默克藥廠 (MRK) 2006 Q2 法說會逐字稿

Good day, everyone, and welcome to Merck's second-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, Michelle, and good morning.

Thanks very much for joining us on Merck's second-quarter 2006 earnings conference call.

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

As in prior quarters, 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'd like to go over the logistics before we go into the details.

On this call, we will review results of the second quarter 2006 released at 7.30 AM this morning.

You can access the earnings press release and supporting material, a 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 July 31st.

Before we begin the review of 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 are based on management's current expectations and involve risks and uncertainties which may cause results to differ materially from those set forth in the statement.

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

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

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

Forward-looking statements in this call should be evaluated together with the many uncertainties that affect Merck's business, particularly those mentioned in Merck's most 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 approximately one hour.

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

Thank you, Graeme.

Good morning, everyone, and thanks for joining us.

It was another strong quarter for Merck and one that gives us momentum as we enter the second half of 2006 and keeps us on track to deliver on the commitments we laid out in December.

I am pleased to announce that our earnings per share for the second quarter were $0.73, including the impact of a charge related to the acquisition of GlycoFi and excluding a net charge related to the ongoing global restructuring program we first announced in November 2005.

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

This better than expected performance was driven by several factors, including worldwide sales of several Merck products and strong performance by our partnerships.

And as we will discuss, acquisition costs moderated the overall results.

One product that drove these results, as it has for many years, is of course Zocor.

As the Company's biggest selling and most successful brand, we celebrated Zocor's legacy of saving lives and improving the health of patients as its U.S. marketing exclusivity expired on June 23rd.

Due to these strong results for the quarter and through the first six months of 2006, we're raising our full-year 2006 guidance.

Our revised expectations are that full-year EPS will be in the range of $2.40 to $2.48, excluding the restructuring charges related to cite closures and position eliminations.

And we anticipate reported full-year 2006 EPS of $2.10 to $2.24.

As you review our guidance, you'll see that we have also raised our estimate for marketing and administrative costs where we see opportunities to invest in our business.

In particular, increasing our planned investments to support Gardasil.

Judy Lewent will provide more details on our financial performance and guidance in a moment.

I'm also pleased to report that Merck is meeting or exceeding our deliverables across the business.

We are aggressively bringing new products to market and supporting their launches.

ZOSTAVAX and Gardasil, both of which were approved by the FDA this quarter, represent important contribution to our business and to patient health.

Let me take a moment to note that what an extraordinary breakthrough Gardasil brings to the cause of human health.

Preventing cervical cancer, one of the leading cancers among women worldwide, is truly outstanding news.

For all of us at Merck, it is an example of the innovative and life-changing work we do.

And it's the kind of achievement that keeps us focused and excited about our Company's potential.

In addition to the vaccine approvals, we continue to advance our pipeline.

The FDA granted priority review for ZOLINZA, the Company's investigational medicine for the treatment of advanced subcutaneous T-cell lymphoma.

We also presented Phase III results for JANUVIA, potentially the first in a new class of medicines to treat the growing burden of Type II diabetes.

We also continue to add new indications and treatment options to our existing products, as well as additional clinical studies that support their efficacy and safety profiles.

For example during the quarter, we received FDA approval of the postoperative nausea and vomiting indication for men.

The Centers for Disease Control advisory committee on immunization practices recommended use of a second dose of VARIVAX, which demonstrated in clinical trial the potential to achieve an even greater reduction of chicken pox in the United States.

And separate head-to-head studies showed Vytorin to be significantly more effective than Crestor in reducing LDL cholesterol and superior when compared to Lipitor in patients with Type II diabetes.

We continue to reinforce our business by entering into partnerships and licensing agreements, as well as targeted acquisitions of companies that complement the Company's pipeline and internal research capabilities.

Consistent with this strategy, we acquired GlycoFi and Abmaxis as wholly-owned subsidiaries of Merck during the quarter.

When taken together, they have potential to create synergies across a wide spectrum of biologics and position Merck to be a significant player in this field.

At the midyear point, Merck is also on track to achieve a number of key metrics on our 2006 score card.

For example, earnings per share are ahead of our earlier expectation for the first half of 2006.

Since FDA approval on June 8th, managed care organizations representing approximately 50% of covered lives in the U.S., have made positive coverage decisions for GARDASIL.

Singulair continues to provide strong growth and lead the competition in the U.S. respiratory market.

ZETIA and Vytorin are performing well, though there is some near-term uncertainty with the expiration of Zocor patent in the U.S.

Senior management has made specific decisions that will significantly change the operating model of the Company, focusing on delivering value to customers and building an efficient and effective business model.

And implementation of the global manufacturing strategy is delivering benefits consistent with our expectations.

Among the many changes underway at Merck, we recently announced that Adam Schecter will become President of the U.S.

Human Health and Stefan Oschmann will assume the position of President of EMEA and Canada.

Adam has served in leadership roles in worldwide marketing and U.S. human health and as the general manager of the Merck Schering-Plough partnership.

Stephan has served as senior vice president, worldwide human health marketing, and has held a number of key positions in marketing and management in Europe, including managing director of MSD in Germany.

Our success in these areas is critical to Merck's future and we're pleased to have individuals of Adam and Stefan's capabilities and experience to step into these roles.

Two Merck executives will be leaving the Company.

Brad Sheares and Per Wold-Olsen each have made significant and wide-ranging contributions throughout their distinguished careers with Merck and we thank them for their service.

I would like to mention one other recent event that is the latest Vioxx jury verdict, where a state court in New Jersey found in our favor, rejecting the claims of the patient who blamed her heart attack on nearly three years of Vioxx use.

We are, of course, pleased with the outcome.

The Company acted responsibly, the science was on our side and the jury agreed.

Let me reiterate, our strategy in defending the Company in the Vioxx litigation is the right one and we will not let it distract us from our core mission of developing breakthrough medicines and bringing them to patients.

Before I turn the call over, I'd like to emphasize that our performance of the first and second quarters demonstrates that even as we implement our strategy and make necessary and essential changes in the Company, our underlying business is solid and we continue to have the capacity to deliver strong results.

With that, I'll turn the call over to Judy, who will talk about highlights of the second quarter and year-to-date 2006 results.

Judy.

Thank you, Dick, and good morning.

As mentioned, the second-quarter results surpassed expectations and for the next few minutes, I'll discuss in some detail several lines of the income statement, highlighting the important underlying drivers of our performance.

I'd like to divide my remarks into two parts.

First I will provide perspective and clarification around our actual results in the quarter, including the accounting treatment of a number of events that affected several lines.

Second, I will then walk through our full-year 2006 guidance and the elements that have changed.

To briefly summarize the quarterly performance, it was driven by top-line growth and product mix, the consequential gross margin, strong performance of our partnerships and alliances resulting in stronger equity income, and an upward move in interest income.

As we will discuss, acquisition costs moderated the overall results.

Turning to sales.

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

In the second quarter, we recorded revenues of $5.8 billion, representing a 6% increase over the same period last year including in the aggregate an overall 1% decrease from foreign exchange offset by growth in volume and price of 4 and 2%, respectively.

Collectively, worldwide sales of Merck products were above our expectations.

The result was driven by regional performance and final product mix.

For the quarter, Singulair experienced stronger retail volume growth driven by a relatively severe and extended allergy season and continues to be the number one product in the U.S. respiratory market.

In addition, Singulair is the only respiratory therapy approved in the EU for the treatment of both asthma and seasonal allergic rhinitis in asthmatic patients and this continues to drive volume growth in Europe.

In the second quarter, Zocor revenue in the U.S. was $742 million, representing a 9% decrease year-over-year.

There were two primary factors behind this relative performance.

First, total RX volume growth in the HMG class was again greater than 10% in the second quarter, as outcome studies highlighted the benefit of statins in preventing cardiovascular outcome.

This class growth contributed to Zocor's retail volume but overall [PRX] market share for Zocor was essentially flat in 2Q, reflecting momentum behind generic Simvastatin.

The second factor was competition, which countered some of Zocor's momentum.

Specifically, share growth of Vytorin and the continued uptake of generic Lovastatin.

As we expected, wholesalers appreciably reduced their inventory levels for Zocor towards the end of the second quarter, given the anticipated loss of marketing exclusivity for Zocor on June 23rd.

At quarter end, there was about two weeks of inventory in the channel and this was consistent with our expectations.

Anecdotally and I know many of you monitor this almost daily, after just two weeks, generic Simvastatin has captured 12.3% of the HMG market.

Branded Zocor has essentially lost essentially 63% of its share.

However, the most recent weekly data suggests that generic Simvastatin is also taking share from several branded statins.

Total sales of Merck's other promoted medicines and vaccines were $1.6 billion for the second quarter, representing a growth of 8% as compared to the second quarter of 2005.

A contributing factor to the 8% growth and the other promoted medicines was the strength in our vaccine business and that was up 41% compared to the base period.

Part of the $349 million of revenue we recorded was driven by the uptake of GARDASIL, RotaTeq, ZOSTAVAX and ProQuad, for which we collectively recorded $83 million in the quarter.

To assist in your modeling, we're providing a breakdown of the new product revenues on our other financial disclosures.

You'll see that global sales for RotaTeq in its first full quarter reached $31 million.

Regarding GARDASIL, since FDA approval on June 8th, managed care organizations representing approximately 50% of covered lives in the U.S. have made positive coverage decisions on the product and U.S. sales were $10 million in the quarter.

As in prior quarters, overall revenue growth was offset somewhat by the impact of foreign exchange in Europe and Asia and the availability of generic Alendronate and generic Simvastatin in several key markets outside the United States.

Also contributing to our top line are revenues from our alliances, primarily AstraZeneca LP.

In the second quarter, revenue recorded by Merck from the Company's relationship with AZ LP was $418 million.

This reflects an increase of 24% from 2Q '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 of AZ LP for PPI and non PPI products as well as their product shipment.

Taking the second-quarter revenue announced today and adding 50% of revenues for the Merck Schering-Plough, Meria, Sanofi Pasteur-MSD and Johnson & Johnson Merck joint ventures and partnerships, second quarter '06 revenue would have been $6.7 billion.

If you do the same adjustment for the second quarter '05, the growth rate from that baseline level was 9%.

As we move into the next three lines on the income statement, recall that they include the consequence of FAS 123(R) or expensing of stock options, consistent with where payroll costs are incurred.

For the second quarter of 2006, our total stock option expense was $42 million, and year-to-date debt that expense has been $141 million.

We remain on track and stock option expense is expected to be approximately $220 million in 2006.

Moving down the P&L, materials and production came in at $1.4 billion, and if you calculate the actual change in PGM dollars, you'll see that it is flat versus second quarter 2005.

The actual reported gross margin in this quarter was 75%, but this includes restructuring costs of $168 million, primarily related to accelerated depreciation and asset impairment costs associated with Merck's global restructuring program announced in November of 2005.

It also includes $5 million recorded in accordance with the adoption of FAS 123(R).

Excluding the restructuring costs but including stock option expensing, that will be an ongoing cost, PGM in the quarter was 77.9% and just is in previous quarters, this result was affected by the final product mix.

Given that we are now recording revenue for GARDASIL, I can confirm that we will be accounting for the royalties within this materials and production line.

As previously disclosed, the Company has entered into a license agreement and collaboration with CSL Ltd., relating to technology used in Gardasil, as well as other agreements of third parties, including certain academic and research institutions.

These agreements include a previously disclosed cross license and settlement agreement with GlaxoSmithKline for certain patent rights related to HPV vaccine.

Based on the terms of these agreements, the Company will pay royalties on the worldwide sales of Gardasil of approximately 24 to 26% in the aggregate.

Keep in mind this royalty rate was of course factored into our long-term guidance that we anticipate PGM rate after 2008 to return to pre Zocor patent expiry levels and there is no change to that guidance.

We're providing the royalty information to you willing to help you in your modeling.

Turning to marketing and administrative, second-quarter expense came in at 1.7 billion, and that is down 1% over the same period last year.

Per our financial footnotes in the press release, this includes $25 million recorded in accordance with the adoption of FAS 123(R).

Year to date, we showed 3% growth over the first half of 2005, reflecting the increase in activities to support the three recently approved vaccines, partially offset by reduced spending in support of Zocor.

As you can appreciate, there are many factors affecting the marketing and administrative expense.

And during the quarter, we made decisions regarding the timing and promotional spending and reallocation of funds through initiatives scheduled throughout the year.

In the second quarter, the Company did not increase the Vioxx legal defense reserve.

We have established an ongoing review of the reserve for the legal expense costs and some of the significant factors considered include the actual costs incurred by the Company to date, the development of the Company's legal defense strategy and structure in light of the expanded scope of the Vioxx litigation, the number of cases being brought against the Company, the costs and outcomes of completed trials and the anticipated timing, progression and related costs of pretrial activities and trial from the Vioxx product liability lawsuits.

Regarding research and development, during the second quarter, expenses were $1.2 billion.

That's an increase of 24% year-over-year inclusive of the $11 million for stock option expense taken in the period.

As you may recall, in early may, we announced our intention to acquire GlycoFi and Abmaxis at a combined cost of $480 million.

While each of the acquisitions has independent scientific merit, the combination of GlycoFi and Abmaxis platforms is potentially synergistic, giving Merck the ability to operate across the entire spectrum of therapeutic antibody, discovery, development and commercialization.

This biologics platform gives Merck what we believe is a significant competitive strategic advantage by providing all elements of antibody modeling, antibody library, selection, maturation, humanization, manufacturing and antibody proof of concept molecules.

This scientifically groundbreaking technology is expected to significantly enhance the ability of Merck scientists to discover, develop and produce novel drugs in several of our nine priorities in these areas of research, such as oncology, as well as novel vaccines for infectious diseases.

Both transactions closed in the second quarter and in accordance with FAS 2, we identified what portion of the purchase price was treated as in-process research.

As a consequence, the R&D line includes acquired research expense of $296 million, resulting from the acquisition of GlycoFi.

This charge is primarily associated with GlycoFi's technology platforms to be used in research activities, for which at the acquisition date, technological feasibility had not been established and no alternative future use existed.

The balance of the costs associated with GlycoFi and the entire cost of the Abmaxis transaction has been capitalized and for accounting purposes will be amortized over a five-year period.

During the quarter, Merck entered into several other agreements, reflecting our strategy of establishing strong external alliances to drive both near-term and long-term growth within our predefined focused therapeutic categories.

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

Moving onto the restructuring costs, we continued to provide this breakout to assist in tracking the restructuring related expenses and to ensure fair comparisons of the underlying business.

This line captures all separation costs and in accordance with GAAP accounting, it also includes asset related dismantling costs, demolition costs, costs to relocate assets being put to alternative use and any gains on facility sales.

Remember, any accelerated depreciation associated with our global restructuring program is being reported in the respective line items, namely materials and production and R&D.

So in our Q2 results, the total charges related to the global restructuring program were $161 million, including a net credit of $7 million that is part of this line and the $168 million of accelerated depreciation and asset impairment costs included in the materials and production line.

The net $7 million credit on the restructuring related expense line is made up of a gain on the sale of building in Japan and the UK of $39.5 million that was part of the restructuring program and a $32.6 million charge for employee separation and other related costs associated with the approximately 500 positions eliminated in the global restructuring program and other related costs.

Turning to equity income from affiliates, you'll see $611 million in income related to the contribution from all of our JVs, AstraZeneca LP, Merck Schering-Plough, Merial, Sanofi Pasteur-MSD and Johnson & Johnson Merck.

Regarding the Merck Schering-Plough partnership, the second quarter combined MSP cholesterol franchise global revenue as reported by Merck Schering-Plough partnership surpassed $970 million.

In the U.S., revenues of ZETIA and Vytorin were 363 and $421 million, respectively.

And while we anticipate that the sale and income from the cholesterol JV will grow in 2006, there are obvious timing uncertainties regarding short-term performance given the entry of generic Simvastatin.

Turning to other income, within this line, interest income continues to come in at a higher level as our portfolio benefits from the rising short-term rate environment.

For the quarter, income before taxes was $2.1 billion.

Taxes on income in the period were $609 million, and the reported tax rate was 28.9%.

But this included a favorable impact of 50 basis points related to the restructuring charge.

The underlying effective tax rate of 29.4% reflects in general the impact of changes in foreign and domestic mix and currency fluctuations and these elements change throughout the quarter.

The quarterly tax rate is affected by the impact of charges associated with the GlycoFi acquisition partially offset by a onetime international tax benefit.

Moving down to net income and earnings per share, net income for the quarter was $1.5 billion, up considerably when compared to the same period last year but recall that in the base period, there was a $640 million net tax charge primarily related to the repatriation of funds in accordance with the American Jobs Creation Act.

However, the second-quarter 2006 EPS and net income were negatively affected by a $296 million acquired research charge related to the GlycoFi acquisition.

And that charge is not tax affected.

During the quarter, we spent $250 million in treasury stock and now have $7 billion under the current authorization from the board with no time limit.

In summary, earnings per share for the second quarter were $0.73, excluding a net charge related to the global restructuring.

On a reported GAAP basis, EPS were $0.69.

With that result, let me briefly turn to our guidance.

Regarding 2006, continuing our previous practice, we provide detailed guidance for the full year and as you will see in today's release, we are raising our full-year 2006 guidance and we are raising several of the elements of our 2006 guidance.

All the details of the guidance are provided for you in the release and as stated, this guidance does not reflect the establishment of any additional reserves for any potential liability related to the Vioxx litigation.

In summary, we are raising our full-year 2006 EPS guidance to capture the fact that we had a solid second quarter and to reflect our strong first-half 2006 performance.

Our revised expectations are that EPS will now be in the range of $2.40 to $2.48, excluding the restructuring charges related to cite closures and physician eliminations and we anticipate full-year 2006 EPS of $2.10 to $2.24.

Now regarding specific elements, we are increasing guidance on the following sales lines and adjusting some of the expense elements.

We are raising Zocor up by $300 million.

We now anticipate full-year 2006 revenue in the range of 2.6 to $2.9 billion, reflecting the year-to-date performance balanced against a number of uncertainties surrounding the new dynamics in the lipid lowering market.

We are raising Singulair by $100 million and now anticipate full-year 2006 revenue in the range of 3.4 to $3.7 billion, again reflecting the year-to-date performance and continued success of the franchise.

On PGM, we are moving up the range by 1%.

We now estimate our full-year 2006 product gross margin to be approximately 76 to 78%.

This incorporates not only the actual results on the first six months of 2006 but also the anticipated changing product portfolio post the Zocor patent expiry that will affect PGM in the subsequent quarters.

As we have been guiding all year, this guidance includes the impact of stock option expense but excludes the portion of the restructuring costs that will be included in the product costs and will affect reported PGM in 2006.

Regarding marketing and administrative expense, we now anticipate this to increase at a high single digit percentage growth rate over the full year 2005.

And as previously stated, the full-year 2005 level excludes the charge taken in the fourth quarter related solely to future legal defense costs of Vioxx litigation.

The full-year 2005 and 2006 levels exclude the costs associated with physician eliminations in 2005 as well as other restructuring costs pursuant to the Company's streamlining of its business processes.

The revised marketing and administration guidance reflects an increased level of promotional activities required to fully capitalize on our first mover advantage and to ensure the successful launches of our recently approved products.

We are also making incremental investments in anticipation of product approvals in the second half of 2006, while maintaining active support of Merck's in-line products.

For research and development expense, we are raising our full-year guidance and now anticipate it to increase at a high single digit percentage growth rate over the full-year 2005 level.

Research and development expense in 2006 includes the impact of stock option expense and the second quarter '06 acquired research expense related to GlycoFi.

The full-year 2006 level excludes the portion of the restructuring costs that are reported in research and development expense.

Given the performance of the last six months, we are raising our guidance on equity income for affiliates by $100 million and it is now expected to be approximately 2.1 to $2.4 billion for 2006.

Remember, this includes the result of the Merck Schering-Plough collaboration combined with the results of Merck's other joint venture relationships.

And finally, we are adjusting our consolidated 2006 tax rate.

We now estimate the consolidated 2006 tax rate to be approximately 26 to 28%, including the net tax rate impact in the second quarter related primarily to the acquisition of GlycoFi.

This guidance does not reflect the tax rate impact of restructuring costs.

And keep in mind that the effective tax rate to be applied to the Company's restructuring costs, that is the tax benefit applicable to these costs, are at a higher level than the underlying effective tax rate guidance.

Given the uncertainty surrounding the timing of events in the lipid lowering market and the relative contribution of our products in this segment on our overall business performance, we're not in a position to provide third-quarter EPS guidance range.

We consider that the loss of marketing exclusivity for Zocor a unique event in the pharmaceutical segment.

Following the patent expiry, there remains uncertainty about the timing of several variables, including the uptake and share of generic Simvastatin relative to branded products, the specific period of generic exclusivity based on litigation that we're not part of, the extent of brand loyalty toward Zocor, the success of our authorized generic deal with Dr. Reddy, the level of branded Zocor inventory at both wholesalers and retail pharmacists and the potential for returns in accordance with the terms and conditions of our inventory management agreement.

As stated a moment ago, the Company's full-year 2006 EPS guidance is now anticipated to be in the range of $2.40 to $2.48, excluding restructuring charges and reported 2006 EPS in the range of $2.10 to $2.24.

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

I also want to emphasize that we have the financial strength to support our dividend and we remain fully committed to maintaining it at the current level while at the same time continuing to fund our investment priorities.

In addition, as Dick noted, our strategy is on track.

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 over our 2005 base.

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

Thank you, Judy.

We will now open the call and take your questions.

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

At this point, I will turn it back to Michelle, who will communicate instructions on the Q&A format then introduce the first question.

Michelle?

(OPERATOR INSTRUCTIONS).

Mario Corso, Summer Street Research.

In terms of Gardasil, what can you say about VSC pricing or CDC negotiations at this point and what the timing may be there?

And then secondarily, can you say at this point that there will not be an FDA advisory panel on JANUVIA or is that still uncertain at this point?

Thank you.

I would say on the advisory panel, it's still uncertain whether we will have one or not.

And when it comes to pricing, that's information we won't disclose at this time.

Next question please.

Tim Anderson, Prudential Securities.

Part of the Merck story has been one of cost controls yet in the last six or seven months, SG&A has gone from low single digit to high single digit growth.

R&D was flat; now it's high single digit and I'm wondering what has changed here and more importantly, what does it say about those trends beyond 2006?

Is that discretionary?

Can you just turn it off when needed?

On JANUVIA, can you confirm that you have not yet filed the product in any European countries?

And on Gardasil, the 25% royalty -- that presumably does not include underlying cost of goods.

I'm wondering what the underlying cost of goods is for the product.

I would have to imagine it's fairly substantial.

Tim, on your first question concerning M&A and SG&A, we are still focused on reducing both administrative costs and marketing costs.

And the statement we made in December that our M&A expenses will remain flat from 2006 to 2007, we are still committed to achieving our long-term performance targets there.

I think that is critical.

You've heard me say before we are a Six Sigma Company moving forward and we have many, many initiatives and activities around marketing and sales and general administration that are underway today that will reduce those costs.

So I feel pretty confident that as we move into 2007 that you'll continue to see that.

However, the other important message as we heard today, the reason some of the M&A was increased was the level of activity required to capitalize on being first mover advantage and to ensure the success of launches of those, the recently approved products.

So while we are looking at that capability, at the same time, we're looking at reducing other SG&A and you'll be seeing that in the near future as well.

From the JANUVIA standpoint, we do not disclose (indiscernible) ex-U.S. at this time.

We haven't done that.

And the other question was on Gardasil --

Those royalties do not include a cost of goods, but I don't think that you should expect that that should skew your expectations on what the manufacturing costs are of Gardasil versus other vaccines that we have in our product line.

Next question please, Michelle.

Chris Schott, Banc of America.

Just two quick questions.

First on Singulair, it seems like you had a very solid quarter in the U.S.

I know you mentioned a strong allergy season, but can you talk about any other drivers there and what's their inventory build?

And then second, a quick Vioxx question.

Can you talk about the legal defense costs you've incurred so for.

Specifically, how much do you have remaining against that $685 million reserve, I think you ended '05, maybe about 400 million or so remaining.

Thanks.

With Singulair, there was no inventory build and it really was due to the strong allergy season moving forward.

And with the VIOXX question, we do not disclose the total breakdown of where we are and where we are going.

The one comment I would like to make about Vioxx is that there are no more trials currently scheduled in New Jersey for the remainder of 2006, so I think that is important as we put that into our equation as well.

Next question, please.

David Risinger, Merrill Lynch.

I had a number of questions about the financials.

First of all, you could just help us understand how you choose to preannounce some quarters but not others?

For example, in early April, you preannounced upside for the quarter ended in March but you didn't do that this quarter.

And then second, with respect to the outlook for the second half, in backing into what you're looking for for the second half, we're calculating $0.89 to $0.97.

Just wondering two things on that.

First of all, with respect to that quarterly run rate, should there be a big difference between the third and fourth quarter?

And then second, are you assuming any unusual R&D charges in the second half like occurred in the second quarter?

Thank you.

Okay so, in terms of when we preannounce, I mean we really have to look at the specific facts as we know them at a point in time and look at where we stand relative to expectations.

So we follow the same process every quarter in that regard.

In terms of the outlook for the second half, the request in terms of how we think about the third and fourth quarter, I appreciate the questions but that was really why we haven't provided you third-quarter guidance is because of really the uncertainties around Zocor.

So we do have confidence in terms of how the full-year will come out and that's why we increased our range to $2.40 to $2.48.

But the specific timing and the breakdown between the third and fourth quarters is the reason why we had not -- any uncertainty around that is the reason why we haven't provided third-quarter guidance.

In terms of the R&D side, we have been very consistent about a couple of key points.

We believe that licensing expenses are part of R&D.

It's the external arm of our internal R&D effort and that is part of our R&D strategy and therefore included in our R&D line.

In terms of looking forward though, the best that I could offer is that we're looking at lots of transactions.

We have our own licensing pipeline of about 40 different transactions but you know it's impossible to predict which ones of those will actually come to fruition and close and even to predict when that's going to happen.

So our guidance for the year on the R&D line is our best estimate of how things are going at this point in time.

Next question, please.

Jami Rubin, Morgan Stanley.

I have a couple of questions.

The first relates to Gardasil.

I was wondering if you could give us a sense of what the ramp is likely to look like in 2006 and 2007.

Obviously, I would imagine the reimbursement environment, both public and private would have a big impact on what that looks like and if you could give us some color around that.

And secondly, my other question is a Vioxx legal question.

If you could confirm statutes of limitation, my understanding is that the vast majority of the states see their statutes of limitations expire this September 30th.

If you could confirm how many of those states if you know that offhand and how important the statutes of limitations are.

And then did I hear you say no more cases in New Jersey?

Because I thought that there was a consolidated case in Judge Higbee's court that was to begin September 11th.

Thanks.

Yes, Jami, to clarify that from the trials in New Jersey, there are no more trials currently scheduled for New Jersey for the remainder of 2006.

So I think that is important as well.

The statute of limitations is really a complicated formula.

So although that is true, that there is a two or three year from a particular injury, when you look at the formulary in determining the statute of limitations, it runs in a particular case in a particular state.

It's not easy to answer that question although it's generally two to three years and obviously that is important as we come to September.

But there is qualifiers around that.

So it's really a case-by-case state-by-state and hopefully in another quarter or so we have better clarification for you then than we do today.

And then with Gardasil, certainly, we are very optimistic about the future of Gardasil, the fact that we have had managed care organizations representing approximately 50% of covered lives have made positive decisions on Gardasil.

We recently have in addition to the U.S. approval, Gardasil in Mexico, Australia, New Zealand and Canada, that you would continue to see potential growth.

So I can't give you the run rate yet.

It is way to important and you know we don't guide on launches moving forward.

So hopefully we'll all have more data within another quarter or two to be look to look at that.

But it certainly has from a personal standpoint it has exceeded my expectations on how we are moving significantly forward.

And as I've said before, as we put our strategy in place, as we continue to take the costs down, as we continue to accelerate our pipeline, it is critical for the Company to execute flawlessly against Gardasil and JANUVIA as we move forward with those launches and I think we are doing that.

I'm very pleased with the acceleration and the capabilities of those two products as well as the other vaccines that have been approved around RotaTeq and ZOSTAVAX and the second dose for varicella.

I think we've put that whole package together.

I think it really sets the stage for our strategy.

Next question please, Michelle.

Roopesh Patel, UBS.

I had a quick question on the tax rate.

The increase in the guidance now brings a closer in line with Merck's tax rate in 2005 and earlier.

Should we be thinking of this as the run rate going forward beyond 2006?

And then just separately, Dick, I was wondering if you could comment on the progress of the Company's performance enhancement strategies, specifically as it relates to elements that you have so far found to be most challenging.

On the tax rate, as you know, we haven't provided any guidance post 2006, but what I just reiterate the events in the second quarter that caused the increase in the guidance range was the GlycoFi IP R&D process research charge, which is [sort of] $96 million and is not tax deductible.

So that does have an impact on the taxes.

That's a onetime investment.

In relation to your second question concerning all the changes we're making, when I look at our scorecard through the first half of the year and it certainly from our perspective looks really positive, the biggest challenge we have and I think the one we're making the best progress on is looking at business processes that go across the Company, across geographies, across functions, across divisions and to get a better alignment on how we can either improve those business processes, improve it from the shared services outsourcing capability, and the fact that that is something new for Merck, whether I would get not only acceptance by an uptake in acceleration of that.

And certainly, we're just at the beginning of that.

That's why I feel confident in reducing the SG&A and the marketing and administration costs moving forward, but there are total acceptance for that.

We just had a senior meeting around that and the fact that we have agreed to move forward with that from an alignment standpoint, from the Merck culture exceeds my expectation and it's something we haven't done in the history of this Company and there's alignment around it.

I think it was a major breakthrough for us and I think as we move forward, you will see that capability and alignment along with what we're doing from a Six Sigma really bring the costs down and actually give better service throughout the world because we will be much better aligned from a business process across the Company instead of every geography and function and division doing it on their own.

That's going to be significant improvements for the Company.

Thank you.

Next question, please, Michelle.

Steve Scala, Cowen.

Thank you, the 24 to 26% royalty on Gardasil seems strikingly large.

Can you break out what entities are getting what percent?

Is there any step-up or step-down in that rate over time?

How does it compare to royalties say on ZOSTAVAX, VARIVAX or RotaTeq?

And will a similar royalty be paid for Gardasil foreign sales by the JV?

Thank you.

Okay, we are not getting into the detailed breakdown.

That is proprietary.

As I noted, this development process did involve quite a few different entities, VSL and a lot of academic and research institutions and then also reflected the cross license with GSK.

So this was a particularly complex undertaking and that is reflected in the royalty rate.

And those are worldwide royalty rates.

Next question, please.

Ed Montgomery, Goldman Sachs.

I just had a quick question just in relation to the royalties.

Are you able to separate those out in terms of what is paid to GSK and VSL?

And just in relation to the uptake, is there any further commentary you can make in relation to whether any of the states is likely to make the vaccine mandatory in the schooling system.

Thanks.

Again, I really have nothing to add on the royalties from my prior answer to the question and we don't break them out by entity.

Thank you.

Next question, please, Michelle.

David Moskowitz, Friedman, Billings, Ramsey.

Just quickly back to the R&D.

Can you talk about the go-forward expense from the two acquisitions you made this past quarter in terms of amortization and the operating expenses?

Perhaps that clears up some of the questions on the higher R&D expense going forward?.

If you could quantify that, that would be great.

And also, as the innovator of Zocor, do you guys have any data on the percent of eligible patients that can get to the new [ACC] and [AEHA] goals with Zocor or Simvastatin?

And thirdly, Arcoxia, I didn't see any mention of that product in the press release.

I'm wondering if that project is now off-line, again.

And if it is, does that account for savings in the R&D line?

And just reiterating a question from before, the Gardasil royalty, step-up or step-down?

I don't believe I heard the answer on that.

Thanks a lot.

Okay so in terms of the R&D going forward, the reason that we increased the guidance was apart from the last time around when we reflected the stock option expense in the R&D line is strictly the GlycoFi acquisition, basically $296 million in in-process research charge hitting that line.

Otherwise, the fundamentals remain the same.

As I noted, the remaining amount of about $180 million will be capitalized and amortized over five years.

And then the ongoing expense of those two entities, I wouldn't consider that material to really how we run the operation.

We clearly are [free] with integrating the organization, but again that's incorporated in how we feel about that.

In terms of Arcoxia, we discussed the fact that the whole metal program is going to be resolved in the second half of this year.

And so we always see that, so yes, you're correct, because that's winding down.

Certainly, those costs don't continue and we're waiting to see what the results of that are.

In terms of the Zocor question, only half of the patients get to go on the older lower [dosing] statin.

One other comment I'd like to make, David, on the whole issue around Gardasil.

First of all, as we have said on past calls that there are significant efforts underway to streamline the cost of biologic [bactrines].

And although vaccines and biologicals have a different profile from a PGM than tableted products, we understand that as that is our growth engine moving forward that we have to do everything we can to improve the PGMs in those areas and we have significant resources that are focused on that.

And when the royalty rate was factored in in the long-term guidance that we anticipated PGM rates after 2008 to return to pre-ZOCOR patent expiry levels, and there's no change to that guidance.

So that was important from our standpoint.

We put those rates in there, knew what we were going to do in biological and vaccines and we haven't changed our guidance around it.

Post 2008, we will return to post 2008 ZOCOR type related PGMs.

Next question please, Michelle.

James Kelly, Goldman Sachs.

Yes, good morning.

On Gardasil, as we think about, now we have the ACIP recommendation, are any states going to have any requirement to include this product for this year or how do you see that rolling out?

Is this something that really has to be addressed on a summer by summer basis?

And also on CANCIDAS, I believe this is one of the first times that this had a sequential down quarter;

I'm interested what the competitive landscape or what is causing that?

Thank you.

Let me just take the CANCIDAS question.

That was strictly a result of price reduction for one of our strengths; a about 20% price reduction gave rise to that result.

CANCIDAS still represents 90% market share in its segment.

Jim, in relationship to your Gardasil question, do states have individual processes and it's really difficult to predict the timing, although we're working closely with them.

It's too early to tell yet at this time.

Next question, please.

Michael Castor, Spiro Capital Management.

Thanks very much, a couple of short ones.

First, will Merck receive any royalties on GSK's HPPC vaccine?

Second, going back to CANCIDAS, what's the rationale behind dropping price on one dose, especially such a significant price decrease?

Third is, at what point do you think you will start HPPC campaign for Gardasil?

And then finally, where is the Gardasil IP domiciled?

Well from a Gardasil direct to consumer campaign, that's something that we really don't disclose and obviously we're having a campaign now around HPV and cervical cancer but have not done anything from the specific product yet.

And in terms of IP, where that resides, we don't get into those details.

And as far as the CANCIDAS price, that was strictly a competitive move reflecting the relative position of those doses in this marketplace.

In terms of the royalties coming from Glaxo, we're really not prepared to talk about that at this point time.

Next question, please.

Jason Pilalas, Capital Guardian Trust.

Just following up on the Glaxo royalty and the Merck royalty, it would seem that if in fact Glaxo's royalties do not approach yours, they will be in a cost conscious and very possibly price competitive environment at an advantage to you.

I wonder if you'd like to comment on that?

That's really difficult to really answer.

We don't know what their strategies are from a cost and a pricing standpoint.

The only thing that I can tell you now is that we have a first mover advantage in the United States and we are taking advantage of that.

Next question, please.

Chris Shibutani, JPMorgan.

Can you provide us with an update on the 524 AB clinical trials.

In particular, I think there have been some issues over formulation status for the B product.

And then secondly on Fosamax in the United States, could you give us a sense for what the pricing or rebate dynamic has been?

The results were quite a bit stronger than we were expecting.

Thank you.

Well on the Fosamax side, we really don't get involved in talking about specific managed care strategies and Fosamax performance is really based on the fundamentals of the efficacy profile of that product.

And in terms of 524 A and b, that is in Phase III.

We have had no update or changes in terms of our guidance in terms of the progress of those two products as of today.

Next question please, Michelle.

Tim Anderson, Prudential Securities.

Thanks for the follow-up.

Just on GARDASIL, Judy, earlier, you said Gardasil would not be different than normal vaccine PGMs.

I'm just wondering if you can tell us what your average vaccine PGMs are?

That's a good follow-up question.

No, I can't -- you know, you see in aggregate how our product profile and our whole composition of our PGM rules up and as Dick has reemphasized, as we've looked out over the next three to five-year period, we are very confident that our PGMs are going to return to pre ZOCOR patent expiry levels post 2008 and we certainly expect that our vaccines, the launches that Dick mentioned, particularly RotaTeq, ZOSTAVAX and Gardasil are going to be contributive to that performance in that period.

Given the time, we will take one more question, Michelle.

David Risinger, Merrill Lynch.

Thanks very much.

Looking to 2007, I think in the past, you've said that you expect earnings per share to grow in 2007.

I'm wondering, number one, if that is still the case and number two, if you were to exclude the unusual R&D costs that depressed the second quarter base of EPS, would you still forecast EPS growth in '07?

Thank you.

When we have our December 15th meeting, we said that we would be returning to a growth period in 2007.

And that still is what we are viewing the future in '07.

So we haven't changed that.

I think it's, again, fundamental to how we approach our external activities as well as our internal R&D.

This is core to achieving our long-term vision for productivity in terms of our research and development pipeline and it's considered part of our R&D expense.

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 seven days.

We appreciate your interest and participation.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference call.

You may now disconnect.