默克藥廠 (MRK) 2010 Q2 法說會逐字稿

Good day, everyone and welcome to Merck's second quarter 2010 earnings conference call.

Today's call is being recorded.

At this time I'd like to turn the call over to Alex Kelly, Senior Vice President of Investor Relations.

Please go ahead.

Thank you, Amanda and good morning everyone.

Welcome to Merck's 2010 second quarter conference call.

There are a number of items in the GAAP results this quarter such as purchase accounting adjustments, merger related expenses, restructuring costs, and also the gain on AstraZeneca's asset option exercise.

We've excluded those items in our non-GAAP reconciliation tables so you can get a better sense of the underlying performance for the quarter.

We've also provided tables to help you understand the revenue trends.

So this quarter there are three tables in the press release.

Table number one is the GAAP results.

Table number two is a reconciliation of our GAAP results to a non-GAAP basis for the second quarter and also for the year-to-date period.

Table three is a supplemental non-GAAP table which provides the sales performance for our products and our businesses as if the Company had been combined in 2009.

During the call we will be referring to tables two and three when we discuss -- or excuse me, table two when we discuss the P&L and table three when we discuss the product performance, so you may want to have those available.

In addition, I would like to remind you that some of the statements we make during today's call maybe considered forward-looking statements within the meaning of the Safe Harbor Provisions of the US Private Securities Litigation Reform Act of 1995.

Such statements are based upon the current beliefs of Merck's management and are subject to significant risks and uncertainties.

Our SEC filings, including Item 1A in the 2009 10-K, identifies certain risk factors and cautionary statements that could cause the Company's actual results to differ materially from those forward-looking statements we make today.

Merck undertakes no obligation to publicly update any forward-looking statements.

In addition, you can see the Company's SEC filings as well as today's earnings release and the tables at merck.com.

This morning I'm joined by Dick Clark, our Chairman, President -- excuse me, our Chairman and Chief Executive Officer, Ken Frazier, our President, and Peter Kellogg, our Chief Financial Officer.

Now I'd like to introduce Dick Clark.

Thank you, Alex and good morning, everyone.

Our strong bottom line performance in the second quarter demonstrates Merck's continued success in executing our post-merger strategy.

We're now halfway through our first full year as a combined Company.

Already, we're seeing positive signs of what can be achieved.

Despite patent expirings in a challenging economy, I'm very pleased with what our team has accomplished.

We remain focused on driving revenue growth, maintaining the momentum of our business, reducing our cost structure, and making the right strategic investments globally, all of which are allowing us to make good progress towards Merck's overall goal of becoming the best healthcare Company in the world.

Strong underlying product performance helped us realize top line worldwide sales of $11.3 billion, non-GAAP earnings per share of $0.86, and GAAP earnings per share of $0.24 for the quarter.

Key brands including Januvia, Janumet, Remicade, Isentress, and Temodar were again standouts this quarter.

In addition, Animal Health and Merck Consumer Care produced strong global sales.

With our strong performance for the first half of the year, we continue to have confidence in delivering on our long term financial targets.

We also remain committed to achieving our previously announced synergy target of $3.5 billion in ongoing annual savings in 2012.

We have already announced initial phases of the merger restructuring program that will contribute approximately $2.7 billion to $3.1 billion toward the overall target, with procurement savings and subsequent pages to account for the rest.

In a few moments, Ken will discuss in more detail our global product performance and then Peter will discuss our full year earnings outlook.

But first let me highlight a few areas.

Merck's integration remains very much on course, but will it involve more hard work and difficult decisions as we proceed forward with our efforts to capture the full value of the new Merck for patients, customers, and shareholders.

The announcements we made recently detailing the plans to integrate Merck's global research and manufacturing operations is another key step, but not the final one in successfully executing our overall plan to create an industry leading operating model.

On the R&D side, our goal is to create a more flexible organization that fuels innovation in our pipeline and excels at external collaboration.

On the manufacturing side, we aim to have a more reliable cost efficient, worldwide supply chain to support Merck's broader product portfolio and meet the demand of a diverse and ever evolving global healthcare environment.

And while there are still lots of moving parts, we are building a strong track record of quickly executing our integration plans, while launching new products and delivering strong performance from current ones.

That is what allows us to drive revenue growth in key brands despite patent expirings and difficult economic conditions.

In markets around the world, we simultaneously have launches underway for a range of products including Simponi in ten markets and Januvia in Japan and India.

Additionally, our latest asthma medication, Dulera, was recently approved by the US FDA and we've begun its launch.

As we shared with many of you during our R&D day in May, we also have several followings under late stage review in the EU.

From our robust pipeline we anticipate making about 20 filings for new compounds and new combinations between now and 2012, including Boceprevir, Vorapaxar, Odanacatib, and Tredaptive in the US.

We also remain well positioned in Animal Health, a business that is driven by growing demand for animal proteins, as well as a strong demand for companion animal health care.

We are on track to bring together Sanofi-Aventis and our Animal Health businesses into a new joint venture that will create a new global leader in animal health.

Looking ahead, we continue to be excited about the many opportunities before us to serve the rapidly expanding emerging markets.

Throughout these markets, I believe we continue to position Merck well by launching new products and making targeted business development investments.

Examples of our committment and execution can be found in high growth markets like China and South Africa.

In South Africa, we have a newly formed strategic collaboration with the local partner, Adcock Ingram.

Together we will co-promote and distribute branded products, as well as over-the-counter medications.

This collaboration will extend our reach into the market.

Earlier this month, Merck's executive committee members and I spent a busy week in China.

It has become one of our most important markets.

Providing needed medicine and vaccines to meet the expanding needs of Chinese patients is an exciting growth opportunity for us, so we are focused on building our capabilities incline a including our local production capabilities in China, including our local production capabilities, our product portfolio and our R&D.

As part of our expansion efforts, we recently unveiled joint venture plans with Sinopharm to manufacture and commercialize adult and pediatric vaccines in China and announced plans for a manufacturing site in Hangzhou where we will invest to build local capacity.

I've seen firsthand the excitement and hard work underway in our emerging markets around the world, with China being the most recent example.

That's why I'm confident that we will reach our goal of driving 25% of our global pharmaceutical and vaccine revenue from emerging markets in 2013.

Merck's committment to improving health around the world is not new to us.

This committment dates back decades and most recently was recognized by the access to medicine index.

Merck was ranked second in the global analysis of companies that are making their medicines and vaccines readily available to markets across all income levels.

All of these actions support Merck's mission to help patients around the world and to maximize shareholder return by providing innovative medicines, vaccines, and consumer and Animal Health products globally.

With that, I'd like to turn the call over to Ken.

Thank you, Dick, and good morning, everyone.

As Dick mentioned, we had another successful quarter despite losing the exclusivity of Cozaar and Hyzaar and the economic challenges facing our businesses and customers around the world.

In describing our second quarter performance, please note that I will refer to supplemental combined non-GAAP results which include the impact of foreign exchange.

The Global Human Health business delivered a solid quarter with sales of $9.8 billion.

This represents a 2% decline on a supplemental combined non-GAAP basis from the previous year, largely due to the loss of exclusivity of Cozaar and Hyzaar, especially in the US.

If you've been following the weekly prescription trends, then you have seen that there's been rapid erosion of approximately 90% of branded Cozaar and Hyzaar prescription volume in the US.

Other markets, such as the UK and Italy, have also experienced rapid erosion.

Excluding the impact of Cozaar and Hyzaar, Global Human Health sales grew 3% year-over-year.

Sales were driven by the robust operational growth of key brands such as Januvia, Janumet, Remicade, Temodar, and Isentress.

We continue to be optimistic about the growth opportunities for these brands.

The speed with which we've integrated our commercial operations, the diversity of our portfolio, and the underlying strength of our global business have been key factors in our successful start to the first half of 2010.

In the second quarter, we continue to drive growth in many of our markets.

International Human Health sales grew by 5% excluding Cozaar and Hyzaar.

Our emerging markets business grew 12% in the second quarter.

We spent a fair amount of time during the business briefing in May discussing our strategy and goals in the emerging markets.

As we said then, we believe these markets will grow to represent more than a quarter of our pharmaceutical and vaccine sales by 2013.

In the second quarter, the emerging markets accounted for 19% of our Human Health sales.

Two of the emerging markets, China and Brazil, are quickly working their way up our list of top ten markets.

Sales in China and Brazil both grew by more than 15% in the quarter.

We continue to expect to have significant future growth opportunities across the emerging markets.

We are well positioned to drive significant growth with our current portfolio of products including Januvia, Singulair, as well as branded generics like Cozaar and Hyzaar, as well as Zocor.

We are also exploring multiple strategies to increase our share in the branded generic and patent protected segments through value creating partnerships and acquisitions.

Dick mentioned some of the recent developments in China including the recent letter of mutual agreement with Sinopharm to develop a joint venture to commercialize pediatric and adult vaccines in China, a very large potential market.

Now, turning to the performance of some of our key brands this quarter.

As I address the individual product performance, you can follow along in table three from our supplemental financial package as Alex said earlier.

Starting with our respiratory franchise, Singulair sales in the second quarter were $1.3 billion, comparable to the second quarter of 2009.

This year, the spring allergy season peaked early in the US and was overall comparable to the 2009 season.

Sales in the US this quarter were also affected by unfavorable fluctuations in trade inventory.

Double digit growth of Singulair in the emerging markets was offset by declines in Japan due to the timing of shipments to our partner.

For Nasonex, global sales increased 5% driven by the strong growth in the US and Japan.

Despite the flat year-over-year comparisons for the allergy season in the US, sales of Nasonex grew in the US by 7%.

Nasonex continues to be the leading branded nasal inhaled steroid and now includes additional congestion labeling in the US.

In Japan, we've had robust growth since the launch and Nasonex is now the market leader.

Moving on to Januvia and Janumet.

Global revenue grew 33% to a combined $818 million.

The Januvia franchise continues to perform strongly in terms of share and overall growth.

Sales in the quarter were driven by double digit growth across all markets.

In Japan, where we recently launched Januvia, sales were $69 million which included supply sales to our partner of about $40 million.

We've seen strong initial response to the value proposition Januvia represents to Japanese physicians and patients.

Our immunology franchise also achieved strong growth during the quarter.

Remicade continues to be a leading immunological therapy with sales of $669 million, an increase of 18% from the previous year.

Remicade continues to deliver growth across all indications -- rheumatology, gastroenterology and dermatology.

We anticipate Remicade's double digit operational growth will continue throughout 2010.

In addition, sales of Simponi were $18 million in the quarter.

Simponi sales continued to grow as we launch the brand in more countries and take share from other subcutaneous anti-TNFs.

We've now launched in ten countries, most recently in Spain.

We will launch Simponi in other EU markets in the second half of 2010 and launches in the UK and France are planned for 2011.

Turning to Zetia and Vytorin.

Sales were $1.1 billion this quarter, which in the aggregate represents a 3% decline compared to the previous year, primarily due to declines in the US.

Sequentially, Zetia and Vytorin grew 4% globally.

Zetia and Vytorin remain a primary focus of our promotional efforts and we continue to see solid growth in many markets around the world, including 28% year-over-year growth in Japan.

We continue to make progress on the IMPROVE-IT study which is now fully enrolled with over 18,000 patients.

Moving on to vaccines.

For the total vaccine business, I will focus my comments on sequential comparisons.

Total sales for the vaccine business were $832 million in the second quarter, compared to $846 million in the first quarter of 2010.

As a reminder, vaccine sales in the first quarter benefited from a $75 million to $100 million inventory build.

With that in mind, we had some bright spots in the second quarter specifically with respect to RotaTeq, which benefited from a temporary competitor supply issue, and Pneumovax.

This, unfortunately, was offset by weaker Zostavax sales due to supply constraints and the ongoing backorders for the brand.

This is a frustrating situation for our teams, our customers, and patients and we have dedicated several hundred engineers and researchers to getting it fixed.

We continue to work to resolve our current supply issues and to create redundant capacity in our facilities in North Carolina and Ireland.

However, we do expect sales to be negatively affected by the supply issue again in the third quarter of this year.

Moving to Gardasil.

Sales as reported by Merck in the second quarter were $219 million, an 18% decline from the previous year.

In the US, Gardasil sales grew sequentially by 5%.

We've made good progress with the coverage for males and funding is now secured for all states.

Gardasil continues to maintain market share leadership in the US, and it also remains the global market leader.

In infectious diseases, Isentress continues its outstanding performance as sales increased 55% to $267 million in the second quarter.

The continued growth of Isentress reflects the unique efficacy and tolerability profile of this product, which has been widely embraced by physicians, patients, and health organizations around the world.

While many of our brands reported positive growth trends in the EU during the second quarter, the environment in the EU and across Europe is now more challenging.

Many countries have announced austerity measures aimed at reducing costs in areas such as healthcare.

While the implementation of pricing actions varies by country, many have announced measures to reduce prices of generic and patented drugs.

In the short-term, we've worked with many of the industry groups and governments to help develop solutions for our customers to improve their budget positions and address the short-term economic issues.

While we're taking steps to mitigate the immediate impact in the EU, we anticipate that the austerity measures will affect our revenue performance going forward.

Peter Kellogg will focus on the financial impact of the EU austerity measures in his remarks shortly.

Moving from the economic environment, I'd like to highlight briefly some recent developments from three of our key R&D programs, Dulera, Vorapaxar and Boceprevir.

We're in the process of launching many new products this year and we have robust late stage pipeline with programs that represent significant scientific achievements and first in class opportunities.

In June, as Dick mentioned, we received US FDA approval of Dulera, our combination steroid and long acting beta agonist for the treatment of asthma.

Despite the availability of other combination treatments, there remains a large unmet need in asthma and we believe Dulera represents a great alternative due to its differentiated profile, which includes the addition of clinically judged deteriorations in asthma within its label.

We're beginning the launch of Dulera now with plans for a full commercial launch late in the third quarter.

Our Phase III program for Vorapaxar, our PAR-1 inhibitor for the prevention of major cardiovascular events is also progressing well.

Both Phase III studies are now fully enrolled.

The TRA 2P study in secondary prevention is fully enrolled and patients are being monitored for the accrual of events.

The TRACER study in patients with acute coronary syndrome is also fully enrolled and patients are being monitored for the accrual of the events.

Based on current event rates, we anticipate that both studies will be completed in mid 2011.

We are pleased with the progress in the Phase III program.

Most importantly, we continue to target a 2011 filing for Vorapaxar.

Turning to Boceprevir, our Hepatitis C protease inhibitor, I'm pleased to share with you that both Phase III studies are now completed and we're in the process of analyzing the results.

We plan to submit the Phase III data for presentation at the AASLD meeting in November.

Finally, we remain on track to file Boceprevir in 2010.

In closing, Global Human Health along with Animal Health and Consumer Healthcare have delivered another solid quarter for Merck.

We continue to be excited by our portfolio of products and our robust late stage pipeline.

While the operating environment is constantly changing, we continue to execute on our long term strategic goals to create the leading healthcare Company.

Now, I will pass the call over to my colleague, Peter Kellogg.

Thank you, Ken, and good morning.

As you've heard from Dick and Ken, we continued our performance in the second quarter and our integration efforts are well underway.

Our performance this quarter is characterized by solid operational performance which was tempered by the impact of generic entries for Cozaar and Hyzaar.

And the cost management and benefits of merger synergies in our cost base.

Ken discussed how our key brands and geographies performed and now I'd like to cover three areas with you.

First, our operating results, second, our restructuring activities, and third, I want to discuss our targets for full year 2010 and beyond.

So let's begin with our results.

As Alex mentioned, we have once again provided data in our earnings release and supplemental charts to help navigate through our non-GAAP adjustments to the P&L.

To simplify my remarks today, I will speak to the non-GAAP results which exclude purchase price accounting adjustments, merger related costs, restructuring charges and the gain on AstraZeneca's asset option exercise.

On this basis, we reported second quarter non-GAAP earnings per share of $0.86.

Total revenue for the quarter was $11.3 billion.

On a supplemental combined non-GAAP basis, sales were down 2% versus prior year due primarily to the impact of generic Cozaar Hyzaar and lower Astra supply sales due to the generic erosion and return of rights to the non-PPI products.

These offset solid operational growth in the rest of the business.

Ken discussed our Global Human Health sales, so let me just comment on our Animal Health and consumer businesses.

Our Animal Health business grew 9% to $731 million reflecting growth among cattle, poultry, and swine products.

We remain on track to complete our Animal Health joint venture with Sanofi-Aventis in the first quarter of 2011.

Consumer Care sales increased 11% to $422 million due to the strong seasonal performance of Claritin and Coppertone.

Now moving on to the expense items in the P&L, you can see that we did a very good job managing our expenses this quarter in anticipation of additional commercial launches and spending on our late stage pipeline expected in the third and fourth quarter.

The costs of our combined Company are represented in our current cost base, whereas only the Merck costs were included in the second quarter of 2009, so it's a little hard to see the underlying trends on a year-over-year basis.

As a result, I will speak to sequential trends on the cost lines since those comparisons are more meaningful.

Let's begin with materials and production.

The non-GAAP gross margin in the second quarter was approximately 76.5%, which is an improvement compared to the first quarter of 2010 where the gross margin was 75.4%.

Most of the improvement in the gross margin was driven by product mix, with higher sequential sales of Januvia, Isentress, and increased sales of seasonal allergy products.

Moving on to marketing and admin expenses, on a non-GAAP basis, marketing and administrative expenses in the second quarter were $3.1 billion, which is about the same level as in the first quarter of 2010.

Research and development expenses for the second quarter was approximately $2 billion, which is also in line with the first quarter.

As the year progresses, we see continued investment in late stage projects such as Vorapaxar, Telcagepant, Odanacatib, and Tredaptive.

Now let's move to equity income.

In the second quarter, Merck recorded $43 million in equity income which was a decrease from the first quarter, primarily due to the inherent variability in the timing of payments for the AstraZeneca joint venture.

Moving on to other income and expense.

The GAAP results include $443 million from AstraZeneca's exercise of the asset option.

On a non-GAAP basis, other expense of $153 million was comparable to the first quarter of 2010.

Moving to tax, the Merck non-GAAP tax rate was 20.5% for the second quarter, better than the rate that we saw in the first quarter.

As noted in the earnings release, we continue to expect the full year tax rate to be in the range of 22% to 24% on a non-GAAP basis.

In addition to the solid operational performance this quarter, we also returned cash to shareholders through our dividend and by making progress on our share repurchase program.

During the quarter, we paid $1.2 billion in dividends and spent approximately $1.3 billion to repurchase about 38 million shares of our common stock.

So in summary, we continue on a strong trajectory since our merger.

Now let's talk about the integration activities.

This quarter, we may continue progress on our cost synergy capture by reducing our headcount and global infrastructure, and generating savings from procurement actions.

On July 8, we announced our plans to phase out operations at eight manufacturing facilities and eight research facilities over the next two years.

The merger restructuring program also includes consolidating our sites in local markets by closing 58 commercial offices.

The actions we've announced so far will bring our number of R&D sites down to 16 and our number of manufacturing sites down to 48, excluding Animal Health sites.

We will continue to pursue productivity efficiencies and evaluate our manufacturing supply chain capabilities on an ongoing basis.

Remember, we are planning to create a new Animal Health joint venture, so our Animal Health business is not involved in the Merck merger restructuring activities.

As a result of these and other actions, such as procurement savings, we are well on track to realize our $3.5 billion synergy target by the end of 2012.

Now I'll spend the remaining time reviewing our outlook for 2010 and beyond that.

Let's start with 2010.

With the first six months complete, it's appropriate to provide an update on our earnings targets.

We have maintained $3.34 as the mid point of our range while tightening the EPS range for the full year.

Merck is now targeting a full year 2010 non-GAAP EPS range of $3.29 to $3.39, excluding certain items.

Factored into this target EPS range is our strong first quarter results, continued benefits from synergies in the second half, the impact of healthcare reform in the US, which is unchanged from our previous comments, and the assumption that Merck retains full rights to Remicade and Simponi in our markets.

In addition, we have assumed top line pressures due to pricing actions in some European countries and foreign exchange, both of which we believe will be a headwind in the second half.

In addition, we anticipate increased second half spending for new product launches like Dulera in the US, new targeted commercial and R&D investments in the emerging markets, and spending to support the late stage pipeline.

Let me go into a bit more detail to help you understand what is already factored into the 2010 targets.

As Ken mentioned, Greece, Spain, Germany and some other markets have already announced price reductions which will have an unfavorable impact on our results in the third and fourth quarter of 2010.

The impact of European -- the impact on European revenues in the first half was about 2% unfavorable.

In the second half, we anticipate a mid single digit unfavorable impact on European sales.

These updates are included in our 2010 targets and will impact our second half performance relative to what we were modeling at the beginning of the year.

As a result, we now expect that EPS in the second half will be similar to the level in the first half, so you should adjust your models accordingly.

Logically, these actions in 2010 will also have an impact in 2011 as they annualize.

Finally, let me touch on our long term outlook.

We remain excited about the future of the new Merck and we have many opportunities between our commercial launches, our R&D pipeline, and the merger restructuring activities that are already well underway.

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

In closing, we are pleased with the solid second quarter results we reported today.

We clearly had a strong first half.

Our expense management contributed to that performance and will help us manage a tighter environment in Europe.

The merger is working and our results and our short term and long term earnings targets demonstrate that we are right on track.

Thank you.

Now, I'll turn the call back over to Alex.

Thanks, Peter.

Now we would like to open up the call to answer your questions.

But in order to get through as many as possible, we would like to ask you to limit yourself to one or two questions and note that we won't take follow-up questions.

But if you do have additional questions you're welcome to rejoin the queue.

Amanda, we're ready for the Q&A.

(Operator Instructions) Your first question is from Marc Goodman with UBS.

Good morning, Marc?

So, given what happened with BRILINTA at the panal, I was just curious how you were thinking about how TRA plays into that market there?

And second of all, can you give us an update on your biologic program?

So I'll talk about BRILINTA.

I think from our perspective, I think it's important to recognize that we always studied TRA and always anticipated that it would be added to the standard of care whether it was Aspirin, PLAVIX, or another medicine in PLAVIX class.

So, it was always our intent to have it added on top of the standard of care and, so we would think that it would be added on to BRILINTA if that became approved at some point and became a competitor of PLAVIX I also think it's important to recognize that even with the -- for example, 16% increase, a great deal of residual risk still remains, cardiovascular risk, still remains and therefore, there's still an important role for medicine like TRA.

I also think it's important to remember the product profile, which includes the fact that we have not seen any increase in bleeding, unlike some of the other medicines that are being used, so for all of those reasons I continue to think there are really robust prospects for medicine like TRA.

Marc, can you just repeat your second question?

Just an update on the biologics, the bio similars.

So, you'll remember that back in May, we discussed our MVB strategy and we updated the status of the PEG-EPO program which was discontinued.

At the same time, we also highlighted the fact that a number of other programs continue in our MVB portfolio and we also referenced biological programs that are part of our novel biologics focus including antibodies against HGF and IGF1R for oncology, IL 23 for immunological indications, MK3415a for C.

difficele, and of course ELONVA, which is a novel follicle stimulating hormone for fertility.

So, that's a--sort of a short description of where we are in our biologics program, but I think it's important to recognize that we see biologics as an important part of our future both with respect to what we anticipate will be an abbreviated pathway for the approval of biological similars, as well as novel biologics research going forward.

Okay, next question please?

Your next question is from Chris Schott with JPMorgan.

Great.

Thanks.

First question was on ZOSTAVAX, just can you give me a little bit more on what needs to be done to address the -- ?

Sure, Chris.

It's Dick.

I think the issue, as Ken mentioned, is that we put significant amount of technical and engineering resources on this both from a manufacturing and a research standpoint, and certainly right now, we are cautiously optimistic.

We have begun production again of Varicella.

We believe that by starting production we have a path forward, so that's good news.

It's not going to have an impact on 2010 forecast because the product process cycle is significant, so there's many more production steps to go through yet.

There's more quality testing to go through.

There's more discussions with the agencies to go through, but I am cautiously optimistic due to the fact that obviously we've started production that it's important.

The second important aspect is, as Ken mentioned, is that we've started our focus around [Dorem], and we hope to have that from a production standpoint up and running in the second half of this year and from a pediatric standpoint, with the relaunch of COMVAX, our HIV and Hepatitis B combination vaccines, all of Merck pediatric vaccines will be available in the US for the first time since mid-2007.

So, we are making that type of progress but we'll keep our fingers crossed on ZOSTAVAX because we did start production again.

Okay, and on the emerging market, following this deal with Sinopharm, should we think about Merck looking at these type of partnerships going forward or when we think about the emerging market, the inorganic growth portion of this, will more traditional M&A play a larger role?

I guess when I'd consider the moves that Abbot made, as an example, this quarter and how you're thinking about what appear to be fairly rich valuations, if you were to consider a larger strategic move as it relates to the emerging market?

Thanks.

I think the way we look at it as a Company is that we don't look at the emerging markets as a entity into itself.

We look upon it as a country-by-country basis and currently, our total focus, obviously, is profitable growth and keeping profitable growth as the principal.

In some cases it will be joint ventures and relationships.

Sometimes it won't be inorganic at all and sometimes there may be an acquisition out there that may help the foundation of a particular country or be a foundation across other emerging markets.

So, we really take it case-by-case and what's in the best interest of that particular country, is there a partner, is there a combination that makes sense from a value standpoint, and most importantly, does it make sense from a profitable growth standpoint.

Next question, please?

Your next question is from John Boris of Citi.

Thanks for taking the question and congratulations on the quarter.

Just one for Peter Kellogg.

Can you quantify the impact of healthcare reform in the quarter and then what you anticipate for the full year, and then just building on the previous question on China?

When you look at China, Dick, especially since you spent a fair amount of time there this past week, how are you thinking about it from an ability to price your medicines, what do you see as the impact of formularies on your ability to price those medicines going forward and then any discussions you had on the intellectual property?

Obviously that's a very important component respecting intellectual property within the Chinese market, but any thoughts you have there would be helpful, thanks.

Peter?

Thanks, John.

It's Peter.

So healthcare reform, I think, really is moving ahead just the way we had originally anticipated, so there's no surprise this quarter.

Ballpark, roughly about $44 million impact in the second quarter and that makes sense given what we'd talked about as a full year impact of about $170 million, so really no update, no change really in what we anticipated or originally modeled.

We've always said that would probably increase next year to something in the $300 million to $350 million range, so it's pretty much in line with what we've always talked about.

No new surprises.

Okay, so on China, let me just start by saying that I think we continue to be very excited about the future in China.

To look at China in a monolithic way as it relates to pricing or every--any other aspect of our commercial strategy I think is not how we are going to approach it, so let's start with the robust growth that we anticipate in the middle class in the urban areas of China.

For those people, healthcare is still likely to be a self-pay exercise and so we will continue to look at those market segments in a way that we can price competitively with alternative therapies, but I will say that the pricing in China has allowed both broad access while at the same time also allowing strong profit margins in that country.

I think the other aspect is through the government and so there's an essential drug list which is part of Chinese healthcare reform and Merck participated in the essential drug list, placing ZOCOR among other medicines on that drug list.

And our experience there has been that while we've had to provide substantial discounts to get entrer to the essential drug list, the volumes have more than compensated for the pricing reductions that we have.

So, I think what we've seen with ZOCOR right now is an example of how in that market we have to price in a way that creates value for that market and there's still an opportunity to be profitable in that context.

Next question, please?

Your next question is from Tim Anderson, Sanford Bernstein.

Thank you.

I know you don't like to say much about the REMICADE dispute, but I'm hoping you can give us at least some information.

You used to talk about being highly confident that you would prevail in the dispute, but I don't really hear that language being used anymore and I'm wondering if that's still the case.

On arbitration can you run through different options here?

Is it all-or-nothing or could there be some sort of middle ground or what exactly?

And then on your comments about not impacting 2013, it's not clear to me why that wouldn't impact your 2013 guidance because it is a pretty material contributor to your financials and by extension if it doesn't impact 2013, can we assume that it wouldn't impact 2010 either?

So I'm going to start with [Bruce Pelus]?

Hi, thanks for the questions and at this point, we've provided the information about when we expect the arbitration hearing to begin and the selection of the panel.

We're looking at whether we can provide some additional information with respect to the process and I hope to do that in the relatively near future.

We continue to believe very strongly that we've structured this transaction in a way that's appropriate for the REMICADE distribution agreement and I'll turn it over with respect to the financial targets.

Hi, Tim, it's Peter Kellogg.

Thanks.

So I don't think we've said it didn't impact one way or the other.

What we said was our guidance has this contingency incorporated, so really our guidance that we've provided would be still achievable, regardless of the outcome in this arbitration or topic.

And in terms of, obviously depending on the outcome, it will make that guidance number easier or more challenging, but nonetheless I think we feel comfortable with the guidance that we've provided under different scenarios.

And then 2010?

Well, for 2010, obviously, the timing is a little unclear and it would be pretty relatively late in the year, but that would be something that would have to really depend on the outcome, so I don't think we've said for 2010 it's one way or the other.

I'd say, right now, what we did highlight was our guidance included REMICADE and SIMPONI in our 2010 numbers.

Okay, thank you.

Okay, next question please?

Your next question is from Jami Rubin with Goldman Sachs.

Jami?

Jami, your line is open.

Hello?

Hi, Jami.

Hi, can you hear me?

Yes, we can.

Okay, sorry about that.

A little technical difficulty.

So Peter, a question for you.

This quarter you beat earnings by $0.03 relative to consensus, but not letting that fall through to full year guidance and you're clipping the top end by $0.02, so is it fair to assume that the cost of European austerity measures will be about $0.05 this year and should we assume about a $0.10 hit next year since the impact will be annualized?

And my second question refers to -- you didn't mention SAPHRIS, I know that was recently introduced, we didn't see sales for SAPHRIS or Tredaptive, and Ken maybe if you can update us on how you're seeing those new launches progress?

Thanks.

Peter, do you want to start?

Sure, so Jami, I think the key thing is we've obviously -- all we've done is narrowed the range for our guidance for the full year, so we really maintained the mid-point of our guidance range on EPS.

Obviously we have, as I've commented and that you've pointed out, we've taken into account some of the top line pressures we see in the balance of the year.

Obviously we do expect to see the pricing impact on the second half of the year.

It's probably -- the way we looked at it, it's about mid single-digit range impact on our European revenues, translating that to the top line, it's probably in the neighborhood of I'm guessing about $300 million or so and obviously we have to full year annualize that next year.

The other thing is obviously ForEx now, the impact of ForEx for us is a little complex because obviously you have the ForEx impact around the world, not just Euro, but Yen and other currencies and you have to net that against our hedge program.

We anticipate in the second half of the year, currency being a slight negative on our top line, probably something in the 1%, 2% range as you go through the second half of the year.

Obviously those rates still move around, so those are the primary factors in addition to the healthcare reform.

So, that said, going the other way, we have a lot of activity in the-- on the expense line in the second half that will actually be driving our business going forward as we go into 2011.

We'll be launching DULERA, we have a lot of activity going on in Japan launching products, having a lot of success.

We will be obviously investing in the emerging markets, as you've seen announcements and we continue to grow there and obviously our pipeline, which is a big driver for us in the future continues to move forward with very nice progress.

So, you can expect to see some spending in that in the second half, it;s a little more in the first half.

So all those points combine to lead us to our guidance, but the most important thing is we didn't really--change the mid-point of our guidance range.

We just narrowed the range as we've gone through the first half of the year.

Thanks, Peter.

Ken?

So, thank you for the question, Jami.

With SAPHRIS, I think we mentioned earlier, that the current performance has been affected by the stocking last year and I would say a couple of things.

We continue to focus on building the brand awareness and we also are getting reasonably good unrestricted managed care access, about 65%, but the product right now I would say frankly is not where we want it to be.

On Tredaptive, I would say that obviously for us, the sales have not yet become material in Europe, but the real thing that we're doing on Tredaptive is HPS2 Thrive and creating a market in the US.

I think there's still a need, a growing awareness of HDL as its impact on cardiovascular health going forward.

I would say the other issues around launches are we very pleased the way SIMPONI is going, JANUVIA is continuing to launch well around the world including Japan, BRIDION is having a spectacular launch in Japan and we look forward to DULERA.

So, I would just say SAPHRIS and Tredaptive have not yet become material.

We continue to think Tredaptive has a great future in the US, and we continue to work with SAPHRIS.

And then I also--it was pointed out to me that I forgot to answer quickly the Chinese IP question and I would say on that one we continue to proceed carefully with respect to our assets in China to make sure that we get the benefit of that market while also protecting our IP.

Can I ask a quick follow-up to Dick?

Dick, you spent about $1.3 billion this quarter repurchasing about 38 million shares.

What are your plans for share repurchases going forward, just given the significant amount of free cash flow you're generating?

Peter, do you want to answer that?

Sure.

So Jami, obviously we have an authorization to do up to $3 billion of share repurchase and we haven't worked our way through that entirely, so that's on our agenda going forward, obviously.

We like to, generally, on an ongoing basis stabilize the shares outstanding, but then periodically step in and when we see a good opportunity to pick up some of our shares and quite frankly we see when our stock is down it is a very good way of returning cash to shareholders.

We know that the focus of a lot of our key shareholders and we take that seriously as well.

I think over the last five years, as we've said in the past, our track record of returning cash flow to shareholders is phenomenal.

We're up in the 90%, above 90% range, so we plan to continue that.

Okay, next question please?

Your next question is from Tony Butler with Barclays Capital.

Thanks very much.

Dick, I think that you, in your opening statements, made reference to the value -- continuously realizing the value of the combined companies.

I'm curious exactly what you mean by that, is it just cost?

And then by extension of Tim Anderson's question, would you be able to make that statement true, if in fact the arbitration does not go your way?

And then as a follow-up to that, if the arbitration does go your way, how do you think about perhaps moving additional increases to the dividend?

Thank you.

Thank you, Tony.

Obviously, I'm not going to make any future comments on the arbitration based on the process of where we are today, but if you go back to why this is such an important merger to our Company, it's far beyond the cost synergies.

Cost synergies, in many cases, is an afterthought to why we did this merger and why we're still excited about it.

First of all, the most important aspect of this merger that we continue to be excited upon is that it's a late stage pipeline and the research synergies from the standpoint that you have complimentary franchises and there's not much overlap and mechanism of actions and there's great scientific and technological sharing now, that is just so important to the future of the Company.

So, the first and foremost reason why this makes sense moving forward is the scientific and research pipeline and the scientific and research technology that we're sharing across mutual franchises as we move forward.

The second part of that is the product portfolio.

The excitement that we see from our professional reps in country-by-country when we visit, they're about having now a combined portfolio that can really come up with the right solution for patients and physicians is just incredible.

We're no longer a one trick pony when it comes to some franchises or disease states.

We have a portfolio that can meet their needs and I think that capability is extremely important.

And then third, I think is the geographical footprint we have, that the geographical footprint that we combined with the two companies, as you know, is critical to the future since we're not and will not be a US centric Company.

So, when you look at all of those evaluations, to us, those are the most important and obviously REMICADE and SIMPONI are important as well, but even without those two, this makes a lot of sense to us.

Okay, if we can--we have a few more minutes so I'd like to ask the next couple of callers to please just ask one question, so we have a chance to get through as many callers as we can.

Our next call, please?

Your next question is from David Risinger with Morgan Stanley.

Yes, thanks very much.

I have a couple questions.

First, with respect to SAPHRIS, can you just update us on where the reformulation process stands?

And then second, you've discussed branded generics this year.

I don't think that you've talked about branded generics in prior years.

Could you talk about how broad of a portfolio you'd like to have in emerging markets?

Thank you.

So on the SAPHRIS formulation issue, we're on track and we plan to launch a new black cherry version to provide patients with a different, better taste option, so that's where we are on that issue.

On the branded generics issue, as Dick mentioned before, I think it does vary very much by market-by-market, but I want to start by saying we have a very substantial branded generics business right now inside the Company with over 150 products available in the emerging markets based on the previous portfolios of the two companies.

And we see brands, as I mentioned, like ZOCOR in China just growing phenomenally.

So, what we intend to do is we intend to look at the branded generics business on a country-by-country basis, look at the opportunities to expand on the current portfolio of products that we have, of both our traditional established products, as well as our innovative products and we intend to build on those in ways that create value for customers as well as for Merck shareholders.

Next question please?

The next question is from Barbara Ryan with Deutsche Bank.

Thanks.

I tried to opt out, you just answered my question.

Thanks a lot.

Next question, please?

Your next question is from Seamus Fernandez with Leerink Swann.

Thanks a lot.

This question is actually for Peter.

It might be a little bit unfair, but Peter, you had said that you'll do opportunistic repurchases when your shares are down.

Would you characterize your stock as an attractive opportunity today or being down at current levels?

Thanks.

Peter?

Seamus, so obviously I can't comment on that, but, I think the key point is-- what I meant by opportunity is also when we have cash positions and we see the opportunity from a window standpoint, obviously for us to go into the market we have to have an open window position.

So, all of those factors come into play, but I can't really comment on that.

Okay, next question please?

Your next question is from David Mayers with Credit Expo CLSA.

Good morning, the Sinopharm China deal looks very interesting.

Can you tell us when will you start to distribute vaccines through their system?

The facility that you broke ground on is that vaccines only or is that oral doses and also how many salespeople do you have in China at this point and where was that a year ago?

Your question on the new facility in Hangzhou is a pharmaceutical facility beginning with packaging of products and then moving on into manufacturing.

So, that won't be completed until 2012 and we'll employ about 800 employees when we're finished.

It's truly too early to make a comment about Sinopharm and the timing of it and activities like that since we're obviously in negotiations of the completed contract and so, just stay tuned on that.

And we'll share that with you as soon as we can.

On the representative levels in China, I think our current compliment is about 5,000 people across the country.

That's up about a thousand since last year, so we continue to build our salesforce and we continue to penetrate deeper and deeper into the country because it's important to be able to win at the hospital level.

Okay, great.

I think we have time for one more question.

Your final question is from Eric Lo with Banc of America Merrill Lynch.

Good morning, guys.

Can you run through what your product launches are in Japan over the next 12 months and also maybe second question, comment on your priorities for the consumer division?

It's one of the smaller divisions, but the growth seems to be improving.

Are you guys planning to grow the business through internal investments or maybe acquisitions and are there any products that you might consider divesting?

So, starting with Japan --

Let's start with the customer first if we can.

Yes, thanks, Eric.

The consumer business continues to be an important part of our strategy.

Particularly outside the US, the complimentary nature of having Rx products and OTC products in many cases using the same distribution channels and wholesalers and pharmacies is extremely important to us.

And I think one of our areas of growth is building the business ex-US in Europe than in emerging markets.

So, we continue to think that that's an exciting growth area for us.

We're investing in it as we move forward and obviously outside the US as well, there's an Rx to OTC switch capability that exists, which is also important.

And there's a synergy where you can use some of the shared services capabilities between the Global Human Health division, as well as the Merck Consumer Care division and get some cost synergies at the same time.

So, it's an important part of our future moving forward and, as you know, some of the products have lives of their own.

CLARINEX can be an 80 to 100 year old product and still perform extremely well on a global platform.

We have to resource it right and make sure we're supporting it from a promotion and we're very excited about the Consumer Care research pipeline as well.

So, on the Japanese launches, I'll just highlight four of them that we think are really important.

ZETIA is having a very strong launch which has already gained 9% share in the Japanese market.

JANUVIA, that launch is going extremely well.

As we mentioned we had sales of almost $70 million this quarter, BRIDION has had a very strong initial penetration in Japan, and then lastly, we're in the midst of launching NASONEX So, we have some really strong launches under way in Japan for key products and we're very hopeful about the ongoing launches, as well as future launches that are upcoming.

Okay, thanks, Ken.

Thank you, everyone.

That ends our second quarter earnings call.

Have a good day.

This concludes today's conference call.

You may now disconnect.