默克藥廠 (MRK) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to Merck's first quarter 2009 earnings conference call.

Today's call is being recorded.

At this time I'd like to turn the call over to Ms.

Eva Boratto, Vice President of Investor Relations.

Please go ahead.

Thank you, Amanda, and good morning.

Welcome to our call to review our business performance for the first quarter of 2009.

Joining me on the call today are -- as always, are our Chairman, President and CEO, Dick Clark; Ken Frazier, our Executive Vice President and President of Global Human Health; Peter Kellogg, our Executive Vice President and Chief Financial Officer.

And we recognize there continues to be a high level of interest in the merger we announced on March 9th, so also here on the call today to participate in the Q&A portion are Bruce Kuhlik, our Executive Vice President and general counsel; and Dr.

Peter Kim, Executive Vice President and President, Merck Research Labs, who many of you met with during our road show.

Before we get into the details I'd like to go over some logistics.

On this call we will review the results contained in the release we issued at 7:00 this morning.

You can access this through the investor relations section on merck.com, and I would remind you that this conference call is being webcast live and recorded.

The replay of this event will be available later today via phone, webcast and podcast.

As we begin our review let me remind you that some of the statements made during this call may discuss certain subjects that may contain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.

Such statements may include, but are not limited to, statements about the benefits of the proposed merger between Merck and Schering-Plough, including future financial and operating results; the combined companies plans, objectives, expectations, and intentions; and other statements that are not historical fact.

Statements about the merger are based upon the current beliefs and expectations of Merck and Schering-Plough's management and are subject to significant risks and uncertainties.

Actual results may differ from those set forth in forward-looking statements.

In connection with the proposed transaction, Schering-Plough will file a registration statement, including a joint proxy statement of Merck and Schering-Plough, with the SEC.

Investors are urged to read this registration statement and joint proxy statement because they will contain important information.

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

Forward-looking statements in this press release should be evaluated together with the many uncertainties that affect Merck's business, particularly those mentioned in the risk factors and cautionary statements in item 1A of Merck's Form 10-K for the year ended December 31, 2008, and in any risk factors or cautionary statements contained in the Company's periodic reports on Form 10-Q or current reports on Form 8-K, which the Company incorporates by reference.

We will begin the call with brief remarks from our senior management and then open the call for your questions and expect to complete the call in approximately hour.

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

Clark.

Thank you, Eva, and good morning, everyone.

This morning I want to comment on our first quarter, give you an update on planning for our proposed merger with Schering-Plough, and talk briefly about our ongoing efforts to strengthen our existing operations and businesses and transform our Company into a leading global healthcare company.

Our first quarter results in part reflect the impact of the difficult global economy on patients, providers and payors, but we remain on track to meet our full-year's earnings guidance.

We saw continued strong growth during the first quarter in our newest medicines, Januvia Janumet and Isentress.

The first quarter also reflects residual effects of the loss of marketing exclusivity for Fosamax in 2008, softness in the performance from Cingular and Gardasil, as well as constraints in our vaccine supply.

In terms of top line, for first quarter we recorded worldwide revenue of $5.4 billion.

Our first quarter non-GAAP earnings per share was $0.74, which excludes certain items, and GAAP EPS was $0.67.

As we said back in January, we expected the first quarter to be our most challenging in 2009.

Looking ahead, we continue to believe our performance in the second half of the year will be stronger.

It is still early, but we are seeing some encouraging signs in the weekly US market share data for Cingular, and for Zetia and Vytorin, where trends appear to stabilizing.

In a few moments Ken will review our sales performance for the quarter and then Peter Kellogg will provide additional details of the underlying financial results.

He also will comment on on our 2009 guidance.

Following these comments, we will be available to answer your questions.

Last December, I promised you at our Company's annual business briefing that 2009 would be a time of fundamental transformation at Merck, a time that establishes the Company as a different competitor for the next decade and beyond.

Even before we announced our pending combination with Schering-Plough last month our goal was to emerge from transformation as a new Merck for the pharmaceutical industry in the future, one that would stand out among our peer companies by delivering sustainable growth from a portfolio of innovative products, products distinguished by the value they provide to patients and payors.

Our planned merger with Schering-Plough will accelerate the transformation.

That's because it's a unique opportunity for us to create a new leader of global healthcare by combining the best programs, processes, and people in the industry.

We'll have an even more talented group of employees and be able to offer a more diverse product portfolio to more customers worldwide.

That will especially be the case in key emerging markets that help generate our future growth, markets like Brazil, Russia and Poland.

Just as important, we will have an expanded pipeline, with more promising candidates in all stages of development.

With that context, let me update you on the progress we are making with our planned Schering-Plough merger and the key steps we've taken since our March 9th announcement.

The syndication of financials have been completed.

We have made the appropriate filings with regard to the Hart-Scott-Rodino Antitrust Improvement Act.

We expect to file our preliminary S-4 proxy filings toward the end of next month so that both company's shareholders can vote for the transaction.

To enable them -- the majority of our people to focus on business continuity and deliver on 2009 results we have established an integration management organization led by Adam Schechter, who is our President of Global Pharmaceuticals.

This group of key executives will handle the heavy lifting of planning for the integration of Merck and Schering-Plough.

Adam already has our newly-created innovation management office up and running.

Adam and his team are working closely with his counterparts at Schering-Plough and the parallel integration team he leads.

Top Merck leaders, including myself, have participated in a series of town hall meetings with employees from throughout Schering-Plough and we have met more than once with our counterparts there and their leadership teams.

We've been very encouraged by these meetings and the enthusiasm we see amongst sharing employees for benefits of the merger.

As we announced last month, we expect the merger on a non-GAAP basis will be accretive in the first full year after the deal closes, but then significantly accretive thereafter, with the opportunity to have $3.5 billion of incremental synergies beyond 2011.

We remain committed to maintaining Merck's dividend at the current level following the close of the transaction, and we remain on track to complete the merger in the fourth quarter of 2009.

So that's the merger update, now let me mention an update to our pipeline.

As you know, we have seen in our earnings news release this morning, we are delaying the US filing for Telcagepant, a potential treatment for migraine.

We believe this is the most appropriate course following the recent findings from an exploratory study, in which a small number of patients taking Telcagepant for the prevention of migraines were found to have a significant elevation in liver enzymes.

The daily dosing regiment and prevention study was different than the dosing regiment used in Phase III studies for the acute treatment of migraines.

Other studies with Telcagepant for the acute treatment of migraines continue, while we're doing the work to further understand the overall safety profile of Telcagepant.

With planning for the merger in full swing this is an exciting and transformational time for Merck.

However, we are committed to the here and now and very focused on meeting our 2009 goals.

My entire leadership team and I are communicating frequently to ensure that everyone at Merck remains focused on the business of Merck.

We are determined to avoid any interruptions in our efforts to improve our operations and moving forward with our more-effective and efficient commercial and other business models.

To that end we are now operating our new commercial selling models in the United States and other markets around the world.

In our labs we are continuing ahead with the reengineering of Merck's basic research operations and our clinical development model.

And we continue to seek out the best science wherever in the world it may be and bring it to Merck.

Just in this month, for example, Merck announced three collaborations to broaden our portfolio.

Together with our partner, Cardiome Pharma, we announced a collaboration for the development and commercialization of the investigational candidate for the treatment of heart disease.

Santen Pharmaceutical and Merck announced a worldwide licensing agreement for a compound under investigation in the United States for the treatment of glaucoma.

In addition, Merck signed a worldwide license agreement with Medarex and Massachusetts Biological Laboratories for an investigational combination antibody and therapy for the treatment of serious intestinal infection that has completed Phase IIb clinical studies.

We're also continuing to provide strong support for our bioventure division by completing the purchase last month of Insumet's biological portfolio and manufacturing capabilities.

These are all exciting additions to our pipeline and highlight our strategy moving forward with the Schering-Plough merger, while at the same time continuing to identify and invest in targeted strategic opportunities.

This is the benefit of Merck's overall strong performance, astute financial management, and the transformational work we have done over the past five years to enable us to invest in our future growth.

Before I turn to Ken, let me assure you that all of Before I turn to Ken, let me assure you that all of our dedicated employees are working hard to position Merck for the long-term success.

Now I'd like to turn it over to Ken.

Thank you, Dick, and good morning to everyone on the call.

As you've already seen, revenue for the first quarter of 2009 was $5.4 billion, down 8% compared to last year, and down 4%, excluding the impact of exchange.

Our overall results were driven by a combination of factors.

We generated strong growth for our newest brands in markets around the world and saw volume increase by 6% outside the US, although this growth was more than offset by foreign exchange.

In the US the continued impact of the loss of marketing exclusivity for some of our brands challenges to our vaccine business, and a reduction in wholesale inventory levels led to a 10% decline in the US sales, despite strong performances for Januvia, Janumet and Isentress.

As we move through the year, we expect improvements to our top line relative to the first quarter because of the normal seasonality of vaccines in Singulair, improvements in supply for Zostavax and continued growth for Januvia, Janumet, and Isentress.

I do want to take a moment to speak to how the global economy is affecting our business before I get into further detail on the quarter.

As you know, patients, providers and payors around the world are making difficult choices about spending.

This is evident based on decreases in physician visits and lower treatment initiation and compliance rate for patients with chronic conditions, such as diabetes.

In the US, wholesalers, too, appear to be responding to the challenges in the economy.

Wholesalers have reduced their inventories of some of our most widely-used brands, including Vytorin and Zetia, by about $75 million to $100 million, which puts inventories for our products at the lowest levels we have seen in recent years.

Now moving to performance of our key brands, I will begin with our prescription products.

Starting with Singulair, sales in the first quarter were $1.1 billion, down 4% versus the prior year, and down 2%, excluding exchange.

Performance in the first quarter reflects a decline in a US business of 4% compared to the first quarter of last year, which included nearly three months of sales prior to the FDA's early communication.

We are encouraged by the most-recent weekly market share data and we continue to invest to restore growth for this important brand.

Outside the US, we generated strong volume growth of 4%.

Japan continues to be the strongest growth driver, thanks to the success of the allergic rhinitis indication we launched last spring and the lifting of the two-week prescription limitation of the oral granular formulation for preschool aged children.

Global revenue for Januvia and Janumet grew to reach to $540 million in the first quarter reflecting the high value physician, patients and payors are placing on these medicines.

Our marketing efforts continue to focus on the compelling attributes of these medicines.

Januvia provides 97% DPP-4 inhibition over 24 hours and delivers strong once-daily efficacy in a single pill without the compromises of weight gain and hypoglycemia associated with other oral diabetes therapies.

Janumet combines Januvia with Metformin for powerful efficacy.

In the US, Januvia continues to be the second-leading branded oral antidiabetic agent in terms of new prescription share.

The Januvia/Janumet franchise continues to outperform the market and grow in both volume and share and is the fastest-growing family of products in the oral diabetes market.

In addition, we were extremely pleased with the international performance of Januvia and Janumet in the first quarter.

In the EU, these medicines are also the fastest-growing family of products in the oral diabetes market.

Januvia is the only marketed DPP-4 inhibitor that is once daily for all indications.

It is widely reimbursed and Janumet is gaining equally strong reimbursement status.

In all markets in Europe, where more than one DPP-4 exists, Sitagliptin is clearly a market leader.

Finally, India, Brazil and other emerging markets have enjoyed strong growth since launch.

Globally, more than 12 million prescriptions have been written to date and as these products are major growth drivers for Merck in the short term and the long term, we are investing in them to ensure that we realize their full potential.

Through lifecycle management, Merck is working to establish Januvia and their family of combination products, including Janumet and other products in development -- Janumet XR, MK-431C, MK-431D -- as key components of therapy.

In the first quarter, the SNDA's were expected for Januvia for use in initial combination with [Petaglitazel] and its triple therapy with Metformin and PZD in the US.

Additionally, Janumet has been filed for use as an add-on to insulin in the EU.

We are very pleased with the performance of Isentress since its global launch in the fourth quarter of 2007.

Sales in the first quarter were $148 million, up 14% sequentially versus the fourth quarter 2008.

In the US, first quarter sales were $75 million and continue to exceed the last five launches in total market share through March.

Outside the US, we achieved $73 million in sales, reflecting the strong performance of our 2008 launches, including France, Spain, and Italy.

Overall, performance has been strong and Isentress has been embraced by our customers around the world as an important option for their patients with HIV, and we look forward to regulatory action in the second half of the year on our treatment-naive SNDA.

I will now move on to our vaccine business, first Gardasil.

Sales, as reported by Merck in the first quarter, were $262 million, a 33% decline when compared to the first quarter of last year.

In the US, sales declined 39% and ex-US sales declined 14%.

Focusing first on ex-US, when one excludes the impact of exchange, sales increased 5%, despite the continued impact on year-over-year declines in early-adopting countries, such as Australia, where so many in the 12 to 26-year-old population have already been vaccinated.

For example, we achieved strong sales in Mexico, due in part to new public sector tenders, and we continue to pursue tenders in markets around the world.

The first quarter US sales performance for Gardasil continues to be effected by the factors we've discussed previously, including continued challenges to vaccinating the 19 to 26-year-old age group.

We are not satisfied with this performance and we continue to develop and implement programs to drive use of this important vaccine.

For example, as part of our efforts to increase vaccination of 19 to 26-year-olds, the reimbursement program we launched earlier this month provides realtime visibility into individual patient coverage for physicians, and for patients, a patient rebate program is available to provide financial support for out-of-pocket costs above $30.

While we recognize it has been a challenge to grow Gardasil we still believe a significant opportunity remains for Gardasil.

There are millions of women not yet vaccinated in the 19 and 26-year-old population and our research indicates that most women in this population may be receptive to vaccination.

Very few, in fact less than 10%, have decided to not be vaccinated and we are working towards increasing vaccination rate for this important vaccine in indicated groups, as we plan for potential indications in other groups, including males.

Globally, it is important to keep in mind that where physicians have a choice of HPV vaccines, Gardasil is selected the vast majority of the time, which speaks to the unique value in broader coverage of this vaccine.

Zostavax, first quarter sales, as reported by Merck, were $75 million, up 2% versus first quarter 2008.

The first quarter performance was affected by the clearing of significant back orders at the end of 2008 and a continued limited supply.

In the first quarter we were able to clear all remaining back orders that existed at the end of 2008 and the shipping delay times are getting shorter.

Demand for Zostavax continues to be strong and we continue to expect that we will return to normal shipping time in the middle of 2009.

We remain excited about the potential of Zostavax.

Customers, including supermarkets and pharmacies around the country, are marketing vaccination programs and we look forward to fully supplying and more fully promoting this important vaccine to our customers.

Now RotaTeq.

First quarter sales, as reported by Merck, were $134 million, down 29% versus first quarter 2008.

The first quarter comparison, however, includes the impact of the first quarter 2008 CDC stock pile purchase of $41 million.

We are seeing moderate impact from competition in the US, with a greater impact in the public sector.

Now I would like to take a moment to provide an update on the performance of our cholesterol JV.

Worldwide sales of Zetia and Vytorin, as reported by the Merck-Schering-Plough joint venture, were $479 million and $466 million respectively in the first quarter.

Sales of Zetia were down 18% and sales of Vytorin were down 28% versus the prior year.

Market share for Zetia and Vytorin in the US appears to be stabilizing.

Outside the US, sales in the first quarter were down 9% relative to the first quarter 2008, but were up 5% after adjusting for exchange.

Growth in these ex-US markets has slowed over the recent quarters due to a number of events, including competitive, economic, and market events.

However, we have extensive actions in place and we continue to anticipate growth outside the US, excluding the effects of foreign exchange.

We remain steadfast in our support for Zetia and Vytorin, which continue to be valuable treatment options for physicians by helping to get more patients to their LDL goals, especially if physicians observe LDL levels for their patients rising as a result of switching products with less LDL (inaudible) efficacy.

In closing, I assure you that the entire Global Human Health organization remains focused on driving revenue this year and in building a portfolio and commercial model that will enable us to succeed in the long term in markets around the world.

We have a portfolio of medicines and vaccines that offer unique value to our customers and we continue to believe that tremendous commercial opportunities exist to grow our established and newer brands in markets around the world and we will capitalize on those opportunities.

We are now operating in our new commercial model (inaudible) in the US and in other markets around the world and we continue to invest in growing our presence in emerging markets.

In the last few weeks, we've announced four business development deals for drug candidates that have a potential to expand Merck's portfolio in important therapeutic areas.

Finally, as Dave mentioned, Merck and Schering-Plough are making progress in planning for the integration of our respective organization, and that is true for our commercial organizations, as well, where we've assigned a team to work on the integration.

I want to be clear, however, that the vast majority of Global Human Health people remain focused on our day-to-day business, driving 2009 revenue and advancing our longer-term commercial strategy.

So with that, I will thank you and turn the call over to my colleague, Peter Kellogg.

Thank you, Ken, and good morning.

I will provide an update on the following; our first quarter results and our 2009 guidance.

Now regarding guidance, I will only highlight key elements of our guidance, as we provide a breakdown of all the elements on the guidance page of the press release issued earlier today.

Please note that all of our guidance given today excludes any contributions by Schering-Plough as a result of the merger and any costs incurred upon closing, which is expected to occur in the fourth quarter.

Finally, I'll also provide an update on our merger on financing.

Before we jump into the results I'd like to give you some perspective on how we are reporting non-GAAP results given the merger.

Our non-GAAP results will exclude restructuring costs, as well as costs related to the merger, including interest, commitment fees, and external integration costs.

Please note we will only exclude large discreetly-identifiable items related to the merger.

We won't exclude every cost incurred by the company.

In accordance with Regulation G we provide a reconciliation of GAAP to non-GAAP EPS in our press release every quarter.

This provides investors a breakdown of what is included in GAAP versus non-GAAP earnings, as well as our guidance.

So with that said, let's get into the results.

Merck reported first quarter non-GAAP earnings per share of $0.74.

On a GAAP basis EPS for the first quarter was $0.67.

When you look at this quarter versus the prior year, the driver of the change were: First, mix performance across the portfolio of product and the lapping of the Fosamax and Cosopt/Trusopt losses of marketing exclusivity in 2008; second, external factors, such as the unfavorable effect from foreign exchange and the wholesaler inventory reductions in the US; third, lower product gross margin; and fourth, higher tax benefits in the first quarter of 2008 than we enjoyed this year.

And lastly, these four negative impacts were slightly offset by continued strong expense management throughout the P&L.

We previously signaled that this would be our weakest quarter of the year, and as you'll hear when I discuss guidance, we expect to see improvement in the second half of the year.

Let's turn to revenue.

Total revenue for the quarter, as reported by Merck, was $5.4 billion.

Ken walked you through the product performance, so I'll quickly cover guidance.

First you'll note on the guidance page of our press release that we are reaffirming the guidance range for our major products.

However, we are reducing overall revenue guidance to $23.2 billion to $23.7 billion.

The change in guidance reflects the trends we are seeing across the broader part of our portfolio, driven by both performance and economic factors, and the effects of our vaccine supply situation.

Specifically, we have made updates to the guidance ranges for our other reported products and our other vaccines, so let's turn to materials and production.

First quarter materials and production costs were $1.3 billion, which includes $22 million for costs associated with the global reinstructuring program, primarily related to accelerated depreciation.

Excluding restructuring costs in 2009 and 2008, material and production costs increased 7% in the quarter.

As you know, this yields a gross margin below our full-year guidance range.

Reported [from this] product gross margin was 75.2%.

Excluding restructuring costs, PGM was 75.6%.

Now, of course, this compares to 79% in the first quarter 2008, so let's look at this in two ways.

First, compared to last year, and then let's look at the balance of the year in our guidance.

Starting with our comparison to last year, the year-over-year lower PGM rate experienced in the first quarter is primarily attributable to three factors.

First, our fixed cost base in the vaccine production area was spread over lower production unit volume during Q1.

Second, we had higher discreet costs, such as discards.

And third, we are seeing an impact from product mix due to the patent [expiree] of higher-margin products, Fosamax and Cosopt/Trusopt, in 2008.

Now, turning to the balance of the year in our PGM guidance, for the full year we are confident in maintaining our PGM guidance of 77% to 78%, as we expect production volumes to increase and we do not expect the discreet costs seen in Q1 to continue.

Now let's turn to marketing and administrative.

M&A expenses were $1.6 billion in the first quarter, a decrease of 12% versus the first quarter of 2008.

Let me provide you some additional perspective on that.

First off, exchange is benefiting M&A expense versus the first quarter last year.

In excluding other unique charges in both years and this foreign exchange impact, M&A expenses decreased 6%.

The lower spending to the quarter is attributable to savings from our new commercial model and corporate G&A efficiency program.

We are realizing reductions in the US and European sales forces and we are also continuing to realize reductions in our administrative expenses.

So turning to M&A guidance, these lower spending trends and the benefits of our 2008 restructuring program allow us to reduce our 2009 M&A guidance by $100 million to a range of $6.9 billion to $7.2 billion.

We continue to maintain A healthy amount of support behind our core brands.

So let's turn to R&D.

Research and development expenses in the first quarter were $1.2 billion, an increase of 14% versus the first quarter of 2008.

When you adjust for the restructuring costs in the first quarter 2009, R&D spending is up 5%.

As you are well aware, we are making a lot of investments in our late-stage clinical trials, including a number of large outcome studies.

That leads us to our R&D guidance.

We are reducing our 2009 R&D guidance by $100 million to $4.7 billion to $5 billion.

Our guidance for 2009 enabled us to fund both the internal pipeline, as well as general collaboration, such as the four deals we've already announced this year.

Moving now to equity income, in the first quarter, Merck recorded $586 million of equity income.

here were two major impacts in this result.

First, the equity income contribution from the Merck Schering-Plough joint venture of $291 million reflects a continuation of the trend that we saw in the second half of last year and is in line with our expectations.

Second, the AZN joint venture equity income was $168 million, which is $37 million higher than the first quarter of the prior year.

This increase in equity contribution is attributable to the inherent timing variability of payments from AZN.

Now let's take a second to talk about equity income guidance.

We are increasing our full-year equity income guidance by $100 million to $2.3 billion to $2.6 billion, reflecting our current expectations.

Moving to other income expense, for those of you who haven't been following this event too closely, FAS 150 was recently adopted in the first quarter of 2009.

FAS 150 changed the presentation of minority shareholder earnings and preferred stock dividends on the face of the Company's income statements and you'll see the impact on the face of our P&L this quarter.

In the past our preferred stock dividend obligation to AstraZeneca was included in other expenses.

As a result of this new standard, you will now see this separated on the face of our income statement below net income.

Now, of course, this standard has no impact on our EPS.

For the first quarter 2009 other income was $67 million.

When you adjust for $12 million in merger-related costs, other income on a non-GAAP basis is [$80 million].

It is challenging to make a comparison of other income to the prior year given that we had a number of unusual items last year, including the gain for the AZ limited partnership in 2008.

There are two important things to note, though, about the current quarter.

As anticipated, interest income is lower than in Q1 2008 as a result of the lower interest rate, and we recorded a gain in this quarter related to the recently-announced divestiture of Timoptic in the US.

Now let's turn to the tax rate.

Merck's first quarter GAAP effective tax rate was 18.4%.

Excluding the impact of restructuring charges and costs related to Schering-Plough transactions, the non-GAAP effective tax rate was 19.4%, reflecting the benefit of approximately four percentage points relating to the favorable tax impact of the previously-announced Canadian tax settlement.

We had previously established FIN 48 reserves for this matter.

Moving to tax rate guidance, given the benefit of this Canadian tax settlement recorded in the first quarter and other factors affecting our tax rate, including the mix of our business, we expect our full-year tax rate to be approximately 21% to 24% and we are adjusting our guidance accordingly.

Now I'd like to give you an update on our financing activity related to the merger.

The Company has received commitments for the syndication of $8.5 billion of new and amended credit facilities associated with the transaction, including a new $3 billion orig loan, $4 billion of new revolving credit facilities, a $1.5 billion amendment to existing credit facilities.

The syndication will be complete upon execution of the documents.

As we've said previously, we are evaluating our opportunities to term out the bridge loan through a term debt issuance.

We are pleased to confirm that the rating agencies have maintained Merck's strong credit rating [posting us into the merger].

Given the merger agreement and the financing activities that are ongoing, we will not initiate stock -- treasury stock purchasing until some time after the deal closes.

Finally, we are committed to maintain our dividend at the current level.

So to summarize, our first quarter results are characterized by the following.

First, mixed performance across our portfolio of products has been reviewed.

Second, external economic factors, including the unfavorable effect of foreign exchange.

And as you'll recall, we indicated on our December 4th guidance call last year that we anticipated foreign exchange to impact 2009.

Indeed, foreign exchange had a three percentage point unfavorable impact on our top line and a four percentage point impact on the bottom line of the quarter.

Third, lower-than-usual product gross margin.

Fourth, continued strong expense management.

And fifth, a favorable tax benefit from the Canadian tax settlement.

As we look ahead in 2009, we reaffirm our non-GAAP EPS guidance range of $3.15 to $3.30.

We reduced our GAAP EPS range to $2.84 to $3.09 solely as a result of merger-related costs.

Please remember, this guidance excludes any contribution by Schering-Plough as a result of merger and any costs incurred upon closing.

In 2009, as we've discussed, the Company expects sales and GAAP and non-GAAP EPS the second half of the year to be stronger than the first half.

In addition, the Company anticipates marketing and administrative spend and research and development expenses to be more equally distributed across the remaining quarters than in previous years.

Now, given first quarter financials, I'd like to discuss how we expect this year to develop.

Several factors should cause our second half results to pick up nicely versus the first half.

First, we expect to return to normal shipping times for Zostavax in mid year, and accordingly, we intend to ramp up promotion.

Second, we anticipate returning to a strong back-to-school season for Gardasil, which we did not fully benefit from last year.

Third, our second half should benefit from the continued strong performance for Januvia, Janumet and Isentress.

Fourth, you should also note that we saw wholesale inventory reduction and a lower product gross margin in the first quarter.

We don't anticipate these continuing in the balance of 2009.

And finely, we are also adjusting guidance for our expense items to reflect the steps that we are taking to adjust our cost structure in line with the trends that we are seeing.

So in conclusion, these factors should cause 2009 quarterly results to improve in the second half very nicely.

With this perspective, we are maintaining our full-year 2009 non-GAAP EPS guidance.

Thank you very much, and now I'd like to turn the call back over to Eva.

Eva?

thank you, Peter.

We will now open the call to take your questions.

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

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

Thank you.

(Operator Instructions), Your first question is from Tim Anderson with Sanford Bernstein.

Thank you.

I have three questions.

Can you say with confidence that your CGRP program will be kept alive?

You mentioned moving the back up into Phase III but I'm wondering if that's realistic?

Second question is, what's going to be the competitive message with Januvia as Saxagliptin nears the market?

Third question is, when can we expect to hear an update on the whole Remicade J&J issue?

I'm wondering how those discussions with J&J issues are going?

Thank you, Tim.

This is Peter Kim.

I'll take the first question.

With regard to the CGRP, just to reiterate, the issues that have arisen were from a Phase IIa exploratory study in which we were looking at the prevention of migraine, dosing patients twice daily for three months, and in that study unfortunately we found that there were a small number of patients that had elevated levels of liver enzymes greater than three times the upper limit of normal.

That study has stopped.

However, other studies with MK-974 for the acute intermittent treatments of migraine continue at this time.

We are currently conducting additional analysis and reviewing data from a separate prevention study -- excuse me, from a separate long-term study in which we had dosed patients for up to 18 months in a migraine treatment paradigm, and at this point in time we're really in the midst of analyzing this data and obviously we will need to discuss this with the appropriate agencies as we move forward.

With regard to your question on the backup, the backup is continuing in Phase IIb of development at this point and remains on track.

I'll take the Januvia question.

As you know, Januvia was the first DDP-4 inhibitor market in Europe and is the only one on the market in the US, and physicians looked at a number of factors in determining treatment decisions, including evidence of longer-term efficacy, tolerability, safety dosing and convenience, and our data has shown that once-daily Januvia and Janumet do provide significant efficacy and safety and tolerability advantage.

We have more than 12 million total prescriptions dispensed worldwide since these products were launched and our post-marketing experience continues to show both the generally favorable safety profile, as well as good treatment experience from an efficacy standpoint from physicians.

There obviously are no head-to-head data available comparing our products to Alogliptin or Saxagliptin; however, the published data of DPP-4s, including Saxagliptin, currently under regulatory review suggests no advantages in clinical profile versus Januvia.

I'd also note that in nearly all markets where we've gone head to head with them we maintain the vast majority of the market share, so that would be my response there.

Tim, Dick Clark.

In response to your Remicade J&J question, we're not prepared to make any additional comments on that at this point in time.

Next question, please.

Your next question is from David Risinger with Morgan Stanley.

Thanks very much.

I have three questions.

First, on the financials, could you just explain what the price impact was on the top line in the quarter, and also the FX impact on earnings per share?

Second -- well, actually those are the first two questions.

Then third, in terms of [Improvit], can you comment on the Improvit strudy progress, in particular whether protocol changes are possible if there's limited separation between the two arms?

Thank you.

Hi, David, this is Peter.

Let me take the first couple, which is the price impact on the financials.

So, on our total first quarter results for revenue pricing was only 1% and on the top line foreign exchange was a negative 3%, but at the EPS line for foreign exchange it was a negative 4% and we can get into that more, but that's basically the top line set of numbers.

So obviously, foreign exchange did adversely impact result, as we anticipated the quarter.

On Improvit?

Thank you.

David, this is Peter.

With regard to Improvit, this year, our academic partners at (inaudible), at Harvard and the Duke Clinical Research Institute will review both the event rates and the lipid levels in the two arms of the study, but they will not be unblinded to the results of the results -- the outcome of the results, but they will be able to look at the overall event rates and the difference in the lipid levels.

And the purpose of that review is to determine if a sample size adjustment is going to be needed.

That review has not occurred yet.

It will occur this year and should that review suggest that we need an adjustment in the sample size then obviously we'll communicate any new plans.

But I want to emphasize that there will not be a look at the efficacy there.

It's simply a difference to look at the lipid levels and the event rates.

Next question, please.

Your next question is from Jami Rubin with Goldman Sachs.

This is -- these questions are directed to Ken.

Ken, if you can drill down a little bit deeper in US Gardasil sales of $179 million, it's the lowest level we've seen of any quarter of Gardasil and while we understand that it's difficult to penetrate the older 19 to 26-year-old cohort, can you tell us what's going on with the 11 to 12-year-olds, so if you could sort of tease out where that's going?

Are you seeing states reduce their invent -- their vaccine inventories because of the difficulty in paying, or if you could just talk about that?

And also European sales of Gardasil were also way down this quarter and if you can talk about what dynamics you're seeing there?

If this is competitive pressure from [Servarex] or if this is government, saying, or sort of pushing back on reimbursement issues?

Thanks.

Thanks, Jami.

I think first starting with the 11 to 18-year-olds, as you know, as we've said in recent quarters, there has been strong penetration since March in the 11 to 18-year-old group and as a result, despite new vaccination in that age group the overall number of first-dose and corresponding second and third-dose vaccinations of 11 and 18% -- 11 and 18-year-old have declined.

I think as it relates to the 19 to 26-year-old group, in particular, as you know, we have had our issues there and we are working closely with customers to learn more about the various practice-related and financial challenges that are affecting vaccination rates.

But if you look at the two areas, the performance that we've seen in the last couple of quarters with first-dose vaccinations in the 19 to 26-year-old group, and also the fewer ones in the 11 to 18-year-old group are leading to fewer second and third-dose vaccinations now and so you're now starting to see that impact.

And as I was trying to say, we are working and implementing programs, particularly in the 19 to 26-year-old cohort, to drive more patient (inaudible) into the office and then also at the same time, importantly, to help those physicians make realtime decisions about coverage and which people are eligible.

Because what we're seeing is that there is some origination, but patients are not being captured and physicians are willing to partner with us to help them capture those patients.

So that's the issue as it relates to the two cohorts in the US.

As it relates to the Sanofi Pasteur territories in Europe, we've also seen sales decline in the first quarter of 2009 due in part to exchange, as I said, but also due to a slowdown from the strong and quick uptake in some of the large early adopting markets like Germany and France.

Next question, please.

Your next question's from Roopesh Patel with UBS.

Thank you, a couple of questions, first on Telcagepant, I was just wondering if you could clarify the dose used in this Phase IIa prevention study?

Was this dose used in the Phase III frequent studies?

And then secondly, just on US sales, they're down 10%.

That seems to be well below at least my forecast and the weakness seems to be across the portfolio.

I'm wondering if this in any way is impacted by the new commercial model?

And Dick, I was wondering if you could give us your thoughts on that?

Thanks.

Thank you, Roopesh, this is Peter.

I'll take the first question.

The dose that was used in the Phase IIa exploratory study for the prevention of migraine was either 140 milligrams twice a day or 280 milligrams twice a day, and as I said, that was every day for three months.

In our treatment paradigm we're also studying each of those doses, 140 milligrams, or 280 milligrams.

But in the treatment study these are administered intermittently with either one or two doses to treat an individual migraine attack and a limit on the number of doses that are given per month to the patients.

And I'll take the new commercial model question.

We think unquestionably that the results that we're seeing in the US are not related to the rollout of the new commercial model in the US.

What we see is, in addition to the impact of marketing exclusivity for some products we have seen continued challenges, in particular to our vaccine business, as well as wholesaler destocking.

But the most important thing to note is that we've looked very carefully at the performance in our new commercial model pilot versus similarly situated regions around the US and for them, if I could take Januvia and Janumet, which we look at very closely in terms of the growth of the uptick of these two brands, we see no difference of any magnitude between the performance of those brands or other brands, like Singulair, in the pilot region versus other regions of the country that have equivalent access and managed care control.

So we are quite sanguine that the new commercial model is working the way we intended, both from the standpoint of customer relations, as well as the efficiency goals that have been outlined in our plan to win.

Next question, please.

Your next question is from Tony Butler with Barclays Capital.

Peter, the backup compound for Telcagepant, is it just simply more potent, that is to say has greater binding kinetics, and if so, is that really substantially better than what you currently have in clinical development in later stages?

Thank you.

Thank you, Tony.

The backup compound is more potent.

It also is a different chemical structure from Telcagepant, We are of the impression that the liver enzyme elevations that we're seeing with Telcagepant are specific -- they're molecule specific and so therefore we -- the fact that the backup compound had a different chemical structure is promising to us.

As I said, the backup compound, MK-3207, continues in Phase IIb of clinical development and beyond that, there's really nothing more to report at this point.

Next question, please.

Your next question is from Chris Schott with JPMorgan.

Great, thank you.

Two questions.

First, on your longer-term tax rate, I don't see a lot of details right now, but we've seen increased focus in Washington about increasing tax revenue and potentially altering tax codes as it relates to deferral of tax [on international] profits.

Can you just talk about your expectations on longer-term changes to tax policy and how that relates to your longer-term assumptions on tax rate?

And then second question, your -- talk about your initial 2013 post-merger guidance in light of the MK-974 delay, I believe you previously stated you were comfortable at low end of the range even if you were to lose rights to Remicade.

would that statement still hold given this delay today?

Thanks.

Yes, this is Peter, Chris.

First of all, on the long-term tax rates obviously we don't have any clarity on where the long-term tax policy would be related to deferral.

Obviously I think one of the nice things is that the administration has talked about having everybody take a seat at the table, so all parties will be involved.

Obviously our business over time would evolve and -- but nonetheless, we don't anticipate anything draconian or dramatic that would change our competitiveness on a global basis and therefore we assume that we have a somewhat conservative set of assumptions for our long-term tax rate planning, but nonetheless, we really aren't planning to see dramatic fallout from the policy changes and we'll just have to play it by ear, but we'll certainly actively contributing to the thought process there.

On the 2009 -- I'm sorry, the 2013 merged company guidance, your assumption is exactly right, which is that obviously that was a pretty high single-digit cager over that time period.

It creates a fairly healthy range but it's very important that we will be growing that level throughout -- we did indicate that with or without Remicade we'd be fine and we are able to confirm that we're comfortable with that range with any of the new events coming on right now.

So, no, we're definitely comfortable with that range and that guidance.

Next question, please.

Your next question is from Steve Scala with Cowen.

Thank you.

I have two questions regarding the tax rate.

The Canadian tax dispute resolution was cited in the 10-K, but Merck said at that time there was no change in the 2009 tax rate guidance, so what has changed in the past two months that lowered the guidance?

And secondly, I believe Merck paid $300 million and interest of $360 million, so since Merck made a payment, I'm not clear why the tax rate is lower than expected and guidance going down.

Is it because of prior reserves or this quarter did you get a US tax offset to the Canadian penalty?

Thank you.

Okay, Steve, good questions.

Let me go in reverse sequence, if I can.

So the first thing, yes, we settled with Canadian tax authorities.

We certainly did make some payments, but those payments are measured against what we already reserved on our FIN 48 reserves based on different assumptions.

So you're right, there are upsides relative to the full year for this year and for the first quarter, so that's what you saw.

Relative to our full-year tax rate, your point is also correct in that we -- as we evaluated and did our forecast in March for the full year, we do see a number of different effects coming through our tax rate, not just the one settlement, and I think in my comments earlier I commented that business mix, other tax topics that we're looking at and so forth have all been updated.

And so in effect, it's quite a portfolio of tax topics that lead us to our guidance and the change in our guidance.

It's only a one-point change.

Hopefully I got to your two questions.

One, yes, we are making payments clearly to the Canadian tax authorities, but those are -- were covered by our FIN 48 reserve.

And secondly, we have -- we deal with the whole portfolio when we do our quarterly updates on an earnings call like this.

Next question, please.

Your next question is from Barbara Ryan of Deutsche.

-- take myself out of the queue, but let me since I did get -- let me ask.

I know, Dick, that you had made some changes, but really just specific to specialty products on your distribution, and I'm wondering if you're looking at the Company as a whole on a broader level of outchanges to the distribution model?

Yes, we have made some changes just on a distribution in the United States, but it was really the back room activity and have outsourced some of that, but we're not planning any other distribution changes at this time.

Next question, please.

Your next question's from John Boris with Citi.

Thanks for taking the question.

Just one for Ken Frazier.

It relates to the top line, lowering it by the $500 million.

I think you did indicate that there was some wholesale destocking on Vytorin, $75 million to $100 million in vaccines, but can you maybe give some better granularity, especially this early in the year when you've just gone through your planning process late last year as to why you would have this $500 million lowering of your top line?

And then secondly, with competition on the horizon, how confident are you that with the new commercial model that you're rolling out, how confident are you that you're going to be able to fend off competition against Gardasil and against Januvia/Janumet that you could face in the back half of the year?

And then one question for Dick on vaccines.

Can we just get an update as to how confident you are that your vaccine production will be kicking in at the back half of the year and how validation of the new North Carolina facility is progressing?

Thanks.

Yes, I'll start with the last question.

We are on track with the validation and certification of our (inaudible) facility for the latter part of this year and we're excited about that.

As you know, that project was approved in 2003-2004, and so for vaccine and for sterile facilities, it takes quite a bit of time, but we'll be moving towards final validation and then release of product by the end of this year and early next year.

We are making slow and steady con -- slow and steady successes in the vaccine parts of West Point.

So for example, as you are heard on the call, from the Zostavax standpoint, by mid year we'll be back to a supply/inventory level where we can actually can start relaunching Zostavx in the United States.

And obviously with Gardasil and RotaTeq we have no inventory problems and Recombivax and the [hip] products, we're also making progress on that so that by the end of this year in some of those products, and by the next year, we'll be back in business.

So it's important to get some of these processes update, it's important to get some of the equipment update and continue to put more and more resources on it so the steady progress we're making is very reassuring that hopefully in a very short period of time we'll be out of these issues.

So as it relates to the overall issue around revenue guidance, as I said earlier, we're looking at a mixed performance across our portfolio of products.

We're seeing some challenges to our vaccine business.

You remember that we originally took Gardasil down and we're towards the low end of what we originally envisioned there.

We continue to see challenges to the vaccine business supply.

We see some positive trends on Januvia, Janumet and Isentress.

And also I wanted to classify on the wholesale destocking, that $75 million to $100 million, included all the product line, also including Vytorin and Zetia, not just Vytorin and Zetia.

So it was across our entire product line.

So as we look at all of those issues, the product trends, the wholesaler approaches to things, the broader economy, it led us to the conclusion that we should lower our overall top-line revenue guidance.

So I would point out that as it relates to most of our major products, or our major product, we maintain those ranges and I think that that goes to the point around the new commercial model.

We continue to see that the new commercial model worked and one of the benefits of the new commercial model is that we're able to flex and put the attention behind certain products when we have to, either because of a competitive threat or because of an indication change or whatever may be happening in the marketplace.

So we are confident that that is the right model going forward, as we haven't yet had competition against Gardasil and Januvia in the US, but we have had it overseas and we,again as I mentioned, as it relates to Januvia in those markets where we've gone head to head with [Saxa] we maintain the vast majority of the market share in nearly all those markets.

In fact, the only market where we see any inroads is Brazil.

Next question, please.

And this will be our final question.

Your final question is from Seamus Fernandez with Leerink Swann.

Thanks very much.

So Peter, I was hoping you could clarify a point.

In the paper -- and this is for Peter Kim.

In the paper that was published on Improvit, there is specifically cited in the Improvit paper a look at efficacy that will occur when 50% of the events have accrued in the Improvit study, so I was hoping you could give us an update on when that look is actually going to be taking place, or if the protocol has changed in some way?

And then separately, Ken, if you can give us a little bit more color -- or Peter, if you can give us -- Peter Kellogg, if you can give us a little bit more color on the wholesaler destocking levels, what is the current number of weeks of inventory that you have currently, and do you expect this to change under the new IMA, as I would have thought you would have had some level of consistency on the number of weeks of inventory?

Thanks.

Thank you, Seamus.

This is Peter Kim, I'll start.

You are correct.

Improvit is on paper.

There is a reference to an interim efficacy analysis that will take place once 50% of the expected events occur.

We are not in a position at this point, though, to provide any -- first of all, as -- by definition therefore, this is an event-driven timing and we're not in a position at this point to provide any additional information on that timing for the Improvit analysis.

So let me take the question on the [close] of our inventory.

So it is -- you're right.

The inventory level did come down in there at a lower level than we've seen in quite some time, actually, as it comes to the first quarter, but they are at the low end of the range that we expect and so your question's a good one, but it doesn't really trigger any concerns on our part relative to the agreements we have in place.

But, while it's a fairly tight range and it doesn't measure in a big way it does have a big dollar impact when you're measuring growth year over year and so forth, and obviously the US market is a big part of our market.

So it doesn't trigger anything relative to what we would expect.

We're comfortable with the range.

It's just at the low end of the range that we've ever anticipated and certainly it's been lower than we've seen over the last year or two.

So I think that covers it, yes.

That concludes today's conference call.

The information from today's call, both the transcript and replay, will be available at our website for the next several months,and [Cal Ferdicson] and I will be available to take your calls and any incremental questions throughout the day.

Amanda?

Thank you for participating in today's conference call.

You may now disconnect.