默克藥廠 (MRK) 2012 Q3 法說會逐字稿

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

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

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

You can see reconciliation tables for the non-GAAP results in the press release and also in Table 2 of our supplement.

We have also provided tables to help you understand the GAAP results and that is in Table 1. The reconciliation tables, as I mentioned, on Table 2 and Table 3 in our press release provides sales performance for the Company, our business units and our products.

During the call, we will be referring primarily to Table 2 and Table 3.

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

The statements are based upon the current beliefs of Merck's management and are subject to significant risks and uncertainties.

You can see our SEC filings, including the 2011 10-K.

They identify certain risk factors and cautionary statements that could cause our actual results to differ materially from any forward-looking statements we make today.

I should note that Merck undertakes no obligation to publicly update any forward-looking statement and importantly, you can find our SEC filings, as well as today's press release on our website at Merck.com.

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

Now I would like to turn it over to Ken Frazier.

Thank you, Alex.

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

Our results this quarter reflect the continuing momentum of our underlying business.

One year ago, we told you that our intention was to maintain 2012 revenues at or near 2011 levels despite the US SINGULAIR patent expiration.

And the Merck team is making good on that commitment.

In the third quarter, we drove growth of our key products and in our key geographies, which offset the impact of the SINGULAIR patent expiration.

With one more quarter to go in 2012, our year-to-date sales are up 2%, excluding the impact of exchange.

So we are right on track in executing our strategy.

We strongly believe that our four-part strategy provides a sound basis for weathering short-term market volatility and driving longer-term shareholder value.

As a reminder, our strategy is focused on executing on our core business, which includes our largest markets, core brands, new launch brands and innovative R&D targeted at therapeutic areas with the greatest future patient demand and scientific opportunity; two, expanding geographic geographically to leverage high-growth markets such as Japan and key emerging markets; three, extending into the complementary businesses of Consumer Care and Animal Health; and four, excelling at managing our costs while continuing to invest for future growth.

We also believe this strategy will allow us to continue doing what Merck does best -- providing innovative products that have demonstrated patient outcomes, provide value to the public and private payers alike and make a real difference for our customers.

In terms of executing our core business, our Companywide sales grew 7% this quarter, excluding SINGULAIR sales globally and foreign exchange.

We are pleased with the solid growth across the portfolio, including double-digit growth for a number of our key products.

In terms of expanding geographically, we continue to invest disproportionately in higher growth markets.

In the third quarter, emerging market sales grew 15%, excluding exchange.

We are also starting to get our joint ventures up and running such as our partnership with Sincere in China, which began operating this quarter.

As always, Adam will provide more specific details about our human health performance by product and by geography.

The third part of our strategy is extending into complementary businesses.

Our Animal Health business continues as a strong contributor with 7% growth in the third quarter, excluding exchange.

Additionally, we launched ACTIVYL in the US, a companion animal health productline for ticks and fleas.

Merck Consumer Care grew 10%, excluding exchange.

This growth was led by the expansion of our Dr. Scholl's franchise with the launch of the Active series, as well as key skincare brands.

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

Consistent with our efforts to tightly manage costs, we once again reduced marketing and administrative expenses this quarter.

We are committed to driving continuous productivity improvements across the enterprise to help us invest for growth and execute our four-part strategy on an ongoing basis.

Speaking of productivity, let me now turn to R&D and update you on our progress there.

We have multiple filings planned between now and the end of 2013.

We are on track for four filings in 2012 and even more in 2013.

I would like to tell you about are six major programs starting with Suvorexant.

Data presented last month from a safety and tolerability study demonstrated that patients who have been taking Suvorexant for 12 months when switched to placebo saw their insomnia return, but without clinically meaningful withdrawal symptoms.

This is significant because what happens when patients stop taking a sleep medication is a key concern for both patients and healthcare professionals.

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

The safety and efficacy of Suvorexant were evaluated through 12 months in one of the longest continuously dosed placebo-controlled trials of a sleep medication ever conducted.

We also recently presented data from a Phase II trial for Odanacatib, a potential first-in-class treatment for osteoporosis, which, as you know, is a disease that continues to have significant global unmet medical need.

In that Phase II trial, treatment with Odanacatib compared to placebo significantly increased bone mineral density over a two-year period in women with osteoporosis who previously had three or more years of treatment with Fosamax.

We are on track to submit regulatory applications for Odanacatib in the United States and EU in the first half of 2013 and in Japan in the second half of next year.

In addition to presenting these data for Odanacatib and Suvorexant, we also recently completed all studies for sugammadex requested by the FDA.

Sugammadex is known as Bridion outside the US.

We are pleased to report that the data support our previously announced plans to resubmit sugammadex to the FDA this year.

Separately, we remain on track for filing vintafolide, a first-in-class innovation for filing in the EU that could have utility in a variety of tumor types, including ovarian and lung cancers.

TREDAPTIVE, our novel cholesterol medicine that improves multiple lipid parameters and V503, a vaccine that expands protection against certain HPV-associated cancers by including additional HPV types.

As a reminder, each of these compounds is consistent with our focus on R&D innovation, meaning a clinically differentiated drug that is either first-in-class or potentially best-in-class.

Beyond our anticipated near-term regulatory filings, our pipeline continues to progress with new programs moving into Phase III.

For example, we recently started Phase III trials for MK-3102, our once-weekly DPP-4 inhibitor and we are on track to start Phase III for MK-3222 for the treatment of psoriasis either later this year or early next year.

In addition, we will soon start Phase II trials with our novel base inhibitor, which we are studying for the treatment of Alzheimer's disease.

We continue to focus on increasing the productivity of our internal R&D efforts while, at the same time, we're focusing on identifying and accessing external innovation.

Just last week, we announced a worldwide licensing agreement with AiCuris for a late-stage antiviral candidate for the treatment and prevention of human cytomegalovirus infection in transplant patients.

In addition, in the third quarter, we announced two HIV partnerships with Chimerix and Yamasa for early-stage compounds.

In closing, through the first three quarters of 2012, we have succeeded in maintaining our sales above the 2011 level on an ex-exchange basis.

We remain confident in our ability to achieve our 2012 sales and EPS goals even with the full impact of the US SINGULAIR patent expiration.

Many of you are expecting 2013 to be a challenging year.

Notwithstanding those challenges, we continue to believe we have the right strategy in place to manage for the long term while, at the same time, we are setting high expectations for ourselves next year.

Like this year, we intend to advance our pipeline.

Like this year, we intend to deliver strong performance from our key in-line brands and businesses around the world.

And like this year, we intend to continue managing our costs well to enable us to invest for growth, including in our pipeline and in new product launches.

We know that we need to continue to execute in the short term and based on our performance so far this year, you should be confident that we know how to execute on both our short-term and long-term plans.

We intend to drive long-term growth and shareholder value.

We will do that by continuing to focus on performance and innovation just as we have done this year.

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

Thank you, Ken.

Good morning, everyone.

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

GHH performance is consistent with the strong results that we have had throughout the year.

With continued strong growth of our key brands this quarter, we were able to maintain the top line versus our prior year on a constant currency basis.

That is despite the rapid loss of SINGULAIR sales in the United States since early August.

Excluding the sales of SINGULAIR and the impact of foreign exchange, Global Human Health sales grew 8% in the quarter.

Our performance was driven by double-digit growth of key brands such as JANUVIA, JANUMET, GARDASIL, VICTRELIS, ZOSTAVAX and ISENTRESS.

I will provide more details about the key aspects of our performance according to our strategy and I'll begin with our execution on our core business, which includes our largest markets, our core brands and our launch brands.

Let me start with the United States where sales were adversely affected by the SINGULAIR patent expiry.

If you exclude the sales of SINGULAIR, our portfolio had strong growth of 12%.

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

Moving to our business in Europe and Canada, overall third-quarter sales in Europe and Canada declined 14% or 3% excluding exchange.

We continue to have good volume growth and a strong evolution index, but the business is affected by the macro economic issues facing our industry.

Volume growth from brands such as JANUVIA and JANUMET, ISENTRESS, SIMPONI and VICTRELIS only partially offset price decreases, other austerity measures and the generic erosion of CLARINEX.

Moving onto several core brands, I will start with the JANUVIA and JANUMET franchise, which continued to perform very well this quarter with sales of $1.4 billion and 19% growth excluding exchange.

The growth of JANUVIA is broad-based and we continue to see volume growth in every region of the world.

JANUVIA and JANUMET combined grew 16% in the United States and 23%, excluding exchange, outside the United States, so there was nice growth in all regions.

Sequentially, sales outside the United States were slightly lower this quarter, primarily due to the timing of supply sales to a co-marketing partner in Japan.

It is important to remember that we only report these supply sales to Ono in the second and fourth quarter.

So there were no supply sales in the third quarter versus the $100 million that we reported in the second quarter.

Despite multiple competitors in the market, the JANUVIA family retained about a 73% share of the global DPP-4 market and it continues to have opportunities to grow.

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

Moving to SINGULAIR, SINGULAIR sales declined by $700 million driven by the patent expiry in the United States.

Within one month of the expiry, we saw a rapid 90% loss in prescription volume.

We have also begun to see generic versions in other markets and we will lose market exclusivity in the major European markets in February of 2013.

ISENTRESS continues to be a strong core brand for Merck with 23% growth excluding exchange.

Earlier this month, we celebrated a significant milestone with five years on the market.

During that time, ISENTRESS has been a valuable treatment option to physicians and to patients in the fight against HIV.

New competition is still early in its launch and we will provide updates in the future.

ISENTRESS retains a preferred position in US treatment guidelines, which is a testament to the efficacy, to the tolerability and to the clinical longevity of ISENTRESS.

In our cholesterol franchise, ZETIA/VYTORIN global sales grew 3% excluding exchange.

ZETIA grew 9% globally, which is partially offset by a decline in VYTORIN sales in the United States.

Moving to immunology, our combined immunology business with REMICADE and SIMPONI grew 4% in the quarter excluding the effect of exchange.

We continue to be a leader in immunology with a strong marketshare for REMICADE.

In addition, SIMPONI remains an important launch brand with $86 million of sales in the quarter.

We recently launched SIMPONI in France and we have reintroduced its convenient autoinjector in Germany.

We continue to be optimistic about SIMPONI's future growth potential competing with other subcu anti-TNFs.

Moving onto vaccines.

Vaccines had another strong quarter of double-digit growth.

GARDASIL maintained its strong performance with 31% growth over the prior year.

The growth is due to continued update of the male indication in the United States and the timing of government purchases in Canada and Mexico this quarter.

Sales of ZOSTAVAX were $202 million, our highest quarter of sales since launch.

We are seeing a very positive response to our promotional efforts and good uptake by patients presenting during the flu season.

We anticipate there will be a cyclical nature to this business.

We believe the flu season, which straddles the third and the fourth quarters, represents the largest opportunity.

We continue to anticipate broader ex-US launches beginning next year.

Moving to launch brands, we continue to drive strong launches, including GARDASIL in Japan and VICTRELIS around the world.

Our launch products contributed more than $200 million in revenue this quarter.

Global sales of VICTRELIS reached $149 million in the quarter.

In the United States, we continue to have strong share, ending the quarter with over a 40% TRX share.

Internationally, VICTRELIS has well over a 50% share of patient days of therapy across all markets where both protease inhibitors are available.

There has been rapid uptake and we have a strong share in markets like France and Germany and Canada.

While our near-term focus is on driving the growth of VICTRELIS, we are also focusing on the future.

In a couple of weeks, we will be presenting new Phase IIb data at AASLD for MK-5172, our potent protease inhibitor.

Now I would like to highlight how we are executing against our strategy of expanding geographically into key high-growth markets.

Let's begin with the emerging markets.

Emerging market sales reached $1.9 billion, up 7%, or 15% excluding exchange.

Growth in emerging markets was broad-based across our portfolio.

In 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 the joint ventures that we have been forming in several of these markets.

China continues to be an important growth driver with 18% growth excluding exchange.

The growth was driven by hospital and specialty products, as well as contributions from our diversified brands and our core brands, which we expect to continue to grow in China.

Moving to Japan, growth in Japan was 1% this quarter.

Strong growth of JANUVIA, ZETIA and our hospital products was tempered by a few factors -- first, a tough comparison last year due to wholesalers stocking for the GARDASIL launch; second, generic competition for COZAAR/HYZAAR and FOSAMAX; and third, the biennial price cuts earlier this year.

Importantly, looking ahead, we believe we have opportunity for strong growth in Japan.

So in summary, Global Human Health continued to drive strong performance from its diverse portfolio.

We were able to maintain the top line this quarter on a constant currency basis, overcoming the effects of the SINGULAIR patent expiry.

We believe our business momentum positions us well to maintain the top line this year despite the loss of SINGULAIR exclusivity in the United States for five months and austerity measures around the world.

Our base is strong; our base is diverse; and our base continues to grow.

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

Thank you, Adam and good morning.

In the third quarter, we are continuing to execute against our strategy and we are on track to achieve the financial targets we laid out earlier this year.

In the third quarter, we maintained our revenue on a constant currency basis despite facing the SINGULAIR impacts that Ken and Adam talked about.

We also reduced our expenses resulting in bottom-line growth.

In addition, we generated new clinical data and advanced key R&D programs.

Our results demonstrate that we have built a strong foundation and momentum in our key brands and across our businesses.

This morning, I will briefly talk about our performance in the third quarter and I will discuss our outlook.

This quarter, we faced a pretty steep climb.

Revenue headwinds of $1.2 billion came from two major items.

First, US SINGULAIR was a $700 million headwind and second, foreign exchange was a $550 million headwind.

As Ken mentioned, this quarter, the entire $700 million impact of the SINGULAIR patent expiration was replaced by strong global sales across the rest of our business.

The Merck team delivered exactly what we said we would do at the beginning of the year -- deliver revenue near the 2011 level on a constant currency basis.

We are proud of that accomplishment and also that we delivered EPS growth this quarter.

So 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 $0.95 this quarter, 1% higher than the prior year due to the unfavorable impacts of the US SINGULAIR patent expiration and foreign exchange.

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

Our non-GAAP gross margin declined sequentially by 200 basis points to 75.2% due primarily to the impact of SINGULAIR.

In fact, during the third quarter, the US SINGULAIR impact was about 140 basis points unfavorable and keep in mind that this is only a two-month impact.

Regarding our year-over-year improvement in marketing and administrative expenses, almost half of the benefit was due to foreign exchange.

The remainder was divided equally between reductions in direct selling expenses, promotion spending and other items.

Meanwhile, research and development expenses were pretty much flat year-over-year.

Moving to tax, our non-GAAP tax rate was 20.3% in the third quarter.

This is lower than the tax rate in the first six months and lower than our prior guidance.

Two discrete items drove this lower rate.

The first was the favorable impact of a settlement with a foreign tax authority and second, related to the realization of foreign tax benefits.

Absent these discrete items, the non-GAAP tax rate would have been approximately 25%.

These items are not expected to have an impact on the fourth quarter.

We continue to expect our full-year non-GAAP tax rate to be approximately 25%.

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

We have narrowed our EPS guidance and now expect our non-GAAP EPS to be in the range of $3.78 to $3.82.

This guidance reflects what we have consistently communicated about how 2012 would evolve, a strong operating performance in the first nine months and a fourth quarter that reflects the full impact of the US SINGULAIR patent expiration.

Accordingly, we continue to expect the fourth quarter to be the lowest quarter of the year.

In addition, our performance in the fourth quarter will also be tempered by higher R&D spending, continued austerity measures and foreign exchange rates that remain below prior-year rates.

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

On R&D expenses, our pipeline programs, which are continuing to progress nicely, and new business development deals have resulted in our year-to-date R&D expenses being about $100 million above the first nine months of 2011.

In the fourth quarter, we also expect to incur approximately $150 million in upfront payments due to the recently signed deals, including the AiCuris deal.

These upfront payments will be included in both GAAP and non-GAAP R&D expenses in the fourth quarter.

As a result of the $100 million increase year-to-date and the pending upfront payments of $150 million, we expect our non-GAAP R&D expenses to be higher than the 2011 level on a full-year basis.

So to summarize our 2012 guidance, our operations are strong and our non-GAAP EPS guidance is now between $3.78 and $3.82.

We also expect GAAP EPS to be between $2.08 and $2.24.

So let's look at what our third-quarter results can tell us about 2013.

First off, we are seeing a significant change in our product mix away from SINGULAIR and towards newer growth drivers such as JANUVIA, JANUMET and our vaccines, among other products, as well as Animal Health and Consumer Health and the fast growth markets like the emerging markets in Japan.

This is expected to continue in 2013.

What may be harder to appreciate is the impact of this mix shift on our gross margin.

We are replacing a very high gross margin product with a basket of products that have a somewhat lower gross margin.

As a result of this mix shift, our 2013 gross margin is expected to be lower than in 2012.

We expect to provide our 2013 guidance on our fourth-quarter earnings call.

In summary, we delivered a very good quarter with strong core operating performance offsetting the impact of the US SINGULAIR patent expiration.

We drove growth of key products and we increased sales in fast growth markets while maintaining strong financial discipline.

In addition, we continue to bring in new R&D programs and advanced our internal R&D pipeline.

Given the performance of our underlying business this quarter, we are indeed facing our current challenges head-on and from a position of strength.

We are confident that our strategy is working and we are right on track to deliver short-term performance and long-term growth.

Thank you.

I will turn the call back over to Alex.

Thanks, Peter and now we would like to open up the call to take your questions.

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

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

So Jackie, can you please start the Q&A please?

(Operator Instructions).

Marc Goodman, UBS.

(technical difficulty) about this MK-3222; we haven't heard much about it.

What is the key to the product and how it will compete with the others?

And then SINGULAIR OUS seemed to be a little weak.

How much of that was currency or is there something else going on?

Obviously, we know what is going to happen next year.

Great, thanks, Marc.

Why don't we start with the SINGULAIR ex-US number and then we will come back to the IL-23.

So Marc, if you look at SINGULAIR outside the US, we have already started to see some patent expiries in countries like Mexico, Canada and Poland, so you really are starting to see some impact from the SINGULAIR patent expiries already.

In addition to that, we had a slightly slower AR season in Japan.

In general, in markets such as the emerging markets in Japan where we don't have the patent expiries, we believe that we continue to see good growth and we expect to see good growth over time.

Okay.

And also, on MK-3222, we expect to begin Phase III trials in psoriasis either late this year or early next year.

This is a drug that we have a great deal of excitement about.

We think that this is a disease where there continues to be a great deal of unmet medical need going forward.

We had a Phase II program that -- based on the study that we had there, we feel that there is value for moderate to severe chronic psoriasis patients and so we look forward to learning more about this drug as we move forward.

And the anti-IL-23 psoriasis program, which is a monoclonal antibody, is one that we look forward to.

Okay, next question, please.

Chris Schott, JPMorgan.

The first -- it seems like this earnings season, we have had kind of mixed data points on US primary care pricing as we kind of think out to 2013 from some of your competitors.

Can you just talk about how you are thinking about managed care access and pricing for the JANUVIA franchise, as well as the ZETIA/VYTORIN franchises as we look out to kind of 2013?

Are you seeing any incremental pressure there?

And then second, if I just think about where Merck is right now, we are getting through SINGULAIR; we have had some positive updates on your pipeline.

It seems like you only have really one more major expiration with cholesterol out in 2016 or 2017.

It seems like a time when Merck could start getting more aggressive with its capital deployment.

I guess how are you thinking about use of cash at this point, particularly business development relative to things like further dividend increases?

Thank you.

Okay, thanks, Chris.

Let's start with your questions about pricing and managed care access and we'll come back to capital.

Hi, Chris.

Thanks for your question.

This is Adam.

We continue to do well with our managed care access for JANUVIA and for that matter for ZETIA and VYTORIN.

With JANUVIA, we have 85% to 90% unrestricted access.

It is important to note that many patients use metformin even prior to JANUVIA or JANUMET, so therefore they are using a Tier 1 product before they move to our unrestricted access in Tier 2 or Tier 3. Of course, there continues to be pressure, but I think with the profile that we have with JANUVIA, with the utilization and where it is utilized, we expect to continue to have very good formulary acceptance as we move forward into 2013.

If you look at VYTORIN and ZETIA, we have 90% of patients that have commercial Medicare Part D access to at least one of the brands.

And what we think is important is that they have the ability to use dual-inhibition through either adding ZETIA or utilizing VYTORIN.

So 90% access we believe for either one of the two being in second tier or third tier with no prior [auth] is a good place to be.

And if you look at 2012 and 2013, we don't anticipate any significant changes for VYTORIN or ZETIA.

Okay, Ken?

Chris, thanks for your question on capital deployment.

I think, first of all, we do have a very strong balance sheet and we have the ability to do deals when we see them.

Our goal is to always look for the best external R&D opportunities that are out there, but we also want to access them at a price at which we can create value for our shareholders.

And from our standpoint, a deal like the one we just did with AiCuris for a late-stage antiviral candidate is the kind of thing that we want to continue to do.

We will look for opportunities, but we want to temper the aggressiveness with being really smart in how we invest our cash for growth.

The other obligation we have obviously is to continue to return cash to our investors in a way that is actually appropriate to where we are.

So I would say the first objective is to continue to do smart deals where they can add value to the long term and the second one is to return cash to shareholders.

Okay.

Next question, please.

Tony Butler, Barclays Capital.

Thank you very much.

Adam, a question around GARDASIL.

This is, I believe, at least the second quarter you have pointed out boys as being somewhat of a driver.

Can you actually discuss this a little bit further?

What kind of percentage of revenue is actually coming from the male population versus females?

And then the second question is around emerging markets, which I think are flat sequentially at $1.9 billion.

Is that an expectation that we should have at least through Q4?

Is there a reason to assume that that can actually accelerate sequentially from this particular level based upon new products?

Thanks very much.

Hi, Tony.

Thanks very much for the questions.

And let me give you some context on GARDASIL and then I will get specific to males.

So we had 31% growth.

If you look at the US sales, we had 25% year-over-year growth and a lot of that, we believe, is due to continued uptake by the male indication.

Outside the US, we had about 46% growth and that was due to timing in some part of public sector sales in Canada, Mexico and Colombia.

If you look at our share globally, we have got over an 80% share and in the US, we have greater than 95% share.

If you look at the males, we are seeing nice uptake by males and we have private sector data, so we don't have data for everything, but in the private sector data, it suggests that about 55% of our first doses are being administered to males.

That is now therefore exceeding the number of first doses for females for the first time.

We think that there is still good opportunity to grow.

If you look at the male indication, the rampup in sales has been slower than what we saw initially with the rampup for females.

So we don't expect to see significant declines in that population.

If you look at the emerging markets, I look year-over-year.

I think you have to be careful looking at sequential trends, particularly because of tenders and government purchases and so forth.

So as I said before, there tends to be lumpiness as you go through the quarters in the emerging markets because of the way in which the governments and the tenders move forward.

I think that we have the potential for good growth in emerging markets.

We are very pleased having 15% growth [ex-Rx] versus the prior year and I think we have good momentum and we expect to keep that momentum.

Okay.

Next question, please.

David Risinger, Morgan Stanley.

I wanted to ask some questions about the IMPROVE IT press release that you had issued I think it was late March or early April.

That release was written a little bit differently than the prior releases.

I was just hoping, since it has been six months since the DSMB told you that they were adding another look, I was wondering, number one, is that look designed in conjunction with Merck and second, what additional details have you learned during the past six months that you can share with us?

Thank you.

Well, I would have to say, David, there is really nothing new to report.

What we know is that there will be an additional review of nine months of adjudicated data and that has been scheduled for March 2013.

We are confident in the study and we continue to look forward to a good outcome.

Okay.

Next question, please.

Tim Anderson, Sanford Bernstein.

Question on biosimilars.

From what I understand, REMICADE does not have patent protection in a reasonable number of smaller European markets.

In these markets, can you talk about when you think biosimilars might arrive?

And then also a number of years ago, Merck made quite a splash about its presence in biosimilars and what that would be going forward, but the Company seems to have kind of gone quiet in this area for a while and I know that earlier this year, you lost your head of biosimilars.

I am wondering if you can update us on your efforts there.

And then on Odanacatib, it is hard to know what to make of the product because obviously we only have top-line results.

One of the things you described previously was some sort of potential safety issue.

Can you please give us some idea of what this is?

So why don't I start with REMICADE, Tim.

So first of all, I think it is unclear how Celltrion's biosimilar will impact REMICADE.

We have REMICADE patent protected in the major EU countries where the vast majority of sales are until late 2014.

We filed for pediatric market exclusivity in the EU based upon the new pediatric indications and we are hoping that that may bring exclusivity to 2015.

But when you think about biosimilars, we expect the impact in the first few years in any of these countries to be relatively slow for the following reasons.

These will be the first monoclonal antibody biosimilars approved in the EU.

In general, we don't believe that they are going to take patients off of their current therapy.

We think that the product will be limited to new patients; (inaudible) patients are controlled and then you are going to need to have mechanisms for approval, for reimbursement, for physician familiarity because it is not going to be necessarily therapeutically substitutable.

So it is going to take a lot of support and promotion to be successful in the marketplace.

So we continue to watch it and monitor it well, but at this point we feel confident that we will continue to be successful with REMICADE and SIMPONI.

And Tim, with respect to your general question about [MBV], I would say that we have a number of biosimilar molecules in early development.

They include Rituxan and Enbrel, which we are prioritizing.

We are also prioritizing other candidates across our portfolio of both the biosimilars, as well as the novel biologics like we talked about IL-23 a little while ago.

So what we are trying to do is continue to look at our investments, to select the molecules that have the highest potential relative to the development costs, the ones where we think we have the highest probability of technical success and of course, the molecules where we also think we have the highest probability of being one of the early first movers at the time of patent expiry.

Turning to Odanacatib, I can only say that there is nothing new to report at this time.

We are waiting for the trial to close out and we will have more data for that to present in 2013.

Next question, please.

Mark Schoenebaum, ISI Group.

(technical difficulty) my questions.

I appreciate it.

Maybe I can ask a question -- just I think you have an analyst meeting that you are planning on holding in the 1Q.

I was wondering maybe if you could help us understand expectations for that meeting.

I think most importantly on investors' mind is are there plans in the company to perhaps reinstitute longer-term financial targets?

And then just to build on ZOSTAVAX, the ZOSTAVAX number was, I thought, pretty impressive and the fact that you are launching ex-US seems to communicate that you think your supply issues are behind you.

Can you speak to the state of the supply issues and also maybe give us an update on where penetration is in that market overall so we can get an idea of where this could go with time?

Thanks a lot.

So let me start with the long-term guidance question and just say that, at this time, there is no intention to reinstate long-term guidance.

And let me, Mark, give you some context on ZOSTAVAX and ex-US.

Right now, the majority of sales are in the United States.

We are pleased with the launch in the United States and Canada, but Canada only represents about $10 million of the ZOSTAVAX sales for the quarter.

But we want to make sure we continue to invest in markets outside the US.

Our top priority is to ensure uninterrupted supply where we launch and we continue to build inventory to support the anticipated demand.

So when we launch into a country, we want to make sure that we will have enough supply to continue to be able to supply that country.

We are planning additional launches in certain ex-US markets beginning in 2013 and we will let you know about those as we get closer.

In terms of [derm], we are in the final stage of review and approval process and we continue to expect approval in early 2013.

But for the US market and Canada right now, we are comfortable that we have the supply for those markets and we will keep you informed as we move forward outside the US.

And Mark, it's Alex.

In terms of the analyst meeting, we have not settled on a date yet, but we are looking at Q2 as probably a target timeline for the next analyst meeting and as in the past, I would expect that R&D programs would figure very prominently in the discussions that we would have there, as well as a review of the overall business.

So with that, we will take the next question please.

Jami Rubin, Goldman Sachs.

(technical difficulty) expect the top-line results for HPS2 THRIVE?

And then secondly, Peter, you gave us a little bit of color around what to expect for gross margins in 2013.

I was wondering if you could provide us a little bit of color around the pushes and the pulls to revenues in 2013.

Specifically do you expect that 2013 could be flat like 2012 versus 2011?

Just remind us please what the, aside from SINGULAIR going generic February 2013, if there is anything else that we should be aware of and offsetting that, what are the product introductions?

Thanks.

Ken, why don't you start with TREDAPTIVE?

So Jami, thanks for the questions.

We expect the trial to complete this year and we expect to present the data sometime in 2013.

So Jami, thanks for the question on the top line and the PGM.

So the PGM I did discuss.

On the top line, I think the factors to consider as headwinds perhaps is that, in addition to SINGULAIR having just gone off patent in the US in August, in the first quarter of 2013, it will go off in a number of the major markets in Europe.

Additionally, MAXALT will go off patent I think at the end of this year and so that is just another consideration.

Not obviously at all as meaningful as SINGULAIR, but just another point to note.

The flip though, the question that you had, which is where will the revenue come from that will offset that or how close will we come, obviously we will be giving guidance for 2013 on the first-quarter call but we aren't really in a position to provide that today.

But clearly you can see in the third-quarter results the kind of drivers we have around the world and across a broad range of products quite frankly.

I think that is pretty clear and you have asked some questions already today relative to the performance of GARDASIL, of ZOSTAVAX and so forth and we are continuing to focus on those products.

I think Adam is obviously -- Adam and his team are obviously going to be getting ready to launch a lot of the products we talked about coming through filing and the pipeline as we go through '13 as well.

So that will be -- may not be as much of a revenue driver, but it is something they are getting us ready for.

So while we are managing '13 really well to make sure we drive the short-term performance, as Ken likes to say, we're also going to be making sure that we are teeing up the business really well so that as we come through '13, we are going to be able to take great advantage of the launches coming out of the pipeline.

Okay.

Next question, please.

Steve Scala, Cowen.

(technical difficulty) and I know 2013 guidance comes in 2013, but, Ken, everything you have said about 2013 suggests top and bottom-line growth and I am just wondering if that is the message that we should take home?

And secondly, assuming the Phase II is positive, what is the earliest you could move your base inhibitor into Phase III and how soon after that can we see data?

This looks like a phenomenal drug and I am just wondering when we could look forward to its late-phase development.

Thank you.

Thanks for the questions, Steve.

What I have said thus far really relates to what we anticipated doing in 2012 and we have done what we have said, essentially that we wanted to maintain the top line at or above -- at or about the 2011 levels.

We have done that in 2012.

We have not given any guidance yet for 2013 for revenue or anything else.

We will do that on our fourth-quarter call.

We are also excited about BACE.

Alzheimer's disease, first of all, is a priority area for Merck and it is something important for us.

We are planning to begin Phase II trials later this year and we will be able to provide more details at that time about what the trial will involve and I just have to say stay tuned.

But we share your excitement about this particular compound and the opportunity that we have in terms of Alzheimer's disease.

Okay.

Next question, please.

Catherine Arnold, Credit Suisse.

I had two questions.

First of all, I wondered if you could comment on anacetrapib's Phase II extension study.

It must be wrapping up soon and I wondered if you can confirm that and talk about if you will disclose those results and how we might see them?

And then secondly I wanted to ask about the Animal Health business and I thought the performance was a little bit light beyond FX and I wondered if you could talk about some of the dynamics in the bigger sub-segments of that business.

On Animal Health, as we said before, our third-quarter sales were 7% ex-exchange.

Year-to-date, we are up about 10% ex-exchange.

So we thought we saw, if you put aside currency, pretty strong quarterly performance of our cattle, our poultry, our companion animal and our fish businesses.

So we are pretty excited about that.

With respect to your questions about the defined extension study, we are moving forward with our program.

We don't anticipate filing on the basis of that data.

The filing will be based on the data from the REVEAL study, which is ongoing, which you'll remember is a 30,000 patient study.

And the good news for us is we are more than two-thirds enrolled on the REVEAL study.

So we continue to move forward with that program and we remain very committed to that development program for both anacetrapib, as well as TREDAPTIVE.

Okay.

Next question, please.

Gregg Gilbert, Merrill Lynch.

Hey, Gregg, are you there?

Can you hear me, Alex?

Yes, we can hear you now, Gregg.

Sorry, guys.

Has your timeline for HPS-THRIVE slipped at all and is it fair to say, Ken, that the outcome could have implications for your BD strategy and priorities?

My second question is for Adam.

What does your market research tell you about a once-weekly JANUVIA?

Obviously, once-weekly played well on osteoporosis.

I am curious how you see it playing out in the category where patients may be on several therapies that can't be put into a once-weekly format.

Thanks.

So Gregg, let me start with the once-weekly first.

And as you think about the profile of the DPP-4s and in particular drugs like JANUVIA, you can see that, with the efficacy profile, the safety profile and the uptake of those products, that there is a lot of need for new diabetes products in the marketplace.

As we start to think about where the current drugs are positioned, in general, they are positioned after metformin in patients that are already being treated.

In addition to that, still 37% of patients are taking sulfonylureas.

As we think about the once weekly DPP-4s, a question that I think will come to fruition is will physicians utilize a once-weekly product prior to metformin.

This is the reason -- if you have a younger, active, more healthy patient with diabetes, wouldn't you want to use a once-weekly product in that patient and therefore, I think it could represent an additional opportunity above and beyond where JANUVIA is positioned today.

And our market research is starting to demonstrate that there is a high likelihood that physicians will consider a once-weekly product for earlier treatment than where the current DPP-4s are utilized.

On TREDAPTIVE, I would say there hasn't been any slippage as it relates to the timing of the trial.

We are waiting for the trial to conclude.

We expect it to conclude by the end of 2012.

We expect to be able to present the data sometime in 2013.

Our normal preference is to wait for presentation at clinical conferences.

And as it relates to business development, I wouldn't say that that would be a driver for our business development activity.

We try to be proactive in business development across the therapeutic areas where we want to be focused and so we will continue to do that.

Okay.

Next question, please.

Alex Arfaei, BMO Capital Markets.

Thank you for taking my questions.

Can you hear me?

Yes, we can, Alex.

Great.

Well, I will be the first to congratulate you on the quarter.

I think it's pretty impressive considering the headwinds you are facing.

REMICADE seemed to be a little lighter than we expected.

I was wondering if you could provide some comments on that.

And then finally with regards to your Alzheimer's drug, are you planning to evaluate that earlier, in earlier stage patients such as prodromal patients considering what we've seen from some of the agents that are a little bit ahead of you?

Thank you.

Adam, do you want to start?

Yes, hi, Alex.

So with regard to REMICADE, we had, and you look at REMICADE and SIMPONI together, we had about 4% growth versus prior year.

REMICADE sales were about $500 million in the third quarter and it was a decline ex-FX of just over 10%.

When you think about the austerity measures and the fact that we are competing primarily in major European markets, they are looking at the anti-TNF class as a way to reduce costs.

So we continue to have a very good share of REMICADE, but there has been some real pricing pressure that we have faced in Europe on that product.

SIMPONI represents a growth opportunity where, with SIMPONI, we have over $89 million of sales for the quarter.

We are launching in France, which is a large market for this class.

We are competing with the other anti-TNFs in the subcutaneous marketplace.

And therefore, I think that we will be able to show growth as we move forward utilizing SIMPONI with France, but also the reintroduction of the autoinjector in Germany for that product.

And with respect to our BACE program, as I said before, we are planning to begin Phase II trials later this year and we will be able to provide more details at the time the trial begins.

But I will reiterate again we are excited about this program.

Alzheimer's disease is a priority area for the Company and the amyloid hypothesis remains a leading approach for disease modification for Alzheimer's disease.

MK-8931 appears can reduce cerebral spinal fluid, Abeta peptides by greater than 90% in healthy volunteers without dose-limiting side effects.

And so we will continue to study this drug as we move forward and we have a tremendous opportunity to design clinical programs that allow us to export it across a variety of patients.

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

So the last two callers.

Seamus Fernandez, Leerink Swann.

Thank you.

Can you hear me now?

Yes.

Okay, great.

So as you developed Odanacatib, can you just give us a sense of what the key attributes were that you found would best correlate to long-term success given the availability of generic bisphosphonates and other injectable products?

And then second, we now have a pretty good sense of the tolerability of CORDAPTIVE.

We are seeing some tolerability issues there and some dropout, which obviously is the case for niacin.

If CORDAPTIVE were to show that its benefits or effects were largely key to LDL reduction only, how would the -- how would you see this franchise evolving going forward given the availability of ZETIA and its effects on LDL?

Thanks a lot.

So, Ken, do you want to start with Odanacatib?

Yes.

So first of all, we think there is a tremendous opportunity for another once-weekly oral regimen that has no special requirements in terms of how people take it or use it.

There is a tremendous market need.

There are 200 million women worldwide and only 20% of them are treated.

Remember, it was a $10 billion market prior to generic FOSAMAX and we see bisphosphonate use declining.

And on top of that, approximately 25% of people can't tolerate bisphosphonates anyway.

So now you have a unique mechanism.

It also shows positive data trends beyond FOSAMAX and we are looking forward to the publication of our fracture outcome trial because we think this is a product that could have tremendous usefulness in the marketplace.

So with regard to TREDAPTIVE, there is still a substantial residual CV risk in the marketplace of about 65% and this remains a very large market.

One share point in the US is still about $400 million.

And if you just look at niacin alone, it is about $1 billion despite the tolerability profile of niacin.

We have data that demonstrates less flushing with TREDAPTIVE than with niacin and we have got some good data looking at the flushing and the incidence of flushing.

If you look at the HPS2 THRIVE trial, it is well-powered to detect a 15% improvement in the time to first cardiovascular event.

We believe that a 20% reduction in LDL cholesterol and other lipid benefits such as an 18% increase in HDL cholesterol, which is what we have seen in prior trials, will support the science behind TREDAPTIVE and we believe that if you get a positive outcomes trial, which is what we expect for HPS2 THRIVE then we could have a real place in the market to help reduce the residual risk that currently exists of 65%.

And niacin is a pretty strong market of about $1 billion despite all the tolerability issues.

Operator, we are ready for our last question, please.

Michael Tong, Wells Fargo Securities.

Two of them.

One, in terms of hepatitis C, clearly, the market and the science is moving pretty quickly to perhaps all oral and one pill regimen.

So where does Merck stand in the long term in that market and how do you expect to get there?

And then secondly, with respect to R&D expenses, as you look out several years, do you reach a point where you get to a certain critical mass and your R&D in absolute dollar terms stay relatively constant because adding more doesn't necessarily give you more productivity?

Thanks.

I will take the HCV question, Michael.

So in the short term, obviously, we are looking to maximize the VICTRELIS opportunity.

We are also aggressively pursuing new, more convenient interferon-free therapies and we are focusing on MK-5172, either in combination with internal candidates like 8742, which is our NS5a in Phase I. There will be more data presented at AASLD on our NS5as or in partnership with others and our goal is to develop an all-oral regimen that maximizes SVR, that shortens duration of treatment and minimizes the side effects.

If you look at clintrials.gov, you can see that there is a study that is planned to evaluate 12 and 24-week regimens of MK-5172 in combination with ribavirin and that is in treatment-naive patients with genotype 1 infection and also in IL-28 CC genotype.

And we think that MK-5172 could have an unprecedented profile and be the partner protease inhibitor of choice for all oral combination regimens and that is what we hope.

You will see that there is new Phase IIb data for MK-5172 with [peg/riban] at AASLD in just a few weeks as well.

So on the question of R&D, first of all, I will just start by saying we really haven't given long-term R&D guidance.

I just want to make sure that is clear.

But in terms of the question of how we think about it, I am not sure that we really feel that there is an issue of critical mass.

I don't think there is a scale or size that fits one company or another.

Much more importantly though, looking at the individual programs and really understanding the economics of those programs and driving a stiff prioritization process that ensures a very, very good return on investment and creation of value in that pipeline.

And I think you have heard Peter Kim and his team partnered with Adam's team has been very rigorous in the last several years actually in really going through that and we continue to do that on a regular basis.

And it has, I believe, now yielded a pipeline that is creating tremendous value and has a lot of potential for the Company.

So we are actually very excited to see how that will progress and continue to unfold.

I think in terms of picking a size for the future of R&D, I think it really does come down to what are the opportunities we see and what are the opportunities we have both in terms of innovative pipeline and supporting markets around the world.

We have made a lot of effort in our R&D structure to make it a bit more virtual and partnered as we work with collaborators, which, on the one hand, in a sense, variablizes our costs so that the activity level goes down.

We actually do see savings.

But conversely, it really does actually open up more capacity.

So if we see the right programs to really execute well that creates a great return on investment, we should really be going after them.

Now that doesn't automatically mean we plan to grow or not grow.

It just really means what's the portfolio as it goes through a strong prioritization effort what do we choose to pursue.

So I think it is more really what are the opportunities and we are now positioned and I think well set up to pursue them properly.

Okay, so let me say a few things in closing.

First of all, I want to say that I believe we turned in a very strong operational performance in the third quarter.

But more importantly, looking forward, our strategy is right on track.

We said that we will continue advancing our pipeline and that is exactly what we are doing on a number of important fronts.

We said we would maintain sales at or near the 2011 levels and we are able to do that.

The important thing is that our underlying portfolio, including products like JANUVIA, JANUMET, ISENTRESS, GARDASIL, ZOSTAVAX and SIMPONI, is continuing to grow very strongly.

We continue to grow strongly in the emerging markets, perhaps strongest growth across the entire industry in the emerging markets.

We continue to reduce costs in targeted ways so that we can continue to invest in our future growth, including the pipeline.

So in the long run, what I think we are doing is we are setting ourselves up to create shareholder value in the long term and we are very excited by the period of time into, a period of time where we will be bringing new products to the market.

So thank you very much and I look forward to speaking to you soon.

Thank you.

This concludes today's conference call.

You may now disconnect.