默克藥廠 (MRK) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to Merck's first-quarter 2012 earnings conference call.

Today's call is being recorded.

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

Please go ahead.

Thanks, Christie, and good morning, everyone, and welcome to Merck's first-quarter 2012 conference call.

Before I turn the call over to Ken, I would like to mention a few housekeeping items.

First, there are a number of items in the GAAP results this quarter, such as acquisition-related charges and restructuring costs and certain other items; and you should note that we have excluded those items in our non-GAAP reconciliation tables.

We have put those in the press release and also in Table 2 so that you can get a better sense of the true underlying performance.

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

So there are tables with the GAAP results, and then there are also tables that -- Table 2, which reconciles GAAP P&L to non-GAAP; and Table 3 provides the sales performance of the Company business and the units.

During the call, we're going to primarily refer to Table 2 and Table 3 when we talk about performance.

Finally, I would like to remind you that some of the statements we make during today's call might be considered forward-looking statements and, as such, such statements are based upon the current beliefs of management and are subject to significant risk and uncertainties.

The Company's SEC filings, including our 10-K which was filed for 2011 back at the end of February, identify certain risk factors and cautionary statements that could cause the Company's actual results to differ materially from any projected this morning.

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

And you can find our SEC filings as well as today's earnings release and tables on our website at Merck.com.

This morning I'm joined by Ken Frazier, our President and Chief Executive Officer and Chairman of the Board; 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.

Good morning, everyone, and thank you all for joining the call today.

Our performance in the first quarter underscores key themes that we have emphasized since early 2011 -- growth and execution.

We remain committed to building shareholder value through continued execution, while focusing on both performance and innovation.

All in all, this quarter shows a strong start in a year when we intend to overcome a significant patent expiry.

We are building momentum, particularly with our key growth drivers, and plan to achieve numerous major milestones in our late-stage pipeline, including a series of important filings with significant commercial potential.

Our focus on aligned execution across geographies and divisions allowed us to deliver worldwide sales of $11.7 billion in the quarter, with solid growth in each of our three major businesses -- 6% in the global pharmaceutical and vaccines business, when one excludes the impact of the J&J arbitration; 7% in Consumer Care; and 8% in Animal Health.

It should be noted that we delivered this growth while also tightly managing costs, resulting in an 8% growth in non-GAAP EPS.

Once again we saw double-digit growth from a number of key products in our global pharmaceutical and vaccines business.

As always, Adam Schechter will discuss the performance of our product portfolio in more detail.

Consumer Care growth was due to strong performance from brands across the consumer product portfolio in both developed and developing markets, including the US, Canada, Russia, and Brazil.

Animal Health growth was driven by the top 20 products in the portfolio, which grew a combined 18%, excluding foreign exchange, in the quarter.

Overall, I remain pleased with the long-term global trends and the growth prospects for both the Consumer Care and Animal Health businesses.

As you know, this is a challenging period for many companies in the industry due to major patent expirations, continued uncertainty in the global economy, and increasing external pressures in the macro healthcare environment.

However, we are confident in our ability to successfully manage these pressures and improve Merck's competitive position over the long term.

In fact, we believe the growth momentum of our underlying business and the strength of our late-stage pipeline position us well as we prepare for the SINGULAIR patent expiry and beyond.

In 2012, we intend to maintain our revenues at or near 2011 levels on a constant currency basis and drive bottom-line growth.

In addition to executing our core business strategies, we also made progress in our efforts to expand in the emerging markets.

For the quarter, emerging market sales represented 17% of total pharmaceutical sales.

China alone grew 19%, including a 5% benefit from foreign exchange.

We continue to estimate that the emerging markets will represent about a quarter of our total pharmaceutical and vaccine sales by the end of 2013.

Our recently announced joint venture partnership with Supera Farma, a Brazilian pharmaceutical company, is just one example of how we intend to grow.

The new JV will market, distribute, and sell a portfolio of innovative pharmaceuticals and branded generic products in the Brazilian retail sector.

Earlier this year we outlined a series of upcoming events that we anticipated would impact our business during the course of 2012.

Since then we have received FDA approval of JANUMET XR, a new treatment for type 2 diabetes that combines JANUVIA with extended-release metformin.

In addition, we remain on track for our five major filings between now and the end of next year, including suvorexant, a new first-in-class treatment for patients with insomnia which will have data presented at an upcoming sleep meeting; BRIDION, a first-in-class neuromuscular reversal agent; V503, a vaccine that provides broader coverage for the prevention of certain HPV-associated cancers; odanacatib, a once-weekly oral compound with a unique mechanism of action for the treatment of osteoporosis; and finally TREDAPTIVE, our novel cholesterol medicine that improves multiple lipid parameters.

Each of these five programs is consistent with our research strategy to develop clinically differentiated drugs which are either first in class or best in class.

In either case, we believe our regulatory submissions will include data that allows these products to have significant market opportunities at the time of launch.

Speaking of our research strategy, as we have said in the past we are not relying on internal discoveries alone.

In fact, we are devoting significant management time and energy to identifying and accessing external innovation.

Our goal is to find those assets that help position us for success in key therapeutic areas and which we can access on terms that create shareholder value.

One example is our recently announced partnership with Endocyte for a late-stage oncology drug that will enhance our pipeline and give us a potential near-term commercial opportunity.

The partnership is a good strategic fit with our own approach to oncology, and we believe this exciting first-in-class innovation could have utility in a variety of tumor types including ovarian and lung cancers.

We expect the drug to be our sixth major product filing between now and 2013, beginning with an application for accelerated approval in platinum-resistant ovarian cancer in Europe later this year.

Turning to cost management, we continue to strategically manage our costs in a way that affords us the flexibility to make appropriate investments for growth, which we believe is critical in our business.

Moving forward, we will continue to make the right investments to capitalize on growth opportunities while driving continuous efficiency improvements.

We remain on track to achieve our full synergy targets by the end of this year.

Before I close, let me take a moment to discuss our strategy in the context of the healthcare environment.

Merck remains fully committed to discovering and developing innovative medicines and vaccines that save and improve lives.

We are being judicious about where we invest in R&D.

We want to put our resources behind the right opportunities, internally and externally, that best address the substantial unmet medical need globally while also creating shareholder value.

In the long run, we believe it is those companies that can execute on a platform of innovation that will achieve the market acceptance, growth, and margin strength necessary to succeed in a world of increasing resource scarcity.

In order to take risks to bring new medicines and vaccines forward, we must continue working with governments, payers, and regulators to foster an environment that encourages innovation and access to medicines and vaccines.

In the US, that means supporting PDUFA V, which will help a strong stable FDA with the resources necessary to ensure timely drug review.

Across the globe, that means focusing on the value that our innovative products bring to individual patients and the healthcare system.

Put differently, this means an unbiased assessment not only of the cost associated with allowing patients meaningful access to innovative medicine, but also the consequences of denying or impeding such access.

In closing, let me emphasize again that we remain confident in our core strategy and our progress in transforming Merck's business.

Overall, our focus on successful execution, combined with the strength of our pipeline and product portfolio, will allow us to continue growing both the top line and the bottom line and delivering shareholder value on a sustainable basis.

With that I would like to turn the call over now to Adam Schechter.

Thank you, Ken.

Good morning, everyone.

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

This year is off to a strong start.

Reported pharmaceutical and vaccine sales are $10.1 billion.

This represents 3% growth compared with the first quarter of 2011, or 6% excluding the REMICADE and SIMPONI sales from transferred territories in 2011.

This performance demonstrates strong execution on our three strategic priorities -- growing the core with our key brands in established markets; expanding the core into new key growth markets; and accelerating new launches.

I'll review with you the highlights of each of the three segments in my comments today.

What you are going to see is that our base is strong, it is diverse, and it continues to grow.

So let's begin with the core business, which includes our largest markets and core brands.

In the United States, sales grew 7%.

Products with long exclusivity -- like JANUVIA, JANUMET, ISENTRESS, GARDASIL, ZOSTAVAX, and VICTRELIS -- drove the majority of growth.

Moving to Europe and Canada, sales declined 4% in the first quarter.

However, if you exclude REMICADE and SIMPONI in Canada, which were transferred to J&J, sales were up 2% excluding foreign exchange.

This was due to strong contributions from JANUVIA and JANUMET, SIMPONI, and the launch sales of VICTRELIS which I will discuss shortly.

While many of our key brands are growing in volume in the EU, we continue to anticipate an unfavorable mid-single-digit impact from pricing measures in 2012.

This is in line with our previous expectations.

Moving on to several core brands, I'll start with JANUVIA and JANUMET, which continued to have strong performance, growing 26% to $1.3 billion this quarter.

Despite multiple competitors in the market, JANUVIA and JANUMET retained a 75% share of the global DPP-4 market.

JANUVIA's efficacy and broad product offering, including the recent launches of JANUMET XR and JUVISYNC in the United States, support our continued strong leadership in this fast-growing DPP-4 class.

Sales of SINGULAIR were comparable to the first quarter of 2011.

SINGULAIR was not a key growth driver this quarter, as we are already seeing pressure from generic competition in certain markets such as Canada and Mexico.

When SINGULAIR loses exclusivity in the United States in August we expect multiple generic entrants.

However, SINGULAIR will retain exclusivity in the major European markets until February of 2013, and in Japan until 2016.

We expect continued growth for SINGULAIR in Japan and many of the emerging markets through this period.

ISENTRESS continues to be a strong core brand for Merck and a valuable treatment option in the fight against HIV.

ISENTRESS grew 15% in the quarter.

We are confident ISENTRESS will continue to be a strong choice for patients because of its efficacy, tolerability, and demonstrated safety profile.

In our cholesterol franchise, ZETIA and VYTORIN global sales reached $1.1 billion and were comparable to last year.

In the US, ZETIA returned to growth, while VYTORIN continued to decline.

Outside of the US, both ZETIA and VYTORIN continued to grow in the high single digits.

Combined REMICADE and SIMPONI sales grew 10% in the retained territories of Europe, Turkey, and Russia this quarter.

If you look at REMICADE alone, sales grew 5% despite continued austerity measures.

When looking at SIMPONI, it remains a strong launch brand with $74 million of sales versus $42 million for the same quarter last year in the Merck territories.

We recently secured reimbursement for SIMPONI in France for all three rheumatology indications and we will be launching there soon.

Moving to vaccines.

Vaccines had a strong quarter of double-digit growth and are benefiting from broader utilization and stable supply.

GARDASIL maintained its strong performance this quarter with 33% growth over the prior year due to continued uptake of the male indication in the United States and the launch in Japan.

Sales of ZOSTAVAX were $76 million this quarter.

We continue to build inventory to ensure a stable supply and we're increasing our promotional efforts to grow demand.

Earlier this month we launched a national television disease education campaign in the United States; this is intended to increase awareness of shingles risk.

We will begin a new branded print and online campaign later this year.

Now let me highlight how we're expanding the core.

In the first quarter, emerging market sales of $1.7 billion were in line with the previous year.

Excluding REMICADE sales in the relinquished territories, the emerging markets grew 9% this quarter, or 11% excluding exchange.

Our growth in the emerging markets was driven by China, Brazil, Asia-Pacific, Eastern Europe, Middle East, and Africa.

Although there is pricing pressure in certain emerging markets, we are maximizing the growth of our core brands, we are launching new brands, and we are building capabilities with our diversified brands to leverage lifecycle management opportunities.

For example, in several emerging markets we are now launching COZAAR XQ, a combination of COZAAR and amlodipine.

China continues to be a key growth driver, with 19% growth this quarter, or 14% excluding exchange.

The growth was driven by our hospital and specialty business lines as well as contributions from our diversified brands and our core brands.

It is important to note that we have not yet received national reimbursement for key products like JANUVIA and ZETIA.

We have plans to file for approval for additional innovative products in the near future, all of which will drive continued growth.

Our growth in Japan this quarter was 9%, or approximately 4% excluding exchange.

Our sales this quarter reflect the expected biennial price cuts and lower wholesaler inventory levels.

In addition, first quarter of 2011 and 2012 comparisons were affected by Japan's very strong allergy season last year versus a late start to the season this year.

We continue to see strong growth from many of our top-selling brands, including JANUVIA and ZETIA, and for launch brands including BRIDION and GARDASIL.

Looking ahead, we believe we have continued opportunity for very strong growth in Japan.

Moving to the third part of our growth strategy, accelerating new launches.

We are now launching many products, including DULERA in the United States, GARDASIL in Japan, and VICTRELIS around the world.

New products contributed more than $180 million in revenue this quarter.

Now I would like to give you an update on VICTRELIS.

Global sales in the first quarter were $111 million.

In the United States, share continued to grow, and VICTRELIS ended the quarter with approximately a 38% TRx share.

This share does not include the VA.

While we are pleased with the consistent share gains over the last six months, we are keeping a close eye on recent Rx trends for the class.

There are still a high number of patients needing treatment, and we are working to widen our universe of physicians prescribing VICTRELIS.

Internationally, VICTRELIS was launched in Australia and Mexico this quarter.

We are now launching in about 20 markets in total.

VICTRELIS maintains a greater than 50% patient share in many of these markets including France, the UK, and Canada.

This rapid uptake signals the value of VICTRELIS and what it represents to patients, physicians, and to payers.

In summary, Global Human Health continued its consistent strong operational performance, and we executed on our growth strategy this quarter.

We believe this momentum positions us well for success in the remainder of 2012 as we face the SINGULAIR US patent expiry in August.

So if there is one thing I would like you to remember, it is that our base is strong, it is diverse, and it continues to grow.

I believe we can deliver strong results in 2012 through our key growth drivers -- our core products, our launch brands, and our performance in the emerging markets and Japan.

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

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

Thank you, Adam; and good morning.

As you heard from Ken and Adam, we delivered another high-quality quarter.

We drove revenue growth and managed expenses carefully, resulting in an even faster bottom-line growth.

And we achieved this performance while continuing to make strategic investments necessary to fuel future growth.

Our results in the first quarter have established a strong foundation for 2012, as we build momentum ahead of the SINGULAIR patent expiration.

This morning I'll briefly talk about our performance in the first quarter, and I will discuss our outlook for the second quarter and our financial targets for 2012.

Now, let me start with the operating results.

My remarks will focus on our non-GAAP financials, which exclude acquisition-related charges, restructuring costs, and certain other items.

On this basis we earned $0.99 this quarter, 8% higher than the prior year.

As Ken and Adam mentioned, we drove revenue growth in each of our three major business units, up 3% in Human Health, or up 6% excluding the impact of REMICADE and SIMPONI in the territories transferred to J&J; up 8% in the Animal Health business; and up 7% in Consumer Care.

Now despite the strong growth in each of our major businesses our total revenues grew only 1% due to a 43% reduction in alliance revenue and third-party manufacturing sales.

On the third-party manufacturing front, remember that we divested our toll biomanufacturing business to Fuji Film during the first quarter of 2011.

We have now annualized that divestiture, so we don't expect it to have an impact going forward; but it did impact Q1.

Additionally this quarter our supply sales to Astra were reduced due to two things.

First, lower commercial demand for Nexium; and second, the timing of supply to Astra, which can create variability in the top line for us, and it did this quarter.

Both of these factors resulted in lower supply sales from Merck.

Now let me turn to our expenses in the first quarter.

Total operating expenses were flat in the first quarter despite making growth-driving investments.

On product costs, our cost of sales were $113 million higher this quarter, resulting in non-GAAP gross margin of 76.1%.

The gross margin was lower on a year-over-year basis primarily due to exchange.

Moving onto M&A, this quarter marketing and administrative expenses were $3 billion, a decrease of about $100 million.

The decrease was due to the year-over-year impact of reduced field forces, actions that improved our operating efficiency across the Company, and decreased promotional spending on certain more mature brands such as SINGULAIR.

Our research and development expense this quarter was $1.8 billion, which is in line with the first quarter of 2011.

Now moving to tax, our non-GAAP tax rate was 24.8% in the first quarter, which included about 30 basis points of unfavorable discrete items.

However, this rate is still within the range we previously provided.

Now let me provide some commentary on our 2012 guidance, which, based on our performance in the first quarter, is unchanged from the guidance we provided in February.

As you will recall, our guidance has taken into account the known 2012 headwinds -- such as the US SINGULAIR patent expiration in August; the full-year impact of the J&J settlement; mid-single-digit pricing pressure in Europe; and the biennial price reductions in Japan.

And despite these headwinds, the underlying momentum of Merck's business and the growth of our key products enable us to maintain our 2012 revenues at or near 2011 levels on a constant currency basis.

Consistent with our prior guidance, at current exchange rates full-year sales would be adversely affected by about 2% to 3%.

As expected, foreign exchange had a 1% unfavorable impact on revenues in the first quarter.

At today's exchange rates, for example, sales in the second quarter would be adversely affected by about 3%.

Now let me discuss how we expect revenues to be spread throughout 2012, just as I did in our earlier prior earnings calls.

We continue to believe that the second quarter will be the strongest quarter due to the allergy season and the last full quarter of SINGULAIR sales in the US prior to patent expiry.

Meanwhile, sales in the fourth quarter are expected to be the lowest, primarily due to the US SINGULAIR patent expiration.

On R&D expenses, we expect to maintain non-GAAP R&D expenses at about the same level as in 2011 on a full-year basis, but there will be some upward pressure from upfront payments for any deals that we complete in 2012.

For example, the recently announced Endocyte deal will add $120 million to our second-quarter R&D spending, so you should adjust your models accordingly for that.

The Endocyte deal is indicative of the active business development program we are pursuing.

However, it is hard to predict which other deals may be consummated, their size, or their timing.

Regarding tax, we continue to expect our 2012 non-GAAP tax rate to be in the range of 23% to 25%.

Finally, at current exchange rates, we expect our non-GAAP EPS to be between $3.75 and $3.85, which includes the impact of the Endocyte deal.

As I mentioned before, our guidance also assumes that we will retain revenue and equity income from the Astra JV for at least half of 2012.

As Astra said yesterday, they have up to six months to exercise the option, beginning in May.

In fact, the working assumption in our plan is that we will retain the JV roughly through September.

Now keep in mind the timing can be different from our assumption, and Astra retains the final decision about the option.

As with revenues, we expect second-quarter EPS to be the strongest quarter and fourth-quarter EPS to be the lowest of the year.

On a GAAP basis we expect EPS to be between $2.04 and $2.30.

So to wrap up my comments, we are off to a very good start.

We grew the top line and we delivered a leveraged P&L, which resulted in even faster bottom-line growth.

As a result of the underlying momentum, the growth of our core products, and the promising R&D projects we highlighted in our pipeline, we continue to be optimistic about our outlook for 2012 and the years ahead.

Thank you.

Now I'll turn the call over to Alex.

Thanks, Peter.

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

In order to help us to get through as many questions as possible, please limit yourself to one or two questions and make note that we won't take any follow-up questions.

But if you do have additional questions, you are welcome to rejoin the queue.

Christie, we are ready to take Q&A.

(Operator Instructions) Jami Rubin, Goldman Sachs.

Thank you for taking my question.

Ken, just a first one for you.

In calling out the strong performance of Animal Health and Consumer, are you saying that you are committed to keeping these businesses?

Or are you considering or would you consider monetizing these assets, which would more than likely trade at much higher multiples than where Merck currently trades, as we have seen with a recent disposal in this business?

My second question is to Adam.

Adam, there was clearly a lot of very exciting data presented at EASL last week in Barcelona, which would suggest a very high bar to compete in an all-oral hepatitis C regimen.

In light of that, can you just elaborate again on your plans for MK-5172?

Many of your competitors have been busy collaborating and partnering, and we have seen less of that activity with you.

But if you can just put that into perspective, thanks a lot.

First of all, Jami, thanks for your questions and good morning.

What I would say is that first of all we, as I said a few minutes ago, we are pleased with the assets that we have in the Company's business portfolio.

And we believe that both Animal Health and Consumer Care complement our Human Health business and contribute to the top- and bottom-line growth.

You saw this quarter Consumer Care grew 7%, Animal Health grew 8%.

So I think what we are trying to do around here is focus on creating long-term shareholder value, and we believe that both Animal Health and Consumer Care can help contribute to that.

For us, though, I think we believe that our R&D pipeline is the most undervalued and underappreciated part of our business.

We are committed to unlocking the value that we believed that pipeline represents.

Data from important clinical trials that are coming due in 2012 and 2013 should help in that regard.

So once again, what we are trying to do is to create long-term shareholder value.

We look at our assets, and we try to determine where we can create the most value going forward.

Okay.

Adam.

Jami, with regard to your question, so first of all there was a lot of interesting assets in HCV as the science continues to move forward.

As you look for shorter, better tolerated, more effective therapies, it was absolutely exciting at EASL for sure.

What the EASL data showed us is that there is a need for multiple mechanisms and that there is room for (technical difficulty).

We are also aggressively pursuing new, more convenient and interferon-free therapies.

We are focusing on MK-5172, either in combination with other internal candidates -- so you saw our NS5A data in Phase -- I but we're also looking for partnerships with others.

So our goal is to develop an all-oral regimen.

We want to maximize SVR, shorten duration of therapy, and minimize side effects.

And we believe that 5172 has a great profile and it could be the partner protease inhibitor of choice for oral combination regimens.

We don't comment on our business development, but as you can imagine we're in discussions with multiple potential opportunities.

Okay.

Next question, please.

Chris Schott, JPMorgan.

Great.

Thanks very much.

Just two questions here.

Maybe first talking about the JANUVIA competitive dynamics, I guess we haven't seen a lot of large categories, particularly primary care, with multiple competitors where you get one asset holding the vast majority of market share.

At the same time we haven't seen a lot of traction from Shantha.

We have seen the alogliptin.

I guess longer-term do you think Merck can hold this high level of share in the category?

Or do we inevitably see a shift to a less consolidated market share position over time?

And the second question is on ISENTRESS.

How are you thinking about competitive dynamics as we look out a few years, with the potential once-daily product coming to market?

Do you believe you can continue to grow this franchise longer term if that once-daily product -- I guess with comparable efficacy -- is approved?

Or just how are you thinking about that product progressing over time?

Thank you.

Thanks for the question, Chris.

I will say that long-term I do believe that Merck can continue to hold a very strong part of the DPP-4 market despite having multiple competitors.

Adam will give you his views as to exactly why that is the case.

Thanks for the question, Chris.

I think the first thing to note is that we do have a 75% share of the DPP-4 class.

If you look at the US, we have an 80% share.

In Japan we're at about a 70% share.

In some markets we already have five competitors in that class, and we are still able to maintain our share.

I think that physicians are very comfortable with the efficacy profile and the safety profile of JANUVIA.

If you look at the data we have that shows that JANUVIA maximizes the mechanism, they really see that the efficacy you can get from this mechanism you can see from JANUVIA.

When you combine that with the safety profile, you'd have to ask -- why would there be a need to use anything other than JANUVIA?

The other key thing is that sulfonylureas still have 37% patient days of therapy, so it represents a very big opportunity for us to continue to move into other classes and continue to have strong DPP-4 growth.

Therefore, I think the future potential is still very, very strong.

That is what makes me excited about 3102 in our pipeline.

Because I believe ultimately when you move to a once-weekly DPP-4 inhibitor that could even penetrate into other classes such as sulfonylureas even more.

So we remain excited, we remain committed, and we have significant support that we put behind JANUVIA.

And we're going to Phase III in that, in 3102 this year.

Right.

Okay.

Next question, please.

Oh, I'm sorry.

Did you want me to address ISENTRESS?

So, ISENTRESS remains a very important product.

When you think about ISENTRESS, the amount of efficacy data that we have, the safety data that we have, the drug interaction data that we have -- it all is very important particularly as more and more HIV patients are living longer and have comorbidities.

So it's now about 70% of patients have comorbidities while they're on ISENTRESS.

I think a bid drug in this class will be okay because many of these patients are taking multiple drugs already.

But in addition to that, you have to trade off the long-term safety, efficacy, and tolerability data that you have with ISENTRESS for a newer drug with a lot of unknowns.

So, I believe trading off once-a-day versus a very well-known product that has a long history is not something that we are concerned about, particularly with the quad.

We think that having two drugs in the quad, a boosting agent that hasn't been utilized or a new integrase inhibitor, versus staying with ISENTRESS which has such long data with it, we will continue to be successful with ISENTRESS.

Okay.

Thank you, Adam.

Next question, please.

Steve Scala, Cowen and Company.

I have two questions.

First on ZOSTAVAX, I'm surprised that sales were down quarter over quarter given the resolving manufacturing situation.

To what extent is the $76 million reflective of underlying demand?

So that is the first question.

The second question is on AZLP.

AstraZeneca seems intent on exercising option 2 at the earliest opportunity, and their primary objective seems to be to gain their strategic freedom.

If it is AstraZeneca's gain, I assume it is a lost opportunity for Merck.

So would you explain what opportunity Merck is losing via AstraZeneca gaining its strategic freedom?

And this goes beyond the contingent payments.

It is some element that has nothing to do with the financials.

So can you explain that, please?

Thank you.

Okay, so let me start off with the ZOSTAVAX.

So quarter-one sales were $76 million, most with which was in the United States.

As I said before, it was going to take a quarter or two before we can actually see revenues predictive of demand.

We wanted to wait until we had enough supply to feel confident to really start to generate additional demand and run our direct-to-consumer advertising, which you saw we just started to run very recently.

We now have about four months of supply in the market or available to us for the marketplace, so we were confident that we can start to run our direct-to-consumer advertising, that we can increase our promotional efforts behind ZOSTAVAX.

So it really is going to take us another three to six months to have a much better understanding of the underlying demand.

But there really is a large unmet medical need that still exists.

If you look at data from the CDC in 2010, only 15% of the 60-plus age group has been vaccinated with ZOSTAVAX.

So as we continue to build demand, we think that there is a lot of opportunity here.

I would also add that we have continued to work very hard on making the right kind of manufacturing enhancements and investments that are necessary to increase our long-term supply of ZOSTAVAX.

We are encouraged by the progress that we are seeing right now, and we expect additional varicella bulk capacity and production this year and next year.

I think this will give us the confidence to enable the expansion of ZOSTAVAX in the US as well as in additional markets overseas.

So, I can take the AstraZeneca LP joint venture question.

Steve, I appreciate the interest in that.

Obviously, that is an event -- or that's a relationship that has been great long term, and there is this option coming up shortly.

I think what we have tried to do is provide the financial profile of what the business looks like and give you some sense of how to think about it in the future if the option is exercised.

But in terms of the strategic implications, I do apologize; I think that I would suggest that you address those questions to our partner and get the sense of how they might think about that.

I think one of the nice things about this relationship is it is one that has been well designed.

I think the relationship of how it moves forward is pretty well articulated.

So we just await to hear from our partner.

Okay.

Next question, please.

Tim Anderson, Sanford Bernstein.

Thank you.

On REMICADE and biosimilars, can you tell us what you have in your planning assumptions for when biosimilars will arrive in Europe?

Dossier has been filed, and it seems like it could happen as soon as 2013.

On emerging markets, if you correct for the REMICADE settlement, what was your year-on-year growth rate?

And then on odanacatib, have you done the first interim look yet?

And if not, is that a second-quarter event?

Peter, want to start?

Sure.

On the REMICADE biosimilar question for Europe, I think there is a lot of news flow out there in terms of different companies that are developing biosimilar, and I think it is just sort of a triangulation.

We actually think the REMICADE position is quite unique.

It's a very strong therapy and it's used in a particular way for the group of patients that it is used with.

Clearly, biosimilars is an opportunity everywhere around the world.

But I think actually we are optimistic REMICADE and SIMPONI will hold a nice position over there.

I think the patent goes out to August 2014.

So that would be roughly what we would be thinking about; but nonetheless, we will see how things evolve.

On the emerging market, why don't I let Adam take that.

So, if you look at the emerging markets, if you remove REMICADE from the relinquished territories in emerging markets, we had 9% sales growth or 11% ex-exchange.

I think it is important to note, though, if you excluded China from that number we still had 10% growth with ForEx in all the other emerging markets combined.

So the emerging market strength is broad across the emerging markets.

So on odanacatib, Steve, there is our two interim looks that are planned for the trial.

We have one interim look planned at 70% of the event, and one interim look at 85% of the event.

And I would just say there is nothing to report at this time on that trial.

Next question, please.

Marc Goodman, UBS.

Yes, could you talk about Japan just a little bit more?

What kind of expectations you have for growth this year, just given the price cuts that we are expecting.

How much is price going to impact you, and what kind of volume growth are you expecting?

What are the key growth drivers?

Do you have any more key launches this year?

Second question is, can you just tell us on GARDASIL what percent the male orders are taking up right now?

Okay.

Adam?

So let me start with Japan.

Our sales grew 9% this quarter, or 4% ex-exchange.

There were four items that affected our sales this quarter.

The first one was the biennial price decrease, as well as some lower inventory levels.

If you look at the average reduction across products on a national registry in Japan, it is about 6%.

Our biennial price decrease was about the same as that.

Also I mentioned that there was a stronger allergy season in the first quarter of 2011 versus 2012.

We also had supply sales through a co-marketer partner recorded in the fourth quarter of 2011.

That happens every other quarter, so we didn't have supply sales for JANUVIA in the first quarter of this year.

Then the last thing, if you remember the beginning of last year, after the first quarter, we mentioned that there was buy-in of about $50 million in Japan that did not occur this year.

So there are some reasons why the growth in Japan was 9% versus some -- if you look at fourth quarter in particular.

But with that said, we see continued growth for a lot of our top-selling brands.

We see a lot of growth for JANUVIA, for ZETIA, for BRIDION, and we are still just launching GARDASIL as we speak.

So, there is still a lot to move forward there.

With regard to GARDASIL, we still have a lot of growth that we can continue.

We are seeing strength in vaccinations of males.

It is very hard to tell exactly how much is coming just from males.

The data is not easy to get.

Based on the latest sector claims, which is about 50% of the sales that go through the private sector, the first dose of GARDASIL among adolescents of 11 to 18, of males, is about 30% of the first dose claims.

That is the best data we have to try to give an indication of what that means and what the penetration to males is, although it is not exact.

The penetration, we believe, is still less than 20% overall in males.

Okay.

Next question, please.

John Boris, Citi.

Thanks for taking the questions and congratulations on the results.

Just first question on VYTORIN.

A trial between generic manufacturers concluded in the latter part of December and then a summation hearing occurred in early March in the Newark courts.

You had opted, at least Schering did, to settle with Glenmark on ZETIA.

Just can we get any idea as to your thinking about settling versus allowing this thing to go to decision here going forward and what your strategy is?

Then second question for Peter, just any thoughts on the amount of shares that you repurchased within the quarter?

Thanks.

Ken?

I'll start with VYTORIN.

We believe we have a very strong case.

We believe this was a patent that is valid and enforceable, and we believe that the court heard the evidence well, and we are anticipating a favorable decision in this case.

So that is the basis upon which we look at how we will go and deal with that going forward.

John, this is Peter.

Thanks.

During the first quarter, we purchased a little over 12 million shares, which was about $450 million of spend.

I think you would note that that is pretty similar to the trend we had last year.

Okay, next question, please.

Catherine Arnold, Credit Suisse.

Catherine, is your phone on mute?

Okay, let's go ahead and take the next question, operator.

Tony Butler, Barclays Capital.

This is Alison Yang asking questions on behalf of Tony.

Two questions.

First of all, Adam, on your comment about VICTRELIS, are you seeing any patient fatigue or difficulty recruiting new patients?

Are you seeing any warehousing?

Your comment regarding expanding the physician reach, I am just curious because, based on our research, most physicians that treat hep C in the US have already prescribed either VICTRELIS or Incivek.

So where is this potential headroom in the US patient base?

Secondly, could you, Adam, please describe your Phase II [assessing] oncology, dalotuzumab, the Endocyte agent, the ALK inhibitor 2206?

Can you give us a sense of what is the going-forward plan there?

Thank you.

Go ahead with (multiple speakers).

So let me start with your question on VICTRELIS.

If you look at VICTRELIS, there is still a significant number of physicians that have not yet prescribed either of the two protease inhibitors.

In fact, of the anywhere from 9,000 to 11,000 physicians that prescribe these products, there is still about 3,500 to 4,000 that we see in the IMS data that have not yet prescribed.

So we think that there is still significant room to get additional physicians to prescribe the product.

In addition to that there were some of the prescribing physicians that had written for Incivek but not yet VICTRELIS.

And we are seeing an increase in a number of physicians that are writing for both products now.

So we still have room to get additional physicians that have not yet prescribed VICTRELIS but have prescribed Incivek to move over and try both of those agents.

So I think they both represent significant opportunities, getting new physicians to begin to treat and then getting physicians that have not yet used it, but are treating, to use VICTRELIS.

With regard to our oncology strategy, it really is to look at patient subpopulations that we can define and use biomarkers in order to treat those patients.

If you look at the licensing deal that Ken mentioned with Endocyte, that is exactly the types of products that we are looking for.

Because we believe that by identifying targeted therapy we can get better payer payments, we can get better treatment rates, and we can actually increase our ability to penetrate into the marketplaces.

So we really are building our pipeline.

There is data coming out at ASCO on a variety of our programs of targeted therapies, and we are excited about our future in oncology.

Okay.

Next question, please.

Mark Schoenebaum, ISI Group.

Hey, guys.

Thanks a lot for taking the question.

I really appreciate it.

I wanted to ask a question; it is probably for Ken or Peter.

The first is -- I have just noticed it seems like for several quarters now your SG&A as well as your R&D seems to come in a little bit below what Wall Street is modeling.

So I am wondering if you share that opinion, if maybe you could give a little color as to why the analyst community seems to be overestimating your spend on the margin?

Then the second question is more of a capital allocation question, and it's a little bit more open-ended.

I recognize it will be challenging to answer.

But last year, obviously, at your analyst meeting late in the year you boosted the dividend a significant amount and the stock reacted.

The stock also reacted very significantly.

I am wondering if you could help us think about what your plans are this year regarding a hike in the dividend, whether or not our expectations should be similar to last year, or in some fashion different.

Thank you very much.

Ken?

Thanks, Mark, for the question.

Let me first start with the patterns of the SG&A and R&D spend that you are seeing over the last few quarters.

What we have tried to say is that we will look for the right opportunities to invest in launches, for example, DTC on the SG&A side.

And of course, there is a normal up and down that goes on in the clinical programs in our R&D budget.

So I would say that we will see some up and down around that.

The trend overall, we have been trying to show much more efficiency going forward.

And you may see some seasonal timing changes, but our goal is to tightly manage our cost structure going forward.

That is the best that I can say on that.

On the dividend issue, as you know, we have a long history of returning cash to our shareholders.

And we did increase the dividend back in January.

At the same time we have been very active in our share repurchases, buying back about $450 million worth of shares in this past quarter.

So I would just say we don't have a set dividend policy but we intend to remain shareholder friendly in terms of returning cash to shareholders, while at the same time building and maintaining a very strong financial profile and business profile.

Next question, please.

David Risinger, Morgan Stanley.

This is Tom for Dave.

We have two questions.

One is how will you be communicating to odanacatib fracture outcomes interim look later this year?

Second, does the new IMPROVE-IT look in December include a fertility analysis?

Thanks very much.

So you are talking about the IMPROVE-IT trial.

So, what we know from the DSMB is that they have looked at the data at the 75% look.

They recommended the trial continue on unchanged, which now they have quite a few years' worth of data in this program.

And they have asked that they -- or have suggested they will take another look at nine months.

That is the extent of the details that we have regarding the next IMPROVE-IT look.

I think there was an odanacatib question too.

Yes.

In terms of the odanacatib look, those interim looks could take place this year, but the timing is really dependent on the occurrence rates for the events.

The thing I would notice that we would plan to file that odanacatib in 2013 regardless of whether we get a successful interim look or whether the trial goes to completion.

So our timing is set on 2013.

And it's really unclear that we would see any data this year from that trial unless there is some kind of outcome from the interim looks.

But we will keep you informed about that going forward.

Okay.

Next question.

Gregg Gilbert, Bank of America Merrill Lynch.

Thanks.

I have two.

First, a strategic question on diabetes.

You're obviously well covered in DPP-4 globally and with combos and stuff, and you seem excited about some earlier stuff like smart insulin.

But can you comment on your appetite to fill any gaps in particular with drugs or devices, sort of between those two, in the middle of that continuum?

Then secondly on the Consumer front, I asked the Company about the potential for OTC statins back at the time of your Analyst Day; and the Company seemed skeptical at that point.

But given the FDA's apparent interest in the area, I thought I would revisit the issue.

Do you see an OTC or some modified behind-the-counter model that could take shape?

And if so, over what rough time frame?

Thank you.

Well, I would say that on the OTC question, we don't see any real guidance from the FDA that changes our perspective on this.

Obvious, it's a product-by-product decision that the FDA will make.

And we continue to see that with our product portfolio there will be opportunities going forward, but I can't say that anything has changed in terms of our logic as it relates to the Consumer business and the OTC business going forward.

Your other question I believe had to do with our perspective on building out our diabetes franchise.

What I would say about that is, as I said earlier with respect to the other areas where we want to compete going forward, we are going to look for opportunities to build out our portfolio in the near term and the longer term, as long as those opportunities will help us have market leadership.

We want to find assets that will grow, and we also want to find assets that we can buy or bring in on a basis that provides us an opportunity to create long-term shareholder value.

So diabetes is a critical area for us.

It is one of the ones that we intend to be winners in, in the long run.

Okay, Operator, I think we have time for just two more questions, if you could take them please.

Seamus Fernandez, Leerink.

Thanks very much for taking the question.

Just, Adam and Ken, this is I guess for both of you to some degree.

Just remind us, with both odanacatib and suvorexant, I always assumed that you will probably lead with efficacy as best you can.

But can you just give us your thoughts on the real differentiating attributes of both of these products?

Whether it be trial design features or specific product attributes that are going to position you to win versus the current options.

Again, this is including the multiple generics out there.

Thanks.

I will start off and then I will add Adam fill in.

The first thing that I think has been true for Merck is that our sweet spot is really coming to market with new science and clinical differentiation.

I think that is going to be true for both of these medicines, notwithstanding the fact that there are generic competitors in the marketplace, both in sleep as well as osteoporosis.

So with respect to the sleep compound we have a number of attributes.

We have pointed out that we have good sleep onset efficacy; good sleep maintenance efficacy; lack of meaningful next-day residual effect; and a safety profile allowing for chronic use.

About 30% of the patients who are in this market need chronic sleep therapy.

So we think that suvorexant comes to market in a way that is differentiated for people who have to travel, people who have to use sleep medication.

Not having that drowsiness, those next-day residual effects are important to them.

We have data with respect to drivers where we see that it really does make a difference.

On odanacatib, I would start by saying that a quarter of all the women who are eligible for osteoporosis treatment cannot tolerate bisphosphonates.

There is declining use of bisphosphonates due to some concerns that have been raised around long-term safety.

What we have here is a unique mechanism that shows positive trends beyond what the bisphosphonates provide.

We're actually expecting also to have a fracture outcomes trial which should read out in 2013, which should demonstrate the benefit of this product vis-a-vis the bisphosphonates.

This is a classic example of what I was saying before, that if people just focused on the differential in cost they are missing the differential in efficacy and the consequences that come from things like hip fractures later, which are debilitating to women.

Okay.

I think we are ready for our last question, please.

Catherine Arnold, Credit Suisse.

I hope you guys can hear me this time.

Loud and clear.

Awesome, thanks.

Okay.

Two drugs I just want to ask you about, one is PD-1 and the other is odanacatib.

On PD-1 could you remind us in terms of timing and priorities, and if this is a research program that might be able to accelerate given that you would obviously be studying it in end-stage disease, and how it might be different than the other PD-1s in the industry pipeline?

And odanacatib, I just wanted -- could you give us some background?

Just remind us what -- the fracture baseline rates you are expecting in the control arm for the study.

Also Ken, on your comment regarding the market deceleration of bisphosphonates, obviously it is a dramatic change in prescription demand for the category.

So I am wondering how that is featuring into the market research you are getting on the interest in odanacatib.

Thanks.

So, Catherine, this is Alex, on the PD-1, I believe there is going to be an abstract presented at ASCO.

So it is pretty early phase for us right now, but it is certainly an interesting area and it's something that we will be interested to see, as that data is presented at ASCO how the oncologists are starting to think about that class.

On odanacatib, there is no publication at this point on the real background of these patients; but I think we have some information to provide relative to the power of the study.

But there is no baseline study or in terms of characteristics of the patients that has been studied -- published so far.

Yes, and the study is 90% powered to detect a 35% reduction in the relative risk of hip fracture.

I also would answer your other question, Catherine, about market research by saying that we have been interacting with key opinion leaders in the osteoporosis field.

Remember this is a field that Merck essentially pioneered a number of years ago with Fosamax.

What those opinion leaders are telling us is that they are extraordinarily excited by what they see in odanacatib.

They are glad that Merck stayed in this field.

That there is a need for an improved set of therapies for these women.

Women are living longer.

They are living -- they want to be independent longer.

And these fractures, whether they are vertebral fractures or hip fractures, are in fact really big issues for those women and for societal costs in terms of people going into long-term care, etc.

So we are very pleased to be in these marketplaces.

Again, I will come back and say that I think osteoporosis is a field where there is still very much unmet need.

So let me close by saying a couple of things.

First of all, thank you for hearing us out this morning.

We have said from the very beginning that our ultimate goal would be to create long-term shareholder value and that we thought the way that we needed to do that was to have sustainable revenue growth and faster growth on the bottom line.

And I think this quarter is another quarter where we showed that profile.

And importantly, in a year in which we are losing our biggest product, SINGULAIR, we see strong portfolio performance across our key growth drivers, and going forward we look to multiple pipeline catalysts in 2012 and 2013.

So thank you very much for your attention and I look forward to seeing you soon.

This concludes today's conference call.

You may now disconnect.