the Board remain committed to our current dividend, and we have the financial strength to support it.

That has not changed, and we do not anticipate it changing in the future.

I can't provide you additional details at this time, given Mr. Clark's ongoing review, and I'll not really be able to comment further on the current strategy on this call, but you will all hear an update on progress at the appropriate time in the future.

Now let's turn to Page 13 and 14 of the press release to begin the P&L review.

Page 13 lays out the second quarter results, and Page 14, the year-to-date.

And as I say, we'll walk through each of these schedules.

So starting with sales, in the second quarter, we recorded revenue of 5.5 billion.

That's a 9% decrease compared to the second quarter of last year, which included 653 million of VIOXX revenue.

If you exclude the VIOXX revenue from the comparative period, you'd have seen growth of 2% in this current view.

As you see from our financial disclosures, this quarter revenue performance included a 2% benefit from foreign exchange, a 1% benefit from price, and a volume decrease, in the aggregate, of 12%.

We are experiencing modest volume growth in our newer franchises, and that has partially offset seeing declines in older franchises.

Year to date, sales were 10.8 billion.

That's down 7%, including an overall 2% benefit from foreign exchange and a 1% benefit from price.

Of course, the base period includes VIOXX, so if you exclude those product's revenues from the corresponding six months of 2004 to give a fair compare, you'd see growth of 5% year-over-year.

I'll go into more detail in a few minutes, but in summary, worldwide sales of Merck's products were consistent with the Company's expectations, and SINGULAIR, FOSAMAX, and COZAAR/HYZAAR sales performance remained strong, at 10% growth collectively in the quarter, and 10% for the first six months of 2005.

Sales of Merck's other promoted medicines and vaccines that treat and prevent a broad conditions grew 9% compared to 2004 corresponding period, and 11% on a year-to-date basis.

The performance of the U.S. business continues to be driven by our newer franchises, which are benefiting from new indications supported by clinical outcomes data and product launches.

Internationally, SINGULAIR, FOSAMAX, and COZAAR/HYZAAR sales performance remained strong, collectively, at 13% in the quarter and 15% for the first six months of 2005.

This is driven by a volume growth of 7% in the quarter and 10% year-to-date.

Consistent with our expectations, sales level in the quarter reflect actual demand, as you have previously discussed.

Our overall product inventory levels are now less than a month, and we expect that to continue.

Now also within the top line are revenues from alliances, primarily AstraZeneca Limited Partnership.

In the second quarter, revenue from the Company's relationship with AstraZeneca Limited Partnership recorded by Merck was $337 million.

Looking sequentially, that is down, but year-to-date we have recorded $772 million, and keep in mind, the inherent variabilities relating to this revenue, given that Merck is not actively managing these products.

Therefore, our revenue recognition takes into account inventory levels at AstraZeneca of PPI and non-PPI products, as well as their shipments out.

On 2005 guidance, as always, it is updated based on recent results as well as future expectations, and reflect the dynamics of the PPI market, i.e., multiple generics, OTC products, and uncertainties these create which regard to future volume and price.

Also keep in mind that these guidelines incorporate the expectations of non-PPI products, such as ATACAND, PLENDIL, LEXXEL, and ENTOCORT.

Notwithstanding these uncertainties, we are reaffirming our estimated AstraZeneca revenue to be approximately 1.4 to 1.6 billion for the full year 2005.

Moving down to the P&L on materials and production, it came in at 1.16 billion.

That's in line with the second quarter of 2004.

If you calculate the actual change in PGM dollars, you'll see that they declined 11% versus 2Q '04.

Now if you were to normalize 2Q '04 by excluding VIOXX from the base, and without getting into the precise amount of VIOXX PGM in the base, you would see that PGM dollars grow at levels generally in line with the adjusted growth in revenue, i.e., 2.5%, ex-VIOXX, as just described.

Likewise, if you were to normalize the year-to-date and make the same exclusion from the base period, you would see that PGM dollars grow, again, generally in line with the adjusted growth rate in revenue, i.e., 5%, ex-VIOXX, as just described.

Now keep in mind these revenues in and PGM's don't always grow at the precisely same rate in any quarter, due to changes in product mix.

The actual product gross margin in the quarter was 78.8%.

This result is affected by final product mix in the quarter.

Consequently, the resulting quarter PGM is up sequentially, and slightly above our guidance range for the full year.

But I would point to the year-to-date PGM as being 77.5, right in line with our 2005 guidance.

Hence, we're comfortable with our full-year 2005 guidance range, and we are reaffirming our product gross margin, as estimated to be approximately 77% to 78%.

Moving down, 2Q '05 marketing, administrative expenses came in at 1.8 billion.

That is an increase of 9% over the second quarter of 2004.

Year-to-date expenses came in at 3.4 billion, and that is up 4%.

In the second quarter of 2004, marketing and administrative expenses included a $21 million restructuring cost.

And if you were to exclude this from the compare, SG&A increased 10% and 6% for the quarter and half year, respectively.

Now just as we saw the benefit from foreign exchange on the revenue line, the opposite is true here, where expenses are higher as a result of foreign currency.

And the 9%, as compared with the second quarter of 2004, included a 3% increase from foreign exchange.

That said, the increase during the quarter reflects activities required to prepare for the launches of our four investigational vaccines; maintaining active support for our in-line products; and the roll out of new product indications globally, as well as the necessary support for current launches; continuous dissemination of critical outcomes data, and the ongoing needs of the business.

Underlying this, there is an increased focus on cost management.

We continue to see the positive benefit of practical, ongoing cost management initiatives started in prior periods, without having a negative impact on either productivity or Merck's ability to meet its business objectives.

We continue to redesign many of our critical business processes that will enhance our ability to maximize future opportunities.

Regarding guidance, we're continuing to provide it on a change in marketing and admin relative to a base period, excluding one-time items to help you with modeling.

And we are increasing our full-year 2005 guidance.

That is, we now anticipate marketing and administrative expenses to increase at a low- to mid-single-digit percentage growth rate over the full-year 2004 level.

The full-year 2004 level referred to excludes the following items -- restructuring costs relating to previously position elimination, costs relating to the withdrawal of VIOXX, and a charge taken in the fourth quarter relating solely to future legal defense costs on VIOXX legal matters.

In other words, the guidance is low- to mid-single-digit increase over full-year 2004, as reported, less the $850 million, and that should get you to the base of 2004 from which to project '05.

Moving down the P&L to research and development.

R&D for the second quarter was $947 million.

That is a 4% decrease year-over-year.

Now recall that in 2Q '04 we accounted for $120 million in R&D expenses associated with initial payments of $100 million to Bristol Myers-Squibb and a $20 million payment to Vertex.

If you were to exclude these items from the base period in 2Q '05, R&D grew 9%.

For the first six months of 2005, R&D expense was $1.8 billion.

That's down 10%, but if you exclude the in-excess of $300 million associated with target acquisitions, collaborations, and licensing in the base period, you will see that R&D grew at 8%.

That reflects continues growth in our internal research, and we are seeing this across the board in terms of basic pre-clinical and clinical developments.

Merck's R&D efforts to expand its pipeline are entering new therapeutic categories and combining internal and external research continued to produce positive results.

These efforts yielded results in the second quarter of 2005 when the FDA accepted for standard review the BLA for two of our investigational vaccines, namely ROTATEQ and ZOSTAVAX.

ROTATEQ is our oral pentavalent vaccine to protect against rotavirus gastroenteritis.

ZOSTAVAX is being reviewed for the prevention of shingles, for the prevention of postherpetic neuralgia, and for the reduction of acute and chronic shingles-associated pain in adults.

Now during the quarter there was a lot of increased focus on our investigational vaccines.

So I'll just take a moment to recap on the discussions that we had in our disclosures during the second quarter.

Regarding ROTATEQ, we have highlighted that we expect to be the first to the market in the U.S. with a three-dose oral pentavalent vaccine.

Merck has submitted applications for licensor of ROTATEQ in Australia and Mexico, and through our Sanofi Pasteur-MSD JV in the EU.

We plan additional filings in the second half of 2005 in Canada, in Asia, and in Latin America.

In addition, two presentations of data from the Rotavirus Efficacy and Safety Trial, or REST were delivered during meetings of the European Society of Paediatric Infectious Diseases in Spain.

These presentations and abstracts probe the results of the safety evaluation with respect to intussusception and efficacy against all severe gastroenteritis.

We expect the full results of REST to be published in a peer journal in the second half of 2005.

On ZOSTAVAX, we've discussed at length the results of the shingles-prevention study published in The New England Journal of Medicine in June, in which ZOSTAVAX demonstrated its ability to reduce total burden of pain and discomfort caused by shingles by 61%, and reduced the incidence of PHN by 67%.

Concerning GARDASIL, our investigational quadrivalent vaccine designed to target HPV types most commonly associated with cervical cancer and cervical pre-cancer, as well as types that cause external genital lesions, we shared Phase III data.

These data of 1,529 girls and women aged between 10 and 23, and boys aged 10 to 15, indicated that anti-HPV immune response following administration in adolescents were higher than those seen in older girls and young adult women.

During the quarter, we confirmed that the Phase III trials were fully enrolled in more than 25,000 people across 30 countries worldwide.

We are gearing up for a phased global launch of GARDASIL.

Market development activities are underway at a state level here in the U.S.

We are working with regulatory agencies and third-party organizations throughout the world in preparation for approvals.

Again, Merck remains on track to submit the license application for GARDASIL to the FDA during the second half of 2005.

We expect the initial target population to include females aged 9 to 24, and we expect to be a first to market in the U.S. and the EU.

I can also confirm that the interactions between Merck and the U.S.

FDA regarding GARDASIL have been operating under fast-track procedure.

SEBA granted fast-track designation to our GARDASIL clinical program back in 2002, as the investigational vaccine is intended to prevent serious or life-threatening conditions, that is to say, CIN 2/3 and cervical cancers and it has the potential to address an unmet medical need.

An important feature of fast-track designation is that it emphasizes the critical nature of close, early communications between the FDA and the sponsors to improve efficacy and product development.

Thus, SEBA has provided expedited and detailed reviews of protocols, analyst plans, and our critical planning documents for the program to ensure the efficacy review process for the licensor application of GARDASIL.

This fast-track designation is not the same as priority review status.

SEBA will make a decision on that once GARDASIL has been submitted to the FDA, and that process has been completed.

As I said, we remain on track for filing in the second half of 2005.

Other progress in Merck's research highlighted during May and June was information and clinical data that we presented at ADA, APSS, and at ASCO.

I refer you back to the respective press releases for details.

But in quick summary, at ADA, Merck presented three studies of Phase II data on sitagliptin.

Also ADA, Merck and Bristol Myers presented Phase III data on PARGLUVA, and a Phase II dose-range study.

At APSS, Merck presented results of Phase II clinical trials with gaboxadol, potentially the first Selective Extrasynaptic GABAA Agonist, or SEGA, compound that demonstrates significant improvement over placebo in several study end points for both sleep initiation, sleep maintenance in patients with primary insomnia.

At ASCO, recently, Merck presented the results of Phase IIa studies on our oral suberoylanilide hydroxamic acid compound for the treatment of cutaneous T-cell lymphoma.

These data showed that SAHA significantly improved overall disease condition in 24% of highly-relapsed CTCL patients. 44% of patients with the Sezary Syndrome had significant improvement over disease condition, and 58% of patients with pruritus observed significant release -- relief, sorry.

On EMEND, which is currently indicated for use in combination with other antiemetogenic medicines to help prevent both acute and delayed nausea and vomiting associated wit highly-emetogenic cancer chemotherapy, and we presented results of an investigational study evaluating the effects of an antiemetic regime, including EMEND, in the prevention of nausea and vomiting after chemotherapy in breast cancer patients, and this was published in The Journal of Clinical Oncology in April.

Now recall that Merck filed the Moderately-Emetogenic Chemotherapy with regulatory agencies around the world during 2004.

MEC, or Moderately-Emetegenic Chemotherapy, triggers nausea and vomiting in between 60 and 90% of patients who do not receive antiemetic medications prior to treatment, and accounts for approximately 50% of the 1.2 billion CINV worldwide market.

Our MEC study, i.e., EMEND in combination with standard regime versus standard regime alone, showed that the overall, complete response was greater in the five days after initiation of chemotherapy.

Significantly more patients reported no vomiting, and there was minimal or no impact on CINV on daily life.

The Moderately-Emetgenic Chemotherapy indication was approved in the EU during 2Q '05, and we expect to launch this indication during the second half of '05 in the region.

In addition to the significant investments we continued to make in our internal research, Merck continues to seek valuable compounds through licensing.

In late June, Merck entered a licensing agreement with Sumitomo for SM13496, an atypical, antipsychotic compound currently in Phase II development for the treatment of schizophrenia in all parts of the world, excluding Japan, China, Korea, and Taiwan.

Again, year-to-date research and development came in at 1.8 billion.

We are, therefore, reaffirming our previous guidance.

And I would refer you back to page 11 of the release for the full guidance details.

This continues to reflect our expectations for internal research and development to continue external collaborations and complement our internal research.

Turning to equity income.

In reviewing equity income from affiliates, you'll see $334 million of income, and that is up sequentially 52% over 2Q '04.

Recall that the contribution to equity income comes from all of our JVs, AstraZeneca Limited Partnership, Sanofi Pasteur, J&J, Merial, and Merck/Schering-Plough.

The $114 million year-over-year increase was driven by several of these JVs, including the performance at Sanofi Pasteur, Merck/Schering-Plough cholesterol franchise, and Merial.

Year-to-date equity income from our affiliates is up 57%, at $650 million, as several of the JVs continue to drive the strong performance.

Based on this, we are increasing our full-year 2005 guidance.

Equity income from affiliates is now expected to be 1.4 to $1.6 billion.

Equity income from affiliates includes the results of the Merck/Schering-Plough collaboration, combined with the results of the other JV relationships.

Moving down to other income expense, and if you go to the other financial disclosures page which accompanied the press release -- and we provide that for backup -- you'll see here that expenses in the quarter were $40 million, and year-to-date, 41 million.

There is nothing to highlight here in the quarter.

All I would point out is the comparative-based period for the first six months of the year.

In the first six months of 2004, it included the 177 million gain from the sale of our equity stake in the European OTC joint venture with our partners, J&J, and a $100 million gain on securities relating to the integration of the Banyu portfolio.

Staying on the other financial disclosures page for a moment, if you move down to the JV detail, consistent with past performance, you'll see strong growth in the top-line revenue from Merial Animal Health JV, as well as from Sanofi Pasteur MSD vaccine business in Europe.

Regarding our very successful collaboration with Schering-Plough, global revenue as reported by Merck/Schering-Plough partnership on ZETIA, branded EZETROL outside the U.S., reached $314 million in the second quarter.

That's up 30%.

In the U.S., ZETIA achieved sales of $240 million.

That's up 13%.

Year-to-date global revenue from ZETIA, EZETROL, as reported by Merck/Schering-Plough partnership reached 646 million, with 509 million coming from the domestic market.

That's up 50% and 34%, respectively.

To date, EZETROL has been approved in more than 80 countries outside the U.S. and continues to achieve solid revenue and market share growth.

Within the U.S., prescription levels for ZETIA increased by approximately 6% for the quarter and 45% higher than June year-to-date versus 2004.

Since the launch of VYTORIN, ZETIA has maintained access with all plasma states.

As importantly, TRx share of ZETIA has actually grown, and is now 6.7% of total prescriptions according to IMS Health Data, in the lipid-lowering market, and this reflects the strong underlying performance of ZETIA.

Turning to VYTORIN, marketed as INEGY in many countries outside of the U.S., developed and marketed by Merck/Schering-Plough, it continues to gather momentum, and all signals point to success.

The Merck/Schering-Plough partnership reported that VYTORIN achieved worldwide revenue of 193 million in the second quarter, 174 million of that was in the U.S.

Year-to-date global revenue for VYTORIN and INEGY, as reported by Merck/Schering-Plough partnership, reached $372 million, with 330 of that coming from the U.S.

Approved last July, VYTORIN accounts for approximately 6% of new prescriptions in the U.S. lipid-lowering market as of June.

And this demonstrates a very strong, consistent growth.

When we look at new patient starts on VYTORIN, over 40% are newly-initiated, first-line patients.

VYTORIN has achieved broad managed care access and has secured greater than 90% in unrestricted coverage.

It is worth noting that in addition to the U.S., VYTORIN or INEGY have been approved in 35 countries.

During the second quarter of 2005, INEGY was launched in the U.K., Portugal, the Netherlands, and Ireland -- Ireland.

In Germany, the first European market to launch INEGY and EZETROL -- okay, these products have achieved nearly 16% market share on a currency basis according to Weekly Data.

The combined Merck/Schering-Plough cholesterol franchise share in the U.S. lipid-lowering market continues to gain momentum, and in the second quarter has captured approximately 12.5% of NRx, and that's based on recently weekly IMS Health Data, and 11.4% of TRx volume in the month of June.

Since the launch of VYTORIN, Merck/Schering-Plough franchise NRx share has grown 103%, reflecting the unique value that both VYTORIN and ZETIA offer physicians and patients with hyperlipidemia.

In the quarter, the combined MSP cholesterol franchise achieved worldwide revenue as reported by Merck/Schering-Plough partnership of over half a billion dollars, and for the first six months of 2005, revenue exceeded $1 billion.

Now let's go back and finish up the P&L.

In the quarter, income before taxes were 1.9 billion.

Year-to-date, that figure is 3.8 billion.

If you were to look at the tax line, taxes in the quarter were 1.2 billion.

And in the second quarter, I'd highlight that Merck recorded a net tax charge of 640 million on taxes on income, which included a $740 million charge relating to our decision to repatriate $15 billion of foreign earnings in accordance with the American Jobs Creation Act, partially offset by 100 million benefit associated with our decision to implement certain tax planning strategies.

The 2Q '05 reported tax rate was 62.6%.

The underlying effective tax rate in the quarter, however, excluding the net $640 million charge was 29.3%.

This is slightly above our previously-announced guidance range, but in this quarter and throughout the year, the tax rate is affected by the impact of changes in mix of foreign and domestic income, currency fluctuations, and the continuous assessment of our tax reserve position.

In reviewing the first six months, the reported tax rate is 45.6%, with the underlying tax rate being 29%.

That said, we are reaffirming our guidance.

The current expectation is that the full-year 2005 tax rate should be approximately 27.5 to 28.5%, excluding the net tax charge that I've just described.

And we're guiding on this basis to help you to continue to model the underlying dynamics of our business.

Moving down to net income and earnings per share, net income for the quarter was 721 million, compared to 1.8 billion for the same period in 2004.

That's down 59%.

Year-to-date, net income was 2.1 billion.

That's down 38%.

Of course, this is affected by all of the factors described above, relating to the worldwide voluntary withdrawal of VIOXX and the tax charge in the current quarter.

Shares outstanding were 2.2 billion.

During -- during the second quarter of 2005, we spent 256 million in treasury stock.

During the first six months of 2005, Merck purchased approximately half a billion as treasury stock.

And in the second half of the year, we consider additional opportunities to purchase the Company stock, as we still have $8 billion under current authorization from the Board with no time limit.

So all of that brings us to an EPS on a GAAP basis of $0.33, compared to $0.79 in the second quarter of 2004.

Excluding the impact of the net tax charge, EPS for the second quarter of 2005 was $0.62, and the quarterly result on this basis is consistent with expectations.

For the first six months of 2005, EPS was $0.95.

Excluding the impact of the net tax charge, EPS for the first six months of the year was $1.24.

And following our previous practice, we continue to provide quarterly earnings guidance one quarter ahead.

Merck now anticipates third quarter 2005 earnings per share in the range of $0.61 to $0.65, and now anticipates that 2005 earnings per share in the range of $2.42 and $2.52, excluding the net tax charge of 640 in the second quarter.

Again, $2.44 and $2.52, excluding the net tax charge of the 640 million in the second quarter.

Merck anticipates reported full-year 2005 EPS of $2.15 to $2.23.

And I refer you to Page 11 and 12 of the news release for a full breakdown of Merck's 2005 guidance.

Again, this full-year 2005 guidance range does not reflect the possibility of the establishment of any reserves for any potential liability relating to VIOXX litigation.

So let's quickly go through some product review which are supported by the other financial disclosures.

And we'll work through these individually.

Keep in mind when we're walking through this, that there is no effective buy-in or buy-out in the base period or the current period.

So, starting with COZAAR and HYZAAR, global sales reached 785 million in 2Q '05.

That's up 8%, and 1.5 billion for the first half of the year, up 11%.

In the quarter, U.S. revenues were 260 million, and that's flat year-over-year, and 495 million for the first half, up 4%.

Retail sales, excluding unaudited sources indicated that U.S. mail-order adjusted prescriptions level for COZAAR and HYZAAR increased by approximately 3% in the second quarter, compared to the second quarter of 2004.

Year to date, mail-order adjusted prescription levels increased 2%.

The reconciling difference there being attributable to price and volume in the unaudited channels.

COZAAR and HYZAAR is available in greater than 90% of all managed care lives, and I would point you back to the fact that in 1Q of '05 the Department of Veterinary Affairs select -- selected COZAAR as the ARB on the VA national formulary for use with patients with hypertension, Type 2 diabetes with neuropathy.

The HYZAAR LIFE stroke risk-reduction indication was approved in 1Q '05, and that is beginning to roll out in the U.S. markets.

Accordingly, for full year 2005, we're reaffirming the guidance range for COZAAR/HYZAAR our antihypertensive franchise at 2.9 billion to 3.2 billion.

Moving next to FOSAMAX.

Worldwide sales for this franchise reached 853 million in 2Q '05.

That's up 8%.

And 1.6 billion for the first half of the year, up 5%.

In the quarter, we recorded 476 million revenue in the U.S., and that is up 9%.

Taking the year-to-date revenue of 885 million, or up 1% for the same period in 2004.

Retail sales data here indicates that U.S. mail order-adjusted prescription levels for FOSAMAX and FOSAMAX PLUS D combined increased by approximately 6% for the quarter compared to 2004.

Year-to-date, mail order prescription levels increased 5%.

Again, as just mentioned, the reconciling difference here is attributable to price and volume in unaudited channels.

Now the FACT data is being very well received by physicians throughout the world.

And based on this study, many physicians are changing their prescribing behavior in favor of FOSAMAX.

The launch of FACT highlighted the efficacy advantage of FOSAMAX versus Actonel and creates a strong platform for FOSAMAX and FOSAMAX PLUS D as they compete in the bisphosphonate market.

The approval of FOSAMAX PLUS D will not extend the patent of FOSAMAX in any region of the world.

For the full year 2005 we are reaffirming our guidance for the osteoporosis franchise at 3.3 to 3.6 billion.

Moving next to SINGULAIR.

Worldwide sales were strong here for this franchise, 730 million in 2Q '05, up 14%. 1.5 billion through the end of June, up 16%.

And this is in line with mail order-adjusted prescriptions.

In the quarter, 489 million related to U.S. performance, and that's up 8%.

Year-to-date, 984 million, and that's up 12% -- sorry, 982 million, and that's up 12%.

Growth from SINGULAIR in the second quarter continues to be driven by positive physician and patient experiences, and the growing body of evidence supporting the use of SINGULAIR in the treatment of both pediatric and adult patients who suffer from asthma or allergic rhinitis.

I would point out that on May the 31st, a price increase for all strengths of SINGULAIR came to effect, at 4.8%.

For 2005 full year, we're reaffirming the revenue guidance from our respiratory franchise here at 2.9 to 3.2 billion.

Moving next to ZOCOR.

Worldwide sales for this franchise were 1.15 billion for 2Q '05, down 16%, and 2.3 billion year-to-date, down 15%.

In the quarter, 814 million was in the U.S., and that is down 15%. 1.6 billion for the first half, that is down 16%.

This performance reflects the many factors shaping the U.S. cholesterol-modifying market.

Be it competing products, both branded or generic, dynamics of price and volume shift, or formulary access, all are present and play into the overall performance of the franchise.

U.S. mail order-adjusted prescription levels for ZOCOR decreased by approximately 6% in the second quarter compared to 2Q '04.

And year-to-date mail order prescription levels decreased approximately 5%.

And this supports the shift that we are seeing to more heavily-discounted segments.

The overall HMG market continues to show acceleration, fueled by product launches and outcome studies that highlight the benefits of statins in preventing cardiovascular outcomes.

In 2Q '05, TRx market share for ZOCOR was approximately 18%, a decrease of 1 point in the period, and that's reflecting the continued market penetration by VYTORIN, the market moving to higher-efficacy statins, and the continued uptake of generic Lovastatin.

Based on our exceptional clinical data, our strong managed care rebate position, and near-term patent expiry, during 2005, ZOCOR has either maintained or improved the number of covered lives in key segments.

At the end of the second quarter, approximately 80% of managed contracts have been renewed through June of '06.

ex-U.S., revenue is down 18%, and this decline reflects the progressive introduction of generics in statin in many markets.

I would remind you upcoming patent expiries on ZOCOR include Australia this month, July 2005; obviously, U.S. in June of 2006; and in Italy in April 2007.

For 2005 full year, we're reaffirming the guidance range here for ZOCOR of 4.2 to 4.5 billion.

Now if we look quickly at other products and medicines, revenue there was 1.5 billion in 2Q '05, up 9% for the second quarter. 2.9 billion was reported for the first half of 2005, and that's up 11%.

For 2005, we are reaffirming the revenue guidance for our other reported products at 5.9 to 6.2 billion.

To complete this product review, I'd like to quickly talk about two other reported products -- ARCOXIA and our antibacterials, to give you some additional perspective and color.

ARCOXIA revenues for 2Q '05 were 50 million outside of the U.S., which is down 19% and 107 million for the first half of '05, which is up 16%.

ARCOXIA is maintaining its share in key markets, including Italy and the U.K., although the overall NSAID market continues to decline.

During the quarter, we announced that the external daily safety monitoring board responsible for the safety of the ongoing clinical outcome studies for ARCOXIA, known as MEDAL and EDGE met and recommended that these study continue as planned.

Consistent with standard scientific practice, Merck remains blinded to data of these trials and anticipates the results of these trials will be available during 2006.

Moving to antibiologics.

Worldwide revenue of PRIMAXIN and INVANZ were 181 and 22 million, respectively in 2Q '05.

That's up 19% and 41%.

PRIMAXIN is the worldwide market leader in the Group 2 carbapenem class, and an antibiologic -- and antibiotic of choice for serious hospital-acquired infections in appropriately vulnerable patients.

Strong performance of PRIMAXIN is a result of pneumonia season, the increase in utilization of PRIMAXIN in light of global availability of alternative therapies, the increased need for broad-spectrum agents to address emerging trends in bacterial resistance.

INVANZ is the only Group 1 carbapenem, a highly effective, once-a-day antibiotic developed to treat a number of complicated community-acquired mixed infections.

Strong performance for INVANZ is being driven by increased formulary review and acceptance as a preferred agent for the treatment of complicated intraabdominal and skin-to-skin structure infections.

So in summary, our core business is developing and discovering novel medicines that address unmet medical needs is on track and delivering results.

The quarter was straight-forward and in line with expectations.

Merck's second quarter EPS on a GAAP basis was $0.33, which included a $640 million net charge, as discussed earlier.

Excluding this charge, EPS would have been $0.62.

Merck will repatriate $15 billion of foreign earnings in accordance with AJCA, and repatriated funds -- repatriated funds will be invested in the U.S. according with the provisions of the law over a multi-year time frame.

Overall revenue of Merck's products were consistent with the Company's expectations, and collectively our franchises are achieving strong top-line revenue growth.

Essential clinical data were presented in important scientific forums to support Merck's progressing pipeline.

We remain on track to submit GARDASIL and file it in the second half of '05.

U.S. sales reflect continued -- the underlining demand.

The U.S. wholesaler product inventory continued to be less than one month.

The Merck/Schering-Plough cholesterol franchise is performing extremely well, and continues to gather momentum.

Year-to-date, the combined MSP cholesterol franchise as reported by Merck/Schering-Plough partnership exceed $1 billion.

Merck anticipates third quarter EPS of $0.61 to $0.65, and as stated earlier, Merck anticipates full-year 2005 EPS in the range of $2.44 to $2.52, excluding the net tax charge of 640 million in the second quarter.

And this should help you to continue to model the underlying business fundamentals, which remain unchanged.

Now this concludes the financial and operational review of the second quarter, but I have one additional note.

Our new CEO wants to continue to expand direct contact with shareholders.

Therefore, starting with the third quarter conference call, I will be accompanied by Merck's CEO and President, Dick Clark; and Judy Lewent, our Executive Vice President, Chief Financial Officer, and President of Human Health, Asia.

Dick and Judy will participate in the operational review and subsequent Q&A that follows.

So now I'm happy to take questions on information provided today.

Luanne, the first caller, please.

[OPERATOR INSTRUCTIONS.] Your first question comes from David Risinger from Merrill Lynch.

Yes, thanks, very much.

Hi, Graeme, I have three questions.

First of all, with respect to VYTORIN, can you just review what percentage of VYTORIN prescriptions for patients are for patients new to cholesterol therapy?

And I'm asking the question because I just wonder what that means for the product when ZOCOR goes generic and managed care might encourage patients to start on a cheaper pill first before moving up to the powerful VYTORIN product?

Second, when do you plan to file GARDASIL in the EU?

And, third, could you just update us on the ex-U.S.

FOSAMAX litigation?

Thank you.

Thank you, David.

With regard to VYTORIN, as I mentioned, in terms of the new patient starts on VYTORIN, that remains at approximately 40% of new, initiated patients.

I don't have the exact statistics that you're looking for to hand with regard to the new, overall entrants.

What I can tell you is that the VYTORIN is being picked up by 40% of new starts.

With regard to the filing of GARDASIL ex-U.S., we haven't at this time disclosed when that will be.

But as I indicated, we expect to be first to market in the U.S. and in the EU.

With regard to your question on FOSAMAX ex-U.S., that process continues as we've described in the past.

And that is the European patent -- we continue to work with the European Patent Office.

The proposal that we put forward to the Patent Office was subsequently sent out to the respective generic companies who are challenging the patent for comment.

And the process requires that they respond with comments to the European Patent Office by the end of July of 2005, so by the end this month.

Then the European Patent Office will begin to look at their responses, and we'll continue to work with the European Patent Office.

And I think as I indicated on the last call, this process with the European Patent Office could go on between one and two years.

Next question, please.

Your next question comes from David Moskowitz from Friedman, Billings, Ramsey.

Yes, thanks, and good morning, Graeme.

The COZAAR/HYZAAR franchise, can you talk about the overall ARB market, in terms of pricing?

I believe you guys have had a price increase there.

Can you talk about the net effect of that pricing?

And also could you update us on the time table for bringing VIOXX back to the market?

Thanks.

Thanks, David.

With regard to your question on the ARB market, the ARB market continues to be one of the most competitive markets out there.

There are, clearly, new entrants in that market.

But we're comfortable with the performance of COZAAR and HYZAAR in that market.

Hence, we're reaffirming the guidance for the range.

Yes, there are pricing pressures in there, and, yes, we have seen movement to higher discounted segments.

But what's important with regard to the franchise that we have is the additional indications.

The fact that we have LIFE now in the HYZAAR label, that clearly is a point of differentiation for that product in that competitive market.

So we remain confident and comfortable with the performance there.

With regard to VIOXX, I can't speculate on that.

We are in discussions with the U.S. regulatory agencies, and it would be inappropriate to comment beyond that.

Next question, please.

Your next question comes from Chris Shibutani from JPMorgan.

Hi, Graeme.

Appreciate your comments, and we look forward to having Dick and Judy on the third quarter conference call.

Could you provide, nonetheless, any more color in terms of what's been happening, in terms of priorities for Dick since he has come on board?

What we might expect to see, rather than waiting until the third quarter?

That would be helpful, thanks.

Thank you, Chris.

We're following a process here since the announcement of our new CEO.

I think Mr. Clark has spent a great deal of time talking to his management committee colleagues, and other senior management within the organization.

Clearly, Mr. Clark, having been a senior member of management for sometime here at Merck is aware of what is going on in the business.

Needless to say, there is a need for that discussion and dialogue with the respective divisional presidents.

That has been occurring.

What else has been occurring is discussions around the current performance and future performance.

And as you indicated, Mr. Clark views that Merck's performance and outlook is not what it should be.

And he is absolutely committed to enhancing Merck's current and future performance.

As I mentioned, I don't have more details.

He's identified several priorities that I called out in the call.

So there are other opportunities.

We'll have Dick and Judy on the call in 3Q.

And then, of course, we've got our annual business briefing at the latter part of the year.

So, with that said, the next question, please.

Your next question comes from Catherine Arnold from CSFB.

Hi, Graeme.

I have two questions.

First of all, could you give us an update on the contingent of ZETIA use that's in combination with ZOCOR?

And, secondly, could you tell us about the sequential change in inventory in total and long term?

Thank you.

I'll address your second question.

With regard to long-term inventory, at this moment in time, we don't have the balance sheet, so I can't comment on that.

I think as we characterize, and as you've seen in prior quarters, there has been that increase in long-term inventory, and that is primarily to support the four investigational vaccines.

Next question, please.

Your next question comes from Tony Butler from Lehman Brothers.

Good morning, Graeme, and thanks.

The question revolves around R&D expense, as many of these trials for the vaccines wind down, yet, guidance seems to be continuing to move up.

Can you comment on what products seem to be moving in to capture the additional R&D expense?

Thanks.

Thank you, Tony.

I mean, with regard to R&D, as the four investigational vaccines, three of which are with the U.S. regulatory agencies, and GARDASIL, as we expect.

Just because they're filing with the regulatory agencies does not necessitate the fact that the standing to support that will continue.

For instance, there are long-term studies on ZOSTAVAX and GARDASIL that will continue way beyond the respective filings here.

So, we're comfortable with the guidance range that we've just provided.

And it supports the activity, not only in terms of internal, and also the fact that we continue to pursue opportunities from an external perspective.

We continue to pursue opportunities that are based on scientific excellence, regardless of their respective phase in the pipeline.

Next question, please.

We have reached our allotted time for questions and answers.

Mr. Bell, do you have any closing remarks?

Well, at this point, I'd like to thank you.

I -- we've covered a lot of ground here.

I think there's important points to cover.

We certainly look forward to the third quarter call.

That's going to represent somewhat of a change in the format, and hopefully you'll appreciate that.

So with that said, we look forward to discussing future achievements with you on the next call.

And I appreciate your participation.

Thank you.

This concludes today's conference call.

You may now disconnect.