默克藥廠 (MRK) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to Merck's first quarter 2007 earnings conference call. Today's call is being recorded.

At this time, I would like to turn the call over to Mr. Graeme Bell, Executive Director of Investor Relations. Please go ahead, sir.

Thank you, Taylor, and good morning. Welcome to our call this morning to review our business results for the first quarter of 2007. We know it's been a busy morning for you already and you may have already participated in two calls. Joining me on this call today is our CEO and President, Dick Clark, and Ms. Judy Lewent, our Executive Vice President and Financial Officer.

Before we get into the details I would like to go through the logistics. On this call, we will review the results contained in the release we issued at 7:30 this morning. You can access this by the Investor section of merck.com. And I would remind you that this conference call is being webcast live and recorded for replay later via phone, webcast and our podcast.

As we begin our review of the results, let me remind you that some of the statements made during this call may disclose 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 risk and uncertainty and 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 or financial performance and no forward-looking statement can be guaranteed and actual results may differ materially from those projected. Merck undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise. Forward-looking statements on this call should be evaluated together with the many uncertainties that affect Merck's business, particularly those mentioned in the risk factors and cautionary statements set forth in item 1A of Merck's Form 10-K for the year ending December 31, 2006, and in its periodic report of Form 10-Q and Form 8-K which the Company incorporates by reference and then are posted on our website.

We will begin with some brief remarks from senior management then open the call for questions and expect the call to take approximately an hour and conclude around about 10 A.M.

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

Thank you, Graeme. And good morning, everyone. As we announced last week our first quarter earnings for 2007 were $0.84 per share, excluding restructuring charges related to site closures and position eliminations. Our reported EPS for the first quarter were $0.78. Certain one-time gains from asset sales and product divestitures accounted for increased revenue in that quarter. We exceeded our own expectations for the first quarter as a result of strong market performance across all product lines and, as a result, raised our full year EPS range to $2.75 to $2.85, excluding restructuring charges, and our full year reported EPS range to $2.60 to $2.75. We anticipate second quarter EPS of $0.67 to $0.71, excluding restructuring charges, and reported EPS of $0.62 to $0.68 for the same quarter. Judy will speak to this in more details in a few minutes.

Our newly launched products, combined with our inline product portfolio, led us to realize strong gains across all markets. Worldwide sales reached $5.8 billion for the first quarter, an increase of 7% from the same period last year.

Let me summarize some of the product performance highlights. SINGULAIR continues to be the number one prescribed product in the U.S. respiratory market, with year-over-year sales growth of 25%, reaching $1 billion this quarter.

Both ZETIA and VYTORIN, which we market in partnership with Schering-Plough, also performed very well this past quarter. They posted a combined $1.2 billion in sales, a 47% increase from the first quarter of 2006.

GARDASIL, the first and only cervical cancer vaccine approved, is being quickly accepted by patients, physicians and payers. First quarter sales were $365 million and included initial purchases by many states through the Vaccine for Children program.

JANUVIA, our first in class treatment for type 2 diabetes, also experienced impressive sales of $87 million in the first quarter. And now that it has been joined by the approval earlier this month of JANUMET, we expect that Merck's ability to meet the needs of the growing population of people with type 2 diabetes will continue to grow as well.

With each of these products, we are continuing to look for new opportunities to strengthen their value to patients and to Merck. The recent FDA approval of SINGULAIR by patients age 15 years and older who suffer from exercise-induced bronchoconstriction is expected to further increase the strength of this product in the marketplace. It is estimated that exercise can trigger an episode of EIB in 80 to 90% of people with asthma.

We announced an agreement last month with Schering-Plough to begin development of a new medicine that would combine ZETIA with atorvastatin, once market exclusivity for atorvastatin expires. We are very pleased we have submitted a supplemental biological license applications to the FDA on GARDASIL's cross protection data. It shows that GARDASIL provides some protection against additional HPV types that cause more than 10% of cervical cancer worldwide. And the FDA accepted two supplemental new drug applications to expand the U.S. label for JANUVIA. These actions reflect our commitment to maximizing the value of all of our inline products, from the day they are launched until the day their patent expires.

While we are taking advantage of opportunities like these to drive our future growth, we remain focused on controlling expenses. Our performance in the first quarter is, we believe, further evidence the path we have chartered to return Merck to a leadership position in our industry is the right one. We still have a long road to travel to realize our long term goals, but we are executing on our plan with confidence.

And while we were disappointed by the recommendation last week of the FDA Advisory Committee regarding ARCOXIA and by the decision we reached with Lundbeck to discontinue our joint development program for gaboxadol, our overall pipeline continues to advance and grow. By building on the strong foundation we established in 2006, we remain confident that we will continue to progress towards the goal we set at delivering double-digit compound annual EPS growth, excluding one-time items and restructuring charges, by 2010 from the 2005 base.

Before I turn the call over to Judy Lewent for what will be her last sales and earnings call at Merck, I want to take just a minute to express to her and to all of you my deep appreciation for the enormous contribution she has made during her course of her career here at Merck. For 27 years, Judy has been an indispensable part of Merck's leadership team. Her vision, her expertise and her integrity has made her one of the most respected and credible people in the field of American business. I will miss her as a colleague and Merck will miss her as a leader. And certainly, when I took over as CEO of the Company in May of 2005, it was Judy's support and partnership that really helped us put a strategic planning process together for the Company and her leadership really developed the strategic planning initiatives and activity that you see that we're executing against. So as a company and as shareholders, there is a tremendous amount that we owe to Judy.

So, Judy, for one more time, I'm pleased to turn the call over to you. Thank you.

Thank you, Dick. And maybe on this very special occasion -- and thank you for the kind words -- everyone listening in on the phone will just pass all the difficult questions over to Dick and I will enjoy my last call. So thank you and good morning, everyone.

As Dick said, we are extremely pleased with our reported results for the first quarter of 2007. And we are working toward ensuring sustained growth in 2007. The first quarter reported EPS growth was driven by top line revenue that reflects strong performance of our inline franchises as well as the rapid early uptake of our first in class DPP-4 inhibitor, JANUVIA, and the continued strong growth of GARDASIL. Another notable contributor was the outstanding performance of our partnerships and alliances, resulting in improved equity income, along with the benefit from gains from certain product and asset divestitures.

Dick mentioned several of the highlights of the quarter results a moment ago. So to build off that in the first quarter we saw revenue of $5.8 billion. That represents a 7% increase over the same period last year, including in the aggregate, an overall 0.5% decrease from price offset by 6% growth in volume and a 1.5% positive impact of foreign exchange. Collectively, worldwide revenue was above our initial expectations and we saw encouraging sales performance from our newer and inline franchises.

Within the quarter, we saw the anticipated decline of ZOCOR and PROSCAR in the U.S., as well as a decline in FOSAMAX in several international markets where there is access to other alendronate sodium products. However, these declines were more than offset by the positive performance of SINGULAIR that showed strong global growth as it continues to experience robust demand driven by continued strength in the asthma and allergic rhinitis markets, as well as our other inline products and the early success of our newly launched products, JANUVIA and GARDASIL.

A major contributing factor to our topline growth came from our vaccine business. Collectively, vaccine revenue, as recorded by Merck, was $903 million for the first quarter, representing a 233% increase when compared with the same period in 2006. Driven by the continued uptake of GARDASIL, ROTATEQ and ZOSTAVAX, in the first quarter our three new vaccines collectively accounted for close to $0.5 billion of revenue. And to assist in your modeling, we provide a break down of the product revenues with our other financial disclosures.

As Dick mentioned, we are extremely pleased that global sales as recorded by Merck for GARDASIL continue to grow and reached $365 million, of which $312 million was recorded in the United States. This quarterly figure includes initial purchases by many states through the CDC's Vaccines for Children program. Total sales of Merck's other promoted medicines were collectively $1.4 billion for the first quarter, representing a 13% increase as compared with the same period in 2006.

As you know, in fourth quarter we launched JANUVIA. It is currently approved in 42 countries and now available in every region around the world as the only DPP-4 inhibitor available for use in the treatment of type 2 diabetes when diet and exercise are not enough. In its first full quarter, global revenue of JANUVIA reached $87 million, of which $83 million was in the U.S.

Also contributing to our top line are revenues from our alliances, primarily AstraZeneca LP. In the first quarter, revenue recorded by Merck from the Company's relationship with AZLP was $534 million [sic -- see Press Release]. As always, keep in mind that there is inherent variability relating to this revenue, given that Merck is not actively managing these products. Our revenue recognition takes into account inventory levels at AZLP for PPI and non-PPI products, as well as their product shipments.

Taking the first quarter revenue announced today and adding 50% of the revenues from the Merck/ Schering-Plough, Merial, Sanofi Pasteur MSD and Johnson&Johnson Merck joint ventures and partnerships revenue was $6.8 billion. If you do the same adjustment in the base period, the revenue growth rate was 10%.

Regarding 2007, given the first quarter performance, we are revising upwards full year revenue guidance for three of our product guidance elements by $900 million to support the higher full year EPS guidance that we initially provided on April 12. Regarding SINGULAIR, we are increasing the full year range by $200 million to 3.9 to $4.2 billion. Regarding vaccines, we are increasing the full year range by $500 million to 3.3 to $3.7 billion. And regarding other reported products, we are increasing the full year range by $200 million to 5.4 to $5.8 billion.

And we were reaffirming guidance for COZAAR, HYZAAR, FOSAMAX, ZOCOR and AstraZeneca. Again, as always, the AZLP guidance is an update based on recent results as well as future expectations and reflects the dynamics of the PPI markets, multiple generics, OTC products and the uncertainty these create with regard to future volume and pricing. Also keep in mind that our reaffirmed guidance incorporates expectations of the non-PPI products, such as ATACAND, PLENDIL, LEXXEL and ENTOCORT.

Moving down the P&L. Materials and production came in at $1.5 billion for the quarter. The quarter includes $118 million for costs associated with the global restructuring program, primarily related to accelerated depreciation and asset impairment costs. Excluding these costs, materials and production increased 24% for the quarter.

The gross margin in this quarter was 73.6%, reflecting a 2 percentage point unfavorable impact relating to the restructuring cost. Excluding restructuring charges, the first quarter PGM of 75.6% was within our disclosed guidance range and, just as in previous periods, the end results were affected by the final product mix. Given this result, we are comfortable with our full year 2007 guidance range and we are reaffirming that our product gross margin is estimated to be approximately 74 to 76%. This guidance excludes the portion of the restructuring costs that will be included in product cost and will affect reported PGM in 2007.

On marketing and administrative, first quarter expense came in at $1.8 billion, which is an increase of 5% over the same period last year. Once again, the primary driver of the marketing and administrative increase was promotional spend for GARDASIL and continuing efforts to more aggressively support the JANUVIA/JANUMET launch. Again, these were choices made in response to the evolving competitive dynamics to fully support our first in class products. These incremental investments are reflected in the strong revenue performance reported this quarter as well as in the higher full year product guidance provided this morning.

Reflecting our commitment to realizing efficiencies throughout the Company and optimizing our cost structure, the component of M&A consisting of selling, administrative and general administrative costs, which support our core operations, was down year-over-year. Even as we launch additional new products as anticipated this year and continue building on the momentum of our successful 2006 launches, we expect that our cost containment efforts and initiatives will allow us to meet our guidance on M&A spending in 2007 and our commitment to maintain flat M&A expenses in 2010 relative to the 2006 base, excluding charges taken to increase the legal defense reserves.

Regarding guidance, we're continuing to provide it on the change in marketing and administrative expense relative to the base period excluding one-time items to help your modeling. And we are reaffirming our full year 2007 guidance. That is, we anticipate marketing and administrative expense to increase between zero and 2 percentage points over the full year 2006 level. The 2006 marketing and administrative expense level referred to excludes the charges taken during 2006 related solely to future legal defense costs of VIOXX and FOSAMAX litigation.

During the first quarter, the Company did not increase the reserve relating solely for future legal defense costs of VIOXX litigation and the Company has not established any reserves for any potential liability relating to the VIOXX lawsuits and the VIOXX investigations. We continue to believe that every case contains a unique set of facts and the appropriate strategy is to defend these matters on a case-by-case basis.

Regarding research and development, expenses were $1 billion for the quarter, an increase from the comparable period 2006 of 9%. R&D growth in the first quarter was driven by an increase in both basic and clinical R&D spend. Basic research spend increased as a result of the integration and underlying operating expenses of the Sirna, GlycoFi and Abmaxis acquisitions. In addition, clinical research expenses were higher in support of Phase III trial for MK-524A, MK-364, ISENTRESS, and other late stage products.

During first quarter of '06, Merck entered into several agreements reflecting our strategy -- and let me correct that -- during the first quarter of '07, Merck entered into several agreements reflecting our strategy of establishing strong external alliances to drive both near and long-term growth. And currently Merck is in discussions with more than 35 companies regarding potential transactions and is also actively monitoring the landscape for a range of targeted acquisitions that meet the Company's strategic needs.

We are reaffirming our 2007 guidance for research and development expense, and anticipate it to increase at a low to mid single digit percentage growth rate over the full year 2006 level. The 2006 level we are referring to includes the $296 million acquired research charge relating to GlycoFi that occurred in the second quarter, but excludes the impact of the acquired research charge relating to the Sirna acquisition. The full year 2006 level also excludes the portion of restructuring costs that are reported in research and development expense.

Moving on to restructuring, total costs associated with the Company's global restructuring program were $186 million for the first quarter. As I just mentioned, $118 million of those were for asset-related charges and are included in materials and production. So in our first quarter results, the restructuring cost line reflects $65.8 million of costs related to the global restructuring program for employee separation and other related costs associated with approximately 230 positions eliminated, bringing the total to 5,100 today, and then remaining -- keeping us on track to eliminate 7,000 positions by the end of 2008. However, the Company does continue to hire new employees as the Company's business requires it.

Accordingly, we are reaffirming the guidance associated with our global restructuring program for 2007. Additional costs related to site closings, position eliminations and related costs will be incurred in 2007 as part of the Company's restructuring of its operations. The aggregate 2007 pre-tax expense related to these activities is estimated to be $300 million to $500 million.

In reviewing equity income from affiliates, $653 million of income in this quarter related to the contributions from all of our joint ventures. This result reflects the continued success of the Merck/Schering-Plough cholesterol franchise in the U.S. and Europe and performance of the Merial animal health business.

As always, I would remind you that there are several components to AZLP equity income which make it inappropriate to draw significant conclusions just based on PPI products. There are complexities that involve, at a minimum, timing and tax differences. That said, the first quarter equity income contribution from Merck's share of the partnership with AstraZenca LP was $212 million.

Regarding the Merck/Schering-Plough partnership, the first quarter combined MSP cholesterol franchise global revenue as reported by the Merck/Schering-Plough partnership continued to grow to $1.2 billion. In the quarter, revenues of VYTORIN and ZETIA were 624 and $544 million, respectively. Within Merck's quarterly income results, the Merck/Schering-Plough partnership contributed $347 million, and that reflects an 85% increase over the prior year.

The balance of equity income comes from other joint ventures, namely Merial, Sanofi Pasteur MSD, and Johnson&Johnson/Merck. Again, Merck's 50% of the revenues from the Merck/ Schering-Plough, Merial, Sanofi Pasteur MSD and Johnson&Johnson and Merck joint ventures and partnerships totaled $1.1 billion in the first quarter, up from $800 million in 2006. Given this result, we are reaffirming our guidance for full year 2007 and continue to expect equity income from affiliates to be approximately 2.6 to $2.9 billion.

Turning to other income in the quarter, you see we recorded $256 million of income as disclosed in our other financial disclosures. In there there is a gain you will see of $188 million. This primarily reflects the favorable impact of gains on sales of assets and product divestitures. During the quarter, it was disclosed that the Company divested the U.S. prescription pharmaceutical rights to PEPCID oral suspension and DIURIL oral suspension to Salix Pharmaceuticals Ltd. and divested the worldwide rights to ALDOMET tablets and INDOCIN capsules, sustained relief capsules, suppositories and oral suspension to Iroco Pharmaceuticals LP.

Now for the quarter, income before taxes was $2.3 billion. Taxes on income in the period were $550 million and the reported tax rate was 24.4%. This reflects in general the changes in foreign and domestic mix and currency fluctuations, and as you know, these elements changed throughout the quarter. Effective January 1, 2007, the Company adopted FIN-48, accounting for uncertainty in income taxes. This adoption resulted in increase in retained earnings of approximately $80 million. Of course, this did not affect net income. We are reaffirming our full year 2007 tax rate guidance range and I would direct you to today's press release for the details.

Moving to net income and earnings per share. Net income for the first quarter of 2007 was $1.7 billion compared to $1.5 billion in the first quarter of 2006, and that represents growth of 12%. During the quarter, we spent $240 million in treasury stock and we now have $6.3 billion under the current authorization from the Board with no time limit.

And in summary, earnings per share for the first quarter were $0.84 when one excludes a $0.06 charge for site closures and positions eliminations primarily associated with the global restructuring. Our reported first quarter EPS was $0.78.

Now let me turn briefly to our guidance. I have mentioned it several times as part of the results review. But as you will see in today's release, with the exception of our upward revision to SINGULAIR, vaccines and other reported products, we are reaffirming all the elements of our 2007 guidance and all the details of the guidance are provided for you in the earnings release. Given these guidance elements, Merck anticipates second quarter EPS of $0.67 to $0.71, excluding restructuring charges, and anticipates reported second quarter EPS of $0.62 to $0.68.

In the second quarter, the Company anticipates that revenue will be comparable to the amount reported in the first quarter of 2007. In addition, it's worthy of note that research and development expense, excluding restructuring charges, is anticipated to be higher than the amount reported in the comparable period of 2006. The Company reaffirms full year 2007 EPS of $2.75 to $2.85, excluding the restructuring charges related to site closures and position eliminations, and anticipates reported full year 2007 EPS of $2.60 to $2.75.

While we are pleased with our performance in the first quarter, it is important to note that we are still only three months into the year and we need to continue to execute on our business plan. Based on our current full year guidance, we anticipate that earnings per share, excluding restructuring, will grow in the range of 10 to 16% in the last three quarters of the year versus the last three quarters of 2006, excluding Sirna and restructuring. There are many factors that impact the variability within the given year that need to be considered when modeling. For example, in the first half of 2007, we are still facing the annualization of the loss of marketing exclusivity for simvastatin and finasteride. In addition, while we are very pleased with the initial successes of the recent launches, you all know there is inherent variability of a continued uptake of new product launches.

As part of the full year guidance, we anticipate that promotional spend will moderate. That is decline, particularly as we think about the pattern last year and the fourth quarter 2006 levels, and decline across divisions as products move out of early launch phase and commercialization efficiencies are realized. We also expect efficiencies to be delivered from new initiatives and provide savings within our general administration cost structure. As stated, this guidance does not reflect the establishment of any reserves for any potential liability related to the VIOXX litigation.

In addition, as Dick noted, the Company remains on track in terms of both strategy and performance to deliver long-term double-digit compound annual earnings per share growth from 2005 to 2010, excluding one-time items and restructuring charges. I also want to continue 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 fund our investment priorities.

With that, I will turn the call back over to Graeme.

Thank you, Judy. We will now open the call to take your questions. As usual, we will take the questions in the order in which they were received and try to get through as many as possible. At this point, I will turn the call back over to Taylor, who will communicate instructions about Q&A format and then introduce the first question.

Thank you. [OPERATOR INSTRUCTIONS] Your first question comes from Chris Shibutani of JPMorgan.

Thanks very much. Could you provide us with an update on GARDASIL? Obviously, good uptake from the states. What percentage of the states do you expect that we've already seen that? And the timeline for additional states? Also, what are you seeing in terms of the actual compliance with the second and third dose at any given patient or practice?

And then finally, could you provide us with an update on your cardiovascular pipeline 524B, anything to know incrementally there? And also, some competitors have commented on their commitment to -- [inaudible - dropped audio]

Thank you, Chris. Just to -- there was an audio problem. Just so I understand your questions, you had two with regard with GARDASIL, and one with regard to compliance in terms of second and third dose, another one with regard to the build of the revenue in terms of how much has been consumed. And then there was a question with regard to the pipeline -- the cardiovascular profile.

So let me start with the last question first, in terms of the cardiovascular pipeline. As we have indicated, we -- and we remain committed to our 524 program in the form of 524A and 524B, and we remain on track with both of those products. As we've previously disclosed and indicated, there is an expectation that we'll file 524A in the calendar year 2007, and we will file 524B in the calendar year 2008.

With regard to GARDASIL --

It's too early yet to talk about uptick for the second and third dose for GARDASIL. However, we have worked with payors and physicians to put reminders in place and be able to trigger, from a compliance standpoint, that we had more success and we'll be able to monitor that. Just another comment around the VFC contract. To date, 53 of the 55 projects have adopted GARDASIL. Each of the 50 states is a project in five cities, and so we are happy with that. From an uptick on the state stand-point, it's going to take the time it takes to get through the committee -- the vaccine committees in each state and then the uptick in discussion and debate within the legislature. It's hard for the time frame on all of that.

Next question, please.

Your next question comes from Tony Butler of Lehman Brothers.

Thank you, very much. First, Judy, thank you very much and certainly all the best. Second, if we can expand upon the GARDASIL commentary. When we think about the fraction of states, you mentioned that, Dick, but does this just simply imply that we have a fair inventory build on GARDASIL currently that we have to work through based upon the state legislation -- legislators throughout the remaining part of the year? That's really the first question.

The second question is, Graeme, if I'm not mistaken, was 524A to be filed in Q2 of this year? Was that the previous guidance? And moreover, could you comment about the integrase inhibitor 0518 again -- the timing on that project? Thanks a lot.

Thank you, Tony. I will take this -- the last part of the question first. So we have always said and remain committed to 524A being filed in the calendar year 2007. We have not been specific on the exact timing.

With regards to the ISENTRESS question, on that particular NDA, we have indicated we will file the NDA with the FDA in the second quarter of 2007.

I think regarding GARDASIL, we obviously know that the initial purchases by many states has in it the fact that now the pipeline is full, that we have to get it to the children. But there is also a vaccine and there are also for second and potentially third dose. We feel comfortable with where the future pipeline is. But there are, obviously, some initial stocking.

I think the other good news is that the managed care plans, representing about 97% of privately insured lives in the U.S. -- more than 140 insurance plans have implemented coverage for GARDASIL. And even better news I think, approximately 75% of the plan members have first dollar coverage for GARDASIL, which essentially means no co-pay. And I think when you put those combinations together with the fact there is 118 million girls and women in the U.S. and the E.U. and in other highly developed markets who are the appropriate age, we feel very comfortable with the future forecasts.

Thank you. Next question, please.

Your next question comes from Timothy Anderson of Prudential Equity Group.

Thank you. I have a couple of questions. Can you talk about the Company's inclination to do corporate acquisitions that are bigger in size than what you have been doing over the past few years?

And second question is, kind of a another general question, which is that revenues for Merck and I think almost all of the drug companies thus far have come in well above forecast in the first quarter. And I'm wondering if there is any seasonality to this purchasing now that Part D is in full effect. My question is whether these strong trends, you think, will they continue unabated throughout the rest of 2007? Or is there a new structural dynamic that could reverse these trends later on? And the reason I ask is because of your big beat this quarter, but not really raising full year earnings as much as would otherwise be suggested.

I think -- answering your first question, the issue around corporate acquisitions; we have said in the past we are interested, not only in science and technology acquisitions, which obviously we did in 2006, but acquisitions that would help both the top line from a revenue standpoint, and at the same time, hopefully are aligned with our therapeutic areas that our research organizations focused on.

Having said that, when we look at those potential acquisitions, we also have a responsibility from a shareholders standpoint to make sure that there is long-term value there. And that, as we go through that process and as other companies are going through that process, that it's appropriate that the value is there for the long term. So we were focused on that, but we aren't going to do an acquisition just to do an acquisition. It really has to strengthen where we are today in the future. Quite frankly, where we are with our pipeline and where we are with some of our results have to be taken into the equation because the internal growth -- the organic growth of the Company right now is pretty positive.

I think, just relative to some of the questions on the top line, just a couple of thoughts. First of all, for Merck, I will speak to Merck, what you are seeing here is really just successful uptake of our new product launches. That's fundamental, that's not a structural change per se in the marketplace. That's the result of the performance that we just discussed with you about the vaccines -- the stellar performance of the vaccines -- the new vaccines, as well as JANUVIA. And then the excellent performance of SINGULAIR which, as you know, has -- doesn't really have that kind of seasonality to it except perhaps as we go into the allergic rhinitis season, which really doesn't start in earnest until late in the first quarter. That is something that unfolds during the year.

And in terms of the guidance, we increased our guidance $900 million and that is for the full year. So we are driving that increase in our earnings per share guidance based on taking up the revenue element. But as we noted, we were continuing to fund R&D and we're going to stay in line with all of our guidance on our expense elements. We think the combination of that, those factors, lead you to the range that we guided to today and that starting on April 12.

One other point is that -- one of the things that I'm pleased about is that when you see the results of the first quarter and the growth, as Judy said earlier, it really is across all regions of the Company. It's not just in the United States. Every region has performed. And why we feel confident in that -- in many of the new products, even though we've launched GARDASIL and JANUVIA, obviously in the United States and other countries, there is still a substantial amount of countries where it's even approved that we have to get ready for launch and then in some countries, have approval and a launch. We are still in a very launch growth pattern, from a Company standpoint, with our new products, globally.

Thank you. Next question, Taylor, please.

Your next question comes from Jami Rubin of Morgan Stanley.

Thank you. And again, Judy, you've had a remarkable career and you've got huge shoes to fill. Congratulations. Just a couple questions. First, related to the gross margin, the guidance this year is -- you have kept the guidance at 74 to 76%, yet this quarter, your gross margins excluding restructuring were 75.6% in what would arguably be your toughest comparison with U.S. ZOCOR sales up the strongest first quarter last year, and I would also think that GARDASIL margins are probably at its lowest, as you continue to launch that product. So 75.6% seems to be a good start for the year, yet you are sticking to your 74 to 76%. So maybe speak to that a bit.

Secondly, my question relates to FOSAMAX and the new reissued EU patent. Just wondering how we should think about our modeling of international or European FOSAMAX sales 2008 and beyond, as I think most of us assumed patent expirations.

My third question relates to the integrase inhibitor. If you could talk about the profile -- what you are planning to include in your initial filing, if you are planning to include front line results? And where you are with your once-a-day version? And just if you could also comment on what you see in terms of the competitive dynamics of [Guilliatt]? Thanks.

So thank you, Jami. Let me start with the question on gross margin. Basically, you do need to think about the evolution of sales over the year. So where as yet GARDASIL had a major impact in the first quarter, we increased our guidance for the total vaccines for the year to $500 million. As you know, GARDASIL carries with it a royalty obligation of 24 to 26%. So we continue to factor in in our annual guidance sort of the dynamics of the product mix.

In addition, bear in mind that COZAAR continues to be a strong contributor, and as you know because of our relationship with DuPont, has a lower product gross margin than some of our other inline products. I think, again, we are factoring in our view of how the year evolved and some of the uncertainty in the dynamics of the product mix that continue to give us comfort with the 74 to 76% ex restructuring.

Jami, regarding FOSAMAX, as you stated, we had done the follow -- our lawsuit and the new patent is effective immediately in 23 countries in Europe, and the patent expires in July 17, 2018 now. And obviously for this reason, the filing of the suits against these manufacturers is in an effort; A, to recoup our financial losses caused by these infringement activities, and then to have these products removed from the market. It's hard to say the impact of this and what is going to be in the future. The outcome of Merck's legal actions may not be realized for several years. Obviously, we are studying it hard but it's very difficult to have an answer to that.

And Jami, I will take your question with regard to ISENTRESS. As previously stated; we remain on track and are committed to ensuring the NDA is filed with the FDA in the second quarter for treatment experience indication for which we have received a fast track designation. We therefore anticipate action on 518 by the end of 2007. If approved, we plan to launch ISENTRESS in 2007. In addition, there is a Phase III program underway in treatments [naive] patients.

With regard to the clinical data -- in the profile, on February 27 of this past year, at the Croix meeting, we presented interim Phase III 16 week data for two of the ongoing studies for ISENTRESS in treatment experienced patients whose HIV was resistant to at least one drug in each of the three classes of oral anti-retroviral therapies. And the investigational drug ISENTRESS was generally well tolerated in all of the studies and we'll be happy to share that Croix data with you.

With regard to what is happening in the program, on August 17 of last year, we announced the establishment of a worldwide expanded access program for ISENTRESS for HIV and AIDS patients with limited or no treatment options. And that program is enrolled and we are seeing that patients are using the product.

Next question, please.

Your next question comes from David Risinger of Merrill Lynch.

Yes, thanks very much. I have three questions. First -- and I apologize if these have been asked before because I have been on and off the call. First questions is in terms of other net, the number in your press release was $187.7 million in the first quarter of '07 versus $47 million in the first quarter of '06. If you could explain that and tell us what type of anomalies were in there? And whether we should expect that figure to decline sequentially in the second quarter of '07?

Then second, in terms of revenue, the revenue came in impressively at $3 -- I'm sorry, at $5.8 billion in the quarter. Looking forward over to the next three quarters, is there any reason why that revenue figure should go down?

And then -- final question is, in terms of ex U.S. FOSAMAX, I understand that it's generic in the U.K., but that the generic penetration is very low. However, generics have launched in other countries. And if you could walk through where the patent had been broken in other countries. If it hadn't been broken, yet there have been generic incursions in other countries, if you could help us explain why Merck wasn't able to stop the generic launches in other countries where the patents hadn't been invalidated? Thank you.

Let me start with the question on other net income. As I noted earlier, that $188 million reflects certain one-time items from asset and product divestitures, such as our sale of PEPCID oral suspension as well as [ALTOMET], some of the [inaudible] products. As you can appreciate, those are one-time events and therefore, they are not going to recur in the second quarter. We, as you know, don't forecast when those other opportunities might occur. We always reassess our product line. And a lot of these particular transactions are linked to our network strategy, in terms of how we are leaning on our supply chain. So we continue to evaluate our product line in that regard. But I can't really forecast what, if anything, might happen other than what happened in the first quarter of '07. Therefore, you need to take that as a one time event.

Last year, in the first quarter, there was really nothing of note there. There were the normal pushes and pulls of some other income and other one-time adjustments but nothing really worth calling out. I think that provides some of the perspective there.

I think in the question also around the guidance for the remainder of the year where we are in the first quarter, in -- and Judy and I spend a lot of time talking about this. Although we're pleased with the first quarter, obviously, we also know that we are only three months into the year and we need to execute against the business and do it flawlessly to continue that growth pattern. As Judy said, the base of our current full year guidance, we anticipate that EPS ex restructuring will grow in the range of 10 to 16% in the last three quarters this year versus the last nine months of the base period, which is very important. And with that said, there could be a lot of variabilities around the business profiles for the year as we launch our new products -- continue to launch our new products. And we still have the issue with first half of '07 with the loss of the simvastatin exclusivity patent.

So there is still a lot to do and there is obviously variability in the continued uptick in new product launches and potential competition. And we also want to make sure with the quality of our full year guidance and we maintain our credibility. As we see changes, we will obviously react to them. I think that 10 to 16% growth range for the last nine months compared to -- for the next nine months compared to last year is significant for us.

Dave, with regard to your question on FOSAMAX, I would point you back to our 10-K filing, in that we state the following and, it hasn't been updated since then; It basically indicates that Merck's basic patent covering the use of alendronate sodium has been challenged in several European countries. And the Company has reviewed adverse decisions in Germany, Holland and the United Kingdom. The decision in the U.K. was upheld on appeal and you know the situation there. We have appealed the decision in Germany and Holland, and yet Company expects a significant decline in European sales of FOSAMAX after the loss of exclusivity period. The countries where there is current generic penetration predominantly are in Germany and Holland and, obviously, the United Kingdom. So refer you back to that section in the 10-K.

Next question, please.

Your next question comes from Bert Hazlett of BMO Capital Market.

Thanks, I have a couple of product questions. First on ROTATEQ, do you expect any impact as a result of the [inaudible] discussions earlier this year?

CANCIDAS saw some pressure in the U.S. Should we expect that to continue?

And last on ZOLINZA, again, a modest rollout initially, but there seems to be a considerable amount of interest in this product. Can you discuss the timing and roll-out of the data? What should we expect and what additional indications are being sought? Thanks.

Let me start on CANCIDAS. As you may recall, there was a price reduction last year of over 20% on one of the major dosage strengths there. And that really had the impact on the product profile. So that really was the sole dynamic we need to take into consideration as we look at how CANCIDAS is progressing.

And with regard to your question on ZOLINZA, our novel [H-dat], which we acquired through the acquisition of Aton. October the 6th marked the approval for the treatment of cutaneous t-cell lymphoma and that initial indication, as you can see, has begun to roll out by virtue of the fact that we recorded revenue this quarter. And ZOLINZA is Merck's first trial at cancer therapy for quite sometime. With regard to incremental studies, we have studies ongoing in hematological melanomas, solid tumor types including acute [melognoma], leukemia, multi-[mellalinias]. I believe we've go ongoing studies in non small cell lung cancers. And in addition, ZOLINZA is being evaluated broadly across a wide range of solid tumor types. We have an extensive program underway and we're certainly committed to the [H-dat] program and oncology, generally.

Thank you. Next question, please.

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

Thank you. Just two quick questions. First on MK-859, your CTP, following the recent torcetrapib data, anything you took away from that? Specifically, have you made a decision of whether to move forward to Phase III? If so, are you expecting that to run imaging studies before the larger morbidity/mortality study?

And the second question on ARCOXIA, following the recent panel review, what's your next step here, assuming the FDA requests additional data? Is this a product you would run further studies if they were required to get onto the U.S. market?

I think the question on 859 is -- it's still under evaluation by us based on the limited information that was provided and what we are looking at internally. And it's interesting to note that, in addition the product development criteria that we had for 859 that we established previously, increase in HDL greater than 50% and reduction of LDL of greater than 20% and the important effect on blood pressure that was similar to placebo, that 859 really hit those end points. And so it's important that we take that good information that we have and relate it to the issues that may exist or may not exist for the class. It's early for us to be able to talk about that yet.

Certainly, when you talk about ARCOXIA, we are disappointed in the outcome. We continue to believe that ARCOXIA has the potential to become a valuable treatment option for many Americans suffering from osteoarthritis. And the anticipated date for the action by the FDA is April 27 for the six month time frame. And we will continue to work with the FDA on that. Obviously, we are continuing to market ARCOXIA outside the U.S. where it has been approved for a broad range of indications and where they have seen this data that we have submitted to the FDA. It's too early to tell for the next steps.

Tim, we will continue on. We still have many questions in the queue. We have an inquisitive group this morning so let's keep on going. Next question, please.

Your next question comes from George Grofik of Citigroup.

Thanks for taking my question. On GARDASIL, can you comment on what kind off-label uptake you may have had in the mid adult female population?

And secondly, if you can give us an update on the timing and venue of the presentation of enhanced study results for VYTORIN? Thank you.

With regard to enhanced, as we have indicated the analysis that's still ongoing, we are going into that information and we will pick an appropriate scientific forum in order to disseminate the enhanced data when we are ready to do that. With regard to GARDASIL --

I think we can't comment on that. I just don't even know that information.

I think what we have seen anecdotally is that within the age range that is approved, we have seen broad uptake across all of that age cohort, whether it's nine all the way through 26 at this stage. But again, we don't have any off label specifics.

Next question, please.

Your next question comes from Steve Scala of Cowen.

Thank you. I have two questions. First, on the Q4 call, Judy, you mentioned that GARDASIL sales were demand pull and not inclusive of stocking in clinics and so forth. I assume this is still the case. But perhaps you can confirm?

Secondly, when will we get visibility on whether Merck will exercise its 2008 option on AZLP? Or should we assume that Merck will not exercise that option? Thank you.

While I don't have my transcript in front of me, Steve, I do have a recollection that the fourth quarter of '06 was note worthy, in terms of getting approval for the VFC contracts. There was uptake in the fourth quarter for the VFC contract. That's really consistent with my comments in the first quarter of '07.

As far as the 2008 options, as you know, it's too early to call that. We do not have to really declare anything on that until -- really into the first quarter of 2008. I will say that as part of the transition, I'm working both internally and with our partner at Astra just to ensure that there is a smooth handoff there so that we are all aligned on the process and we understand what needs to be done in the months ahead.

Next question, please.

Your next question comes from John LeCroy of Natexis.

Thanks for taking my call. Did you guys see any affect from the so-called 'doughnut hole' in the Medicare plan, in that did people buy into January trying to avoid hitting that doughnut hole in December towards the end of last year? Thanks.

That data really isn't available to us. That's really hard to make a prediction based on that.

Next question, please.

Your next question comes from Seamus Fernandez of Leerink Swann.

Thank you. Can you hear me?

Yes.

Okay, great. I wanted to get an update on the timing of the first VIOXX appeal, when we might see that?

Second, can you verify for us that the trials that have started with 524B are with the single pill combination?

Third, can you also update us on the potency efforts regarding the Varicella-based vaccines and where you are in that process?

And then finally in terms of this suit that you have filed versus Teva and Bar, which is a manufacturing suit on FOSAMAX in the U.S., is there a possibility that this suit could allow generic exclusivity? If so, is there some form of an agreement that you have for an authorized generic that we could possibly see with FOSAMAX in the U.S.? Thank you.

I'll take them in reverse order. With regard to the FOSAMAX situation, we are a party by name only in that ongoing discussion, by virtue of some intellectual property that was licensed. So we are not integrally involved in that ongoing discussion and dialogue.

And then jumping to you first question, if I may, Seamus, with regard to the appeals process. In terms of where we are on that -- as you know, the first case which was Ernst in Texas, the appeal brief in that case was filed on April the 5th. So at this point we are still in the very formative stages of that appeals process. Today, that's the most advanced of the appeals. Again, we are appealing and in the process of appealing Ernst, [Garzer], [Corn McDabby], Plunkett, Barnett and [Humistan]. And we will progress and continue to provide you updates. Even the most advanced of those is Ernst and appeals briefs were only filed on April 5.

Your question concerning Varicella potency; we were making excellent progress on the issue. We certainly have narrowed it down to three variables. And we are looking at these variables and validating the variables and then taking it into full production to see the impact. The progress is being made. We are in validation stage now to see whether the probable cause is where we think it is. And we should know that very shortly.

Next question, please.

Your next question comes from David Maris of Balyasny Asset Management.

Good morning. A follow-up on ZOLINZA. The -- is this the most extensive oncology program that you have ongoing? There is going to be any data at the upcoming ASCO? And if so, and what data should we expect?

Thank you. I will take that quickly. The answer is yes, it's the most advanced program that we have in terms of the H-dat program within oncology at this time. And it's extensive in nature with many ongoing studies. And as you know, oncology is certainly a focus of area. With regard to when and where, we have not disclosed at this point in what forum we will be disseminating the next round of ZOLINZA data.

With regard to the prior participant's question, I want to be very clear; with regard to 524B, at this moment in time, that trial is being run co-administering 524A with simvastatin. At this moment in time, none of the participants are ingesting the triple combo.

Next question, please.

Your next question comes from Joe Tooley of AG Edwards.

Good morning. I want to follow-up on the earlier pipeline questions with one on the CB-1 antagonist MK-0364. It's my understanding you may be looking at lower doses than were originally studied for the drug. And given FDA's long-term follow-up requirement for obesity compounds, I was wondering if you could confirm your 2008 filing guidance? Or if the potentially lower dosage range could result in any filing delays? Thanks.

I think it's something we can't comment with right now, from a statement on what is going to happen in 2008 with that product. It's an important study for us. We initiated a focus Phase III program in fourth quarter '06 and we still anticipate filing this drug in 2008. But we're not ready nor do we know a lot of the details around the particulars around the Phase III outcomes.

Next question, please, Taylor.

Your next question comes from Roopesh Patel of UBS.

Thank you. Just a couple of questions. First on GARDASIL. In terms of the first quarter GARDASIL sales, can you give us a rough sense as to what proportion the sales were first dose versus second or third dose on GARDASIL?

And then separately, if I look at the total vaccine sales reported this quarter, approximately $900 million, you've raised the guidance for total vaccines for the full year to between $3.3 to $3.7. That implies that sales in subsequent quarters relative to the first quarter will be a flat to down, looking forward. And I was wondering if you would just offer a little bit more clarity as to what are the dynamics that could influence the trend in that direction? Thanks.

Certainly, for your first question -- it is early for us to be able to give statistics around the uptake of the second and obviously, the third dose. And that data really isn't available other than with some dialogues with the physicians. So that will have to wait until we get much more experience and much more uptake. As I said earlier, we have programs in place to help, from a reminder standpoint, both from the physician and the patient. But it is a good question. It's too early to answer it.

Thank you. Given the time, we have one or two more questions. So Taylor -- please.

Thank you. Your next question comes from John Boris of Bear Stearns.

Good morning and thanks for taking my questions. I have three. First one, just as -- more related to cost of goods. Dick, can you just talk about vaccine yields? And I think this year's pretty important year for improving vaccine yields. The type of progress you are making there?

And secondly, it seems like there were a fair amount of asset sales going forward. I guess why all of a sudden are we seeing more asset sales? And should we be anticipating more asset sales of these smaller products going forward?

Secondly, I think this question relates more on the acquisition side. I think earlier in the year you did mention that you were interested in a biotech acquisition that was aligned, from a research therapeutic stand-point, with your R&D operations, but would have inline revenues that are actually approved and sold and marketed and have a P&L. Can you comment on, for that type of acquisition, what Merck's defined internal of rate of return would be for that type of acquisition?

Then third on ISENTRESS, I think you wanted to file it in the second quarter and I think this is one of your important projects for compressing cycle times. Can you comment as to whether the product has been filed already and you are just waiting for the FDA to indicate that they've accepted the filing? So any type of insight there would be helpful. Thank you.

On your last question, we cannot comment on filing and the timing of it, other than what we have been already stated publicly. So that is our information, we are very comfortable with it. Your question about cost to goods in biologics and vaccines; the good news is we were making progress there and I think our manufacturing organization is doing a great job of looking at the cost to goods line and trying to focus all of the efficiency and effectiveness that we need to be able to accomplish that. And obviously, when you see the increase in the forecast for vaccines and biologicals, a part of that is productivity and throughput to be able to support that. So it is a major initiative for us, not only for this year but for the five year plan that we have. And we are making progress in manufacturing to be able to accomplish that. I feel good about that.

I would say on the asset sales, that was just -- there is no integrated focus on selling assets of those types. It was just an opportunity -- it was the right thing for the Company and the other companies were interested in it. So it was a one time impact. Obviously from an asset standpoint, as we look at the manufacturing strategy, moving forward, there are going to be assets that are available based on potential plant closings. And when you do that, you really step back and look at those assets and see what kind of value they might bring to other partners that we have that would be of help. But nothing worth -- specifically.

So with that last question, it concludes today's call. The information on today's call, both the transcript and replay, will be available on our website for the next seven days. And as always, we in IR remain available for the rest of the day. We certainly appreciate your interest and participation. So with that, Operator, thank you very much.

Thank you. This concludes today's first quarter 2007 earnings conference call. You may now disconnect.