默克藥廠 (MRK) 2009 Q3 法說會逐字稿

Good day everyone and welcome to Merck's third 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, Cynthia, and good morning.

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

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

Also here to participate in the Q&A session are Bruce Kuhlik, Executive Vice President and General Counsel, and Dr.

Peter Kim, Executive Vice President and President of Merck Research Lab.

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

On this call we will review the results contained in the release we issued at 7:30 this morning.

You can access this through our Investor Relations section on www.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.

These statements are based on Management's current expectation and involve risks and uncertainties which may cause results to differ materially from those set forth in these statements.

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

No forward-looking statement can be guaranteed and actual results may differ materially from those projected.

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

Forward-looking statements in this press release should be reviewed 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 the total call to last approximately one hour.

With that, we will begin with remarks from our Chairman, President and CEO, Dick Clark.

Thank you Eva and good morning everyone.

This morning I'm pleased to discuss our Company's strong third quarter performance, update you on the readiness for the pending transformation of the merger Schering-Plough and highlight how we continue to plant the seeds of sustainable future growth through innovative partnerships that will position us as a leading global healthcare company for many years to come.

By continuing to concentrate on the fundamentals and growing key global pharmaceutical brands we realized top line revenue performance of $6 billion in the third quarter delivering worldwide revenue growth of 2% on a year-over-year basis.

And by continuing to concentrate on lowering our cost and streamlining activities throughout the organization, we recorded third quarter non-GAAP earnings per share of $0.90 and GAAP earnings per share of $1.61 per share.

Our strong third quarter is evidenced that Merck has maintain our focus on business performance and overcome a challenging economic environment, while continuing to ensure our operational readiness for the pending merger.

Sales of key products, particularly SINGULAIR, JANUVIA, JANUMET and ISENTRESS, during the third quarter illustrate the base that we are building upon to create a new Merck for the new era in global healthcare.

And that day is just around the corner as we continue to expect to close the merger this quarter.

We have made significant progress in our planning during the past few months and have achieved a number of key milestones during the third quarter.

Perhaps most importantly shareholders of both companies voted overwhelmingly to approve the proposed merger this past August.

In addition, we announced the global leadership team for the new Merck to include executive committee level positions for consumer healthcare and animal health as well as the addition of a chief medical officer and a chief compliance officer.

About 40% of Schering-Plough senior leaders will be part in a newly combined company in executive roles.

We completed the $4 billion sale of Merck's interest in our animal health joint venture, Merial, Sanofi-Aventis.

And we filed with regulators in the European Union seeking approval of the merger with Schering-Plough.

Both Merck and Schering-Plough are working diligently and cooperating with regulators in other countries to obtain all necessary approvals.

When all the necessary approvals are in place, I am confident we will be ready to hit the ground running on our first day of business as a new Merck because the quality of our integration planning and the strong momentum we are building.

Out of the gate we will hold the leadership position as new era in global healthcare dawns.

As such, we will continue to focus on critical areas such as healthcare reform, anticipating customer needs and growth areas such as emerging markets, biologics, and vaccines.

Before year end, I am cautiously optimistic that the US will finally pass major healthcare reform.

Merck and the pharmaceutical industry stepped up earlier to support a real change.

Throughout, we have supported healthcare reform that improves quality through market based competition, encourages innovation and ensures that every patient that's has been prescribed one of our medicines or vaccines have access to it.

Our participation in healthcare reform in the US demonstrates that in response to a rapidly changing operating environment, Merck has taken the bold actions necessary to adapt to the future environment.

That is why the new Merck we plan to take advantage of our broader and deeper in line product franchises when the merger is completed.

We will pursue the significant growth opportunities we have identified in three key areas, emerging markets, biologics, and vaccines.

The cross divisional approach we are taking will allow the new companies commercial, research, and manufacturing divisions to dedicate the necessary focus and resources to take and sustain leadership positions.

As we have built the foundation of the new company in recent months, we have been guided by four underlying principals.

We must ensure a smooth transition for our existing customers.

We must have the right people in the right jobs in the right culture.

We must capture synergies in the form of cost savings and revenue growth opportunities, and we must stay focused to maintain momentum in our late stage pipeline.

One thing is certain.

With the opportunity for a pending merger with Schering-Plough, we are more externally focused than ever.

We are listening harder and gaining a deeper appreciation for what healthcare solutions our customers around the world, patients, physicians, and public and private healthcare providers alike, are saying they need.

To this end, we are busy cultivating new scientific discoveries and delivering opportunities, the future growth for our company, by seeking out the best science and the best innovation to improve healthcare.

In the past quarter alone, we've added a seasonal flu vaccine to our US vaccine portfolio, developed by our long term partner, CSL Limited, which now means that Merck will market eight of the ten vaccines on the recommended schedule for adults in the US.

We've launched a Hillman Laboratories, a first of its kind research and development joint venture, between a leading pharmaceutical company and the world renowned research charity, Wellcome Trust, with a nonprofit mission to focus on developing affordable vaccines to prevent diseases that commonly affect low income countries.

We closed an exclusive collaboration and license agreement with Portola Pharmaceuticals for the development of a potential novel new medicine to treat cardiovascular disease.

All of which is part of the reason why the plans we are making for the future are so exciting and hold so much promise for so many.

Now I will turn it over to Ken.

Thank you Dick and good morning, everyone.

As Dick mentioned, revenue for the third quarter 2009 was $6 billion, up 2% compared to last year, including a 3% negative impact from foreign exchange.

Overall, a combination of factors drove our growth in the quarter.

We continued to generate strong growth for our newest brands and markets around the world.

ZOSTAVAX sales were bolstered by the return to full supply and increased origination linked to the start of the fall flu season and SINGULAIR continued its sales momentum.

Looking at the results geographically we saw volume growth of 6% outside the US, which was offset by foreign exchange.

In the US, we achieved sales growth of 4% despite the continued impact of a loss of marketing exclusivity for some of our brands.

We are pleased with the continued momentum of the business and the focus of our team as we move toward the planned merger with Schering-Plough.

Now, turning to individual product performance.

Starting with SINGULAIR, sales in the third quarter were $1.1 billion, up 5% versus the prior year.

Outside the US excluding exchange, we generated strong growth of 11%.

We recently achieved leadership in Japan, and in Europe we are seeing strong growth in key markets including France and Spain.

Moving to JANUVIA and JANUMET, global revenue grew to reached a combine $664 million in the third quarter, up 39% versus the prior year.

The JANUVIA, JANUMET franchise continues its strong performance in markets all around the world.

In the vast majority of markets where more than one DPP4 exists, Sitagliptin is clearly the market leader.

In the US, JANUVIA and JANUMET have achieved a new milestone as the number one branded family of product prescribed by endocrinologists.

We are positioned well to address the competition entering the market.

More than 16 million prescriptions have been written in the US alone since our launch in 2006 and we have favorable formulary positioning.

We have invested in the continued success of these brands by making them the top priority of our sales and marketing organization and frequently introducing new data to offer physicians and patients new treatment choices in managing this progressive disease.

I would like to share with you some recent examples.

JANUVIA was approved for restrictive first line use for treatment of Type 2 diabetes in the EU this past August.

It is the only DPP4 in the EU to have this indication.

JANUVIA and JANUMET are under regulatory review in the US and the EU for use as add on to insulin and in September, we received a positive opinion from the CHMP for this indication.

In the US, we continue to implement patient programs through direct-to-patient advertising, physician office program and pharmacy initiatives to address potential cost sensitivity including the impact the economy has had on certain patients.

Lastly, we are extremely pleased with the recent approval of JANUVIA in Japan and China.

As you know, Japan is the second largest pharmaceutical market in the world and JANUVIA is the first introduction of a new class of agents to treat Type 2 diabetes there in ten years.

During a recent trip to Japan I had the opportunity to review the launch plan with the team and I am confident that the brand will be successful in that critical market.

Also as you know, we are very focused on growing our emerging market business.

The JANUVIA approval in China is an important milestone.

Next, ISENTRESS continues to form well with another quarter of strong steady growth.

Sales in the third quarter were $197 million, up 14% sequentially versus the second quarter 2009.

In the US, third quarter sales were $95 million and market share continues to exceed the last five HIV launches in new RX market share.

Outside the US, we achieved $102 million in sales thanks to strong uptake in markets including France, Spain, and Italy.

The recently approved expanded indication for ISENTRESS in both the US and now the EU, makes ISENTRESS available for patients who are new to treatment and patients who are treatment experienced.

This means that ISENTRESS is a very important option for physicians and patients to consider at each stage of the treatment continual.

I will now move to our vaccine business.

Starting with GARDASIL, sales as reported by Merck in the third quarter were $311 million, a 22% decline when compared to the third quarter of last year.

In the US, sales declined 20% versus third quarter 2008 but increased 19% sequentially versus second quarter 2009.

Performance in the quarter was in line with our expectations, driven primarily by increased vaccination of the 13 to 18 year-olds during back to school season.

We also saw modest increase in the 19 to 26 first dose vaccination.

While this gives us some confidence that our programs are beginning to have an effect, we remain focused on addressing the barriers in this challenging age group.

Ex-US sales as reported by Merck decreased 27%, attributable to the high penetration rate in early adopting countries such as Australia where so many in the 12 to 26 population have already been vaccinated and the initial adoption of school based program in all Canadian provinces in the third quarter of 2008.

Growth in less mature or later adopting market such as Korea is partially offsetting the decreases.

Let me now press on yesterday's news regarding the use of GARDASIL in the US.

The ACIP voted to recommend permissive use of GARDASIL in boys 9 to 26 years of age and the ACIP recommended vaccine for children funding for males.

The recommendation for BIC funding for males will enable access and, importantly, remove the potential barriers to underserved populations.

However, we expect the uptick in males to be much less than uptick for females due to the differences in the strength of their respective ACIP recommendation and the lack of cancer claim in males.

I will remind you though that only GARDASIL is indicated for use in males.

And in a separate vote, the ACIP was clear yesterday in recognizing the clinical differentiation of GARDASIL.

The proposed language for the revised HPV recommendation explicitly states that the quadrivalent vaccine GARDASIL is recommended to prevent vaginal and vulva cancers, genital warts, as well as cervical cancer.

The recognition of the unique value of GARDASIL further supports our strong positioning in the marketplace.

In countries where physicians have a choice, GARDASIL is the clear market leader.

Moving to ZOSTAVAX, third quarter sales as reported by Merck were $84 million and more generally reflective of underlying demand now that supply is stable.

We have been ruling out new marketing programs in physicians' offices and pharmacies to help providers more easily integrate ZOSTAVAX into their routine standard of care.

We are continuing the consumer campaign for ZOSTAVAX initiated in July.

These new programs, coupled with full supply and increased patient originations during fall flu season, should position ZOSTAVAX for strong growth.

In the other vaccine categories I want to take a moment to discuss Pneumovax 23, our vaccine for pneumococcal disease.

Third quarter sales were $130 million and reflect an acceleration of demand as more patients originated earlier in the adult immunization season due to additional media attention on the H1N1 pandemic and seasonal flu.

Looking ahead to 2010, we are pleased to expand our adult vaccine portfolio in the US to include a seasonal flu vaccination, AFLURIA, which we recently licensed from CSL.

As Dick said, with the addition of AFLURIA, Merck will market eight of the ten vaccines on the recommended immunization schedules for adults in the US.

Now finally, let's discuss performance of our Cholesterol JV.

Worldwide sales of ZETIA and VYTORIN as reported by the Merck/Schering-Plough joint venture were each $514 million in the third quarter.

Sales of ZETIA were down 4% and sales of VYTORIN were down 9% versus the prior year.

The rate of prescription market share decline in the US, however, appears to be stabilizing.

Outside the US, sales in the third quarter were down 1% relative to third quarter 2008 and were up 9% after adjusting for exchange.

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

For many patients, particularly high risk patients, statins alone are not sufficient to get them to their LDL goal.

Given this, we believe these products will continue to be valuable treatment options for physicians by helping to get more patients to their LDL goals.

The NFP joint venture is prepared to engage in dialogue with scientific leaders at the upcoming AHA meeting in November.

Our goal is to provide fair and balanced scientific information to the medical community and other constituents.

Looking forward, we are excited by our strong combined cardiovascular portfolio and pipeline after the close.

Across our organization, we are encouraged by the momentum of many of our key brands and are excited about the other near-term opportunities ahead of us.

As we look forward to the new Merck, there are a number of near term launch opportunities in major markets around the world across both companies' portfolios that have significant potential.

We are focused on ensuring successful launches, continued momentum for our inline brands and maintaining strong and productive customer relationships as we prepare for the integration with Schering-Plough.

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

Thank you, Ken.

And good morning, everybody.

I will provide an update on our third quarter results and our full year 2009 guidance.

I will also comment on what you can expect from us in the first half of 2010.

As I've said previously our non-GAAP results exclude restructuring costs as well as pre-closing costs related to the merger, including interest, commitment fees and external integration cost.

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

Merck reported third quarter non-GAAP earnings per share of $0.90, representing a 13% increase versus the third quarter of 2008.

Our GAAP EPS was $1.61 per share including a gain in the sale of our share of Merial.

We are pleased with the strong performance this quarter.

The 13% increase in non-GAAP EPS over the same quarter last year reflects strong operating performance, including growth for our newest brands in markets around the world, an improvement in gross margin versus prior year, and continued expense management of marketing and administrative spending.

There are a couple of other items that I would also like to mention.

These are the foreign exchange negatively impacted the top line by 3% and the bottom line by 2%.

We increased our legal expense reserves in the quarter by $55 million.

Now, these two negative impacts were roughly offset by a third item.

We benefited from $127 million in portfolio gains this quarter as we liquidated securities in advance of the merger closing.

Now, on revenue, our total revenue for the quarter, as reported by Merck, was $6 billion and Ken walked you through our strong product performance, so I'll move on to other areas in our P&L.

Third quarter materials and production costs are $1.4 billion when you exclude restructuring cost in both years, this represents a 1% decline in cost and a 76.8% gross margin in this quarter.

Now, on a guidance basis we continue to anticipate PGM at a 77% to 78% rate for the year excluding restructuring cost.

Now let's turn to marketing and administrative expenses.

M&A expenses were $1.7 billion as reported; excluding merger related expenses of $56 million, M&A expenses declined 3% versus Q3 in 2008.

The current quarter's exchange benefit was entirely offset by the aggregate $55 million increase to the VIOXX and FOSOMAX legal defense reserves.

As I've said previously, we expected higher marketing expenses particularly focused on seasonality and the back to school season for vaccine in the second half of the year.

We did increase promotion this quarter in support of our international launches in vaccines, especially ZOSTAVAX, and we are seeing the benefit in our top line.

The cost of this increase support was more than offset by the continued benefit from our new commercial models and corporate G&A efficiency program.

We do expect to continue to emphasis on promotion of key brands and new launches in Q4 and as a result we expect to see higher spending relative to prior quarters.

In particular we will be supporting the continued launches of TREDAPTIVE in the EU and the launch of JANUVIA in Japan.

Now turning to R&D, our research and development expenses in the third quarter were $1.3 billion.

When you exclude restructuring cost in this year and 2008, research and development spending is up 6%.

This increase is primarily driven by $50 million of upfront payments associated with our previously announced licensing of a factor 10-A program from Portola Pharmaceuticals.

Now let's turn to equity income.

In the third quarter, Merck recorded $688 million of equity income, an increase of $23 million.

This increase is attributable to income from the AZLP joint venture, partially offset by the decline in Merial equity income.

Now, remember that this sale of Merial to our partner, Sanofi was finalized on September 17th, and therefore, income from the last couple of weeks in the quarter was not recorded by Merck.

Likewise given the divestiture, you will not see Merial equity income in Merck's fourth quarter results.

Now let's talk about other income and expense.

For the third quarter of 2009, other income net is $2.8 billion.

This includes the $2.8 billion gain on the sale of Merial.

When you adjust for this gain and $88 million in merger-related costs, other income, on a non-GAAP basis is $117 million, compared to other expense of $31 million in the third quarter of the prior year.

There are a few items driving this year-over-year change.

First, in the third quarter of 2009, Merck realized approximately $127 million of portfolio gain from liquidating security in anticipation of the Schering-Plough merger closing as I mentioned earlier.

Second, as we anticipated, interest income of $33 million was $110 million lower when compared to the prior year as a result of lower interest rates and a change in our investment portfolio mix towards cash and shorter days securities, again in anticipation of the merger closing.

Third, in the same quarter of last year, Merck recognized $88 million of portfolio losses and $52 million of exchange losses.

So if you take these three factors, I think that pretty well explains the change year-over-year in that area.

Now let's turn to the tax rate.

Merck's third quarter GAAP effective tax rate was 31.9%; excluding impact of the Merial sale, restructuring charges, and cost related to the Schering-Plough transaction the non-GAAP effective tax rate was 24.7%.

While this rate is similar to the rate that we saw at this time a year ago, it is higher than the first two quarters of 2009.

We anticipated this, as a tax rate in the first half of this year included benefits from various tax settlements.

So, turning to guidance.

We continue to expect our full year non-GAAP tax rate to be approximately 21% to 24%.

So, overall, a very successful quarter.

Now I'd like to discuss what this means for our guidance for 2009 and before I begin, let me remind everyone that this guidance is Merck's stand-alone guidance.

It excludes any contribution by Schering-Plough as a result of the expected merger and any cost incurred upon closing.

We continue to expect the merger with Schering-Plough to close in this quarter.

And once -- in the fourth quarter -- and once this closing occurs the stand-alone guidance for Merck will no longer be applicable as the combined companies' fourth quarter reported results will include Merck results for the full quarter and Schering-Plough results from the closing date through the end of the year.

With that let's get into our guidance.

We are pleased with our operating results this quarter and expected our key products will continue to perform well for the rest of the year.

In structuring our guidance for the year, we did consider a few other items.

First, we do not expect any further significant portfolio gains.

Based on our current levels of cash and investments and anticipated cash flows between now and the expected close of the merger, we do not anticipate needing significant additional funding to close the merger.

Second, fourth quarter results will exclude equity income from Merial, that I mentioned earlier, which contributed approximately $50 million to equity income in the fourth quarter of 2008.

Third, we expect that fourth quarter M&A spend will be higher as we support our key brands and new launches in line with the guidance we've provided throughout the year.

Given our year-to-date performance and these factors, we are raising the bottom end of our non-GAAP EPS guidance to $3.20.

This results in a full year Merck stand-alone non-GAAP EPS guidance range of $3.20 to $3.30 per share.

We are also decreasing our M&A guidance range to $6.8 billion to $7.1 billion.

All other guidance elements remain the same.

You will find a break down of these on the guidance page of the press release issued earlier today.

We are also adjusting our GAAP EPS guidance range to $3.69 to $3.89 which includes the gain on our sale of Merial.

Our merger guidance is still applicable.

We continue to target a high single digit non-GAAP EPS compound annual growth rate from 2009 to 2013 for the combined company.

We continue to anticipate that the transaction will be modestly accretive to non-GAAP EPS in 2010.

Now as we look ahead to the first quarter of 2010, which we anticipate being our first full quarter of the new Merck, we want to emphasize that the EPS expectations should be moderated relative to the full year outlook.

As we have already seen in Merck's 2009 trends, our first quarter non-GAAP EPS was less than second and third quarters, as we had expected.

We expect to see this pattern in the new Merck due to the seasonality of our business, specifically, our respiratory franchise and vaccine sales.

Other factors that you should keep in mind that would be specific to the new Merck includes first, as Ken said, there are a number of upcoming launch opportunities for the new Merck.

A substantial amount of promotion effort is planned in the near term to ensure the success of these launches.

Second, the synergies we expect to capture, while substantial, will not be immediate, but rather would be achieved more heavily in the second half of the year.

Now with that said I would like to look ahead for a moment and share our thinking about the timing of 2010 communications.

Given the anticipated fourth quarter close of our merger, we expect to hold our fourth quarter and full year 2009 sales and earnings call during the second week of February, which would be about two weeks later than our normal timing.

I am sure you can appreciate the need for the additional time given the additional complexity of our combined financials, the added requirement to develop purchase accounting for the first time, and additionally, we will use this time to develop adjusted financial statements that are most useful for investors to understand the trends of the combined businesses.

In addition, we expect to hold our annual business briefing during second quarter of 2010, rather than in early December as it's been Merck's practice in the past.

We believe this will make the briefing most useful for you because it will enable us to speak to the products, the pipeline, and the strategy of the combined company.

Accordingly we expect to provide annual guidance around the timing of our first quarter 2010 sales and earnings call ahead of the ABB.

We really look forward to an exciting future as a new Merck.

And, thank you very much.

Now, I would like to turn the call back to Eva.

Thank you, Peter.

We will now open the call to take your questions.

(Operator Instructions.) Your first question comes from the line of Chris Schott with JPMorgan.

A couple of quick questions.

On the R&D side, for ISENTRESS QD, can you supply us an update on that program, where we are in enrollment?

Second, with the Portola and licensing, when can we see that program moving into Phase III?

I know a number of your competitors have data releases expected over the next year.

Should we expect that Merck's going to wait because of some of these studies before moving forward.

A bigger picture question.

In the current economic environment, we are seeing copay assistance programs meaningfully boosting usage of products in certain therapeutics category.

Is this something that Merck's would consider more broadly employing for some of your products, some of your newer products or categories, specifically something like JANUVIA?

Thanks.

Thanks Chris.

This is Peter Kim.

That program is moving forward.

We have not made any announcements in terms of additional developments there.

The (inaudible) date for that remains 2011.

With regard to Portola, that program is in Phase II of clinical development, and we are actively engaged in discussions with our new partners to move that program forward, and we have not made any announcements about when that would go into Phase III.

Thanks, Chris, for your question about the economy and could pays.

We are mindful that the impact of the economy really does make a difference, particularly to certain lower -- middle income patients and among diabetics, they are on multiple medications.

So we do in fact have programs that are coupon programs, discount programs that are aimed at helping patients be able absorb some of the economic impact of their copays.

We actually target those programs.

We are very cognizant of the differential impact that it has had across geographies within the US as well as certain patient demographics.

So we do target those programs where we think it will create the greatest good.

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

Thanks very much.

I have two questions.

First, could you just comment on the sequential trends in JANUVIA prescriptions?

It seems like the IMS data suggests that JANUVIA has stopped growing in new RXs in the last several months.

And then second with respect to the cholesterol joint venture, I believe that Merck management has commented that you expect revenue growth for that cholesterol joint venture in 2010.

Is that correct?

Thank you.

For the JANUVIA question, we have continued to see growth for JANUVIA.

I think fortunately we are continuing to see growth, as we mentioned on the early part of the call, and we have a number of programs in place to continue to drive the future growth of the brand, including making it now our top priority for our sales and marketing organization.

We continue to introduce new data.

We continue to add on, for example, with the long-acting metformin as well as the pioglitazone, so we continue to implement a number of patient programs, direct to patient advertising.

We have physician office programs and pharmacy initiatives to address, as I mentioned a few minutes ago, the potential cost barriers on patients.

So we continue to believe that we can drive additional growth.

It is now the focus of our efforts now in our, particularly our US sales force.

On our cholesterol sales force, we do expect growth.

We have not said exactly when.

The products continue to grow outside the US.

We continue to believe that VYTORIN and ZETIA are important treatment options, particularly as people try to treat the newest treatment goals around LDL lowering and, in particular, for high risk patient.

Next question please.

Your next question comes from the line of Catherine Arnold with Credit Suisse.

Thanks very much.

Two topics, one for Peter in terms of the staph vaccine, is it reasonable to think your second quarter briefing you might have an update in terms of your "go, not go" decision?

And if you can give us any sense in terms of what the hurdle rate would be and reduction of incidence of FAS?

And then as far as the upcoming Arbiter-6 halt stata, I know you guys aren't in control of that but from the marketing perspective have to be thinking about various outcomes of that meeting, and I'm wondering the next day, if the study is favorable to niacin, which given the patient population isn't a crazy thought, what are your sales reps going to say in reaction to doctors asking about that and what would your medical information folks say to the same?

Thanks, Catherine.

With regard to the staph vaccine, there is nothing to update you.

Last time I told you that we did anticipate a delay in the proof of concepts decision due to a slower enrollment as well as significantly lower event rates that were occurring in that trial.

With regard to Arbiter-6, I'd just like -- a few points.

One is that obviously Arbiter-6, we don't know the results of that study yet.

I do think, as you know, it is a IMT study.

It is not an outcome study.

And we certainly think it's important to note that IMT studies have had inconsistent results in the past; one notable example that you are probably familiar with is the cashmere study which is a 12 month study comparing 80 milligrams of atorvastatin to a placebo, and in that IMT study comparing 80 milligrams of atorvastatin to placebo, there was not a statistically significant difference between the two groups when measured by IMT, and as all of you are aware of that result stands to marked contrast to multiple large clinical outcome studies that have shown clear benefit of atorvastatin on reducing cardiovascular disease.

That said, as you point out, Catherine, the study was, the Arbiter-6 study was conducted in patients that had been extensively pretreated with statins, had well-controlled LDL, but relatively low HDL and so therefore it was a study design that would likely favor niacin.

In addition, there was no placebo control.

So even if there were a difference to be observed between two arms, one couldn't determine an effect for either treatment approach versus placebo.

And finally it's a small study.

There are fewer than 400 patients in this study, and therefore we think again not knowing the results, it would be inappropriate to draw conclusions about outcomes from this study regardless of the results.

The way to study this question, of course, is to do a true outcome study.

And, as you know, that's what we are doing with Improve It; and indeed we are happy to let you know that Improve It, through extensive efforts on the part of our investigators to expand in a number of countries, as well as sights, is now doing very well and I'm pleased to announce that the enrollment has now increased to over 15,000 patients.

So we fully expect that this study, Improve It, will answer the question in the way it should be answered, which is an outcome study.

From a commercial standpoint, Catherine, I want you to know that we have a proactive plan in place for AHA and the company, both companies will have strong presence there.

We also know how important it is not only to provide fair and balance scientific information at that meeting, but to also have the outreach to the medical community and other constituencies, including the media, and also to communicate directly and forthrightly with our customers, including patients, providers, and payors.

So our intent to engage all of those including key scientific leaders to ensure that the results of the study are put in the appropriate the scientific context, as Peter just discussed.

Your next question comes from the line of Eric Lo from Merrill Lynch.

A question on annual health business, with Sanofi interested in exercising the option to combine the Merial business with Intervet.

What is the willingness for the Company to divest assets in order to ensure the combination will actually pass regulatory hurdles?

And a question on GARDASIL, what do you think the market potential is for male indication for GARDASIL, and what's the marketing strategy for the new indication and can you also provide some update in terms of any improvements in the second and third dose compliance rates for female vaccination?

With respect to your question about the animal health business, if Sanofi does exercise the call option, following the completion of our merger with Schering-Plough, we would work closely with them and with the antitrust and the competition authorities as needed to determine what sorts of divestitures would be required in order to close that transaction.

With GARDASIL, as we mentioned the ACIP did vote to recommend permissive use in boys age 9 to 26, but it did provide vaccine funding from the ELC program.

We think that is an important development in that it enables access and what we will be doing is working with public health authorities, state, local health authorities as well as with pediatricians to ensure that people understand the very real and medical burden associated with genital warts.

So I would say -- as I've said in earlier remarks, we see this as an opportunity, because it's a real opportunity.

We do not think the uptick would be like it was with female.

It's very early days after what we heard yesterday, but we are eager to get out there and help people understand the importance of this drug, this vaccine for men.

As it relates to the compliance issues, the compliance rates for GARDASIL among women remain high compared to historical norms for vaccination.

Private compliance rates remain at approximately 75% for the second dose and about 50% for the third dose.

We should note that we do have ongoing efforts to further increase compliance levels to the programs that is focused on those very stage groups.

Next question please.

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

Thanks.

I have two questions.

First for Dr.

Kim, what is the total enrollment of HPS2-Thrive to date, and would the results of the pre-specified safety analysis at 25,000 patients be something that Merck would seek Cordaptive approval upon and that would presumably be well before 2012?

And second question is on SINGULAIR, Merck has said in the past it would look at a new GC opportunity.

The question is would that automatically go through J&J Merck, or could that be retained by Schering-Plough OTC and perhaps more broadly, does J&J Merck have rights to future Schering-Plough Rx to OTC switches?

I'll take the first question.

With regard to HPS2-Thrive, which is our clinical outcome study with TREDAPTIVE, I am pleased to say that enrollment is going very well and the current enrollment is now over 20,000 patients.

With regard to your question about the interim analysis, the interim analysis, as you say, was a safety interim analysis.

But that study design has been modified by Oxford, which is the group that is conducting this trial as well as Merck and the two groups decided that interim safety analysis was not necessary at this point because of the safety of TREDAPTIVE being assessed by an independent data safety monitoring board on a regular basis that reviews online safety data as this goes on.

And based on these reviews, the DSNB has confirmed that the study should continue as planned and so we are just continuing to move forward with this trial which as I've said is progressing very well in terms of enrollment.

With respect to your questions about the OTC business, obviously we do have a joint venture with Johnson and Johnson to develop and market certain non-prescription medicines.

That will continue to operate as a separate business from the OTC business in the combined Merck/Schering-Plough company following the merger.

The specific criteria that we have for our obligations to offer products to the J&J joint venture are confidential and we can't disclose those terms and it does relate only to the US and Canada.

Next question.

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

First on the Betrixiban, just curious to know if you think that the results from the Rely trial this past summer raises the efficacy bar for the other factor 10a's and if you could again remind us how Betrixiban compares to the other factor 10a's, which do appear to be ahead of yours?

The other question relates to ISENTRESS, does any signal for capturing Front Line uptakes since the label expansion and can you make this a fixed does combo with NITI?

Thanks.

Thank you, Jami.

I'll take the first one and just comment very quickly on the last part of your second question, which is that we have not disclosed anything on combination products with ISENTRESS, but it is something that is of interest to us.

With regard to Betrixiban, which is the factor 10a anticoagulant that we licensed from Portola, the Rely results are very interesting and needs to be considered with regard to development of any anticoagulants moving forward.

That said, the reason why we are so excited about the Portola molecule is that we believe that it is clearly the best, has the potential to be the best in class factor 10a out there.

It is once a day dosing.

It has a very low peak to trough ratio, as compared to the competitors, and it has minimal renal clearance which would indicate or suggest that we can develop that without dose modification for patients with renal impairment, which is very important in this patient population.

So while acknowledging your point that we are behind competitors with this molecule, the reason why we did this license was because we think this molecule has the potential to be by far the best in class factor 10a.

On ISENTRESS as far as moving to the first line indication, the treatment population, we are not in the position now to give any data about the change in the first line usage, but I will say that we are pleased with the addition of this and that expanded indication does provide us an opportunity to accelerate the growth for this product because a number of physicians recognize it's really got terrific safety tolerability profile.

This expanded indication makes available to physicians another treatment option and really enables us to begin to unlock the product's full potential.

So while I'm not able to give a specific answer, I do say early days and that's something that is very much in our focus.

Next question please.

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

Good morning and thanks for taking my question.

The question is actually on Pneumovax 23, can you just run some of the numbers that you spoke about earlier, the $130 million in revenue this quarter.

Do you expect the run rate to continue and was there any stockpile sales that was part of that $130 million?

Thank you.

As I've said, the cut quarter does reflect first of all an acceleration in demand.

Sales were up from $72 million in the third quarter of '08, so $130 million, and a lot of that has to do with the focus that physicians and patients have on the H1N1 pandemic and the prevention of pneumococcal pneumonia, but I also should point out that third quarter sales did benefit to some extent from government agencies purchasing quantities of pneumococcal vaccine as part of their pandemic flu preparedness strategy.

We are in a unique area now with respect to pandemic flu concerns, and we continue to work with many government agencies and health authorities around the world to help them address their needs.

I will say that as far as stockpiles go, today the orders for stockpile that we receive have been relatively nice.

Next question please.

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

Thank you.

Maybe a couple of questions for Ken, and then Peter, a question for you.

Ken, you continue to talk bullish; (inaudible) is behind VYTORIN and ZETIA, but it's been almost two years since you've been out of the market with DTC on VYTORIN and ZETIA and I am wondering why that is still the case and when that might restart?

And the second question is on ISENTRESS, international sales were greater than US sales for the first time, and I'm wondering if you can give us some idea how big the ex-US can be relative to the stress market for this product.

The question for Peter is, the Analyst Day not coming until next year, can you highlight the one or two novelty or pipeline you are most excited about.

On the ISENTRESS question, we are pleased with the ex-US up take.

It's really reflecting the strong launches that we've had in France, Spain and Italy, and I can't really comment on how the big ex-US will be relative to the US.

it has a strong reception in the EU countries and we continue to see an opportunity to accelerate growth outside of the US and inside the US.

As it relates to VYTORIN and ZETIA in DTC, the JV continues to evaluate the opportunities for directed consumer advertising.

We continue to look at what's happening in the outside world in the communications environment, and we will continue to monitor those things and make decisions as to where we think the right investment should be behind those two products.

I should also point out that just because we are not into the broadcast marketplace for DTC, it doesn't mean that we are not continuing to strongly resource these brands.

With regard to the pipeline, I guess the products that I would highlight here are first of all, are osteoporosis drug or MK822.

As you know this is a novel mechanism inhibitor and we have been conducting outcome study and I'm pleased to say that that enrollment is going very well, and we actually anticipate that the study enrollment will be complete by the end of this month.

So those results, that trial is moving forward very well, and we presented three-year data in bone marrow density and what we are seeing is that those bone marrow density measurements continue to increase over time even after three years.

But also importantly that if you stop the drug, that you see, that the bone marrow density comes down indicating that the drug effect does not persist long after the physician decides to stop treating.

And moreover that the bone turn-over continues even while you are on drugs.

So we think that this drug has really tremendous potential not only in terms of increasing bone marrow density but also allowing for healthy bone development during treatment, and we obviously are anxiously await the results of the outcome study as we move forward but we are pleased with the situation with regard to enrollment.

The other drug that I would highlight is Anacetrapib, which is our CETP inhibitor.

As you know we started the Phase III trial defined in April of 2008.

This is being study with patients with coronary heart disease.

That study continues to move forward.

It is now fully enrolled and we anticipate completion by the end of 2010 for that study, and we also continue to anticipate that we will start the cardiovascular outcome study for the CETP drug in 2010.

Next question.

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

Thanks for taking the questions.

For Peter, just on R&D and integration planning, can you afford or provide any commentary on what percent of the R&D personnel that you might be able to retain (also Dick referred to the productivity of R&D as being a clinical thing and the making) and most large mergers have failed in that arena, but can you give us some color as to why this may be a case study in the making?

And then on HIV treatment guidelines for ISENTRESS, can both you and Ken provide some color on how that might shape the US market, both positive and negative for ISENTRESS going forward?

Thanks, John.

With regard to R&D integration planning what I would say is this is moving forward very well.

We have a team that is working very hard on both sides to put in place what we call the portfolio cards, which outline the key attributes of each of the molecules that are in the pipelines starting with pre-clinical development and working all the way through to postmarketing studies.

Those cards, as we call them, are being filled out in detail such that on day one will be in a position to rapidly move to a prioritization process in which we look at the portfolio in detail.

And actually I think it's fair to say that the scientists are quite excited about looking forward to being able to do that prioritization.

With regard to the personnel and the retention of personnel, this is something that has been very much on my mind.

I have gone around and visited with all of the Schering-Plough and indeed many of the Merck's sites as well, and the message that I'm putting out there is that we, in research, that we are going to take a staged approach to how it is that we evaluate is and that approach will begin with the people.

The first thing we need to do is understand the people, the talent that we have, the capabilities that we have.

The second thing we need to do is understand the programs and how it is that the programs between the two companies should be brought together, where are there overlaps and where are the potential complimentary and benefits to enhance programs that are ongoing in one company or the other.

Then and only then are we going to turn to network consideration and that will take us sometime.

So from the point of view of research, it's really right now a critical component on identifying and then retaining our key talent, identifying the key opportunities for problematic positive effects, but also where there are redundancies and then deal with the issues around the network.

And then finally, I've talked about this before, I think the franchise strategy that we put in place, the franchise structure, that we put in place will be critical to allow us to make the key prioritization that we need to do.

We are going to do it on a research franchise basis by research franchise basis, not on a site by site basis.

So, for example in our cardiovascular disease, we are going to look across the entire spectrum of everything in both companies in cardiovascular disease and we are going to prioritize within that disease area across both companies.

And I think the fact that we spent the last few years putting in place this franchise structure with the research franchise head as well as the research franchise structure, will allow us to approach this in a way where we will be able to, not to only maintain, but enhance productivity moving forward.

As far as the question about the impact of the evolving HIV guidelines on ISENTRESS, of course, we continue to evaluate that as well as what's happening terms of clinical practice in the marketplace.

We can't specifically give a comment about your question, but I will say that we continue to be pleased by the fact that physicians continue to adopt it, now the fourth most prescribed medicine in a very crowded market, and we are continuing with Peter's help to work on the product going forward to get the kind of product profile modifications that will help with combination products as well as once daily dose of ISENTRESS on which we began Phase III study last September.

Okay.

That's the last question and concludes today's call.

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

Cynthia?

Thank you, ladies and gentlemen, this concludes today's conference.

You may now disconnect.