默克藥廠 (MRK) 2011 Q3 法說會逐字稿

Good day, everyone, and welcome to Merck's third-quarter 2011 earnings conference call.

Today's call is being recorded.

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

Please go ahead.

Thanks, Brooke, and good morning, everyone, and welcome to Merck's 2011 third-quarter conference call.

Before I turn the call over to Ken this morning, I want to mention just a few housekeeping items.

First, as a reminder we are hosting our R&D and business briefing in less than two weeks on November 10.

At the briefing we will discuss our pipeline and we will also spend time discussing the Company's strategy.

As a result we are going to limit the content of today's call to a discussion of the business in the third quarter, and we will also limit the call to 45 minutes because we know we will have ample time on November 10 for further discussions about the business; and we will look forward to seeing all of you then.

The second thing I would like to mention is that there are a number of items in the GAAP results such as acquisition related charges, restructuring costs, and a gain resulting from our sale of our interest in our Consumer joint venture.

We have excluded those items in our non-GAAP reconciliation tables in the press release and also in Table 2, so that that will give you a better sense of the underlying performance in the business.

Finally, I would like to remind you that some of the statements we make during today's call may 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 management and are subject to significant risk and uncertainties.

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

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

Our SEC filings can be found on our website at Merck.com.

This morning, I'm joined by Ken Frazier, our Chief Executive Officer and President; Adam Schechter, the President of Global Human Health; and Peter Kellogg, our Chief Financial Officer.

Now I would like to introduce Ken Frazier.

Thank you, Alex.

Good morning, everyone.

Thank you all for joining the call today.

As Alex just, said since our business briefing will take place in two weeks I am going to be fairly brief in my remarks.

We look forward to providing you an in-depth view of our pipeline as well as the progress we're making in executing our growth strategy at that time.

For today I will simply provide a synopsis of the third quarter and our accomplishments year to date, and then invite Adam Schechter and Peter Kellogg to provide additional context.

I'm pleased to report that we had another good quarter.

We coupled top-line growth with strong expense management to yield an 11% increase in non-GAAP EPS.

In addition, this quarter we were very active in repurchasing our shares.

At this point, three quarters through 2011, I can report that we are successfully delivering on our stated intent to grow both the top line and the bottom line, maintaining the consistent execution we have seen all year.

While we transitioned rights to REMICADE and SIMPONI in certain countries this quarter, we were still able to drive 8% year-over-year growth in our overall business.

If one excludes these territories from our history, total Company sales on a comparative basis would have grown 10%, or 5% ex-exchange.

This quarter's results were in large part driven by the strength of our in-line portfolio, with double-digit growth from JANUVIA, JANUMET, ISENTRESS, SINGULAIR, GARDASIL, and ZOSTAVAX.

This strong underlying growth across our product portfolio is why we continue to make selective investments behind our key in-line products, key launches such as VICTRELIS, geographic growth in Japan and the key emerging markets, and lifecycle management for our key brands, all while we move towards the SINGULAIR patent expiry in August 2012.

Adam will speak about our product performance in more depth in a few minutes.

Merck Consumer Care grew 3% for the quarter.

And as we announced we divested Merck's interest in the Johnson & Johnson Merck Pharmaceuticals joint venture.

This gives Merck's greater strategic freedom in the OTC consumer environment.

In addition, we saw strong growth from our Animal Health business in the third quarter, which grew 20%.

In late August, we announced that Rick DeLuca will serve as the new President for our Animal Health division.

I would like to acknowledge the contributions of Raul Kohan, who is retiring after many years of distinguished service to our Company.

Rick and Raul are working closely together to ensure a smooth transition for our business and customers.

We believe that Rick's extensive experience in Animal Health will help us continue to drive growth in this important component of Merck's portfolio.

Overall, we are continuing our efforts to better adapt Merck to the evolving conditions of the external landscape.

We are making progress on a number of fronts.

We are continuing to transform our commercial model to better meet the needs of each customer segment and win in the marketplace.

We are continuing to change our operating model for R&D, with a strong focus on improving ROI.

We are looking very actively at licensing and partnership opportunities to augment our pipeline and drive sustainable and profitable revenue growth across Human Health, Consumer Care, and Animal Health.

And we continue to focus on maximizing our productivity by reducing costs, shifting from a fixed to more flexible cost base wherever possible, and reallocating our resources to the best growth opportunities.

While doing all of this, we are focused on returning cash to shareholders.

Peter Kellogg will speak more about this in a few minutes.

Our third-quarter results reflect our focus and execution across all these fronts.

The combination of our product performance and our expense management allows us to maintain our 2011 non-GAAP EPS guidance, but narrow the range to $3.72 to $3.76.

In addition, to maximizing our portfolio and building our diversified businesses, our growth strategy also includes delivering on the pipeline.

In the third quarter, we continued to advance our pipeline, including the VICTRELIS launch in the EU; the GARDASIL launch in Japan; and filing a New Drug Application for both the US and EU for our investigational oral mTOR inhibitor for patients with sarcoma.

And earlier this month we received FDA approval for JUVISYNC, the combination of JANUVIA plus simvastatin.

This was the first FDA approval of a combination therapy for diabetic patients with high cholesterol and is another example of Merck's renewed focus on lifecycle management.

As you are all aware, we are operating in a dynamic global environment, from austerity measures in Europe to healthcare reform in the United States.

We are actively engaged and our monitoring developments so that we are able to adapt our business accordingly.

Overall, we believe that innovation will continue to be valued in the marketplace.

And therefore innovation remains the centerpiece of our growth strategy.

We will have more to say about our approach to innovation, the Merck pipeline, and what we are doing to improve R&D productivity in two weeks at our November 10 business briefing.

Finally, there were two business development highlights worth noting during the third quarter, including an agreement with Serum Institute of India Limited to develop and commercialize a pneumococcal conjugate vaccine for use in the emerging and developing world countries, and a collaboration with China-based BGI, the world's largest genomics center, to focus on the discovery and development of biomarkers and genomic technologies across a wide range of therapeutic areas.

Let me close by saying that this year's three consecutive quarters of top-line and bottom-line growth demonstrate our ability to execute and deliver on a consistent basis.

We remain fully committed going forward to executing our growth strategy, driving innovation, and delivering value to our customers and our shareholders.

Thank you, and with that I would like to turn the call over to Adam Schechter.

Thank you, Ken, and good morning, everyone.

It's a pleasure to speak with you today and provide you with an overview of the performance of Global Human Health.

GHH had another solid quarter, with revenue growth of 9% including the impact of foreign exchange.

Our performance was driven by growth in the US, Japan, and the emerging markets.

The solid performance for GHH was achieved despite the loss of REMICADE and SIMPONI sales in certain territories beginning this quarter.

If you were to exclude sales from the relinquished territories in 2010, Global Human Health sales grew by 11%, or 6% excluding the impact of foreign exchange.

This equates to about $500 million of operational growth this quarter, and it reinforces that our focus on the strategic priorities of growing the core, expanding the core, and accelerating new launches is working.

So let me share with you how we did on each of the three parts of our strategy.

First let me focus on our core business, which includes several of our largest markets.

In the United States, sales grew 6% and were driven by double-digit growth from JANUVIA, JANUMET, ISENTRESS, and vaccines, which had strong contributions from GARDASIL, ZOSTAVAX, and a $25 million CDC stockpile replenishment for RotaTeq.

Growth in the United States was partially offset by lower sales of VYTORIN.

Overall, our solid performance in the US reflects our continued strong execution and customer focus around our full portfolio of innovative brands.

So moving to Europe and Canada, these markets grew 6% due to the impact of foreign exchange.

Double-digit growth of JANUVIA, JANUMET, ISENTRESS, REMICADE, and SIMPONI in retained territories was offset by over $200 million due to several factors.

These factors include the unfavorable impact from EU austerity measures, the loss of REMICADE in Canada, and the return of CAELYX rights to J&J.

Despite the difficult business environment in Europe, we believe opportunities to launch new products that meet unmet medical needs still remains.

Moving on to other areas of growing the core, there are several brands with very strong performance I want to highlight.

I will start with JANUVIA and JANUMET, which continue to perform well and demonstrate a strong growth of 41% to $1.2 billion in the quarter.

With five years on the market, the JANUVIA and JANUMET brands now have about 27% market share.

The strong clinical profile of JANUVIA and JANUMET is a key driver for continued strong DP IV Class leadership and growth for the brands.

In addition, we recently received approval for JUVISYNC in the United States, a fixed-dose combination with the glucose lowering of JANUVIA and the cholesterol lowering of ZOCOR in one tablet.

We believe this unique offering provides further differentiation of a sitagliptin family of products, and it will enable us to maintain our strong leadership position in a DP IV Class.

Moving to immunology, REMICADE and SIMPONI continued to demonstrate very strong performance.

Sales in the retained territories, Europe, Russia, and Turkey, grew 35% in the quarter.

REMICADE's sales grew 25%, and SIMPONI remains a strong launch brand with $75 million of sales versus $25 million for the same quarter last year.

In our cholesterol franchise, combined sales of VYTORIN and ZETIA grew 3% as sales growth in the international markets offset declines of VYTORIN in the United States.

The international performance was driven by growth in all regions including Europe, Japan, and the emerging markets.

I would also like to provide an update on the strong performance of GARDASIL, which grew 41% this quarter to $445 million.

The growth was driven by continued success and uptake of the male indication and the strong back-to-school season.

Sales also benefited from roughly $50 million of wholesaler inventory purchases in conjunction with the recent launch in Japan.

We are pleased with the expanded ACIP recommendation received this week for routine vaccination of boys, and we are moving ahead to communicate this new recommendation.

Now I would like to discuss how we are expanding the core.

As part of the expanding-the-core strategy, we are making investments to grow our business in the fastest-growing markets -- the emerging markets and Japan.

In the third quarter emerging market sales grew to $1.8 billion.

Growth was driven by the top six markets and was achieved despite the loss of REMICADE and SIMPONI in the relinquished territories.

If you exclude the sales in the relinquished territories, the emerging markets grew 15%, or 10% excluding the benefit of exchange.

A key growth driver continues to be China, which grew approximately 50% year over year.

We expect sales in China to grow over 30% for the full year in 2011 versus 2010.

Our growth in China in 2011 has consistently exceeded market growth and we continue to invest significant resources in China.

We're also expanding the core by investing in Japan which grew 30% to $1.1 billion in the quarter, or approximately 20% excluding exchange.

The performance in Japan was driven by the strong in-line franchises and from the sales of new launch brands such as JANUVIA, GARDASIL, and BRIDION, as well as favorable foreign exchange.

As I mentioned previously, GARDASIL is now available in Japan and we look forward to a successful launch in this key market.

Moving to the last part of my discussion -- accelerating new launches.

We now have over 15 products launching around the world which together contributed more than $450 million in revenue this quarter.

We are well on our way to achieve over $1 billion in incremental revenue from these launches in 2011.

For example, the launch of SIMPONI in the EU continues to progress well.

We are launching GARDASIL and JANUVIA in Japan.

And we continue to see increases in share and volume for DULERA and SAPHRIS in the US.

Now I would like to turn specifically to VICTRELIS.

Global sales in the third quarter were $31 million.

Sales were adversely affected by declines in US wholesaler inventory levels following the launch last quarter.

Inventory levels are now consistent with demand.

There are several things that make us optimistic about the future performance of VICTRELIS.

IMS reports a current TRx share of about 25%.

We have seen TRx share grow in seven out of the last 10 weeks.

In addition, TRx volume has shown strong growth of about 30% in the rolling four weeks.

Given the VICTRELIS duration of therapy, we expect dollar share to more closely match patient share and build over time.

VICTRELIS was the only HCV protease inhibitor added to the VA formulary.

With 130,000 hepatitis C patients, the VA is the largest single provider of services to hepatitis C patients in the United States.

We are seeing orders from the VA increase already in the fourth quarter and believe this represents a significant and a profitable opportunity.

It is important to note that the VA sales are not captured in the IMS market share data.

In addition, most treating physicians have not yet prescribed either protease inhibitor.

So we believe that significant growth opportunity exists.

Lastly, VICTRELIS is now available in Brazil, Canada, and major markets in the EU.

We have received reimbursement in many of these markets.

The VICTRELIS launches are only just beginning and we look forward to updating you about our continued progress in the future.

In summary, GHH had another strong quarter.

It is clear that our focus is on driving top-line revenue growth, and we did that again this quarter.

We will continue to execute on our growth strategy, and I look forward to discussing that strategy in more depth with you in November 10.

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

Thank you, Adam, and good morning, everybody.

As you heard from Ken, we continue to execute on our strategy.

This quarter we had strong top- and bottom-line performance, and we achieved this performance while continuing to make strategic investments necessary to fuel future growth.

Based on our performance through September we are once again raising the lower end of our 2011 non-GAAP EPS range, which also increases the midpoint of the range.

Now, my remarks today will focus on our non-GAAP results, which exclude acquisition-related charges, restructuring charges, and a gain resulting from the decision to sell our interest in the J&J Merck Consumer joint venture.

Now let's get into the results, starting with revenue.

Total revenue for the quarter was $12 billion, 8% above a year ago, which includes a 5% benefit from foreign exchange.

Excluding this benefit, revenue grew 3% over the prior year.

As you know, we relinquished REMICADE and SIMPONI in certain territories as of July 1.

This masked the strength of our underlying performance in the third quarter.

As Ken mentioned, if you exclude the relinquished territories from last years' sales, total Company sales in the third quarter would have grown 10% on a reported basis, or 5% excluding exchange.

Now let's talk about expenses, starting with product costs.

Our non-GAAP product gross margin was 75.3% in the quarter.

The gross margin was sequentially lower than the second quarter due to the J&J settlement which became effective July 1.

As a result of the settlement, the profit split on our sales of REMICADE and SIMPONI moved from 58-42 favoring Merck to a 50-50 split.

This was the biggest driver of the sequential gross margin movement.

Moving onto M&A, marketing and administrative expenses of $3.3 billion were up about $250 million over the third quarter of last year.

On our last earnings call we highlighted that there were four factors that continue to drive year-over-year increases in the M&A line.

First, and largest, foreign exchange; second, emerging market investments; third, launch investments; and finally, healthcare reform excise fees.

In total, these four factors added more than $300 million to marketing and admin expenses in the third quarter.

As Adam mentioned, in the fourth quarter we expect to continue making targeted investments to drive new product launches such as VICTRELIS, JUVISYNC, and GARDASIL in Japan.

We also anticipate making additional investments in the emerging markets.

Moving on to R&D, we continued to invest in our most promising opportunities and advance the late-stage pipeline while making real strides to improve our efficiency and incrementally reduce our R&D spending.

Research and development expense this quarter was $1.9 billion and was in line with the first two quarters of 2011, but slightly below the third quarter of last year.

The year-over-year decline was due to savings from site closures in 2010 and some lower clinical trial grant expenses.

Given the results of the first nine months, we now expect that R&D expense will be in the range of $7.8 billion to $8 billion on a full-year basis.

But keep in mind we tend to have a higher level of R&D spending in the fourth quarter due to the timing of clinical trial grants.

Moving to tax, our non-GAAP tax rate was 23.7% in the third quarter, which was higher year-over-year due to product and geographic mix.

We have maintained our 2011 non-GAAP tax rate guidance in the range of 23% to 24%; but given the tax rate in the first nine months of 2011 we now expect the full-year rate to be at the high end of that range.

Non-GAAP EPS for the third quarter was $0.94 per share, up 11% over the same quarter in 2010.

Based on the strong year-to-date performance our 2011 non-GAAP EPS range is now $3.72 to $3.76.

Our new 2011 GAAP EPS target range is $2.03 to $2.20.

In addition to the fine operational performance we drove this quarter, we continue to generate cash and execute on our capital allocation strategy.

Given our strong operational performance in 2011 and the weakness in the global equity markets, we saw an opportunity to be an aggressive buyer of our stock during the third quarter.

As a result, we continue to return a high level of our operating cash flow to shareholders in the form of our dividend and share repurchases.

This quarter we returned $1.2 billion in dividends and repurchased 32 million shares at a price of $1 billion.

Through September we have returned almost $5 billion to shareholders through the dividend and share repurchases.

To wrap up my comments, this was a very good quarter, characterized by continued operational sales growth and cost efficiencies which enabled us to fund strategic investments in new product launches and emerging markets, and still grow non-GAAP EPS by 11%.

At the same time, we returned more than $2 billion to shareholders this quarter.

So we anticipate that 2011 will end up as a strong year on both top- and bottom-line performance.

We are focused on continuing this good performance in the fourth quarter, and we look forward to providing our 2012 guidance in conjunction with our fourth-quarter earnings call.

Thank you.

Now I will turn the call back to Alex.

Great.

Thanks, Peter.

Now we're ready to open up the call to answer your questions.

So in order to help us get through as many callers as possible we ask you to please limit yourself to one or two questions.

We won't take any follow-up questions, but you are welcome to get back in the queue if you have additional questions.

So, Brooke, we are ready for the Q&A, please.

(Operator Instructions) Chris Schott, JPMorgan.

Thanks very much and congrats on the quarter.

Just two questions here.

First on ZOSTA, appreciate an update there.

You have had two straight quarters of $100-million-plus sales.

Are we getting back to normalized production levels?

And maybe just looking forward, when can we expect to get back to fully normalized levels here and consistent product shipment?

Second is on the tax guidance.

I think you've moved your range up about 300 basis points over the course of the year.

I guess if you could elaborate a little bit more on specifically what is happening here and how we should think about your tax rate moving forward.

Thanks.

Thanks, Chris.

I'll take the question on ZOSTAVAX first.

I would say that we continue to work on the manufacturing enhancements necessary to fortify and increase our long-term supply.

I'd also say we're encouraged by the progress that we have been making.

We still back orders; but from our perspective those back orders are getting shorter in duration.

So we are optimistic that we are starting to get some good solutions.

But time will tell, and I can't say for sure when we will be able to definitively declare that those issues are completely behind us.

Hi, Chris.

This is Peter.

I'll take the second question.

You're right; we have increased our view of the tax rate during 2011.

I would say that the primary driver of that shift over the course of the year has been product mix.

We've had some really tremendous performance from some of our products, particularly JANUVIA, JANUMET, that are just going very well.

We also, as you may recall, closed out an IRS review earlier in the year.

At that time obviously you may recall we had a gain from that.

But we also slightly revised some of our FIN 48 reserve rates, just in recognition of some of the dialog and items that we observed during that review.

So those are the two factors.

I think the mix is the biggest one.

In terms of how you should think about it going forward, obviously we will give 2012 guidance on the fourth-quarter call, so I can't really give guidance now.

But I think certainly a good place -- tax sort of evolves.

Tax rates evolve; they don't jump around.

So I think it's always good to start with what the current year ends up at as a good starting point.

Okay.

Next question, please.

Catherine Arnold, Credit Suisse.

Thanks very much.

Wondered if you could give us a little bit more of a peek behind the curtain, Ken, on the R&D expense.

It seems like there's been three consecutive quarters where you've brought down the level of targeted (technical difficulty).

Wondering if there is not an element of initial stages of burning off some of the obligations of the outcome studies, which is obviously something that should be more prominent I think next year in 2013.

If this is integration related, where there might be a little bit of uncertainty on timing, and have you got more visibility on that?

I would just like to have a little bit more color on how that process has been playing out for you as you have changed those targets.

And then if you could just speak to Animal Health growth.

Obviously very strong there, and wondering -- are their commercial or government contracts that are expanding the market, or other trends we should be thinking about in modeling that business?

Okay.

Thanks, Catherine.

Ken, do you want to start?

Yes, Catherine, thanks for the question.

First on the outcomes study side of things, obviously from a vorapaxar standpoint we are starting to wind down some of the costs associated with vorapaxar.

Also that we have the sharp year-on-year benefit there.

I think the other issues that we are facing are some of the savings that we thought or efficiencies that we thought we would get in connection with the merger.

So we are seeing facilities being closed.

And I think across R&D, Peter and his colleagues are really focused on identifying ways to improve the efficiency of all the R&D processes.

So that is a major focus of our work right now, is to try to continue to find efficiencies in our processes.

But at the same time I want to be clear, we remain firmly committed to investing in R&D, which has always been the cornerstone of our success.

We are confident that that R&D investment will lead to another cycle of scientific innovation.

So we were very much committed to staying at the forefront of biomedical innovation while at the same time reducing the time and money we spend on developing medical breakthroughs at every stage.

Catherine, maybe if it's okay I will take the Animal Health question.

Indeed you are right; the Animal Health team has done just a great job.

They're having a good year.

It's very broad-based across the business, their performance.

We often point to different animal segments, but quite frankly it would be along the straight and narrow, because they are doing quite well in all areas.

The interesting thing about the Animal Health business is that right now about 50% of their growth is coming from new products that they are launching into the market.

They have a very good pipeline, and those pipeline products are just beginning to come through.

There's many more still in late stage or about to be launched.

So we are pretty pleased with the results.

Now I think you will just note that obviously they are a very international business, so there is some ForEx benefit.

So I believe you'll see in the third quarter we had 20% revenue growth, but about 6 points of that or 6% was foreign exchange based.

So it's good to note that.

But still you can see underlying that, they are doing a great job.

And again, 50% of it is in-line products and 50% are new product launches.

Okay.

Next question, please.

David Risinger, Morgan Stanley.

Thanks very much and let me add my congrats as well on the vaccine business rebound.

With respect to the operating cost base, obviously your operating costs exclude acquisition-related costs and restructuring costs.

Could you just help us understand where the baseline stands today?

Where the number of employees was at the end of the third quarter versus the end of last year, and how much has already been stripped out of the run rate of costs, and how we should think about costs coming down going forward.

Thank you.

Thanks.

Peter, do you want to take that?

Sure.

So really a pretty broad-based question, Dave, and I think there is a lot going on.

Let me just start with the value capture from the merger.

As we talked about, we have set a pretty strong goal out there of net synergies.

And at this point we are happy to point out that we are in the $2.8 billion, $2.9 billion kind of rough area of billions of dollars of savings coming through; and you can see it in the P&L.

The other thing I would say is that clearly we're in the neighborhood of about 90,000 to 91,000 employees at this point as of the end of the third quarter, which obviously is very clear progress.

I think the one thing to highlight is that really a lot of the things that we are doing with our operating cost base -- I just want to point some of the comments Ken made in his speech.

It really is in all areas of the Company.

Our R&D organization -- obviously we have talked about it -- has been working to become more efficient and more productive.

But the same is true around the world in our commercial organization.

They have really rapidly combined their commercial organizations and got a lot of benefit from that.

But they continue to drive more and more productivity; and Adam can talk to the kind of multichannel approaches that he's using and so forth.

It's also true in manufacturing, the network.

Willie Deese and his team are looking to have a long-term plan to really refine and reduce the infrastructure and build the efficiency of our entire global supply chain.

And also in the G&A areas, all the areas are looking to become a little bit more variable and more virtual, and become even more and more of an efficient, productive Company -- which is, I think, the right thing obviously to be doing in this world.

I think that what is important to remember though, as you look at our cost base, is that while we are definitely getting these savings we are also at the same time making sure that we make investments in areas like the emerging markets and product launches and really driving the pipeline forward, to make sure that we fuel future growth.

Because as Ken has highlighted, we really are taking a long-term view of where we want to be.

We want to have the right cost structure; but at the same time we want to drive investments.

Year to date, for example, our investments in the emerging markets have been quite significant.

I think Adam, you can comment on that, if you like.

Yes, and we will spend some more time on it on November 10, but we have got investments in emerging markets that are greater than $400 million year to date, above what we spent last year.

And we have been able to do that while we are continuing to invest in new product launches around the world.

We will show you more of how we have transformed our commercial model so that we can really be impactful in the mature markets, but grow significantly and reinvest even more in emerging markets.

Great.

Next question, please.

Tim Anderson, Sanford Bernstein.

Thank you.

A question on VYTORIN and ZETIA, on pricing and formulary positioning.

AstraZeneca yesterday in their Q3 call talked about the downward pricing pressure on Crestor that generic Lipitor is going to create.

I imagine the same will hold true with VYTORIN, but wondering if it might also apply to ZETIA.

This is still a big franchise for Merck at about $4 billion a year.

I am wondering if you can also just mention formulary positioning heading into 2012.

Then second question is on your PNEUMOVAX vaccine.

I know it is a smaller product at just under $400 million a year, but hoping you can discuss what you expect will happen, assuming approval of Pfizer's Prevnar 13 for adults.

How fast do you think the decline could be, for example?

I know you have your own 15-valent version of Prevnar in Phase II.

But that still seems like it is quite a few years away.

Okay, thank you, Tim.

Adam, do you want to start with that?

Yes, so Tim, let me talk first about VYTORIN and ZETIA, and then I will get to PNEUMOVAX.

If you look at -- let me start off with a ZETIA.

ZETIA, currently about half of the use is in statin-intolerant patients.

Obviously irrespective of Lipitor being on or off patent, that population doesn't get impacted.

The other half of the use is add-on to statins.

It is typically added on at about the same market share as you see the market share for the statins in the marketplace.

There is no reason to believe that physicians will not add ZETIA to statins as much in the future as they have in the past, irrespective of what is happening with generic Lipitor.

In addition, with VYTORIN we continue to work with formularies.

We have already begun to work on formularies not just for 2011, but we are looking at 2012.

I can tell you our contract discussions to date, we have been able to successfully maintain our status for the vast majority of Medicare D plans, which you know you already had to submit formularies for earlier this year.

I can tell you recently one of the largest commercial customers maintained a formulary status for 2012.

So I believe that there will continue to be pressure.

There has been pressure for several years, frankly, because there has been generic statins.

I think generic Lipitor in the marketplace will have a minimal impact on ZETIA, and so far we have been fairly successful maintaining our formulary position for VYTORIN.

With regard to PNEUMOVAX, PNEUMOVAX 23 has the broadest serotype coverage of any pneumococcal vaccine.

If you look at the CDC information, in 2009 the serotypes in PNEUMOVAX 23 were responsible for about 76% of disease in adults 50 to 64 years old, and 66% of the disease in adults who were 65 years of age or older.

So I believe that we will continue to have a very good vaccine here that will be successful in the marketplace.

I am not going to comment on the impact of competition right now, but I believe that we are going to be and continue to be successful moving forward.

Okay, next question, please.

Marc Goodman, UBS.

Morning.

I have two questions.

One, can you talk about GARDASIL specifically in the US?

I know you mentioned O-US, with Japan obviously impacted there.

But what was the key to the US growth besides just back-to-school, which obviously comps take care of that?

Then the second question is on VICTRELIS.

Can you just help us understand and put in context just the Vertex sales number that they put out yesterday, that I am sure you have already seen, and the number that you reported in revenues.

Then also talk about the EU launches and how your expectations there relative to the US as far as the ramp-up?

Thank you.

Okay, Adam, why don't you take both of those?

So, Marc, let me start off with GARDASIL.

So, GARDASIL grew 41% in this quarter, and we were very pleased with that.

I mentioned that about $50 million of that was GARDASIL launch stocking for Japan.

If you look at the US specifically, we are seeing continued uptake of the male indication.

In fact about 30% of the first doses today are coming from the male indication.

We have seen a very strong back-to-school season.

We were prepared; we were ready; we were in physicians' offices.

And I think we were able to execute very, very well around the back-to-school season.

So we remain very pleased with the execution of our team for back-to-school.

We were also pleased with the expanded recommendation for the routine vaccination of boys 11 to 12 which happened earlier this week.

I think that we will continue to see increases in boys being vaccinated, but it's going to come at the same time with less females that are available to be vaccinated.

So the bottom line is we are pleased with the growth of GARDASIL.

We think there is continued room for growth in the US as we move forward.

But I would be careful not to look at the boys as an incremental opportunity without realizing that there will be less girls that will be moving into the marketplace.

So with regard to VICTRELIS -- and let me take some time and walk you through how I think about VICTRELIS.

First of all, if you look at the IMS share, it shows about 25% TRx share.

We believe it is somewhere between 25% and 30%.

If you look at number of patients treated with VICTRELIS we believe it is about 5,000 patients.

We have seen that our share is growing.

It has grown seven out of 10 weeks, and our TRx volume is growing.

The issue is that it takes us about 3 times longer to get the value from a patient; and let me explain that.

If a patient was started on VICTRELIS today and another patient was started on the competition today, the competition would get the value over 12 weeks.

VICTRELIS would get value 20 more weeks above those 12 weeks, because the therapy and the length of therapy with VICTRELIS is much longer than it is for the competition.

There is a slightly different price as well.

So as I look at the future, I look at what our share is and then I look at the fact that we will get dollars per patient much longer than what the competition does.

Then in addition to that I look at the VA and also some high-control Medicaid plans where they have chosen VICTRELIS as the exclusive product on formulary, and I think that we will be able to show growth in those areas as well.

With regard to the launches ex-US, it is very early.

The price is similar to the US.

The anecdotal feedback that we are getting is very strong.

I have spoken to some of our managing directors across Europe and in Brazil, and we are very optimistic about our ability to launch VICTRELIS successfully in those markets.

The thing I would also say is if you look at the high-control areas, like the VA and some of the high-control Medicaid, where VICTRELIS has had a good formulary control or formulary position, in Europe, where they are very price sensitive, we believe that VICTRELIS will also be in a very good position.

Let me just say that I think that the GARDASIL case is an example of why it's important to invest in lifecycle management.

Also I think the VICTRELIS future opportunity is another example of why we think it is important to invest in new product launches, so that we can have a durable opportunity with VICTRELIS over time.

Thank you.

Okay.

Next question, please.

Jami Rubin, Goldman Sachs.

Thank you.

Just say few follow-ups for Marc's question on VICTRELIS.

Just so I understand it -- what is, Adam, your share of new patient starts today?

Based on your description or the difference between what you have reported and what we are seeing in TRx-es, are you suggesting then that the fourth quarter should be more representative of the TRx demand that you are seeing?

Is there an opportunity to further grow your share from what you are seeing?

Because we have now been through two full quarters of both PIs, and it does appear that Incivek has a substantial lead.

I am just wondering what your thoughts are on how or if that could change; and we are trying to think about a run rate for next year.

Then just so I understand this, specifics around the VA deal how long does that -- is that deal good for?

Are VA doctors not allowed to give other patients the -- to give patients the other VA -- or the other PI in the VA setting?

And I don't know if you want to talk about the discount that you had to give to win that business.

But if you can give any color around how we should think about the profitability of that opportunity, that would be great.

Thanks.

Okay, Jami.

There is a lot there.

So let me start and then if I miss anything you can jump in.

So if you look at VICTRELIS, I think the best way to look at new patient starts is to look at new Rx-es.

The TRx-es will give you a sense of continuing patients and new patients.

Our new patient starts are also showing an about 25% market share.

We believe that IMS is off maybe 3 to 5 share points.

So we think that our market share of new patients is probably closer to 28% to 30% based upon our own data.

With regard to how to think about it, I wouldn't think about it from one quarter to the next quarter and any type of catch-up that way.

It is going to be over time.

Because for every patient that comes into the market it takes 32 weeks of treatment with VICTRELIS versus -- and that is on average, somewhere between 30 and 32 weeks -- versus 12 weeks with the competition.

So each patient continues on therapy for a much longer period of time if they are on VICTRELIS.

Now it's important to note that irrespective of which protease inhibitor a patient is on, they have to be on treatment for a long period of time anyway because of PEGINTRON and ribavirin treatment.

It is just that their competition is more front-end loaded versus where VICTRELIS is, and it occurs much more gradual.

Another way to think about it is if you just take the total number of scripts in the market, and you would times that by the amount of dollars per week, and you assume each script is worth four weeks, you could get to about the sales that have been reported for the products.

So that is another way to start to think about it.

With regard to the VA deal, it is a several-year deal.

It is a two-year contract.

The physicians typically follow the formulary.

We are the only PI on formulary.

They can have access to the other product, but it is a way that they have to go about that with a lot of paperwork and it's difficult for them to do.

But it can be done, and there are some physicians that will do it.

The other thing is that the price is not public right now.

I can tell you we continue to negotiate other contracts, so I do not want to give the exact price.

I think that it would not be a competitive good move.

But it is profitable for us, and we have a lot of experience in the VA.

We have worked there in many classes.

Many of our most important products over time have been part of the formulary, and we are very pleased to be working with them again with VICTRELIS, because the patient population is very large here.

Okay.

Next question, please.

Steve Scala, Cowen.

Thank you.

Two questions.

First, Ken, you mentioned a few minutes ago a wind-down of costs related to vorapaxar.

What does this imply for the TRA-2P trial, which I believe is still running towards a conclusion?

Are you signaling that that trial will be stopped as well?

And secondly, Merck stated in September and Ken you reiterated today, that it has greater freedom to operate in the RX-to-OTC switch realm after selling its stake in Merck's J&J OTC to J&J.

The question is, will Merck now pursue an OTC switch of SINGULAIR for allergic rhinitis?

And if you plan not to do that, can you please tell us why you will not do that?

Thank you.

Okay, so let me just say that with respect to both TRACER and 2P, we will have an update on November 10, particularly with respect to 2P.

TRACER, we will have that data be presented at AHA in November.

So my comment on vorapaxar shouldn't be read as implying any change in either one of those studies, except the fact that TRACER really is winding down in a normal course.

And Steve, with regard to SINGULAIR OTC, we are not presently pursuing that opportunity.

Okay.

Next question, please.

Gregg Gilbert, Bank of America.

Thanks.

For Adam, can you frame the opportunity for GARDASIL in the male market and talk about how much has penetrated already?

Then secondly, on the VA contract for VICTRELIS, should we assume that that is all about price?

Or are there other angles that we should appreciate about your differentiated message?

Thanks.

Yes.

So once again I think that if you look at the recommendation, it's for routine vaccinations of boys 11 to 12.

It moves the recommendation from the current permissive, at provider's discretion, to universal on the routine schedule.

However, I also mentioned that about 30% of our first doses already were being administered to males.

It may improve our managed-care coverage; but we already have about 75% of managed-care coverage for males already.

So we are not providing the penetration rates yet because it is still early and it is still relatively low, and we want to see how that progresses over time.

But I do believe that it would be much slower than what we have seen in the rates that we have seen for penetration into the female segment.

The second question I think was about the VA in terms of how did we get on the formulary.

Oh, so with the VA, the first thing the VA does is they do a clinical review.

So they look at the efficacy of the product; they look at the safety of the product.

And then after a clinical review they will do a pricing review.

So it's the totality of the product.

It's clinical and pricing that enabled us to be on the formulary.

Okay.

Next question, please.

Tony Butler, Barclays Capital.

Thanks very much and good morning.

Adam, you call out a number of your established products and the growth that has occurred.

One of those of course is ISENTRESS, which continues to grow very well both in the US but especially well ex-US.

I wanted to simply focus on the US growth, though, and ask questions around elvitegravir; and if in fact you think you need to increase overall resources for ISENTRESS in the US in the upcoming year with the assumption that Quad comes to market.

Thanks very much.

Thanks, Tony.

Adam?

Yes, hi, Tony.

So we are pleased with the growth of ISENTRESS.

We had 23% growth year-over-year.

We had a little bit of a slowdown if you look quarter over quarter, but that is because a lot more patients for this quarter moved into the ADAP, which is more discounted.

But that is not uncommon to occur, and we have seen that happen in years in the past, where one quarter slows down versus other quarters.

I like to look at the year-over-year growth, which we are still very pleased with.

We look at our resources very carefully.

I think we are resourced well.

If we believe we need to increase our resources we have the capability and the ability to do it, for sure.

When I look at Gilead's Quad I think there's a couple things to keep in mind.

First is the inclusion of the booster in the Quad.

I think that you have to look at tolerability that that might bring into play.

I think that it might enable ISENTRESS to have a tolerability advantage, because it does not have a booster for ISENTRESS.

Now that HIV has become much more of a chronic disease, long-term safety and efficacy data are very important.

ISENTRESS has long-term safety and efficacy data.

So I believe that we will continue to be successful with ISENTRESS despite the competition next year.

I think we have the right level of resources; and if we need to increase those resources we will.

Okay, thank you.

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

John Boris, Citi.

Thanks for taking the questions and congratulations on the results.

First question for Ken.

As you take a fresh look, Ken, at the cost structure of Merck, recognizing there is a need for investment but certainly also potentially room for cost-saving initiatives, how are you thinking about at least Merck's cost structure and how a major pharma look over the longer term?

Then second for Adam, on your China sales can you just break off what percent of those revenues are coming from off-patent medicine versus on-patent medicines?

Then just very quickly on DULERA and the COPD filing in the US, does it contain data on exacerbation?

Thanks.

Ken, you want to start?

So on the first question around the overall cost structure, I think it's important to remember that we are on track for the synergy goal that we set with respect to the merger in the first place.

Last quarter we announced an additional restructuring around $1.2 billion to $1.5 billion,(Sic-see press release) so I think that shows you that we see opportunity.

We also see the need competitively to be a very efficient organization.

We talked about R&D a few minutes ago, and I wanted to be very clear.

We are very much committed to funding R&D.

But Peter Kim and his colleagues are also committed to looking at ways in which they can increase the efficiency of everything that they do in R&D.

Adam and his colleagues in the commercial area are also looking at the best way to serve customer, consistent with that theme of efficiency.

And, lastly, I think from a network standpoint and a manufacturing standpoint, we have a lot of work to do in front of us to bring together the plant structures that we have and to find efficiencies there.

I would also say that in our headquarters group people also see the need to behave and to run the Company in a way that allows us to be as efficient as possible and reallocate resources where they are going to drive the most growth.

Okay.

Adam?

Then with regard to China, we reported about 50% increase in sales quarter over quarter.

The reason I affirmed that overall for the full year we believe that the growth will be 30% is because, as I have said many times, in the emerging markets you have some quarters where there's purchasing patterns that cause increases or decreases versus prior quarters.

If you look at last year, we had less sales in July than typical, and therefore the year-over-year growth of 50% seems higher than it actually was.

It was probably closer in the 30%.

So that is why I wanted to make sure people understood for the full year we expect sales to be -- growth in China to be well over 30%.

But the other thing that is important is we do very well with both patented and unpatented products in China.

I don't have the sales broken out exactly like that for you.

I am going to spend more time speaking about China specifically on November 10, and I will be able to provide you with some additional insight into how we see that market and how we see our growth coming from that market.

With regard to DULERA, we already have significant improvements in lung functions and also less exacerbations in the label for asthma, and the additional -- the COPD claim I think will help us continue to grow.

But it will also help us to get onto formularies, because having both indications is going to be important and helpful.

But we already have the exacerbation data available to us in the label.

Okay.

Next question, please.

Seamus Fernandez, Leerink Swann.

Thanks very much, so I actually have just three quick questions.

First, can you just update us quickly on prospects for Lipitor, ZETIA and the JANUMET XR in terms of just filing capabilities and perhaps an update there?

Second, Ken, and for Peter as well, we are seeing very impressive return of cash via the repurchase and the dividend.

How should we be thinking about cash returns of the Company?

Because as I see it there is still going to be a fair amount of cash accumulation, certainly relative to consensus expectations for this model.

So can you just help us think about what your thresholds are for utilization of cash and whether the stock is a key threshold there?

Then lastly, a question on -- maybe more for Adam -- the importance of biosimilars, as you think about that as part of a potential growth strategy as well as a potential risk long-term.

Thanks a lot.

So, Seamus, we will try to keep track on this.

Let me start with the biosimilars.

We are not going to talk about biosimilars today.

We have the November 10 business briefing coming up in less than two weeks, so we will perhaps have that on the topics there.

So let me answer.

So JANUMET XR, we responded to the letter from the FDA and we expect to hear back from the FDA in the first quarter of 2012.

With regard to EZ/atorva we already filed that product.

Obviously you have probably seen that Pfizer has filed a lawsuit.

We are not going to comment on the litigation.

The lawsuit has the potential for delaying the FDA's ability to approve the product until January of 2014.

Okay, and just generally I will just kick off the issue around returning cash to shareholders.

As we have said all the time we intend to be shareholder friendly in that regard.

I think we have done a good job in the past few years in returning cash to shareholders around 70%.

And with that, I will turn it over to Peter Kellogg.

Sure.

Thanks, Seamus Fernandez, for the question.

I think as you saw in our share repurchase activity -- in our year-to-date activity quite frankly, we are actually this year repeating the performance and having a very strong return of cash to shareholders.

We don't give guidance going forward on that, so I am not able to really comment on it specifically.

But I think generally I'm most comfortable highlighting that we stick to the standard that we really need to make sure we invest in the business, whether that be through pipeline or investments geographically.

So we make sure that we have the resources to drive the strategic growth of the business going forward.

Then beyond that I think we have demonstrated over and over again, and we really have a goal, Ken and I both, with our Board, to make sure that we really are shareholder friendly.

We clearly saw in the third quarter an opportunity to utilize the authorization for share repurchase, and I think we did a nice -- that was a nice volume there.

We do have a dividend of $4.7 billion on an annual basis.

But I think as we go forward, Ken and I both said that we are very focused on making sure that we continue the heritage of being very shareholder friendly in terms of how we return cash to shareholders.

Okay.

Let me just close the call by thanking you all for being here with us this morning.

I just want to say again I think this was another good quarter.

As a management team at the beginning of this year we said our intent was to make selective investments that would drive both the top line and the bottom line, and we are pleased that we are able to show that kind of execution.

Going forward we look forward to discussing with you on November 10 our perspectives on Merck's strategy to drive growth and shareholder value over the longer term.

Peter Kim and his colleagues will be speaking with you about the many promising projects in our pipeline.

And, finally, as Adam has said, he will also be able to share with you his views of our product portfolio and the commercial strength that is driving the top-line growth that we just discussed today.

So thank you very much again for joining us, and I look forward to seeing you on November 10.

Thank you.

This concludes Merck's third-quarter 2011 earnings conference call.

You may now disconnect.