默克藥廠 (MRK) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to Merck's first-quarter 2006 earnings conference call.

Today's call is being recorded.

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

Please go ahead, sir.

Thank you, Amanda, and good morning.

Thank you very much for joining us on Merck's first-quarter 2006 earnings conference call.

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

As in prior quarters, I am joined on the call by most of senior management.

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

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

On this call we will review the results of the first-quarter 2006 released at 7:30 AM this morning.

You can access the earnings press release and supporting material, the live webcast and an Internet-based replay of this conference at Merck.com.

The Internet-based replay of this conference will be available on the Web until April 27.

Before we begin our review of the results, let me remind you that some of the statements made during the call may discuss certain subjects and may contain forward-looking statements 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 risks and uncertainties.

They may result 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-looking statements on this call should be evaluated together with the many uncertainties that affect Merck's business, particularly those mentioned in Merck's recent 10-K or in Form 10-Q that are posted on our website.

We will begin with brief remarks from our senior management and then open the call for questions and expect the total call to last less than an hour.

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

Thank you, Graeme.

Good morning, everyone, and thanks for joining us on the call this morning.

Merck is off to a strong start for 2006 with our first-quarter results.

Our earnings per share for the first quarter were $0.78, excluding the impact of the charge related to the global restructuring we announced in November of last year.

Including the impact of the restructuring charge, reported EPS for the first quarter were $0.69.

Net income for the first quarter of 2006 was over $1.5 billion, up from nearly 1.4 billion in the first quarter of last year.

We anticipate second-quarter EPS of $0.62 to $0.66, excluding restructuring charges and reported second quarter EPS of $0.55 to $0.61.

As I am sure will be noted in our press release, we are raising our guidance for the full year.

We now anticipate a full-year EPS range of $2.32 to $2.40.

Excluding the restructuring charges related to site closures and position eliminations, we reported full-year 2006 EPS of $2.02 to $2.16.

Our strong first-quarter results were driven by the performance of ZOCOR and SINGULAIR in the U.S., our vaccines, plus the performance of our partnerships and alliances.

Judy will provide more detail on the performance of our products and partnerships in a minute.

The strong first-quarter performance, along with the late stage pipeline events that occurred in the quarter, demonstrate Merck's solid momentum as we move forward in 2006.

In February the FDA approved ROTATEQ, the only rotavirus vaccines available in the U.S.

And later that month, the CDC's advisory committee on immunization practices unanimously voted to recommend that all infants beginning at six to 12 weeks of age be vaccinated with ROTATEQ.

The FDA gave priority review status to GARDASIL, our cervical cancer vaccine in February.

The FDA's review goal date is June 8 of this year.

Regulatory agencies in Australia and New Zealand also have given priority with you to GARDASIL.

We also announced in February that the NDA for JANUVIA has been accepted for standard review by the FDA.

We expect FDA action on the NDA by mid-October.

JANUVIA is our investigational once daily medicine with the novel mechanism of action for the treatment of Type II diabetes.

We expect the FDA's review of the biological license application for ZOSTAVAX, our investigational singles vaccine to be completed by May 25.

As at the end of the first quarter, we have five drugs in Phase III development for diabetes, insomnia, high cholesterol, heart disease and HIV/AIDS.

Clearly our late stage pipeline is progressing well.

We are also making progress on our global restructuring program, which we announced in November.

We eliminated approximately 1800 positions throughout the Company in the first quarter.

That figure is in addition to the 1100 positions we eliminated as of December 31.

We are well on our way towards our target elimination of 7000 positions worldwide by the end of 2008.

Work continues on all of the other components of the Merck strategy, which we had unveiled in December.

But you don't have to simply take our word for it.

We have developed a set of company performance metrics.

I call it the Merck scorecard for our external stakeholders to use in evaluating our progress against our performance targets.

The scorecard covers four major areas.

The first outcome focuses on financial results and is designed to maximize shareholder value.

Key measures of this outcome includes EPS growth and revenue growth.

The second outcome focuses on our customers and is designed to help us deliver greater customer value.

Key measures of this outcome will include the success of our new product launches and of our key products.

The third outcome focuses on the internal business drivers and is designed to help us build a more efficient and effective business model.

Key drivers of this outcome include improving our R&D productivity, reducing our spending per brand in the U.S. and implementing our supply strategy.

And the fourth outcome, which focuses on our people and culture, is designed to create a high-performance organization.

You can have the right strategy, but it will never be successful if you don't have the right culture and people to implement it.

Twice a year we will report on key elements within these four areas.

The first update for 2006 will take place in July during the second-quarter earnings call, and the second will be provided during our annual business briefing in December.

We created the Merck scorecard for several reasons.

The first reason was internally focused.

We are committed to fundamentally changing the way we do business, and this includes changing the way we managed performance of the Company.

The scorecard helps drive the entire organization toward the execution of our strategic priorities, and it improves alignment across our divisions.

It also enhances the link between company results and individual performance and compensation.

The second reason was externally focused.

In December we told you we are committed to driving a compound annual double-digit EPS growth, excluding restructuring costs and one-time events over the three to five year period, as well as an adjusted compound annual revenue growth, including 50% of the joint venture revenues of 4 to 6% through 2010.

We know we can't simply put our targets like this and ask you to trust that we're on track with meeting them.

We need to show you results along the way, and that is exactly what we are prepared to do.

So stay tuned with the updates in July.

For today, let's focus on the strong results in the first quarter.

For that, I will turn the call over to Judy who will provide you more details about the quarter.

Judy?

Thank you, Dick, and good morning, everyone.

As mentioned, the first-quarter result was slightly better than we previously anticipated, and for the next few minutes, I would like to discuss in more detail several lines on the income statement, highlighting the important underlying drivers of our performance.

To briefly summarize the quarterly performance, it was driven by the final product mix and consequently a strong reported product gross margin.

Both marketing and administrative and research and development expenses were, in fact, on track with our guidance.

The performance of our partnerships and alliances contribute to a strong quarterly equity income, and overall we benefited from an upward move in interest income in the quarter.

I will talk about some of these factors driving our quarterly performance as we go through the numbers.

Dick mentioned several of the highlights of the quarterly results a moment ago, so to build off that, let me start by coming on our revenue.

In the first quarter, we recorded revenues of $5.4 billion, and that is comparable to the same period last year, including in the aggregate an overall 2% decrease from foreign exchange, offset by growth in volume and price of 1 and 2% respectively.

Collectively worldwide sales of Merck products were consistent with our expectations, and the result was driven by regional performance and final product mix.

For the quarter we saw strong growth in SINGULAIR, as well as our growth in other promoted products and our vaccines business.

This growth was counterbalanced by the impact of foreign exchange in Europe and Asia and the availability of generic alendronate sodium and generic simvastatin in several key markets outside the United States.

In the first quarter, ZOCOR revenue in the U.S. was $833 million, representing a 13% increase year-over-year, and there were two primary factors behind this performance.

During the first quarter, total Rx volume growth in the HMG class was greater than 10% as we gained momentum and continued to benefit from outcome studies, highlighting the benefit of statins in preventing cardiovascular outcomes.

During the quarter, ZOCOR experienced stronger retail volume and favorable pricing given our final pricing actions taken.

That said, the underlying trend reflects the market dynamics and recognizes factors such as the shared growth of VYTORIN, the continued uptake of generic lovastatin and the anticipated generic simvastatin from June 24.

Also contributing to our topline are revenues from our alliances.

In the first quarter, revenue recorded by Merck from the company's relationship with AstraZeneca LP were $380 million.

This reflects a decline of 13% from 1Q '05, but keep in mind that 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 of PPI and non-PPI products, as well as their shipments out.

Taking the first-quarter revenue announced today and adding 50% of the revenues from the Merck/Schering-Plough, Merial, Sanofi Pasteur MSD, Johnson & Johnson/Merck joint ventures and partnership, first-quarter '06 revenue would have been $6.2 billion.

If you do the same adjustments in first-quarter '05, the growth rate from that baseline level was 4%.

As you see from the release, we're reaffirming guidance for all our key franchises, our other recorded products and the revenue we record from our relationship with AstraZeneca for the full-year 2006.

As we move into the next three lines on the income statement, I will be commenting on the impact of FAS 123R or the expensing of stock options.

So just to provide perspective, we are still on track for our estimated full-year guidance of $220 million for stock option expense in 2006.

A portion of that expense will flow through material and production, a portion through R&D and a portion through marketing and administration consistent with where payroll costs are incurred.

For this first quarter of 2006, the total stock option cost is $99 million, and that is clearly more than one quarter of the anticipated full-year cost.

This relates to the fact that we grant most of our options in the first quarter of every year, and the accounting rules require that certain aspects of our amortization of these costs are accelerated in the quarter in which the options are granted.

For example, all options granted to retirement eligible employees are amortized in the quarter granted versus over the three-year vesting period.

In addition, there are some carryover costs of options granted in prior years that vest in the current period.

In future cost quarters, the expense will be lower, and therefore, we are comfortable reaffirming our full-year guidance of $220 million for stock option expense.

Moving down to the P&L, materials and production came in at $1.3 billion.

If you calculate the actual changes in PGM dollars, you'll see that it is down 1% versus first-quarter 2005.

The actual reported product gross margin in the quarter was 75.2%, but note that this includes restructuring costs of $205 million recorded in the first quarter of 2006 related to accelerated depreciation associated with Merck's global restructuring program announced in November 2005.

Looking sequentially at the restructuring embedded in PGM, the level of restructuring taken this quarter is higher because it reflects three months versus just one month last quarter.

Excluding the restructuring costs, PGM in the quarter was a very strong 79%, and just as in previous quarters, this result is affected by the final product mix.

Also, included in this quarter was materials and production lines in accordance with the adoption of FAS 123R are stock option expenses of $11 million.

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

This guidance excludes the associated portion of the restructuring costs but now includes 123R.

Keep in mind our changing product portfolio post the ZOCOR patent expiry and how that will affect PGM in the latter quarters versus the results we see in this quarter.

Turning to margin and administrative, the first-quarter expenses came in at $1.7 billion.

That is an increase of 7% over the same period last year.

Within that and in accordance with the adoption of FAS 123R, there was a charge of $63 million associated with recounting for stock options.

In the first quarter, the Company did not increase the VIOXX legal defense reserves.

Now regarding guidance, we are continuing to provide it on the change in marketing and administrative expense relative to the base period, excluding onetime items to help your modeling.

To accommodate the implementation of FAS 123R, we are updating our full-year guidance to simply add in the impact of 123R to the marketing and administrative line.

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

This slight change simply reflects the fact that we want to give you one number for marketing and administrative guidance, including 123R.

Note that our expected underlying level of spending, excluding the 123R costs, remains unchanged.

The full-year 2005 level excludes the charge taken in the fourth quarter related solely to the future legal defense cost of VIOXX litigation.

First-quarter research and development expense (technical difficulty)-- [$942] million.

This includes restructuring costs of $55 million related to accelerated depreciation associated with Merck's global restructuring program announced in November 2005.

In addition, $24 million is included related to these options of FAS 123R.

During the first quarter, Merck entered into several agreements reflecting our strategy of establishing strong external alliances to drive both near and long-term growth.

And at this time, we are in discussions with approximately 40 companies regarding potential transactions and actively monitoring the landscape for a range of targeted acquisitions that meet the Company's strategic needs.

Regarding guidance, to accommodate FAS 123R, we are updating our full-year R&D guidance to simply add the impact of 123R.

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

This slight change reflects the fact that we want to give you one number for R&D guidance, including 123R, and that our expected underlying level of spend excluding 123R remains unchanged.

Moving on to the new line in the P&L that we added last quarter regarding restructuring costs.

As we stated in the previous quarter, we are providing the breakout to assist in tracking the restructuring-related expenses and to ensure fair comparisons on the underlying business.

This line will capture all separation costs.

In accordance with GAAP accounting, the accelerated depreciation associated with Merck's global restructuring program is being reported in the respective line items, namely materials and production and R&D.

So, in our first-quarter '06 results, the total charges related to the global restructuring program were $304 million, including 44 million that is part of this line, 205 million for asset-related charges that are included in materials and production, and $55 million for asset-related charges that are part of R&D.

On the restructuring-related expense line in this quarter, we booked $44 million.

That result reflects restructuring costs related to separations associated with the approximately 1800 positions eliminated in the global restructuring program and charges related to the completion of other separation programs.

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

Again, this restructuring line will include position elimination expenses associated with the global restructuring and some shutdown costs when incurred, while materials and production and R&D will pick up the accelerated depreciation costs.

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

In reviewing equity income from affiliates, you will see $503 million in income related to the contribution from all our joint ventures -- AstraZeneca LP, Merck/Schering-Plough, Merial, Sanofi Pasteur MSD, and Johnson & Johnson/Merck.

Regarding the Merck/Schering-Plough partnership, the first quarter combined MSD cholesterol franchise global revenue as reported by the Merck/Schering-Plough partnership reached $793 million.

In the U.S. revenues as reported by the Merck/Schering-Plough partnership of ZETIA and VYTORIN were 316 and $319 million respectively.

And while we anticipate that the sales and process from the cholesterol JV will grow in 2006, we are mindful of the changes that may occur in the cholesterol market as new generic products enter.

Let's turn to other income.

Within this line, interest income was higher than in the past as our portfolio benefits from a rising short-term rate environment.

For the quarter, income before taxes was $2 billion.

Taxes on income in the period were $460 million, and the reported tax rate was 22.9%.

But this included a favorable impact of 1.7% related to the restructuring charge.

The underlying effective tax rate of 24.6% reflects in general the impacted changes in foreign and domestic mix and currency fluctuations, and these elements as you know change throughout the quarter.

We are reaffirming our full-year 2006 guidance.

This guidance does not reflect the tax rates impact of restructuring costs, and I would direct you to today's press release for the details.

Moving down to net income and earnings per share, net income for the quarter was $1.5 billion, up 11% when compared to the same period last year.

During the quarter we spent $250 million in treasury stocks, and we still have $7.3 billion under the current authorization from the board with no time limit.

Earnings per share for the first quarter were at $0.78, excluding $0.09 related to restructuring.

On a reported GAAP basis, EPS were $0.69.

Regarding 2006, continuing our previous practice, we provide 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 raising our full-year 2006 range and are reaffirming the majority of the elements of our 2006 guidance, and all the details of the guidance are provided to you.

As stated, this guidance does not reflect the establishment of any additional reserves for any potential liabilities related to the VIOXX litigation.

Concerning the second quarter of 2006, we anticipate EPS in the range of $0.62 to $0.66, excluding restructuring charges related to site closure and position eliminations and, therefore, anticipate reported second-quarter EPS of $0.55 to $0.61.

For the full-year 2006, we are raising guidance.

We're doing this to capture the fact that we have a solid first quarter and to reflect in the full year that strong performance.

However, we recognize the year still includes uncertainties.

For example, as I mentioned when discussing equity income, our current expectations are that EPS will be in the range of $2.32 to $2.40, excluding the restructuring charges related to site closures and position eliminations.

Merck anticipates reported full-year 2006 EPS of $2.02 to $2.16.

I would highlight that in 2006 the Company remains on track to generate approximately $5 billion in free operating cash flows after capital expenditures but before dividends and share repurchases.

I also wanted to emphasize that we have the financial strength to support our dividend.

We are fully committed to maintaining it at the current level and at the same time to continuing 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 EPS growth, excluding restructuring costs, net tax charges, any onetime gains associated with the AstraZeneca partnership and the establishment of any reserves for any potential liability related to the VIOXX litigation over the three to five-year period, as well as adjusted compound annual revenue growth, including 50% of joint venture revenues of 4 to 6% through 2010.

With that, I will turn the call over to Graeme who will introduce the question and answer portion of this call.

Thank you, Judy.

We will now open the call to take your questions.

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

So, at this point, I will turn the call over to Amanda who will communicate instructions on our Q&A format and then introduce the first question.

(OPERATOR INSTRUCTIONS). [Ru Pesh-Patel], UBS.

I had a question related to ZOCOR and one related to FOSAMAX.

On ZOCOR I just wanted to get a sense for how much inventory was there in the channel and if there has been any unwinding of inventory during the first quarter?

And then on FOSAMAX, I just wanted to get a sense if there are any additional patent expirations that are expected in international markets later this year?

Thank you.

Relative to ZOCOR in the U.S., as you know, we instituted an inventory management program at the end of 2003, which has been working very very effectively.

So we have very well-controlled levels of inventory in the channel at this point in time.

That is being managed appropriately, and there is no issue regarding ZOCOR inventory in the U.S. at all.

Revenue to any other patents on FOSAMAX and patent expirations internationally, there is nothing to add accept I bring your attention to the comments in the release that we did see the decision from the Board of Appeals, the European patent office on March 14, upholding its decision from 2004, and therefore, Merck's alendronate products are protected in many major markets in Europe until at least 2007.

Tim Anderson, Prudential.

A general question and then a specific question.

The five-year guidance that you guys had given, I think most people found it a little bit hard to get there.

My question is whether that guidance is based on the business as we see it today or if there's big surprises or strategy changes or business changes built into that guidance that the outside world of investors just does not know about yet, which is one of the ways that you guys can see double-digit CAGR and others can't?

And the second question, the specific question is just on the triple combination HDL drug and the formulation issues that you talked about previously.

I was hoping you can maybe give us a little more detail on what those issues are?

Certainly for your first question is the fact that the way we are able to get to the double-digit growth in the 4 to 6% revenue was based on our business as we know it and the implementation of our strategy.

So there was no special or creative ideas on how to do anything differently but except get the core business right and focus on research to have a new commercial model and get the expenses right.

And when you combine that with the pipeline that we see for our new vaccines and our new products and our relationships with our joint ventures, we are able to put a very realistic goal together that gives us the numbers we have.

So we are very confident in it, and no miracles have to happen here.

Let's just focus on the business and get your results.

I think that is the solution to that.

That is why we're not only confident in that and when we share it with our organization, they can see that line of sight in 2010 as well, and they know by the scorecard methodology what they have to do in order to get there.

So we are pleased with the enthusiasm and feedback from the organization, and as you can tell the way we ended '05 and the way we are beginning '06 where we think we are on our way.

Obviously there is a long way to go, but I think we are on the right path.

In relationship to your question, we are working on the formulations issue with the (indiscernible) combination product, and we are continuing with our Phase III program and studying the individual components of the product, and that is about all we can say now until we understand the solutions to that.

David Moskowitz, Friedman Billings Ramsey.

A couple of questions.

One on GARDASIL.

Can you talk about the production plans for the product assuming approval?

I understand there is a facility under construction in Virginia.

Can you talk about the timing of completion on that project, whether or not there has been any pushback in that timing, and also the fact that I guess you have been producing bulk product from a facility that was used in clinical trials, can you talk about that?

In addition, on ZOCOR inventories, I'm just trying to get a handle on what was shipped in the first quarter.

Did you fill the channel for this quarter, last quarter?

I guess another way of asking that is, how are you booking sales on the product?

Are you booking it when you ship it or when the sales are fulfilled?

I think the first question concerning GARDASIL, the facility in North Carolina, the first products to be approved and produced there are measles, mumps and rubella vaccines.

So it is in line products.

We have large-scale bulk manufacturing capabilities in our West Point, Pennsylvania site, and there are absolutely no capacity issues in this site in order to support the ability to support the launch and potential upsides for the product.

So we are well positioned for GARDASIL longer-term.

And on the ZOCOR inventory, you know, a couple of points.

Let me reemphasize that we have had a very successful implementation of our inventory management agreement.

Our revenue recognition policy is obviously we recognize that revenue when we shipped the product.

But let me emphasize the fact that all of our customers also recognize that ZOCOR is going on patent on June 26.

So there is nothing unusual at all going on in those inventories levels whatsoever.

They are completely appropriate and under control.

Jami Rubin, Morgan Stanley.

Just two questions.

The first is on VYTORIN.

VYTORIN revenues came in -- were reported below prescription trends and would seem to be the reverse to the fourth quarter.

Can you clarify what is driving that?

Is that wholesaler fluctuations, or is that increased rebating to managed care?

And the second question relates to the recent McDarby verdict.

Our understanding is that based on the New Jersey statutes on punitive damages this case goes to the New Jersey Attorney General's office.

So if you could talk about the procedures there?

And also, the consumer fraud class-action decision that was recently upheld by a lower appellate court in New Jersey, if you could talk about that, and just the overall list of a consumer sought class-action against the Company?

Well, in relationship to VYTORIN, certainly in the first-quarter '06 the demand for VYTORIN in the U.S. continues to be strong.

And in the quarter, there was some modest workdown in trade inventory levels, but inventory levels remain in the range that we saw, and as you said, really we had a strong fourth quarter as well.

I think when you look at the Rx trends as leading indicators it shows you the future strength in growth of VYTORIN.

In relationship to your concern around VIOXX, certainly we believe in all of the issues we have strong appeals as a part of the process moving forward.

That is about all I can say now for both of those issues.

But, as has been stated in the past, we feel pretty strongly about the appeal process no matter where we have to go.

James Kelly, Goldman Sachs.

I have two questions.

First of all, on SINGULAIR internationally last year the trend was running about a 20% growth rate I believe, and I think this quarter it was down, and I'm just wondering what is happening to that product overseas?

Also, for Judy, I just want to understand a little bit as we now have this reporting on earnings excluding more of the restructuring charges.

In the restructuring actions that were taken over the last couple of years, not the current one, was accelerated depreciation a component that we should be looking for inside the gross margin lines or R&D lines in '04 and '05 so we can understand comparability there?

First of all, on SINGULAIR international, foreign exchange is the major contributing factor there.

A strong dollar in that -- you know, compare in that period, as I think you can appreciate.

In terms of restructuring, past restructurings were purely headcount-related.

There was no accelerated depreciation.

So when you take out what we have disclosed in '06 and the piece that we disclosed in '05 in the fourth quarter, you'll have apples-to-apples on a historical comparison.

Steve Scala, Cowen & Co.

What will Merck's response be if the IVAX and Ranbaxy suit against the FDA regarding their alleged right to six months of ZOCOR exclusivity is successful?

Would you appeal the decision to encourage a high level of competition, or would you simply decide to sell more ZOCOR through Reddy's for six months and share the profit?

That really is not our issue at all.

You are correct that we have an arrangement with Dr. Reddy for an authorized generic with ZOCOR if that opportunity presents itself.

That is the extent of our involvement.

David Risinger, Merrill Lynch.

I had a couple of questions.

First of all, the first question relates to your long-term guidance.

So the street I think starts with an '05 base of 253 per share, and if you assume 10% EPS growth, that would suggest 2010 EPS of about 405.

Can you confirm that that is your minimum target since you said 10% plus growth?

And then the second question related to that is, your guidance for the second half in terms of the midpoint of the range if we back out the first-half guidance is $0.94 per share.

If we annualize that, that is under $2.00.

So could you help us understand how you doubled the earnings over the four-year period?

Thank you.

In response to your first question, I believe that what we had said in our December analyst meeting was double-digit growth, and that is about all the information that we can give in addition to that December meeting.

So we are staying with double-digit growth is our answer to that.

Yes.

Actually absolutely 253 is the base.

That is consistent with the base that we provided that guidance on.

So that is the sum total of the guidance we have provided.

As far as your math on the second half and how that impacts that long-term guidance, as I think you appreciate, the second half of 2006 is heavily impacted by ZOCOR's patent expiry in the U.S., and what is included in the years going forward that gives rise to the continent that they can manage (indiscernible) is a lot of new product launches, continued strength of a lot of our in-line franchises and a major rollout of new products starting this year and in the years to come.

Chris Shibutani, JPMorgan.

I noted you had some additional commentary about COX-2s.

Could you let us know in terms of your thinking particularly about any post-approved data presentations?

Secondly, if you would anticipate the ARCOXIA timing of the data there that you discussed for the study?

As we mentioned, we expect to have approved [PLUS1] data in midyear, and we mentioned that the MEDAL trial is ongoing and was coming to a conclusion during this year.

(OPERATOR INSTRUCTIONS).

John Boris, Bear Stearns.

I just have three questions if I may.

On the R&D side, you have a couple of compounds for the treatment of atherosclerosis, I think MK-0859, 0354, and 0633.

Can you confirm if the 0859 compound I think was targeted to go into I think it is either Phase II or Phase III development?

Can you comment on the mechanism of action also of these compounds?

Are they [C-type] inhibitors or what other mechanism they might work by on atherosclerosis?

Also, does the joint venture have any rights to those compounds?

The second question just has to do with field force productivity.

Just some comments there, Dick, on where you are on field force productivity?

And then just lastly on the recent addition to your management team, just your thoughts there?

Thank you, John.

In relation to your first question, we really don't discuss mechanisms of action, particularly in the early stage compound.

So when it gets into Phase III, we will be glad to share more of that with you.

Hopefully it gets there.

We will be able to do that.

I'm enthusiastic about the sales force productivity, not only in the U.S. but throughout the world as I visit subsidiaries and look at not only the region frequency model but spending much more time with the use of technology as with the use of making sure that education around the disease states and our products are appropriately understood by regional opinion leaders and having the proper influence on GP.

So I think we're well on our way.

There is still a tremendous amount of work to do.

But being able to have the results that we had in the U.S. this year, and remember when we took out a significant amount of sales force and moved it over to the vaccine division to get ready for those launches and still make the numbers we have, I think is a good indication that we are moving in the right direction with them, marketing and sales administration costs going forward.

And finally, certainly we are excited about Peter Loescher joining us on May 1.

He has an excellent track record, very successful in several major companies with several different kind of cultures.

So he is going to be able to bring an outside view into our company and be a member of our leadership team.

He has a leadership behavior and values and missions that Merck has, so we're pretty well aligned with that.

We look forward for him joining us.

I think it is important one of the reasons I made that decision was as you know the way we are organized inside of Merck is by region in the marketing and sales organization, Asia-Pacific, U.S., Europe, Latin America, etc. and we really wanted to have one commercial strategy and voice both internally and externally, and Peter is the right choice for that.

Thank you, John.

Norman Fidel, AllianceBernstein.

On SINGULAIR overseas where there was a decline, can you just tell us the situation now in terms of competitive factors, exclusivity and etc. to shed better light on that type of number?

I'm not sure there are any issues around that whether from an exclusivity or -- standpoint.

As Judy said, part of the issue is around exchange rates.

We still feel pretty confident about SINGULAIR moving forward.

And just with regard to SINGULAIR, I will just remind you that that time runs out until mid-2012.

Next question, please.

Barbara Ryan, Deutsche Bank.

The question I guess is for Judy.

Judy, you mentioned obviously there would be a change in the gross margin for the Company following the ZOCOR patent expiration.

I'm just wondering looking into '07 off of those levels based on product mix and the restructuring initiative which I think you mentioned at your analyst meeting, 50% of the dollar benefits of that 5 billion out to 2010 were going to come in the cost of goods line, and obviously we're seeing the costs there of those implementations.

Can you comment on what we should expect in 2007 given those confluence of events vis-a-vis the second half of 2006 for gross margin?

Sure.

So, first of all, clearly the first-quarter impact is heavily ZOCOR related, and obviously it is not going to continue in the second half of the year, and that is why we reaffirmed our guidance of 75 to 77%.

That is obviously excluding the restructuring charges.

Whereas we have not given specific details on '07, we did provide some guidance that by '08 as a result of making the product mix, product launches and all of these initiatives that after 2008 we would return to prepatent expiry levels relative to ZOCOR.

We certainly continue to stand behind that expectation.

So given the time and we know that you have another call to go and join, Amanda, may I now have the last question for today?

David Moskowitz, Friedman Billings Ramsey.

Actually I already had a question, but I have one more if I may.

In terms of maximizing the joint venture, I am pretty sure that there is some good data out there on ZETIA and fibrates, particularly the fenofibrate product.

Can you talk about what you guys are planning to do in terms of the combination product of those two molecules?

David, we have not talked about that publicly at all, and so I would prefer not to comment on that now.

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

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

Thank you very much.

We appreciate your interest and participation.

Have a good day.

Thank you for participating in Merck's first-quarter 2006 earnings conference call.

You may now disconnect.