默克藥廠 (MRK) 2012 Q2 法說會逐字稿

Good day, everyone, and welcome to Merck's second-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, Jackie, and good morning, everyone.

Welcome to Merck's second-quarter 2012 earnings call.

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

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

You can see our reconciliation tables in the press release and also in table 2 of the charts.

That will give you a better sense of the underlying performance.

We have also provided tables to help you understand the revenue trends and we have some additional tables as well.

So during the call, we're going to refer primarily to the non-GAAP results which you will find in table 2.

And finally, I would like to remind you that some of the statements we make today might be considered forward-looking statements within the meaning of the Safe Harbor Provisions of the US Private Securities Litigation Reform Act of 1995.

Statements are based upon management's current beliefs and are subject to significant risks and uncertainties.

You can see our SEC filings in our -- which identifies certain risk factors and other cautionary statements that you should know about when considering those forward-looking statements.

You can find our SEC filings on at our website at Merck.com.

Now I would like to turn the call over to our speakers.

First, we have Ken Frazier, and our Chairman and CEO; we also have Adam Schechter, our President of our Global Human Health business; and then Peter Kellogg, our Chief Financial Officer.

Now, I would like to turn the call over to Ken.

Thank you, Alex.

Good morning, everyone.

Thank you for joining the call today.

Last year we laid out our plans for success in 2012 and beyond.

We told you that we continue having high expectations for ourselves and that we intend to deliver strong operational performance and advance our pipeline.

We are delivering both.

Our results this quarter demonstrate the momentum we continue building in our underlying business.

As I've said for some time, we are focusing on delivering growth through innovation and execution.

We are pleased with the growth we saw this quarter and our longer-term focus on innovation remains intact.

This quarter, we delivered our sixth straight quarter of topline growth and even faster non-GAAP bottom-line growth.

We did so in the face of significant pressures from the difficult global economic environment including an increase in government austerity measures and currency headwinds.

Although we anticipate many of these external challenges to continue, the greatest longer-term threat to the global healthcare system remains the rapidly increasing and unsustainable growth in costs.

This is why we are committed to our strategy of bringing forward innovative medicine and vaccines that have demonstrated outcomes, provide value to public and private payers, and make a real difference in the end to patients.

Despite the external challenges to our industry, and the imminent SINGULAIR US patent expiration, we remain focused on building long-term shareholder value by executing the four-part strategy we shared with you at our business briefing last November.

First, executing on our core business which includes our largest markets, our core brands, our new launch brands, and innovative R&D.

Second, expanding geographically to leverage high growth markets such as Japan, and key emerging markets.

Third, extending into the complementary businesses of Consumer Care and Animal Health.

And fourth, excelling at managing our cost structure while continuing to invest for future growth, which is critical in this industry.

Our second-quarter results plus a broader view of our robust pipeline, demonstrate that we are executing our strategy well.

So let me start with how we executed on the core.

Overall, we grew worldwide sales by 1% which includes a 4% unfavorable impact from foreign exchange.

On a constant currency basis, therefore, sales increased 5%.

Once again, we saw double-digit growth from a number of key products.

We remain confident in our ability to weather the loss of exclusivity for SINGULAIR and in 2012, we intend to maintain our revenues at or near 2011 levels on a constant currency basis.

The second part of our strategy is to expand geographically in high growth markets like Japan and key emerging markets.

Since the merger, we have been making investments accordingly, and as you will hear from Adam, those investments are paying off.

In addition to our organic growth initiatives and capabilities, we have also started new joint ventures in places like China, Brazil, and India to expand our capabilities while making further inroads into these important markets.

Moving to the third part of our strategy, extending into complementary businesses, Merck Animal Health grew 14% this quarter excluding exchange.

The double-digit growth in the quarter was primarily driven by sales in the United States and Asia Pacific across the cattle, swine and companion animal segment.

We see connectivity and R&D and manufacturing between our Animal Health and our human health businesses and we remain optimistic about the global trends and growth prospects for our Animal Health business.

Merck Consumer Care continues to show topline growth in 2012 and is experiencing growing in-market demand in many key countries.

Sales this quarter grew 3%, excluding exchange.

We remain confident about the future prospects for this business which meets the needs of consumers and complements our pharmaceutical core in terms of its lifecycle management.

The last element of our growth strategy is to excel at managing our costs while also investing for future growth.

This quarter, we drove top line growth across our business while also tightly managing costs and reducing operating expenses overall by about $200 million resulting in an 11% increase in non-GAAP EPS.

We are committed to driving continuous productivity improvements across the enterprise to help us invest for growth on an ongoing basis.

Finally, I would like to focus the remainder of my remarks on our foundation, [that's] innovation and the progress that Merck is making on that important front.

Last year, we reiterated our commitment to R&D, translating cutting edge science in a medically important product is at the heart of what we believe Merck does best.

We are pleased to see significant progress in the pipeline.

We remain on track with six major filings over the next 18 months.

Among them is odanacatib, our investigational Cat-K inhibitor for osteoporosis.

Odanacatib represents a potential whole new way to treat osteoporosis, and the unmet medical need in this field remains very high.

Currently, as you may know, there are about 200 million women worldwide who have osteoporosis but only approximately 20% of these women are treated.

As we reported earlier this month, the data monitoring committee for the fracture risk reduction study completed its first planned interim analysis and recommended that the study be closed early due to robust efficacy and a favorable benefit/risk profile.

We still need to close out the trial and follow-up on the safety issues that remain in certain selected areas as noted by the DMC.

We anticipate submitting regulatory applications for approval of odanacatib in the US and the EU during the first half of next year and in Japan in the third quarter of 2013.

In addition to odanacatib, we are also on track to file suvorexant, a new first in class treatment for patients with insomnia.

Suvorexant approaches insomnia differently than other medicines because it helps patients to sleep by targeting and blocking orexins, which play a role in keeping people awake.

As you know, many patients have a need for chronic treatment.

Suvorexant has demonstrated efficacy through 12 months, which is one of the longest continuously dosed placebo controlled trials of a sleep medication ever conducted.

Beyond odanacatib and suvorexant, we are on track to file BRIDION, a first in class neuromuscular reversal agent.

V503, a vaccine that expands protection against certain HPV associated cancers.

TREDAPTIVE, our novel cholesterol medicine that improves multiple lipid parameters.

And vintafolide, a first in class innovation that could have utility in a variety of tumor types including ovarian and lung cancers.

As a reminder, each of these compounds we intend to file is consistent with our focus on R&D innovation, meaning clinically differentiated drugs that are either first in class or best in class.

We believe all six of our planned major submissions include data that will create significant market opportunities at the time of launch and afterwards.

We also anticipate several meaningful R&D events in the second half of this year, including responding to the FDA with additional data for Atozet, our combination tablet containing ezetimibe and atorvastatin.

Beginning Phase III trials for MK-3102, our once weekly DPP-4 inhibitor and starting Phase II trials for our novel base inhibitor which recently had early data presented at the Alzheimer's Association International Conference.

In conjunction with the growing momentum of our internal R&D efforts, we remain committed to identifying and accessing external innovation.

Our goal is to seek out those assets at all phases of development that help position us for success in key therapeutic areas and which can be attained on terms that create shareholder value.

Our recent partnership with Endocyte for a late stage oncology drug is an example of our strategy as are the HIV partnerships with Chimerix and Yamasa for early-stage compounds announced earlier this week.

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

As we are facing a major patent expiration, we are confident that we are building a foundation for growth for our underlying portfolio of products.

As importantly, we are pleased to be advancing and delivering on the pipeline.

Overall, our focus on strong operational performance and investing for the future will allow us to deliver shareholder value over the longer term.

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

Thank you, Ken.

Good morning, everyone.

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

Global Human Health continued to deliver topline year-over-year growth in the second quarter.

Pharmaceutical and vaccine sales grew 2%.

Sales grew 8% excluding the transfer of REMICADE and SIMPONI in certain territories and 2011 and the impact of foreign exchange.

The benefits of our diverse and our innovative portfolio of products and our focus on growth and execution are evident in the results again this quarter.

I will highlight several aspects of our performance according to our strategy.

I'm going to begin with the execution on our core business which includes our largest markets, our core brands and our launch brands.

In the United States, sales grew significantly this quarter.

They grew significantly whether you include or exclude SINGULAIR.

Driving this performance are innovative products with double-digit growth and long exclusivity like JANUVIA, JANUMET, ISENTRESS, GARDASIL, ZOSTAVAX and VICTRELIS.

Moving to Europe and Canada, sales declined 14% in the second quarter.

If you exclude the transfer of REMICADE and SIMPONI in Canada and the impact of foreign exchange, sales declined 3%.

Strong contributions from JANUVIA and JANUMET and the launch of VICTRELIS were offset by continued austerity measures and a loss of CLARINEX exclusivity.

Many of our key brands are growing in volume in the EU.

However, we continue to anticipate an unfavorable maid single-digit impact from pricing measures in 2012.

But it is trending to the higher end of that range.

Moving onto several core brands.

I will start with the JANUVIA family of products which became our largest selling products for the first time this quarter.

JANUVIA and JANUMET continued to have strong performance growing 33% to $1.5 billion.

This quarter's results include about $100 million of supply sales to a comarketing partner in Japan.

As you may recall, these supply sales are reported every other order.

Despite multiple competitors in the market, the JANUVIA family retained about a 75% share of the global DPP-4 market and continues to have opportunities to grow.

There continues to be opportunity to gain share from the generic sulfonylureas class which still represents about 37% of the patient days of therapy.

We believe that JANUVIA's efficacy, tolerability, and broad product offering will enable continued strong growth of this important brand.

Worldwide sales of SINGULAIR grew 6%.

When SINGULAIR loses exclusivity in the United States next week, we expect multiple generic entrants on day one.

This means that erosion will be rapid and it will be significant.

In addition, SINGULAIR will lose exclusivity in major European markets in February of 2013.

ISENTRESS continues to be a strong core brand for Merck with 18% growth.

This week we presented the year five data from the STARTMRK study.

This efficacy and tolerability profile underscores why ISENTRESS has been a valuable treatment option in the fight against HIV.

We are confident that ISENTRESS will continue to be a strong choice for patients going forward.

In our cholesterol franchise, ZETIA and VYTORIN global sales grew 2% to $1.1 billion.

ZETIA continued to grow in the United States and VYTORIN contributed to growth outside of the United States.

Combined REMICADE and SIMPONI sales grew 6% excluding foreign exchange in the retained territories of Europe, Turkey and Russia this quarter.

SIMPONI remains an important launch brand with $76 million of sales versus $59 million for the same quarter last year and a Merck territories.

We are looking to expand SIMPONI's product offering with an additional indication in ulcerative colitis which is a fast growing anti-TNF category.

The file was recently submitted to the European Medicines Agency for their review.

Moving onto vaccines.

Vaccines had another strong quarter of double-digit growth.

GARDASIL maintained a strong performance with 17% growth over the prior year.

This is due to continued uptake of the mail indication in the United States and the launch in Japan.

Sales of ZOSTAVAX were $148 million, the highest quarter since 2008.

Given a stable supply situation, we have been increasing our promotional efforts this year.

First, with the disease awareness campaign in the spring and more recently with a branded campaign that began just last month.

Moving to launch brands.

We continue to launch multiple products including GARDASIL in Japan and VICTRELIS around the world and our launch products contributed more than $200 million in revenue this quarter.

Global sales of VICTRELIS reached $126 million.

In the US, share continued to grow and VICTRELIS ended the quarter with over a 40% TRx share.

While we are pleased with the continued share gains, we have seen a contraction in the market for new patient starts.

However, there are still a considerable number of appropriate patients that need treatment and we are now working on market development activities.

In addition, US new patient starts should increase somewhat after the historically low summer months.

Internationally, VICTRELIS is launching in 23 markets around the world.

VICTRELIS has a greater than 50% patient share in many of these markets including France, Germany, Canada, Norway and Denmark.

This rapid uptake and strong patient share performance signals a value of triple therapy with VICTRELIS and what it represents to patients, to physicians and to payers.

Now I would like to highlight how we're executing against our strategy of expanding geographically into key high-growth markets and let's begin with Japan.

Growth in Japan was 9% or approximately 7%, excluding exchange.

Sales this quarter continued to reflect strong growth of JANUVIA and launch brands such as GARDASIL and BRIDION, tempered somewhat by the biennial price cuts last quarter and a tough comparison to a very strong allergy season last year.

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

Moving to emerging markets, sales reached $1.9 billion, up 1%.

However, the emerging markets grew 16% if you exclude REMICADE sales and foreign exchange.

Growth in emerging markets was driven by China, Russia, Brazil, Mexico and the Middle East.

In the key emerging markets, our growth is outpacing overall market growth.

Although there is pricing pressure in certain emerging markets, we are maximizing the growth of our core brands, we are launching new brands, and in the future, we will begin to realize the benefits of joint ventures that we've been forming in several of these key markets.

China continues to be an important growth driver with 27% growth or 23% excluding exchange.

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

We expect we will continue to grow in China and other emerging markets.

In summary, Global Human Health continued its consistent, strong operational performance.

We believe our business momentum positions us well to maintain the topline this year even considering the SINGULAIR US Patent expiry next week and austerity measures around the world.

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

I believe we can deliver strong results in 2012 by executing on our strategy, our strategy of optimizing our core businesses, which includes our largest markets, our core brands and our launch brands and by continuing to expand into high-growth emerging markets in Japan.

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 are continuing to execute against our stated plans to grow and perform.

We are on track to achieve the financial targets we laid out earlier this year.

In the second quarter, we drove revenue growth and reduced our expenses resulting in even faster bottom-line growth.

We also generated new clinical data to support our late stage R&D programs.

These results demonstrate that Merck is operating well and is building a strong foundation and momentum in our key brands and across our businesses.

This morning, I'll briefly talk about our performance in the second quarter and I will discuss our outlook including the implications of foreign exchange and austerity.

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 $1.05 this quarter, 11% higher than the prior year.

As Ken and Adam mentioned, we drove revenue growth in each of our three major business units.

However, our total revenues grew only 1% due to a 4% unfavorable impact from foreign exchange and a 1% unfavorable impact from Alliance revenue and third-party manufacturing sales.

We do expect supply sales to Astra to continue to decline going forward.

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

Our financial discipline has resulted in total operating expenses being reduced by nearly $200 million in the second quarter.

Product costs were about $30 million lower year-over-year.

Marketing and administrative expenses were down about $260 million, and research and development expenses were up about $100 million due primarily to the $120 million upfront payment to Endocyte.

On the R&D expenses, I would note that the continuing momentum in new pipeline projects and business development deals have led our R&D expense to be about $100 million above the first half of 2011.

As a result, we now expect our 2012 non-GAAP R&D expenses to be slightly higher than the 2011 level on a four-year basis.

Our non-GAAP gross margin of 77.2% was better on a year-over-year basis, primarily due to product mix and productivity improvements.

However, with the SINGULAIR US patent expiration in August, we anticipate that our gross margin will be lower going forward as SINGULAIR is a very high-margin product.

The improvement in marketing and administrative expense was due to actions that improved our operating efficiency across the Company which account for about two-thirds of the marketing and admin expense improvement.

The balance was due to foreign exchange.

Moving to tax, our non-GAAP tax rate was 25.8% in the second quarter.

This is higher than the first-quarter tax rate.

The Endocyte payment unfavorably affected the rate and foreign exchange also unfavorably affected the tax rate due to the magnitude of change during this quarter.

Based on the first half non-GAAP tax rate of 25.3%, we have revised our tax guidance for 2012 and now expect our full-year non-GAAP tax rate to be approximately 25%.

Now let me provide some additional commentary on our 2012 outlook.

At the outset, we are reconfirming our non-GAAP EPS in the range of $3.75 to $3.85.

That guidance incorporates the strong operating performance in the first half and the amendment of the AstraZeneca partnership and it is tempered by the slightly higher R&D spending, a higher tax rate, austerity measures and foreign exchange.

As Adam mentioned, the environment of austerity remains challenging from a price perspective.

While our volume in Europe is growing, we continue to expect pricing pressure in the mid single-digit range of our European business in 2012.

Although it may now be in the higher end of that range.

Despite these pressures and consistent with our prior guidance, we expect the underlying operational momentum of Merck's business will enable us to maintain our full-year 2012 revenues at or near 2011 levels on a constant currency basis.

But it is now clear that currency and especially the euro has deteriorated significantly since we last spoke and that deterioration in foreign exchange rates is putting downward pressure on our results in the second half.

At current exchange rates, the ForEx pressure that I mentioned are expected to adversely affect full-year sales by more than 3%.

For example, at today's exchange rates, sales in the third quarter would be adversely affected by about 6%.

Much of that topline pressure will flow through to the bottom line so you should adjust your assumptions accordingly.

We continue to believe that the fourth quarter will be the lowest quarter of the year primarily due to the US SINGULAIR patent expiration.

So to summarize our guidance, our operations are strong.

We are maintaining our non-GAAP EPS guidance between $3.75 and $3.85.

But the euro movements during the remainder of the year will influence where we finish the year within that EPS range.

We also continue to expect GAAP EPS to be between $2.04 and $2.30.

As Ken and Adam mentioned, we are consistently delivering on our strategy that is focused on growth and execution.

And also we are right on track with the roadmap that we laid out at the time of our merger.

At that time we talked about a progressed timeline that had three phases.

We completed the bulk of the launch phase in 2010 in the early part of 2011.

Now, in the accelerate phase, we are focused on driving topline growth and leveraging the income statement to achieve even faster bottom-line growth.

Six quarters of topline growth and roughly double digit non-GAAP EPS growth are indicative of our execution during this accelerate phase.

We have succeeded in creating momentum to absorb macro, external pressures and the SINGULAIR patent expiration.

The next phase, which we call the breakthrough phase, happens when key products begin emerging from the R&D pipeline.

Two of these programs, odanacatib and suvorexant, took significant steps forward this quarter.

As we bring these and other drugs to market, we will invest to drive their long-term success and help them reach as many patients as appropriate so that the Merck of tomorrow is even stronger than the Merck of today.

Thank you.

Now I will turn the call back over to Alex.

Okay.

Thanks, Peter.

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

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

You are welcome to join the queue, though, if you do have additional questions.

So, Jackie, we are now ready to take the Q&A.

(Operator Instructions).

Catherine Arnold, Credit Suisse.

Thanks very much and good morning.

I had two questions.

One, I wondered if you could just comment on ZOSTAVAX?

I mean a very impressive performance and I know last quarter you had said that it's going to take another three or six months to better understand the demand here and you've been doing DTC.

Does the second quarter tell us more about what we should be thanking on annualized rates and how we should start seeing maybe more normalized sequential quarterly progression or is it going to remain choppy?

And then a more big picture question, Ken, I guess I am just wondering if the Board or the executive team has evolved or changed over the last few quarters in the way it is thinking about evaluating or considering what is core for Merck strategically and what might be candidates for divestment or spin?

And if the answer is yes, if you could just give us a little bit of color there.

Thanks.

So, thanks for the questions, Catherine.

I think our approach to our overall business portfolio remains essentially the same which is we need to evaluate as we go forward what the opportunities are across Animal Health and Consumer Health in conjunction with Global Human Health.

Right now, we are pleased to have them in the portfolio.

We think they are performing well.

We will continue to evaluate how we can ensure that those portions of the portfolio actually help us contribute to our plans to have long-term shareholder value.

So that was what I would say.

We will continue to look at that, but we are pleased to have those in our portfolio right now.

The other thing is that we continue, as we look at our portfolio, to look for ways to augment our businesses through the kind of business development that will create long-term shareholder value, so that wasn't directly your question but I want to make sure that that is also clear.

On the ZOSTAVAX thing, I have to say we are very pleased that we can now say we are in a stable supply situation now in the United States and we are continuing to work hard to make the kinds of manufacturing improvements and enhancements that are necessary to meet worldwide demand.

So, with that, I will turn it over to Adam.

Hi, Catherine.

So the $148 million for the second quarter, that was the highest quarter since 2008, but I think it's important that we believe it is reflective of current market demand.

At the same time, we are increasing our promotional efforts and we just started our branded DTC campaign last month.

So we are looking to see if we can continue to accelerate.

Also in the fourth quarter, there may be some seasonality as the flu season hits and some patients are going in to get their flu vaccine, they might also get the PNEUMOVAX vaccine.

The question is will they get a third one, which would be ZOSTAVAX.

So we are going to be working very hard in the fourth quarter, but watching it very closely to see if demand can continue to increase.

Adam, just as a follow-up, are you basically saying that this quarter shows real demand, but there's opportunity to stimulate more demand, if possible?

So, I believe that this quarter is real demand and we are going to continue to see if we can accelerate growth moving forward.

Thanks.

Okay.

Next question, please.

Tim Anderson, Sanford Bernstein,

Thank you.

On odanacatib, the press release about early stoppage of the trial suggests that there was a safety issue.

Can you give us any color even at a high level on what this is and also say when full results will be released?

On REMICADE, which will be your third-biggest drug once SINGULAIR goes off, we recently saw the first biosimilar approval in South Korea.

Can you give us your general thoughts on biosimilars against the product?

And the VICTRELIS new patient start declines, is that because of warehousing at all, or is that just a natural treatment evolution?

Okay.

Thanks, Tim.

Ken, you want to start?

Good morning, Tim.

We don't have any updates beyond what we said in our press release.

We are waiting, as you are, for the trial to close out following the first planned interim efficacy analysis.

We anticipate that will take several months and that the data from the trial will be presented in 2013.

So, let me try first to answer your question regarding REMICADE, and if you look at REMICADE, it is currently patent protected in the majority of EU countries until late 2014.

We filed for an extended patent license in the EU based upon the pediatric indication, so we are hoping that that will bring exclusivity to 2015.

We are still doing a lot of work but we would expect potentially minimal impact the first few years after biosimilar entry because it will be the first monoclonal antibody biosimilar in the EU.

The product will be limited to new patients and we don't think they will necessarily be switching for patients that are controlled.

And many of the mechanisms for approval and reimbursement and physician familiarity will take time to build up.

If you look at VICTRELIS, as I said, we have seen a slowing of new patient starts.

We think there are a couple reasons for that.

The first one is there is a lot of clinical trials that are ongoing and they are enrolling new patients.

The second reason is some of the highest prescribing physicians are at capacity of how many patients they can bring into the office and they are not expanding their staff.

With the economic environment that they are facing, they are not increasing staff to try to bring in more patients.

And in addition to that, it is the slower summer months.

We don't have any sense at this time that there is significant warehousing that is taking place.

Okay.

Next question, please.

Gregg Gilbert, Merrill Lynch.

Thanks.

Good morning.

Adam, if you consider the next couple of years, is your sales force size and structure appropriate to launch drugs like odanacatib, TREDAPTIVE and suvorexant?

Secondly, for Ken, now that the FDA is open for business at least in theory on biosimilars and in light of your affordability comments, can you share any tangible milestones over the next year or two that relate to Merck's biosimilar strategy?

Thanks.

Okay.

Let's start with Adam.

Yes, so when you look at the products that you mentioned, they are obviously primary care products.

So if you look at odanacatib, you look at suvorexant, you look at TREDAPTIVE, the majority of the prescribing occurs in the primary care offices.

We have a significant presence today in every market around the world, including now in markets like China and India and Brazil for primary care.

I believe that the salesforce that we have in the United States and in Europe is appropriately sized to launch important new products into the primary care setting.

We are going to make sure that we resource in order to be successful with these products.

In addition to that, several of these products will take market development work and we are going to make sure that we invest in order to ensure that we do the right work for market development.

So to answer your question, I believe we have the right sized primary care salesforces.

We are going to invest in order to be successful with these new product launches and we feel that we will be prepared in each of the markets around the world to be ready.

With respect to Merck BioVentures, we have made progress in developing a portfolio of biosimilar targets and securing partnerships to enhance the portfolio and capabilities.

As we've said, we also have a number of specific biosimilar molecules in early development.

So we continue to look at those.

We continue to prioritize those across our portfolio of both biosimilars and novel biologics but right now, we have nothing more to share on those issues.

I would say again that the most prominent of the ones that we have are Rituxan and Enbrel.

Okay.

Next question, please.

Jami Rubin, Goldman Sachs.

I have a couple of questions.

Ken, first for you, when you look at your R&D expenditures going forward and given that a number of your large outcomes trials are beginning to wind down, do you see an opportunity to bring that level of spend, that roughly $8 billion-ish and spend down on an absolute basis?

Should we think about it that way going forward?

Secondly, to you, Peter, on the 2012 guidance if I heard you correctly, it sounds like you are guiding to the lower end of that range, given the worsening foreign-exchange as well as the gross margin impact from SINGULAIR, and please confirm that that is correct.

And also, I just want to make sure we are thinking about the gross margin impact correctly.

Can you give us a sense for the magnitude of change over the next several quarters?

Thanks.

Okay.

Ken, you want to take the please?

So thanks for your questions, Jami.

I think first of all, as I said in my prepared remarks, we remain committed to R&D, and since 2009, we have reduced our R&D annual spend by about $900 million while continuing to invest in key programs.

I think as we move forward, we will have greater opportunities in terms of improving efficiencies.

You are right, the outcomes studies will be winding down but I am also pleased that the pipeline overall is moving forward.

So as I have tried to say from the very beginning, we want to apply very stringent ROI hurdles to the work that we do in R&D but at the end of the day, R&D spend should be a function of the specific assets that we have in specific stages of development in the pipeline.

Jami, this is Peter.

I will take your next question which is regarding guidance.

For 2012, the range that we provided really is the right range.

I don't know that we were pointing to the bottom end of the range necessarily.

Clearly ForEx is an impact and so that is what we spend time trying to explain.

Obviously we mentioned the third quarter ForEx is the biggest impact which all of you know, I'm sure, primarily because the euro was so strong in third quarter last year.

So we're lapping a very strong euro as we go through the third quarter.

But there was no further than that.

I think on the PGM, it's a good point.

Clearly, first of all, I would say that as our PGM has improved it has been through some productivity gains but also through some very positive mix due to some strong margin products.

As SINGULAIR goes off patent, that is a very high PGM product so I think that is something I would really emphasize.

That is a very high one so it does have an impact on PGM.

And I'd just additionally reiterate what Adam commented on which is that SINGULAIR, while it goes off next week practically in the US, it also has an expiry in Europe in February of 2013 and that's married up with MAXALT US patent expiry in December of this year, and the first TEMODAR generic entry in the US in August of 2013.

So all of those are impacts that affect our PGM going forward.

So I wouldn't want to be too dire but I just think as you think about it, these are good PGM products.

And, Jami, maybe I can provide some additional context that will be helpful.

As we thought about the SINGULAIR loss of exclusivity in the United States, we looked at other products where they had multiple generics available right at launch, so things like XALATAN that occurred in 2011.

We went back and looked at Ambien and Coreg.

And what you see is within four weeks they lose over 80% of their sales and then within the second month, they lose 90% of their sales and ultimately they are up to 93%, 94%, thereafter.

So when you have multiple generic products in the marketplace, you do see very rapid decline and that is as you think about modeling, might be helpful.

Okay.

Next question, please.

Mark Schoenebaum, ISI Group.

Hey, guys.

Thank you for taking my question.

Congratulations on a strong quarter.

I had two questions if I might.

One is one you have gotten before, but I think it would be helpful to ask it again and get an update and that is on the IMPROVE-IT trial.

Can you maybe outline your thoughts on what the impact commercially would be to a trial that no harm but it also shows no benefit considering that the label doesn't currently claim an outcomes benefit in any way?

And also, could you give us an update on the timing for the interim and the final, just to make sure we are all straight on that.

And then the second is on JANUVIA.

You said that the sulfonylurea class still had 37% of patient days.

I was wondering if you could give us that same metric for the entire DPP-4 class right now?

Thank you very much.

Okay.

Ken, do you want to start?

Yes, so I'll start.

Let me first say that we remain confident in the IMPROVE-IT trial and we remain confident on the basis of the LDL hypothesis which I think has been proven over and over again in various studies with various agents and interventions.

We announced previously, in March 2012, that the Independent Data Safety Monitoring Board plan to review data from the study again in approximately nine months.

That review has now been scheduled for March 2013 at which point nine months of additional data will have been adjudicated.

So there is no change to the study and we are looking forward to getting that data and we remain confident in these products because we are confident in the LDL hypothesis.

And a couple of things.

First of all, with regard to patient days of therapy for JANUVIA -- JANUVIA and the DPP-4s altogether of which JANUVIA is by far the largest, represents about 8% of the current patient days of therapy so it's under 10%.

That is the equivalent number to the 37% worldwide number I gave you for the sulfonylurea.

And with regard to IMPROVE-IT, of course we look at all potential outcomes.

We believe, as Ken said, that the data supports the LDL cholesterol hypothesis and therefore it will be a positive trial, but we will make sure that we are prepared under any circumstances.

Okay.

Next question, please.

David Risinger, Morgan Stanley.

Thanks very much.

Ken, I was hoping that you could speak to the 2013 revenue outlook.

I know that at your analyst meeting in late 2011, I believe that you made a statement with respect to an aspiration for flattish revenues in 2013 or revenues that would be somewhat consistent with those in 2012.

Could you just please update us on your outlook for next year?

Thank you.

Hi, David.

Actually, the statement that I made back then was with respect to 2012.

We have not provided any 2013 guidance.

We will do that later.

Okay, thank you.

Thank you.

Next question, please.

Seamus Fernandez, Leerink.

Hello.

Thanks for the questions.

So, just, Ken, can you update us on your comments about delivering a leveraged P&L as we kind of think about the pushes and pulls as we head into the second half of this year and into 2013?

Historically you have commented on that so maybe just update us there.

And then second question, with regard to ZOSTAVAX, and a demand-based performance there, can you just help us understand where that demand is really originating from in terms of the patient pool?

Is it really coming from the patients at this point, the over 65 patient population or the new indication of the over 50 patient population?

Thanks.

Ken, you want to start?

Thanks, Seamus.

I think what I would like to say first of all is that we have articulated a longer-term goal of driving the top line and we have invested in the topline both in our products and in our emerging markets and we are going to do that.

But we also have this aspiration of growing the bottom line in a faster fashion and so that remains our long-term goal through the pushes and pulls of patent expiries and everything, there will be certain periods where things might look a little bit different but be clearer.

That is our long-term goal and we have been able to do that in the first half of 2012.

Yes, and if you look at ZOSTAVAX, the vast majority, we believe, is coming from patients over the age of 60 and if you look at 2010 data from the CDC which is the only data that we have right now, they estimated that about 15% of the 60 plus population was vaccinated.

If you try to extrapolate based upon the data that was provided then, it might be somewhere around 20% to 25%.

So there is still an opportunity to grow.

There's over 50 million adults 60 plus years of age, and 41 million of the adults are between the ages of 50 to 59.

So you can see that there is still a large group above the age of 60 and that is where the majority we believe of the sales are coming from right now.

And also we have to wait for the ACIP recommendation in order to really be successful with people below the age of 60.

Okay.

Next question, please.

Steve Scala, Cowen.

I have two questions.

On IMPROVE-IT, the interim look appears to have been delayed from Q4 this year to March of 2013 while the final outcome remains June 2013.

I assume the delay is because of insufficient events, but doesn't that raise a concern about the final results?

So perhaps you can comment on that?

Second, on odanacatib, what is the European regulatory strategy given that the trial was placebo-controlled?

Thank you.

Thanks, Steve.

Again, I want to reiterate there has been no change with respect to IMPROVE-IT.

The move to March 2013 is just a question of the time that it takes to get the data adjudicated after the nine-month look.

And with regard to odanacatib, we are still planning to file in the first half of '13 in Europe, and we feel good about that filing.

I think we're also going to have to work very hard on the reimbursement and I think the fact that 25% of women can't tolerate bisphosphonates is actually going to be helpful for us as we start to think about reimbursement in Europe.

Okay.

Next question, please.

Marc Goodman, UBS.

Yes, hi.

First can you just remind us on BRIDION in the US what is left and when will we see the filing?

Second, just specifically talk about Latin America and what is going on there?

There is some one time things happening this year.

Will we see growth again in 2013?

And then in your prepared remarks, you talked about the emerging markets, pricing pressure.

Can you just go into specifics there?

Thanks.

Yes, just to start with BRIDION, Marc, as Ken mentioned, we do plan to file that in 2012.

We are right now working on a study to hopefully satisfy the FDA around bleeding times and we look forward to completing that this year and filing this year for BRIDION.

And if you look at the US opportunity for BRIDION, we think that it's an important product potentially.

There is 30 million surgeries in the US every year, muscle relaxants are used in about half of those surgeries, so there is also a wide use of agents that BRIDION reverses in the United States and the majority of surgeries in the United States are reversed.

So we think with the way BRIDION works in minutes providing a quicker turnaround, it could prove to be very helpful.

The second question with regard to Latin America, we continue to see strong performance in Latin America.

We see good performance in countries like Brazil.

In Mexico, Merck is now number one in terms of revenue and we show good growth and our evolution index continues to be very strong meaning that we are growing faster than the overall market in most of the Latin American companies.

And then the last question with regard to emerging market pricing pressure, there continues to be pressure in countries like China and other countries, but what is key is the volume growth.

Now what we are trying to do is to ensure that there is significant opportunity for our volume to increase much faster than what the price pressure is and that is how we have been successful that we are able to really show significant increases in volume that offset the pricing pressures.

Okay.

Next question, please.

Tony Butler, Barclays Capital.

Thanks very much.

Good morning.

Adam, as you think about reimbursement in the sleep market for suvorexant, could you please provide us a little color on how that reimbursement actually might be different from say a non-symptomatic area like statins or something like that?

That is to say, does it really matter if you are Tier 2 or even Tier 3 relative to the generics?

My second question is could you provide some color given that SINGULAIR stays on patent in Japan until 2016, what percent -- or roughly could you say what percent of total SINGULAIR sales are actually in Japan?

And then, Ken, sorry, but back to Steve Scala's question on IMPROVE-IT.

Have previous interim looks included adjudication?

Thank you.

So let me start with SINGULAIR outside of Europe and the United States.

It represented 2011 about $1.1 billion of sales and was growing in the single digits.

So we think there is continued opportunity in Japan and the emerging markets for SINGULAIR as we move forward.

If you think about the sleep market, it is going to be a very different way to think about reimbursement and I think with generic availability, it could end up in Tier 2 or Tier 3. The key would try to get unrestricted access even if it is in Tier 3.

People are switching in this market all the time.

They are looking for the next agent and they are willing to pay out-of-pocket for a good product that could help them sleep.

So this is different potentially than other classes such as JANUVIA or the statin market where it was critical to be in the highest tier possible.

If you look, branded drugs like the Lunesta and Ambien, they had over $1 billion in sales and that is despite current generics and most of their businesses in Tier 3 today.

And Steve -- Tony, I'm sorry, just on the IMPROVE-IT question, it's a good question.

I haven't actually considered that question before, but I would venture to say that they do try to adjudicate the data as they are doing their interim looks before reaching a conclusion.

But as I said, that is a not a question that I have contemplated before.

Next question, please.

Chris Schott, JPMorgan.

Great, thanks very much and congrats on the pipeline news flow this quarter.

Just three questions here.

First, odanacatib, the bisphosphonate market obviously has declined significantly, continues to decline.

How are you thinking about going about rebuilding the oral osteoporosis market and does the current market dynamics imply a relatively slow ramp for odanacatib once it is approved?

Second, anacetrapib, can you just update us on when we're going to see the DEFINE extension data and any updates on the REVEAL trial enrollment?

And then finally, the recent Amylin deal, Merck was reported to be looking at the asset.

Just more broadly speaking, can you talk about Merck's interest at looking at commercial stage assets such as this versus earlier stage compounds?

And maybe just also talk about your interest in expanding your diabetes platform as a whole, what are kind of your priorities here?

Thank you.

Okay, Adam, do you want to start?

Yes, let me start with odanacatib.

As I said a little bit before, and I will give you a little additional context, we have great reach into the majority of prescribers for osteoporosis markets and the good news is, we know this market very well.

There is no doubt that there is a decline in the bisphosphonate class.

There is no doubt that there is patient dissatisfaction right now.

We will have to invest in order to do market development.

We are going to have to really explain the new mechanism of action of odanacatib and have prescribers and payers understand the relevance of a new mechanism in this class.

We will make sure that we have the right resources behind it to do the right market development work and do to be prepared to launch.

So, on the questions about the DEFINE extension, I think that that data could mature sometime in 2013.

And there is really -- the REVEAL trial is ongoing and there is really no new updates on the REVEAL trial at this time.

And regarding Amylin, we don't comment on particular business deals.

I will say that as we look out at the marketplace today, we continue to say that there are opportunities to access the kind of external research that will complement our internal efforts in the key therapeutic areas that we want to be leaders in.

And we will continue to look at all those opportunities again with a lens of how important is this to build on our current position in the marketplace but also coupled with financial discipline in terms of our ability to access that technology on terms that will allow us to create shareholder value.

And if you look at the diabetes franchise, we continue to divest or invest in DPP-4.

We have MK3102 which is our once weekly molecule.

We are looking longer-term at mechanisms like GPR40 and then we are also very excited about SmartCells, which is the glucose responsive insulin program, although it's in early stages.

So we continue to take a look to make sure we are successful in the diabetes area for some time to come.

So, also, Chris, let me just point out on the DEFINE extension trial, I need to correct myself.

I said sometime next year.

ClinicalTrials.gov actually lists this trial as finishing in the early part of 2014.

Okay.

So I think we are now ready for the next question, please.

Barbara Ryan, Deutsche Bank.

Thanks for taking the questions.

Most of them have been asked, but maybe just based on the comments that you made in the press release with filing TREDAPTIVE by the end of 2013, I am assuming we are still on track for the HPS2-THRIVE study to complete in the first half.

And then, Peter, if you could just give us an update on share repurchase in the quarter?

Thanks so much.

Yes, we are still very much on track for HPS2-THRIVE.

We will probably get that data at the end of the year, by the end of the year.

And we are looking forward to a filing in 2013.

Hi, Barbara, it's Peter.

Yes, we had -- we were very active in the second quarter with share repurchase.

We actually had more activity than we had in the first quarter, so a good volume of share repurchase activity.

When you see the share count outstanding, we do have -- because our stock price has performed well, we actually have more shares coming in through the stock option program.

So it has offset some of the impact of that share repurchase activity but we continue to see an opportunity with share repurchase.

I think in the second quarter, the neighborhood was about $500 million in share repurchases.

Okay.

Let me just make a couple of comments in closing since I know were at the end of our hour.

First of all, again, thank you for joining us.

This was a good quarter.

I think we feel it is indicative of our ability to execute going forward.

We continue to focus though on building a foundation for long-term growth which is based on strong operating performance, but also significantly on R&D progression and we continue to see Merck as having a great opportunity going forward to drive shareholder value.

So thank you for joining us.

Thank you.

This concludes today's conference call.

You may now disconnect.