默克藥廠 (MRK) 2005 Q4 法說會逐字稿

Good day, everyone, and welcome to Merck's fourth 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, Angela, and good morning.

And thank you for joining us on Merck's fourth quarter and full year 2005 earnings call.

I'm Graeme Bell, Head of Investor Relation.

As in prior quarters, today I'm joined on the call by Merck's senior management.

With me today is Merck's CEO and President, Dick Clark, and Judy Lewent, our Executive Vice President and Chief Financial Officer.

I would like to go over the logistics before we get into the details.

On this call we will review the fourth quarter and full year 2005 results, released at 7:30 this morning.

You can access the earnings press release and all supporting materials, a live webcast, and Internet-based replay of this conference, and that will be available until February the 7th at Merck.com.

Before we go 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 statement, as that term is defined in the Private Securities Litigation Reform Act of 1995.

These statements are based on management's current expectations, and involve risk and uncertainty which may cause the results to differ materially from those set forth in these statements.

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

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

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

Forward-look statements on this call should be evaluated together with the many uncertainties that Merck -- affects Merck's business, particularly those mentioned in Merck's most recent 10-K or Form 10-Q, which are posted on the website.

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

And we anticipate the call to last approximately an hour.

So with that, I'll turn the call over, and we will begin our remarks with our CEO and President, Mr. Dick Clark.

Thank you, Graeme.

And thanks to all of you for joining us on the call this morning.

I am pleased to report that Merck posted strong 2005 earning results, both for the fourth quarter and for the full year.

Our earnings per share for 2005 were $2.53, excluding the impact of the net tax charge and a restructuring charge related to head count reductions and site closures that we announced late last year.

Full year reported EPS were $2.10.

Our full year EPS reflects a 13% increase in annual sales for Singulair and the strong uptick of Vytorin.

It also includes the impact of reserving an additional $295 million for Vioxx legal defense costs in the fourth quarter.

As of December 31st, 2005, our Vioxx reserve was $685 million.

I want to note that this figure is solely for Vioxx legal defense cost.

We spent $285 million of our original Vioxx legal defense reserve of $675 million in 2005.

This expenditure covered all of the Vioxx litigation, not just the product liability cases.

We are vigorously defending this litigation, and the money spent to date has provided a strong foundation for the defense of the cases moving forward.

For the fourth quarter 2005, EPS were $0.64, including the addition to the Vioxx reserve and excluding tax and restructuring charges.

Reported EPS for the fourth quarter were $0.51.

In November of last year, we announced a global restructuring program designed to reduce the Company's cost structure, increase efficiency, and enhance competitiveness.

As a part of the program, we plan to sell or close 5 manufacturing sites and 2 preclinical research sites by the end of 2008.

The manufacturing facilities include Ponders End in the UK;

Okazaki, Japan;

Kirkland, Canada; and Albany, Georgia and Danville, Pennsylvania, in the U.S.

The 2 preclinical sites are in Okazaki and Menuma, Japan.

We also plan to close a basic research center at Terlings Park in the UK.

In addition, we also announced in November our plan to eliminate approximately 7,000 positions in manufacturing and other divisions worldwide by the end of 2008.

These positions represent about 11% of our global work force.

About half of the position reductions are expected to occur in the United States, with the remainder in other countries.

Today I can report that we are on track with the position reductions, and as of December 31st, approximately 1,100 positions throughout the Company have been eliminated.

The global restructuring program was the first step in our plan to reclaim a leadership position within the pharmaceutical industry.

As I announced in December, we have begun implementing a strategic plan designed to change every aspect of our business.

Specifically, we are focused on 9 priority disease areas, redefining our job discovery and development model, working to achieve leadership in emerging pharmaceutical markets, building a new commercial model, and creating a lean and flexible cost structure.

I have seen the work going on at Merck related to this strategic plan, and I'm very confident in our ability to make this plan a reality.

As a result, we continue to believe we can generate compound annual revenue growth, including 50% of the revenues from the joint ventures from which Merck derives our income -- our equity income of between 4 and 6% through 2010.

We also believe we can deliver double-digit compound earnings, excluding restructuring charges, over the next 3 to 5 years.

We anticipate returning the bottom line EPS growth, excluding restructuring charges, in 2007.

In addition, we continue to believe we can achieve 4.5 to $5 billion in total expected savings through 2010 from a business process redesign effort.

For 2006, we are reaffirming our full year EPS range of $2.28 to $2.36, excluding the restructuring charges related to site closures and position eliminations.

We are also reaffirming our full year reported EPS range of $1.98 to $2.12.

And we anticipate first quarter EPS of $0.62 to $0.66, excluding restructuring charges.

We expect reported first quarter EPS of $0.52 to $0.58.

Also in 2006, we expect to generate approximately $5 billion in free cash flow after capital expenditures, but before dividends and share repurchasing.

I want to close by saying that there's a lot of excitement and momentum at Merck these days.

We have 5 products in or on track for phase 3 testing by the first quarter of this year.

We have 3 late stage investigational vaccines awaiting FDA approval.

We are on track for filing a new drug application this year for Januvia, DPP-4 inhibitor, that offers a novel approach to treating type 2 diabetes.

Our global restructuring program is progressing as we have planned, and the important mark of implementing our strategic plan to reclaim a leadership position in the industry is well underway.

Now I will turn over to Judy Lewent, who will provide additional details about our performance in the fourth quarter and the full year.

Judy?

Thank you, Dick, and good morning, everyone.

As Dick just mentioned, we are pleased with strong fourth quarter and full 2005 year results.

For the next few minutes, I'd like to discuss in more detail several lines of the income statement, highlighting the important underlying drivers of our performance.

If you go to page 15 and page 16 of the press release, you will find the fourth quarter and full year 2005 consolidated results, and as in previous quarters, I will walk through each of the respective schedules.

You will notice that we have inserted a new line on our P&L, namely restructuring costs.

As the foot note states, this line includes restructuring costs associated with Merck's global restructuring program announced in November, as well as costs associated with earlier separation initiatives.

More on this line item in a moment.

I am very pleased that our full year reported results were consistent with our earlier expectations, and within our previously disclosed guidance.

Our earnings in the quarter from ongoing operations reflects strong performance in a number of areas, particularly AZLP revenues, equity income, as well as the benefits of our ongoing cost management initiatives, which are starting to have an impact on our bottom line.

There are several drivers that require explanations, and a number of the lines in the P&L where prior year comparisons require additional clarity, and I will note them as we go along.

Dick mentioned several of the highlights of the quarter and full year a moment ago.

So to build of that, in the fourth quarter we recorded revenue of $5.8 billion.

That's comparable to the same period last year, including in the aggregate, an overall 1% decrease from foreign exchange, offset by a 1% growth in volume.

Worldwide sales of Merck products were consistent with our expectations.

For the quarter, we saw strong growth in Singulair, as well as growth in Cozaar/Hyzaar, and our other promoted medicines and vaccines.

This growth was offset by a decline in Zocor and Fosamax.

The Zocor decline is attributable to the loss of market share in the U.S., although on a sequential quarter basis, the decline did slow in the latter part of 2005.

Nevertheless, the underlying decline reflects the market dynamics and recognizes factors such as the share growth of Vytorin.

The introduction of generic Simvastatin in many markets, ex-U.S., and the continued uptake of generic lovastatin also affected our results.

The Fosamax decline is attributable to the ex-U.S. sales performance being down 20%, reflecting the availability of generic Alendronate Sodium in several key markets.

The actual full year sales of all key products ended within our previously disclosed guidance ranges, and revenues for the full year were $22 billion.

That's down 1%, including an overall 1% 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, you would see growth of 3% over the current funding 12 months in 2004.

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

In the fourth quarter, revenue recorded by Merck from the Company's relationship with AstraZeneca LP was $440 million.

For the full year 2005, we recorded $1.7 billion of revenue, reflecting strong growth of 12% over full year 2004, and consistent with our previously disclosed guidance range.

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-PPI products, as well as their shipments out.

In December we discussed that we had the opportunity to capitalize on our robust product portfolio and deliver revenue growth through 2010.

Despite the patent expirations that we all know occurred during this time, we expect that both our in line products and our potential new products, if approved, can drive revenue growth of 4 to 6% on a compound annualized basis, including 50% of the revenues of the joint ventures from the 2005 base.

As you see from the release, we are reaffirming guidance for all of our key franchises, our other reported products, and the revenue we recorded from our relationship with AstraZeneca for the full year 2006.

As always, the AZLP guidance is an update based on recent results, as well as future expectations, and reflects the dynamics of the PPI market, that is multiple generics, OTC products, and the uncertainty these create with regard to future volume and pricing.

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

Moving down to P&L, materials and production came in at $1.5 billion.

If you calculate the actual change in PGM dollars, you will see that it is down 4% versus fourth quarter 2004.

For the full year, if you were to normalize it by excluding Vioxx from the base, you would have seen PGM dollars grow at levels generally in line with the adjusted growth in revenue.

That is about 3% excluding Vioxx, as we just discussed.

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

The actual reported product gross margin in this quarter was 74.4%.

But this includes restructuring costs of $177 million related to accelerated depreciation and asset impairment costs associated with Merck's global restructuring program announced in November.

Excluding these costs, PGM in the quarter was 77.4%, and just as in previous quarters, this result is affected by the final product mix.

For the full year, reported PGM was 76.6%.

And on an adjusted basis, that is excluding restructuring, it was 77.4%, and that was within our previously disclosed guidance range.

We're comfortable with our full year 2006 guidance range, and are reaffirming that our product gross margin is estimated to be approximately 75 to 77%.

This guidance excludes the portion of the restructuring cost that will be included in product cost, and will affect reported PGM as they materialize in 2006.

Fourth quarter 2005 marketing and administrative expense came in at $2.1 billion.

That is a decrease of 9% over the same period last year.

During 2005, the Company spent $285 million in the aggregate in legal defense costs worldwide related to the Vioxx litigation.

In the fourth quarter, the Company recorded a charge of $295 million to increase the net reserves to $685 million, solely for its future legal defense costs related to the Vioxx litigation.

This reserve is based on certain assumptions, and is the best estimate of the amount that the Company believes at this time it can reasonably estimate will be spent through 2007.

Recall that in the fourth quarter of 2004, we set aside a reserve solely for future legal defense costs.

If we exclude the litigation expenses in the fourth quarter of '05 and in the base period, then marketing and administrative expenses increased 6%.

For the full year 2005, marketing and administration expenses decreased 1%.

Again excluding Vioxx related expenses in base and current year, the underlying marketing and administration expense increased 6%, and that was within our guidance range.

This underlying level of expense reflects activities required to prepare for the launches of our 3 investigational vaccines, to support our in line products, and to maintain the ongoing needs of the business.

Regarding guidance, we're continuing to provide it on the change in marketing and administrative expense, relative to the base period, excluding 1 time items to help your modeling.

And we are reaffirming our full year 2006 guidance.

That is, we anticipate marketing and administrative expense to increase at a low single-digit percentage growth rate over the full year 2005 level.

The full year 2005 level excludes the charge taken in the fourth quarter, related solely to future legal defense costs of Vioxx litigation.

The 2006 amount also does not include the impact of stock option expense, but we have included the impact of stock option expense in our operating EPS guidance.

Now turning to R&D.

Fourth quarter expenses were $1.1 billion.

The fourth quarter R&D expenses included restructuring costs of $19 million related to accelerated depreciation costs associated with Merck's global restructuring program, and $51 million of accelerated depreciation associated with the closure of the basic research facility in Terlings Park in the UK.

For the full year 2005, R&D was $3.8 billion, that's down 4% in absolute terms.

That full year spend includes a total of $122 million of restructuring related costs.

You may recall that we mentioned a restructuring related cost was included in the 2005 R&D expenses, when we discussed the long-term growth and research cost at our investor meeting on December 15th.

If you take the full-year numbers, and exclude from 2005 and 2004 the significant licensing milestone payments, and the acquired research charge from 2004, and the restructuring cost, then underlying R&D grew 8%, reflecting our ongoing commitment to internal basic preclinical and clinical research.

During 2005, Merck entered into a total of 44 licensing agreements, reflecting our strategy of establishing strong external alliances to drive both near and long-term growth.

And as we move into 2006, Merck is in discussions with over 40 companies regarding potential transactions, and is also actively monitoring the landscape for a range of targeted acquisitions that meet the Company's strategic needs.

Returning to R&D, we are reaffirming our 2006 guidance for expense, which is at the same level as 2005.

Moving on to the new line in the P&L, we are providing this breakout to assist in tracking the restructuring-related expenses, and to ensure fair comparisons on the underlying business.

This line will capture all re -- separation costs.

In accordance with GAAP accounting, accelerated depreciation associated with Merck's global restructuring program, are being reported in the respective line items.

For example, materials and production and R&D.

So in our fourth quarter 2005 results, the total charges related to the global restructuring program were $401 million, including $205 million that is part of this line, $177 million for asset related charges which are included in materials and production, and $19 million for asset related charges which are part of R&D. .

On this new line in this quarter, are restructuring expenses of $229 million.

That includes $205 million in separation costs associated with the approximate 1,100 positions eliminated in the global restructuring program, and $24 million associated with earlier separation programs.

For the full year 2005, we incurred restructuring costs of $322 million, including the $205 million recorded in the fourth quarter, and $117 million of expenses associated with earlier separation programs.

Regarding the base period, fourth quarter 2004 restructuring costs were $19 million, and they were $108 million for the full year 2004.

To assist in your modeling, as part of the Company's restructuring efforts, additional costs related to site closing, position eliminations, and related costs, will be incurred in 2006.

This restructuring line will include position elimination expenses associated with the global restructuring, while materials and production and R&D will pick up the accelerated depreciation cost.

The aggregate 2006 pretax expense related to these activities is, as previously disclosed, estimated to total up to $800 million to $1 billion.

In reviewing equity income from affiliates, you'll see $587 million in income, and that is up sequentially, based on the contribution from all of our JVs: AstraZeneca LP, J&J Merck, Merial, and Merck/Shering-Plough.

For the full year 2005, equity income from affiliates is up 70%, at $1.7 billion, with several of the JVs driving the strong performance.

And this is consistent with our previously disclosed guidance.

I would remind you that there are several components to AZLP equity income which makes it inappropriate to draw significant conclusions just based on PPI products.

There are complexities that involve, at a minimum, timing and tax differences.

That said, the full year equity income contribution from Merck's share of the partnership with AstraZeneca LP was $834 million.

Regarding the Merck/Shering-Plough partnership, the fourth quarter combined MSP cholesterol franchise global revenue, as reported by the Merck/Shering-Plough partnership, reached $746 million.

And the full year revenue exceeded $2.4 billion.

Within Merck's full year equity income results, the Merck/Shering-Plough partnership contributed $570 million.

The balance of equity income comes from our other joint ventures, including Merial, Sanofi Pasteur MSD, and J&J Merck.

As stated in the footnotes, Merck's 50% of the revenue from Merck/Shering-Plough, Merial, Sanofi Pasteur MSD, and Johnson & Johnson Merck joint ventures and partnerships, totalled $2.8 billion in 2005, and $2.1 billion in 2004.

We are also reaffirming that our anticipated full year 2006 equity income from affiliates is to be approximately 2 to $2.3 billion.

For the quarter, income before taxes was $1.5 billion.

Over the 12 month period, that figure was $7.4 billion.

Taxes on income in the period were $400 million, and the reported tax rate was $26.3%.

This marginally lower tax rate in the fourth quarter, reflects in general the impact of changes in the mix of foreign and domestic income and currency fluctuations.

These elements changed throughout the quarters.

For the full year, the reported tax rate is 37.1%.

If you exclude the second quarter '05 net tax charge of $640 million, and the additional $27 million recorded in the fourth quarter, primarily relating to the AJCA repatriation, the underlying tax rate was 28%.

Under AJCA, we successfully competed the repatriation of $15.9 billion prior to the December 31st deadline.

Final clarifying IRS guidance enabled Merck to repatriate an additional $900 million, and thus we completed our repatriation at a slightly higher level than we had indicated earlier in 2005.

We are reaffirming our full year tax rate, and again I would direct you to today's press release for details.

Moving down to net income and earnings per share.

Net income for the quarter was 1.1 billion, up 2% when compared to the same period last year.

For the full year 2005, net income was 4.6 billion, or down 20% over prior year.

Of course, this is affected by all the factors I just described.

During the quarter we spent 250 million in treasury stock and we still have $7.5 billion under the current authorization from the board with no time limit.

Earnings per share for the fourth quarter were $0.64, excluding $0.12 related to restructuring from our November actions, and approximately $0.01 related to AJCA tax costs.

These results include a $295 million charge to increase the reserve solely for its future legal defense costs related to the Vioxx litigation.

On a reported GAAP basis, EPS were $0.51 compared to $0.50 for the fourth quarter 2004.

For the full year 2005, EPS were $2.53, excluding $0.31 related to the net tax charge and $0.12 related to the restructuring charges.

As a reminder, the $2.53 is the operating base for the double-digit compound annual growth rate forecast for the years from '05 to 2010.

Full year 2005 reported EPS were $2.10, including the $0.31, the $0.12, and of course, the $295 million charge to increase the reserve.

And that compares to $2.61 for 2004.

Regarding 2006, continuing our previous practice, we provided detailed guidance for the full year, as well as EPS guidance for the upcoming quarter.

As you will see in today's release, we are reaffirming all of the elements of our 2006 guidance, and all the details of the guidance elements are provided for you in the earnings release.

As stated, this guidance does not reflect the establishment of any additional reserve for any potential liability relating to the Vioxx litigation.

Regarding the first quarter of 2006, we anticipate EPS in the range of $0.62 to $0.66, excluding restructuring charges related to site closures and position eliminations.

Merck anticipates reported first quarter 2006 EPS in the range of $0.52 to $0.58.

I would highlight that in 2006, the Company is anticipated to generate approximately $5 billion in free operating cash flow after capital expenditures, but before dividends and share repurchases.

I also want to emphasize that we have the financial strength to support our dividends.

We are fully committed to maintaining it at the current level, and at the same time, to continue to fund our investment priorities.

In addition, as Dick noted, our strategy is on track, and we remain committed to driving compound annual double-digit earnings per share growth, excluding restructuring costs, over the 3 to 5 year period, as well as adjusted revenue growth including 50% of joint venture revenue, of 4% to 6% through 2010.

With that I'll turn the call over the Graeme, who will introduce the question-and-answer portion of the call.

Thank you very much, Judy.

We will now open the call for your questions.

We will take the questions in the order in which they were received.

And to get through as many questions as possible, we would ask that you limit yourself to 1 or 2 questions.

Of course, if you do have additional questions, you are welcome to rejoin the queue.

At this point, I will turn the call back over to Angela, who will communicate instructions for our Q&A format, and then introduce the first question.

Angela?

Thank you, Mr. Bell. [OPERATOR INSTRUCTIONS] Tim Anderson, Prudential Securities.

Thank you.

I guess this is a question maybe for Dick.

On the 5 year EPS CAGR you have given, I was wondering if that at all is contingent on doing any sort of corporate acquisitions?

I think a fair number of people have a hard time getting to those figures that you've laid out.

And you were on the wires recently saying you were interested in buying companies.

Hoping you can just kind of frame out what sort of things you're looking for, and what sort of discipline you'll exercise when considering targets?

Are you looking at profitable companies?

What are the disease areas?

What are the size limitations on -- and that sort of thing.

And then second question is just a quick one on AstraZeneca's total product sale.

If generics launch, let's say midyear or, do you think you'd still be able to hit your '06, EPS targets?

To your first question on, is acquisitions included in our 5 year compound annual growth rate from a revenue standpoint.

In the base model, to begin with, the answer is no.

We had no acquisitions in that period of time, so obviously that is something that, if happens, would be very positive.

As you know, we've had a very successful licensing and joint venture, and acquisition of some biotech companies, particularly over the last 3 or 4 years.

And we will obviously continue that.

But from my standpoint, it would be an excellent opportunity if we can find the right biotech company that has priority in the disease stage, we've already mentioned is part of our December 15th focus from a research standpoint.

But also would have in line revenues at the same time.

So I really would like to have my cake and eat it too, from the standpoint of helping research from a pipeline standpoint.

But also during the 5 years, to be able to have an impact on top line revenue.

But they are not included in the numbers that Judy and I presented at the analyst meeting.

And so I thought -- well, first of all I think it's way too early to speculate.

As you know, Astra is appealing and there are no approved generics.

So, I really think it's a little premature to get into that discussion.

Next question, please?

Barbara Ryan, Deutsche Bank.

Good morning.

And thanks for taking my question.

I just had a quickie, which was on the tax rate.

I may have missed it, but I don't know whether you had given us any guidance vis a vis the tax rate in 2006.

Or if we should just assume something similar to 2005.

Thanks.

Yes.

Hi, Barbara.

Yes, we did provide it.

I also reference you to page 14 of the release.

But to share that, we are guiding to a tax rate of approximately 24 to 26%.

But again, this guidance is not reflect the tax rate impact of restructuring costs.

And as you know, the effective tax rate for those are anticipated to be higher than the effective tax rate guidance.

But for the underlying business, 24 to 26%, versus where we came out on 2005, which I would say apples to apples, is about 28% for the year, and consistent with our guidance for 2005, as you know, which was 27.5 to 28.5.

Next question, please, Angela.

Jami Rubin, Morgan Stanley.

Thank you.

It relates to the Vioxx -- the additional Vioxx legal reserve of 295 million.

Just curious to know how you assess that.

Because the actual number of lawsuits has not changed that dramatically.

Is that an assessment of what you anticipate to be a swelling of future lawsuits before the statutes of limitations?

Maybe you could just talk around that.

Because obviously, it's a big number, and it brings your total up to 675 million.

And secondly, if you could talk about the status of the upcoming consolidated long term Vioxx cases in Atlantic City.

When you expect Judge Higbee to make a decision.

And how you can sort of expect the cases in her jurisdiction to play out.

Thanks.

From a standpoint of how we calculate it, some of the significant factors considered in the reserve obviously, are the actual costs accrued, the development of the Company's legal defense strategy, the structure in light of the expanded scope, the number of cases being brought against the Company, the cost and outcomes of completed trials, and the anticipated timing progression and related costs of the pretrial activities, and trials in the Vioxx product liability suits in general.

So there's a lot of detail -- bottoms up detail, that goes into our assumptions of where we are.

Really where we're headed in the cases you mentioned, it's really too early for us to tell.

And the good news, as you heard, is that there was a Judge Higbee in Atlantic City, granted a motion for a summary judgment to Merck against a case that was there.

So that's good news.

But putting the cases together, it's difficult yet to see where that's going to end up.

That's really important when you hear all of the issues around which cases are being put together, which cases have summary judgment against them, which cases are being withdrawn.

That's really why, and reaffirms our strategy, that we are doing this case by case.

That it really validates our complete strategy, in making sure that every case is different, every issue is different.

And that we have to approach it on a case by case basis.

Next question, please.

David Risinger, Merrill Lynch.

My question is related to the long-term targets for the Company.

And I really have 2 sub-questions.

First, for future non-GAAP EPS, what unusual items do you plan to include in expenses, and what unusual items do you plan to exclude from your non-GAAP EPS?

And with respect to the first question on the call, there was a question about the 2010 outlook and the impact of biotech.

And I think that Dick had said that if acquisitions happened, that would be positive.

But it would seem to me that some acquisitions could be dilutive.

So could you just confirm that you anticipate acquisitions to be accretive and thus positive to your 2010 EPS outlook?

Thank you.

So, let me try to give you a little bit of a recap on the assumptions that we put in when we gave the guidance on December 15th.

As you recall, what we said then, is we were excluding restructuring cost.

We were excluding any future potential liability on Vioxx.

And we also were excluding any 1 time gain from AstraZeneca.

So those were the major elements that we called out as being excluded from that outlook.

And those are the guidelines that were appropriate to use in your model.

David, your second point.

Obviously, if there was an acquisition, you would want it to be in the best interest of shareholders, longer term.

Not knowing the company or the financial equation it would take to bring them into the Merck family.

Whether you can say short term whether it would be dilutive or accretive is really hard for me to predict.

Next question, please, Angela.

Chris Shibutani, JPMorgan.

Thanks very much.

My question relates to Gardasil.

I believe, based upon my understanding of the timing of your filing, that we are very close to 60 day response window.

Would we expect to hear something from you, as far as what the FDA's response is on the application?

Secondly, on the manufacturing, a lot of closings throughout the world.

Can you describe for us whether or not there's any impact relative to vaccine manufacturing.

And in that regard, can you give a general sense for where the products that are being launched are being manufactured, in terms of U.S. or non-U.S. ?

Some sense for the mix.

Thanks.

Yes.

To your first question on Gardasil.

The time is near, but we don't obviously know what that time is.

As soon as we hear, we will obviously share that.

Because that's obviously good news for Merck, as well as good news for patients.

The vaccine production area, in the manufacturing areas that we named that we're going to close, none of them are affected by vaccine operations.

Most of our vaccine operations today is in West Point, Pennsylvania.

So Gardasil, RotaTeq, Zostavax, Proquad, the 4 new vaccines, are all manufactured in West Point.

And we have built significant biological technology infrastructure in place in the past, to make sure that, first of all was compliant, it was state of the art, and to have the capacity capability to handle the type of sales forecast that we may have with those products.

Next question, please, Angela.

Steve Scala, SG Cowen.

Thank you.

We have been seeing numerous patent litigation settlements industry wide over the last few months.

Your predecessor elected to pull all Zocor patents from the Orange Book, some of which in retrospect, might have supported a settlement.

Could you tell us first, what the last expiring Zocor patent was before it was pulled, even if a process or use. .

Secondly, whether you have the legal ability to reinstate those last expiring patents.

And third, whether you have investigated that option.

I would think, given the fact that the courts have blessed these settlements, that it would be in the best interest of your shareholders to pursue this to all ends.

As you know, Zocor is off of patent in June of '06.

So we don't have any plans to look at it, from an extension standpoint or reinstate.

And certainly, I don't want to comment on past decisions that were made.

As you may know, we also have made the decision, and entered into an agreement with Dr. Reddy's Laboratories, which will allow DRL to distribute and sell generic versions of Proscar and Zocor, upon the expiry of Merck's patents covered by these products, provided there's an 180 day exclusivity after the patents expiration for either product.

So that's my primary focus for the short term.

Next question, please, Angela.

Michael Kaster, Bernstein.

Thanks very much. 2 accounting questions.

First, the accelerated depreciation, when you talked about closing plants through 2008.

Does that mean roughly that the 177 million is base line, and that should continue through 2008?

And then secondly, the tax rate as I understand it, largely Zocor going off patent, and Zocor was domiciled in the U.S.?

And so [un-tax] rate is a function of Zocor's disappearing?

Okay.

So, to the first point, the accelerated -- don't straight line the accelerated depreciation.

You can appreciate -- let me give you some methodology.

What we are doing is looking at all of the different assets involved, and really layering them in, based on sort of the expected time before we would either see abandonment or closure.

So those vary in terms of the outlook over the next year or 2.

So one would expect that number actually to decline over time.

Bearing in mind also, that what you saw in the fourth quarter, was the fourth quarter piece of that, not a full year '05 piece.

Obviously, you pick up the pro-rata amount for -- from the announcements going forward.

So I think that there are a lot of different components in there.

And obviously, we're going to call those out for you each quarter, so that you can get a sense of what the impact is going to be.

On the tax rate, Zocor has nothing to do with the tax rate at all.

It is, as we said, is a function of really geographic mix and currency changes, and Zocor is not -- has not been, and is not a player, at all, in terms of the impact on the tax rate.

Next question, please, Angela.

[OPERATOR INSTRUCTIONS] Edward Montgomery, Goldman Sachs.

Good morning.

Thanks for taking the question.

Just in relation to Gardasil.

On the news release, doesn't look like there's anything too material, but can you just highlight the ongoing studies that you have currently?

In particular, looking to see if you have ongoing studies [inaudible] more of a potentially a cure versus a vaccine as such, going forward.

And the second question is, in relation to an update on -- have you got any feeling as whether any states here in the U.S. would be looking to make this mandatory upon FDA approval?

In the studies we have underway, none of them are focused on a cure.

The 2 studies we have underway are obviously in men.

And the other study is in women greater than 25 years old -- excuse me, less than -- greater than 29 years old.

The issue around mandatory, we're working with the states.

We're working with the reimbursement processes we have in place.

But it's way too early to be able to talk about mandatory requirement.

Next question, please.

Thank you.

Chris Schott, Banc of America Securities.

Great.

Thanks.

Just 2 quick questions.

First on Vioxx, when are you expecting to see follow-on data from the approved study, just with cardiovascular safety?

And the second question, when we look at your equity income, you're looking for about 300 to $600 million in annual growth into '06.

Can you just give us some rough estimates of how much of that is coming from the cholesterol JV, as compared to businesses such as Sanofi Pasteur?

Thanks.

In answer to your first question, we should have the data available by midyear '06.

And then the second question, we don't provide that information.

Next question, please, Angela.

Thank you.

Mario Corso, Summer Street Research.

Yes.

Thank you for taking my question.

For MK-518, will you be doing studies in naive patients and treatment experienced patients simultaneously, or is one before the other?

It would seem like with the CCR5 inhibitors not faring so well in the naive population, that that might be a large opportunity for Merck.

Thanks very much.

Mario, it's Graeme.

With regard to the studies on 518, obviously we shared in December, some data with regard to the recovery patients.

And we indicated at the time that there were indeed, ongoing studies with regard to the naive patients.

So that's where we stand with that.

So once we have shared with you our preliminary data with regard to 518 at the appropriate scientific forum, which we indicated would be in the first half of this year, that data really relates to the recovery patients.

Okay.

Next question, please.

David Moskowitz, Friedman, Billings, Ramsey.

Yes.

Thanks for the question.

First question is, are there any circumstances where you guys may have to share any of the niacin combination product revenue with your cholesterol marketing partner, Shering-Plough?

Also Judy, if you could give us the baseline marketing administration spend that we should be using to grow our M&A spending this year, that would be helpful.

And also, AZLP, could you talk about any particular items, unusual items or nonrecurring items, that may have contributed to the current quarter?

I think you mentioned that there were some tax changes that could occur.

Would appreciate that.

Thanks.

Well, your first question, the answer is no.

The joint ventures relationship is based on a cholesterol absorption inhibitor.

And so products that you mentioned would not be a part of the joint venture.

As you know, we're focusing our attention, both from a Merck standpoint and a Shering-Plough standpoint, on Vytorin and Zetia.

They're very important to both of our companies moving forward, and for our success.

So our focus is on the ability to continue to be successful with those 2 products.

And the common objective that we all have is to maximize Vytorin and maximize Zetia.

Let me turn to AZLP first.

Again, as I noted in my comments, there's really not a lot more detail to provide.

But through the partnership, there are different impacts in terms of really the tax versus book accounting, and timing of certain entries, and those do factor in, and they are variable.

So there's nothing to extrapolate from that, unfortunately, one way or another.

So, in terms of the M&A base, I think it might be most helpful just to refer to the general guidance on 13, which helps you sort of track through what we're basically talking about, which is to exclude those charges.

The 295 basically from the $7.1 billion.

So you're really in the $6.9 billion range for the base.

I think, given the time, Angela, we probably have time for 1 more question.

Thank you, sir.

Scott Henry, Oppenheimer.

Thank you.

Couple questions on the cholesterol franchise.

First, with regards to Zocor generics in mid '06.

Should we expect a Q2 inventory reduction for Zocor ahead of generics?

And as well, when we look at generic Zocor and the impact it has on formularies in drugs such as Vytorin, do you believe that impact would be immediate in the middle of 2006?

Or would it be more of a turn of the year issue that would impact 2007?

Coming from an inventory standpoint with our inventory policies, we'll have less than a month worth of inventory.

So that shouldn't be an issue.

And as far as, if I believe I understand your question, generic impact on Vytorin, generic simva impact on Vytorin.

As you know, Vytorin has a distinctive profile, and really represents a major difference in getting patients to goal, than even higher doses of Zocor.

So, again, we believe there's a very special place for Vytorin, and we expect to see continued progress for Vytorin because it is differentiated.

And as you know, also has very strong position on managed care formulas.

So, with that last question, we conclude today's conference call.

I want to remind you that a replay of this call will be available on Merck.com for the next 7 days.

We thank you.

We thank you for your appreciation and interest.

And good-bye.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.