默克藥廠 (MRK) 2006 Q3 法說會逐字稿

Good day, everyone and well on come to Merck's third 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, [Cynthia] and good morning.

Welcome to our call this morning to review our business results for the third quarter of 2006.

I'm Graeme Bell, Head of Investor Relations.

Joining me on the call today are CEO and President, Dick Clark, and Judy Lewent, our Executive Vice President and Chief Financial Officer.

Before we get into the details, I would like to go over some of the logistics.

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

You can access the earnings press release and supporting material through the Merck website.

This conference call is being webcast live, recorded for replay later today via phone, webcast and Podcast.

As we begin to review 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 Act of 1995.

These statements are based on Management's current expectations and involve risk and uncertainty, which may cause results to differ materially from those set forth in the 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 statements, whether as a result of new information, future events or otherwise.

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

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

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

Thank you, Glenn.

Good morning, everyone, and thank you for joining us.

I am pleased to report that Merck's strong performance in 2006 has continued right through the third quarter.

Let me take a few moments to review the highlights of the quarter, which are led by the performance of Singulair, Vytorin and Zetia, our vaccines, as well as our ongoing cost management initiatives.

It was another solid quarter for Merck.

Our earnings per share for the quarter were $0.51 excluding restructuring charges.

This figure includes reserving an additional $598 million in the third quarter, solely for future Vioxx legal defense costs.

It excludes an $0.08 net charge for activities associated with the global restructuring plan we announced in November of last year, which continues to unfold as expected.

The Vioxx reserves are consistent with our commitment to defend these cases in their rigorous and responsible manner.

We have both the financial strength and resolve to see our litigation strategy through.

Including the impact of the restructuring charges, our reported EPS for the third quarter were $0.43.

We are pleased to report that Vytorin and Zetia achieved combined global sales of more than $1 billion in the third quarter.

Vaccine sales also realized strong growth, with Gardasil reaching $70 million in the quarter.

Due to these strong results, we are raising our full year 2006 guidance and now anticipate an EPS range of $2.48 to $2.52, excluding restructuring charges.

We anticipate a reported 2006 EPS range to be $2.18 to $2.25.

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

Our third quarter results reflect Merck's fundamental strengths and our determination to take full advantage of the opportunities that exist inside our Company.

We are establishing our credibility in delivering the results our stockholders have every right to expect.

As we announced last year, our business model is changing in many ways.

We are concentrating on nine therapeutic areas, based on scientific opportunity and value to our customers.

We are focusing on research efforts on the most promising candidates and reducing the time to takes to bring drugs to market.

Our commercial model is becoming leaner, more nimble, more information and value-driven and much more cost effective.

By investing in these areas that will drive our growth, by reducing costs based in the strategic and targeted way, and by continuing to provide patients with the innovative products they want and they need for their health, we expect to continue to see Merck progress towards a goal that I expressed last December to gain the leadership position we so long enjoyed.

As I mentioned, our established products remain strong.

I would like to take a moment to review the results of these products with you.

Singulair continues to be the number one prescribed product in the United States respiratory market with strong growth.

Zetia also achieved impressive sales growth, with-- $500 million last quarter, sales of Zetia have increased by 41% over the same quarter last year.

Sales of Vytorin also exceeded $500 million in the third quarter, increasing by over 90% over the same quarter last year.

The combined sales of Zetia and Vytorin topped $1 billion in the third quarter, the first time the combined sales of these products have exceeded that major milestone in one quarter.

I should add that the strong growth of both of these products has been consistent through 2006.

Global sales of Zetia reached $1.4 billion for the first nine months of the year, also for the first three quarters of the year, sales of Vytorin also reached $1.4 billion.

As you know, Merck launched three new vaccines during the first three quarters of this year.

To date, Gardasil has been approved in more than 30 countries, including the U.S., EU, Australia, Brazil and two countries in Africa.

In fact, as recently as this week, SPMSD has launched Gardasil in the United Kingdom.

It is validation of how well these vaccines are being received as a new standard of care.

It's important to know that approximately 10,000 American women are diagnosed with cervical cancer every year.

An average of ten women die each day from this disease.

Being able to prevent cervical cancer is something all of us at Merck take pride in, to provide those at risk for this terrible disease.

Besides Gardasil, Merck runs two other important vaccines, Rotateq and Zostavax.

These vaccines represent significant medical breakthroughs in protecting infants and children from Rotavirus and adults from shingles.

These three new vaccines in ProQuad have helped drive a 64% increase in vaccine sales for the quarter compared to the same period a year ago.

Before I turn it over to Judy, let me say that we are very pleased with the recent FDA approvals over the past two weeks of Januvia, our first in class drug to treat type 2 diabetes and Zalenzia, the first anticancer treatment approved for CTCO since 1999.

Merck is delighted that the FDA approved Januvia on Monday, October 16, the first and only DPB inhibitor available in the United States for the treatment of type 2 diabetes.

Januvia has been approved as monotherapy, as well as add-on therapy to either the two other types of diabetes medication, Metformin or TZD to improve blood sugar control in patients with Type II diabetes when diet and exercise are not enough.

Januvia is a potent and highly-selective DPT-4 inhibitor.

The recommended dose of Januvia is 100 mg, once a day.

Januvia provides powerful A1C reductions as monotherapy in patients with Type II diabetes and poor blood sugar control.

Also Januvia has a significant complimentary effect when added to metformin or TZD.

Januvia has an overall increment of side effects comparable to placebo, and in Phase III clinical programs, treatment with Januvia was not associated with weight gain or increased of hypoglycemia.

Regarding the launch of Januvia, we began taking orders from customers on Tuesday, began packaging product Wednesday, and shipped product to our distribution centers on Thursday.

Our customers will begin to have their orders filled today.

The FDA approval is clearly demonstrated our ability to deliver on our strategy of providing physicians and patients with innovative medicines that meet unmet medical needs.

We are prepared to ensure that Januvia reaches its full market potential.

The Januvia approval letter this week marks the first new Merck medicine or vaccine approved for the U.S. in the United States since 2002.

That is an extraordinary record of success.

As I look back over the most recent quarters and over the first three quarters of 2006, I believe the evidence is clear that the course we've embarked on last year is providing to be the right path toward Merck.

And to restate, this approval of Januvia this week marks the fifth new Merck medicine or vaccine approved in the United States in 2006.

I'm pleased to ask Judy to provide you with additional details about our strong third quarter.

Judy?

Thank you, Dick, and good morning.

As mentioned, we are pleased with the third quarter results.

Our earnings in the quarter from ongoing operations reflect strong performance in a number of areas, particularly Singulair, vaccine, equity income, as well as the benefits of our ongoing cost management initiative that are starting to have a positive effect on our bottom line.

I'll take the next few minutes to highlight the important underlying drivers of our performance.

Then I will discuss our full year 2006 guidance and the elements that have changed.

To briefly summarize the quarterly performance, our inline franchises and the recently launched vaccines exhibited strong growth.

When taken together, their performance offsets the financial effect of the loss of patent exclusivity for Zocor and Proscar in the U.S.

We've also had strong performance of our partnerships and alliances resulting in its enhanced equity income and upward-- in interest income these positive contributors were partially offset by an increase in the level of sales and marketing activity to support the recently approved vaccine and the imminent launch of Januvia.

In the third 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 price, offset by 1% growth in volume and 1% positive impact of foreign exchange.

For the quarter, strong global growth in Singulair, vaccine and other promoted products were offset by those products losing exclusivity in the U.S., namely Zocor and Proscar.

In the third quarter, the first full quarter following the loss of U.S. patent exclusivity, branded Zocor revenue in the U.S. was $152 million, representing an 80% decrease year-over-year.

During the quarter, Merck recorded revenue associated with the [inaudible] Simvastatin of approximately $80 million, and please note that Merck records this revenue on the top line as part of other revenue, not within branded Zocor.

It remains unclear whether the whole 180-day exclusivity will be awarded to the first filer for Simvastatin.

The issue of exclusivity is not [inaudible] and is pending the court's decision.

As you know, we have no influence over the outcome.

Total sales of Merck's other promoted medicines and vaccines were $1.8 billion for the third quarter, representing growth of 15% as compared with the third quarter of 2005.

A major contributing factor to the 15% growth and the other promoted medicines was the strong growth in our vaccines business and that was up 64% compared to the base period.

Part of the $555 million of revenue we recorded was driven by the uptake of Gardasil, Rotateq, Zostavax and ProQuad, for which we collectively recorded $226 million in the quarter.

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

You will see the global sales for Rotateq in its second full quarter on the market reached $62 million.

Regarding Gardasil, since FDA approval on June 8, managed care plans representing over 90% of covered lives in the U.S. have made positive coverage decisions on the product and U.S. sales were $70 million in the quarter.

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

In the third quarter, revenue recorded by Merck from the Company's relationship with AZLP was $442 million and that's flat compared to third quarter '05.

Keep in mind there is inherent variability relating to this revenue given that Merck is not actively managing these products.

Our revenue recognition takes into account inventory levels at AZLP for PPI and non-PPI products, as well as their product shipments.

Taking the third quarter of revenue announced today and adding 50% of the revenues from the Merck Schering-Plough, Merial and Johnson & Johnson-Merck joint ventures and partnerships, third quarter 2006 revenue would have been $6.3 billion.

If you do the same judgment in third quarter '05, the growth rate from that baseline was 3%.

Keep in mind the base period has a full quarter of branded Zocor sales.

Year to date, that growth rate would be 5%.

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

For this third quarter of 2006, our total stock option expense was $42 million and year to date that expense has been $183 million.

So 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 $1.5 billion.

The actual reported product gross margin in the quarter was 71.5%.

But this includes restructuring costs of $200 million, primarily related to accelerated depreciation and asset impairment cost associated with Merck's global restructuring program announced in November 2005.

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

Excluding the restructuring costs, but including stock option expensing that will be an ongoing cost, PGM in the quarter was 75% and just as in previous quarters, this result was effected by the final product mix.

We are reaffirming our guidance for the full year of 76% to 78% and keep in mind that we anticipate PGM rates after 2008 to return to pre Zocor patent X3 levels.

Turning to marketing and administrative, third quarter expense came in at $2.4 billion and that's up 43% over the same period last year.

Per our financial footnotes in the press release, this includes a $598 million charge related to increasing the legal defense reserve and $25 million recorded in accordance with the adoption of FAS 123R.

The year to date excluding the legal defense reserve charge taken in the third quarter, we show 4% growth over the first nine months of 2005, reflecting an increase in activity to support the three recently approved vaccines and the imminent launch of Januvia, partially offset by reduced spending in support of Zocor.

As you can appreciate, there are many factors effecting the marketing and administrative expenses, and during the quarter, we made decisions regarding the timing of promotional spending and reallocation of funds to initiatives scheduled throughout the year.

Regarding the legal defense reserve charge, the Company accrues legal defense costs expected to be incurred in connection with a loss contingency, when such costs are probable and reasonably estimable.

As of December 31, 2005, the company had established a reserve of $685 million, solely for its future legal defense costs related to the Vioxx lawsuits and the Vioxx investigation.

During the first nine months of 2006, the Company spent $325 million in the aggregate in legal defense costs worldwide related to Vioxx litigation.

In the third quarter, the company recorded a charge of $598 million to increase the reserve solely for its future legal defense costs related to Vioxx to $958 million at September 30, 2006.

In increasing the reserve, the company considers the same factors that it considered when it previously established reserves for the Vioxx litigation and management now believes it has a better estimate of the Company's expenses and can reasonably estimate such costs through 2008.

Some of the significant factors considered in the establishment and ongoing review of the reserve for the Vioxx legal defense costs were as follows: The actual cost incurred by the Company, the development of the Company's legal defense strategy and structure in light of the scope of those Vioxx litigations, 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 activity and trial in the Vioxx product liability lawsuit.

Events such as scheduled trials that are expected to occur throughout 2007 and into 2008 and the inherent inability to predict the ultimate outcome of such trials limit the Company's ability to reasonably estimate its legal costs beyond the end of of 2008.

The Company will continue to monitor its legal defense costs and review the adequacy of the associated reserves.

The Company has not established any reserves for any potential liability relating to the Vioxx lawsuit and the Vioxx investigation.

Regarding research and development during the third quarter, expenses were $945 million.

That's flat year-over-year, inclusive of the $11 million for stock option expense taken in the period.

Merck continues the strategy of establishing strong external alliances to compliment our internal research and for the first nine months of 2006, we have entered into 24 such transactions.

Two recent examples of our commitment to strategic alliances are the Umbrillia Biopharma licensing agreement in which Merck was granted the worldwide rights to Umbrillia's HIV-AIDS protease inhibitor program.

In late September, Merck and Foxcell Technologies announced they will expand the scope of their existing strategic collaboration for astro sporadic plaque analysis.

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 on to restructuring, we continue to provide this breakout in tracking restructuring-related expenses and to ensure fair comparisons of the underlying business.

This line captures all separation costs and in accordance in GAAP accounting, it also includes asset-related dismantling costs, demolition expenses, 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 item, namely materials and production, and R&D.

So in our third quarter results, the total charges related to the global restructuring program were $50 million and $200 million of accelerated depreciation and asset impairment costs included in the materials and production lines.

The $50 million charge is for employee separation and other related costs associated with the approximately 500 positions eliminated, bringing the total to 3900 to date in the global restructuring program, and we remain on track to eliminate 7000 positions by the end of 2008.

In reviewing equity income from affiliates, you'll see $595 million in income related to the contribution from all our joint ventures, AstraZeneca LP, Merck Schering-Plough, Merial, and Johnson & Johnson-Merck.

Regarding the Merck Schering-Plough partnership, the third quarter combined MSP cholesterol franchise global revenue as reported by the Merck/Schering-Plough partnership surpassed $1 billion.

In the third quarter, revenues of Zetia and Vytorin were 502 and $527 million respectively.

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 $1.2 billion.

Taxes on income in the period were $290 million, and the reported tax rate was 23.6%.

This included a favorable 160-basis points associated with the restructuring charge.

The underlying effective tax rate of 25.2% reflects in general the changes in foreign and domestic mix and currency fluctuations and these elements change throughout the quarter.

Moving down to net income and earnings per share, net income for the quarter was $941 million, down considerably when compared to the same period last year, but recall that in this period there was a $598 million legal defense charge.

During the quarter, we spent $250 million in treasury stock and now have $6.8 billion under the current authorization from the board with no time limit.

In summary, earnings per share for the third quarter were $0.51 excluding a net charge related to the global restructuring and on a reported GAAP basis, EPS were $0.43.

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

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

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

In summary, we are raising our full year 2006 EPS guidance to capture the fact that we had another solid quarter and to reflect our strong year to date performance.

Our revised expectations are that EPS will now be in the range of $2.48 to $2.52, excluding the restructuring charges related to site closures and position elimination, and we anticipate reported full year 2006 EPS of $2.18 to $2.25.

Now, regarding specific elements, we are increasing guidance on the following four items: We are raising Cozaar/Hyzaar product guidance by $100 million a year of year to date performance and Cozaar's, Hyzaar-- we now anticipate full year 2006 revenue in the range of $3.0 to $3.3 billion.

We are also raising other reported products by $300 million and now anticipate full year 2006 revenues in the range of 6.6 to $6.9 billion, again, reflecting year to date performance and continued success of the many franchises within this roll-up.

Keep in mind the result of our new vaccine launches all fall into in this guidance element.

Regarding marketing and administrative expense, we are lowering our full year 2006 guidance and now anticipate this to increase in a mid to high single-digit percentage growth rate over full year 2005.

The marketing and administrative expense guidance excludes the charges taken in the fourth quarter of 2005 and the third quarter of 2006 related solely to future legal defense costs of Vioxx litigation.

The full year 2005 and 2006 levels exclude the costs associated with position elimination, as well as other restructuring costs pursuant to the company's streamlining of its business processes.

The 2006 amount now includes stock option expense.

We are revising our full year 2006 guidance regarding marketing and administrative expense growth from high single digits to mid to high single digit percentage growth rates.

This is based on the first nine months of actual marketing spend and also reflects the effects of our ongoing cost management initiatives.

We are confident that mid to high single digit growth for 2006 allows us to fully capitalize on our first mover advantage and to ensure the successful launches of our recently approved products, while maintaining active support of our inline franchise.

And finally, we are adjusting our restructuring guidance.

Given the expense incurred during the first nine months, we are tightening our range by $100 million and we now anticipate the aggregate full year 2006 pretax expense associated with site closings, position eliminations and related costs to be $900 million to $1.0 billion.

As stated a moment ago, the Company's full year 2006 EPS guidance is now anticipated to be in the range of $2.48 to $2.52, excluding restructuring charges, and reported 2006 EPS in the range of $2.18 to $2.25.

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

I also want to emphasize that we have the financial strength to support our dividends and we remain fully committed to maintaining it at the current level, while at the same time continuing to fully 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 one-time 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'll turn the call back over to Graeme.

Thank you, Judy.

We will now open your call to questions.

We will take the questions in order they are received and try to get through as many as we possibly can.

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

Thank you. [OPERATOR INSTRUCTIONS].

Your first question comes from David Risinger with Merrill Lynch.

Yes, thanks very much.

With respect to government rebate reversals, the number of other drug companies have recorded government rebate reversals that have benefited the top line.

I may have missed it, but if you could comment on whether Merck recorded any such benefit in its top line this quarter, and if not, why not?

And then with respect to Zostavax, I believe that there's upcoming reviews of Zostavax that could potentially accelerate market adoption of that product.

If you could comment on that.

And then finally, with respect to Gardasil, can you just characterize whether the uptake of Gardasil has been surprising on the upside in young girls, IE, those aged 11 to 12, or whether Gardasil demand upside is more so being driven by the females between the ages of 16 and 26? thank you.

Okay.

So I'll take the first question.

This, I believe, you're referring to the TRICARE decision, and this is based on the September decision of the U.S.

Court of Appeals For the Federal Circuit, where they determined that pharmaceutical companies do not owe rebates to the Department of Defense associated with TRICARE business for the period from the fourth quarter of 2004 to the third quarter of 2006.

For Merck, this really generated minor third quarter 2006 discount rates favorability That's been reflected in Merck's net sales and is also a minor pickup in the net sales of Vytorin and Zetia, which was-- which were reported by Merck/Schering-Plough.

In relation to your question on Gardasil, it's too early for us to be able to answer that, that question.

Obviously we'll have more data as the year progresses.

And with Zostavax, we're pleased during the third quarter, sales of Zostavax reached $10 million, and there has really been extremely positive response from managed care organizations of Zostavax and I think that was a major part of the uptake.

In addition, on October 25 of this year, ACIP, which develops written recommendations for the administration of vaccines, will vote to determine their recommendation for the use of Zostavax in the U.S.

So I think that will be another critical part of it and Zostavax is on the agenda.

Thank you.

Next question, please?

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

Great.

Thank you.

Just two quick questions.

First, on Gardasil, once we get through this initial launch stage, are you expecting seasonality with this vaccine, IE, summer, strong summer season as we see with Monastra vaccine, for example, and then second, on Januvia, can you comment on the initial market you're targeting with this product launch?

One of your competitors highlighted they are initially targeting the heavy TZD prescribers, compared to the Sulfourea users.

Do you share this view and just any color there would be appreciated.

Thank you.

On Gardasil, I don't see any seasonality with, you know, with a vaccine with that type indication and certainly what we're looking at with our Januvia launch strategy is something that's preparatory and really across the whole Type II diabetes drug therapy.

Next question, please.

Your next question comes from Mario Corso with Summer Street Research.

On Gardasil, can you comment on where the VSC process may be at this point and what timing may look like?

And then in terms of the obesity drug, can you talk about how the mechanism or chemical structure might be different than the first iteration models being developed?

Thanks.

Bye.

On the issue with Gardasil, as you know, we received ACIP recommendations on June 29, which supplied the girls and women ages-- 9 to 26 which is very important.

We're in negotiating the CDC contract as we speak and what's also important to realize with that, while the MMWR publication is currently pending, the American College of Obstetricians and Gynecology, the American College of Health Associates and the Society For Adolescent Medicine has already published their support for the vaccine, so I think that's been very, very important.

But obviously finalizing the CDC contract is important and that's under discussion as we speak.

And regarding obesity compound, it's way too early as we noted to really provide any insight into the profile of that product whatsoever.

Next question, please, Cynthia.

Your next question comes from Tim Anderson with Prudential.

Thank you.

Back on the TRICARE decision, can I just clarify that that is fully washed through the P&L, whether it occurred in this quarter or whether it might occur in future quarters, it's done for you guys?

And then on the general topic of sales, it seems like, a few products came in ahead of where prescription trends would suggest.

I didn't see anything on your press release that talked about his this, so I'm wondering if there was anything else that may have boosted sales this quarter that we may not be seeing.

A second question on your obesity product, the CV 1 receptor product, did you see any depression in your Phase II trial program?

So first of all, the, the financial impact of TRICARE is fully reflected in the third quarter of 2006.

It's completely taken account of and-- no impact in the future periods.

And in terms of sales trends, globally, recognized versus-- prescription trends, there continues to be substantial growth in the-- channels and that's really across all of the major product lines.

So that needs to be factored into the performance.

And, again, as noted in the answer to the prior question, on the CV 1, on the new antiobesity compound, we really had nothing more to say than we put in the press release at this point in time.

[OPERATOR INSTRUCTIONS].

Your next question comes from James Kelly with Goldman Sachs.

Good morning.

I have a question about the other products line.

If we take a look at that line and even if we adjust it for the vaccines, that line seems to have gone from a modest decline a year ago to good growth going through this year and I'm wondering if there's any important factors about the business away from the big four products and the new launches that we should be considering here.

Thank you.

No, it's really just reflects the continuing contribution for supply, from supply sales for basically our joint venture relationships, and also bear in mind my earlier comment that a major contributor there was the $80 million from our [inaudible].

Next question, please?

Your next question comes from Jami Rubin with Morgan Stanley.

Thank you.

Just a couple of Vioxx-related questions.

The next big Vioxx case in Atlantic City is early next year, which as my understanding is that it is a, it's eight consolidated cases, which I'm not a lawyer, but I would think that would put you in an impossible position.

Can you discuss what your legal options are, and also with respect to Judge Higbee's to reverse your win on the Humston case.

Thirdly on Gardasil, I don't know if you spoke to this, but was there any stocking in the $70 million recorded this quarter?

Thanks.

There's no stocking apart from normal inventory, you know, wholesale inventory provision there.

There's nothing unusual on that Gardasil, none whatsoever.

That reflects the uptake of the product launched in June, early June.

And Jamie, the issues concerning Vioxx, certainly Merck is very concerned about the potential strategy of multiple cases, and our concern evolves around the fact that they involve different states, different periods of ingestion, different risk factors, preexisting conditions, et cetera, et cetera, so it makes it extremely very complex for a jury to understand all of that in the combined focus, and so obviously we continue to work on convincing the judge that that may not be the appropriate way to go and with regard to the whole issue around Vioxx and some of the other issues, we will appeal as appropriate.

And to come back to my earlier comment, I didn't want-- I just wanted to clarify.

Clearly the major place where we are shipping Gardasil-- again, that's just based on underlying commitments.

Your next question comes from Steve Scala with Cowen.

Thank you.

I'm intrigued by your legal strategy on Fosamax.

You dropped the inequitable conduct suit and then I believe you sued the generics over process patents.

I'm wondering, what is the best case outcome here?

Could generic Fosamax be substantially delayed by what I believe has been a recent suit?

We continue to expect that Fosamax is going to lose exclusivity in early '08.

Thank you.

Next question, please.

Your next question comes from Seamus Fernandez with Leerink Swann.

Thank you very much.

Just a couple of questions here.

I was hoping you could discuss, should we be thinking about the payment from, from Dr. Reddy as basically 100% gross profit margin, so assuming that it's contributed roughly $0.02 to earnings in the quarter and then second, can you just discuss, there was a news report about a manufacturing plant for cancer products in Germany.

Was this for Zalenzia are or should we be thinking about it as something for other products, and that's it.

Thank you.

So based on our agreement with Dr. Reddy, we don't comment on the specifics of our contractual arrangement there.

Those are proprietary.

And concerning the manufacturing plant in Germany, that is-- there's really not a Merck facility, so we're-- maybe it's the German Merck versus ours, but we don't have any plans for manufacturing facilities in Germany.

Your next question comes from Roopesh Patel from UBS.

Thank you.

I have a couple of questions.

First, on gross margins, given that Merck has already recorded a significant erosion of Zocor and Proscar sales this quarter, would it be reasonable to assume that the gross margins recorded this quarter are notwithstanding the restructuring costs, should be the forward run rate, if not, what are the broad pushes and pulls that we should take into account?

And then separately, I was just wondering if you could also broadly comment on the sales force support behind Januvia's launch, have you increased the size of much overall sales force?

If not, is the effort, is effort being diverted from any particular product?

Thank you.

Concerning the sales force, we really think about our launch for Januvia and other products, as their important part of proprietary information and certainly don't provide details on that.

But what I can reassure you is that we are providing the proper capabilities for promotion, as well as reeducating the physicians.

We did announce earlier that as a part of our plans of looking at a new operating model for marketing and sales, that we were going take 1500 sales representatives and reallocate them to vaccines and other activities.

And regarding thinking about the progression of product gross margin, I think you need to take a few things into consideration.

Obviously in the second half of 2006, you're seeing, as you noted, the impact of Zocor on the product mix.

But as you also may recall in our longer-term guidance, we talked about product gross margins returning to pre-Zocor patent expiry levels after 2008 and that's a function of a lot of these product launches that we're talking about and the major cost improvement initiatives that are-- already has under way.

So I think you need to factor all of that in at this point in time.

[OPERATOR INSTRUCTIONS].

Your next question comes from Craig Baskin with Loomis Sayles.

Hi.

Thanks for taking my question.

I was wondering, on Gardasil, since the rate at which you, you're able to ship the product out to physicians is probably significantly greater than the rate at which the insurance companies might choose to reimburse the physician, I was wondering what sort of terms you were giving.

Well, certainly we're not going to discuss terms with physicians.

I can tell you this, as of today, managed care plans representing over 90% of the covered lives of girls and women ages 9 to 26 in the U.S. have added Gardasil to their respective formularies.

So I think that's a critical part that we're up to 90%, which certainly was accelerated and it exceeded our expectation of where we would be on October 20.

Your next question comes from Chris Shibutani with J.P. Morgan.

Thanks very much.

Two questions, if I may.

On MK 524 A, time lines are still apparently on track.

Can you comment on when we should expect to see a little bit more data in regard to the profile.

Can you also address where you are in terms of the formulation issues for the 524 B, and secondly a question on collaborations 24 year to date, obviously the rhythm and pace of these can vary.

I believe the numbers have been higher in the past, 40 to 50 per year, which is a considerable stepup.

Does this change in number reflect-- appetite or capacity to manage these, the quality of the deals you're seeing or maybe the competitiveness or valuation that's out there, since everyone is looking for end licensing, et cetera.

Thanks.

Relative to 524 A, I'll remind you that there will be papers presented at the American Heart Association the week of November 13, and I think some of those have already been posted.

So that's where, that's where those are going to be discussed.

In terms of the formulation, you know, as you note, we have not stipulated a timetable on the progress of 524 B at this point in time.

In relationship to the licensing deals that we have focused on and 24 compared to the previous number, there really is no change in strategy.

We are still very aggressive.

We're still looking at the opportunity and we'll take advantage of each and every opportunity.

So we're looking at quality and certainly not quantity.

Your next question comes from [Bob Yetis with Principled Capital].

Thanks for taking my question.

Just to follow on the questions on Vioxx, number one it, seems like there are more cases that came in this quarter and can you comment, if there was a statute of limitations, which expired in certain states during the quarter and secondly, Judy, you sort of bumped your reserve here to $950 million.

Does that mean you expect you're going to spend most of those funds over 2007 and 2008?

So let me just address the process of the reserve.

As you noted earlier, we continue to look at our ability to estimate and part of that is a function of the progress, in the litigation and our knowledge and visibility over a certain timetable.

So at this point, all of that reflects is our best estimate.

We can establish and make a reasonable estimation only through the end of 2008.

So it's really just part of our, you know, the horizon that we've got in our ability to forecast with the right rigor that we need to update the reserves, but it really doesn't stipulate anything else about the timetable really or the progression of where this is going to go.

Cynthia, given the time, we'll take one or two more questions.

Your final question comes from Tim Anderson with Prudential.

Oh, thanks.

I just had a follow-up question.

Actually two.

Judy, you mentioned higher sales in unaudited channels.

Why, I guess, is the question?

Is that a change in the strategy, in terms of how you're contracting in those channels, or what exactly?

And then, Dick, at one point last year, you said Merck may actually get into the medical device business.

This morning you referenced the Fox hollow collaboration.

I question as whether medical devices, is there anything else outside the traditional pharmaceutical space are areas you would potentially consider building a presence in?

So, Tim, just to the first question, there's no change in strategy there.

It's really what-- picked up and the fact that we continue to work to contract our products and-- channels.

There's nothing there, just helps explain why sometimes you may see a slightly different trend in sales reported as opposed to the reported sales trends.

And, Tim, thinking about medical devices as a part of our strategy, we are certainly interested in the capabilities and technologies around medical devices-- when it helps us from a research standpoint, but not a standalone business.

To go back to a previous question concerning Vioxx, one of the reasons you saw such an increase in the third quarter of suits is on September 30 was that the two-year date since we voluntarily-- Vioxx and that is significant from the standpoint that approximately two-thirds of the states have a two-year limitation, and obviously that two-year limitation took place on September 30.

So there's obviously complexities around whether that can continue or not, but that's probably the major driver.

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

The information from today's call, both the transcript and the replay will be available on our website and Mike and I will be available all day to take your calls.

I would like to now turn the call back to Dick Clark for some concluding remarks.

Thank you, Graeme.

And thank you for tuning in and listening to our call today.

Judy and I are very pleased to continue to speak directly with you every quarter and as we stated, we're very pleased with the third quarter results.

It exceeded consensus expectation and we are certainly looking forward to updating you further on our progress at our annual business briefing that we will hold in White House Station on December 12.

We'll be in touch to give you details on the meeting very soon.

So, thank you again.

We appreciate your interest and participation.

Operator, thank you very much.

And that's the end of our call.

Thank you.

Ladies and gentlemen, this concludes today's Merck third quarter 2006 earnings conference call.

You may now disconnect.