默克藥廠 (MRK) 2013 Q2 法說會逐字稿

Good morning, my name is Andrea and I will be your conference operator today.

At this time I would like to welcome everyone to the Merck second-quarter 2013 earnings call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions).

I would like to now turn the call over to your host, Joe Romanelli.

You may begin your conference.

Thank you, Andrea, and good morning, everyone.

We would also like to say good afternoon and good evening to everyone listening outside the United States.

Welcome to Merck's second-quarter 2013 conference call.

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

First, there are a number of items in the GAAP results such as acquisition related charges, restructuring costs and certain other items.

You should note that we have excluded those items in our non-GAAP reconciliation tables and you can see this in our press release in table 2. This will give you a better sense of the underlying performance of the business.

There are three tables in the press release.

The first table is the GAAP results; table 2 reconciles our GAAP P&L to the non-GAAP results for the second quarter; and table 3 provides the sales performance for the Company's business units and our products both on a reported basis and excluding exchange.

During the call, we will refer to table 2 when we discuss the P&L and table 3 when we talk about revenue performance.

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

Such statements are based upon Merck's current beliefs of management and are subject to significant risk and uncertainties.

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

The company's SEC filings including Item 1A in the 2012 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 forward-looking statements made this morning.

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

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

You can also find our earnings release and all the tables there as well.

So with that this morning I am joined by Ken Frazier, our Chairman and Chief Executive Officer; Adam Schechter, our President of Global Human Health, who will update you on our product and geographic performance; Peter Kellogg, our Chief Financial Officer, who will review our P&L and provide an update on our outlook for 2013; and lastly, Roger Perlmutter, our President of Merck Research Labs, who will provide you with an update on some of our key programs.

With that I would like to introduce Ken Frazier.

Ken?

Thank you, Joe.

Good morning, everyone.

It is a pleasure to be here again today to provide an update on our performance and to highlight some of the key events from the quarter.

We continue to focus on our core strategy.

In so doing, we will build shareholder value by prioritizing investments in our best commercial growth opportunities with key in-line products and in innovative R&D.

Second, making disciplined decisions regarding the allocation of resources and managing our costs effectively.

This approach is especially critical in a period when we are navigating significant patent expirations and adapting to the global healthcare environment.

This quarter our business momentum accelerated while we continued to manage our costs.

We believe these results more accurately reflect the strength of our underlying portfolio when compared to the first quarter of this year.

We are still working hard to improve the competitive position and growth potential of key brands like JANUVIA which will allow us to drive our topline growth in the future.

In addition, we continue to manage our expenses and are maintaining our EPS guidance for the year.

Peter Kellogg will provide more detail on our revenue and cost assumptions.

For the quarter, we delivered an EPS of $0.84.

This reflected underlying sales growth of 3% excluding the impact of foreign exchange and patent expiries.

The growth was driven primarily by our Global Human Health business including strong performance from our diabetes, immunology and vaccines franchises.

In total, seven of our top 10 products grew in the second quarter.

As always, Adam will provide more detail on specific product performance.

The fundamentals of our complementary businesses, Animal Health and Consumer Care, remain strong.

We continue to view these businesses as important components of our diverse portfolio.

In terms of geographic performance, we grew 10% in emerging markets in the second quarter, excluding exchange.

In the past several months, I have had the opportunity to visit Brazil and Korea to see firsthand both the tremendous potential of these markets and the extraordinary enthusiasm of the MSD colleagues there.

In Korea for example, our diabetes and vaccine businesses are performing particularly well.

The emerging markets now account for approximately 22% of our pharmaceutical sales with China continuing as a key growth driver.

Moving to the longer term view, we remain committed to pursuing innovative science that translates into medically important products.

To sustain our ability to do so however, we are mindful that we must continue to find ways to improve our cash flow and build shareholder value over both the short and long term, a commitment we also take very seriously.

One way we demonstrate our commitment to building value in the short term is by returning cash to shareholders.

Year to date, we have returned nearly $9 billion to shareholders through both our dividend and stock buyback.

We have repurchased over 120 million shares including our accelerated share repurchase in May.

Longer-term shareholder value is of course driven by innovative R&D and improving the return on R&D investment.

Roger will share his views in a moment but I would like to comment on why we believe innovation is the path to sustainable value and needs to remain the cornerstone of Merck's efforts despite challenges like the recent suvorexant and sugammadex delays.

There is an increasing need for innovative treatments that offer meaningful differentiation to patients and demonstrate value to payers.

This is true for chronic diseases like diabetes but also in areas of tremendous scientific opportunities such as cancer amino therapies and neuroscience.

I am excited about the programs like our anti-PD-1 for oncology and our base inhibitor for Alzheimer's disease that have the potential to alter the course of medicine.

With the opportunities we see before us, I want to be clear that we intend to aggressively manage our costs in the short term and our fundamental cost base over the long term.

We need to do this in order to preserve our ability to invest in our future and have the flexibility to respond to the opportunities and challenges presented by the global healthcare environment.

In the second quarter, we continued to take out costs and prioritize our investments.

We are doing this while supporting future growth in core brands and in the pipeline.

Let me share two examples.

First, with JANUVIA, we continue making the necessary investments behind this franchise to ensure that we maintain our leadership position in the increasingly competitive diabetes market and maximize opportunities for future growth.

Second, with PD-1, we have created a strong expert team with streamlined decision-making.

We are committed to making clinical investments to ensure that we fully realize the potential of this important product and bring it to patients as quickly as possible.

In summary, we are committed to driving topline performance with key growth products in key geographies, advancing and augmenting our pipelines and aggressively managing our cost base.

By doing these things well, we will preserve the ability to invest in our future, continue to generate strong cash flow and drive shareholder value and return over both the short and long term.

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

Adam?

Thank you, Ken.

Good morning, everyone.

This morning I will focus my remarks on the performance of our core products and our core markets.

Let me begin with our overall performance.

Human Health sales declined 12% in the second quarter.

Our topline results continued to reflect the loss of exclusivity of SINGULAIR, PROPECIA, CLARINEX and MAXALT and weakness in the yen.

Excluding sales from these products, our underlying business grew 4% on a constant currency basis.

Key contributors were JANUVIA and JANUMET, SIMPONI and our vaccine business.

So let me provide some more details.

I will start with the JANUVIA and JANUMET franchise.

The franchise had sales of $1.5 billion and 10% growth excluding exchange.

The franchise grew 9% in the United States and 11% in international markets.

In the United States, demand, price and inventory contributed to growth.

With regard to demand, we were able to maintain a 75% TRX share of the very competitive DPP-4 market.

Volume grew slightly by about 1% this quarter.

Regarding price, we did see a benefit this quarter from price.

We have increased price over the last year but we have also seen increased rebate and pricing pressures as competitors seek to improve their formulary positions by increasing discounts.

Finally on inventory.

Our customers increased their inventory levels by about $30 million in the second quarter.

If we excluded this inventory benefit, we believe our sales would have grown by of about 5% in the United States, in line with our expectations.

In international markets, JANUVIA and JANUMET had good volume growth in every region around the world and maintained market leadership with a 70% global market share.

Now let me touch on our outlook for the rest of the year.

We continue to expect mid single-digit sales growth in the United States which excludes channel movements that are difficult to predict.

We also continue to expect low double-digit growth excluding exchange internationally.

In the United States, we continue to invest to change the current TRX trend.

We have focused our resources on JANUVIA to drive demand and to defend our strong leadership position in a highly competitive market.

Globally there continues to be good growth opportunities in the diabetes market and we are positioned well with the market-leading DPP-4 inhibitor.

So moving now to ISENTRESS.

ISENTRESS sales were $410 million which represents about 5% growth.

In the United States, we are maintaining our patients there despite new competition.

Outside of the US, ISENTRESS continues to have good volume growth offset partially by pricing pressure in Europe and timing of emerging market purchases this quarter.

In our cholesterol franchise at ZETIA and VYTORIN global sales were up by about 1% over the prior year.

ZETIA growth was partially offset by a decline in VYTORIN sales.

We are currently launching LIPTRUZET, the combination of ZETIA plus atorvastatin in the US.

This product reinforces the benefit that this family of products can provide to many patients who continue to have high LDL cholesterol despite the wide use of statins.

Moving to immunology, the combined immunology business consisting of REMICADE and SIMPONI grew 11% in the quarter excluding exchange.

The growth was driven mostly by SIMPONI.

Sales of SIMPONI grew 60% to $120 million this quarter.

We are continuing to see a positive impact from the launch in France and a reintroduction of the auto injector in Germany.

Last week we received a positive CHMP decision for an additional indication in ulcerative colitis and we look forward to the potential approval later this year.

Moving to VICTRELIS with global sales of $116 million this quarter, growth in emerging markets was offset by continued contraction of the hepatitis C market in many countries including the United States.

Lastly moving to our vaccines business which had another strong quarter, GARDASIL maintained its strong performance with 20% growth year-over-year.

Second-quarter sales benefited from continued uptake of the male indication in the United States and timing of government purchases in Latin America.

Those are partially offset by lower sales in Japan.

In Japan, the government recently suspended the proactive recommendation of HPV vaccines.

We anticipate this decision will have a significant negative impact on the rest of year's sales for GARDASIL in Japan.

For reference, sales of GARDASIL were $140 million in Japan last year.

We are working with and we are providing information to the government on the vast amount of safety and efficacy data available for GARDASIL.

On the other hand, we are pleased that the Minister of Health in Brazil recently announced a national immunization program with GARDASIL to begin in 2014.

Moving on to ZOSTAVAX, ZOSTAVAX sales were $140 million this quarter.

As we had expected, sales in the United States declined sequentially due to seasonality.

We expect the second half of the year to be stronger than the first half and the strongest quarter will likely depend on the start of the flu vaccination season.

We continue to see ZOSTAVAX as a key growth driver.

In the United States, we estimate that a little over 20% of the population ages 60 and older have received a vaccine to date so there remains opportunity for growth.

Internationally, we are just beginning launches in a few Asian markets including Korea and we continue to anticipate our first European launch in the UK this fall with additional markets in 2014.

Now I would like to touch on our performance on a regional level.

In the United States, Europe and Canada, sales continued to be affected by the loss of exclusivity of SINGULAIR, MAXALT, PROPECIA and CLARINEX.

Excluding these products, US sales increased by 7% and sales in Europe and Canada were flat in the second quarter.

Japan sales declined 4% ex-exchange.

That was due to an increase in the utilization of generic versus branded products and lower sales of GARDASIL which I mentioned earlier.

Emerging markets had another good quarter with 10% ex-exchange sales growth.

That included 10% growth in China.

Growth in the emerging markets was broad-based.

It came from our base business, our new products and our joint ventures.

In key emerging markets, our growth is at or outpacing the overall market and we expect to continue to deliver strong growth in 2013.

In closing, the Human Health business demonstrated growth of our underlying portfolio of key brands.

In August we will annualize the SINGULAIR expiry in the United States but we also anticipate generic entry in the United States for TEMODAR.

Despite the significant number of patent expiries we are facing this year, I am confident that we can drive growth of our strong and our diverse portfolio.

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

Thank you, Adam, and good morning.

As you heard from Ken and Adam, our core brands performed well this quarter.

Furthermore, we continued to manage costs effectively while investing for future growth.

Additionally, we executed a significant capital initiative in the quarter.

Our confidence in our future cash flows and the historically low cost of debt allowed us to return cash to shareholders in the form of a $5 billion accelerated share repurchase.

This accelerated repurchase is a key component of our goal to buy back $7.5 billion of shares within the first 12 months of our $15 billion repurchase program announced in May.

These results and actions demonstrate that Merck is committed to improving our performance in the short term, investing for the long term and continuing to allocate capital in a shareholder friendly manner.

This morning I will briefly talk about our performance in the second quarter and I will discuss our outlook for the remainder of 2013.

My remarks will focus on our non-GAAP financials.

Starting on the bottom line, we earned $0.84 per share this quarter compared to $1.05 in the prior year.

On the top line, total Company sales declined 8% in the second quarter excluding an unfavorable exchange impact of 3%.

As Adam said, sales increased 4% in our pharmaceutical business if you exclude generic erosion and foreign exchange.

Animal Health sales increased 1% year-over-year excluding exchange driven by companion animal and poultry businesses.

In Consumer Health, we had a one-time unfavorable adjustment to sales this quarter.

Excluding this adjustment, Consumer Health sales would have been up 4% on a constant currency basis.

Moving to other revenues, we saw an increase in supply sales to AstraZeneca in the second quarter.

Despite this we continue to expect that supply sales will decrease as we approach the May 2014 US patent expiration for Nexium.

At the PGM line as previously discussed, generic erosion of high gross margin products also created a 2.5% headwind on the gross margin this quarter.

As a result, our non-GAAP gross margin declined on a year-over-year basis to 75.7%.

As we indicated previously, we expect the full-year gross margin ratio to be about 1% lower than 2012 due to this mix shift in our sales.

Turning to marketing and administrative expenses, our second-quarter SG&A expenses were about $60 million lower year-over-year.

Excluding foreign exchange benefits and some one-time corporate charges, we reduced our SG&A spending by about $100 million this quarter.

Similar to last quarter, we continued to proactively reduce spending.

As a result of our cost reductions, we continue to expect SG&A spending in 2013 will be lower than 2012.

Moving on to R&D, research and development expenses in the second quarter were $144 million lower than prior year.

However, recall that last year we had a significant upfront payment of $120 million for our agreement with Endocyte.

Excluding this, R&D expense would have been relatively flat.

Other income and expense was about $100 million higher year-over-year primarily as a result of foreign exchange losses and interest expense.

In the month of May, we concluded a $6.5 billion debt offering at a blended average interest rate of less than 2%.

This debt offering funded our accelerated share repurchase and we now have new interest expense and lower shares outstanding.

Moving to tax, our non-GAAP tax rate was 21.9% in the second quarter.

We are maintaining our estimated full-year tax rate to be in the range of 22% to 23%.

The tax rate for the second half of the year will be considerably higher compared to the rate in the first two quarters.

Now turning to the 2013 outlook.

On the bottom line, we are reconfirming our 2013 non-GAAP EPS guidance range of $3.45 to $3.55.

On a GAAP basis, we expect to earn between $1.84 and $2.05.

Now for additional color on the outlook for the rest of the year, let's start with revenue.

During the second quarter, the US dollar continued to strengthen against many global currencies.

If today's foreign exchange rates persist, we would expect full-year 2013 sales to be negatively affected by about 3 percentage points which is greater than we had previously anticipated.

Given our performance in the first half of 2013, the continued strength of the US dollar, and select product trends, we have adjusted our full-year revenue expectations.

We now anticipate that total Company revenue will be 5% to 6% below 2012 including the negative impact of foreign exchange.

While we have adjusted our sales guidance, we are maintaining our EPS guidance through cost management in SG&A and R&D.

Accordingly, we now expect R&D expenses in 2013 to be lower than 2012.

Moving to the quarters as we think about the back half of the year, we see improvement in EPS performance compared to the first half of the year.

Additionally, we anticipate that the fourth quarter will be higher than the third quarter from an EPS perspective.

So in conclusion, this was a solid quarter where we successfully executed a major capital initiative to return cash to shareholders.

We also drove growth in our key brands while managing costs and we continued to step up our efforts on our key R&D programs.

Thank you.

Now I will turn the call over to Roger who will provide an update on MRL.

Roger?

Thanks, Peter.

During the second quarter, we made steady progress in clarifying the registration process for Merck's next wave of products and advanced our clinical trials in important areas.

For suvorexant, our first-in-class orexin antagonist for the treatment of insomnia, the FDA has provided a clear path to registration through their complete response letter which we received at the end of the quarter.

We're making good progress in preparing 10 milligram and 5 milligram suvorexant dosage forms to enable initiation of therapy at lower starting doses which was the principal change requested in the FDA's review.

We hope to be able to begin stability testing of these materials in the very near future with a goal of submitting definitive data in response to FDA's requests in the first half of 2014.

As was demonstrated at the FDA Advisory Committee review in May, suvorexant has distinctive therapeutic properties which we believe will enable it to become an important treatment for patients suffering from insomnia.

Turning to other regulatory actions, two weeks ago we announced that the FDA had postponed its Advisory Committee review of sugammadex, our parental agent for the rapid reversal of certain types of neuromuscular blockade during surgery.

This delay will enable the FDA to complete audits of certain US and European study sites that were involved in generating data contained in our submission.

We are working closely with the FDA to facilitate these audits and we will have more to say about the registration timeline for sugammadex once the FDA has completed this review.

As you know, sugammadex is already registered and more than 40 markets around the world.

Also during the second quarter, we had the opportunity to present encouraging data on MK-3475, our monoclonal antibody directed against PD-1 for the treatment of malignant melanoma at the American Society for Clinical Oncology meeting in Chicago.

This immunomodulatory approach to the treatment of malignant disease is also under study in patients with non-small cell lung cancer.

We hope to present preliminary results observed in such patients in October at the International Association for the Study of Lung Cancer meeting in Sydney.

Our data thus far have encouraged us to begin a Phase II/III study in non-small cell lung cancer for which enrollment is just beginning.

We are also continuing to study responses in patients with other malignancies where we believe treatment with MK-3475 may be beneficial by itself or in combination.

New studies have recently begun in patients with hormone receptor negative breast cancer, uroepithelial tumors, head and neck cancer, and in certain patients suffering from colorectal cancer.

In the preliminary presentations at the ASCO meetings in Chicago, it was noted that immunomodulatory agents offer great promise for the treatment of desperately ill patients suffering from malignant disease.

Our portfolio includes not only MK-3475 but other immunomodulatory agents which have emerged following a systematic evaluation of cell surface proteins involved in immune regulation.

With respect to MK-3475, you will recall that we have received breakthrough designation from the FDA for this therapy and we are in very close communication with the agency regarding requirements for an evaluable data set in the setting of advanced melanoma.

Meanwhile our MK-8931 program, a small molecule inhibitor beta-secretase for the treatment of Alzheimer's disease continues to enroll patients in advance of a safety review which we believe will complete at the very end of this year.

Satisfactory completion of this review will permit expansion of the study for formal efficacy testing.

In this pivotal study, patients with mild to moderate Alzheimer's disease will be evaluated for the effect of MK-8931 on cognitive performance and activities of daily living following 78 weeks of treatment as compared to placebo.

Finally, during my first three months in this role at Merck, I have found much to be proud of in terms of the quality of our programs and our people.

However, I see the clear need for changes that will strengthen the return on investment in R&D.

My review has focused on each critical area of performance -- programs, processes and people, and I have begun to make adjustments along each dimension.

From the programmatic point of view, we are moving to narrow our focus to make certain that products with unambiguous clinically meaningful advantages receive our complete attention.

With respect to process, the governance structure has been flattened considerably removing some layers of decision-making.

Much has already been achieved here but more will be required to improve our efficiency in providing resources to leading projects.

Finally with respect to people, we are moving quickly to build our leadership in R&D.

I have specifically brought our licensing business development function into my senior leadership area.

As for all large biopharmaceutical companies, licensing plays a key role in the development of breakthrough therapies.

I expect Merck to participate fully in this area.

Additional details of our revised R&D strategy will be the subject of future reviews.

I am very much looking forward to sharing this information with you.

Ken?

Okay.

So thank you, Roger, and thank you Andrea.

Before we move into Q&A, just to remind you that we're going to try to get through as many questions as possible if you could keep your questions to one or two and if you have additional questions if you could rejoin the queue, this way we can get to as many callers as possible.

So, Andrea, if you could go ahead and open up the first line for questions.

Marc Goodman, UBS.

Good morning.

A couple of things.

First, can you comment a little more about Animal Health and Consumer?

Both areas seem to be a little weak even Consumer excluding that one-time change you made?

You talked about additional products for immunotherapy.

Can you talk about how quickly you can get those into demand?

And then R&D, can you talk about some of the changes that allowed you to take spending down for the quarter?

Thanks.

Let me start with the Animal Health and Consumer questions.

So I would say that overall reflecting on this quarter, it was an okay quarter for those businesses but if you step back, you will see that they grew low single digits and as we looked back beyond this quarter, we think both are performing well.

So I would not let one quarter be the answer for those two businesses.

As I said, we continue to think of them as being complementary businesses that will help us over the longer term contributing to our top- and bottom-line growth.

Thank you, Ken.

I would add, I think in the Animal Health business, they are in the middle of rolling out the ACTIVYL product line which we are very excited about as well as ZUPREVO.

And I think I would remind you that last year in the second quarter, we actually has some very strong performance as we picked up some business where there were out of stocks with some of our competitors.

So we are probably in the Animal Health business lapping a pretty strong prior-year.

For your other questions maybe I will pass it over to Roger.

So just, Marc, just a couple of things.

With respect to the immunomodulatory agents, there is a whole set of different cell surface molecules that are involved as checkpoint regulators if you will that control the response of T lymphocytes to a stimulus.

And we have had the opportunity to inventory these to develop antibodies directed against a whole set of them and to look at them and preclinical studies.

We hope to be advancing those into the clinic relatively soon.

You will see them come up on clinicaltrials.gov and I will have more to say on them in subsequent quarters.

With respect to expense, there is no single category of expense control that we can point to but there are a whole variety of things that I have been able to do in terms of reassigning resources and in that process have pulled back on some of the spending levers which enabled us to reduce our expense now and will going forward as well.

Chris Schott, JPMorgan.

Thanks very much.

Just had two questions.

The first is on JANUVIA, obviously we saw a rebound in reported 2Q growth but it looks like prescription volume growth at least in the US is still fairly low.

I guess my question is do you believe you are seeing a benefit from the additional resources you put on the franchise earlier this year?

And maybe more broadly, talk about the overall DPP-4 market at this point.

I guess as we start to annualize the TCD benefit, do you believe you can re-accelerate growth for this category?

My second question was just coming back to some of the comments that Roger had made about the licensing of assets.

I guess in thinking a little bit more, should we think of this as a greater focus on M&A from Merck that we have seen in the past and is that focus more in early stage assets or are those for the achieved proof of concept?

Thanks very much.

Okay.

Let me start with the second one first.

I would just say that for us when we think about capital allocation strategy, one of the most important things as Roger said is to augment the pipeline and that means looking for the best technology that we can find, the best opportunities we can find that are value creating opportunities and that will remain a major priority.

And I know for Roger, it is even a greater priority.

So why don't I turn it over to Roger?

Chris, just let me emphasize as I think I did at the first-quarter earnings call that I am really interested and really focused on products and so it is to me less important that we consider the stage and more important that we consider what is the potential value of this new therapeutic entry?

Does it have unambiguous meaningful clinical impact that can change the practice of medicine and bring important benefits to patients suffering from grievous illness?

That is the critical point and I am prepared to go after those wherever those exist and I know Ken and Adam and Peter are completely on board with that.

And with respect to your JANUVIA question, I will turn it over to Adam.

But again, we are pleased that we saw the product perform better this quarter versus the first quarter.

We think it is rebounding and we are continuing to provide tremendous support behind it.

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

Let me give you some additional context in the US and I will also give you a little bit more color outside the US and how we think about it outside the US.

So as I discussed in the US, we had 9% growth and I tried to give you some context of that by breaking it down where we had 1% that with volume, 4% was inventory and the rest was price.

The real key is changing the TRX trend and that is what we are frankly focused on.

The real issue, Chris, is that we have a 75% market share in the US despite a very significant number of competitors.

So it is not about trying to gain more market share.

It is really about getting sulfonylurea over into DPP-4s of which we are the lion's share.

Typically with multiple new entrants in a market you see a lot of class growth.

We don't see a lot of class growth despite all of the new competitors that have come into the marketplace.

So the way for us to change the trend is really to focus on the switch from sulfonylureas and sulfonylureas still represent about 35% of the patient days of therapy.

So there is still a big opportunity there for us to go after.

So what we have done is we have increased our focus.

We now have dedicated salesforce and they are out there, they are promoting, they are engaged.

In addition to that, we have increased our promotion spending and our print direct to consumer advertising.

All of our focus now is on the Sulfonylurea utilization.

Up until the first quarter this year, most of our focus was on the TVD opportunity that is no longer there.

So it really is about sulfonylureas.

The good news is that we have maintained our strong managed care access in the US so we have access to our product in over 80% of the patients we have preferred access and now it really is about executing on the sulfonylureas strategy in the United States.

Outside the United States, we still have a very significant opportunity and every region outside the US had strong volume growth.

The one thing I think is important that although we had 11% growth ex-FX, the big difference between ex-FX and FX was the yen.

We have a very significant amount of our sales in Japan for JANUVIA.

In Japan you may recall the DPP-4 class is the number one class of oral diabetics in Japan.

It is ahead of metformin, it is ahead of sulfonylureas and we have by far the leading market share.

At the same time every other quarter we get supply sales from our comarketing partner which happened this quarter.

So when you look at our success in Japan plus the supply sales coming in lumpy, you can see how the yen would have a very significant impact on our sales when you don't expect adjust for exchange.

That is the difference primarily for the underlying business performance being very strong with what you see including foreign exchange.

Outside the US, we continue to anticipate low double-digit growth and we see that we are getting that in volume and I think the opportunity remains very strong there for us.

Tim Anderson, Sanford Bernstein.

On the new guidance changes, this is the second time this year that you are kind of changing guidance albeit here you are not changing earnings guidance.

And the revenue guidance that is weaker is not just foreign exchange which is something that is out of your control.

Ken, when you first took over at Merck, you withdrew long-term guidance that was standing at the time.

So my question is that kind of a higher level here, what is happening within the Company such that numbers are seeming to move around as much as they are?

Then going back to the outlook for mergers and acquisitions from here, historically Merck did not do big mergers until it did Schering-Plough back in 2009.

What is the outlook for M&A from here in terms of deal sizes?

Are you going to revert back to really only looking at bolt ons or are you considering midsized targets as well or what exactly?

Thanks for the question, Tim.

Let me just start by saying we of course maintained our EPS guidance and so I want to make that very clear.

In terms of what is happening with the sales, you heard Adam talk about the foreign exchange but there also have been during the course of this year, we took on some I think at the beginning some pretty ambitious revenue targets given the fact that we were facing major patent expiries.

That is how we tried to deal with the situation last year.

That was our undertaking this year.

We have seen some things that have impacted product trends this year including JANUVIA.

We have seen the warehousing in HCV just to pick a couple of major growth drivers that we have seen an impact on this year.

I want to just underscore that we take our guidance very seriously.

During the course of this year as you know, we have seen a negative impact on full-year sales of about 3% for foreign exchange but we have also seen some other impacts that have hit us like this quarter there was a one-time charge for MCC.

And I would also point out that if you look at our overall performance, you can see that we are managing costs in order for us to continue to deliver our bottom-line EPS guidance which again, Tim, I take very seriously.

On the M&A front so, Tim, you kind of went through the chronology of Merck for a long time haven't done any really big M&A deals I guess and then we did the Schering-Plough deal.

I think as we go forward really in many ways we are thinking a lot about the product portfolio in the business we have.

I think I would reiterate a lot of what Roger commented on relative to making sure we have breakthrough products and really exciting products.

And if that ends up leading us to business development deals or joint ventures or M&A, I think we are comfortable with any of those.

I think as Ken commented earlier, we really do talk about our capital structure as having the number one goal of supporting the strategic needs of the business and so we are certainly always maintaining a position to be able to do that.

That said, we also don't want to build up inefficient balances on the balance sheet so that is why we have had a more proactive capital structure program recently.

But in no way does that say that we wouldn't be doing the right things to build the pipeline and we are always on the prowl looking for the right things with great assets that are out there.

I will just underscore what Peter just said.

I think from our standpoint looking for M&A deals that would be sensible value creating bolt-on deals is something that we would be very interested in doing but we have tried to become and remain a very disciplined Company when it comes to paying for assets so that we can actually create shareholder value with them over the longer term.

So deals, the number one priority if we can create value.

We have enhanced our share repurchase.

We obviously remain committed to our dividend but in the long term, it is products that drive this business and that is why we are going to continue to look for sensible opportunities to augment our pipeline whether it is licensing or bolt-on M&A deals.

Jami Rubin, Goldman Sachs.

Roger, a question for you.

Merck issued a press release about a month ago providing a sort of outline on R&D restructuring which involved removing layers of management.

Today you are talking about lowering R&D spending for 2013 versus 2012 and narrowing your focus.

Just curious to know if you see this R&D restructuring process as more iterative in nature or should we expect more substantial change ahead involving paring back on your specific therapeutic focuses, meaningful change in the way you allocate capital and R&D.

Just wondering if there is more big news to come with respect to what you are doing to improve ROIC and R&D?

Secondly, again on PD-1, just wondering if you can update us on your views on combo studies, where you are with that; if you are seeking to combine your drug with a CTLA4, and when we can expect to see news on that front.

Thanks.

So, first of all, with respect to R&D structure and to lowering expense, as I indicated, the goal is to focus our very substantial resources on the programs that matter the most and give them our complete attention.

There will be a series of changes that take place in order to improve the efficiency of the process.

And as that goes forward, of course, we will communicate that to you.

But our expectation is not that they are going to be big enormous changes that will be announced in the way that you describe.

With regard to PD-1 we are interested, first of all, of course in delivering on the monotherapy promise in melanoma and in lung cancer.

And as you know when we presented these data at ASCO, there are very impressive response rates that we have seen in patients with melanoma who have refractory disease who have failed all prior therapies.

And naturally, we want to bring the benefits of that therapeutic intervention to those patients.

At the same time, we also recognize that there will be opportunities to combine immunoregulatory modulators, our anti-PD-1 therapy 3475, with other agents, both our own internally as well as others from other companies.

It won't surprise you to know that a lot of companies are interested in working with us on that.

We have had discussions with many of them, and we will be talking about these combinations as we announce more results for the PD-1 program.

Tony Butler, Barclays Capital.

Thanks very much.

Ken and Peter, while you have reiterated guidance for the full year and I may have missed this, what is the change from Q1 on the GAAP full-year guidance, which I think is down now about a dime?

Then, Roger, on 8931, the safety readout, will that be at a clinical meeting, [CTAB], for example, in November or would you expect that at a press release?

Would there be any data coming out on the base inhibitor in the second half?

Thanks very much.

I will turn the first question over to Peter but from an operating standpoint, we are reiterating our EPS guidance.

So in the GAAP P&L, there are some items that we actually exclude from the non-GAAP because they can be lumpy and it goes back to in many cases the restructuring or the merger accounting.

Now in this case, we actually do have some adjustments to our R&D intangibles that we actually booked in the second quarter and that is simply looking at either products as well as commercial intangibles I should also highlight.

And so that is all part of the merger accounting.

When you go through a major merger, you look at the balance sheet and the items that are coming through and you actually allocate value both to the pipeline in the form of in-process R&D intangibles as well as the commercial products which are intangible commercial assets.

Then on a quarterly basis, we work very closely in monitoring that very accurately in terms of are the expectations of those products all delivering exactly what we thought.

And from time to time, something happens in the pipeline perhaps and that causes us to write down and in-process R&D intangible or conversely perhaps the commercial trends aren't quite as robust as we had originally thought and so that would cause us to trigger a write-down or a reduction of the asset value in the intangible for a commercial asset.

So primarily when you look at the change in the EPS at the GAAP level, what you are seeing are some of those evaluations that we go through on a quarterly basis where we actually change the value of intangibles of that is primarily the difference that you see in the GAAP EPS that is incremental to what you see in the non-GAAP.

And Tony, I apologize for getting into that much accounting but that is really what you are seeing.

Tony, with respect to 8931, the structure of the program is that we have an initial phase in which we analyze -- as I said, we enroll and analyze a set of patients over a three-month period.

Each patient exposed for three months in order to look at dose ranging and to look at safety tolerability.

And based on those results, we then proceed into our large Phase III study.

We believe that we will complete that safety run-in period including the three-month drug exposure by the end of this year.

Our hope and belief of course is that safety and tolerability will be expected and we will move on into the large efficacy portion of the trial.

If there were any problem of course we would let you know and if we proceed into that, we will let you know about that as well and ultimately those data will be presented in a scientific meeting.

So you can expect to hear about it at the beginning of 2014.

Mark Schoenebaum, ISI Group.

Thanks a lot for taking my question.

First of all, congratulations to Adam and his team especially on the US JANUVIA and as you know there is probably a lot of consternation around that number on the street and you guys delivered.

So my questions are mainly are around that.

Number one, you said that there was a $30 million inventory (inaudible) in the quarter.

Can you just remind us -- I believe there was a $70 million draw down last quitter so there has been a fair bit of movement here.

Has that stabilized?

Should we expect further movements going forward, yes or no?

Then I heard a couple of numbers thrown around and I got a little bit confused.

So just a clarification.

What exactly was the price benefit in the US year on year?

And then the ex-US, can you update us on what is going on with AMNOG and [ICKWIG] in Germany?

There has been some I know movement over there and I guess you guys came out a little bit ahead of your competitors.

But could you walk us through the potential scenarios there?

I know no one knows what is going to happen but what are some of the potential outcomes?

Thanks so much.

Absolutely, Mark.

It is important that I try to give you as much specific as we can because it is such a big growth driver for us.

And if you look at JANUVIA, what I said was that of a 9% US growth, about 1% was from volume, 4% was from inventory, the rest was from price.

So that makes about 4% price.

You have to be careful extrapolating that over every quarter because mix can have a significant impact on how much price comes through at any point in time.

Also the timing of price increases makes that a little difficult for you to try to predict and look for it to be the same quarter over quarter.

With regard to the inventory, we did see about $30 million of inventory movement this month which I mentioned.

On the base of business that we have, it is very, very small, $30 million, so it is very difficult to predict the channel movements from one quarter to another.

We are not seeing large channel movements in terms of how big the product is in the United States, so relatively small but small channel movements can have $30 million to $50 million impact.

So that is why for the guidance that I gave for the rest of the year, I said mid-single digits for the US but I excluded the movement of channel in there because you can't predict $30 million to $50 million of channel movement.

It is within half a day sales or something like that.

So that is how I think about the inventory moving forward.

With regard to on ICKWIG, so on July 1, they unannounced the outcome of their assessment of JANUVIA and some other DPP-4s.

We were pleased that they've recommended that there is additional benefit for JANUVIA when added to metformin.

We are very pleased with that.

That is the beginning of the process.

The next step is a decision on the added medical value by the GBA and that is expected in the fourth quarter of this year.

Once that happens, you actually go into the reimbursement discussions so we are happy with where we are today.

We are very pleased with the initial assessment but there is still a lot more work for us to do and it will be another six months before we probably know the final outcome of that.

Just to put that in perspective for you, Mark, if you look at Germany, it represents less than 5% of our JANUVIA family sales to just give you a sense of the magnitude of that.

So we are excited with what has happened thus far but there is still a long way to go.

David Risinger, Morgan Stanley

Thanks so much.

I have two questions and they both relate to some cross currents.

And so Ken, I am hoping that you can clarify for me and I guess for investors on the call with respect to the Animal and Consumer businesses, I think you described them as complementary today.

But there has been a lot of hoping and dreaming about Merck divesting these businesses or re exiting these businesses on Wall Street.

So can you just sort of set the stage right in terms of how investors should think about them as being core to Mark that you will be building them or you will consider exiting them?

And then second with respect to R&D cross currents, I think Ken, you described how important it was to invest in R&D but many on the street have been hoping for significant R&D cuts.

So if you could maybe settle that debate and frame whether you expect R&D to remain flattish over time or whether there are meaningful cuts ahead?

Thank you.

So let me start with the Animal Health and Consumer conversation that we had today.

So first of all, I have been saying for years that I think that they are complementary to our business but I also have been saying that we periodically assess our overall business strategy based on fit and based on business opportunity.

We believe that business diversity can be complementary and contribute to our top and bottom line growth.

But if we were to view these assets as being more productive outside the Company, we would consider other alternatives.

So I am saying that we constantly reassess and reevaluate our entire portfolio.

That is an ongoing thing for us.

When I said that I consider them complementary again that is not a new comment, I have made that ever since I have been CEO.

But I am also saying that we have to look at the overall performance of the portfolio and decide basically how we can maximize long-term cash flow for shareholders.

With respect to R&D, the first point I would make is that we continue to think innovation is going to be the long-term driver of the Company's success.

We are going to continue to invest in programs like PD-1 to ensure that we bring those products to market as quickly as possible and reach their full potential.

We are always looking to improve productivity across the Company.

So I will let Roger comment on what he sees going forward but I would say that in every aspect of our business we are looking for an opportunity as you heard Roger say, he is evaluating programs, processes and people.

I think it is appropriate though to give him some time to assess that entire equation and decide how he is going to drive better ROI going forward.

We also by the way did say that we are lowering our R&D guidance in 2013 versus 2012 so all of those things coming together I think directionally say something about R&D spending inside the Company but I do again think Roger has the right and the opportunity to look at the overall picture and decide how he wants to improve ROI going forward.

I will just close by saying at the end of the day, all of these companies at the end of the day have to innovate and they have to bring forward clinically meaningfully differentiated products the way that Roger has said and that remains to me the major focus of Merck and Merck's strategy.

Andrew Baum, Citi.

Good afternoon.

A couple of questions.

First, on the DPP forecast within Europe, the (inaudible) Commission in France just yesterday announced they are going to be focusing on the (inaudible).

ICKWIG, while Merck may benefit from the ongoing discussions there, it is clear some of your competitors are going to have a pricing drag down.

The first outcome trial failed to show any DPP benefit of the much older drugs and healthcare systems in my part of the world are still struggling and DPP-4s make a soft target in obviously reference to Japan.

Am I being too negative here when I think about the pressures on the franchise outside the US?

Second question is for Roger.

Perhaps you could outline what the split in current investments is between research and development within Merck?

And then following on from that, what scope do you see for downsizing Merck's current research as opposed to development but research infrastructure?

Thank you.

So why don't I talk a little bit about DPP-4 class and I will focus outside the US because that is where you focused and I spoke of lot about the US already.

I just want to reiterate that we had good volume growth in all regions and we had good growth if you just looked at the five core European markets, we had very strong growth not only in volume but also in dollars.

I believe the environment in Europe is tough and I think it will continue to be tough but I also believe that the value that physicians and patients see in a product like JANUVIA is very strong.

And also when you talk to the governments, I do believe that they see the value that a product like JANUVIA can bring into the marketplace.

And the marketplace tends to show you the value of the product based upon the utilization and when you look at the utilization of JANUVIA, I think it is because physicians see not only the great efficacy that you can see on HBA 1C but they also feel comfortable with the safety profile that they have been accustomed to.

And if you look at the cost of the implications of diabetes, they are very significant.

In Europe typically the DPP-4s are utilized after metformin so it is not threatening the largest generic in Europe.

It is actually being utilized after the generics are used in Europe.

So I think that it shows that there is a way to try to use a low-cost metformin but since many patients can't get to goal on a low-cost metformin or with the sulfonylurea has safety or side effect issues that the physicians are looking for a way to control diabetes such as with JANUVIA.

And then the government sees the implications of not treating diabetes in terms of the macrovascular disease, microvascular disease in terms of hospital admissions and so forth.

So I still think that there is a strong potential for JANUVIA in Europe.

In addition to that, we still have markets that we are waiting for reimbursement outside of Europe such as in China where we think there is also opportunities for the future.

Andrew, it is Roger.

With respect to the split in current investment, we could spend quite a long time talking about the way in which funds are allocated at Merck.

But let me just point out that as has been described in detail by academic analyses of expenditures and pharmaceutical companies, investments in discovery research as a fraction of the total investment in R&D have been declining monotonically since 1980 and discovery research is actually a very small component of all large pharmaceutical companies.

It represents simply the fully allocated cost of the people doing the work.

And the expense associated with clinical trials has been rising progressively.

Merck is no different from all other big companies.

We spend far more on development than we do on research.

Having said that, you should keep in mind that there is a lot of stuff that is classified as research that really relates to development.

Questions are raised by regulatory agencies with respect to products that have long been on the market that require preclinical studies.

It is researched effort but it actually is contributing to the development role.

So there is a lot of complexity in there.

And with respect to opportunities that exist for reducing expenditure in research, I think the real question to be asked is what do you do to improve the productivity of the R&D organization to actually create breakthrough products that make a real difference to patients.

Ultimately you innovate or you die and that is what needs to be done and you need to do it as effectively, efficiently and productively as possible and that is what we intend to do.

Alex (inaudible), BMO Capital.

A couple for Roger if I may.

Are you doing any co-formulation work to combine the SGLT2 you got from Pfizer with JANUVIA as a fixed dose combination similar to what your competitors are doing?

And also could you please provide us an update on our once weekly DPP-4 and is there any possibilities for a co-formulation there?

Thank you.

Thanks for the questions.

With respect to the SGLT2 program, of course we are just moving forward with that program.

We expect to advance that program into Phase III this year.

But we also are interested as I said last quarter, that one of the things that is extremely attractive about this program is it is very well behaved pharmaceutically and hence, we expect it to play nicely with others.

We have always had an interest in the idea that this could be used in combination with our existing programs and so we are looking at those things very closely.

That would be something of course that we would include in our registration programs.

And we continue to make progress on our once weekly program, our Phase III program is ongoing and we are enthusiastic about it.

We think it is a very, very good opportunity.

Jeff Holford, Jefferies.

On a margin basis, where do you think the greatest scope for cost savings going forward on this Company of a two-, three-year view would be?

Would it be in COGS, SG&A and R&D?

Maybe you can rank those for us.

And then secondly coming back to I think Consumer Health specifically, probably under 4% of group EBITDA in terms of what it actually produces.

How do you think of that really as being an asset to give diversification to the Company for such a small contribution?

And then how would you assess the margins of that Company versus some of its peers of larger scale?

Thank you.

Okay, let me take the consumer question.

We have looked at the profitability of our consumer business and we believe it stacks up well against its competitors.

I agree that the asset is smaller compared to our pharmaceutical business.

I have said before that it is not global scale but it is a very good business.

It produces really strong cash flow and we also continue to see that the OTC opportunities of which is Oxytrol is the most recent example for us do give us a complementary tie to our pharmaceutical business.

So, Jeff, this is Peter Kellogg.

Let me answer your first question regarding margins and opportunities in our P&L.

So we are a large complicated business so I can appreciate it is hard to sort through but let me go back to kind of a couple of pieces.

First of all, when we announced the merger almost four years ago, we did highlight that we had a fairly extensive manufacturing network because quite frankly we combined three companies, Merck, Schering-Plough and Organon, and really had an extensive manufacturing network of over 90 plants and I think you will recall that is what we highlighted on day one that required rationalization over time.

We have made great progress on that.

At this point a number of plants we have in the network is numbered kind of in the low 70s and I think that it is very clear that we are going to continue to do that.

As we indicated at the time of the merger, that is not something you can get done in three or four years.

It is really an ongoing process of continuing to drive more and more efficiency.

So I think there is more to come there.

Obviously how it shows up in the P&L is through the cost of goods eventually.

There is always if you measure things in terms of PGM percent then you get the blend between the efficiencies and productivity coming through the cost of goods sold versus the pricing that you can realize and that really comes down to again the innovation and the exciting new products that we bring forward.

I do think that clearly on the cost of goods sold that is an ongoing opportunity that we have talked about.

Just going down the P&L, in the R&D side, I think what I know Roger and I have talked a lot about is it is really a question of the ROI that we think about there.

If we have the right opportunities such as a PD-1, we are going to spend the money on that and we are intending to have an exciting pipeline.

So it is not a goal of ours to have -- not to have exciting opportunities and not to spend money.

Conversely we do really want to pay close attention to how we are spending and making sure it is focused on -- as Roger said -- the really big things that can make a big difference in the marketplace and then obviously drive the top line.

So R&D I think is very much of a focus for us from a productivity standpoint but very much of an ROI perspective.

If we have the great opportunities we are going to go after them and we will make sure that we are doing it efficiently.

Then obviously the last thing is on SG&A, we continue to evaluate that globally as what does our footprint look like and how do we operate in the most efficient manner?

We made tremendous progress since the merger as I think we highlighted at the end of last year.

We actually hit and exceeded all of our merger synergy goals that we had which were pretty extensive.

I think we highlighted that we achieved a net benefit of $3.5 billion which actually means that are gross savings were over $6 billion.

So that is very, very substantial merger synergy program that we have executed.

But I think what is very important is as Ken said in his talk today, cost management is very important for us and it is a resource that creates on the one hand a more efficient P&L but quite frankly, it also allows us to spend on the growth drivers which is so important to our future.

So I don't want you to conclude that we are simply thinking about our cost structure as how do we take cost out but it is also how do we reinvest to drive shareholder value and really create a lot of value in this Company bodes to the pipeline as well as the commercial assets around the world.

So I think SG&A continues to be a focus for us but on the other hand, I think we are also going to balance all of those savings with where we have opportunities to invest.

So I'm not giving you a very specific answer I realize that but I do want to make the point that while we have opportunities and we're going to continue to pursue them, we certainly executed well in the merger synergies that we laid out and we are going to continue on that through the manufacturing network.

Elsewhere in the organization, we are thinking about return on investment and creating value but we will never be passive about those.

As Ken likes to say, we are going to be ambitious in driving performance in the short term but we are never going to back away from investing for long-term potential, long-term value creation.

Steve Scala, Cowen.

First, why will the tax rate be so much higher in the second half of the year versus the first half and what does this tell us about the tax rate in 2014?

Secondly, you mentioned 2013 R&D spend will be lower but you haven't quantified it.

I guess we should assume it will only be modestly lower.

Would you like to recalibrate that expectation?

Thirdly, why was (inaudible) sequentially down in the second quarter?

It had been sequentially up in the second quarter of 2012?

Thank you.

This is Peter.

Let me take the first question on tax.

I think you had a couple of questions there so let me just take them one at a time if I can.

You asked why would the tax rate be higher in the second half of the year than the first half of the year.

So as we went through the first half of the year, and I'm just going to take it quarter by quarter, in the first quarter, we saw some significant tax benefits that came through and I think we highlighted them at that time and they are very kind of one time in nature.

There were R&D tax credit being re-implemented and so forth.

We also had a couple of resolution of some tax audit situations allowed us to release some reserves and so that caused our tax line to be lower in the first quarter.

In the second quarter, we also had a reduction in some tax reserves because we had the expiration of some statute of limitations and so that allowed us to free up some tax reserves and basically some of these benefits were things that we thought about over the course of the full-year, we didn't really actually when we first put the plan together anticipate getting all of these things in the first and second quarters.

So as you think about how the year comes together, when you think about the full-year tax guidance of 22% to 23%, the way you get to that on a full-year basis is it ends up being a weighted average of all the quarters.

So if the first two quarters were lower that by definition means the third and fourth quarters will be higher and they will only be higher because we just won't have those one-time benefits pulling the rate down.

We are going to return to a more natural run rate than we would expect.

So I think you will recall that what we are talked about in the past is the ongoing tax rate of the Company will be a little higher than what you are seeing right now and so generally, we have talked about the long-term tax rate recognizing it is a little uncertain because things can move around but excluding any unusual items or any items that pull it down or move it up that are kind of unique in nature, we expect it to be running at a higher rate in the range of something like 25% to 26% on an ongoing basis.

But I think we want to be careful that always each year as we go into the year, we will update you in terms of what we see on the horizon relative to how the taxes are evolving.

I think on the second question, you were asking about R&D and why will it be lower in the second half and in the first half in fact how should we think about what we are looking at?

So obviously in my comments, I highlighted that in prior year, we actually did have a payment for ENDOCYTE in the second quarter of last year so we are lapping that in a sense.

But we also basically see as we move forward kind of there is a flow of activity.

Roger is making decisions and so forth and I think that basically we are using kind of the most recent updated view of R&D as we think about it.

So quite frankly, it ties to productivity, to focus and we are not talking about a sea change.

We are just simply -- previously we thought it would be a little bit higher and now we are kind of indicating that our expectation is based on what we see it will be a little bit lower.

I'll take the third one.

Steve, this is Adam.

With regard to ZOSTAVAX, there is definitely a seasonal nature to the business and we have been predicting that all along.

In 2012, it was our first year with full US supply so when we had full supply, the offices were buying the vaccine and they were stocking and getting ready for vaccinations.

In addition to that, we had just started our direct to consumer promotion in the second quarter of 2012 because we wanted to ensure that we would have adequate supply before we would actually drive demand through the DTC promotion.

So I wouldn't use 2012 as a direct year-over-year comparison to 2013.

We expect that the second half of this year will be stronger and the strongest quarter will be dependent upon when flu vaccinations occur because that is when we believe we will see many people getting vaccinated for [zoster] as well.

Gregg Gilbert, Bank of America Merrill Lynch.

Thank you.

For Roger, I would love to get your personal view on the opportunity and the risk associated with odanacatib at this point.

Secondly, could you be in a position to file lambro in melanoma early next year given the unmet need in that population and your breakthrough status?

And maybe lastly, Adam, can you talk about what prompted the GARDASIL decision in Japan and whether that has implications anywhere else?

Thanks.

(inaudible) but at the same time asks that we continue the study in order to obtain additional efficacy and safety data, we are continuing the study in that way.

We do anticipate that we will have the opportunity to look at those data in the not-too-distant future and based on what we see there, we hope to be able to move forward with the odanacatib filing but we have to see the data of course.

With respect to PD-1 again, the information that we have is that as you can see from looking at clinicaltrials.gov, we have ongoing pivotal studies in melanoma refractory to therapy.

We have a Phase III study in melanoma versus [sipalumamab].

Those studies will deliver results either in the latter case at the end of next year or in 2015.

If in fact it were the case that there were overwhelming efficacy earlier on, there might be opportunities for a more accelerated filing strategy but that is something that we really will have to wait to see data on and of course, we are working very, very closely with the FDA on that.

With regard to Japan, the government suspended the proactive -- so it is important to say the proactive recommendation of HPV vaccines.

The vaccines still remain on the market in Japan and the MLHW is just looking to some postmarketing of these that they have seen specific to Japan.

We have not seen any significant impact at this time in other markets around the world and MRL continues to monitor the AEs as appropriate and we are confident in safety profile for GARDASIL.

Let me just close by saying I think this was a good quarter, a solid quarter.

Going forward, our strong focus will remain on growth for the Company as well as driving greater profitability.

It was good to see a bounce back in certain sales particularly JANUVIA.

We had good vaccines and immunology sales.

It is great to see that the emerging markets are still moving ahead in a very strong way.

As we go further, we will continue to invest thoughtfully in these commercial opportunities as well as our pipeline opportunities.

We are very excited about for example PD-1.

And as we think about this business going forward, we continue to think that innovation has got to be the key but we have got to be very careful to deliver the right kind of reductions in our cost base that will allow us to do that in a sustainable way.

So thank you very much for your attention and I look forward to talking to you in future quarters and in future venues.

Thank you.

Bye-bye.

Thank you, ladies and gentlemen.

This concludes today's conference call.

You may now disconnect.