默克藥廠 (MRK) 2012 Q4 法說會逐字稿

Good day, everyone, and welcome to Merck's fourth-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.

Good morning, everyone, and welcome to Merck's fourth-quarter 2012 conference call.

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

First, you'll see that we have items in our GAAP results such as acquisition-related charges, restructuring costs, and certain other items.

You should note that we have excluded those items from our non-GAAP results.

There are reconciliation tables available in our press release so you can get a better understanding of the underlying performance.

We have also provided tables to help you understand the sales results in the quarter, based for the business units and also for the products.

That is in Table 3 of our press release, and the reconciliation table I mentioned is in Table 2 of our earnings release.

During the call, we will be referring to primarily Table 2 for the P&L and Table 13 as it relates to revenue.

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

Such statements are made based on the current beliefs of Merck's management and are subject to significant risks and uncertainties.

If underlying assumptions prove inaccurate, or risks or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements.

Our SEC filings, including Item 1A in the 2011 10-K, identify certain risk factors and cautionary statements that could cause the Company's actual results to differ materially from those projected in any of our forward-looking statements made this morning.

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

And you can see our SEC filings as well as today's earnings release on Merck.com.

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

With that, I would like to introduce Ken Frazier.

Thank you, Alex.

Good morning, everyone.

Thank you for joining the call today.

I am pleased to be with you today.

As we close out 2012, we see continued evidence that our focus on a core growth strategy to create shareholder value has us on the right track.

We expected that 2012 would be a challenging year, particularly with the SINGULAIR patent expiry as well as pricing and austerity challenges.

Despite these challenges, we were able to maintain our top-line and 2011 levels without resetting our revenue base, as we committed to you at this time last year.

We also committed to continuing to reduce our cost structure in order to deliver a leveraged P&L, and it is clear that we delivered on both fronts.

By driving growth in our broad product portfolio and reducing costs, we were able not only to absorb the impacts of a challenging year but also reinvest for future growth.

In addition, we returned more than $7.5 billion to shareholders last year by increasing our dividend 11% and increasing our share repurchase level to $2.6 billion.

In 2012, we also said that we would advance the pipeline, and we did just that.

Although we were disappointed by the outcome of the HPS2-THRIVE trial, we successfully completed four new drug applications last year, with more on the way this year.

Before I continue I would like to turn the call over to Peter Kim, who will provide a brief update regarding odanacatib.

Peter?

Thank you, Ken, and good morning, everyone.

As you will recall, last July the Data Monitoring Committee for the fracture trial recommended the pivotal study be closed and the extension study, which includes more than 8,000 women, continue.

We have just recently received data from the pivotal study but do not have data from the ongoing extension trial.

We have decided to include data from the extension study in our filings for regulatory approvals.

The extension study is double blinded.

Patients and investigators are blinded.

Our plans to present the data are dependent on our need to maintain the blind in order to file.

Therefore, we do not intend to present the results of the pivotal study, and we do not intend to provide additional information on safety or efficacy until after we have locked the database for the filings.

We will then present the data at an appropriate scientific meeting.

Let me underscore that we continue to believe in the potential of odanacatib to address unmet medical needs for patients with osteoporosis and look forward to filing in 2014.

Ken?

Thank you, Peter.

As we begin 2013, we face higher hurdles for patent expirations and many of the same external challenges we saw last year.

Nevertheless, we are well positioned to meet those challenges, with the growth of our underlying portfolio and our four-part growth strategy.

Our strategy provides solid footing for navigating marketplace volatility, weathering the inherent unpredictability of innovative R&D, and driving shareholder value.

Once again, our team's ability to execute our strategy well gives us confidence that we can maintain sales near prior-year levels on a constant-currency basis.

The breadth and strength of our product portfolio was a significant contributor to our overall growth last year.

On the Human Health side, pharmaceutical sales grew 1% for the year, excluding exchange, and 5% excluding exchange and SINGULAIR.

As always, Adam will share more details about our key growth drivers and their performance.

While our key growth drivers continue to perform well in established markets, there also remain additional growth opportunities for many of these products as we continue to expand geographically, the second component of our core strategy.

Emerging markets grew 13% for the year, excluding the impact of foreign exchange and the 2011 REMICADE settlement.

We are driving growth organically from our existing portfolio.

In 2012, our sales in China alone grew 22% ex-exchange, to cross the $1 billion mark.

In 2013, we see continued benefit across the emerging markets from the growth of our product portfolio as well as the contributions we are beginning to realize from our joint ventures such as Simcere in China and Supera Farma in Brazil.

The third component of our strategy is to extend into complementary businesses.

For us, that means Animal Health and Consumer Care.

Our Animal Health business grew 9% ex-exchange last year, and our Consumer Care business grew 7% ex-exchange, which outpaced overall consumer market growth in several markets.

Our Animal Health and Consumer Care businesses are complementary with our core Human Health business.

We are a leader in many categories in both Animal Health and Consumer Care, and we intend to leverage that leadership to grow these businesses to enhance the overall performance of the Company.

The recently announced first-cycle FDA approval of OXYTROL, a prescription-to-OTC switch, is just one example of how we can create value in the Consumer business.

Lastly, the fourth element of our strategy is to excel at reducing costs and maintaining a competitive cost structure.

In 2012, we achieved our merger synergy target of $3.5 billion net savings.

Importantly, we got the benefit of those synergies while also making investments that over the long term will grow Mark's top line and increase our profitability.

For example, when a market opportunity developed we quickly put additional resources behind JANUVIA and JANUMET, which generated greater market share, higher sales, and a very high return on investment.

Over the last three years, we have reduced spending in our base, reinvested for the long term, and steadily improve our operating profit margins.

This enables us to prepare for our next wave of product launches.

Peter Kellogg will speak more about our 2013 guidance in a few moments.

I would like to turn now to R&D.

As I mentioned, in 2012 we had four major filings -- suvorexant, our novel sleep compound; vintafolide in the EU for ovarian cancer; our combination of ZETIA and atorvastatin; and sugammadex, which is marketed as BRIDION outside the US.

For 2013, we plan multiple additional filings including V503, a vaccine that expands protection against certain HPV-associated cancers, and two allergy immunotherapy products -- one for grass allergies, which was recently submitted, and another for ragweed allergies.

Beyond our anticipated regulatory filings, we also expect to advance our pipeline this year.

This follows two Phase III starts last year, our once-weekly DPP-4 inhibitor and our monoclonal antibody for the treatment of psoriasis.

We also moved our BACE inhibitor for Alzheimer's disease into a Phase II/III program in November and advanced our PD-1 candidate for cancer to the Phase II.

Our priority is turning cutting-edge science, both within our labs and externally, into innovative medicines and vaccines.

During the course of 2012, we completed more than 60 business development transactions.

While we have traditionally been very good at creating value with early-stage transactions, two good examples of transactions involving late-stage candidates with significant commercial potential are AiCuris and Endocyte.

For 2013, our goal remains to seek out those assets at all phases of development that help position us for success in key therapeutic areas where we choose to compete and which can be attained on terms that create shareholder value.

In closing, Merck had a good fourth quarter and a strong year overall.

As we begin 2013, our top-line performance targets remain as challenging as ever, as we seek to overcome the patent expirations and macro challenges facing our Company.

We will accomplish this by continuing to execute with key growth products and in key geographies, advancing and augmenting our pipeline, and continuing to meet the evolving needs of customers around the world.

We will deliver this while driving a culture of continuous productivity improvements so that we can continue to invest in the future and deliver shareholder value over the long term.

Thank you for your attention, and I would like to now turn the call over to Adam.

Thank you, Ken; good morning, everyone.

It's a pleasure to speak with you today.

This morning I will provide you with an overview of Global Human Health results for 2012, and I'll also touch on the 2013 outlook.

In 2012, Global Human Health delivered on the objective that we established at the beginning of the year.

With strong growth of our key brands, we were able to maintain our $41 billion top line versus the prior year on a constant-currency basis.

That is despite more than a $1.6 billion decline in SINGULAIR sales driven by the US patent expiry.

Excluding SINGULAIR and the impact of foreign exchange, GHH sales grew 5% in 2012.

GHH contributed $1.9 billion to the top line.

In the fourth quarter, Human Health sales declined 6%, largely due to SINGULAIR.

If you exclude SINGULAIR and the impact of foreign exchange, underlying sales grew by 5%.

Underlying growth was driven by key brands and by key markets.

2012 was a year of strong execution.

We have executed on our strategic priorities of growing the core, expanding the core, and accelerating new launches.

I will now provide more details about the key aspects of our performance this quarter, beginning with execution on our core business, which includes the largest markets, our core brand, and our launch brands.

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

Excluding the sales of SINGULAIR, the portfolio had strong growth of 10% for the year and 7% in the fourth quarter.

The US performance was driven by double-digit growth of JANUVIA, JANUMET, ISENTRESS, GARDASIL, and ZOSTAVAX.

Moving to our business in Europe and Canada, on a full-year basis, sales in Europe and Canada declined by 4%, excluding exchange.

Fourth-quarter sales in Europe and Canada declined by 2% ex-exchange.

We continue to have good volume growth, and we are growing faster than the market in most EU countries.

But the business continues to be affected by macroeconomic issues.

Volume growth from brands such as JANUVIA and JANUMET, REMICADE and SIMPONI, and VICTRELIS only partially offset price decreases, other austerity measures, and increased generic erosion.

Moving on now to several core brands, I'll start with the JANUVIA and JANUMET franchise, which continued to perform very well this quarter, with sales of $1.6 billion and 20% growth, excluding exchange.

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

The JANUVIA and JANUMET franchise combined grew 15% United States and 25% excluding exchange outside of the US.

Despite multiple competitors in the market, the JANUVIA family retained over a 70% share of the global DPP-4 market.

On a full-year basis, JANUVIA and JANUMET sales reached $5.7 billion.

Our diabetes franchise now has achieved the distinction of being the highest-selling product family on an annual basis in Merck's history.

But more importantly, there continues to be opportunities to grow.

Moving to ISENTRESS, ISENTRESS continues to be an important core brand for Merck.

US sales grew 11% in the fourth quarter.

Despite new competition in the US market, we have maintained our patient share.

That means that competition is sourcing primarily from other classes.

Outside of the US, ISENTRESS sales declined 10%, ex-exchange.

But I would like to note that a major factor behind this decline was the timing of emerging market tenders.

We anticipate a return to growth in these markets.

In our cholesterol franchise, ZETIA and VYTORIN global sales grew 1%, excluding exchange.

ZETIA grew 7% globally, which was offset by a decline in VYTORIN sales.

We recently announced a resubmission of the NDA for Atozet, the ZETIA and atorvastatin combination.

We look forward to hearing from the FDA this year.

Moving to immunology, the combined immunology business with REMICADE and SIMPONI grew 18% in the quarter, excluding exchange.

SIMPONI remains an important launch brand, with $95 million of sales in the quarter.

We recently launched SIMPONI in France and Russia, and we continue to be optimistic about SIMPONI's future growth potential, competing with other subcutaneous anti-TNFs.

Moving on to vaccines, vaccines had another strong quarter of double-digit growth.

GARDASIL maintained its strong performance with over 50% growth year-over-year, driven in part by about $50 million of higher public-sector purchases.

There are a number of other factors contributing to the growth this quarter.

First, continued uptake of the male indication in the United States; second, strong uptake of the Japan launch; and third, the timing of government purchases in the emerging markets.

Since first launch in 2006, 100 million doses of GARDASIL have now been distributed around the world.

Moving on to ZOSTAVAX, sales of ZOSTAVAX were $225 million in the quarter.

We continue to see 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, with the flu season being the largest opportunity.

This year the flu season has extended into January.

We saw strong demand in January.

However, we would expect that demand in February and March will decline on a sequential basis.

We continue to see ZOSTAVAX as a good growth driver.

We estimate that only about 20% of the US population ages 60 and older have received the vaccine.

In addition, we continue to anticipate ex-US launches beginning later this year.

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

So let's begin with the emerging markets.

On a full-year basis, emerging market sales grew 8% ex-exchange.

If you also exclude REMICADE sales in the relinquished territories, emerging market sales grew 13% on a full-year basis.

In the fourth quarter, emerging market sales reached $2 billion, up 9%, and represented 20% of GHH sales.

Growth in the emerging markets was broad-based and it was across much of our portfolio.

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

China continues to be an important growth driver, reaching over $1 billion in sales in 2012.

China sales ex-exchange grew 22% for the full year and about 30% in the quarter.

The growth was driven by many products across different therapeutic areas, including diversified brands and core brands.

Moving to Japan, growth in Japan ex-exchange was 6% for the year and 9% in the fourth quarter.

Strong growth of JANUVIA, GARDASIL, ZETIA, and hospital products more than offset the biannual price cuts earlier this year.

It also offset the generic competition for COZAAR/HYZAAR and FOSAMAX.

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

Now moving on to launch brands.

Our launch products in total contributed more than $750 million in revenue for the full-year 2012.

They also represented greater than $200 million this quarter.

VICTRELIS global sales were $115 million this quarter, over 30% higher than the prior year.

A decline in US sales was more than offset by growth in international markets.

We continue to have strong share, over a 40% TRx share in the United States and well over a 50% share of patient days of therapy across international markets.

While we are pleased with our global market shares, we are seeing a contraction in some of the early launch markets, such as the United States and France.

In these markets there are still a considerable number of patients that need treatment, and we are working on market development activities.

Now moving on to 2013.

This year we have a lot of work to do to drive the top line in face of a number of challenges.

Those challenges include the full-year effect of the loss of SINGULAIR exclusivity in the United States; the loss of SINGULAIR EU exclusivity beginning later this month; other US patent expiries including MAXALT and PROPECIA; and continued austerity measures around the world.

In addition, we will also be preparing for a number of launches, and 2013 will be the following.

First, continue to launch VICTRELIS in international markets; launch GARDASIL in Japan and ZOSTAVAX.

Second, if approved, we will launch sugammadex and Atozet in the United States in the second half of the year.

And third, begin to invest in important market development activities for future launches.

So 2013 is shaping up to be a very busy year.

In closing, Global Human Health continued to drive strong performance from its diverse portfolio.

We met our goal of maintaining the top line on a constant-currency basis, overcoming the effects of the US SINGULAIR patent expiry.

We believe the business momentum of our key brands and growth in markets around the world positions us well in 2013.

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

We also have many exciting opportunities in the near term that should position us well for future growth.

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

Thank you, Adam, and good morning.

In the fourth quarter, we continued to execute against our strategy, and we achieved the financial targets we laid out at the beginning of 2012.

We accomplished a great deal and are ready to take on 2013 as we prepare for the launch of our next wave of new products.

Ken and Adam have talked about our sales performance in the fourth-quarter and full-year 2012.

As Adam described, the Merck team overcame significant revenue headwinds in 2012 to grow the top line 1%, excluding foreign exchange, on a full-year basis.

We are proud of our accomplishment on the top line.

In addition to our top-line accomplishments, we achieved full-year EPS growth, including about a $750 million reduction of our operating expenses in 2012.

Now, before I discuss our 2013 outlook, I would like to review the operating results in the fourth quarter.

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 $0.83 per share this quarter.

While we replaced much of the SINGULAIR sales decline in this quarter, as Adam described, we replaced those sales with a basket of products that have a somewhat lower gross margin.

As a result, our non-GAAP gross margin declined on a year-over-year basis to 75%.

And with more expiries coming in addition to what we saw in the fourth quarter, this mix shift is expected to continue in 2013 as we work through the EU SINGULAIR expiry and the expiry of MAXALT and PROPECIA.

In fact, in the early part of the year we expect that there will be some downward pressure from this level.

On a full-year basis, however, the fourth-quarter gross margin is a good barometer for you to consider for 2013.

Turning to marketing and administrative expenses, our fourth-quarter SG&A expenses were $300 million lower than the prior year.

More than one-third of the benefit was due to a decrease in corporate charges such as legal defense reserves.

There was also a $50 million benefit from foreign exchange.

In addition, we reduced direct selling expenses and promotional spending in developed markets.

These developed market reductions were partially offset by increased investments in the emerging markets.

On a full-year basis, SG&A spending decreased by $900 million in 2012.

While this included about a $300 million benefit from foreign exchange, management actions ahead of the SINGULAIR patent expiration reduced our SG&A spending by more than $600 million.

Over the past three years, we have significantly reduced the level of SG&A spending.

In fact, considering that half of the net merger synergies came from SG&A, we have reduced our base SG&A by about $1.75 billion.

While we are continuing to be very disciplined about spending, we don't expect to see further reductions in 2013.

In fact, SG&A may increase slightly in 2013 as we, first, invest in emerging markets to grow our core while we build out our joint ventures; second, invest to maintain our leadership position in competitive markets like diabetes; third, invest in near-term launches like sugammadex; and finally, invest in future launches like suvorexant and odanacatib.

We also expect a reversal in some of the exchange favorability that we saw in 2012.

Moving to R&D, research and development expenses in the fourth quarter were about $70 million higher year-over-year due to the $140 million upfront payment to AiCuris for the CMV program.

So what we are seeing in the fourth quarter and also on a full-year basis is that we are getting more and more disciplined and efficient in our R&D base and bringing in new programs from the outside.

For example, absent the AiCuris upfront payment, R&D expenses were slightly lower in the fourth quarter, and on a full-year basis our R&D expense would have been about $100 million lower than 2011 if we exclude the upfront payments for AiCuris and Endocyte.

Moving to tax, our non-GAAP tax rate was 23.6% in the fourth quarter, and the full-year 2012 rate was 23.8%.

This is lower than our prior guidance primarily due to a favorable ruling on a state tax matter in the fourth quarter.

Now let's turn to 2013.

Against a backdrop of an even bigger patent expiry impact, we are targeting to hold 2013 sales near the 2012 level on a constant-currency basis.

We will be investing to drive the top line and prepare for new product launches.

The changes expected in non-GAAP EPS are primarily due to the gross margin mix shift that I discussed earlier and investments to drive the top line.

Now let's turn to our guidance as outlined in our earnings release.

As noted, our 2013 non-GAAP EPS guidance range is $3.60 to $3.70.

Similar to our guidance in 2012, we expect that the underlying operating momentum of Merck's business will allow us to maintain our full-year 2013 revenues near 2012 levels on a constant-currency basis.

Now at current exchange rates, sales would be affected unfavorably by about 1% to 2% as weakness in the yen more than offsets improving euro exchange rates.

We expect to offset the patent expiries we face in 2013 with growth from JANUVIA, JANUMET, our vaccines, and other products as well as Animal Health and Consumer health, and the fast-growth markets such as certain emerging markets and Japan.

On R&D expenses, we expect our 2013 non-GAAP R&D expenses to be about the same as the 2012 level on a full-year basis.

The final element I will discuss is the tax rate.

Our 2013 non-GAAP guidance of 21% to 23% includes the benefit of both the 2012 and the 2013 R&D tax credits.

For planning purposes, you should assume that the 2012 credit will be realized in the first quarter and the credit for 2013 will be realized proportionately over all four quarters.

Speaking of the quarters, with additional patent expiries for MAXALT in the US and SINGULAIR in Europe during the first quarter of 2013, we think that the first quarter of 2013 will look a lot like the fourth quarter of 2012 from a bottom-line perspective.

The subsequent quarters should improve from that level.

So to summarize our 2013 outlook, our operations are strong and our non-GAAP EPS guidance is between $3.60 and $3.70.

On a GAAP basis, we expect to earn between $2.03 and $2.26.

In conclusion, in 2012 our goal was to drive through the SINGULAIR patent expiration.

We were able to maintain our sales line despite the expiry impact by driving growth of key products and increasing sales in the fast-growth markets.

This required commercial investment in certain growth products, which was offset by reduced operating expenses elsewhere.

This was a very ambitious and outstanding performance on the part of our Merck team.

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

We are well prepared and confident that we are on the right track to execute our strategy in 2013 as we prepare the market for our next wave of growth-driving product launches.

Thank you, and now I would like to turn the call back over to Alex.

Thanks, Peter.

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

But in order to help us get through as many questions as possible, please limit yourself to one or two questions; and note that we will not be taking follow-up questions.

You are, however, welcome to rejoin the queue if you have additional questions.

Jackie, we are ready for the Q&A.

(Operator Instructions) Tim Anderson, Sanford Bernstein.

A couple of questions.

On odanacatib, you have talked about safety obviously in the past, and today you said the filing will slip.

Without telling us what that safety issue is exactly, can you at least tell us whether that safety concern is a theoretical one, or whether there has actually been a signal of some sort that you have seen in the data that you have in hand?

Then on ZETIA/atorvastatin, I look at that as normally a lower-risk application.

But given the controversies with ZETIA in the past I would have to imagine FDA doesn't take any final action until they have results from IMPROVE-IT.

So the fact that you are saying FDA should complete its review by midyear might suggest that IMPROVE-IT could wrap up at this next interim look in March.

So I am wondering if I am thinking about this correctly in terms of IMPROVE-IT potentially stopping at the interim look.

And can you just reiterate your level of confidence in the outcome of IMPROVE-IT, whenever it stops?

Thanks, Tim, for that question.

I would like to turn it over to Peter; but just to reiterate, we continue to believe in the future benefit that is possibly associated with coming forward with both of those drugs.

So let me turn it over to Peter.

Thanks, Ken; and thanks, Tim for the question.

Tim, as you know, in July we announced that the Data Monitoring Committee, the DMC, for the study completed its first planned interim analysis and they recommended that the study be closed early due to robust efficacy and a favorable benefit/risk profile.

As a result of that we made the decision to begin to take steps to close out the pivotal trial.

And as you note, we also said that the DMC noted that safety issues remain in certain select areas, and that they made recommendations with respect to following up on that.

At that point, we reiterated the fact that our previously announced plan to conduct a blinded extension trial would allow us to further monitor these issues, as well as to continue to measure efficacy.

Really, at this point in time, that is all we can say.

We are going to be conducting, as I say, that extension trial in the double-blinded manner, and we anticipate filing in 2014.

With regard to Atozet, the combination of ZETIA with atorvastatin, what I would say there is that that file has now gone in.

It is a re-filing, as we have now conducted the clinical efficacy study to show that we are clinically -- with regard to clinical efficacy we have bioequivalence to the individual components alone.

And, of course, the individual combination of ZETIA with atorvastatin is something that is in the label.

It is currently being used.

So what we are talking about is a combination of convenience.

And with regard to IMPROVE-IT, you are correct; the Data Monitoring Committee for IMPROVE-IT, as you know, requested that there be another interim analysis.

That interim analysis is currently scheduled for March, and we will see what happens there.

With regard to confidence I'd just reiterate, as I have before, that we are very confident that lowering LDL cholesterol is a good thing to do for cardiovascular health.

Tony Butler, Barclays Capital.

Thanks very much.

Staying with odanacatib and then a couple of other pipeline questions, Peter, while we have you.

You reemphasized or re-read the July press release by saying that the DMC, when they reached 70% of the key events -- so it is roughly at least 166 events that would have occurred out of the 16,000 patients.

But the question is, in the release also it states that you would file in '13.

The notion of the extension study was documented.

So I guess the question is -- was the anticipation at the time to file on the existing data set without the extension study?

And then what changed to then therefore include the extension study, if it was to have been included all along?

Is it just simply taking longer than you would have assumed?

And then two brief comments, if I may.

Will we get any readout on the PD-1 in melanoma this calendar year?

And also on the BACE inhibitor in the Phase II in Alzheimer's.

Thanks very much.

Thank you, Tony.

You are correct that in July we said that we anticipated filing odanacatib in 2013.

As I said, we have just recently received the data from the pivotal study.

We do not have any data from the ongoing extension study.

But we have made the decision to include data from the extension study in our filings for regulatory approvals.

So that is really what I can say about that.

With regard to PD-1, I'll begin by saying that this is a very exciting mechanism and that actually unleashing the immune system so that it can now attack tumors is a very exciting area of research.

And we are certainly excited about our PD-1 inhibitor, MK-3475, which is still early in development, but which has shown significant improvement in patient outcomes.

We reported recently on over -- I think on 85 melanoma patients that were on our monotherapy.

And we saw a 51% objective anti-tumor response.

So that is really what we know right now.

We have not made a final decision as to what it is that we want -- we are going to be presenting this year, although I certainly anticipate that we will present additional data at the ASCO meeting as we move forward.

So I will just say stay tuned.

We certainly are very excited by this program.

We are pleased with the data that we have seen to date, and we do anticipate presenting additional data later this year.

With regard to the BACE inhibitor, which as you also know we are very excited about, the key developments from 2012 were, first of all, that we were able to show that one can lower CSF A-beta levels in people by over 90% without having untoward effects.

And that was a new result.

Really we had not known previously if you could lower CSF A-beta by those sorts of levels and not have something show up which was untoward.

So that then gave us the confidence to kick off a Phase II/III outcomes trial in Alzheimer's patients, and that has now started.

The design of that trial is to begin by enrolling an initial cohort of patients with mild to moderate Alzheimer's disease; and then after a set period of time to look for any safety issues that would preclude us from moving forward to Phase III; and absent any of those safety issues that would preclude us from moving into Phase III, to then move in a seamless manner into Phase III in the mild to moderate patient population.

At the same time, such a move would kick off our plans to conduct a study in what is called the prodromal patient population.

The prodromal population are basically patients with mild cognitive impairment, or MCI, that -- as judged by biomarkers -- have a higher propensity to progress to Alzheimer's disease, to frank Alzheimer's disease, in a shorter period of time.

And as you may have seen, we have announced a deal with GE to use their PET ligand to identify patients with MCI that fall into this prodromal category.

We will use their PET ligand and take advantage of the infrastructure that they are helping to establish, to allow us to enroll a prodromal Phase III study with our BACE inhibitor.

So that is really the upshot of where things exist.

We will conduct an interim analysis of the safety cohort, as I said, and we expect this interim analysis of the safety cohort to occur by the end of 2013.

Chris Schott, JPMorgan.

Great, thanks very much.

I realize you guys can't comment too much on odanacatib, but can I just maybe try a different way?

Is the signal that you are seeing here something that your raises your excitement in the commercial prospects of this drug, if it is in fact approved?

Then the second question on PD-1, just following up on those comments, how far would you estimate you are behind Bristol's development program at this point?

Is there any way you can further accelerate your development of PD-1 in melanoma?

And should we think about other indications moving into Phase II in 2013 beyond melanoma?

Thank you.

Let me start with the first question, Chris.

As we said earlier, a decision that has been made with respect to odanacatib is to include data from the extension study when we file for regulatory approval.

Then we continue to believe in the potential of this drug to meet the unmet needs that exist for patients with osteoporosis and we look forward to filing it in 2014.

So I think that is the most that we can say about that.

Chris, this is Adam.

The thing I also want to remind you is that there are 200 million women worldwide with osteoporosis, and only 20% of them are treated today.

It is a $10 billion market prior to generic Fosamax.

And if you remember that about 25% of patients can't even tolerate the bisphosphonates, and bisphosphonate use is declining, so it remains a very big, important market.

This is Peter, Chris.

Thank you for the question and to all of you, I hope you understand that really I am not trying to be difficult; it is just that our plans to present the data really are dependent on our need to maintain the blind so that we can file this file.

So therefore we are really not in a position to speak to additional information on safety or efficacy as we move forward here.

With regard to PD-1, as I said, this is something that we are excited.

We are excited about the profile of our molecule MK-3475 and what we have seen so far.

In terms of how far behind we are, I think we are very committed to this program.

We won't -- I'm not really going to speak to the competitors' programs, except to say that obviously we are very interested in being very competitive in this arena.

In terms of our commitment to PD-1, I can tell you that we are very committed to this mechanism and to this molecule.

You know that we have already shown results on melanoma.

We have started a very large Phase II study, which as you can see on ClinicalTrials.gov involves over 500 patients.

We have a study in non-small cell lung cancer which is currently in Phase I. And without going into any details because -- for competitive reasons, we are very interested in being smart about what additional indications we move into.

And that is something that is certainly of great interest.

Marc Goodman, UBS.

I guess one more thing on odanacatib.

Peter, you mentioned what has changed, I guess, since the last time we have heard you all talk is that you have actually seen a data analysis.

It's the first time we have heard you say that.

So I was curious if you made this decision alone, or if you talked to the FDA and you made the decision to wait for this additional data.

And secondly, can you remind us on the psoriasis drug that you are working on, what the hook is there and why you believe that is going to be a very important product when it hits the market?

Thank you, Marc.

With regard to odanacatib, as I said we received the data; and the decision to wait and include data from the extension study in our filings was a decision that was made internally by Merck in consultation with a small number of external experts, and not something that was done in consultation with the FDA.

So that is an internal decision that we made.

With regard to psoriasis, this is an anti-IL-23 antibody, and it is one that we have -- obviously we have gotten good results in psoriasis, which is why it is that we are moving forward into Phase III.

The proof of principle for this mechanism, the IL-23, actually comes from another drug that is currently marketed, and that is Stelara or ustekinumab, which works by blocking both IL-23 and IL-12.

In contrast to that drug which blocks both IL-23 and IL-12, our drug is specific for blocking just IL-23.

There are theoretical issues having to do with preclinical studies and genetic studies in preclinical animals, which point to two specific infections that are at increased risk in preclinical studies, which include mycobacteria, including Mycobacterium tuberculosis, and salmonella infections.

And I want to emphasize these are preclinical studies.

But what we're trying to do here is develop an antibody which is more specific and targets the cytokine that is important in psoriasis, namely IL-23, and do so in a specific manner.

Marc, just to add some context from a marketing perspective, if you look at the world-wide psoriasis market, it's expected to grow from about $4.5 billion in 2011 to almost $8 billion in 2018.

It affects about 2% to 3% of the global population.

If you look at the patients that are impacted, about 25% of them suffer moderate to severe disease that could require potentially more aggressive treatment with phototherapy or systemic therapy.

If you look at -- even with the advances of anti-TNFs and the fact that it is a life non-life-threatening nature of psoriasis, we think that additional systemic agents that can have an improved risk/benefit profile potentially, compared to the current biologics, would represent a very significant opportunity.

Mark Schoenebaum, ISI Group.

Hey, guys.

Thanks for taking the question.

I have yet another question on odanacatib.

I apologize in advance, Peter.

Can you just clarify?

Does the Company know what the safety issues are specifically that the DMC highlighted, that the DMC is watching?

And then my second question is totally unrelated.

Maybe, Ken, can you just talk a little bit about your plans for the Animal Health business?

Obviously Zoetis IPO-ing today, looks like P/E is going to be somewhere in the mid to high teens, substantial P/E premium to where Merck's shares are trading right now.

If indeed that P/E holds over time, what would be your rationale for not mimicking what Pfizer has done?

Thank you very much.

Okay.

Peter, do you want to start?

Sure.

Mark, really what I can say is that we have seen the data of the pivotal trial, and we have studied the data from the pivotal trial, and we have decided -- we have made the decision to include data from the extension study in our filings for regulatory approval.

I will just reiterate again that we continue to believe in the potential of odanacatib in patients with osteoporosis and look forward to filing that in 2014.

As it relates to our Animal Health business, I think you could see from this quarter's performance it is a very strong contributor to Merck's overall performance.

And from our perspective, we are committed to this business.

We think it is a good fit with our overall business.

The research that we do in Vaccines and other parts of our business we think actually dovetail nicely with this business.

I think as we stand here today we think it is a very good, profitable business and one that actually contributes very strongly to Merck while remaining in its own right one of the leaders in the Animal Health space.

Alex Arfaei, BMO Capital Markets.

Morning and thank you for taking the questions.

You mentioned that you are just beginning to realize the contributions from emerging markets, your joint ventures.

Would you help us, I guess, quantify the upside potential there?

Then, quickly on hep C and 5172, how would you describe your strategy in hep C given how fast the market is evolving?

Do you believe you have all the necessary pieces in your early-stage pipeline, or are you looking for external assets to complement 5172?

Thank you.

Okay, Adam, you want to start?

Hi, Alex.

So a few thoughts on emerging markets.

We continue to believe that there is significant potential for growth in the emerging markets.

And our strategy has been one to make sure that we maximize our current core brands, which includes our diversified brands, our large in-line brands, and also our launch brands; but in addition to that we believe that there is potential growth opportunities from joint ventures in some of these markets.

We have formed multiple joint ventures of which two are up and running as we speak.

If you look in China we have a joint venture with Simcere, and I attended the launch meeting where we had several hundred sales representatives for that joint venture, very motivated, very energized, and working across both companies in order to maximize some of the diversified brands.

If you look in Brazil we have our joint venture with Supera up and running.

There again we have a very sizable sales force that is really working together on diversified brands.

When I think about them, I think of them as part of our ability to continue our momentum in the emerging markets.

I don't think of it as a step-change where you should start to see a big increase at any point in time.

Instead, it is the way in which we are running our business.

It allows us to continue to grow.

And our goal has been and will continue to be to grow faster than the overall market in each of the markets that we competes in the emerging markets.

I believe that the joint ventures will allow us to continue to be successful and continue the momentum we have in those markets.

Peter?

Thanks, Alex, for that question.

As you point out, this is a fast-moving field.

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

Our focus is on MK-5172, our protease inhibitor, which we think is going to be the cornerstone of treatment regimens moving forward, and we are interested in using that drug in combination with either internal candidates like MK-8742, our NS5A inhibitor, or in partnership with others.

I will just emphasize that our goal is to develop an all-oral regimen that maximizes SVR and shortens the duration of therapy and minimizes side effects.

We recently announced, and you can see it on ClinicalTrials.gov, two new clinical trials.

The first is a 12-week regimen that contains MK-5172, our potent protease inhibitor, as well as MK-8742, which is our oral NS5A inhibitor, plus or minus ribavirin.

And that is in HCV genotype 1 patients.

The second trial that we announced and that is posted right now that we are going to conduct is a study of MK-5172 alone in combination with ribavirin in either 12- or 24-week regimens.

For this trial, we are conducting this in HCV genotype 1 patients with an IL-28 CC genotype.

The point being that if we are not able to reach -- achieve SVR with these patients because they have an IL-28 CC genotype, they are at a much higher propensity of being cured using the normal PEG-riba regimen.

So together with the FDA we worked out a strategy by which we can actually test a much more aggressive regimen, which is MK-5172 alone with ribavirin in patients.

Of course, we also have our other protease inhibitor, MK-7009, that is ongoing in Japan and showing very good progression.

Okay, operator.

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

Andrew Baum, Citi.

Good morning.

A couple of questions.

Firstly, given the margin pressures on your business, I know you have rationalized a number of your manufacturing sites already.

There seems to be considerable potential to do more.

Perhaps you could remind us the target opportunity and the timing of that.

Then second, with reference to the external opportunities highlighted at the beginning of your press release to augment your growth, perhaps you can remind us, within Pharma, from an M&A perspective, the type of framework you use in assessing assets, a particular size.

Many thanks.

Let me start with the second part first.

We look out across a spectrum of opportunities.

We try to find the best science that we can find.

Historically, I think we have done our best work in the early stages in identifying targets and projects that are more on the earlier side of the spectrum.

But as we have shown this year we are willing to do late-stage deals.

We will do them when we are interested in competing in that area and maintaining leadership in that area, and where we think there is significant shareholder value to be obtained.

And I will just turn it over to Peter there.

Yes, I believe the question was related to the manufacturing network, where we stand at that standpoint.

I will just go back quickly to the time of the merger where we had 93 plants globally across all of our businesses -- that is Pharma, Animal Health, and Consumer.

And at this point we currently operate in 75 sites around the world, so you can see that we have obviously made a fair bit of progress on the network rationalization.

We are working on plans to further reduce the size of our footprint, but those plans will take some time to implement.

As we have always said, we are three years, roughly, into the merger; that some of the items that we synergize and get benefit from come in the first couple years; but that we think the manufacturing network will probably -- we always have said manufacturing and IT type of items take more like four or five, six years even.

So at this point we think that our network consolidation effort will continue into 2016 probably at this point.

So much work still to be done, but I think really good progress by the manufacturing network team.

And we will be getting benefits from those hard efforts.

Okay.

Now we will have our final question, please.

Damien Conover, Morningstar.

Thanks for getting my question in.

Just had a question regarding suvorexant.

I think in January of this year the FDA was talking about an increased concern with driving studies for insomnia products.

I was just wondering; with the current package that you submitted, do you believe that you have addressed this heightened concern?

Then secondly, just shifting gears to potentially a smaller product for you guys, MK-7243.

I think in Europe your partner sells about $30 million.

I was just wondering if the opportunity in North America might be larger, just given this is a pretty large indication; but just wasn't sure if was enough differentiation around the product to really see a sizable impact.

Thank you.

Okay.

Adam?

Yes.

Let me start with suvorexant.

We are not going to comment on the file specifically; but when I think about suvorexant, the first thing to realize is this is a significant need.

About 30% of the population has sleep issues, and 30% are chronically treated.

It represents about 60% of prescriptions.

We have seen and we have heard through market research multiple times that patients are unsatisfied with existing therapies; that they believe there are residual effects and reduced efficacy over time.

And it is a big market.

If you look at the branded drugs, prior to patent expiries it was a multibillion-dollar market.

So we believe that a new product like suvorexant coming into the marketplace could really have a significant impact and be an important product for these many patients that are suffering from the inability to sleep.

Regarding the AIT, the allergy immunotherapy, there are about 30 million moderate-to-severe allergy sufferers in the US alone, and that is per year.

About 3 million of those receive immunotherapy shots.

Of the ones that are receiving the immunotherapy shots, only 50% of them are still on a medicine 12 months after initiation of therapy.

So there is a lot is dissatisfaction.

The people do not like getting the shots; they don't typically go back over a longer period of time.

So we view a daily sublingual AIT immunotherapy, as an alternative to shots, as a potential opportunity to increase not only the number of patients that come into the market willing to take a product for their allergy, but also those that will take it over a more sustained period of time.

Okay.

Let me close out by thanking you all for your attention this morning.

Make a few points in closing.

Merck did have a very strong fourth quarter and a good year overall.

Looking forward to this year, we expect that our underlying operating momentum will allow us to continue to maintain our full-year 2013 revenues near 2012 levels on a constant-currency basis.

We are also committed to remain focused on our core strategy and executing it, including advancing and augmenting our pipeline.

And today's news that we have decided to include data from the extension study in our filing for regulatory approvals should be one that doesn't cause you to be confused about our commitment.

And I would like to underscore that we continue to believe in the potential of odanacatib to address unmet medical needs of patients in osteoporosis; and we also look forward to advancing additional filings and to approvals this year for suvorexant, then capitalize Atozet as well as the sugammadex compound which is marketed as BRIDION.

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

Thank you.

This concludes today's conference call.

You may now disconnect.