默克藥廠 (MRK) 2011 Q1 法說會逐字稿

Good morning.

My name is Arnica and I will be your conference operator today.

At this time, I would like to welcome everyone to the Merck first-quarter 2011 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions).

Mr.

Kelly, you may begin your conference.

Thank you, Arnica and good morning, everyone and welcome to Merck's 2011 first-quarter conference call.

Before I turn the call over to Ken, I wanted to point out a couple of things.

First of all, I really want to thank Joe Romanelli for his contributions to the investor relations team over the last 4.5 years.

He has been a great asset to our team and I really thank him for his time with us.

Some of you may know this is Joe's last day in the investor relations team as he begins the next chapter in his career at Merck where he will be working as the Executive Director of Global Human Health Operations supporting Adam Schechter and his leadership team.

So Joe, good luck in your new role.

Second, as usual, there are a number of items that I need to remind you of before we begin.

First, if you look at our GAAP results, there are some items such as purchase accounting adjustments, merger-related expenses, restructuring costs and other charges, such as the arbitration settlement.

We have excluded those items from our non-GAAP results so you can get a better sense of the underlying performance.

Next, we provided tables to help you understand the trends in the business.

There are three tables in the press release.

Table 1 is the GAAP results; table 2 reconciles our GAAP P&L to non-GAAP for the second quarter -- excuse me -- for the first quarter and year-to-date period.

Table 3 is a supplement to our non-GAAP results, which provides the sales performance for the Company's business units and products.

During the call today, we will be referring to table 2 and table 3.

Finally, I would like to remind you that some of the statements we make today might be 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 risk and uncertainties.

Our SEC filings, including Item 1A in the 2010 10-K, identify certain risk factors and cautionary statements that could cause our actual results to differ from any forward-looking statements we make today.

And we undertake no obligation to publicly update our forward-looking statements that we make.

The Company's SEC filings are available on the Company's website at Merck.com.

Now I would like to announce our speakers this morning -- Ken Frazier, our President and Chief Executive Officer; Adam Schechter, our President of Global Human Health; and Peter Kellogg, our Chief Financial Officer.

Now I would like to introduce Ken Frazier.

Thank you, Alex and thank you, Joe, for your contributions.

Good morning, everyone.

We are pleased to report strong results for the first quarter of 2011.

Our performance underscores that we are successfully delivering on our stated intent to grow both the top line and the bottom line.

This is really an execution story.

We are executing on our plans and we believe we are off to a good start this year.

The quarter was characterized by growing revenues and double-digit EPS growth.

Our performance was largely driven by double-digit growth of key products such as JANUVIA, JANUMET, SINGULAIR, REMICADE, ISENTRESS and NASONEX, combined with deliberate cost control measures across all areas as we continue our work to create a more effective and efficient operating model within Merck.

In addition to the significant contributions of our Human Health portfolio this quarter, our Animal and Consumer Health businesses grew 7% and 6% respectively.

We are pleased with the assets we have in Animal Health and Merck Consumer Care and believe they complement our Human Health business.

We remain focused on executing our growth strategy, which includes these businesses.

Just a year ago, we were facing a significant patent cliff for our $3.6 billion COZAAR/HYZAAR franchise.

Clearly, patent expirations are a fact of life in our industry and going forward, we believe a company's ability to consistently grow through patent expiries will be an important differentiator and measure of success.

I am pleased to say that, over the past year, we grew earnings while at the same time overcoming the loss of exclusivity for our COZAAR/HYZAAR franchise and performing as we did under the integration.

Overall, this underscores the strength of our Human Health, Animal Health and Consumer businesses and the benefits of this mix of businesses.

Looking at the quarter's results, it is clear that our business momentum is building as we enter the accelerate phase of our growth strategy.

And we continue to demonstrate the ongoing value of the merger.

We made progress in our robust late-stage pipeline and are leveraging the benefits of our expanded portfolio.

Indeed, the steps we are taking are paying off and enable us to increase the midpoint of our 2011 guidance range despite the $0.08 to $0.09 second-half impact of the J&J arbitration resolution.

We know that given the long leadtime nature of this industry, in many ways, we are still reaping the benefits of actions and decisions that were taken as long as a decade ago.

Therefore, we are taking decisions now that will position us for sustained growth well into the future.

We will improve all aspects of our operations, prudently invest for growth and most importantly deliver value through innovation.

A key part of our growth strategy is to maximize revenue from our current products while launching new ones and this quarter's results clearly demonstrate that we are delivering on that front.

During last quarter's call, we mentioned that we are increasing disciplined investments in our best growth drivers -- new product launches, select inline products and Japan and the emerging markets expansion opportunities.

While still early, our first-quarter results reflect positive underlying trends that support these investments.

Going forward, we will complement the growth of our inline products with contributions from the 12 launches currently underway across the spectrum of our therapeutic portfolio.

Turning to R&D, while delivering a strong financial performance, we also are maintaining our focus on advancing the late-stage pipeline.

So far this year, we have achieved multiple approvals, including SYLATRON, our injectable cancer therapy for the treatment of stage 3 malignant melanoma after surgery.

Also, on the cancer front, our investigational mTOR inhibitor being studied to treat sarcoma achieved its primary endpoint in a Phase III clinical trial.

We plan to file it for approval this year.

On Wednesday, we had an FDA Advisory Committee meeting to review boceprevir now known as Victrelis, our protease inhibitor for the treatment of hepatitis C infections.

The vote was a unanimous 18 to nothing.

We anticipate approval later this spring in the US and shortly thereafter in Europe.

The Advisory Committee vote underscores the fact that Victrelis represents a significant advance for patients living with hepatitis C.

I recently traveled to Germany to meet with scientific leaders at the EASL meeting where data from the pivotal Victrelis Phase III studies were shared with physicians in various international markets.

In the conversations Adam Schechter and I had, it was clear that the enthusiasm for Victrelis is commensurate with the potential we see.

We have five additional filings accepted for review by regulatory authorities.

Among these are Tafluprost known outside the US as SAFLUTAN, which was submitted in the US for glaucoma; JANUVIA plus Simvastatin in the US; and an extended release formulation of JANUMET.

And there is more on the way in 2011 and beyond.

We are also excited about several other candidates in our late-stage pipeline that have the potential to address major unmet medical needs, including TREDAPTIVE, Odanacatib, Suvorexant, our novel orexin inhibitor for the treatment of insomnia, vorapaxar and most notably, in the longer term, anacetrapib, which begins a large outcome study this year.

While there are many good things happening in the pipeline, a few recent events remind us that pharmaceutical and vaccine innovation is not without challenges.

That was exemplified by the recent announcement of the suspended enrollment of our staph vaccine V710.

On balance, we remain committed to bringing medical innovations to patients and physicians in ways that also deliver a return on investment in R&D.

Since our fourth-quarter earnings announcement, I have had many discussions with investors and others about the position we have taken to continue making disciplined and focused investments in research and development.

Let me take a moment to share how we are thinking about innovation and balancing the risks that are inherent in it.

Over the longer term, we firmly believe that the predominant driver of growth and sustainable value creation for Merck will continue to come from discovering and developing new and differentiated products that address unmet medical needs.

In this regard, Merck has had a long history and recent success of bringing first-in-class and best-in-class medicines and vaccines to the market and we continue to see this as a cornerstone of our research strategy.

We do, however, recognize that first and best-in-class products offer a higher risk and higher reward value proposition.

To better balance the risk/reward equation, we are actively managing our overall R&D portfolio and allocating our investments across R&D segments that reside at different points on the risk/reward continuum in a way that positions us to win in each segment.

This includes lifecycle management such as new indications, new formulations and new combination products, biosimilars and innovative branded generics.

This will enable us to better balance risk and timing within our overall portfolio and maximize the value of our pipeline and inline product assets.

To be clear, while Merck's commitment to innovation is unwavering, we are not in a business-as-usual mode when it comes to managing our investments in R&D.

Peter Kim, working along with Adam Schechter, Peter Kellogg and me, has been improving the decision processes by which we either commit to or discontinue projects.

We are being more aggressive about prioritizing the program and therapeutic areas where we will place our biggest bets.

Our decision to return the rights of betrixaban to Portola underscores this disciplined approach.

An example of how we are allocating investments at different points along the risk/reward continuum is our JANUVIA franchise.

It now includes approved and investigational combination products, including JANUVIA plus simvastatin, JANUVIA plus pioglitazone and JANUMET XR.

By building on our prior innovation, we create the equivalent of launching multiple new products that have a significantly higher probability of success.

Another example is our recent announcement of a new joint venture with Sun Pharma, which capitalizes on the best of the two companies.

The JV combines Sun's track record and rapid innovative product development and its outstanding low-cost manufacturing capabilities with Merck's clinical development and registration expertise and broad geographic commercial footprint.

Through the new JV, we plan to develop, manufacture and commercialize differentiated combinations and formulations of branded products for the emerging markets.

All of our R&D investments, including those in lifecycle management, have rigorous ROI and NPV hurdles in place.

This helps to ensure that the returns justify the investments.

Additionally, our companywide internal incentives are directly aligned with the creation of shareholder value.

In addition to actively investing for growth during the quarter, we also made several decisions that I believe illustrate the business and financial discipline we are exercising as we make capital allocation decisions.

For example, we discontinued pursuit of the Animal Health joint venture with sanofi-aventis and we reached agreement with Johnson & Johnson regarding marketing rights for REMICADE and SIMPONI.

This resolved a major area of uncertainty while retaining approximately 70% of our 2010 revenue from these products.

Of course, while investing for growth, we still have the financial strength to return significant cash to shareholders.

Our strong dividend and recently increased share repurchase program show confidence in our business and the balance we strike to provide attractive total shareholder returns.

In closing, we are very pleased with the first-quarter results we reported today.

We have demonstrated our ability to advance the pipeline, grow our key brands and leverage the benefits of our expanded and diverse portfolio.

Moving forward with our growth strategy, a companywide focus on innovation, actions to create a more efficient and effective operating model and ongoing cost control measures, we are well-positioned to deliver sustained results and value in the remainder of 2011 and over the long term.

Thank you for your attention.

I would like to turn the call now over to Adam.

Thank you, Ken and good morning, everyone.

It is a pleasure to speak with you today and provide you with an overview of the performance of Global Human Health in the first quarter of 2011.

The year is off to a strong start with reported sales of $9.8 billion.

This represents 2% growth compared to the first quarter of 2010, or 6% growth if you exclude the impact of generic COZAAR and HYZAAR.

The performance was primarily driven by the double-digit growth of our key brands, including JANUVIA, JANUMET, SINGULAIR, REMICADE, ISENTRESS and NASONEX.

And also the solid regional performance in the United States, Japan and the emerging markets.

In all of our markets, we are executing on our commercial growth strategy.

Our strategy includes the following -- first, to grow the core; next, to expand the core; and then also accelerate new launches.

We will do this while relentlessly focusing on the needs of our customers.

I will use this strategy framework for my discussion today.

So first let me discuss growing the core.

The first critical part of our growth strategy is to maximize the growth of our key products and our core business in our largest developed markets.

That is the core focus.

We have to ensure we are supporting these opportunities that provide the foundation for our growth platform.

Let's start with the United States where sales declined 4% year-over-year.

If you exclude the impact of COZAAR/HYZAAR, sales increased 2% driven by the diabetes, respiratory and neuroscience franchises.

Our vaccine business was largely in line with the previous year once you exclude the impact of CDC stockpiling and customer inventory fluctuations in the first quarter of 2010.

Leveraging our strong commercial presence is paying off in the United States.

The United States remains the largest market in the world.

There are still significant unmet medical needs and our team is focused on ensuring broad access to our products for patients and physicians.

We have a very strong managed care presence and high ratings with pharmacy and medical directors.

And we continue to build our relationships with the larger primary care audience, which ranks Merck number one on customer trust and value.

Moving to the EU, sales were down 3% this quarter, excluding the impact of COZAAR/HYZAAR.

The sales decline was due to a number of factors.

The factors include generic erosion of TEMODAR, the return of SUBUTEX and CAELYX rights and the impact of EU austerity measures, which remains in line with previous guidance.

Despite this, we continue to drive the growth of our key brands, including JANUVIA, REMICADE, ISENTRESS and SIMPONI.

The EU remains a core part of our business and we are ensuring we have the right level of resources to take advantage of the unique opportunities in each of these markets.

Now let me highlight some of the brands that make up the core and contributed to the positive performance in the quarter.

First, the JANUVIA and JANUMET franchise continued its strong performance with global quarterly sales growing 47% and surpassing the $1 billion in sales for the first time.

The franchise is growing in all regions and JANUVIA now has a 24% marketshare in the global branded oral diabetes market.

Regionally, sales increased 23% in the United States and over 50% in the EU.

In Japan, demand remained strong and sitagliptin now has a 26% combined marketshare.

Around the world, we saw opportunities to invest in JANUVIA and JANUMET at the country level as a result of the Avandia market event and we moved quickly, we moved decisively in each market where it made sense to do so.

These investments are already paying off.

As Ken mentioned, innovative combinations in lifecycle management projects create lower risk growth opportunities to drive our key brands and this has been our strategy for the JANUVIA franchise.

If approved, we plan to launch our once-daily version of JANUMET and fixed-dose combinations of JANUVIA with simvastatin in 2011.

Moving now to SINGULAIR, SINGULAIR had a strong quarter as sales grew 14% to $1.3 billion.

We are seeing significant growth for SINGULAIR in the emerging markets in Japan where we will have market exclusivity until 2016.

SINGULAIR was a key contributor to the 12% growth in our respiratory portfolio this quarter, which benefited also from purchases in advance of the spring allergy season.

Looking at the prescription trends in the United States, you can see that the allergy season is off to a slow start.

We will continue to monitor that very closely.

REMICADE sales grew 12% in the quarter, led by the strong growth in UC and Crohn's disease indications.

We are enthusiastic about the opportunities ahead for REMICADE as we leverage our strong lifecycle management platform.

Now that the arbitration is behind us, our teams in Europe, Russia and Turkey can focus on the broad opportunities to improve penetration rates and drive growth for the immunology franchise.

Combined sales of VYTORIN and ZETIA grew 5% in the quarter with growth from all regions, including the United States.

The international growth was driven by sales in Japan, 41% growth and the emerging markets with approximately 20% growth.

We are encouraged by the volume-driven growth of ZETIA in Japan, as well as other growth in other Asia-Pacific markets.

We are looking forward to continuing momentum as we seek to include the Sharp data, which showed a medically important outcome benefit, albeit in a relatively small population, in our approved labels for markets around the world.

Now I would like to briefly discuss expanding the core.

A key part of expanding the core strategy is growing our business in the fastest-growing markets, the emerging markets and Japan.

Let me start with the emerging markets.

The emerging markets grew 10% in the quarter and contributed 18% of our total Global Human Health sales.

The growth was driven by the top six markets, which grew 18%.

Our performance in China this quarter was strong.

Sales grew 40% driven by the respiratory portfolio and diversified brands.

We continue to see a lot of opportunity in the emerging markets and our goal remains to have 25% of our pharmaceutical and vaccine sales coming from these countries by 2013.

We are approaching each of these markets differently.

Our primary focus is to maximize the more than 150 brands that we already have approved in markets today.

Then we look for opportunities to leverage partnerships that give us access to additional customers, products and lifecycle management platforms.

Lastly, we look for interbrand opportunities where it makes sense to do so.

So let me mention one of our new partnerships, the formulation of a joint venture with Sun Pharmaceuticals.

This is an exciting opportunity for us to partner with a proven leader to introduce incrementally innovative products into the emerging markets and to ultimately give our salesforce additional brands to complement their portfolios.

While we are also expanding the core in Japan, Japan grew 44% in the quarter, or 31% excluding foreign exchange.

Sales were driven by strong growth of JANUVIA, NASONEX, SINGULAIR and ZETIA, as well as solid contributions from new launch brands such as BRIDION.

Thanks to the extraordinary effort of our team in Japan, patients and physicians had access to our medicines during the devastating natural disaster.

There was a slight inventory build of approximately $40 million to $50 million in the quarter and we anticipate inventory will be reduced over time as the supply chain gets back to normal.

Lastly, in expanding our core, we have recently implemented a key initiative we call the Next 10.

The Next 10 is designed to help our teams focus on the brands after the top 10 in a given market and to maximize those other brands.

It is a very specific call to action to find additional growth opportunities by allocating greater focus and resources beyond the top brands.

As an example, we have just launched the diversified brand salesforces in markets including Brazil, Mexico, Germany and Colombia.

We believe the allocation of resources to these brands will provide incremental growth opportunities in these markets and we will closely monitor the success, market by market, around the world.

The third component of our growth strategy is to accelerate new launches.

We now have 12 products launching around the world, which together contributed about $300 million to this quarter.

I would like to highlight a few key contributors to the top-line growth in the first quarter.

First, SIMPONI sales were $54 million, driven by the strong growth in Germany.

As part of the lifecycle management, we received approval for the structural damage claim for SIMPONI, which will help us position against other anti-TNF therapies.

We are also planning additional launches of SIMPONI in Europe in 2011 and 2012, including the UK, France, and Portugal.

Another brand that continues to grow is DULERA, our combination treatment for asthma in the US.

We are seeing a steady increase in volume growth in DULERA, which now has roughly 2% new Rx marketshare in the combination category.

Two of our neuroscience brands, BRIDION and SAPHRIS, continue to make positive gains, contributing about $65 million to the top line this quarter.

We are allocating time and resources to make each of these launch brands as successful as possible.

Some may take longer than others, but we are confident that we have the right plans in place and we will support growth opportunities to maximize these brands.

As we think about future launches, we see an opportunity to regain a foothold in the ophthalmology segment with a preservative-free formulation of tafluprost for the reduction of intra-ocular pressure.

Tafluprost is marketed outside the US as SAFLUTAN.

The NDA was accepted by the FDA in March and we anticipate approval later in 2011.

We look for an opportunity to gain critical mass in the commercial organization in this market.

We found that with Inspire Pharmaceuticals.

This was a great opportunity to accelerate our launch preparedness and give our teams a greater platform for success.

The salesforces from Inspire have strong relationships with existing customers and very good knowledge of the ophthalmology area.

Now let me take a moment to talk about Victrelis, a brand that we look forward to launching soon for the treatment of hepatitis C.

We were pleased to receive a positive recommendation from the FDA Advisory Committee this week as the Committee recognized the benefits that Victrelis will have for patients.

I have spent a lot of time with the team to ensure that we are ready for the launch.

I am confident that Victrelis will offer an excellent value proposition for both physicians and patients.

As Ken mentioned, we spent time with many of the key scientific leaders last month in Germany and we were extremely encouraged by the feedback, especially the positive feedback from physicians who have already had an opportunity to utilize Victrelis in early patient access programs.

While I am not going to provide details of our launch strategy, I will tell you this, we are ready to launch.

In summary, we had a strong first quarter and it is clear that we are achieving growth while continuing to improve our cost structure.

We will continue to evaluate our resource needs to ensure we are funding the right growth opportunities and cutting costs where possible and appropriate.

Our focus in Global Human Health is on delivering top-line revenue growth.

We will look forward to updating you on our progress and performance throughout the year.

Now I would like to turn it over to my colleague, Peter Kellogg.

Thank you, Adam and good morning.

As you heard from Ken and Adam, we had great performance in the first quarter of 2011.

We performed well on all fronts.

Sales were strong and operating expenses were down across the board in marketing and admin, R&D and product costs.

And we grew non-GAAP EPS by double digits.

We continue to demonstrate our commitment to driving out inefficiencies in our cost structure while making appropriate investments in growing the top line.

My comments today will be about the quarterly performance and how that translates into the rest of the year.

So let me start with our results.

To streamline my comments today, I will speak to our non-GAAP results, which exclude purchase accounting adjustments, merger-related costs, restructuring charges, and the one-time arbitration settlement charge that we previously announced.

On this basis, we reported strong first-quarter non-GAAP earnings per share of $0.92, 11% growth compared to the same period last year.

Total revenue for the quarter was $11.6 billion, 1% above a year ago.

The strong performance of our key brands and launching products offset more than $600 million of headwinds that we experienced in the quarter, including generic erosion, the impact of healthcare reform and continued pressure from EU austerity measures.

Excluding just the largest item, the impact of generic COZAAR/HYZAAR, total Company sales were up 5%.

Now let's talk about expenses.

This quarter, you can see we reduced our operating expenses by more than $350 million versus the first quarter last year while still making additional investments in emerging markets of over $140 million.

The savings this quarter are on top of more than $2 billion in savings we generated through the end of 2010.

So you should have no doubt about our commitment to achieve our $3.5 billion synergy target.

As Ken mentioned, we have taken smart across-the-board cost control measures that have enabled us to accelerate the realization of these savings.

Our non-GAAP product gross margin of 76.8% was slightly higher compared to a year ago, as well as last year.

There are two things contributing to this improved rate -- product mix in the current quarter and manufacturing efficiencies.

While the main driver of PGM tends to be product mix, we anticipate that you will see some of the manufacturing efficiency benefit in future quarters.

Now let's talk about marketing and admin.

On a non-GAAP basis, marketing and administrative expenses in the quarter were $3.1 billion.

As you can see from these results, we achieved cost reductions while also making additional investments in key growth areas such as the 12 products that are currently being launched in major markets and the emerging markets.

Moving on to R&D, research and development expense of $1.8 billion was approximately $200 million lower than last year.

Ken described our investment philosophy and how we strive to have a balanced R&D portfolio across the risk and reward continuum.

I would like to reiterate that we have rigorous ROI hurdles in making these decisions.

In fact, we anticipate that our focus and financial discipline in this area will translate into a slightly lower R&D spend than we had anticipated in early February.

As a result, we are reducing our R&D targets for 2011 to a range of $8 billion to $8.4 billion.

Moving to tax, our non-GAAP tax rate was 25.5% for the first quarter.

However, we continue to anticipate that our full-year non-GAAP rate will be in the 20% to 22% range.

With our balance sheet and cash flow statement for the quarter -- while our balance sheet and cash flow statement for the quarter is not yet realized, we ended the quarter with a strong financial position.

We had about $15 billion in cash and investments and roughly $18 billion in debt.

As you look forward to Q2, remember that the Inspire purchase price of $430 million and the $500 million arbitration settlement will come from our cash balance.

So in summary, we are off to a great start in 2011 and we are well-positioned to achieve our growth targets for the year, so let me cover those next.

I have already touched on our targets for R&D and taxes, so I will now focus on revenues and EPS.

We are very pleased to maintain our prior top-line target for 2011.

We are confident in our ability to build on the top-line performance that we drove this quarter and overcome the challenges we face this year.

We continue to target low to mid single-digit revenue growth in 2011.

Our performance this quarter puts us on the right growth trajectory for the year and we have now lapped the full 12-month impact of the COZAAR/HYZAAR patent expiry as Ken mentioned earlier.

In fact, Merck has maintained the top line through the loss of several major patent expiries over the last five years -- ZOCOR, FOSAMAX, and now COZAAR/HYZAAR.

In an industry where investors worry about patent expiries, and ask the question can pharma companies replace their lost revenue, Merck has now done it three times in a row.

On the bottom line, our new non-GAAP EPS range of $3.66 to $3.76 raises the midpoint of the range to $3.71.

This guidance reflects our new R&D range and absorbs the $0.08 to $0.09 EPS impact from the arbitration settlement in the second half of the year.

This quarter's strong performance and the focused steps we have taken to grow the top line and achieve continued cost savings have positioned us well to achieve our sales and EPS targets.

The new 2011 GAAP EPS target range of $2.04 to $2.39 also reflects the new R&D guidance and in includes, among other items, the entire impact of the arbitration settlement.

Given the strength of our results and our expectations for strong free cash flow, earlier this week, we announced the Board authorization of a $5 billion stock buyback program.

This is in addition to the $1.4 billion we had remaining under the current authorization.

This authorization is consistent with our intent to remain one of the best pharma companies in terms of cash distribution to shareholders.

Last year, we bought approximately $1.6 billion in treasury shares.

This demonstrates our desire to actively buy back shares at the right time and at the right market conditions.

In fact, over the past five years, we have returned greater than 85% of free cash flows to shareholders.

Only one other pharma company can claim this.

Over the same five-year period, we have been in the top third of our peers in terms of dividend payout ratio.

In 2010 alone, we returned $6.3 billion to shareholders.

We have done this while continuing to invest in key growth drivers and maintaining a sound capital structure and an appropriate credit rating.

This authorization of $5 billion should confirm that Merck is confident in our strategy and accordingly has taken this action.

So in summary, we are very pleased to kick off 2011 with such a strong performance.

Growth on the top line despite many challenges, double-digit growth on the bottom line.

Advancing the late stage pipeline with five products under regulatory review, increasing investment in key growth areas such as emerging markets and our 12 product launches, making strategic deals in support of future growth such as Sun Pharma and Inspire, while also demonstrating the financial discipline to only make investments that meet our rigorous prioritization and financial criteria.

We are confident in making thoughtful resource allocation decisions to drive future growth and at the same time maintaining our history of returning cash to shareholders.

Thank you.

Now I will turn the call back to Alex.

Thanks, Peter.

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

In order to help us get through as many callers as possible, we would like to ask you to limit yourself to one or two questions and we will not take any follow-up questions.

If you do have additional questions, you are always welcome to rejoin the queue.

Operator, we are ready for the Q&A.

(Operator Instructions).

Gregg Gilbert, Merrill Lynch.

Thanks, good morning, team.

I have two; I will ask them upfront.

First for Ken, you mentioned that Animal Health and Consumer are core to the strategy.

Just curious how you ensure that each business gets the management attention, the internal funding, as well as access the business development capital that they require.

And secondly on boceprevir, I know you said you seem very ready or you said you are ready to launch, but would it be reasonable to expect at least a 90-day delay based on the data on drug/drug interactions that you just recently provided the agency?

Thanks.

Okay, on the first question, again, I feel that we have great assets in both Animal Health and Consumer Care, as I mentioned, that complement our Human Health business and to help contribute to our top line and bottom-line growth objectives.

From the standpoint of focus and resources and management oversight, we see these businesses as being very complementary to what we are doing.

We have strong leaders in both businesses.

We are developing the right kinds of plans going forward to ensure that those businesses can contribute to Merck in the right way, subject to the way we run the entire business, which is to have strong growth on both the top line and the bottom line.

So we are pleased to have those businesses.

I will turn the boceprevir question over to Adam.

For boceprevir, we believe that we have completed the studies required for approval, and we anticipate to launch in May.

Okay, next question, please.

Chris Schott, JPMorgan.

Great, thanks very much.

Just had a couple of questions on capital deployment priorities, now that we are about 18 months post the Schering deal.

I guess first, how should we think -- or should we think about Merck's net debt levels remaining near current levels over time?

Second, on business development, obviously you saw the Inspire deal this quarter, but what is Merck's interest in larger transactions that would bring in-market assets to the Company?

Then finally, why not a higher dividend versus share repo as a cash flow return vehicle at these points?

Thanks.

Let me start by talking about the overall strategy we have for capital deployment.

As we have said all along, we believe that what is important for us is to focus on driving total shareholder return and to provide attractive total shareholder return.

So for us, that means when we are in the business development field, we want to look for those assets that will complement our franchises and help drive our business over the long term, but we are only going to be disciplined in how we use capital to go after business development opportunities.

For example, in the emerging markets, I think we have shown that approach to how we are going to grow our business.

We are going to look for the kinds of partnerships that actually are beneficial to our business in the long run.

We are not going to overspend.

So we are going to be disciplined in spending.

As it relates to the dividend and the share repurchase, I would just say before turning it over to Peter, we think we have a strong dividend right now.

We also think that this increase in the share repurchase program signals that we have confidence in our business going forward.

So we have a history of being shareholder-friendly returning cash to shareholders and we are going to continue with that.

Peter?

Yes, thanks.

I would reiterate actually what Ken just said.

There is no question that we have an absolute desire to be as shareholder-friendly as possible.

We see returning cash to shareholders as part of the formula of total shareholder returns and we certainly appreciate how important that is.

We do look at our net cash/net debt level over time and so we do forecast that out.

We don't give guidance on it obviously, but we have been very focused on returning a lot of the cash that we do generate to shareholders.

And I think that's certainly evident in some of the facts and perspective that I provided during my discussion.

Relative to the dividend versus the share repurchase, obviously, that is a trade-off that we think about.

At this point, we think, as we look at the opportunity to create shareholder value, we felt that the share repurchase was a great opportunity.

That is not to discount any other options for the future.

Okay, next question please.

Jami Rubin, Goldman Sachs.

Thank you.

Ken, question for you.

Your definitive statements about the importance of Consumer Health and Animal -- Consumer and Animal Health does suggest that you would not consider strategic alternatives for this business.

And I think at our conference in January you had signaled that, for Consumer, which is primarily a domestic business don't have scale, that this would be a business that you might consider for future strategic activity, i.e.

spinoff or make future acquisitions.

So I am wondering if you can talk about that a bit more.

And also, Peter, if you can give us a sense of the timing of when you might take advantage of your $5 billion buyback program.

Thanks.

Thanks for your questions, Jami.

Let me just say that we are pleased with the assets that we have because we believe they complement our Human Health business.

As we go forward, we will be looking for opportunities to grow our presence in the Consumer space if that is what we believe will create long-term shareholder value.

But strategy has multiple dimensions and what I am saying is that we think these businesses are good, they provide us with, in effect, buffers on some of the issues that I think that the core pharma business provides us while helping us to grow right now.

We like the fact that we are seeing 6% growth in Consumer, 7% growth in Animal Health and going forward, we are just going to have to look at those to figure out how those assets can help us maximize shareholder return and I am not ruling anything out.

I didn't mean to rule anything out.

I am simply saying that we like those businesses and they are performing well as a part of our portfolio.

Again, I will report that Consumer Health is tied directly to Global Human Health, particularly in the emerging markets where we use the same channels, we reach the same patients, if you will.

So we like those businesses and we will continue to look at how the entire portfolio can perform to maximize shareholder value.

Great.

So Jami, on the second part about the share repurchase timing, we don't obviously give guidance relative to when we will be in the market and so forth.

I would highlight that, last year, our purchases of $1.6 billion were done primarily in the second and third quarter and then just due to a variety of factors, the earnings time schedule, vorapaxar news and the J&J settlement, we've actually been blocked out of the market from being able to go into the market for quite some time, a number of months.

So I think going forward, we will see some windows and we will see what we do.

But we really don't forecast going forward.

Tony Butler, Barclays Capital.

Good morning, thanks very much.

Two questions.

The first for Adam, could I get you to flesh out the Sun Pharma relationship?

For example, is this relationship in all emerging markets?

What is the exact brand or subsidiary brand?

Is it a Sun pill or product or is it a Merck product?

And how do you think about the salesforce?

Do Merck reps or specialty reps market Sun products or is this all just within one bag and both companies are marketing each other?

And then one follow-up please.

So, Tony, if you look at Sun Pharma, we have spent a lot of time with the companies working together and we are taking a look at all the potential opportunities for novel innovative combinations and formulations.

And we have quite a long list of potential possibilities.

What we are now doing is we are going to put a general manager in charge of that joint venture.

The general manager will work with the Board that is made up of equal employees from both Merck and from Sun Pharma.

The general manager will come with a recommendation on the priority of the different opportunities that we have that will be based upon how quickly we can get them to market, what the probability of success is, what the market needs are and how these products will meet those market needs.

So ultimately, the revenue potential of the products.

We anticipate that the formulation work, the low-cost manufacturing work will be with Sun Pharma.

The commercialization will be done by Merck and we would look to launch those products in whatever emerging markets we believe there would be significant opportunity in for each of those products.

We would use the regulatory capabilities in those markets from Merck.

So there is still a lot of work for us to do to go and make sure that we have got it all washed out.

This deal is for all the emerging markets with the exception of India and we don't have the exact product list.

We are going to wait for the general manager to make the recommendation.

So there is still work for us to do there, but we are very excited about this opportunity because we believe it gives us the capabilities and the opportunities to bring novel innovative branded generics to these markets, which we think are going to help with the innovation platform that we are launching in the emerging markets.

Yes, I would just underscore Adam's last point.

We have always been focused as a company on innovation and differentiation.

We want to participate up and down the segment through the markets, in the emerging markets, but we want to play to our strength as a company and that is really around science and innovation and differentiation.

And that is why we have entered into this agreement with Sun Pharma.

We think they are able to help us develop a brand, a line of brands that actually meet the Merck standard when it comes to patient value, innovation and differentiation.

Thanks very much for that commentary.

And then as my follow-up, Ken, you made a great deal of -- or you created a great deal of discussion around making decisions and one of the decisions that you and Merck made was to give back an asset to Portola in a therapeutic area that one could argue is potentially quite large.

So the question is is there some consideration to either engage in a later-stage asset in that same therapeutic area or maybe enter into an agreement with an unencumbered asset that may even be more later stage or even on the market or is Merck just simply saying this was a large cardiovascular area that we just therapeutically and scientifically missed?

Thanks very much.

So the decision that was made about betrixaban really reflected, as I said, our approach to looking at the high ROI and NPV hurdles that we think we want to have before we go ahead and make big bets.

Going forward, in this area, as well as all other areas, we are really focused on finding the best science available externally, bringing it into Merck and being able to work with molecules and in partnership with other companies to drive growth going forward.

So I would say it wouldn't just be an issue around Factor Xa, it is a factor about each one of our franchises and our franchise leaders both on the commercial side and the scientific side are actually charged with bringing in the best external science.

Okay, next question please.

John Boris, Citi.

Thanks for taking the questions and congratulations on the quarter.

First question for you, Ken.

I think in your previous press release, you -- at least on the J&J arbitration, you had indicated that you would retain the assets, but you had to give up 30% of the sales and I think you indicated $0.08 to $0.09 of earnings.

Can you articulate why you had to give up 30% and why, within the negotiation, you felt compelled to do that?

And then for Adam, on emerging markets, you had a target of 25% that you wanted to hit at a specific timeframe.

The 30% that you give up, obviously, was largely in emerging markets.

Are you still reiterating that target of 25% in emerging markets?

Thanks.

So I will start with the J&J question, John.

I think that we had a strong position going into that arbitration.

I think the 70/30 split reflects that we had a strong position and as to why we ended up where we ended up here, it was because both parties agreed that given the merits of the case, this would be a good place for the two parties to come out and remove all the uncertainty that exists in any arbitration proceeding.

And to answer the question regarding emerging markets, we are committed to a target of 25% in 2013 and if you look at the emerging markets and the strong growth that I mentioned, for example, China up 40%, we never had REMICADE or SIMPONI in China.

We also retained Russia and Turkey.

So overall, the performance in emerging markets is very strong.

We believe there is very significant opportunity and we continue to reinforce the 25% that we said before.

Tim Anderson, Sanford Bernstein.

Thank you.

My guess is you're going to resist answering this, but I'm hoping you can share your thoughts.

On R&D spending, if you could potentially keep it flat or slightly down in 2011, is it possible that R&D spend might contract further beyond 2011?

I am just looking for a directional answer on this.

On SINGULAIR, is it possible you might be able to take that product over the counter as part of a lifecycle management strategy?

And then on betrixaban, going back to Tony's question asked a different way, are there still creative ways that Merck might be able to enter this oral anticoagulant market in a reasonable timeframe?

Ken, do you want to start with the R&D?

Yes, on the R&D question, I would say that, as I have tried to say all along, the R&D spending that you see at this time in Merck is a function of the assets that we have at various stages of development in the pipeline.

I don't think you should consider it to be a number going forward.

I think it will all depend on what we have.

We are pleased to have the assets that we have in late-stage development inside our Company.

And going forward, we are going to be looking for ways to produce efficiencies in our R&D, including prioritization decisions.

We have been reducing the number of R&D sites.

So we are committed to ensuring that whatever we spend on R&D going forward is about quality not about quantity.

So we have no dogma about an $8 billion spend in R&D.

It is really about making sure that we maximize the assets because we are committed to grow long term and we believe that R&D is the predominant driver of long-term growth in this industry.

On the SINGULAIR OTC issue, I'll turn it over to Adam.

Yes, first, I'd start by saying -- I mentioned with SINGULAIR that we think there is tremendous opportunities in Japan and also the emerging markets.

We expect there to continue to be strong growth even after the patent expiry in the United States and Europe.

We look at the possibility of all of our Rx brands to go OTC and we always evaluate and look at those opportunities and of course, we will do the same with SINGULAIR.

And I'm sorry.

I know your last question was on betrixaban, Tim, I seem to have not remembered it exactly.

Yes, yes.

The question was are there creative ways that Merck might be able to enter the novel oral anticoagulant market in a reasonable timeframe?

So as I just said a few minutes ago, we are looking at opportunities across a broad spectrum of therapeutic areas.

If we find opportunities that we believe provide value for us to enter into that space or any other space in which we have actually determined we want to be a party going forward, we will look for those opportunities.

Okay, next question please.

David Risinger, Morgan Stanley.

Thanks very much.

A couple of questions.

First, you obviously had a very strong quarter, which is analyzing at 368.

The midpoint of your annual guidance is 370.

So I am just wondering if we should take away that your guidance is quite conservative given your projection for accelerating sales growth over the course of the year or are you expecting results to weaken in the second half after a seasonally strong second quarter due to the REMICADE and SIMPONI step-down?

And then second, the betrixaban cancellation, obviously, is going to help lower R&D costs, but I was just wondering about that decision, whether you were aware that rivaroxaban was going to have a bleeding issue in the MAGELLAN trial before you dropped it shortly before that release?

Thank you.

Hi, this is Peter.

Let me take the first part.

So yes, we did have a strong first quarter.

I think as we commented, we do anticipate about an $0.08 to $0.09 impact in the second half of the year from the arbitration settlement.

So I think if we factor that in then I think the guidance probably makes a lot of sense.

And I would remind you also that, in the second half of the year as we go through the balance of the year, we are going to be investing against some very important launches that we intend to plan to win or play to win for.

So I think our guidance right now reflects what we think is a realistic range of outcomes for the year and we feel very good quite frankly about how we got started this quarter.

We made a real focus on getting a fast start this year and we are very happy to be able to hold the top-line and bottom-line guidance and in fact, despite the arbitration, the impact actually increased the midpoint of our bottom-line guidance range.

So we are feeling very good about kind of the total package at this point from the guidance standpoint.

On the last question on betrixaban, I won't comment specifically on the specific decision.

I will say that we looked at the totality of public information about the various molecules in the space and decided that it was not going to meet our ROI standards to enter into the sort of large-scale study that we thought we would be required to enter into.

Okay, next question please.

Steve Scala, Cowen.

Thank you, I have two questions.

Will CORDAPTIVE be refilable in 2012 even if the HPS2-THRIVE trial does not achieve its efficacy endpoint given that the FDA questions are related to safety or will CORDAPTIVE not be an opportunity in the US should HPS2-THRIVE not achieve its endpoint?

So that is the first question.

And the second question is can you remind me whether the $3.5 billion in cost savings should be viewed on a net or gross basis?

Thank you.

So I will say that we intend to file CORDAPTIVE/TREDAPTIVE in the United States in 2012.

That is our intention and I think that is what our expectation is going forward.

On the synergies, we have said that we intend to achieve the $3.5 billion in net synergies going forward.

We are focused on that, but as I tried to say early on, our ambitions go even well beyond that in terms of how do we position this Company to have a model that will be successful in a tough future environment.

So we are committed to achieving the $3.5 billion in annual cost synergies by 2012, as we said, but we are also looking at having the right kind of model going forward to allow us to succeed long into the future.

Okay, next question please.

Marc Goodman, UBS.

Yes, first question is, Peter, can you talk about the tax rate a little bit, just what was going on this quarter and how we should think about it on a quarterly basis the rest of the year?

And then the second question is can you give us an update on vaccines, what was unusual in the quarter and what we can expect kind of to play back?

It's a little unusual as far as the lumpiness quarterly over the rest of the year.

Thanks.

This is Peter.

So first, on the tax rate, I think you have got it exactly right.

In other words, the first quarter, we highlighted that we had a couple of discrete items and sometimes, as you know, you have basically your whole tax structure and the tax rate is sort of running on a full-year basis and then from time to time, you have discrete items that hit in a particular or single quarter.

So in this quarter, we had a couple of items that pushed our non-GAAP tax rate up to 25.5%, but we are comfortable as we look forward on a full-year basis seeing the rate end up at about its guidance range.

In terms of how that plays out quarter-by-quarter, I don't want to break it down specifically, but I think that, in general, you should see, based on that guidance, you should see it being lower than 25.5% as we go forward quarter-to-quarter for sure.

In terms of vaccines, Ken, do you want to take that?

Sure.

So as you know, we continue to experience intermittent backorders with respect to ZOSTAVAX.

We were able to make some shipments in the last couple of weeks for orders placed in February.

We expect to have additional shipments in May, June for orders that were placed.

From April 18 or later, we expect to ship things in August.

So we are an intermittent backorder situation.

I think with respect to vaccines overall, if you strip out ZOSTA supply and you strip out the buy-in that we had last year, we performed pretty much on plan.

Good.

Next question please?

Michael Tong, Wells Fargo Securities.

Hi, good morning.

First question for Ken.

You devoted quite a bit of time talking about risk diversification in your R&D bucket.

So if I could get your color on at least what you are looking at at different ROIs for your different R&D buckets, namely branded generics, biosimilars, newer products or fixed combos.

And then the second question for Adam, as you get ready to launch boceprevir, what is your message to clinicians to encourage adoption into what at least to me seems a bit more complicated dosing regimen than the competitor product?

Thanks.

So on the first question, I can speak to it generally.

I think if you look at the history of Merck, we have been really good at first-in-class innovative products.

That has been our history, but we think that is sort of at the high-risk end of the spectrum.

It is also at a high reward part of the spectrum.

So what we have tried to do is we have thought about our research strategy is to have specific programs that go first-in-class, that focus on best-in-class, lifecycle management in terms of new indications, biosimilars, new combinations, formulations and in the emerging markets what we call differentiated branded generics.

Now they all, I think, have a different probability of success.

They have a different level of investment that is required and what we want to do is we want to be able to spread our risk across that spectrum and be able to participate in all those segments of the market.

I would add I think that in all those areas, we hold the same standard that the return on investment ought to be positive.

All of these actually had a nice return on investment profile.

Obviously, as Ken said, some have different POSs or different commercial rollouts, but in general, we shoot for strong returns in all those areas.

And Michael, with regard to boceprevir, the first thing I would say is we know this market, we have been in this market for quite some time.

We know the physicians, we have worked with these physicians for quite some time.

I don't want to give the specifics of our strategy right now.

I am sure our competition would love to hear that, but I really do look forward to talking about our strategy and talking about how we are implementing that strategy once the product is approved.

Operator, I think we have time for one more question.

Seamus Fernandez, Leerink Swann.

Thanks very much for the question.

Just a couple of things, this is for Peter.

Maybe you can just remind us how you are dealing with the accounting on the Inspire acquisition and whether or not that is in non-GAAP guidance.

The second question is for Ken and Adam.

As you think about the Consumer business, and Tim's question on SINGULAIR OTC, how can you -- I guess what I am a little bit wondering is how can you ringfence the former Schering Consumer business from the J&J joint venture so that you can effectively execute or how have you effectively executed any business development transactions?

And then can you just give us an update on your timing expectations, if any, for vaccine manufacturing coming back online so you can execute a full launch of ZOSTAVAX?

Thanks a lot.

Ken, do you want to start that?

Yes, we don't publicly discuss the terms of our J&J agreement around Consumer products.

I will say that we like the Consumer business that we have.

We see opportunities again to have it complement what we are doing in our Human Health business and that is about all that I can say right now.

I will turn it over to Peter.

So relative to the Inspire acquisition, obviously, that hasn't closed yet, but it has been announced, we will use our normal protocol.

So the specific purchase accounting elements we would exclude from our non-GAAP performance, but, obviously, all the operational, elements all the ongoing business expenses and trends of that business would be part of our ongoing business.

And with regard to ZOSTAVAX, I can tell you we are working our -- our manufacturing team is working very hard on that.

We have made some shipments in the last two weeks of April for orders that were placed back in February.

We are expecting to have some more shipments in May and June, but we are going to continue to be in backorder situations intermittently.

So we don't have an exact timing for that to be fully resolved.

I guess just as a quick follow-up, the timing I guess that had previously been disclosed may have been the back half of this year for North Carolina coming online.

Can you just maybe update us on any views along the lines of when the North Carolina facility will come online?

I will remind you that the North Carolina facility is a fill and finish operation at this point.

It is not ready for bulk.

We hope to get the bulk supply through that facility later.

Let me just say again in closing I want to thank you all for your participation this morning, as well as your important questions.

If you have further questions, I encourage you to reach out directly to Alex or any member of our Investor Relations team.

As we move ahead, we really look forward to updating you on our progress in executing our growth strategy and our plans to deliver shareholder returned through the continued progression of our pipeline and the continued growth of our products.

We are very much committed to growth and we think we are off to a terrific start in the first quarter and I look forward to speaking with you in the future.

Thank you very much.

Thank you and goodbye, everyone.

This concludes today's conference call.

You may now disconnect.