默克藥廠 (MRK) 2005 Q3 法說會逐字稿

Good morning, everyone, and welcome to Merck's third quarter 2005 earnings conference call.

Today's call is being recorded.

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

Please go ahead, sir.

Thank you, Michelle and good morning.

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

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

As we mentioned on our July conference call, starting this quarter I will be accompanied on the earnings call by Merck senior management.

So with me on the call today is Merck's CEO and President, Dick Clark, Judy Lewent, our Executive Vice President and Chief Financial Officer, and Ken Frasier, Senior Vice President and General Counsel.

A few logistics before we get into the details.

On this call we will review the results of the third quarter and the supporting materials issued at 7:30 this morning.

You can access the earnings press release and supporting material, a live Webcast and an Internet replay of this conference call on Merck.com.

The Internet-based replay of the conference call will be available on the Web until October 31st.

Before we get into the results, let me remind you that some of the statements made during this call 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 statement may include statements made 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 event or otherwise.

Forward-looking statements on this call should be evaluated together with the many uncertainties that affect Merck's business, particularly those mentioned in Merck's most recent 10-K and our 10-Qs which are posted on the Web site.

We'll begin this call with brief remarks from our senior management and then open the call for questions.

We expect the total call to last approximately an hour and a quarter.

With that I'd like to turn over the call to begin our remarks to Mr. Dick Clark.

Thank you, Graham.

Good morning, everyone.

It's a pleasure to be talking with you today.

Some of you may be wondering why Judy, Ken and I are on the call.

The reason is that the investor community is important to us and I believe the senior leadership of the Company should communicate regularly with you.

So Judy and I will participate in quarterly calls going forward.

We've asked Ken to be here this morning to answer your questions concerning Vioxx litigation as well.

The third quarter was the first full quarter as my tenure as CEO, and I am pleased to report that our quarterly results were consistent with our expectations.

Our net income for the third quarter was $1.4 billion, and earnings per share for the quarter were $0.65.

Our results were driven by revenue growth in Singular and Cozaar/Hyzaar and continued growth in revenue and equity income contribution from our joint ventures.

For the full-year 2005 we anticipate an EPS range of $2.47 to $2.51 which excludes a net tax charge of $0.29 per share primarily relating to the American Jobs Creation Act.

Including the net charge the full-year 2005 guidance is $2.18 to $2.22 per share.

Judy will speak to the guidance in more detail as she reviews the quarterly results in a moment.

The third quarter results include an expense of $80 million associated with the ongoing global cost reduction initiatives, specifically the elimination of about 825 positions across the Company.

The position eliminations are the results of a significant ongoing review we have had underway to assess our resources subsequent to the voluntary withdrawal of Vioxx in the third quarter of last year.

Today's announcement represents the completion of the Vioxx-related cost reduction activity.

Going forward we will be looking at our cost base in a more comprehensive way to determine how we can achieve reductions beyond what we have announced to date.

The level of marketing and administration spend during the quarter reflect activities required to prepare for the launches of our four investigational vaccines, to maintain active support for our in-line products and introduce new product indications globally and to continue the dissemination of critical outcomes data.

During the quarter we did not increase our legal defense reserve.

We will continue to monitor our legal defense costs and review the adequacy of the associated reserves.

As we have noted in the past, we have not established any reserves for any potential liability relating to the Vioxx lawsuits.

Turning to our pipeline, we had good news on the vaccine front this quarter.

In September, the FDA approved Proquad, a vaccine to help protect children against measles, mumps, rubella and chicken pox in a single injection.

And earlier this month we presented the first Phase III data for Gardasil, our investigational cervical cancer vaccine.

In the study Gardasil prevented 100% of cervical pre-cancers and non-invasive cancers caused by the two types of HPV that cause 70% of the cases of cervical cancer.

Cervical cancer is one of the leading cancers among women and causes approximately 290,000 deaths worldwide each year.

Our applications for Rotateq and Zostavax are under review by the FDA and regulatory agencies around the world.

On the pharma side we remain on track to submit applications for our diabetes drug, sitagliptin, to the FDA next year and our sleep disorder drug, Gaboxadol in late 2006, early 2007.

Looking forward we will be focusing on improving our core business fundamentals, specifically successfully launching our anticipated new products, advancing the progression of our pipeline and reducing our cost structure over and above what we have achieved year-to-date.

We must improve our performance over the long-term and I truly believe we can do this.

By the end of year, I will provide details about our plans as well as milestones and metrics that can be used to evaluate our progress against them.

I won't be going into any further detail on this subject today and look forward to further discussions by year-end.

Before I wrap up, I want to proactively answer a question that usually comes up when I meet with investors and shareholders.

Our dividend remains secure.

We are fully committed to maintaining it at the current level and we have the financial strength to support it while continuing to invest in our business priorities.

With that, I'll turn the call over to Judy who will comment on the highlights of the third quarter results.

Judy?

Thank you, Dick, and good morning, everyone.

I'm glad to have the opportunity to discuss the third quarter financial results with you today.

I want to spend a few minutes going through and reviewing each line of the income statement and highlight the important drivers.

If you go to Page 14 and Page 15 of the press release to begin the P&L review, you will see Page 14 lays out the third quarter and Page 15 our year-to-date 2005 results.

And I will talk to each of these schedules.

In the third quarter of 2005 sales of our major franchises were generally in line with the description trends for those products that you have been tracking.

Of course, this also demonstrates the continued success of our inventory management agreement as overall product inventory to the wholesalers are less than a month and we expect that to continue.

There are a few lines in our P&L where prior year comparisons require some explanation, especially as it relates to the third quarter 2004 Vioxx withdrawal, and I will note them as we go along.

So turning to sales.

In the third quarter we recorded revenue of $5.4 billion.

That's a 2% decrease compared to the third quarter of last year which included a net $175 million of Vioxx revenue.

If we were to exclude Vioxx revenue from the comparative period you would see growth of 1% in the period.

As you see from other financial disclosures this quarter revenue performance includes a 1% benefit from foreign exchange, a 1% benefit from price, and a volume decrease in the aggregate of 4%.

We are experiencing modest volume growth in our newer franchises and that is partially offsetting declines in older franchises.

Worldwide sales of Merck products were consistent with the Company's expectations and Singular, Fosamax, and Cozaar/Hyzaar sales performance reached 5% growth collectively in the quarter and grew 9% in the first nine months of 2005.

Sales of Merck's other promoted medicines and vaccines that treat or prevent a broad range of conditions grew 10% compared to third quarter '04 and 11% on a year-to-date basis.

This was offset by a decline in Zocor which is attributable to lower U.S. market share given the share growth of Vytorin, the introduction of generic simvastin in many markets outside of the U.S., continued uptake of generic lovastatin, and a shift to higher discount segments in the U.S.

Ex-U.S.

Fosamax sales were down 5% reflecting the availability of generic alendronate sodium in some markets.

Year-to-date sales were $16.3 billion.

That's down 5% including an overall 2% benefit from foreign exchange and a 1% benefit from price.

Of course, the base period includes Vioxx so if we were to exclude those product revenues from the corresponding nine months in 2004 you would see a growth of 4% year-over-year.

We are reaffirming guidance for Zocor, Singular, Cozaar/Hyzaar and other reported products for the full-year 2005.

Regarding Fosamax, we have provided a revised full-year 2005 range that reflects our current expectations and I would refer to you Page 12 of the release for full guidance details.

Also within our top line our revenues from our alliances, primarily AstraZeneca LP.

In the third quarter revenue from the Company's relationship with AstraZeneca LP recorded by Merck was $444 million.

Year-to-date we have recorded $1.2 billion, but keep in mind there is inherent variability relating to this revenue given that Merck is not actively managing these products.

Our revenue recognition takes into account inventory levels at AstraZeneca LP, of PPI and non-P P I products, as well as their shipments out.

Our 2005 guidance, as always, is an update based on recent results as well as future expectations and reflects the dynamics of the PPI market which include multiple generics, OTC products, and the uncertainties these create with regard to future volume and pricing.

Also keep in mind this guidance incorporates the expectations of the non-PPI products such as Atacand, Plendil, Lexxel and Entocort.

Notwithstanding these uncertainties we are increasing our estimated [AG] revenues to be approximately 1.5 to $1.7 billion for the full-year 2005.

Now moving down the P&L, materials and production came in at $1.24 billion.

If you calculate the actual change in PGM dollars, you'll see that it is flat versus third quarter 2004.

If you were to normalize third quarter 2004 by excluding Vioxx from the base without getting into the precise amount of Vioxx PGM in the base, you would have seen PGM dollars grow at levels generally in line with the adjusted growth in revenue.

Likewise, if you were to normalize the year-to-date and make the same exclusion from the base period you would see PGM dollars grow at levels generally in line with the adjusted growth in revenue.

Keep in mind that revenue in PGM dollars do not grow at precisely the same rate in any quarter due to changes in product mix.

The actual product gross margin in the quarter was 77.1%, and just as in previous quarters, this result is affected by product mix in the quarter.

Year-to-date PGM was 77.4% right in line with our full-year 2005 guidance.

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

In the third quarter of 2005, marketing and administrative expense came in at $1.7 billion.

That is a decrease of 1% over the third quarter of 2004.

And year-to-date expense came in at $5.1 billion.

That's up 3%.

In the third quarter of 2004, marketing and administrative expense included $34 million for restructuring costs and $141 million relating to Vioxx.

Third quarter 2005 includes costs associated with ongoing efforts since the voluntary withdrawal of Vioxx to lower costs, streamlined operations, and increased efficiencies.

The $80 million charge we recorded related to approximately 825 position eliminations throughout the Company is included here.

Excluding Vioxx and restructuring in the base and in the current year, our marketing and administration expense increased 5% and year-to-date increased 6%.

This underlying level of spend during the quarter reflects activities required to prepare for the launches of our four investigational vaccines, maintain active support for our in-line products, and rolling out new product indications globally, the necessary support for current launches, continued dissemination of critical outcome data and the ongoing needs of the business.

So turning to guidance on this line we're continuing to provide it on the change in marketing and administrative expense relative to the base period excluding one-time items to help your modeling, and we are increasing our full-year 2005 guidance.

That is we now anticipate marketing and administrative expense to increase at a mid single-digit percentage growth rate over full-year 2004 levels.

Now recall the basis for this guidance.

The full-year 2004 level excludes the costs related to the withdrawal of Vioxx and the charge taken in the fourth quarter related solely to future legal defense costs of Vioxx litigation.

The full-year 2004 and full-year 2005 exclude the costs associated with position eliminations that occurred in 2004 and in the third quarter of 2005 to get to the level of this guidance.

Moving down the P&L to research and development.

R&D for the third quarter was $943 million.

This is a 3% increase year-over-year.

Recall that in third quarter 2004 there were some expenses associated with the initial payments for collaborations, and if we exclude these items from the base period R&D grew 8%.

For the first nine months of 2005, R&D was $2.7 billion.

That's down 6%, but there is an excess of $350 million associated with acquisitions, collaborations and licensing in the base period of 2004.

So for comparative purposes, if we exclude the disclosed items, R&D grew 11% reflecting continued growth in our internal research and continued activity across basic pre-clinical and clinical development.

Merck's R&D efforts to expand its pipeline by entering new therapeutic categories and combining internal research and external licensing continues to produce productive results.

In mid-September Merck entered into a novel pharmacogenomics collaboration with FoxHollow Technologies that will focus on analyzing atherosclerotic plaque removed from patient arteries and the means of identifying new biomarkers of atherosclerotic disease progression for use in the development of cardiovascular compounds in Merck's pipeline.

This deal marks the first pharmaceutical-medical device partnership aimed at identifying cardiovascular biomarkers for use as diagnostics and as tools for drug development.

And just last week we announced we have formed a global alliance to jointly develop and commercialize a novel antibody for cancer therapy with Agensys.

Again year-to-date R&D expenditure came in at $2.7 billion we are therefore reducing our guidance and I would refer to you Page 12 of the release for full guidance details.

This reflects our expectations for internal R&D and continued external collaborations to compliment that internal R&D.

Turning to equity income.

In reviewing equity income from affiliates you'll see $480 million in income and that's up sequentially and up 56% over third quarter 2004.

Recall that the contribution to equity income comes from all our joint ventures, AstraZeneca LP, Sanofi Pasteur MSD, J& J Merck, Merial and Merck-Schering-Plough.

The year-over-year increase was driven by several of these JVs including Sanofi Pasteur MSD, the continued success of the Merck-Schering-Plough cholesterol franchise, both in the U.S. and in Europe.

Year-to-date equity income from affiliates is up 57% at $1.1 billion with several of the JVs driving the strong performance.

So based on this we are increasing our full-year 2005 guidance.

Equity income from affiliates is now expected to be approximately 1.5 to $1.7 billion.

Equity income from affiliates includes the result of the Merck-Schering-Plough collaboration combined with the results of Merck's other joint venture relationships.

Moving down to other income and expense net, if you go to the other financial disclosures page where we provide a break out, you'll see that we have an income this quarter of $25 million and year-to-date an expense of $16 million.

There is nothing special to highlight here except to mention that the comparative base period includes the $177 million gain from the sale of our equity stake in the European OTC joint venture business to our partner J &J, and the approximately $100 million gain on securities related to the integration of the Banyu portfolio.

Staying on the other financial disclosures and moving down to the JV detail, you'll see continued stronger performance year-to-date for the Merial Animal Health joint venture and also for the Sanofi Pasteur MSD vaccine business in Europe.

Regarding our very successful collaboration with Schering-Plough Corporation, global revenue as reported by the Merck-Schering-Plough partnership of Zetia and Vytorin are highlighted, and as you will see for the first nine months of 2005 revenue for Zetia exceeded $1 billion.

For the quarter income before taxes was $2 billion, and taxes were $578 million, and the reported tax rate was 28.9%.

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 the mix of foreign and domestic income and currency fluctuations.

In reviewing the nine-month figures the reported tax rate is 39.9%.

However excluding the second quarter of 2005 net tax charge of $640 million the underlying tax rate is 29%.

That said, we are reaffirming guidance.

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

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

Moving down to net income and earnings per share.

Net income for the quarter was $1.4 billion compared to $1.3 billion for the same period in 2004, and that's up 7%.

Year-to-date net income was $3.5 billion, or down 25% over the prior year.

Of course this is affected by all the factors we described above related to the worldwide voluntary withdrawal of Vioxx and the tax charge taken in the previous quarter.

During the quarter we spent $255 million in treasury stock and we still have $7.8 billion under the current authorization from the board with no time limit.

That brings you to earnings per share on a GAAP basis of $0.65 compared to $0.60 in the third quarter of 2004.

This result was consistent with our expectations.

For the first nine months of 2005 EPS were $1.59.

Excluding the impact of the net tax charge EPS for the first six months of 2005 was $1.88.

Following our previous practice we continue to provide earnings per share guidance.

Merck anticipates full-year 2005 earnings per share in the range of $2.47 to $2.51 excluding the net tax charge of 640 million, or $0.29 in the second quarter of 2005.

Therefore, Merck anticipates full-year reported 2005 EPS of $2.18 to $2.22.

I refer you to Page 12 of this news release for the details of Merck's full-year 2005 financial guidance.

Just want to modify that the EPS for the first nine months of 2005 were $1.88.

Pardon me for that misstatement.

We are nine months through the year.

And again this full-year 2005 EPS guidance range does not reflect the possibility of the establishment of any reserves for any potential liability relating to the Vioxx litigation.

With that, I'd like to turn the call over to Ken Frasier.

Thank you, Judy, and good morning.

As you know, we are in the midst of defending ourselves in the Vioxx litigation.

We have a trial ongoing in New Jersey, and during the next six months we will be facing six more trials.

Let me start with an overview of our litigation strategy.

The legal strategy we have now is the right one because of the unprecedented and complex nature of the Vioxx litigation.

We will continue to defend these cases based on the scientific is facts of causation as well as the Company's responsible action.

This may take time to understand and to sort out, but Merck is prepared to take a long-term view of the litigation and will continue to take a responsible course throughout the litigation.

We have a good story to tell and we are fully committed to telling it.

Our defense remains the same because it is based on facts and the facts don't change.

Our defense, like our Company, is based on sound, reliable science.

We believe that decisions made on reliable scientific evidence in the courtroom or in the laboratory are in the best interest of patients.

The current focus of the Company is on defending these cases in court.

We hope that jurors in the current trial as well as upcoming trials will take a close look at the scientific evidence of the cases and see that Merck acted responsibly and appropriately.

We recognize, however, that a jury verdict is not always the end of a case.

In this type of litigation it is not uncommon for the parties to seek review in the appellate courts and to seek direction from those courts on the rules to be applied in that case as well as in future cases.

In formulating our strategy we did a number of things.

First, we looked at the history of past litigations, particularly but not exclusively those involving the pharmaceutical industry.

There are obvious lessons to be learned from the different approaches taken by companies.

We had already retained lawyers who knew the Company and the issues quite well.

We supplemented that representation by retaining leading lawyers in the field to represent the Company.

Even now we continue to seek input from lawyers not directly involved in the cases.

We are confident in our approach to the litigation and in the responsible way in which the Company acted with respect to Vioxx.

Now I'd like to make a few comments about the federal litigation, the so-called MDL litigation.

As you know, Judge Fallon of New Orleans has relocated to Houston and is working out of the court there.

The first MDL case, Plunkett versus Merck, is set for November 28th in Houston.

Mrs. Plunkett alleges her then husband, Richard Irvin, and EMT worker, died of heart attack on May 15, 2001, in Palm Beach County, Florida, at the age of 53, allegedly as a result of his use of Vioxx.

Mr. Irvin allegedly took Vioxx starting approximately one month prior to his heart attack.

There is no medical or scientific evidence that Vioxx contributed in any way to Mr. Irvin's heart attack.

Mr. Irvin would have suffered a heart attack when he did whether he was taking Vioxx or not.

Phil Beck, of Bartlit Beck, will be leading Merck's trial team in Houston.

The court has scheduled three more MDL trials that could occur on a monthly basis starting in February 2006, although the cases have not yet been selected.

We are confident that the MDL process, led by Judge Fallon, will result in court decisions based on sound and relevant science.

A few words about Humeston, the case that's now pending in Atlantic City, New Jersey.

We began our second trial in state superior court a few weeks ago.

As our court motions indicate, we believe the evidence in this case will show that Vioxx did not cause the heart attack suffered by Frederick Humeston of Idaho on September 18, 2001.

Mr. Humeston, according to motions filed by Merck with the New Jersey court, only took Vioxx intermittently for approximately two months and had multiple pre-existing risk factors for a heart attack.

Mr. Humeston, according to the motion, recovered from his mild heart attack and did not suffer significant cardiac impairment.

There is no medical or scientific evidence that Vioxx contributed in any way to Mr. Humeston's heart attack.

We have a very capable and experienced trial team in Atlantic City.

Diane Sullivan, of Dechert in Princeton, New Jersey, Steve Rayber of Williams & Connolly in Washington D.C., and Christy Jones of Butler, Snow in Jackson, Mississippi, are our lawyers.

These lawyers are passionate in their defense of the Company and defending the appropriateness of the Company's actions, and in presenting the science in a manner designed to ensure that this jury reaches its verdict based on the data.

We are confident that when juries review sound reliable science, the will decide that Merck acted responsibly with regard to Vioxx.

In summary, the legal strategy we have now is the right one because of the unprecedented and complex nature of the Vioxx litigation.

We've looked up the history of past litigation, we've consulted with top legal experts around the country and we'll continue to defend these cases based on the scientific facts of causation and the Company's responsible actions.

This may take time to understand and sort out, but we are prepared to take the long-term view of the litigation and we'll continue to take a responsible course in the litigation.

We believe we have a good story to tell and we are fully committed to telling it.

We acted responsibly every step of the way, our actions on Vioxx were dictated by sound science and in the best interest of patients so we will continue to defend our actions wherever and whenever we are called upon to do.

With that, let me turn this call back to Graham.

Thank you, Ken.

We will now open the call to take your questions.

We will take the questions in the order they were received and we will try to get through as many as possible.

We would like to try and limit your questions to one or two, and if you have additional questions please rejoin the queue.

At this point I'll turn the call over to Michelle who will communicate instructions for our Q&A format and provide our first question.

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q&A roster.

One moment for your first question.

Your first question comes from David Risinger with Merrill Lynch.

Thanks very much.

I have two questions.

First, could you discuss your strategy of boosting Zocor rebates to Express Scripts for the first half of '06 as the patent expiration approaches?

Typically drug companies reduce rebates on products as they're about to go generic.

Second, I understand that you're seeking input from various lawyers on Vioxx litigation which makes sense given that Merck has not faced significant mass litigation before, but can you clarify who your lead outside counsel is and whether or not they are clearly in charge?

Thank you.

I'll start with the litigation question.

We have retained a number of firms because we believe it is most appropriate to take the best legal representation wherever we find it around the country.

We have retained Phil Beck of Bartlit Beck going forward as our lead trial lawyer, but we believe it's appropriate and responsible to have a number of lawyers in different places in the country who are prepared to defend us in each venue in which a case can come up.

Your next question comes from David --

Michelle, can we just answer the question with regard to Zocor?

Certainly with the Express Script comment we don't go into details about our rebate strategy, but certainly Express Script has said before that simvastin was a viable alternative to Lipitor for most patients and that's at its minimum 10 mg dose Lipitor reduced bad cholesterol by 39%, and in contrast to 40 mg dose of simvastin cut cholesterol by 41%.

And so for patients that even need a higher potency statin Vytorin is available so you can see the impact that Express is making.

They also confirmed that in '06-'07 Vytorin and Zetia are in the preferred position for Express Scripts in their national formulary.

So from a Merck standpoint it's a win-win.

Next question, please.

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

Yes, thanks and good morning.

I also have two questions.

Number one, could you give us an update on Pargluva and your plans for getting final FDA approval?

Can you talk about the necessary steps that the FDA is requiring there?

And then two, could you give us an update on the relaunch of Vioxx?

Thank you.

Certainly for your first question we're currently working with our partner, [VMW], to respond to the FDA's request and so it's too early yet to comment on that.

And from a Vioxx situation we're continuing to look at that and have not made the decision yet.

Next question, please.

Your next question comes from Tim Anderson with Prudential Securities.

Thanks.

A couple of questions.

On the legal side with Vioxx there's a story out in the press today about a group of lawyers breaking away from the pack and attempting to form, I guess some sort of consortium that will only take their cases to state court, but seems like it kind of could introduce more chaos into the process and end up being a time thing for management.

And I'm wondering what your thoughts are on this?

And then second question is for Dick.

As you kind of traveled around earlier to meet with investors you generally talked about your focus on the cost structure now that you're CEO.

And I know that you guys started a program a couple of months ago to look this, but when I look at what Ray Gilmartin did over the decade he was there, I've always understood that he ran the business pretty lean so I'm just wondering how much costs there are that can be cut from here especially when you guys are preparing to launch new drugs over the next 12 to 18 months or so?

Let me start with the litigation question.

We are aware of the report in today's Wall Street Journal.

Those papers have not been filed and so we would have to look at those papers if they are in fact filed, but I will say that we expect to oppose any attempt to splinter, to disrupt the actions of the MDL.

We believe that it's the appropriate way to deal with these cases to ensure that they are done in a cost effective streamlined way and to avoid inconsistent outcome.

So we would oppose that.

I would also say what I said before which is, we intend to have the resources available to defend these cases wherever they should occur in state or federal court.

To your earlier question concerning the cost structure, there is no doubt that operational excellence has always been a part of our initiatives from a Merck standpoint throughout the year.

Having said that, there are still significant opportunities available to us.

It's not only around cost cutting, it's around improved business processes, looking at different business models, thinking about the business differently.

And I will be able to share more of that information with you by the end of the year.

Could we have the next question, please, Michelle?

Your next question comes from Jami Rubin with Morgan Stanley.

Thank you.

Two questions.

Ken, first to you.

If you could comment then on your success in shifting state cases to the federal court and remind us how many state and federal court cases are now pending?

And secondly to you, Judy, I noticed equity income from affiliates this quarter was 480 million up over 40% sequentially from 2Q.

I'm wondering if you can comment on what's going on there?

Obviously Vytorin Zetia is doing well, but I'm just having trouble making sense of that.

Was there a one-time payment or something unusual there?

Thanks.

Of the cases that we have currently filed approximately 2,900 representing approximately 6300 plaintiff groups are slated to be in the federal court.

And of the remaining cases about 2800 representing 2800 plaintiff groups are in the coordinated New Jersey proceeding.

So I would say that at least half of the cases are in federal court and we continue to remove those cases wherever we believe there's a jurisdictional basis to do so.

And relative to the equity income line, in fact, there was contribution from a lot of the joint ventures but the major driver was related to our joint venture with Schering-Plough and it's basically two things.

The continued strong growth in the fundamentals and the fact that at this point in the level of our success in the market that the profit split really moves to full 50/50.

So you're starting to see that kick in.

Could we have the next question, please, Michelle?

Your next question comes from Chris Shibutani with JP Morgan.

Thank you very much.

It's about a year since we had the approved trial and I'm wondering if you could tell us whether there's going to be any follow-up presentations of data either at an upcoming meeting such as the ACR or another meeting looking at if there was any residual effect because of conclusion of that trial?

Thank you.

The next set of data available from approve will be the one-year follow-up data.

The final patient visits will extend into October before the data can be collected, entered, and analyzed.

Timing for data availability and subsequent publication would be speculative at this point.

It is Merck's policy that all studies such as these are published in a timely manner but we cannot provide a definitive date right now.

Next question, please.

Your next question comes from Steve Scala with SG Cowen.

Thank you.

Two questions.

First for Judy.

Given that a full approval of Pargluva likely would have triggered a payment to Bristol-Myers Squibb, did the recent approvable letter prompt the decrease in the R&D forecast?

And secondly for Dick, do you have any early views on AstraZeneca restructuring particularly regarding Merck's 2008 option for the non-PPI Astra-Merck products?

How will you proceed based on what you now know?

Okay.

So first of all the change in the guidance for the R&D line for the year was primarily driven by the pace of external collaborations.

So to one extent you might relate it to Pargluva but in point of fact as you may recall, once you launch a product any payments are basically capitalized and amortized over the life of the product.

So that actually is not a material event in terms of our outlook.

It really is that 2004 was pretty unprecedented in terms of the level of activity and the magnitude of activity and where as we're actively out there and in fact have engaged in over 20 transactions year-to-date and have well over 20 in our pipeline, 2004 created that different compared to 2005 now that we're nine months through the year.

Concerning the AstraZeneca comment we can't make any comments about that at this time.

Next question.

Your next question comes from Chris Schott with Banc of America Securities.

Thank you.

Just have a couple of quick comments when you're expecting to pull further resources away from Zocor as we approach that patent expiration.

And also just what your view is with regards to Vytorin heading into next year.

I know in your comments you mentioned lovastatin impacting some Zocor share.

Are you expecting a similar impact on Vytorin as we see Zocor go off?

Thanks.

From a Zocor standpoint we continue to support the product.

We've seen cases in other parts of the world that if you take off your promotion and sales focus with a product too early then it has a negative impact.

And as well it's getting excellent positioning from a formulary standpoint based on the obvious comment of its ability to go generic and have a preferred position so it's important that we continue to support Zocor.

We can't make forward-looking statements about Vytorin for 2006 yet.

It's too early.

Next question.

Your next question comes from James Kelly with Goldman Sachs.

Thank you and good morning.

I have two questions about the SG&A line.

Inside the disclosures when it talks about the amount of restructuring charges it talks about 80 million for the quarter and 95 million for the nine-month period.

When I look back at the last second quarter report, I didn't see the other 15.

Wondering if that's something that should be included or shouldn't be included and is it spread out amongst them?

And then secondly on SG&A looking at the large jump in equity income as Jami asked, when Schering-Plough has their reimbursement for details does that cost for you fly through this line or SG&A?

Thanks.

Two things.

First of all the difference between the year-to-date and the third quarter restructuring costs really occurred over a six-month period and therefore really was not material in either of those prior quarters, so there really was no need to call that out at that point in time.

Relative to the location of any credits, SG&A credits for the Schering joint venture, that, as you know, all flows through the equity income line.

Next question.

As a reminder to ask a question please press star then the number one on your telephone keypad.

Your next question comes from Scott Henry with Oppenheimer.

Thank you.

Two questions.

First, with regards to Vioxx, could you remind me of when the statue of limitations runs out with regards to filing a case?

And the second question is related to the HPV vaccine, Gardasil.

It is certainly a product where demand will be difficult to forecast, which makes supplying the product and building inventory equally difficult.

Could you give any color on the flexibility of producing Gardasil possibly with regards to lead time, shelf life of the product or general capacity, or just any color around that issue?

Okay.

First of all on the statue of limitations, the statutes of limitations vary from state to state.

It is generally the case that they run generally two years or three years from the time that the plaintiff should have been aware that they had an injury that was caused by Vioxx.

And so that would be generally the answer, although they do differ from state to state, and their application differs on the fact of individual cases.

Concerning your question around Gardasil, we have plenty of capacity from a Gardasil standpoint.

In the past we have invested in a biological and vaccine infrastructure and with a product like Gardasil you can make bulk product and just store it.

So there's a strategy put in place that we can successfully support the Gardasil launch and sustain it based on the potential sales forecast.

That won't be an issue with us.

Next question.

Your next question comes from Tony Butler with Lehman Brothers.

Good morning.

Thank you.

Just a brief question again on SG&A.

Judy, comments were made in Q2 regarding SG&A in the low to mid single digits, and I think you began the year in the low single digits and now we're in the mid single digits, and I'm just trying to understand the two comments about cost control and then what actually other than the new launches which you probably knew at the beginning of the year, what's actually causing this SG&A creep if you will?

Thanks.

It's true that the guidance has been modified somewhat although we're still talking about pretty low growth and I think the factors that you're seeing here are definitely continued efficiencies that pertains to the underlying base in SG&A and also by the way it pertains to all of our other lines on the P&L as well as you know.

Getting ready to launch four major vaccines is a pretty major undertaking and as we go through the year and get more visibility on the level at investment and get closer to those events, obviously we see that build, so it is consistent with our expectations, but I think as we've experienced more during the year we, as you know, want to continue to make sure that we support all the product opportunities we have at an appropriate level.

Also bear in mind that foreign exchange has, you know, has a negative effect, if will you, on the growth on SG&A and a positive effect on the sales line.

So when have a weaker dollar year-over-year, which we have, you'll see the nominal growth in expenses higher than you'd otherwise expect, but you also see that translated in the top line and then to the bottom line, and that, as you know, is something that we're not in the forecasting business on.

That's a variable that's completely out of our control and we just monitor as we go through the year.

Next question.

Your next question comes from John Boris with Bear Stearns.

Yes, thanks for taking my question.

I have two questions.

First one just has to do with Vytorin-Zetia in the quarter.

Seems to be sort of a disconnect between prescription trends and what was actually reported.

Was just wondering if you can comment as to whether there was destocking there?

Second question for Dick on repatriation, can you just comment on the amount repatriated and also can you comment on your appetite for acquisition?

Your predecessor had taken one stance on acquisitions and I just wonder what your stance on acquisitions will be moving forward?

Thanks.

Concerning the $15 billion, it will be repatriated by the end of the year.

And from an acquisition strategy standpoint, we still don't believe that large mergers will drive shareholder value or increase research productivity.

Having said that, we are open to targeted acquisitions including companies with existing products that can enhance revenue and [inaudible] line with what we're focusing in on from a therapeutic area.

So we are actively looking, we are aggressively looking for the right deals that meet long-term shareholder value.

So that is a part of our strategy.

On the inventory levels in the third quarter there's nothing to report there.

As you know there was a move to an inventory management agreement earlier in the year and that's now fully in place and therefore now prescriptions really are tracking for the [inaudible] through the channel.

Next question.

Your final question comes from Tim Anderson with Prudential Securities.

Thanks for taking another question.

Back to the topic of HPV vaccines, your competitor in this space, Glaxo has talked about what they expect to be a fast and extraordinary ramp up of those products once they're launched.

Would you concur that this is going to be a significant demand type of product right out of the gates that would translate into quick sales?

Thank you.

We certainly can't make that comment, either as a forward-looking statement or the fact that we're getting ready to launch so it's probably not appropriate for to us discuss that.

So with that last question, we have come to the close of the conference call.

I want to remind you that a replay on this call is available for seven days, and I'd like to now turn the call back over to Dick Clark for some concluding remarks.

Thank you, Graham, and thank you for tuning in and listening to us from a conference standpoint.

As I said earlier Judy and I will be on future calls as well.

I think it's important for senior management to have this engagement and as we've stated we're very pleased with the third quarter results.

It meets our expectations, and we certainly look forward to updating you on our progress at our annual business briefing that we will hold in Whitehouse Station on December 15th.

And we'll be in touch to give you details on that meeting later.

So thank you.

We appreciate your interest and participation.

Thank you, ladies and gentlemen.

This concludes today's Merck third quarter 2005 earnings conference call.

You may now disconnect.