默克藥廠 (MRK) 2007 Q1 法說會逐字稿

Good morning.

My name is Kimberly and I will be your conference operator today.

At this time, I would like to welcome everyone to the Schering-Plough first-quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(OPERATOR INSTRUCTIONS).

Mr.

Alex Kelly, you may begin your conference.

Thanks, Kimberly.

Good morning, everyone.

And welcome to the Schering-Plough 2007 first-quarter conference call.

We appreciate you joining us at this hour and apologize in advanced to our investors in other time zones for the early start.

We like to announce our ZETIA and VYTORIN sales figures on the same day as our partner and as a result, we got squeezed into a bit of a box this quarter.

So we apologize in advance.

We appreciate your patience and understanding.

We know that you have other conference calls planned this morning, so we will try to wrap up our call by 7:50.

Before we begin, let me remind you of a few things.

First, some of the statements we make during the call today may be considered forward-looking statements.

The Company's SEC filings including Item 1a of the 2006 10-K identify certain factors that could cause the actual results to differ materially from any projected statements we make this morning.

The Company's SEC filings can be found on our website at schering-plough.com.

Finally, I would also note that during the call we may refer to non-GAAP measures including adjusted net sales or adjusted topline sales.

This is a non-GAAP measure that we define as our GAAP net sales plus an assumed 50% contribution from the cholesterol joint venture.

We may also refer to adjusted earnings and adjusted R&D expense which excludes certain upfront R&D payments.

Please refer to the non-U.S.

GAAP reconciliation tables in the financial highlights section of our Investor Relations website.

And in there you will find reconciliation tables for all these adjusted figures to GAAP results.

This morning I am joined by Fred Hassan, our Chairman and CEO; Bob Bertolini, our Chief Financial Officer; and Carrie Cox, the Head of our Global Pharmaceutical business.

Now I would like to introduce Fred Hassan.

Thank you, Alex, and good morning, everyone.

Thank you for joining us.

You will have seen our press release.

We are again pleased with our performance this quarter, just like we have been for the past ten quarters.

We are also very confident as we look ahead.

When we look at the Schering-Plough picture, this is what we see.

We see a company that has sustained momentum into the turnaround phase of our Action Agenda and then has been maintaining that momentum into the build a base phase.

We see a company that has been gaining momentum in R&D as we keep investing for long-term strength.

And we see a company that is now ready to leverage its strength with the planned acquisition of Organon BioSciences.

This quarter we delivered 17% GAAP sales growth.

Adjusted for our assumed 50% share of VYTORIN and ZETIA sales, that is 21% adjusted growth versus the same quarter last year.

We continue to grow VYTORIN and ZETIA despite the new wave of generics that has recently entered the market.

As we have said before, physicians and their patients are following the evolving medical science; evolving medical science that is indicating that lower LDL cholesterol is better.

And now we will be extending the core of our cholesterol business into Japan.

The Japan approval of ZETIA earlier this week will bring a very important new treatment option to Japanese physicians and their patients with the kind of clinical profile that is very attractive in the Japanese market.

We are also pleased to see other key products contributing to the growth.

In fact, our top nine products including VYTORIN and ZETIA all grew double digits.

These include REMICADE, which grew 34% and NASONEX, which grew 24%.

Our Animal Health and Consumer Health businesses are also growing nicely.

In fact, 70% of our growth came from outside our cholesterol franchise.

It is clear that our long-term strategy is paying off.

Topline growth reinforced by financial discipline is driving bottom-line's earnings growth.

This is the same strategy that has been driving our performance over the last three years.

Financial metrics such as sales, earnings, free cash flow, and other metrics such as employee engagement, R&D productivity, and business integrity are all showing dramatic improvements in nearly every aspect of our business.

As a result of the momentum we have built in our business over the last three years, we ranked first in our total shareholder return among our peer group of eight U.S.

companies between January '04 and December '06.

Thank you for your confidence in our company.

Now, about gaining momentum in R&D.

We are gaining momentum from internal innovations.

Our Phase II pipeline has expanded nicely during the past three years.

One of our Phase II compounds, the thrombin receptor antagonist, TRA, emerged as one of the higher profile compounds at last month's meeting of the American College of Cardiology.

Cardiovascular experts noted the emerging data showing that TRA is not associated with a significant bleeding risk.

They also saw potential signs of TRA's efficacy even though the study was not powered to demonstrate this.

So there is a lot of interest in this compound.

This Phase II data on TRA gives us the confidence to go into larger Phase III studies.

This data is also confirmation that Schering-Plough has emerged as a serious player in cardiovascular medicine.

We also expect to see further Phase II data on two of our other FDA fast track projects in the second half of this year, vicriviroc for HIV/AIDS; our protease inhibitor for hepatitis C, boceprevir.

So this will be a key year for Phase II clinical data.

Then we are also gaining R&D momentum from external innovation.

Recent in-licensing deals have a good strategic fit, strengthening our key therapeutic areas.

I'll share a few examples.

The in-licensing of tablet based allergy immunotherapies from ALK-Abello strengthens our respiratory business.

The deal with Anacor for an innovative nail fungus treatment builds on our infectious disease franchise.

In cardiovascular, the ZETIA plus atorvastatin fixed dose combination with Merck will allow us to get even more out of our very special medicine, ZETIA.

And in immunology, golimumab is advancing in Phase II trials.

So you can see that we now have a lot going on in R&D and we will be investing strongly to create the value and then to capture the value.

Finally let me comment on the Organon BioSciences combinations.

As we have said, there is a strong strategic fit, strong scientific fit, and strong financial fit.

We see four features that promise to add to our build a base phase.

First, we will gain five Phase III compounds and fill our late stage pipeline gap.

We also gained substantial R&D strength with the Organon R&D organization and also the Intervet animal health R&D organization.

Second, we have an opportunity to gain access to Organon's innovative women's health and anesthesia products.

This allows us to enter these two important therapeutic areas.

Third, we see an attractive, innovative animal health business in Intervet.

It will be complementary to Schering-Plough animal health.

And fourth, we see a new combined company with 2006 pro forma adjusted sales of nearly $17 billion and strong cash flows.

A new combined company that we expect to realize at least $500 million in synergies by year three.

Underlying all this is the people strength of the combined company.

We have met with the senior management of Organon and Intervet at the Oss and Boxmeer sites in the Netherlands.

I have held employee meetings with Organon's U.S.

people in Roseland, New Jersey.

I have also met with people at Intervet's U.S.

headquarters in Millsboro, Delaware.

So far we've established a very constructive relationship with the senior management of Organon BioSciences and with the senior management of the parent company, Akzo Nobel.

We have also begun work to satisfy regulatory conditions for completing the transaction.

This is a complicated transaction.

It will take time and energy, but we have confidence that it will be a success.

Our management team has a strong track record of value creating integrations including trans-Atlantic combinations.

In closing, we continue to apply the same strategy that has brought us this far by driving topline growth, reinforcing it with financial discipline, we're driving sustainable bottom-line growth and we are building long-term value through building our R&D pipeline.

This combination builds on the momentum that we have developed over the last three years and it further positions our company for long-term value creation.

Now let me turn over to Bob Bertolini.

Thanks, Fred.

Good morning, everyone.

As Fred indicated, we have had a very strong first quarter.

This morning I'll cover three topics with you.

First, our sales performance and factors that affected our earnings; second our operations; and finally, I'll discuss some information pertaining to our outlook.

First our sales performance for the first quarter.

Our GAAP sales were nearly $3 billion, 17% higher on a year-over-year basis.

Currency had a 3% benefit on our sales growth in the quarter.

Adjusted sales increased 21% to $3.6 billion.

As Fred mentioned, we've sustained the momentum that we built over the last three years.

Our sales growth was led by VYTORIN and ZETIA, which had combined global sales of nearly $1.2 billion this quarter.

We also had strong contributions from key products like REMICADE, NASONEX, CLARINEX, TEMODAR, and AVELOX.

And our Animal Health and Consumer Health businesses also had strong quarters, each growing double digits.

So you can see our overall business continues to perform well.

Carrie will tell you more about the products in a moment.

Moving onto earnings, on a GAAP basis we earned $0.36 per share in the first quarter.

Included in this number are expenses of $96 million or about $0.06 per share in upfront payments for three in-licensed R&D projects.

Excluding these payments, we earned $0.42 per share.

I will discuss these items in more detail in a moment.

Let me spend the next few minutes on our operations starting with our gross margin.

On a GAAP basis, our gross margin was 68.5%.

This was higher on a year-over-year basis and sequentially.

On a year-over-year basis, the gross margin improved more than 300 basis points, primarily due to product mix and cost savings.

On the product mix, NASONEX, CLARINEX, AVELOX, and TEMODAR all contributed to a positive trend and more than offset the impact of REMICADE growth on the gross margin.

On AVELOX, under our agreement with Bayer we keep a greater share of the gross profit when the product was growing.

So the fast growth of AVELOX this quarter, which was a seasonal quarter, had a favorable impact on our gross margin.

On the cost savings, we had cost savings of about $30 million from the manufacturing streamlining actions.

Also over the past few years, our manufacturing and quality colleagues have made good progress enhancing productivity through our right first-time initiative.

Keep in mind that if you include half the sales and half the costs of the cholesterol joint venture, our gross margin for the first quarter would be in the range of our peer group.

Moving onto SG&A, in the first quarter, our selling, general, and administrative expenses were higher on a year-over-year basis.

This was mostly due to increased field force expenses, additional promotional spending, and continued investments in geographic expansion.

While SG&A expenses increased, you can see that these investments drove strong topline growth.

So we're getting a good return on these investments.

On research and development, there are no surprises here.

We continue to invest heavily in R&D to advance our pipeline.

R&D expense for the first quarter was $707 million.

Remember included in this, are upfront payments of $96 million for the ALK-Abello, Valeant, and Anacor agreements that closed in the first quarter.

Excluding these payments, the R&D expense would have been $611 million, up 27% versus the prior year.

As you can see, our R&D expense is growing faster than adjusted sales, as we told you before.

The growth in R&D spending was primarily due to two factors.

First, increased investment in ongoing clinical trials; and second, increased headcount as we build greater scale and capacity into our global clinical operations.

My final topics this morning relates to our outlook for sales, gross margin, R&D spending, taxes, and a few comments on the planned acquisition of Organon BioSciences.

First on sales.

As you can see, we had strong adjusted sales growth in the first quarter at 21%.

This high growth rate is expected to moderate in the remaining quarters of 2007.

On cholesterol, we continue to anticipate that sales of VYTORIN and ZETIA will grow in 2007.

Also as the year progresses, several of our key brands could face increased competition, including REMICADE, NASONEX, and in Japan, PEGINTRON.

As Carrie will tell you, we are confident in our key brands and we will continue to focus on driving their growth.

On the gross margin, going forward we expect that our gross margin for full year 2007 will be better than it was last year.

As we've said, this is primarily a result of the $100 million in annual cost savings expected from our streamlining actions.

Also as you think about the remainder of the year, keep in mind that product mix has a significant impact on our quarterly gross margin.

On R&D, we anticipate that the number of patients in our clinical trials will substantially increase in the remainder of 2007.

This increased R&D activity is a result of our pipeline that is gaining momentum, as Fred mentioned earlier.

For example, on TRA, we recently announced that we will begin two Phase III trials later this year encompassing nearly 30,000 patients.

This will result in increased R&D investment.

We will also be funding new clinical trials for all the projects that we recently in-licensed and we will have continued patient enrollment in ongoing trials like golimumab and the ASMANEX/FORADIL combination product.

As a result, we continue to expect R&D expenses excluding any upfront payments to grow faster than adjusted sales in 2007 as they did in the first quarter.

On taxes, our tax rate will vary between quarters depending on the country mix of earnings.

Given the performance this quarter, we now expect that our overall tax rate for full year 2007 will be in the mid to high teens on a GAAP basis and will be lower if you exclude special items like upfront R&D payments.

Finally on Organon BioSciences, for the remainder of 2007 we will have a number of special items in advance of the close, including integration related costs, as well as, potential currency related activity associated with the purchase.

The impact of these items in the first quarter was not significant.

In summary, you can see that we are off to a strong start in 2007 and it is clear that our strategy is paying off.

Topline growth reinforced by financial discipline is driving bottom-line earnings growth.

Now let me turn the call over to Carrie.

Thanks, Bob.

Good morning.

Our global prescription business is off to a great start in 2007 and we're very pleased that we have maintained our momentum.

Strong and balanced performance can be seen across much of our portfolio.

Our U.S.

and international businesses both delivered impressive results with GAAP sales growing 22% and 16% respectively.

Including our cholesterol franchise, our top nine brands grew in double digits with many important growth drivers continuing to reach new highs.

Turning now to our product portfolio, our global cholesterol franchise continued its exceptional performance with Q1 sales increasing 48% to nearly $1.2 billion.

Both VYTORIN and ZETIA delivered outstanding results in the U.S.

and in international markets.

In the U.S., new prescription share for the franchise reached 16.4% with both products continuing to set new market share highs despite the availability of a second wave of generic statins.

We believe that this further validates the importance of the unique mechanism of VYTORIN, which provides superior LDL reduction through dual inhibition of the two sources of cholesterol.

VYTORIN's performance remains strong across many fronts, in first-line use, in switches and among specialists.

In first line, new patient starts represent more than half of all VYTORIN prescriptions demonstrating continued excellent first-line use in recently reported data.

VYTORIN is the fastest-growing brands in the market.

In switches, VYTORIN remains the branded leader among switch patients.

Among cardiologists, our combined new prescription share is approaching 23% and growing.

These are all good signs of the continuing strength of prescriber confidence in VYTORIN and position us well in a post generic market.

At last month's American College of Cardiology meeting, lowering LDL was again validated as the primary target of lipid therapy and with lower clearly better, we believe this plays right into the strength of our cholesterol franchise.

Only VYTORIN provides more than a 50% LDL reduction at the usual starting dose and across the dosing range.

More than Lipitor and more than Crestor.

No other product, branded or generic, delivers this kind of powerful efficacy.

Managed care organizations continue to recognize this compelling value proposition and VYTORIN continues to enjoy competitive second-tier access.

Outside of the U.S., the cholesterol franchise continues to gain critical mass with sales increasing 74% to $263 million.

And as you have heard, ZETIA has received marketing approval in Japan, the second-largest cholesterol market in the world with annual sales of nearly $2.2 billion.

With yesterday's approval, ZETIA has achieved the major milestone on its way to launch.

We're very pleased that ZETIA will be indicated for use alone and in combination with a statin.

ZETIA will become available in Japan upon national health insurance reimbursement approval.

Today less than 10 million people in Japan receive treatment for high cholesterol and with an estimated 30 million people eligible, there could be considerable growth potential longer term.

ZETIA provides a whole new way to treat cholesterol, but it will take some time for Japanese physicians to become familiar with this new medicine.

We believe that the clinical profile of ZETIA is a good fit for the Japanese market and we hope to see the growth develop well over time.

Along with our partner Bayer, we're excited to bring this important advance to market.

During the quarter, we also announced another step in extending our leadership position with the development of a fixed dose combination of ZETIA and atorvastatin.

In partnership with Merck, this new therapy could offer an advance to patients at risk for cardiovascular disease and reflects the ongoing potential of ZETIA.

Turning to REMICADE, Q1 sales increased 34% fueled by growth across all indications.

In nine of the last ten quarters, REMICADE delivered greater than 25% growth each quarter.

A key to generating this strong performance has been the ability to energize and transform REMICADE through sharper execution and lifecycle management.

In rheumatoid arthritis, it is worth noting that REMICADE marketshare has increased 600 basis points across Europe in the last year, now reaching 26%.

This is particularly impressive given its previously declining trend as well as increasing competition.

REMICADE recently received approval in the European Union for greater dosing flexibility in the treatment of RA, allowing physicians to now tailor both the dose and infusion time to better meet the needs of their patients.

In allergy, global NASONEX sales increased 24% with similar growth rates in both the U.S.

and international markets.

In the U.S., NASONEX has continued to perform well, with accelerating share growth heading into the spring allergy season.

During the quarter, NASONEX significantly outpaced the prescription growth of both the market and competitors.

We are pleased to report that NASONEX new prescription share neared 36% in March, an all-time high for the brand.

Results are even more impressive among allergists, pediatricians, and ENTs where NASONEX remains the number one prescribed inhaled nasal steroid with a new prescription share of more than 47%, a 5 point share increase versus the previous year.

NASONEX has the broadest clinical profile among all inhaled nasal steroids with the most indications to treat more types of patients including children as young as two.

Recently NASONEX became the first nasal allergy spray to receive recognition from the Arthritis Foundation for ease-of-use, an award recognizing user-friendly products for people with arthritis.

In hepatitis, global PEGINTRON sales increased 10%, reflecting the continued stabilization in the U.S.

and European markets, offset in part by the gradual but expected decline in new patient enrollment in Japan.

We also want to mention our strong performance with our antibiotic, AVELOX, a broad spectrum fluoroquinolone we market in the U.S.

AVELOX represents yet another example of our increasing commercial strengths and our ability to maximize the potential of product assets in highly competitive areas.

Sales of AVELOX increased 43% to $112 million during the quarter.

New prescription share grew to more than 18% during the recently ended respiratory tract infection season, an all-time high for the brand.

Schering-Plough has nearly doubled AVELOX marketshare since we gained the product in late 2004, five years after it was launched by Bayer.

Lastly, improving selling excellence is one of our cornerstone priorities and remains a key lever to further drive performance.

In an industrywide survey conducted by Target Rx, our field force achieved impressive results among U.S.

prescribers, ranking number three as the most effective sales force among primary care physicians.

Although there is still work to be done, we are proud of this recognition of our commitment to selling excellence and believe this will serve us well as we continue building a high-performance company for the long term.

And now I will turn the call back to Alex for Q&A.

Thank you.

Thanks, Carrie.

Now we'd like to open up the call to answer your questions.

In order for us to get through as many questions as possible, please limit yourself to one or two questions and note that we will not take any follow-up questions.

If you do have additional questions, you are welcome to rejoin the queue.

Kimberly, we're now ready for the Q&A.

Michael Caster, Sio Capital Management.

Two quick questions.

First the tax rate was impressively low.

Can you comment on what it will be over the long term and perhaps the drivers?

And the second question is, Bob, can you describe the accounting treatment for ZETIA in Japan please?

Ok, so Bob, why don't you take both these questions?

I think the tax rate had been discussed some years ago when we said that we were doing some good tax planning long-term and I think some of that is now coming through.

Bob?

Sure, Michael.

I would be happy to.

As we had in prior quarters, our tax expense is generally foreign taxes.

Now the country mix of earnings is going to really move that rate quarter by quarter, so we have ended up fairly low in the quarter.

We think for the full year we'll be in the mid to high teens on a GAAP basis, a slightly lower if you excluded special items like our upfront R&D payments.

So that's kind of where we are with respect to taxes on a mix of earnings standpoint.

Is that sustainable over several years?

I think it's going to be a function, Michael, as our mix of earnings over the course of time.

We are generating operating losses in the U.S.

so that has an impact on our taxes.

So that will be a function long-term of our country mix.

At the same time you should be aware, Michael, that our business in the U.S.

is picking up so it is hard for Bob to make an accurate forecast on the tax rate because if we are very successful in the U.S., then obviously our tax rate might start to change downstream.

Beyond that, Bob, I'm not sure if you can say --.

That is pretty much it.

And on Japan, Michael, each company, both ourselves and Bayer, will book our own sales with respect to that product.

One reason we are happy with our consumer business and Animal Health business is that they make good U.S.

profits and we always look for more opportunities to make more profits in the U.S.

I think we're ready to go to the next question.

Tim Anderson.

Thank you.

A couple of questions.

Your first big kind of quasi outcomes trial is coming up on VYTORIN, which is ENHANCE and I have not heard you talk much about that despite that trial and all those results almost being in hand.

It seems like they could be fairly important to VYTORIN franchise.

I'm wondering if you are at all worried about the outcome of this trial in terms of what it shows?

Second question is on TRA, just actually a couple questions there.

In your press release last night, you said patient will be followed for at least one year.

I am wondering if that -- is that the bare minimum?

Is this an event driven trial that could have average exposure that goes well beyond one year?

In your guiding in the past you have guided for a late 2010 or 2011 launch and I am wondering is that is still accurate?

Then what happens if Prasugrel shows that it is superior to Plavix?

How does that change how you would look at those trials?

Very good questions, Tim.

First, I think we've already discussed on previous occasions that the data analysis is ongoing for the ENHANCE trial.

That as you know is a surrogate market trial in a very special population with very special doses.

There is a much larger trial called the IMPROVE-IT trial which is more of an outcomes trial.

So one has to look at the overall mix of the data.

The overall regression curve in terms of LDL, lower LDL, is better, is being proven in numerous studies, so we are pretty confident about the overall pattern of data for VYTORIN.

Now I would ask our head of R&D, Tom Koestler, who is here with us to talk more about the TRA, since your questions were so detailed, that I think it is a lot better that he answer.

Yes, I think your question was is this going to be an event driven trial?

The answer is yes, it is an event driven trial and I think the most important part of that is to recognize that these patients both in ACS and in secondary prevention will be followed for at least one year.

So these are fairly robust trials that are being planned, 19,500 patients in the secondary prevention trial and almost 10,000 patients in the acute coronary syndrome trial.

I think, Tim, it is fair to say that the bucket, the time bucket of 2010, 2011 is where we are going and we are really going for it, because this thing is a very exciting opportunity based on the Phase II data that we have seen.

I think we're ready for the next question.

David Risinger, Merrill Lynch.

Thanks very much.

Two questions.

The first is, Bob, could you speak to the FX benefit on the bottom line?

Obviously there was a significant benefit to the top line and the company isn't fully hedged.

So if you could help us understand that in case currency swings the other way in a year so we know how tough the FX comp is.

And then second, with respect to the TRA and I guess this is a question for Tom Koestler, could you help us understand the dosing in each of the Phase III studies?

In the one study, you have chosen the 40 mg loading dose; however, that dose in Phase II showed numerically higher bleeding.

I am assuming that you are assuming that was a spurious result, but if you could help us understand that and make us comfortable that indeed you have chosen the rights dose.

And then for the second study, it doesn't mention anything about a loading dose and I am assuming that there is none because of the design of the trial and the patients that are being studied.

But if you could confirm that, thank you.

David, very good questions.

I think the good news is versus 3 1/2 years ago, that we have focused our efforts on the U.S.

and the U.S.

has turned around dramatically for our company.

So the U.S.

is going to be a larger and larger part of our mix going forward and that will of course reduce the FX risk quarter -- in any short-term period.

Bob?

I think you said right.

We have -- it is basically a natural hedge.

David, I would just quantify it I was in the $0.01 to $0.02 range for the quarter.

And Tom?

David, on the dose selection, we are very comfortable with the dose selection of 40 mg for the loading dose.

Frankly there was no, absolutely no difference whatsoever in the doses that we chose it on the loading dose with respect to any major or minor bleeding, so we feel very, very, very comfortable about that.

In terms of your second question, which was on the loading, will there be a loading dose in the secondary prevention trial?

The answer is no.

We'll use the 2.5 mg maintenance dose that we established and we feel comfortable with that as well.

Okay, I think we're ready for the next question.

Jami Rubin, Morgan Stanley.

If I could just follow up on TRA.

Tom, maybe you can just sort of conceptually discuss this because I'm sure you've already had your pre-FDA meetings on the design of the Phase III trial.

But I don't understand why you can't do a TRA trial compared to aspirin and placebo instead of aspirin and clopidogrel because it would -- it is not a stretch to imagine TRA actually replacing Plavix.

So if you can talk to that?

And secondly, Bob, my question relates to the SG&A ratio.

You gave us sort of guidance on other line items of the P&L, but with respect to SG&A, the ratio was 40.7%.

It is lower than it has been in quite some time.

It has been sort of hovering in the mid-40s% range.

What can we expect for that ratio going forward, because as we pointed out for the last many, many years, Schering's ratio still seems even at 40% well above the industry average.

We'll ask Tom to answer the first question and Bob to answer the second question.

Yes Jami, thanks for that question.

Obviously there's many different ways one could approach this, but having given this a lot of thought amongst ourselves and with the key opinion leaders, we feel that it's really important to establish first the safety and efficacy of our TRA compound on top of standard of care.

And, remember the promise here that we are establishing particularly with our Phase II data is that we do not believe that based on our novel and selective mechanism here that we're going to have any increase in bleeding.

So we feel very positive about the fact that we can profile this compound first on top of Plavix, on top of aspirin, and as you know there are other Plavix-like compounds coming along like Prasugrel.

So that's our strategy right now.

And yes, you are right.

We would not at all rule out looking in terms of a follow-on strategy whether or not we would profile this product for monotherapy.

Thank you, Tom.

In general on SG&A I will just say we are in good shape, Jami.

We are moving along very nicely.

As we have said many times, we don't engineer the company to ratios.

We engineer the company toward growing earnings and I think that is really what is happening and especially coming off the top line.

The other aspect on ratios one should always remember is that we do have a joint venture where we don't get to book sales.

Bob?

Good points, Fred.

Just a couple other points, Jami.

We did improve the ratio 180 basis points this quarter, really driven by the good topline growth.

We don't have specific ratios going forward that we are providing, but just a couple of points I would point you to.

First, we're going to continue to invest in the cholesterol franchise.

We are not going to shortchange that franchise.

Our field force generally right sized in the U.S., but we will continue to invest geographically where it makes sense.

And third, we're going to continue to invest in promotional opportunities to drive topline growth, but we're going to do so on a return on investment basis.

Okay.

I think we're ready for the next one.

John Boris, Bear Stearns.

Congratulations on a good quarter.

Just real quickly on the Organon BioSciences acquisition, Fred, you outlined four points and you mentioned five Phase III compounds.

Can you just mention what in terms of priority would be the rank or priority of those five Phase III compounds?

Then a question for Bob on the synergies by year three, $500 million.

Would you classify that as somewhat conservative going forward in that a lot of the operations for Organon especially in ex-U.S.

markets are pretty analogous to what you currently have in both the pharma side and Animal Health side?

So I would have anticipated they might have been a little higher than that.

And then also just if you take that $500 million that you have laid out there, can you just give some guidance on each of the lines on the P&L of how that might shake out on the synergy side?

Thanks.

John, those are very good questions.

As you know, the late stage pipeline is attractive and it greatly, greatly increases our combined late stage pipeline as a result of this.

The two most interesting projects which are far advanced are asenapine and sugammadex.

Asenapine, as we know is for schizophrenia and sugammadex is a product for anesthesia.

Both are very interesting compounds.

We are hopeful that our partner, our future partner, will keep advancing these during the transition period.

And I know that they are very enthusiastic about it.

Asenapine works for schizophrenia and also for bipolar mania.

We also know that when it comes to synergies, we will do the right thing.

This is not a cost-cutting situation.

This is not a situation where you have a large company that has very poor topline growth that is desperate to keep going with their EPS for a few years.

This is a totally different situation.

We have very good R&D engines on both sides.

We're growing nicely on both sides.

We have strong Animal Health businesses on both sides.

So I think we can have a very good opportunity here to get the synergies, but then also to build long-term growth at the same time.

Bob, on the specifics regarding the half a billion?

You said a lot of it, Fred.

We said, John, at least $500 million.

You know, that's roughly 10% of sales of Organon which you know if you look at benchmarks is in the range of what similar transactions would be.

As Fred said, this is not a slash and burn transaction.

Now we do expect the majority of the synergies, as Fred has said, continue to drive topline growth.

So as we have said, most of these synergies are going to be in overhead related functions, so are going to be very tough on the overhead related functions keeping the growth engines going in both companies during this period.

And there may be some other overlaps that we will certainly take care of and we just want to do it the right way.

There are some very good social discussions occurring in Europe and we will work the right way given the fact that this is a trans-Atlantic combination.

I think we may be ready for the next one.

Chris Schott, Banc of America.

Just a couple of quick questions on TRA.

Do you need to or do you plan to complete both of these studies before you file the drug?

And are both studies required to -- do they need to be successful in order to file here?

Then with the increased of the organization with the Organon acquisition coupled with the potential for TRA, I'd just be interested in your thoughts of potentially partnering this drug.

Thanks.

So Chris, I apologize for your name, but that happens to my name all the time too.

Tom, go ahead.

We've got fast-track status with this with FDA so that enables us to have an ongoing dialogue almost at any time we choose, we have access to the FDA reviewers because of that.

Our strategy is, frankly, to be in a position to do both of these trials in a parallel fashion so that we can file both of these trials at the same time.

That is our strategy right now.

I don't think one is necessarily contingent on the other, but our strategy is to go forward with both at the same time.

Okay, we're ready for the next one.

Chris Shibutani, JPMorgan.

On Japan, could you give us a sense for what timeline we should be able to expect the reimbursement to come through in Japan?

Then also, could you give us a sense for whether the pace of R&D spending growth that we've seen or that you've guided to in '07 versus '06, is that looking a little bit further out?

Is there something extraordinary about this year over your pace?

Are we going to be able to think about it in similar terms going forward perhaps at least a year or two beyond given the clinical trial burden that you talk about?

Carrie, why don't you comment on the reimbursement and then we will go to Bob.

As you know in Japan, reimbursement discussions are held only a few times a year, so we anticipate it could be another few months before we actually get that clearance and are able to fully launch the product.

As you know, these are always hard to predict subject to local situations, budgetary situations, but in general the Japanese experience is more reliable than experience in some European countries.

Bob, go ahead.

Chris, on the R&D spend it is going to be depending on the timing of enrollments.

It is really timing driven.

Keep in mind with TRA, it will be 30,000 patients and our pipeline, as Fred mentioned, is building momentum.

So as those patients continue to enroll over that period, you are going to see increasing patient enrollment depending on the outcome of the trials.

Okay we're ready for the next one.

Steve Scala, Cowen.

I have two questions.

After dominating the Proventil CFC market, Schering has been considerably less successful on the HFA market.

What are your plans here?

Will those initiatives be evident in the second quarter?

Then secondly, will you apply to have the consent decree lifted?

I think the earliest you can do so is next month.

If so, when might it actually be lifted and does your guidance reflect having that lifted successfully?

Okay, Carrie, if you can answer the first one, I will answer the second one.

When it comes to the transition in the Proventil HFA market from the CFCs to the more environmentally friendly HFA, our major focus has been on assuring that patients have good and continued access to these medications, so this is a slow and deliberate and very appropriate transition that's keeping patients at the forefront of all the activities.

That said, I actually believe that the transition is going quite well.

If you look at the way the market is developing, it is unusual to see a market of products that were formerly all generics now converting back into a branded market as well and it's important to note that Proventil HFA is not considered by FDA to be interchangeable with any other product on the market.

So for the long-term this becomes a very important situation to recognize.

I think our progress is actually quite good, but it is going to be a much longer period of time before we can actually say how the market has settled out because it is most important that this transition happen appropriately for patient management.

On the consent decree, Steve, we have done a very good job.

We've focused on getting the work done -- the work has done very well.

Above -- through this whole period we have maintained an excellent dialogue with the FDA.

It is really a dialogue that's at the ground level, at the middle level, and at my level.

And there is now a very high level of respect for our company and a high level of respect for what we have accomplished.

It is true that the consent decree period ends in May.

We are working with the FDA on the consent decree being lifted.

There is no assurance about any particular date when this might happen, but the good news is that we are in very good dialogue with them.

And from a viewpoint of modeling, a lot of the costs that were involved with the consent decree have been coming down over the last several quarters, so there is not really a lot to come down based on the consent decree.

The overall quality management systems in the company are working very well and that is one reason why we do have a much better experience with cost of goods quarter after quarter.

I think we're down to the last question.

Jim Kelly, Goldman Sachs.

Just two more questions on TRA, if I may?

First off, back in the analyst meeting that you held in November of 2005, did you conceive at that time that the TRA trials would be of this size in Phase III and also in this timeline?

Or has your enthusiasm or view changed on the product since that time to today?

And secondly, I am just interested in the disparity between size of the loading dose and the maintenance dose and why we see such a large change there, Tom, if you could comment on that at all?

Okay.

Tom?

Sure, Jim.

First of all, as far -- what we presented at the R&D day that you referred to, we were very positive overall about the development of our compound.

So the answer is yes in general terms we were anticipating that if successful in Phase II, which is where we believe we are today.

That we would be embarking upon in general very large outcome trials.

Your second question related to the loading dose and getting a selection of the maintenance dose, and again as I said earlier, on this call, we have pretty good data now with the TRAP assay and we feel very confident that those dose selections of 2.5 for the maintenance as well as 40 for the load is going to get us where we need to go to really assess the overall efficacy and safety of this product.

Jim, I can assure you that given the level of spend, this gets interrogated pretty hard, this whole project.

Even I ask some of these questions because it is important that we do it the right way and get the best for our shareholders money.

Now I would like to make a few closing comments, so thank you, everyone.

Our people are excited to be part of our transformational journey, a journey that will launch into a new phase with our planned combination with OBS.

The good results that you heard about today are simply a scorecard.

The real continuing value will be the improvements in our R&D engine and in our customer touch.

And you heard that we are getting better and better with our customers every year.

Once again we thank our investors for their confidence in this management team.

Thank you.