默克藥廠 (MRK) 2009 Q2 法說會逐字稿

Thank you for your patience.

Good day, everyone.

Welcome to Merck's second quarter 2009 earnings conference call.

Today's call is being recorded.

At this time, I would like to turn the call over to Ms.

Eva Boratto, Vice President of Investor Relations.

Please go ahead, ma'am.

Thank you, Cindy and good morning.

Welcome to our calls to review or business performance for the second quarter of 2009.

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

Also here on the call to participate in the Q & A is Bruce Kuhlik, Executive Vice President and General Counsel.

00 a.m.

this morning.

You can access this through the Investor Relations section on Merck.com, and I will 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 that you 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.

These statements are based on management's current expectations and involve risks and uncertainties which may cause results to differ materially from those set forth in this statement.

The forward-looking statements may include statements regarding product development, product potential, or financial performance.

No forward-looking statement can be guaranteed and any actual result 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 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 10K and for the year ended December 31, 2008 and in any risk factors or cautionary statements contained in the Company's periodic reports on Form 10Q or current reports on Form 8K, which the Company incorporates by reference.

We will begin with brief remarks from our senior management and then open the call for all your questions.

And expect the total call to last approximately an 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 second quarter performance and update you on the good progress we are making in planning for our proposed merger with Schering-Plough.

This past quarter saw continued volatility in the worldwide economy, as well as fast-moving development in US healthcare reform.

Against this back drop, Merck delivered a solid second quarter.

As you saw in our news release this morning, our top line came in at $5.9 billion for the quarter.

Excluding the impact of foreign exchange, our total worldwide revenue grew 3%.

With this top line performance, an improvement in gross margins and continued diligence against expense management, we produced second quarter nonGAAP earnings per share of $0.83, which excludes certain items.

Excluding the impact of foreign exchange, nonGAAP EPS would have increased 4%.

Our second quarter GAAP EPS was $0.74.

We are particularly pleased with the strong double-digit growth of key products such as Singulair, JANUVIA, JANUMET, and ISENTRESS, especially in light of the challenging global economic environment.

And speaking about ISENTRESS, we recently received good news from the FDA.

We now have approval to market ISENTRESS for all adult patients diagnosed with HIV, and other such approvals are pending around the world.

During the second quarter, we continue to invest in strengthening our pipeline, both internally and externally.

We closed the three important collaborations that we announced last quarter.

Cardio Informa, for cardiovascular disease, Santen Pharmaceuticals, for the treatment of glaucoma, and with Meterex and Massachussets Biological Laboratories for infectious disease.

In addition, earlier this month we announced an exclusive global cooperation with Portola Pharmaceutical for a promising anti-coagulant, currently in phase II of clinical development for the prevention of stroke in patients.

We believe this is a medically significant compound with great commercial potential.

We are confident in the near and long-term actions we are taking at Merck and we believe our performance in the second half of the year will reflect that.

In a few moments, Ken will review our sales performance for the quarter and then Peter will provide additional details on the quarter's underlying financial results and comment on our outlook for the remainder of the year.

As you continue to see in daily news reports, healthcare reform efforts in the United States are accelerating.

Unlike the healthcare reform push of the early 1990s this time, our industry has a seat at the table, and I believe our voice is being heard.

We are convinced that we need to be part of the process and that healthcare reform can be accomplished.

Merck's overall goal has been and continues to be that every patient who has been prescribed one of our medicines or vaccines has access to it.

Now, let me take a few minutes to speak of our pending merger with Schering-Plough.

With our broader portfolio and stronger pipeline, the new Merck will be in a better position to meet our customer's healthcare needs with the best that medicine has to offer.

Post merger, we will have double the number of potential medicines and vaccines in late stage development, more diverse portfolio across important therapeutic areas, including the combination of our biologics efforts with Schering's own capabilities and a more global and diversified revenue base, and the dramatic acceleration of Merck's international expansion, particularly in key emerging markets.

Incremental cost savings, worth approximately $3.5 billion annually beyond 2011, which are expected to be generated through efficiencies realized across the company.

These savings are in addition to the previously announced ongoing cost reduction initiatives at both companies.

But most importantly, the combination of the two research-based organizations will strengthen the customer-focused collaboration, innovative thinking, and scientific excellence already occurring inside each company.

In the past few months, we have reached several key milestones needed to complete this important merger.

The US securities and exchange commission completed review of the company's joint merger proxy statement, which is mailed to shareholders, and who will vote on the proposed merger at separate special shareholders meetings on October -- excuse me, on August 7.

Merck successfully completed a $4.25 million public debt offering at attractive rates given our strong balance sheet.

The company received and responded to an anticipated second request for additional information from the US Federal Trade Commission and both Merck and Schering-Plough will continue to cooperate fully with the FTC and other regulators around the world to obtain all necessary approvals as expeditiously as possible.

Turning to the Animal Health businesses, as we've said, we are continuing to explore all of our options given that these are very strong businesses.

I don't have anything new to add, but let me reiterate, we will communicate our decisions at the appropriate time.

Our integration planning process is well underway, and I feel good about the excellent progress we are making.

In showing that the combined companies begins its first day of business in as strong as possible a position continues to be one ever my top priorities.

We have carefully analyzed and identified the key factors in determining whether or not a pharmaceutical merger achieves its promise.

As a result, our planning is sharply focused on these key success factors.

Maintaining momentum in the current business in the late stage pipeline.

Launching the new combined company in a way that ensures a smooth transition for our customers.

Launching new products exceptionally well.

Capturing both revenue growth and cost-savings opportunities.

And ensuring we have the right people in the right jobs in the right culture.

As for our timeline, it remains the same.

We expect to complete the merger in the fourth quarter of 2009.

Before I turn things over to Ken, I want to emphasize that my leadership team and I, as well as the many dedicated employees who work with us, are focused both on building Merck's business today and laying the necessary foundation to position new Merck for tomorrow.

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

Thanks, Dick, and good morning, everyone.

Merck's (inaudible) and marketing organization remains focused on our day-to-day business, driving 2009 revenue and advancing our longer term commercial strategy.

And I believe our second quarter results reflect this focus.

Revenue for the second quarter 2009 was $5.9 billion, down 3% compared to last year.

As Dick mentioned, though, excluding the 5 percentage point unfavorable impact from exchange, sales increased 3%.

This performance was driven by continued, strong growth for our newest pharmaceutical brands and for Singulair.

Looking at the results geographically, we generated 11% volume growth outside the US.

This growth was offset by exchange and a decline in our US business to 3% due to the impact of the loss of marketing exclusivity for various products and also due to lower vaccine sales.

In the second half of the year, we expect continued improvements in our top line because of the normal seasonality of vaccines, staple supply and increased promotional efforts for ZOSTAVAX and continued growth for JANUVIA, JANUMET, and the launch of the recently approved treatment naive indication for ISENTRESS.

We're also increasing our promotional efforts to continue to drive growth for our other key brands, including back to school opportunities for pediatric and adolescent vaccines.

Now, turning to individual product performance.

Starting with Singulair, sales in the second quarter were $1.3 billion, up 16% versus the prior year in the US and 17% outside the US.

Outside the US, excluding exchange, we generated strong growth of 32%.

Japan continues to be the greatest growth driver, and we recently achieved market leadership based on the continued strong performance of our new indications.

Additionally in Europe, we are seeing strong growth in key markets, including the UK, Spain and Poland.

This was clearly a quarter in which the performance for Singulair strongly rebounded and we will continue to invest to drive growth for this important brand.

We are pleased that physicians and patients continue to recognize the unique benefits of Singulair.

Moving on to JANUVIA and JANUMET, global revenue grew to reach a combined $617 million in the second quarter.

The JANUVIA /JANUMET franchise remains the fastest growing family of oral diabetes products in both the us and the EU.

In all European markets where more than one DPP4 exists, Sitagliptin is clearly the market leader.

We also lead the branded diabetes market in Latin America, and we are growing rapidly in emerging markets such as India where the disease burden is extremely high.

We're continuously introducing new relevant efficacy and safety data to bolster physician and payer acceptance of these innovative medicines and to strengthen our position versus competitive products around the world.

We also are implementing other types of programs to drive growth.

In the US, for example, we are leveraging our already favorable formulary position for these products by helping physicians and their patients better appreciate and understand how JANUVIA and JANUMET fit into their medical coverage and by offering coupon programs to help address potential cost barriers.

We are also piloting innovative programs with physicians and payors to support improved patient care.

Next, ISENTRESS continues to perform well with strong, steady growth since its launch in late 2007.

Sales in the second quarter were $172 million, up 16% sequentially versus the first quarter 2009.

In the US, second quarter sales were $88 million, and we continued to exceed the prior five HIV launches in new prescription market share.

Outside the US, we achieved $85 million in sales, thanks to the strong 2008 launches, including France, Spain, and Italy.

The recently approved expanse indication for ISENTRESS, which now makes this medicine available for HIV patient whether they are new to treatment or treatment experience means that ISENTRESS is a very important option for physicians and patients to consider at each stage of the treatment continuum, particularly as HIV continues to be treated as a longer term chronic illness.

I will now move to our Vaccine business.

Starting with Gardasil, sales as reported by Merck in the second quarter were $268 million, an 18% decline when compared to the second quarter of last year.

In the US, sales declined 28% versus second quarter 2008.

Performance continues to be affected by the saturation of the 13 to 18-year-old cohort due to rapid, early uptake and ongoing challenges to vaccinating the 19 to 26 age group.

While we are by no means satisfied with the current performance, we are executing on our recently initiated programs and remain firmly committed to achieving greater vaccination rates in the 19 to 26 age group.

As we move into the third quarter, we expect sequential growth as we leverage with the back to school season.

Ex-US sales increased 18% attributable to strong sales in Mexico and Poland, due in part to new public sector tenders.

We continue to expect our sales for Gardasil to achieve $1.1 billion to $1.3 billion in 2009.

We are confident that Gardasil's differentiated profile as the only vaccine for HPV infection will allow to us address any potential competition in the US should it arise.

Moving to ZOSTAVAX, second quarter sales as reported by Merck were $42 million, down 36% versus second quarter 2008.

The sales decline reflects lower purchases by healthcare providers working through inventory built after we fulfilled back orders in 4Q '08 and 1Q '09, at which time, I point out, we're not fully promoting this product.

We believe inventory in the channel is now approaching normal levels.

As we enter the third quarter, we're increasing our promotional efforts now that we are confident in our ability to adequately supply this important vaccine.

We are rolling out new marketing programs in physicians' offices and pharmacies to help providers integrate ZOSTAVAX into their routine standard of care.

In addition, last week we launched our first branded consumer campaign for ZOSTAVAX.

These new programs, coupled with increased patient origination during the fall flu season, positions ZOSTAVAX for strong growth in the second half of this year.

Moving to RotaTeq, second quarter sales, as reported by Merck, were $126 million, down 29% versus the second quarter 2008.

This comparison includes the impact of the second quarter 2008 CDC stockpile of $13 million.

We maintain a significantly greater share of the markets than the competition and recent data suggests that we have been able to slow the rate of erosion since our competitor's launch.

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

Worldwide sales of ZETIA and VYTORIN, as reported by the Merck Schering-Plough joint venture, were $514 million and $520 million, respectively in the second quarter.

Sales of ZETIA were down 8% and sales of VYTORIN were down 12% versus the prior year.

The rate of prescription market share declined for ZETIA and VYTORIN in the US is slowing.

Outside the US, sales of the second quarter were down 11% relative to second quarter 2008 and were up 5% after adjusting for exchange.

While growth has slowed over the recent quarters, we continue to expect to see positive growth for the rest of the year, excluding the effects of foreign exchange.

We remain committed to investing in ZETIA and VYTORIN while prudently managing our expenses.

For many patients, statins alone are insufficient to get them to their LDL goals; given this, we believe these will continue to be valuable treatment options for physicians by helping to get more patients to their LDL goals.

Let me close by saying that across our organization, we are encouraged by the momentum of many of our key brands, especially Singulair.

We are now preparing for the back to school season for VARIVAX and Gardasil and the return of full promotion for ZOSTAVAX and are excited about the other near-term opportunities ahead of us including launches in markets outside the US this year for TREDAPTIVE and Saflutan, which we recently licensed from Santen Pharmaceuticals.

We believe we have transitioned to a commercial model that is more flexible, efficient and customer focused.

That model combined with our existing portfolio, which will be expanded by the proposed merger, will allow to us offer our customers a broad array of medicines and vaccines that produce unique value.

Even as we plan for the merger, the vast majority of the people in our organization remain focused on driving 2009 performance.

So with that, I'll turn the call over to my colleague, Peter Kellogg.

Thank you, Ken, and good morning.

I will provide you an update on our second quarter results and why we remain confident in affirming our 2009 guidance.

Let me remind you that our nonGAAP results exclude restructuring costs as well as pre-closing costs related to merger, including interest, commitment fees and external integration costs.

With that said, let's get into the results.

Merck reported second quarter nonGAAP earnings per share of $0.83, representing a 3% decline versus the second quarter 2009.

GAAP EPS was $0.74 per share.

For the first six months of 2009, NonGAAP EPS was $1.57 and GAAP EPS was $1.41 per share.

Excluding the impact of foreign exchange, we grew the top line 3% and the bottom line 4% as Dick and Ken have pointed out.

This solid operational performance puts us right on track for delivering within our full-year guidance.

The key drivers of performance versus the same quarter in 2008 were first, strong growth from our key pharmaceutical brands in our international markets.

Second, an improvement in gross margin versus prior year and prior quarter.

And third, continued expense management in marketing and administrative expenses.

Please note that some of the second quarter spending reductions reflect our decision to prioritize promotional spending against Q3 opportunities.

This performance was offset by two items, a higher tax rate, although we benefited 5 points from tax settlements this quarter, we are lapping an even larger benefit last year.

And the negative effects of foreign exchange, which had an impact of 5% in the top line and 7% on the bottom line this quarter.

Additionally, there were litigation-related expenses and higher research and development investments in the quarter.

Total revenue for the quarter as reported by Merck was $5.9 billion.

Ken walked you through product performance so I'll move directly to guidance.

We are reaffirming our revenue guidance of $23.2 billion to $23.7 billion for the full year.

We are also reaffirming the guidance ranges for our major products, which you can find on the guidance page of our press release.

Second quarter materials and production costs were $1.4 billion.

When you exclude restructuring costs in both years, this represents a 5% decline in costs and a 77.9% gross margin in this quarter.

Importantly this is a significant improvement over our first quarter 2009 PGM.

The quarter-over-quarter improvement in PGM rate was due to product mix, an increase in vaccine production volumes and lower street cost versus the first quarter.

Given this second quarter performance, and our continued expectation that production volumes will increase in the second half of the year, we reaffirm or PGM guidance of 77% to 78%, excluding restructuring costs.

Marketing and administrative expenses were $1.7 billion as reported.

Excluding merger related expenses of $44 million, M&A expenses decline 13% versus the second quarter of 2008.

The current quarter's expenses also benefited by exchange, but were offset by a $25 million increase to the Fosamax legal defense reserve.

If we adjust for these two items, M&A expenses decreased 8%.

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

Some of the reduced M&A was just a timing delay and in fact, we're seeing promotional spending ramp up for ZOSTAVAX, Gardasil and our key brands in the third quarter as Ken commented on.

For the full year we reaffirm our 2009 M&A guidance range of $6.9 billion to $7.2 billion.

Research and development expenses in the second quarter were $1.4 billion, an increase of 19% versus the second quarter 2008.

When you adjust for the restructuring costs in the second quarter this year, research and development spending is up 10%.

This increase is primarily driven by $120 million of up front payments associated with our previously announced licensing activity with Cardio Informa, Meterex and Massachusetts Biologic Laboratories.

We are reaffirming our 2009 R&D guidance range of $4.7 billion to $5 billion.

We continue to invest in internal and external growth opportunities.

We expect our recently announced licensing transaction with Portola Pharmaceuticals to close in the third quarter.

Now that has a $50 million up-front payment which will be expensed upon closing.

Now let's turn to equity income.

In the second quarter, Merck recorded $587 million of equity income, an increase of $64 million.

Most of the variance is attributable to the AstraZeneca LP joint venture.

In terms of guidance, we are reaffirming our full year guidance range for equity income of $2.3 billion to $2.6 billion.

Moving to other income expense, for the second quarter 2009, other expense is $4 million.

When you adjust for $50 million in merger-related costs, other income on a nonGAAP basis $46 million.

Now this is a decline of $66 million over the same quarter of 2008.

Interest income was lower than in second quarter last year by $73 million as a result of lower interest rates and a change in our investment portfolio mix toward cash and shorter dated securities driven by the liquidation of some securities in anticipation of the upcoming Schering-Plough merger closing in the fourth quarter.

Moving to tax, Merck's second quarter GAAP effective tax rate was 19.3%.

Excluding the impact of restructuring charges and costs related to the Schering-Plough transaction, the nonGAAP effective tax rate was 20.4%.

This nonGAAP rate reflects an approximately five-point favorable impact from tax settlements in the quarter that reduced our fin 48 reserves.

Turning to guidance, we continue to expect our full-year nonGAAP tax rate to be approximately 21% to 24%.

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

As Dick said earlier, we completed a $4.25 billion dollar public offering of senior unsecured multi-year notes.

The average interest rate on the debt was approximately 4%.

Proceeds from the notes will be used for general corporate purposes and or to fund a portion of the Schering-Plough merger consideration.

As a result, the company's $3 billion bridge loan agreement has been terminated and the commitment of lenders under the revolving credit facilities entered into in May was reduced by approximately $360 million.

We continue to have access to approximately $5.1 billion under these revolving credit facilities.

Given the merger agreement, we will not initiate treasury stock purchasing until sometime after the deal closes.

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

So to summarize, our second quarter operating performance is solid as Dick mentioned and Ken reviewed.

And it supports our full-year guidance.

Our sales performance, improved gross margins, and continued expense management was offset by higher R&D investments, the effects of foreign exchange, and lapping of a higher tax benefit in 2008.

Turning to the full year, we continue to anticipate that sales will be stronger in the second half of the year given normal seasonality of vaccines, a strong back to school season for Gardasil, which we did not fully benefit from last year, the re-launch of ZOSTAVAX, and continued growth of our key brands.

On the expense side, beginning in Q3, we expect higher marketing expenses, particularly focused on seasonality and the back to school season for vaccines.

We expect continued investment in R&D for items such as Portola.

We also expect lower interest income as we approach the merger closing.

And expect our tax rate to return to normal levels from the reduced level of the second quarter.

While we're happy with our second quarter solid operational performance and continue to anticipate stronger sales in the second half of the year, we do need to make the necessary investments and do not expect our second quarter performance to change our full-year results.

We are therefore reaffirming our nonGAAP EPS guidance of $3.14 to $3.30 per share and our GAAP EPS range of $2.84 to $3.09.

Please remember this guidance excludes any contribution by Schering-Plough's result of the merger and any costs incurred upon closing.

Thank you very much.

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 take as many as possible.

At this time I will turn the call over to Cynthia who will communicate instructions for our Q&A format and introduce the first question.

Cynthia?

Thank you.

(Operator Instructions).

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

Thank you.

A few questions.

Can you frame out Arbiter-6 in terms of potential outcomes and what that might mean commercially to the franchise?

Your Cholesterol partner had surprisingly little to say on the subject.

And then VYTORIN growth, beyond 2009, outside the US, it seems like you're on a trajectory to turn negative which would imply an impact from Enhance which is something I think you said previously you would not likely impact Ex-US markets.

And last question on Singulair court ruling, could you just give us your best sense of timing for this?

Bruce?

As you know, the 30-month stay expires at the end of August 22nd, and we still fully expect a ruling from the court in advance of that date.

And we remain very confident in our position.

As it relates to VYTORIN sales and outside the US, as we mentioned in the earlier comment, we have seen a slowing of sales outside the US in recent quarters, but we see sales improving, and we expect to see growth for the rest of the year on a net exchange basis.

As it relates to Arbiter-6, as you know, according to clinical trials.gov, this is a study sponsored by Abbott and Walter Reed; it was not sponsored by us.

We don't know the results of Arbiter-6 or the reason why it has stopped.

We've seen as you have several people's speculations about multiple reasons that could explain that, but we have really essentially no new light to shed on that.

I do want to say that because we don't know those results, all we really can say is that we don't see any impact of Arbiter-6 on sale as we currently look at the product.

But again all we know is what the website said, which is that the trial was not stopped for safety reasons.

Next question, please.

Your next question comes from the line of Chris Schott of JPMorgan.

Two questions on the vaccines.

First on ZOSTAVAX, I know you had a wide range of results the last two quarters given inventory, could you help us better understand what the underlying demand for the product is to the best of your ability and quantify a little bit of the inventory move we saw this quarter?

Beyond ZOSTAVAX, can you just update us where you are as you are addressing some of the manufacturing challenges with some of your other vaccine businesses.

First of all, ZOSTAVAX, as we said earlier, our sales have been impacted as healthcare providers have been working through inventories this quarter after the fulfillment of significant back orders.

We do see the inventory levels coming back to normal right now.

So going forward, we would think that that would be less of an issue.

And in terms of vaccine supplies?

We're making great progress with our vaccine supply issues and some of the other vaccines.

Targets that we've had established in the past are targets that we're still committed to as we move toward.

I think just remind everyone, we continue to make stock investments in our vaccines.

We've invested over $1 billion in new manufacturing capabilities to increase capacity and create redundancy from a standpoint in West Point, Pennsylvania, as well as in our Elkton, Virginia and in our French facility as well.

And as you know, we're building new facilities in Durham, North Carolina and Carlow, Ireland at the same time.

In Durham, it's a $750 million facility, and we are on track with that to be able to take product and supply in the first half of 2010.

So there's a lot of positive things going on from an investment standpoint.

And the organization with VAQTA and RECOMBIVAX-HP are on target to meet the established dates that we put forward.

Next question, please.

Your next question comes from the line of Jami Rubin with Goldman Sachs.

Good morning.

Can you all hear me?

Yes, good morning.

Thank you.

I've got a few questions.

First on the equity income line.

With respect to Gardasil sales in Europe.

They were $145 million down substantially from a year ago and sequentially.

Can you tell us what's happening there?

Is this the impact of competition from Cervarix or is this reduced demand?

How do we think about that opportunity going forward?

And my next question relates to just the overall performance of equity income.

I just noticed that Merck's Schering-Plough equity was relatively flat despite downed sales.

What's happening with cost reduction programs there?

And can you remind us why the comparisons were so much easier with AstraZeneca LP this quarter and how we should think about that going forward.

Thanks.

Let me start with the Ex-US sales, particularly the FPMFC sales, which as you pointed out, Jami, did decline in second quarter versus 2008.

First of all, we have seen those sales decline due in part to, first of all, exchange, but also due to a slowdown after we saw very strong and quick uptake in large early adopting markets like Germany, France, and Belgium.

In addition, there was a substantial amount of media discussion around safety of the vaccine following the batch suspension in Spain.

Beyond that, though, I do want to point out that Gardasil maintains greater than 85% overall market share as of the first quarter of 2009, vis-a-vis our competition.

And in reimbursed market where physicians actually have a choice more than 9 of 10 prescriptions are for Gardasil, which I think illustrates the choice being made by physicians as well as the parents of girls and young women.

So any sales issues that you see overseas right now, I think, are really related to the fast uptake last year and not related to competition.

This is Peter.

Let me take your next two parts.

The first related to the Merck Schering-Plough joint venture.

Just to remind you, and I think you probably remember this business, second quarter last year we included a $43 million expense related determination of the respiratory joint venture.

If we exclude that on a year-over-year basis, I think the Merck Schering-Plough joint venture equity income reflects the continuation of the trends we saw in the second half of last year and is pretty much in line with what we expected.

For the AstraZeneca Joint LP, you may recall that last year we talked about in second quarter sometimes the number can be a little bit, have some inherent variability on the timing of payments.

Last year, we had a weak second quarter so if you run across the different quarters over last year and this year, I think you'll see pretty clearly our second quarter results this year were in line with where expectations would be but probably the second quarter last year was a little bit light.

I think just some of that was the timing of the payments that we received.

Next question, please.

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

Thanks for taking the questions.

The first question is for Peter.

Can you just quantify the impact of foreign exchange on your earnings?

Second question for Ken, just on your antiviral product ISENTRESS.

If you look at most of your peers that compete in this marketplace, it seems as though partnerships are very, very important largely because of the use of combination therapy.

Can you help us think how you're going to think with the naive indication at least going forward and how you're thinking about partnering with a player that could potentially improve your competitive positioning?

Third question for Dick.

Traditionally, Merck likes to be a dominant player in businesses that it plays in.

You will be inheriting consumer assets from Schering-Plough, some very good assets.

Historically, you've always had a position of potentially joint venturing things such as that with a stronger player.

Historically, you've always had a position of potentially joint venturing things such as that with a stronger player.

Can you just help us think through how you're thinking about managing consumer assets and your overall focus relative to your focus which has always traditionally been on the pharmaceutical side of the business and how you think about managing that and the need potentially for a JV partner there?

Thanks.

John this is Peter.

Let me start off Wall Street foreign exchange impact.

So the impact on our P&L this quarter -- I'll cover both.

It was a 5% impact on the top line and 7% impact on the bottom line.

So that's pretty much as we anticipated when we set up the year from a guidance standpoint.

I don't think we've been surprised by foreign exchange movements, but that's where I think everybody was anticipating.

Ken?

On ISENTRESS, we look at the future opportunities for this brand, I think it's useful to note that after just one and a half years after launch, ISENTRESS is already being used in 10% of HIV patients.

Once you recognize that, although we have been promoting ISENTRESS consistent with our current labeling, a number of physicians have already been prescribing ISENTRESS for patients outside our initial treatment experience indication and excluding nucleotide backbone therapy, ISENTRESS is the fourth most prescribed medicine in this crowded market.

The expanded indication provides us an opportunity to accelerate growth for ISENTRESS because of the fact that many physicians recognize its favorable safety and tolerability profile.

It also makes available to physicians another important treatment option, and I think, begins to unlock the potential of the product as patients are being on these drugs for a longer period of time and are looking for the tolerability advantages, although, we do recognize that there's more to be done.

So in that same vein, we are looking forward to the once daily dosing regimen, which we have had the FDA accept the file for, I believe, is that right?

We filed that.

Certainly our study has been initiated in that area.

Thank you.

And we're also looking forward to the fixed dose combinations that we have in development with other ARVs to simplify dosing and reduce co-pays.

I apologize for that issue on the once daily dosing.

That is something we initiated the study for and we do plan to move forward to with that.

Next question, please.

Wait.

Oh.

John, I think Schering-Plough's built a very powerful plan with the consumer businesses, particularly in the United States, and are starting to grow externally as well.

I think it would be a very important part of our business moving forward from a diversification standpoint in building the brand, particularly in the merging markets and what we need to do to support them.

Countries like China, if you take the brands (inaudible).

Your question about how you do it strategy is something we actually have a team looking at today.

Certainly there's going to have to be an investment in the consumer health business.

Do we do it as a stand alone or we do it with a partner?

And how do we move that forward?

I can tell there is a great deal of excitement around the consumer health business from a Merck standpoint.

If you look at some of our products that have recently come off of patent or will be coming off of patent, they are excellent candidates from the Rx to OTC switch, to make it even more powerful in the future.

Next question, please.

Your next question comes from the line of David Risinger with Morgan Stanley.

Thanks.

Could you just comment on the flattening of JANUVIA/JANUMET franchise new prescription trends in the last three months.

It seems like they're just flat and not growing sequentially anymore.

Second, obviously, you did a lot of due diligence on Schering-Plough's TRA and just wondering if you could provide some comments on comparing and contrasting Schering's TRA to ASI's, since ASI is going to be reporting Phase II TRA data shortly.

And then finally, if you could please provide some more color on the cordaptive outlook eXUS?

Thank you.

I'll start with the JANUVIA question.

Thanks, David.

We're continuing, as I said before to introduce new and relevant efficacy and safety data to strengthen our position and also implementing a number of programs to drive growth.

I mentioned the fact that we're continuing to work with physicians and patients to help them improve the understanding and awareness of the key efficacy and safety attributes of these medicines through this data.

We continue to leverage and improve on our favorable managed care with recent improvements in Medicare Part D coverage.

In addition, we are working to enhance awareness and understanding of our very favorable formulary position for JANUVIA, and JANUMET with physicians and patients.

We're beginning to see with our new commercial model and the work that we're doing with various patient offering programs, we're actually starting to see better receptivity in the physician's offices.

So we continue to believe that there's significant growth potential for this medicine as we move forward.

As it relates to TREDAPTIVE, we are in the process, as you know, in the third quarter of continuing to launch this medicine in important markets around the world including Mexico, the UK and Germany and into the fourth quarter and into 2010.

We began launching it in the third quarter in countries like Ireland, Norway, and Finland.

And we don't provide specific product guide for TREDAPTIVE.

This is a product we intend to move forward with and have a great deal of excitement about its potential.

Concerning TRA, as we have said in the past, we continue to be excited about TRA, and at this point, we are not going to comment beyond that.

Next question, please?

Your next question comes from the line of Keyur Parekh with UBS.

Thanks for taking the question.

My question is actually related to a pipeline compound, MK0633.

Could you please elaborate further on the reasons behind the decision to not continue the evaluation, specifically were there any safety concerns that you saw with this drug?

Thank you.

Merck decided not to continue with the Phase II-B study that was designed to evaluate the efficacy and safety of MK633 and asthma.

It was based on our specimen of the efficacy safety profile observed within the population in that study.

So after careful consideration, we have discontinued clinical development efforts for that compounding asthma.

We will focus our future clinical development program and effort on the treatment of chronic obstructive pulmonary disorder, COPD.

Next question, please?

Your next question comes from the line of Tony Butler with Barclays Capital.

Thanks very much.

Last week, Novartis characterized what they believed the impact of healthcare reform would be as a moderate impact on the overall P&L.

While it still remains a morphis, you have spent some time in the White House with the Chief of Staff, and I'm curious today how you might actually characterize what you see as potentially coming down the road, potentially a bill signing and coming out of Congress as the overall impact to the pharmaceutical business.

Thank you.

Well, as you know, as an industry, Pharma and Merck continues the efforts chaired by President Obama and members of Congress; it really is critical for all Americans to have access to high quality healthcare coverage.

With this goal in mind, I think we're very happy that we're supporting a comprehensive healthcare reform bill and that we've been very active, as you said, in this dialogue.

I think it's important to have a seat at the table this time around to make sure that we can add value.

Certainly, we're continuing to evaluate the impact of these various proposals on our business.

We cannot be definitive about the impact at this point.

I think we do have an obligation to contribute, to provide resources.

Certainly, it isn't going to be easy.

From a standpoint, as you know, the $80 billion that has been reported.

Certainly our potential liabilities include expanded rebate payments in Medicaid and Medicare and additional tax liability.

We're still evaluating it.

We still think it's the right thing to do, it's important to do to participate and contribute and now's the time to reform healthcare.

And given the time we have time for one or two more questions.

Go ahead, Cynthia.

Your next question comes from the line of Seamus Fernandez with Leerink Swann.

Can you update us on the magnitude of wholesalers stocking and destocking in the quarter and which products were potentially impacted?

I realize that you do have IMA agreements, but last quarter you stated that roughly there was a $75 million negative impact.

I'm just wondering if there was a positive impact in the quarter.

Second question, can you just update us on the timing of the interim look that's planned on your staph aureous vaccine, V710, and if it is possible to file based on that interim look?

And just a very last quick question, in terms of Singulair, do you see Singulair as a product that was a potential opportunity to be brought OTC or are the challenges of this product as an asthma product simply too difficult to manage over the counter and such that, you know, perhaps I was just wondering if it's possible to split the asthma indication OTC versus the allergic rhinitis indication?

Thanks.

Starting with the last question.

We're not in a position today to declare where we see Singulair OTC being, but it's something we are looking at very carefully.

It is a brand that's had broad acceptance for allergic rhinitis and asthma.

We believe it is a safe, effective product.

So that's something that we will evaluate along with the FDA and others to decide what's the best way to bring that forward in the context of OTC?

The second question was the staph vaccine.

We don't have any updates on the staph vaccine as of this time.

The first question had to do with the current status of wholesaler inventory.

And what I can tell you is that in the US in the second quarter, there has been minimal change in wholesaler inventory levels as compared to the first quarter.

After the end of the second quarter, wholesaler inventory levels remained approximately $75 million to $100 million lower than in 2008.

Year end levels across our entire portfolio, including MSP-JV.

We still find these inventories to be within a reasonable range and consistent with our inventory management agreements in the US to meet customer service levels.

Still current inventory levels do remain below historic norms.

The last question, please, Cynthia.

Your last question comes from Steve Scala from Cowen.

When does the Front Line patent expire and how does Merck and Sanofi seek to sustain the franchise post that patent expiration?

It's not clear to me why Sanofi would want to buy Merck's half of Merial given this patent expiration, but perhaps I'm missing something.

And secondly, Schering said on its call that the single event look at the improvement trial would not occur for some time.

I'm wondering if some time is expected to be some time in 2009 or some time there after?

Thank you.

Okay.

So I'll start with the interim look.

As you know, there is an interim efficacy analysis that's to be conducted by the independent DFMB when 50% of the expected total primary events become available.

Since this analysis is, in fact, event driven, timing of the interim analysis is dependent on the accumulation of events and it would be inappropriate at this point to speculate on that timing.

Of course when there's something significant to report, we will communicate it.

Also, I apologize, I recognize that that question was asked by one of the previous questioners, and I did not respond to it.

From our perspective on the Front Line patent, the Front Line Spot patent, as we understand it runs till September 2016, and the Front Line Plus patent runs to 2017.

Okay.

Cynthia.

That concludes our call.

As always, Carol Ferguson and I will be here to take any additional questions that you have.

Ladies and gentlemen, thank you for participating in today's conference.

You may now disconnect.