默克藥廠 (MRK) 2007 Q3 法說會逐字稿

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

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

Thank you, Crystal, and good morning. Welcome to our call this morning to review our results for the the third quarter of 2007. Joining me on the call today are our Chairman, President and CEO, Dick Clark, and for the first time we welcome Peter Kellogg our Executive Vice President and Chief Financial Officer.

Before we go into the details, I would like to go over some logistics. On this call we will review the results contained in the release we issued at 7:30 this morning. You can access this through the Investor Relations section of Merck.com and I would remind that you this conference call is being webcast live and recorded. The replay of the event will be available later today via phone, webcast and as always, our pod cast.

As we begin to review the results, let me remind you that some of the statements made during this call may contain subjects that may contain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and involve risks and uncertainty which may cause results to differ materially from those set forth in the statements. The forward-looking statements may include statements regarding product development, product potential, or financial performance. No forward-looking statement can be guaranteed, and actual results may differ materially from those projected. Merck undertakes no obligation to publicly update any forward-looking 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 on form 10-Q and Form 8-K which the Company incorporates by reference and that are also posted on our web site. As always we will begin with remarks from our senior management then open the call for all of your questions, and expect the call to last approximately 60 minutes.

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

Thank you, Graeme, and good morning, everyone. I am pleased to report that the momentum that Merck began to build last year continues as proven by the strong performance in this last quarter. In an increasingly difficult healthcare environment, our company has been resilient while demonstrating an outstanding capacity to innovate, drive near flawless execution, as shown by our regulatory and commercial success, and post significant revenue growth, show gains in market share, and increase operating income.

The results reported today show that Merck continues to deliver on its promise to remain a leader in the pharmaceutical industry. Year-to-date we have reported solid growth of 8% on the top line and 24% on the bottom line. We're also working to ensure sustained growth in 2007. We remain convinced our plan will enable us to achieve our business targets, meet emerging challenges and discover and develop breakthrough medicines and vaccines.

Merck's reported earnings per share for the quarter were $0.70. Third quarter EPS excluding restructuring charges were $0.75. That represents a 47% increase compared to third quarter 2006. This increase includes the impact of NovaCardia charge in 3Q '07 as well as the legal defense costs in '07 and '06. The Company's worldwide revenue was $6.1 billion during the quarter which is an increase of 12.3% over the third quarter in 2006. Year-to-date our worldwide revenue was $18 billion, up 8.2% compared to the first 9 months of 2006. Net income for the quarter was $1.5 billion.

What distinguishes our performance is it was driven by the rapid up take in strong growth of our new first in class vaccines and medicine like GARDASIL and JANUVIA, as well as sustained growth from our broad range of [estimated] franchises including SINGULAIR. GARDASIL'S performance has been outstanding. In the third quarter total Merck revenue for GARDASIL was $418 million. Year-to-date revenue exceeds $1.1 billion. Merck has distributed more than 13 million doses of the vaccine worldwide since it came to market in June of 2006. To date GARDASIL has been approved in more than 86 countries and is in various stages of launch in 72.

Looking forward, studies to evaluate the efficacy of GARDASIL in women up to the age of 45 and 16 to 26-year-old young men are under way. Based on data available at this time, a presentation of the mid-adult women data are expected this quarter. We also have two supplemental biological license applications for GARDASIL under standard review at the U.S. food and drug administration to update the labeling for GARDASIL.

Local revenue for JANUVIA and JANUMET reached 185 million and $19 million respectively in the third quarter. Our revenues reflect the high value that physicians, patients and payers are placing on our products and on the healthcare benefits they provide. They also demonstrate that we continue to build on momentum established with our product launches last year. JANUVIA has already become the second leading branded oral antidiabetic agent in the U.S. in terms of new prescription share. Going into the fourth quarter, JANUVIA has achieved reimbursement coverage in approximately [211] million lives in tier 2, representing over 80% of targeted life and more than 210 million lives in tier 2 and 3 combined in the U.S. In JANUMET has achieved reimbursement coverage in more than 179 million lives on tier 2 and in more than 200 million lives in tiers 2 and 3 combined in the United States.

Our overall financial results were also supported by the strong performance of our partnership and alliances. Specifically the Merck Schering Plough partnership, which continues to drive our equity income, such positive contributions helped us fund our increase in research spending on the investigational product development, the acquisition of NovaCardia, and various licensing activities. It is encouraging that our business continues to deliver substantial growth. This has been an outstanding quarter for Merck as our new products established their leadership in an increasing competitive market even as older products have gone off patent. We are leveraging learnings from our new products and vaccine launches while utilizing the new commercial model to further support and consolidate the strong positioning of our established in-line brands.

As we look to the final quarter for this year and into 2008, we are purposefully moving ahead with the launch of ISENTRESS after the FDA granted the product accelerated approval on October 12th. This represents the eighth approval for Merck in the last 24 months. This FDA approval clearly demonstrates our ability to deliver on our strategy of providing physicians and patients with innovative medicines that meet unmet medical needs. The introduction of ISENTRESS is a realization of the Company's 20-year commitment to HIV AIDS and we're prepared to ensure that ISENTRESS launches well and reaches its full market potential. We will continue to work closely with all stakeholders to ensure access, and we have the support program available in the U.S. to assist patients in need.

I want you to know the following approvals: within one day we were printing the product circulars. Within two days we began packaging and shipping product to our distribution centers. Within three days we began to process and ship initial customer orders. The first business day after approval our fully trained specialty representatives ran doctors offices [reporting] on ISENTRESS. And as of today the first prescription has been filled.

In view of our strong financial performance in the first nine months of this year, we are raising our EPS guidance range for the full year 2007. We now anticipate a full year EPS range of $3.08 to $3.14 excluding restructuring charges and reported full year EPS range of $2.87 to $2.93. I also want to tell you that PROQUAD, the proposed trademark for MK524A, which is our investigated [FS garosus] compound has been filed with the FDA. This compound combines Merck's extended released niacin with a novel Merck compound that reduces flushing, a common side effected of niacin therapy. Over and above that we've added three compounds to the Phase III pipeline in the third quarter, MK822 for osteoporosis, MK7418 for active CHS, and we licensed MK8669, an oncology compound for Myriad Pharmaceuticals who we signed a licensing agreement last quarter.

In addition to our internal pipeline progress we continue to seek new licensing opportunities and targeted acquisitions in therapeutic areas that is are strategic importance to Merck. Indeed, our external partnerships and alliances have become an integral part of our considerable research efforts towards discovery and development of break through medicines. Meanwhile, our global restructuring initiative is proceeding and on track. Now ongoing initiatives will further reduce our cost structure and create a leaner and more nimble business model so that we can respond quickly and efficiently to customers expectations. We can address emerging marketing demands and so that we can support the [inaudible] discovery and development efforts that are core to our business model.

As we implement fundamental changes to every aspect of our business, we remain confident that our current products and anticipated new product introductions, as well as our cost savings initiatives, will help position the Company to deliver what we promised in December of 2005. That is we continue to believe that we can generate top line growth in a range of 4 to 6% on a compound annualized basis from 2005 to 2010 including 50% of the revenue from the joint ventures from which the Company derives equity income. By sustaining our cost management initiative, Merck expects to fulfill our promise to expand the product portfolio while maintaining marketing and administrative expenses flat in 2010 relative to 2006. In compound annual double-digit earnings growth excluding restructuring charges and one-time items by 2010 from the 2005 base. Although the healthcare market continues to be challenging, we are confident that our customers will continue to find value in our product, that [barcodes] sets us apart from the rest of the industry.

I want to add a note about one of the things that makes me proud to work at Merck. Today marks the 20th anniversary of our commitment to donate MECTIZAN to all of those in need of the treatment of river blindness and prevention of LF for as long as these diseases continue to be public health problems, and today after seeing both the positive health and economic impacts of Mercks Mectizan Donation Program, and those affected by the disease we have renewed our commitment to this initiative. Thanks to the efforts of Merck and our many partners since 1987 we have distributed more than 530 million treatments and 33 countries where these diseases are epidemic. This is but one reflection of our company's philosophy and practice to ensure that the outcome of our discovery and development efforts reach the patients who need them most.

Now I would like to take a moment to introduce you to Peter Kellogg, our new Chief Financial Officer. This is the first earnings call with Merck, and we are pleased to welcome here today. Peter will provide more details on Merck's financial performance and guidance, and we will be happy to answer your questions at the end of the call. With that, I am pleased to turn the call over to Peter.

Thank you, Dick, and good morning. It is a pleasure to be here. As Dick said, we're extremely pleased with our business results. In the third quarter the Company reported double-digit growth in the top line and double-digit growth on the bottom line. The performance has achieved while the Company is actively re-engineering the way Merk operates in several areas. It included the in-process R&D charge for NovaCardia of $325 million or $0.15 per share, and it is in a period when we're lapping a major product expiration last year.

The third quarter reported EPS excluding restructuring costs was driven by several lines in the P&L all with strong results. First, revenue growth of 12% reflects strong performance of our new and in-line vaccine. We continue to up take of JANUVIA and JANUMET, and the continued market leadership and strong performance of SINGULAIR. Secondly, product gross margin continued to improve, and this resulted -- this trend is the result of both operational efficiencies and certainly Q3 favorable mix. Finally, we continue to see outstanding performance in our partnerships and alliances which resulted in strong equity income growth. So while I will go into more detail about the underlying drivers of our performance in a minute, I should note that this exceptional performance has led us to increase our full year 2007 EPS guidance yet again.

So let's begin with top line revenue. Dick mentioned several of the highlights a moment ago so I'll build on that. Let's start with Q3 total revenue which was 6.1 billion, that's a 12% increase over the same period last year and included 9 points of growth in volume, 2 points of benefit coming from foreign exchange, and 1 point from price. A major contributing factor to our top line growth came from our vaccines business. In Q3 vaccine revenue, as recorded by Merck, was over $1.2 billion. That's a 124% increase as compared with the same period in 2006. This was driven by the continued up take of GARDASIL, ROTATEQ and VARIVAX. The three new vaccines accounted for roughly $650 million in Q3.

Let's start with GARDASIL. We're obviously extremely pleased with global sales for GARDASIL, as recorded by Merck, which reflects the continued strong underlying demand for the vaccine in both the public and private sector. Of the $418 million recorded in the quarter, 328 million was in the United States. Sales outside the U.S. continue to show strong growth and increased 27% sequentially, as we continue the successfully navigate the processes surrounding regulatory approval, country recommendations and reimbursement with governments. Merck's year-to-date revenue for GARDASIL is now over $1.1 billion in [fix ed], so it is already a blockbuster after only nine months, and remember, this is a vaccine. When you take the end market sales, as recorded by Merck, and include end market sales recorded by the Sanofi Pasteur MSD joint venture, global sales of GARDASIL increased 28% sequentially in the third quarter.

Now let's turn to VARIVAX. In the third quarter revenue was 284 million, a 218% increase over prior year. This strong quarterly result is a function of two major factors, first as of September 30th all 55 VFC projects had adopted the second dose Verosol recommendation. 52 had adopted a recommendation for all children, including [catch up], while the other 3 projects have adopted for 4 to 6-year-olds. Now the cohort, where we're seeing the most up take in the second dose is in the 4 to 6-year-olds. Secondly, the the use of vaccine business experiences a certain back-to-school surge, that does make Q3 a peak period. Indeed recent demand for VARIVAX has been unprecedented, and when coupled with the ACIP recommendation, we have to acknowledge that there is some seasonality here. Now Merck is further increasing production of VARIVAX and we fully expect to meet anticipated market demand for varicella, measles, mumps and rubella vaccine.

Let's move to the category of other promoted medicines. In Q3 total sales were 1.5 billion. That's an 18% increase compared with the same period in 2006. Of course we having to go straight to JANUVIA. As you know, we launched JANUVIA late last year. It is currently approved in 58 countries worldwide. With this JANUVIA is the only DPP 4 inhibitor available in every region of the world for use in the treatment of Type 2 diabetes when diet and exercise are not enough. In the third full quarter on the market global revenue for JANUVIA reached 185 million of which 171 million is in the U.S.

Turning to alliance revenue, that odyssey contributed to our top line revenues as well and primarily AstraZeneca is the key player there. Q3 revenue recorded by Merck from our relationship with AstraZeneca was 416 million, and that's a slight decrease versus prior year. 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 AstraZeneca, for PPI and non-PPI products as well as their product shipments. So we try to capture and adjust for any fluctuations in inventory.

Moving to the total revenues for medicines and vaccines, as we've stated many times, we have the opportunity to capitalize on our robust product portfolio and deliver compound annual growth rates that are attractive through 2010. Despite certain patent expirations during the time frame we continue to expect revenue growth of 4 to 6% on a compounded annualized basis, driven by our in-line products, our launched products and our new potential products in the pipeline. And of course this includes 50% of the revenues of the joint ventures moving off the 2005 base. Taking the third quarter revenue announced today and adding 50% of the revenues from the Merck Schering Plough, Merial, Sanofi Pasteur MSD and Johnson and Johnson Merck joint ventures and partnerships, our Q3 revenue was $7.3 billion, that's a 15% increase if you do the same adjustment in the base period. Year-to-date the same measure is $21.3 billion, an 11% increase over the same period last year.

And again, this stellar year-to-date top line growth is over a base period that included Zocor prior to the loss of marketing exclusivity. Just to take that a little further, if we were to exclude Zocor, Proscar and the revenue associated with the supply of authorized generics from the first nine months of 2007 and the first nine months of 2006, then for what you might consider the ongoing portion of our business, our year-over-year revenue growth would have been 25%. This again emphasizes the strength of our organic business, fueled by our established brands, and the newer recently launched next generation of products that will take us forward.

Regarding 2007, this third quarter and year-to-date performance has driven us to revise our full year revenue guidance to support our increase full year EPS guidance. This guidance re significance includes five of our product guidance elements. Singulair where we narrowed the full year range by $100 million, that now stands at 4.1 to 4.3 billion. Vaccines where we increased by $300 million the full year range, that now stands at 4.2 to 4.6 billion. Cozaar and Hyzaar where we narrowed the full year range by 100 million, so that's 3.2 to $3.4 billion. FOSAMAX , where we also narrowed the full year range by 100 million, and that stands at 2.9 to 3.1 billion. And Zocor where where we narrowed the full year range by 100 million, as well, and that now stands at 0.7 to 0.9 billion.

We are reaffirming full year guidance for other reported products and AstraZeneca, and as always the AstraZeneca guidance is an update based on recent results as well as future expectations and reflects the dynamics of the PPI market which includes 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 the expectations of the non-PPI products. As always, to assist your modeling, we provide a breakdown of the product revenues in our other financial disclosure schedule attached to the press release issued this morning.

So moving past revenue into the materials and production line, in the third quarter materials and production were $1.5 billion. Now, this quarter includes $129 million for costs associated with the global restructuring program primarily related to accelerated depreciation and assets impairment costs. Excluding these costs materials and production increased 3% in the quarter. Our Q3 product gross margin was 75%, and this reflected a 2.1 percentage point unfavorable impact related to the restructuring costs that I just mentioned. Excluding these restructuring charges we had a third quarter product gross margin of 77.1%, just as in previous periods these results were indeed affected by the final product mix. Our year-to-date adjusted gross margin therefore is 76.4%. Given the strength of this result, we are raising our full year 2007 guidance range and now anticipate our product gross margin to be approximately 76 to 76.5%. This guidance ex excludes a portion of the restructuring costs that will be included in product costs and will affect reported PGM in 2007.

Moving to the marketing and administrative line, in third quarter marketing and admin expense was $2 billion, an 18% decrease versus the same period last year. In the third quarter after reviewing the actual costs incurred and estimates of future costs, the Company determined that it was appropriate to record a charge of $70 million to increase the reserve solely for its future legal defense costs related to the Vioxx litigation, and that takes it up to $720 million as of September 30, 2007. Regarding legal defense reserve charge, the Company accrues legal defense costs expected to be incurred in connection with the loss contingency when such costs are probable and reasonably estimatable.

In the third quarter the Company spent $150 million in the aggregate for legal defense costs worldwide related to the Vioxx litigation. In adjusting the reserve the Company considered the same factors that it considered when it previously established reserves (inaudible) litigation, including the actual costs incurred by the Company, the development of the Company's legal strategy and structure in light of the scope of the Vioxx litigation, the number of cases being brought against the Company, and the costs and outcomes of completed trials and the most current information regarding participated timing, progression and related costs of pretrial and trial activities. Events such as scheduled trials which are expected to incur into 2008 and the inherent inability to predict the ultimate outcome of this trial, limit the Company's ability to reasonably estimate it's legal costs beyond the end of 2008.

Accordingly, the reserve at September 30, 2007, represents the Company's best estimate of legal costs that will be incurred through 2008. While the Company does not anticipate that it will need to increase the reserve every quarter, it will continue to monitor its legal defense costs and review the adequacy of the associated reserves. It may determine to increase its reserves for legal defense costs at any time in the future if based on the factors mentioned above it believes it would be appropriate to do so. To date the Company has not established any reserves for any potential liability relating to the Vioxx litigation itself.

Excluding the charges in 2006 and 2007, M&A increased 6% in the quarter. Regarding underlying level of spend, once again, the primary drivers of the marketing and administration increases were promotional spend for JANUVIA and JANUMET, and continuing efforts to more aggressively support the ZOSTAVAX launch. Where appropriate, these were deliberate choices, made in response to the evolving competitive dynamic that we felt could provide additional advantages as we have the first in class products. As you see from our revised product specific financial revenue guidance, we're increasing our revenue guidance to reflect these incremental investments.

Reflecting our commitment to realize efficiencies throughout the Company and optimizing our cost structure, the component of marketing and administrative consisting of selling and general administrative costs which support our core operations remain down year-to-date over the prior year. So let's turn to guidance for marketing administration. It is pretty clear from fixed comments and what I just reviewed, the commercial team continues to have a very full agenda. We are beginning to launch [ACENTRIS] and continue to build on the momentum on the previous seven launches over the last 24 months. That's quite a handful to juggle.

As we look at trends and opportunities in the rest of 2007, we're increasing our guidance from marketing and admin to 2.5 to 3.5% growth over prior year. Now a good part of this change is driven by the Euro which has significantly increased during 2007. It now stands about $1.40 to $1 as compared to the mid-$1.20 at the beginning of the year. Now, of course we see this as a benefit on our top line revenues adding roughly 2 points to the overall Merck revenue growth year to date and in Q3. But this will also add roughly 2.5 points to the full year marketing and admin growth.

Secondly, we are maintaining a healthy amount of support behind the success of our growing core and new franchises. In Q4 we anticipate DTC efforts for Singulair and JANUVIA as well as increased commercial support for GARDASIL, ROTATEQ and ZOSTAVAX. We will also be supporting our ongoing launch agenda at Merck, MK524 A and ISENTRESS for the U.S. and continued supported for the international rollouts of JANUVIA and GARDASIL. Finally, we are comfortable with the focus and management of this investment. It is being very well spent and managed. It is important to note that in Q4 we anticipate a reduction in marketing and admin spending versus the prior year.

Now let's turn to research and development. In Q3 our R&D expenses were $1.4 billion. That's a 52% increase from the comparable period in 2006 and of course it included the NovaCardia in process R&D charge. Excluding NovaCardia, R&D was up 18% versus 2006.

I want to take an extra minute to explain this result in our R&D guidance for the remainder of the year. At Merck, we remain committed to fully funding core internal R&D to ensure the continued progress of compounds in all phases of development. Internal R&D growth remained strong. We continue to invest in late stage clinical programs on ISENTRESS, MK524 A, MK524 B, MK364, MK822, MK974. You get the point. In addition, all of our vaccine development in progress. So in addition, the Company continues an active external collaboration in business development agenda, funding clinical grant programs, third party scientific collaborations and important licensing transactions. So overall our R&D spend is focused on progressing our pipeline and adding to it on the outside as well.

So, regarding the full year we're raising our 2007 guidance for research and development expense to adequately resource incremental external R&D opportunities, and now anticipate R&D spend to increase 13 to 15 percentage points over the full year 2006 level. Our R&D guidance includes the impact of acquired research charge associated with NovaCardia, and I would refer you to our press release to see how we define the base period on a similar basis, although I believe all of you have it captured correctly in your models and reports.

In the third quarter turning to restructuring, our total costs associated with global restructuring programs was $178 million. As I mentioned before, $129 million was for asset related charges there included in materials and production. The restructuring cost line itself reflects $49 million of costs from employee separation and other related costs associated with approximately 250 positions eliminated, and that is now a total of 6,000 to date. So we remain on track to eliminate 7,000 positions by the end of 2008. Restructuring guidance for the full year 2007 would indicate that our aggregate 2007 pre-tax expense related to these activity is estimated to be approximately $700 million.

Now let's turn to the equity income line. In the third quarter equity income from affiliates was $769 million. Just remind everyone this line relates to the contribution from all of our JVs, AstraZeneca, Merck Schering-Plough, Merial, Sanofi Pasteur, Johnson and Johnson. Our Q3 performance reflects the continued success of the Merck Schering-Plough cholesterol franchise in the U.S. and Europe. The seasonality of the Merial animal health business and an increasing contribution from our European vaccine JV, Sanofi Pasteur.

Regarding the Merck Schering-Plough partnership, the third quarter combined MSD cholesterol franchise global revenue as reported by the Merck Schering-Plough partnership continue to grow at $1.3 billion. Q3 revenues of VYTORIN and ZETIA were $693 million and $607 million respectively. In the U.S., VYTORIN was $526 million, up 22% and ZETIA was $443 million, up 14%. Within Merck's quarterly equity income results, the Merck Schering-Plough partnership contributed $481 million, and that reflects a 37% increase over the prior year.

Turning to AstraZeneca, as always, I remind you that there are several components to AstraZeneca equity income that make it inappropriate to draw significant conclusions just based on PPI products. There are complexities that involve, at a minimum, timing and past circumstances. That said, the third quarter equity income contribution from Merck's share of the partnership with AstraZeneca was $181 million. The balance of equity income comes from our other joint ventures namely Merial, Sanofi Pasteur and Johnson and Johnson Merck. Given this result we are narrowing our guidance for full year 2007 by $100 million and now expect equity income from affiliates to be approximately 2.8 to $3 billion.

So, let's move to our tax line. First our Q3 income before taxes was 2.1 billion, so our taxes on income in the period were $539 million, and the reported tax rate was 26.1%. This reflects in general the changes in foreign and domestic mix and currency fluctuations. These elements changed throughout the quarters as always. We are reaffirming our full year 2007 tax rate guidance range, and I would direct you to today's press release for details. So moving to net income, our Q3 net income was $1.5 billion. In our Q3 earnings per share was $0.75 excluding a $0.05 charge for site closures and position eliminations primarily associated with the global restructuring. Our reported third quarter EPS was $0.70.

Let's turn to 2007 guidance. I have mentioned several changes as part of the results with you already, and I would direct to you the details of our financial guidance contained in today's press release. We are raising, or changing, many elements of our full year 2007 guidance, and as a result Merck is raising the full year 2007 EPS range to $3.08 to $3.14 excluding restructuring charges related to site closures and position eliminations. In other words, we anticipate that EPS ex-restructuring, will grow in the range of 36 to 48% in the the fourth quarter of this year versus prior year. On a reported basis we now anticipate GAAP full year 2007 EPS of $2.87 to $2.93. As stated, this guidance does not reflect the establishment of any additional reserves for any potential liability regarding the Vioxx litigation.

We are committed to providing quality full year guidance and updating it during the year. We believe that there is value in providing quality financial guidance because it assists investors, and we do recognize that our business is complex, and we serve our investors as well by communicating our financial performance expectations.

So, in summary, the Company remains on track, both in terms of strategy and performance, to deliver long-term double-digit earnings per share growth from 2005 to 2010 excluding one-time items in restructuring charges. We have the financial strengths to support our dividend, and we remain fully committed to maintaining our dividend at the current level. At the same time we continue to fully invest in our key strategic priorities. With our year-to-date performance and our guidance full year is clear that our products are driving a healthy top line despite lapping the Zocor [expiree]. We anticipate continued strong performance from our key franchises in the remainder of this year. So if you take this all together, Merck is clearly very busy with it's successful product launches worldwide, and behind the scenes we continue to re-engineer the Company into a lean and effective competitor for the future. It was a good quarter.

With that said, I will turn the call back to

Thank you, Peter. We certainly appreciate your patience during the prepared remarks. We will now open the call to take your questions. We will take the questions in the order in which they were received and try to get through as many as possible. Please help us to keep on track by asking a one or two-part question only. So at this point, I'll turn the call back over to Crystal, who will communicate instructions on our q&a format then introduce our first question.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Tony Butler with Lehman Brothers.

Thanks very much. Back to the gross margin, Peter, if possible. The rise in -- to 76 to 76.5% from 75 to 76 is curious, and you mentioned the principle driver from, if I am not correct please help me, is mix. However, if I am not mistaken, the greatest delta from the beginning of this year until today has been the growth in the vaccines component of revenue. Do I just have the wrong impression that vaccines might be a lower margin component yet the increase in overall GM is critical? If you could help us with some understanding of the incongruence of that notion? Thanks.

Sure, Tony, let me just make some general comments. First of all, your observation is correct, in that vaccine has been doing very well, but obviously the other product lines we have as well are very big. When you take, kind of, the weighted average of all those you have factors moving both ways. In fact, as we went from the second quarter to third quarter and as we projected out to the full year, you do see some mix effect that helped us in Q3. What I would recommend is that we narrow the range on -- we update it and narrow the range for product gross margin and excluding the restructuring charges, so I would go with that. But, in fact, you're right. There are different mix effects, some of which based on like, like, for example, vaccines would cause it to go one-way but some of the other products over weigh that for the time being. But, in general, obviously, as we narrow the range we actually also increase the range excluding restructuring. Obviously the general conclusion is the trend of positive, despite some of the vaccine business activity.

The other point is around supply strategy as well, so as our strategy is put in place and as we do the right combination of outsourcing and put the Merck production system which is a Six Sigma lean process inflation you're seeing improvements, and as I mentioned many times, it is not only on the pharmaceutical side of the business, the biological and vaccines, which is obviously very critical to us in showing a volume increase, to be able to prove them -- and our ability to improve those PGMs will be substantial for us moving forward.

Next question, please.

Your next question comes from the line of Barbara Ryan with Deutsche Bank.

Good morning. Thanks for taking my question. I wonder if you could just speak to some of the trends for JANUVIA in the U.S. relative to the reported results in the scripts? Because obviously the scripts are up about 50% in the third quarter versus the second although those revenues reported in the U.S. are relatively flat, so I am assuming that there was some stocking in the second quarter and some maybe destocking in the third, but maybe if you could just help us understand the sequential line just for the purposes of understanding better the fourth quarter? Thank you.

Thank you, Barbara. You're absolutely right. Even though we mentioned the (inaudible) rise are increasing for JANUVIA and JANUVIA also ranked second in (inaudible) Rx volume, there is some stocking impact in the second quarter, particularly for JANUMET, since initial purchases followed the launch of the product in April of 2007. And as you also know, it is approved in 58 countries, but we're just beginning our process outside of the U.S., so we're very optimistic and very strong with the future of JANUVIA, not only for this year but obviously in the future years, and it is off to a great start with a great franchise team in the U.S. and a global franchise team that's pulling it out across the globe. Thank you.

Next question, please.

Your next question comes from the line of David Risinger with Merrill Lynch.

Yes, I am now French. I have two questions. First, on GARDASIL, could you please comment on government purchases in the third quarter relative to the second quarter? If you could provide any detail, that would be helpful. And also, if you could talk about compliance with the three doses and what you've seen to date? And in addition, if you could just discuss the ZOSTAVAX opportunity going forward? It seems to me that that's a substantial opportunity, yet the trajectory to date has not been that significant, and as part of your answer if you could discuss any changes in reimbursement for 2008?

Starting with ZOSTAVAX, as you know we have said that we are back in production again for the various components of ZOSTAVAX, and so as that continues to move forward from a production standpoint that we'll put this in a refrigerated ZOSTAVAX versus the frozen ZOSTAVAX which you need globally. ZOSTAVAX in my opinion is a key vaccine for our future. You'll see growth. We are working with our customers and with physicians and with CMS to try to come up with a process in place that makes it less onerous from a reimbursement standpoint for the physician, as well as for the client and patient to overcome that, and we haven't been able to come up with the right process yet but I think we're making progress on it. I am very happy with where we're moving forward as long as we can solve that and particularly with the volume that we're moving forward.

Obviously in the third quarter with everything that we get done from a vaccine standpoint with GARDASIL and the up take, particularly with the initial dose, one of the key is to make sure that the young women get in for the second and third dose, and so we have put in place substantial reminder programs that allow them to improve the ability to remember to go back to the second and third dose, so we're doing it by mail. We're doing it by e-mail. We're doing it by text messages, and a variety of different technologies to be able to make sure as they come, particularly college students as they come back for breaks they get their second and third dose ,and so that compliance capability is extremely important to us.

And, Dave, just on your initial question with regard to revenue, domestic revenue for GARDASIL in the quarter, we're still seeing that contribution coming from both the public and private. There was no market increase in the orders being placed by the public sector through VFC and CDC, so we're seeing this leveling off in terms of underlying demand in the market in the 3Q revenue reflect that.

Thank you.

Next question, please.

Your next question comes from the line of Tim Anderson with Sanford Bernstein.

Thank you. A couple questions. On GARDASIL in the U.S. specifically, can you give us a rough idea for what percent of the time the product is being used in a population different from what what's technically indicated in the label? The second question is just looking at FOSAMAX sales in the quarter in international markets, can you update us on what's happening or what's likely to happen with generic FOSAMAX in Europe following the previous restatement of patent protection there? I am just wondering what to expect in terms of future brand performance, as long as it technically remains on patent?

I will take that if you don't mind. With regard to GARDASIL in the U.S., in terms of percentage use outside the approved range, so, again, it's 9 through 26 at this point. We are seeing very, very limited use beyond that initial indication, primarily because physicians are focused in, obviously, on the data that we have in hand, and as we've communicated to all, including the physician community who are administering, though we will not have the efficacy data pertaining to the mid-adult women in house until the fourth quarter. So, as Dick mentioned in his prepared remarks, the expectation is that we'll have that data and begin to move that forward for labeling expansion.

With regard to the age range that is currently indicated, we've begun to see a little more use in the 12 through 18-year-old range. Initially, when we launched the product we were seeing even distribution from 9 through 26-year-olds, but clearly with the concentrated effort that Dick's just articulated pertaining to going after college students and the appropriate age range, you would expect to see the origination, all the immunization occurring in the 12 through 18-year-olds, and that is also a phenomena which is taking place ex-U.S. as well. With regard to your FOSAMAX question, internationally, obviously you're aware of the reinstatement by the European patent office. Where we are with regard to that is, clearly we're in a process of identifying where there is currently illegal weekly alendronate on the market and taking appropriate legal steps to determine what actions we can take to remove that off the market. The other complexity comes of course in the fact that toward the end of this year and early part of next year there will be legal alendronate sodium available in the EU for the daily dosing. So we have a two-part challenge really. That is to, A, remove from the market the illegal weekly and keep it off while simultaneously, B, renegotiating with countries in terms of ensuring that we can continue to have weekly branded in Europe through the period immediately following patent expiring all the way through 2018. Next question, please.

From the line of Chris Schott with Banc of America.

Great. Thank you. Just two quick questions. The first on the gross margin side, you had strong increase year-over-year. Can you talk about, aside from mix, the benefits of your restructuring program. How far are we through that program at this point? And is there another way of looking at it is, are current numbers reflecting much of that benefit or should we expect additional opportunities over the next couple years? And then just quickly in your CT inhibitor, has a decision been made in moving into Phase III? I know the Phase IIB [antraceprative] data showed some strong LDL reductions. I guess, basically discussions with the FDA do you believe LDL could be part of a filing pathway there? Thanks.

Regarding your second question, we had not made a decision yet to go into Phase III, so we're still evaluating not only our compound but the mechanism in general and waiting for additional external information before we make the decision.

Concerning where PGM is moving in the future and our supply strategy, as we said, position eliminations around 6,000 of the over 7,000 that we committed to back in December of 2005, but when it comes to where we are from a lean and a Six Sigma process and our outsourcing capabilities and our ability to increase the PGMs within the vaccine areas by using many of these methodologies, I would say we're probably around 50% of where I want to be, so within the next two years, we'll be continuing to make progress in effectiveness and efficiency within the supply chain. And also something that we're very excited about when it comes to PGM, we also naturally gravitate towards a supply strategy and production, but many parts of PGM are also based on marketing concepts and packaging and what customers and physicians need in distribution, and so there is many parts of it that are integrated that you need to think about, and I think Merck has this one Merck approach of how we think about PGMs now across all the functions in the Company. So, I am very bullish of where I think our PGMs will be moving based on the statement we made in December, 2005 and our ability to achieve pre-Zocor numbers in the near future.

Next question, please.

Your next question comes from the line of Burt Hazlett with BMO Capital Markets.

Thanks, good morning, thanks for taking the questions. First on SINGULAIR, can you comment on international trends you're seeing there, again, up take in foreign sales has been significant. Can you just comment on currency effects, price volume and maybe what's driving that? And then, secondly, with regard to RotaTeq, again, it's proved in 69 countries, we have a significant pickup in the U.S. What's holding back the international sales? Is it a question of the bulk of them being driven through Sanofi Pasteur, or is it a question of pricing or reimbursement or just a little color there? Thank you.

With the RotaTeq question, is there's obviously a reimbursement activity that we need to be able to put in place throughout the world. The supply is available, and we're now rolling it out across in many other countries, but it just takes time. As you know, vaccines are different than pharmaceutical products and getting physicians approved and reimbursed to a certain degree, and Merck also has a responsibility that as we think through this in the development world is also thinking about access in the development world, and to make sure that we put programs in place to have it available there. From a SINGULAIR standpoint, I can't give you the specifics towards your question other than say that we're pleasantly surprised about not only SINGULAIR in the United States with it's labeling, and where it is positioned from the informative standpoint, but it is an outstanding product and still is receiving up take throughout the world and much of it is based on volume.

Yes. In Europe, Middle East and Africa as we see it, SINGULAIR was up healthy in the quarter, we seldom break down revenue by geographical region, but I can tell you that in the region it was up over 20%, about 22%, the majority of which was volume, so the volume growth is primarily a function of label expansion at montelukast sodium and the label carries on the indication for allergic rhinitis, and it's one of the -- in fact it is the only product on the market with that indication, so that's what's fueling that strong European drug.

Thank you.

Next question, please.

Your next question comes from the line of John Boris with Bear Stearns.

Just have two questions. Thanks for taking the questions. Congratulations on the quarter. First question for you, Dick, on JANUVIA and JANUMET, they appear to be case studies on how to decrease cycle times. Is there any additional room for taking additional days, months, years out of the cycle time with respect to products and are there any you would like to key us in on as to what you might be applying to those products going forward that are entering or have entered the clinic? And then on GARDASIL, of the 328 million reported in the quarter, can you comment on any stocking at the physician level, how many doses is the physician stocking? And can you comment on the total number of patients in the U.S. that have been treated to date? And with your three key strategy here what percent of them have been treated once, twice, or three times? Thanks.

The first question concerning cycle time with JANUVIA and JANUMET, I believe as you look at the progress we made from a cycle time reduction, not only in a clinical base of these products but in the manufacturing supply side have been significant, and we believe that there is more opportunity there, so we have actually made a commitment. And what's important about it is, and the processes were put in place across the Company, is not only to do it, obviously, with JANUVIA and JANUMET, but do it for the entire portfolio. If you can do that for the portfolio, you can imagine the impact it is going to have on a Company wide basis. And so we put substantial resources and focus on our clinical development as well as other aspects of the Company to be able to continue that. And I think you'll see much more progress in the next several years and continued cycle time reduction. And as you know, once you're able to reach a steady state, continuous improvement methodologies tell you there is always room for further improvement. So I am never going to declare victory when it comes to cycle time reduction either in research or the manufacturing side.

There is minimum stocking on GARDASIL from our physician level standpoint. I can't tell you specifics around where we are with our three key areas or going for the second dose and the third dose or with that minimum is. It is still too early for us to be able to provide data on that.

And part of the reason why we can't do that, John, is I would remind you that we're going after approximately 118 million girls and women in the U.S., EU and other highly developed markets that are within the appropriate age range for GARDASIL indication. Even if you pad out back and look in the United States alone, there are 36 million females who are eligible to receive this vaccine, and the intent here is to ensure that all of them, obviously receive all three doses from a compliance perspective. And as you heard from the prepared remarks, since June of 2006 when the product was approved, we have shipped and sold 13 million doses so there is certainly a long way to go and we continue to gather the intelligence. But one data point that I will talk to you is, if you go on gardasil.com, which we constantly update, you can see and read, as do the individuals who are getting GARDASIL, the new banner there which is 3FT, and 3 is key, is the compliance message that we're basically communicating to the physician community, the pediatricians, and the OBGYNs. Hopefully that helps. Next question, please.

(OPERATOR INSTRUCTIONS) Your next question is from Seamus Fernandez with Leerink Swann.

Thank you. A couple of quick questions, I just stepped out of the room for a second, I apologize. I wanted to know if you could update us on timing of the ProQuad relaunch and manufacturing, and just give us a manufacturing update on that front? And then secondly, SINGULAIR after the end of this year will be the last allergic rhinitis drug or branded allergic rhinitis drug on the market, to our knowledge, and as the Zyrtec comes off patent, are there potential formulary risks for Merck here in 2008? Whether it be on prior authorization or on formulary changes? And how would that impact your growth rate? Thanks.

Your question on ProQuad, and I mentioned it in an earlier question, that we are now back in production with the various other components of ProQuad, and started up and are waiting for results. We're very optimistic about the results of that. It is really difficult to commit to a specific date at once we the -- until we see the [tighters] and the potency performance for that moving forward. But I am optimistic that we have a solution and manufacturing is back in action again. That's very positive. From a SINGULAIR standpoint, when you think about the clinical indications we have and the success we've had with SINGULAIR to date, reminds me a little bit of the SANDOSTATIN situation, so when a product like that goes off the patent, there's still obviously a focus on that from a generic standpoint, but when you have such an excellent label and indications for SINGULAIR, to be able to have them remain on the second tier of formulers, I think SINGULAIR will do very, very positive.

Next question, please, I am conscious of the time, and I believe we have three more questions in the queue. We'll take that and cut it off. Next question, please, Crystal.

Your next question is from the line of Steve Scala with Cowen and Company.

Thank you. I was just wondering do you believe your top and bottom line guidance through 2010 is achievable if you exercise your put to AstraZeneca for the non-PPI products in Q1 of '08 or will your guidance need to be altered when that put -- when you take the non-PPI products? The concern is that if you do put in Q1 of '08 can't AstraZeneca call the PPIs in Q1 of 2010 and aren't they a nontrivial component of your earnings?

David, we put the December 2005 targets in place. It was ex any impact on the AstraZeneca activity.

Next question, please.

Your next question comes from the line of Roopesh Patel with UBS.

Thank you. Just a couple of questions. First on RotaTeq, I was wondering if you just elaborate on the outlook for the product? Sales seemed very strong for this quarter. Is this the run rate we should be looking at moving forward? And then just separately on Vioxx litigation charges, I was just wondering if the year-to-date spending is a rough representative of the general run rate we should be again looking at moving forward? If not, what are the factors that influence that? Thanks.

If you want, I will take the question on the Vioxx litigation, and I will highlight that what we try to do is sort out exactly what we know is coming, and so to talk about a run rate beyond 2008 is very difficult for us to do. Obviously, it is involving situation with a number of trials and outcomes from that. So it would be hard for us to speculate exactly what the run rate may or may not be because really it is all specific to the circumstances that we're looking at and exactly what the trial count is, what the pretrial legal activity is, and that's obviously evolving as we go. I would caution you to kind of jump too quickly through a run rate assumption one-way or the other, but I think we're pretty pleased with how things have been going so far.

Your question of RotaTeq, there has been more than 9 million doses of RotaTeq that have been distributed, and it is estimated about of [62%] of the (inaudible) [cohort] is now being vaccinated. There is up tick based on the cohort that we have today, and it is available through the Vaccine For Children's Fund in all 50 states, and it is on the percent covered under managed care. We're very enthusiastic about the future of the product. Concerning a global bases, it is approved in 69 countries, and we have only launched in 30 countries around the world to date. So we're still very strong on what the performance is when moving forward, but at the same time as you know we will have competition in the near term with RotaTeq.

Crystal?

Yes, sir.

Last question for the day and by no means least, I think we have Jami Rubin on the line.

Yes, sir, that's correct, with Morgan Stanley.

Thank you, Graeme, I am so flattered. I had a couple of follow-on questions on GARDASIL. Peter had talked about with VARIVAX over the back-to-school effect, I was wondering if there was a back-to-school effect with GARDASIL? And while, Graeme, I can appreciate why it is very difficult to pinpoint precisely where this vaccine is being used and what penetration rates are, within the VFC market, where I would imagine data is much stronger since they are ordering directly from you, can you tell us what is the penetration of the 11 to 12-year-old cohorts? Or my understanding is the goal is over 80%? And then lastly, on international sales were 90 million. Can you tell us what markets that represents and how much of that is stocking? Thanks.

Jami, let me take a shot at the first one which is the back-to-school dynamic. Obviously we're dealing with a population that is, does have a lot of school activity, and some of them young women are heading off to college, so there is always that chance, however, we don't really feel that it is clear there is a strong back-to-school effect just yet. We haven't really concluded on that as much as there is perhaps some on the VARIVAX zone. But nonetheless it is certainly clear that we are working with young women who are in the school-age area and may well be visiting physician before they go back to the Universities and so forth. That's a possibility. Related to the cohort question, actually let me just hold off on that one.

Jami, with regard to your cohort question, we're still seeing a very encouraging up take within the VSC programs, so the age range they're addressing particularly, right, the younger females, that's still very, very healthy. Certainly moving along as we would expect.

With regard to your question on international revenue, you're absolutely correct. We recorded -- we, Merck and Pro Inc., recorded 91 million ex-U.S., and I would point out that notwithstanding the statistics pertaining to the approvals and the launches, when you look at the revenue contribution there are basically six countries that are contributing to the 480 million, so one of those countries hit the U.S. at 308, the remaining 5 countries include the likes of Australia and Canada, and that's just starting to continue to launch, so your question on stocking isn't really a driver for the ex-U.S. business, it is just basically countries coming online because you can appreciate we move from approval into launch phase, and as we move into launch phase, it progresses through the revenue recognition. I would point out, though, on the other financial disclosures that Sanofi Pasteur MSD recorded revenue for GARDASIL, so end market as recorded by SPMSD was $137 million in the quarter, and again they cover the 19 countries on territory, but again that 137 million only reflects 3 or 4 countries that are contributing in a meaningful way that revenue number.

Thank you, Graeme, and thanks for listening to our all call today. As we've stated, we're very pleased with the third quarter results, and we are certainly looking forward to updating you on further -- on our future progress at our annual business briefing that will be held in Whitehouse Station on December 11th. We'll be in touch to give you details on this meeting very soon. Thank you again. We appreciate your interest and participation. Operator, thank you very much.

Thank you, sir. This does conclude today's conference call. You may now disconnect.