默克藥廠 (MRK) 2010 Q3 法說會逐字稿

Good day, everyone, and welcome to Merck's Third Quarter 2010 Earnings Conference Call.

Today's call is being recorded.

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

Please go ahead, sir.

Thank you, Brooke, and good morning, everyone and welcome to Merck's 2010 conference call.

Before I turn the call over to Dick Clark, I wanted to point our a couple of things this morning.

First, there are a number of items in the GAAP results, such as purchase accounting adjustments, merger-related expenses, restructuring costs, there's also a $380 million tax benefit and a $950 million legal reserve.

We've excluded those items from our non-GAAP results and you can see a reconciliation table from the GAAP to non-GAAP figures in our press release and that'll give you a better sense of the underlying performance.

Next, we've also provided tables to help you understand the revenue trends.

There are three tables in the press release.

The first table, Table One, is the GAAP results.

Table Two reconciles our GAAP P&L to non-GAAP for the third quarter and year-to-date periods.

Table Three is a supplemental non-GAAP table, which provides the sales performance for the Company, the business units and the products, as if the Company had been combined for 2009, as well as 2010.

During the call, we'll refer to Table Two, when we discuss the P&L and Table Three for the revenue performance.

So you may want to have this available.

Finally, I'd like to remind you that some of his statements we make during the call today may be considered forward-looking statements within the meaning of the Safe Harbor provision of the US Private Securities Litigation Act of 1995.

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

Our SEC filings ,including item 1-A in the 2009 10-K, identify certain risk factors and cautionary statements that could cause the Company's actual results to differ materially from those projected this morning.

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

Our SEC filings, as well as our earnings release, are available on merck.com.

And with that, I'd like to let you know that I'm joined by Dick Clark, our Chairman and Chief Executive Officer, by Ken Frazier, our President and also, joined by Peter Kellogg, our Chief Financial Officer.

Now I'd like to introduce Dick Clark.

Dick?

Thank you, Alex and good morning, everyone.

It's been a year since Merck and Schering Plough merged to form today's Merck.

First let me say that I'm extremely pleased and proud of all that we've accomplished in such a short period of time.

We have consistently focused on achieving the benefits of the combination for patients, customers, shareholders, and employees.

Most important is furthering the science that underpins Merck's ability to address many of the world's most serious unmet medical needs.

Today our Company has greater geographic reach, one of the industry's broadest portfolios and has a tremendous late stage pipeline that I believe is second to none.

As we mark the anniversary of our merger, I want to thank many Merck colleagues who have helped us manage this significant combination so effectively.

Throughout the past year, we have continued to drive revenue growth for key products, improve our cost structure, and make the right strategic investments in our business.

We've accomplished this while successfully taking on the challenging task of integrating our people, systems, and cultures to form a powerful unified organization.

And while we still have work to do, Merck is well-positioned now and for the future.

Our solid third-quarter 2010 financial results illustrate that we are continuing to execute our strategy.

We realized top line worldwide sales of $11.1 billion, non-GAAP earnings per share of $0.85, and GAAP earnings per share of $0.11 for the quarter.

Key brands including JANUVIA, JANUMET, SINGULAIR, ISENTRESS, and REMICADE were each strong performers this quarter.

It is Merck's ability to develop and offer these truly differentiated products that will position us to successfully navigate difficult economies, pricing pressures, and challenging regulatory environments throughout the world.

In a few moments, Ken will discuss our global product performance in more detail.

Peter will then provide you with our full earnings outlook.

While our merger has always been about the science, synergies are also important.

We are on track to achieve our previously announced synergy target of $3.5 billion in annual savings by the end of 2012.

As we continue to integrate, there's exciting activity across all of Merck and the world, particularly R&D and commercial friends of Merck.

In coming months and into next year, we expect some important clinical data from promising candidates in our robust pipeline.

You will hear more about these milestones in a few moments.

And this pipeline is coming through in other ways, too.

As we speak, we have ten major product launches underway in important markets around the world.

In just the last few weeks alone, we have received regulatory approval for BRINAVESS in Europe and signed an important partnership agreement to allow Lundbeck to distribute SYCREST in all markets outside the United States, China, and Japan.

Recently, we also marked our first major US product launch as a combined company with the DULERA launch.

With the addition of this exciting new asthma product, Merck now has the widest respiratory portfolio available in the United States.

Last week, I had the pleasure of participating in the DULERA launch meeting, along with our sales and marketing team.

It was great to share first-hand the enthusiasm and excitement our sales representatives have to bring this new treatment to our customers.

We've made excellent progress in the integration of our commercial operations in our major markets throughout the world.

Those integrated markets account for about 85% of our global human health sales.

It is exciting to see the benefits of our broader, more diversified product portfolio as we engage with physicians and customers.

The team is doing an excellent job executing on our commercial sales model in the United States and in key markets in Europe, Japan, Latin America, and Asia-Pacific.

Our overall goal is to outperform our peer pharmaceutical companies and become the clear industry leader in the eyes of our customers.

In fact, our customer survey for the US market indicates that Merck continues to lead in trust and value metrics versus our peers.

If our is on positioning Merck to become a leader in the key global growth markets, then our broad portfolio of healthcare offerings will drive further growth in these emerging markets.

We are currently the fifth largest multinational pharmaceutical player in a fast-growing emerging markets and we are aiming much higher.

By 2013, we seek to derive at least 25% of our global human health and vaccine sales from the emerging markets.

We are making good progress and in third quarter, that number was 18%.

Over time, we will build further on these efforts by leveraging our advantage, using our broad in line portfolio.

Many of these brands are former blockbusters with considerable brand equity such as ZOCOR.

We are also successfully launching new products in these markets, such as JANUVIA.

Additionally, we are seeking to globalize the vaccine business through growth in emerging markets, through partnerships and through the introduction of low-cost manufacturing for some of our key products to expand affordable access.

Finally, we are working to tap the significant growth potential for many of our well-regarded consumer care brands by expanding our operations outside the US.

In summary, we've made great progress driving growth of key products, achieving our merger synergies, expanding our global reach, launching new products, and advancing our late-stage R&D pipeline.

One year post-merger, our results demonstrate that we are realizing the benefit of our merger while ensuring that the Company is well-positioned for the future.

Now I'll turn it over to over to Ken.

Thank you, Dick and thanks everyone for joining us this morning.

As Dick mentioned, we had another successful quarter with global human health reporting sales of $9.7 billion despite the economic challenges in many markets and the loss of exclusivity for COZAAR and HYZAAR.

Our commercial performance this quarter was characterized by continuing strong performance of key brands such as JANUVIA, JANUMET, SINGULAIR, ISENTRESS, and REMICADE which was complemented by strong growth in key geographic markets and new contributions from our ongoing product launches such as SIMPONI, BRIDION, and AFLURIA.

Before I review the sales performance, I'd like to refer you to Table Three, which provides the supplemental combined non-GAAP results and includes the impact of foreign exchange.

As you review Table Three, you'll see that product sales were driven by the robust growth of our key brands, SINGULAIR, JANUVIA, JANUMET, REMICADE, and ISENTRESS.

These brands grew a combined 17% year-over-year.

Now let's take a closer look at the performance of some of these key brands, starting with SINGULAIR, which grew 12% over the previous year.

The increase in sales was driven by growth in most regions.

We continue to see volume growth in the US and EU, and continued class leadership in Japan.

Additionally, SINGULAIR sales in the emerging markets grew 25% in the third quarter.

Moving on to JANUVIA and JANUMET, global revenue grew 28%.

Sales this quarter were again driven by double-digit growth across most regions.

We continue to see volume growth in the US, and the franchise continues to grow in the EU, due largely to new indications and the ongoing launches of JANUMET.

On a combined basis, JANUVIA and JANUMET are the leading branded oral anti-diabetic franchise and roughly 75% of the top 20 markets.

We continue to focus on extending the value of this franchise, and we remain on track for filing a JANUMET once-daily formulation with FDA next year.

Actually, this year.

I apologize.

REMICADE sales increased 9% in the third quarter.

Despite the austerity measures across the EU, REMICADE continues to grow by double-digits, excluding the impact of foreign exchange.

Even in markets where we've seen a good uptake of SIMPONI, REMICADE continues to grow.

Turning next to ISENTRESS, after three years on the market, it continues to deliver outstanding performance, gaining market share across all indications.

ISENTRESS's strong sales growth in the third quarter was driven by the growth in the treatment-naive indication and broad utilization of new treatment guidelines in the US.

We remain on track to file the once-daily dosing regimen with the FDA in 2011.

For the VYTORIN and ZETIA franchise, sales decreased 3% in the third quarter, as volume declines in the US were only partially offset by higher sales outside the US.

The sales growth outside the US was primarily driven by the 30% growth of ZETIA in Japan and 13% growth of VYTORIN in the emerging markets.

VYTORIN and ZETIA continue to be an important treatment option to help many patients lower their LDL cholesterol.

We understand that researchers from Oxford plan to present the results of the SHARP study at the ASN meeting in November.

That study, as you know, focused on patients with chronic kidney disease.

Now let's shift to our vaccine business, where we're starting to see signs of progress, including more stable supply.

GARDASIL sales grew 2%, benefiting from the timing of shipments to customers.

Sales increased sequentially, largely due to the seasonality of the back-to-school period.

Sales in PNEUMOVAX were down 15% as a result of the unfavorable seasonal comparison from the H1N1 pandemic last year.

We launched our newest vaccine, AFLURIA, for the seasonal flu, which posted sales of $35 million in third quarter.

We continue to work on the supply issues for ZOSTAVAX.

We had limited shipments of the products in Q3, and we anticipate delivering additional shipments to US customers by the end of this year.

As you can see, our overall business continues to benefit from the diversity of our product mix and our portfolio of differentiated brands.

In addition, our broad global presence is also an asset, providing us with the flexibility to leverage our portfolio in key markets around the world.

In the US, sales grew 1% if one excludes the impact of generic erosion for COZAAR and HYZAAR.

When you look more closely at the business lines, you'll see that we had double-digit growth in our diabetes franchise, as well as strong growth in our women's health franchise and we continue to gain market share for products such as ISENTRESS and SINGULAIR.

In addition, as Dick mentioned, we're in the process of launching DULERA, our newest treatment for asthma in the US.

We shipped to pharmacies in July and we completed our full promotional launch last week.

We are encouraged by the early feedback from the field as we focus on the unique attributes of DULERA compared to other combination products.

Now, let's turn to the EU where sales or lower this quarter due to the loss of exclusivity of COZAAR and HYZAAR, as well as the impact of European austerity measures.

We continue to believe these measures will have a mid-single digit impact on European sales in 2010.

Despite those economic challenges, we continue to see strong growth in key brands such as to JANUVIA, JANUMET, ISENTRESS, and REMICADE.

We're also launching many new products in the EU.

SIMPONI, which has been launched in 18 countries, recorded sales of $27 million in the quarter.

While we're still working to gain reimbursement in many markets, the early performance indicators are positive.

We also launched BRINAVESS and DAXAS into markets and will have additional launches of those products in 2011.

As I said earlier, we saw good performance in key growth markets.

In Japan, sales increased 7%, largely driven by ZETIA and SINGULAIR and the strong launches of BRIDION, COSOPT, and JANUVIA are also contributed to our growth in Japan.

We continue to focus on our business in Japan as we get ready to file and launch many additional brands over the next three years.

We also continue to make significant ,yet disciplined, long-term investments in the emerging markets.

Growth in the quarter was driven by our top six markets, where we saw significant gains from countries such as China, which grew 21% in the quarter.

We're approaching each emerging market as a separate opportunity to optimize our product mix.

As we focused on each local market and its specific customer needs, we've seen an ideal match with our diverse product portfolio.

Whether it be vaccines, products for cardiometabolic disease, or the offerings in our women's health franchise, we're seeing growing utilization of Merck products in the emerging markets.

People typically think of branded generics as the only key to success in the emerging markets, but JANUVIA is a great example of how an innovative and differentiated product, with the right level of educational and promotional support, can become a market leader in the Asia-Pacific region.

While there's a lot of focus on the emerging markets, one shouldn't forget that science and innovation remain at the core of our business in every part of the world.

For us to be successful, we have to continue to discover, develop, and launch differentiated products with clinical profiles that offer patients and payers proven benefits.

That's why our late-stage pipeline is so critical to our future.

In the fourth quarter, we have data presentations for three of these key late-stage programs which I'd like to discuss with you briefly now.

Last week, at the ASBMR meeting, we presented the four-year BMD data for odanacatib, our selective cat K inhibitor for the treatment of osteoporosis.

Patients on odanacatib continued to show increases in bone mineral density at the lumbar spine and hip.

Odanacatib is currently in Phase III, and we will have a long-term fracture study with 16,000 patients, which is fully enrolled.

We plan to file odanacatib with regulatory authorities, bolstered by that outcome study, in 2012.

Starting this weekend and continuing into next week, researchers will present final Phase III data for boceprevir, our hepatitis C protease inhibitor at the AASLD meeting in Boston.

We previously announced the topline results of the Phase III program.

In those studies, boceprevir added to the current standard of care, doubled the cure rate in treatment-experienced patients and nearly doubled the cure rate in treatment-naive patients.

With the use of response-guided therapy, we also showed that the addition of boceprevir has the potential to shorten the duration of therapy in both treatment-experienced and in treatment-naive patients, compared to standard therapy.

The data that will be presented at the upcoming liver meeting are compelling, and we look forward to sharing them with you.

We remain on track to complete the filing of boceprevir with regulatory authorities around the world this year.

Later in November, we will present study results for anacetrapib, our CETP inhibitor for the treatment of atherosclerosis at the AHA meeting in Chicago.

As expected, the results of this study confirmed our decision to move anacetrapib to the planned outcome study that will begin next year.

As you can see, we will be presenting a lot of data in the fourth quarter and beyond as we move many of our late-stage research programs forward.

In summary, we've delivered another good quarter.

We continue to be excited by the opportunities to grow our business through our current portfolio of products in key markets and through our robust late-stage pipeline, supported by outcome studies.

While the operating environment is constantly changing, we are steadily executing on our strategic goals to create the leading health care Company in the world.

And now it is my pleasure to turn the call over to my colleague, Peter Kellogg.

Thank you, Ken and good morning.

As you've heard from Dick and Ken, our performance this quarter was, once again, characterized by solid operating performance in our business, which continues to help offset the impact of generic COZAAR and HYZAAR and continuing cost management and benefits of merger synergies in our cost base.

Ken discussed how our key brands and markets performed and now I'd like to cover our third quarter financial performance and our outlook.

So let's begin with our results.

Our GAAP financial information can be found in Table One of our release.

To make it easier to follow my remarks today, I will speak to the non-GAAP results in Table 2A, which exclude purchase accounting adjustments, merger-related costs, restructuring charges, a $380 million tax benefit, and a $950 million legal reserve.

On this basis, we reported third quarter non-GAAP earnings per share of $0.85.

Total revenue for the quarter was $11.1 billion, down 4% on a supplemental combined non-GAAP basis.

Excluding the impact of generic COZAAR HYZAAR and the unfavorable impact of foreign exchange, sales were actually up about 2%.

This is good performance.

Despite the unfavorable impact of austerity measures in Europe and the impact of health care reform in the US and we are pleased with the performance of each of our businesses.

Ken discussed our global human health sales, so let me just comment on our animal health and consumer businesses.

Our animal health business grew 3%, 6% ex-exchange to $687 million, reflecting growth in North and South America, as well as growth in poultry, swine and aquaculture.

Consumer care sales also increased 3% to $291 million, due to the growth of foot care, respiratory, and skin care products.

Growth in this area was partially offset by the impact of generic MIRALAX.

Now moving on to the P&L, you can see that we've done a very good job controlling our expenses again this quarter.

We continue to be very pleased with the progress we're making against our merger synergies.

And, we are doing so while launching new products and making great progress with the R&D pipeline.

As you know, the costs of our combined Company are represented in our current cost base, whereas only the legacy Merck costs were included in the third quarter of 2009, which complicates analysis on a year-over-year basis.

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

First, materials and production -- the non-GAAP gross margin in the third quarter was 74.9%, which was lower than the second quarter of 2010 when the gross margin was 76.5%.

As you can see, our gross margin moves a bit quarter to quarter, mostly due to product mix.

This quarter, the mix changes came from a variety of factors including lower sequential sales of products like NASONEX, CLARINEX, and CLARITIN.

Sequentially, the second quarter also benefited from a favorable foreign exchange impact which did not recur in the third quarter.

Moving on to marketing and admin expenses, on a non-GAAP basis, marketing and administrative expenses in the third quarter were $3 billion, which was about $100 million lower than the second quarter of 2010.

And on a year-to-year basis, we drove significant cost savings in M&A, due to the realization of merger synergies.

This was partially tempered by increased promotional spending to support new launches like SIMPONI and DULERA.

As you know, we are actively launching many new products and we expect 2011 to be an exciting year for new product launches in the US and around the world.

I'll talk more about that later.

Research and development expense for the third quarter was approximately $1.9 billion, which was slightly lower than the first two quarters, due to the continued work we are doing to further prioritize our R&D investments.

As a result of the prioritization activities, we decided to stop investment in a few additional programs in the third quarter.

We also previously announced plans to rationalize our R&D networks.

Meanwhile, we continue to invest in our most promising late-stage products such as vorapaxar, boceprevir, telcagepant, odanacatib and tredaptive.

And these key programs in our pipeline continue to move forward.

Now let's move to equity income.

In the third quarter, Merck recorded $236 million of equity income.

As expected, this was sequentially higher than the second quarter.

Remember the income from the AZLP joint venture was low, due to the inherent variability in the timing of income from the AZLP joint venture.

Moving on to other expense, on a non-GAAP basis, other expense of $158 million was comparable to the second quarter of 2010.

Our non-GAAP results exclude the impact of a legal reserve of $950 million in connection with an anticipated resolution of the previously disclosed investigation by the US Attorney's Office for the District of Massachusetts, related to VIOXX.

Moving to tax, the Merck non-GAAP tax rate was 22.2% for the third quarter, which was higher than the rate that we saw in the second corner.

As noted in the press release, we continue to expect 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 continued progress on our share repurchase program.

During the quarter, we paid $1.2 billion in dividends and spent approximately $300 million to repurchase roughly eight million shares of our common stock.

So far this year, we have repurchased about 47 million shares for $1.6 billion.

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

Now let's spend our remaining time reviewing our outlook for 2010 and beyond, and let's start with our 2010 outlook.

Given our strong year-to-date performance, we are only making one change to our 2010 financial targets.

We raised the lower end of our EPS target range, resulting in an increase in the midpoint of EPS range.

On a non-GAAP basis, Merck is now targeting a full-year 2010 EPS range of $3.31 to $3.39, excluding certain items.

Please see our press release for the GAAP guidance.

Factored into this EPS range are the topline pressures in the US and the EU, including the impact of health care reform in the US, which is unchanged from our previous estimates and the impact of European austerity measures.

Recall that we had anticipated a mid-single digit unfavorable impact on European sales in the second half of 2010.

We still believe that will be the case.

Our current year EPS range also assumes that Merck retains full rights to REMICADE and SIMPONI in our markets.

On the expense side, as I mentioned earlier, we also anticipate increased promotional spending in the fourth quarter and in 2011 for new product launches like DULERA,, DAXAS, BRINAVESS, and additional lunches of SIMPONI around the world.

Not to mention we are preparing for the prospect of launching boceprevir in 2011.

And we continue to make new targeted commercial and R&D investments, including those in the emerging markets.

These growth driving investments are a major reason why we expect our operating expenses in the fourth quarter to be sequentially higher than they were in the third quarter of 2010.

So, while these topline pressures and operating investments put pressure on the fourth quarter, we are comfortable with our full-year 2010 EPS guidance range.

Finally, let me touch on our long-term outlook.

We remain excited about our future 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 rate from 2009 to 2013 regardless of the outcome of the REMICADE arbitration.

In addition, we are well on track to realize our $3.5 billion synergy target by the end of 2012.

So in closing, we're pleased with the solid third quarter results we reported today.

Operational growth in our business, the launch of new products, and tight expense management each contributed to our results.

We have had a strong performance during our first year of combined operations, demonstrating that the merger is working and we are right on track.

Thank you.

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

Alex?

Yes.

Thanks, Peter.

Now we'd like to open up the call to take your questions.

But, in order to get through as many questions as possible, we ask that you please limit yourself to one or two questions.

We don't plan on taking any follow-up questions, but if you do have additional questions, you're always welcome to rejoin the queue.

Brooke?

(Operator Instructions) Your first question comes from Barbara Ryan with Deutsche Bank.

Good morning and thank you very much for taking the question.

Maybe it's for you, Dick and possibly, Peter.

The comments that you've made this morning relative to 2013 guidance, which specifically, is the height single-digit (inaudible) using 2009 as the base.

You consistently said that, that guidance holds, irrespective of the outcome of the J&J arbitration.

An obviously those products contribute meaningfully today to your earnings.

And I would appreciate that, over the long haul, you obviously have a number of pushes and pulls.

So maybe you could speak to us specifically about, what are the offsetting factors?

Let's assume that you were to lose that litigation and lose the earnings from those products, will what be the offsets that allow you to get to the same place?

First of all, Barbara, I will turn it over to Peter in a second, but I think the most important aspect of this is that we do remain very confident in our position in this arbitration and I think that's important.

And as you know there's a lot of variables that go into a product range or guidance range that we present.

And the good news from a Merck standpoint is that we have a very robust late-stage pipeline, we have cost synergies that we have in place, we're looking at new operating models, we have new product launches throughout the world now, and so we do sensitivity scenario planning to be able to accomplish that.

So, we have so many levers to pull and attributes as this new company that that's why we're able to state that.

Peter, anything else?

Thanks, Dick.

No.

I think you wrapped it up properly, Dick.

That's it.

Thank you Barbara.

Thank you.

Next question, please?

Your next question comes from Steve Scala with Cowen.

Should we assume that if there were any negative aspects in the SHARP data such as cancer signal or progression of disease that Oxford group would reveal the data immediately?

So, I guess that the conclusion should be that there are no such negatives and I'm wondering if you agree?

And secondly on SINGULAIR, what is the benefit to not filing this over the counter?

It seems like a strategy that does not fully utilize Merck's largest single asset and does J&J Merck think they have rights to OTC SINGULAIR?

Thank you.

So on the first question, I think when particular data is revealed is up to the Oxford group and we look forward to seeing the data next week when it's revealed -- in two weeks.

On the SINGULAIR question, we constantly look at all of our products to evaluate what their long-term lifecycle management value would be, including prospects for over the counter switch.

Okay.

Next question, please.

Your next question comes from Tim Anderson with Sanford Bernstein.

Hi.

A couple of pipeline questions as you won't be having an R&D meeting and then a question on REMICADE.

On TRA, can you just narrow the timing of seeing results from the two Phase II trials in 2011?

And then, second pipeline question, it looks like you guys have 15 valent pneumococcal vaccine in Phase II that would go up against Pfizer's Prevnar.

Wondering when that might go into Phase III and also wondering where you're getting that conjugation technology from?

And then, on REMICADE, you say it was a strong performer, but it looks like this is three quarters in a row where there's been sequential declines and I'm wondering what the trajectory is from here?

Is this all a function of price cuts or are there share losses?

Backwards -- on REMICADE, the growth would have been, without exchange issues, 13%.

I think the other issues that we're dealing with, since we have the European territories, is we have the general austerity measures and measures that are aimed, actually, at the anti-T&F category.

I think the product continues to maintain its share and it continues to grow, notwithstanding the introduction of SIMPONI in those markets.

So, we feel very good about that.

On the pneumococcal one, we have not revealed any new information on the timing of moving that forward.

TRA, we've said that we expect generally that we'll have this data to be revealed in the mid- 2011 period.

As you know, it's an event driven to trial, and I think that's about all we can say about it right now.

And we have an R&D meeting, of course, coming up --

So, Tim, normally Merck has been in the history of having an R&D day in December, there will not be one in 2010 since we just had an R&D update in May of 2010.

Okay.

Next question, please.

Your next question comes from Mark Goodman with UBS.

You mentioned that in R&D you had stopped work on a couple of programs, can you mention which ones they were?

And then, second of all, in cost savings, can you tell us where we are so far?

I know that of the 3.5, about half of it was supposed to be in year one, are we on track for that?

I think it was 60% in SG&A, so that's like $1 billion out of SG&A, are we seeing that?

Obviously, we're seeing SG&A come down, but you're saying you're spending more on advertising promotion for the new products, so just trying to get a flavor for where we are in the cost savings.

Okay, Peter.

Hi.

Good morning.

Thank you for the questions.

So, the first question about the R&D pipeline decisions, those affected Aveo, which I think we announced earlier for a program we had with them, acadesine, a program numbered SCH-900105, which is in the oncology space.

In terms of the SG&A performance, I think your question was, do we -- are we achieving the first year synergies that we anticipated?

And I would say that, in fact, that's probably one of the areas we're very proud of so far.

The commercial team, speaking for them if I can, has done a great job, actually, in the beginning of this year, rapidly integrating the organizations and finding the right synergies, leveraging the new commercial model around the world.

I believe we've commented in the past that, at this point, we've got, Ken, I'll turn this over to you, but about 17 of our top 20 markets around the world now integrated.

Ken, do you want to add any other comments?

That's correct.

And I think that we've been able to do it quickly with the least amount of disruption possible given the size of these two organizations that we're bringing together.

So, we feel very confident that we'll continue to meet our synergies on the timetable we revealed.

Next question, please.

Your next question comes from Chris Schott with JPMorgan.

Great.

Thanks.

First question was on GARDASIL.

I believe your competitor announced a price cut in Canada.

I'm interested in your thoughts on that move and would you consider in certain markets lowering price to drive incremental demand for the product?

Second question, bigger picture, just latest thoughts on capital deployment?

How are you prioritizing business development, share repo and the potential to increase the dividend?

And just as a follow-up to that, we're now a year post- Schering, how were you thinking about just leverage for the overall Company, given the broader, more diversified organization that's been created?

Does that diversification increase your comfort with more permanently carrying leverage at the Company?

Thanks.

Starting with the Cervarix question, we won't, obviously, be in a position to talk about what our pricing strategy is going forward, but I think it is important to recognize that we are the market leader with greater than 90% share in that market.

So on the questions of capital deployment, good question, and as you know, we have talked in the past about how we have a fairly strong dividend.

And, as I mentioned in my discussion, we actually had a dividend that amounts to $1.2 billion per quarter and as I mentioned, also, that in this quarter, we had about $300 million of share repurchase.

But on a year-to-date basis, that's $1.3 billion.

So, I think from the free cash flow of the Company, you can see that we're doing a good job redeploying cash even this year in the first year of the merger.

So, that is important to us.

That said though, we are very actively looking to make great value-creating deals around the world and I think our business development activity is very active in a number of areas.

One is to make sure we have the best pipeline in the industry.

Secondly, looking for great combinations and opportunities to partner around the world on the commercial side.

And thirdly, in the emerging market space, we recognize that we're going to be broadening our footprint and we want to make sure that we work with good partners locally to help create that value.

So, the BD side is also active and that does come into play.

The last thing I would say, is relative to our debt.

Obviously, what we talked about at the time of the merger was that we designed the merger to make sure that we landed at about the same place that we were before the merger.

And we targeted the credit ratings to allow us to have some flexibility but to also reinforce the strength of Merck so that we can handle any kind of issues that come up.

But also, more importantly, that we can invest on the strategic opportunities that we have around the world and we intend to continue that.

It is true we are generating solid cash flow and will be -- that cash flow performance will be growing.

So, we will keep an eye on that, we will be shareholder-friendly, but obviously we will also intend to maintain our credit rating.

We work closely with the credit agencies to make sure we're in the right place and I think were in about the right place right now.

Thank you.

Next question, please.

Your next question comes from Jami Rubin with Goldman Sachs.

Just a couple of follow-up questions.

Dick, on the consumer business, I'm just wondering if you could remind us what your strategic plans are for that?

Relative to the overall company, it's very small.

And is the plan to scale this up or to spin it off?

And then, secondly, regarding REMICADE arbitration, I know there's a limit to what you say, but just given the fact that has been protracted now to more oral arguments at the end of this year, if you could provide any color on what this means, your confidence level in the outcomes, and how far apart are the two companies now and just, when we can expect to get a resolution?

Thanks.

Jami, to your first question, I think, we look at the consumer care business as still an important part of our future.

And the fact that I can sure applaud the tremendous job of taking those brands and seeing the growth that we had in the United States.

And our strategic approach right now is to do that on a global basis.

They're good brands, they last a long time and so, we're putting resources behind the growth from a global standpoint.

I think just as important, it's a natural fit with many of our pharmaceuticals as well.

So, from a distribution standpoint and a customer standpoint, we're looking at first growing it organically as we move forward.

To your second question, I'll just restate that we remain very confident in our position in this arbitration and Bruce, if you want to say a few words about that?

Sure.

Jami, it's Bruce Kuhlik.

I would not read anything into the post-hearing process.

This is simply something that we've agreed to with the arbitration panel as an orderly way of completing the written and oral submissions before the panel.

Okay.

Next question, please.

Your next question comes from David Risinger with Morgan Stanley.

Thanks very much.

I have a couple of questions.

The first is, with respect to the tax rate outlook, can you just frame how you're thinking about the longer-term tax rate?

And the trigger for my question is the tax rate development in Puerto Rico recently.

And then second, with respect to the pipeline, could you just update us on the timing of news flow on V710, the staph vaccine?

Specifically, I'm interested in understanding the efficacy better.

And then the BRIDION hypersensitivity data.

Thanks.

Okay.

Peter, you want to start?

Sure.

I'll start with the tax rate, David and I'll pass it over to someone else for the pipeline question.

On the tax rate, obviously we haven't given long-term guidance on our tax rate, and as you've articulated, obviously, there's a lot of different pushes and pulls, both ways as you go forward.

And so, that's something that's part of her long-term guidance on the EPS line, but we really haven't broken that out.

And some of that is because it's not all crystal clear.

I think on the recent developments that were just announced this week in Puerto Rico, obviously we made a couple of public statements through Pharma and so forth, and clearly it's something that we need to get to understand better.

We are clearly disappointed, but on the other hand, we will work with it.

On the pipeline side, let me pass that over to Ken.

So, on the staph vaccine, as you know, the ongoing study is an endpoint-driven study.

And I think our view is that we'd expect to see the interim look in 2011.

On BRIDION, we are now hypersensitivity and coagulation and we plan to be able to file that in 2011.

Okay.

Next question, please.

Your next question comes from John Boris with Citi Investment Research.

Thanks for taking the questions and congratulations on the results.

First question, just really on the dividend, if I could just press there a little bit in an environment where some of your peers are paying a higher dividend and/or most of your peers are consistently raising their dividend, you haven't had a dividend increase in quite some time.

Can you just help us understand how you're thinking about the dividend and dividend increases going forward?

And then a pipeline question on boceprevir, you deployed a strategy for certain assets, such as JANUVIA, a go-to-market strategy that was pretty quick and pretty rapid.

Are you going to use a similar type of strategy on boceprevir?

And can you confirm whether the product's been filed or completed the filing as of yet?

John, thank you, this is Peter.

Thanks for your question.

As you point out, obviously our dividend is very competitive with the pretty attractive yield, obviously and the good dividend payout ratio.

That said, obviously it's something that we're asked about on a regular basis.

We don't give guidance going forward about our dividend but, as I've mentioned in my script and in one of the earlier questions, we do remain highly focused on returning cash to shareholders in an appropriate manner, while at the same time making sure we have the cash to drive the science-first mindset we have here.

We're very proud of the pipeline and our international footprint.

We think we're building a great growth story for the future and we think that's also a priority for us.

And so, at this point, I think we are, as I've mentioned, we intend, going forward, to be very shareholder-friendly.

And, that said, also make sure that we attend to the strategic needs of the business in a very important way.

Okay.

Ken, would you like to --

What we've said about the status of boceprevir with the FDA and the EMEA is that we plan to file and we are on track to complete the submissions in 2010.

I think on the commercial side, we can't reveal, obviously, what our marketing strategy is.

But, I think we have a robust strategy and I think we know how to launch products in the specialty area, like ISENTRESS, as well as in primary care like JANUVIA.

So, we're very excited by the prospects of boceprevir.

We look forward to November 1 and 2 and the Phase III data being presented at AASLD.

Okay.

Good.

Next question, please.

Your next question comes from Catherine Arnold with Credit Suisse.

I just had one more housekeeping question in regards to the J&J arbitration.

Because I know you've covered that a lot, but I just want to be very direct in my question on something.

And then I'd like to ask you another question after that.

Which is one, on J&J, there was obviously a lot of misinterpretation potentially about the first press release, when you talked about the series of events and that, when people did the math, it led to the decision before the end of 2010 and then there was more clarity on that for 2011.

It may be splitting hairs, but I'd like you to comment on the process.

Did you change the communication because there was a misunderstanding or did you change it because there was incremental step in the process?

And then the second question I have is about the donut hole coverage.

And I wondered if you've looked at your portfolio and made some judgments as to what products might have the most upside in 2011?

Because there's better compliance due to the donut hole coverage.

Thank you.

Okay.

Bruce, do you want to start?

Sure, Catherine.

In response to the question about the timing of the arbitration, what we've done is make the disclosures with reference to the timing as it stood at the time and in terms of averages, for example.

One of the advantages in an arbitration proceeding is that the parties and the arbitrators are able to agree on changes of the process as they go along and that's what we've reflected during our ongoing disclosures.

And on the donut hole, we obviously look at our entire portfolio.

Some of our products are more subject to Medicaid than others like the chronic care products, but overall, we think that that has a benefit because you can see greater patient compliance when you take away the economic dis-incentive that was inherent in the donut hole.

Okay.

Operator, I think we have time for two more questions, please.

Your next question comes from Seamus Fernandez with Leerink Swann.

Thank you very much.

Just a couple of quick questions.

Can you just discuss for us the contribution to earnings from AZLP?

We saw pretty strong revenue number from AZLP this quarter.

Just wondering what kind of contribution on the revenue and then the equity income also was quite strong in the quarter.

I know these payments are lumpy, but it looks like it was a -- like it brought something to the table here.

Also, can you talk about the gross margin weakness is in the quarter?

What pushed it so low in the quarter, was it really just king of mix and seasonality with Schering?

Was it the mix of AZLP revenues?

And just the final question, really related to AZLP and your long-term guidance, what are the assumptions?

Can you just remind us about the assumptions relative to AZLP and the PPI option that Astra-Zeneca holds for 2012?

And I guess, when would be the timing of the execution of that option should Astra-Zeneca actually choose to execute it.

Thank you.

Okay.

Thank you for the questions.

I think those are all headed my way.

This is Peter.

So, first on the AZLP, you've got it right obviously from a quarter to quarter standpoint.

That is an operation that does have inherent variability in the timing of payments and recognition of income, obviously.

However, it's a business that continues to do nicely.

We haven't really given guidance for these individual businesses and so forth, but there are timing of different seasonality of the products and so forth.

On the -- related to that relationship, there is, as you know, in February there was an option on the non- PPI products that was executed, and you saw a gain in our financials earlier this year from that.

And obviously that gain is excluded from our non-GAAP results, but you can see it in our GAAP results and in some of our tables.

The next option timing is two years later, that's for the PPI item.

So, that would be roughly in the first part of 2012.

And at this point, what we've always assumed is that they would exercise that option that said it's their choice and we can't really predict exactly what'll happen, but that's the way we've always thought about it anyway.

And then moving to the product gross margins for the quarter, you're right, you put your finger on the two points.

One is obviously there is some volatility in PGM just naturally because of the mix, and some of that mix is because of products, or it could be divisional and so forth.

That does it a little bit.

The other factor that we had in the second and third quarter this year, when you compare from the second to third quarter, was in the second quarter, we did get some foreign exchange benefit.

And in the third quarter, that didn't recur.

So, that also kind of caused the third quarter to look a little weaker versus the second quarter, and then obviously, the mix also.

So we had two factors go against us in the third quarter.

I think we have experienced a higher level of volatility in foreign exchange rates this year than normal and so that, on some timing basis eventually does roll to the cost of goods.

I hope that answers all your questions.

Okay.

We're now ready for our last question, please.

Your last question comes from Tony Butler with Barclays Capital.

Good morning.

Thanks for squeezing me in.

Just two questions.

Ken, on diversified brands, is that managed independent of other areas of business?

And secondly, do you actually have a dedicated sales force to sell those diversified brands?

And then, secondly, Dick, big picture, I've heard you talk about customers and excellence with customers and being number one with customers, but if I think back over the last 20 years, the balance of power has really shifted.

And I'm curious today, who are your principal customers, and please don't just say, well, it's patients, it's physicians, it's payers.

That we kind of know, but there's been a shift and I'm just curious how you think about that from a focal point on the sales effort?

Thank you.

Dick?

Let me start with diversified products.

I would say that, first of all, we have been trying to focus on those brands as a separate business line.

They have their own separate customer segments and so, we have a GM to manage it as a franchise from a marketing standpoint.

And in some markets, we actually have separate sales forces; China, for example.

I think it varies depending on the actual market characteristics.

But to answer the thrust of your question, we actually try to treat this business line as its own distinct business line to be managed.

And to your other question, obviously, the focus that we have on physicians is still very important to us, mainly from an education standpoint, so that the physicians know about our products or vaccines.

And now, with the merger, that we have such a robust capability in each of the franchises, that they know they have many choices.

I think we're moving to a more customized customer approach than just the same messages on the same kind of products and services for every customer.

But, on a more strategic level, Tony, and I think that's a good question.

I think one of the things that Merck will have from a competitive advantage standpoint, is that when you look at either governments on an international basis, whether it's a NICE-type organization, or whether we're moving to health care reform today and the government's going to play a larger role or whether you're looking to some of the larger managed care payers that exist in the United States, the important part is going to be health technology assessment.

And the ability to have clinical outcomes and to be able to prove that whatever product they are thinking about from a regulatory approval or launch standpoint is above the standard of care that exists today.

And I think where our competitive advantage is as a Company is our late-stage pipeline and how much of it has an ability to meet unmet medical needs.

And it is differentiated products and we have the clinical outcome studies to prove it.

Okay.

Thank you, Operator.

That concludes our call today.

Thank you, everyone.