默克藥廠 (MRK) 2013 Q3 法說會逐字稿

Good day, everyone, and welcome to Merck's third-quarter 2013 earnings call.

Today's call is being recorded.

At this time I would like to turn the call over to Mr. Joseph Romanelli, Vice President of Investor Relations.

Please go ahead.

Thank you, Andrea, and good morning everyone.

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

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

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

First of all, 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 them in our press release on Table 2. This will give you the better sense of the underlying performance.

There are three tables in the press release.

The first table provides the GAAP results.

Table number 2 reconciles our GAAP P&L to the non-GAAP results for the third 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 be referring 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 in the US Private Securities Litigation Reform Act of 1995.

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

This morning I am joined by Ken Frazier, our Chairman and Chief Executive Officer; Adam Schechter, 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 Dr. Roger Perlmutter, President of Merck Research Laboratories, who will provide you with an update on some of our key programs.

With that, I would like to turn the call over to Ken Frazier.

Ken?

Thank you, Joe, and good morning, everyone.

This morning I will provide an update on our performance and highlight some key events from the quarter.

I will start with performance.

This quarter, our teams delivered solid growth in the underlying portfolio while aggressively managing costs to deliver non-GAAP EPS of $0.92.

Our diverse core business continues to grow despite challenges in the marketplace.

Excluding the impact of patent expiries, Company sales grew 3% on a constant currency basis with strong contributions to the top line from our vaccines, immunology, and HIV businesses.

At this point in 2013, I believe it is useful to step back and look at the solid year-to-date performance of these and other growth drivers in our portfolio.

During the first nine months of the year, excluding exchange, vaccines grew 15%; our immunology business grew 12%.

We had consistent, global growth of Isentress at 7%.

Our diabetes franchise grew [4%] (corrected by company after the call), and our hospital portfolio grew 5%.

As Adam will detail shortly, our commercial teams are focused on maintaining share and driving growth for key brands despite competitive pressures and patent expiries.

Our complementary businesses, Animal Health and Consumer Care, were flat year-over-year this quarter but their fundamentals remain strong despite some factors affecting short-term performance.

Now I would like to briefly comment on our announcement earlier this month to sharpen our R&D and commercial focus.

On this point, let me be clear.

Merck is and will remain committed to investing productively in R&D both internally and, importantly, externally as we firmly believe it is the best pathway to sustainable competitive advantage and growth.

By investing for growth, we will strengthen our ability to drive innovation and translate cutting-edge science into medically important products, the fundamental driver of long-term shareholder value in this industry.

As part of our global initiative, we are proactively reengineering our cost base to realize operating efficiencies, while at the same time bringing greater focus and commensurate investment to those areas where we have the strongest potential for growth.

These plans enable us to reduce our cost base by $2.5 billion by the end of 2015.

We are confident that this is the right plan for future growth in the current and future healthcare environment, although the steps we are taking are very difficult.

However, I cannot emphasize enough that significantly reducing our cost base does not mean that we will stop investing for the future.

On the contrary, we believe it is necessary to focus our resources even more precisely so that we can invest in those opportunities which best position us for a return to growth.

As part of this same process, we are evaluating strategic options for those areas that have not been prioritized.

We have a research portfolio with innovative assets such as our anti-PD-1 and HCV programs, both of which have been granted Breakthrough Therapy designation by the FDA.

These require significant investment, and we are committed to fully resourcing these and other critical programs, like BACE for Alzheimer's disease.

Regarding our anti-PD-1 program, we're looking forward to presenting our first data in non-small cell lung cancer tomorrow.

I am pleased with the speed and the intensity with which our colleagues around the Company are working on this important program.

Since joining us this past spring, Roger Perlmutter has been working on creating the foundation to achieve a high return on R&D capital by reducing operational complexity and introducing significant efficiencies.

This ensures that our researchers are focusing their efforts on the programs most capable of delivering medicines and vaccines that provide unambiguous, promotable advantages to patients and payers.

Roger will talk more about that shortly, including how our combination HCV regimen and V503 underscore this point.

As we think about our business going forward, we are focused on balancing the short-term and the long-term by resourcing the key internal programs to deliver our pipeline, including potential game-changers like anti-PD-1, while also augmenting our pipeline with even greater emphasis on external opportunities.

In addition, we will maintain a high level of cash return to shareholders through both the dividend and stock buyback.

In addition to the dividend, thus far we have demonstrated our shareholder friendliness with a $15 billion treasury stock authorization and the accelerated stock repurchase this year.

So in closing, we demonstrated solid financial results again this quarter.

We are taking steps to sharpen our R&D and commercial focus, which will strengthen our position for the future by increasing productivity and investing in our most promising opportunities.

And finally, we are committed to increasing shareholder value in the future through value-creating business development and returning a high level of our free cash flow.

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

Thanks, Ken.

Good morning, everybody.

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 4% in the third quarter.

Our top-line results continue to reflect the loss of exclusivity of a number of brands and weakness in the yen.

Our underlying business grew 4% excluding sales from these products on a constant currency basis.

Key contributors to the growth in the quarter were vaccines, Isentress, Remicade, and Simponi.

Let me provide more details, and I will start with the Januvia and Janumet franchise.

The franchise had sales of $1.4 billion and 2% growth, ex-exchange.

Growth of 15% in international markets was offset by an 8% decline in the United States.

The United States sales decline this quarter was driven by lower customer inventory levels of more than $60 million.

With regard to demand, in the United States we saw a decrease of about 2% in TRx volume this quarter.

However, we continue to maintain our strong market leadership position with a greater than 70% share despite three other DPP-4s in the US market.

The key issue in the United States is that the branded oral diabetes market is relatively flat.

Regarding price, while we saw a small benefit from price this quarter, we also continued to experience rebate and pricing pressure, as this is a very competitive market.

In international markets, Januvia and Janumet sales increased 15% on a constant currency basis.

We drove good volume growth in each region around the world, and we maintained leadership with about a 70% global market share.

Now let me touch on our outlook for the franchise.

First, in the United States we continue to focus our resources on Januvia to drive demand and to take share from the sulfonylureas.

With significant new competition, we must defend market share while at the same time focus on market growth.

Although this has proven to be difficult, we must change the TRx trend in order to return to growth in the United States.

Second, internationally we expect good growth.

The diabetes market continues to grow, and we are well positioned as the market-leading DPP-4 inhibitor.

Moving to Isentress, Isentress sales were $430 million, which represents about 7% growth.

In the United States we are maintaining our patient share despite new competition, although it is still early.

Outside of the US Isentress continues to have solid volume growth.

Moving to immunology, the combined immunology business consisting of Remicade and Simponi grew 16% in the quarter.

Sales of Simponi grew 40% to $126 million this quarter.

We are seeing good growth across our markets including the recent launch in France.

We are also pleased with last month's European approval for an additional indication in ulcerative colitis.

Lastly, moving to our vaccine business, demand for our vaccines portfolio remains very strong.

We also benefited from about $90 million of higher US public sector purchases, including about $60 million of Gardasil, and about $30 million of RotaTeq sales in the quarter.

Gardasil maintained its strong performance with 15% growth year-over-year.

US sales increased more than 30% due to continued uptake of the male indication and higher public sector purchases.

Internationally, as expected, sales declined this quarter.

The Japanese government decision in June to suspend proactive recommendation of HPV vaccines had a negative impact on the HPV market.

We continue to work with the Japanese government to provide the vast amount of persuasive safety and efficacy data available for Gardasil.

In addition, the timing of emerging market tenders had an unfavorable impact on sales this quarter.

Moving on to Zostavax, Zostavax sales were $185 million this quarter.

As expected, sales in the United States are up sequentially due to seasonality.

However, the flu vaccination season is getting a late start this year, so we would expect our strongest quarter of the year to be the fourth quarter.

Internationally, we have now launched in a select set of Asian markets and the United Kingdom.

We are seeing good uptake in each of those markets.

As an important reminder, our European vaccine sales are reported through equity income.

We recently received approval of our Durham manufacturing facility and we are on track to launch in additional markets beginning next year.

We continue to see Zostavax as a key growth driver.

Now I would like to touch on our regional performance.

In the United States, Europe, and Canada, sales continued to be affected by the loss of exclusivity Singulair, Maxalt, Propecia, Clarinex, and most recently Temodar in the United States.

Excluding these products, US sales increased by 7%, and Europe and Canada sales increased by 3% as compared to the prior year.

Japan sales declined 2%, ex-exchange, due to an increase in the utilization of generic versus branded products, but also lower sales of Gardasil, as I mentioned earlier.

Sales in emerging markets grew by 2%, ex-exchange.

Double-digit growth in key emerging markets like Brazil, Korea, Russia, and Turkey was partially offset by declines in China and Mexico this quarter.

The timing of tenders also affected our performance in the emerging markets including China this quarter.

In key emerging markets, our base business is strong and diverse, and Merck's growth continues to outpace the overall market.

We expect stronger growth in the emerging markets in fourth quarter.

Before I close I would just like to touch on the changes we're making in Global Human Health as part of the global initiative we announced earlier this month.

We are sharpening our focus on core therapeutic areas and top markets.

We are prioritizing investment in those areas where we have a future platform for growth and for leadership, like diabetes and vaccines.

In other areas, we are reducing investment and looking for creative ways to be successful in the marketplace and to maximize the values of these assets.

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

I am confident that the changes we are making, together with our strong portfolio, position us well for future success.

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, today's results reflect the various pushes and pulls the business is facing today.

First, we continue to work through the negative impact of patent expiries.

Second, we saw strong growth in key areas of the base business such as immunology and vaccines.

Third, we maintained solid levels of sales and market share with products that are under considerable competitive pressures.

And finally, we continued to manage costs effectively while making focused investments for future growth.

In total, we delivered a solid performance this quarter.

Reflective of this quarter's performance, we are narrowing our 2013 non-GAAP EPS guidance range to $3.48 to $3.52.

Coupled with the new global initiatives to strengthen Merck by sharpening our commercial and R&D focus, today's results demonstrate that Merck is committed to delivering in the short-term while preparing the organization for future growth.

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

My remarks will focus on our non-GAAP financials.

Starting at the bottom line, we earned $0.93 (sic - see release "$0.92") per share this quarter.

Merck is now emerging from the most significant period of Singulair patent expiry, which began in August of last year.

Also, this year has brought significant foreign exchange headwinds.

So it is important for us to highlight how the underlying base business is performing outside of patent expiries and foreign exchange.

On that basis, sales increased 4% in our Pharmaceutical business, as Adam outlined earlier.

Also, on an ex-exchange basis, Animal Health sales were flat year-over-year.

Growth in companion animal and swine segments was offset by declines in the cattle segment.

In Consumer Care, sales were also flat on an ex-exchange basis.

Strong sales of Claritin and the launch of our new Oxytrol OTC product offering were offset by the footcare and GI segments.

Moving to other revenues, we saw a 14% decline in supply sales to AstraZeneca in the third quarter.

As the joint venture continues to utilize an alternative supplier and as we approach the May 2014 US patent expiration for Nexium, we expect increasingly aggressive year-over-year declines.

At the PGM line, as discussed in prior periods, generic erosion of high gross margin products created a headwind on the gross margin this quarter.

As a result, our non-GAAP gross margin declined on a year-over-year basis to 74%.

Turning to marketing and administrative expenses, our third-quarter SG&A expenses were about $220 million lower year-over-year as a function of continued proactive cost management and foreign exchange.

We continue to expect SG&A spending in 2013 to be lower than 2012.

Moving on to R&D, research and development expenses in the third quarter were about $260 million lower than prior year.

The magnitude of this decline represents continued cost management and some impact of timing of clinical program investments.

For example, we are now initiating Phase III studies for the partnered SGLT2 program, which will bring milestone payments and clinical development costs into the fourth quarter.

And we will continue to invest heavily on our anti-PD-1 program.

Taken together, we still expect that our full-year 2013 R&D expenses will be lower than 2012.

Moving on to other line items, equity income from affiliates decreased $56 million versus the prior year due to lower income from the AstraZeneca joint venture.

We expect to see continued sharp declines as we approach the end of the partnership.

We fully expect AstraZeneca to exercise its option to end the JV in June of next year, and you should plan your models for supply sales and equity income accordingly.

Other income and expense was about $30 million lower year-over-year.

Lower foreign exchange losses on the balance sheet offset higher interest expense from the $6.5 billion debt offering we completed earlier this year.

Now moving to tax, our non-GAAP tax rate was 25.3% in the third quarter.

As previously discussed, this rate is significantly higher than the first half of 2013, and it is also consistent with the range we expect to see for the business going forward in 2014.

With this quarter's results we are maintaining our estimated full-year 2013 tax rate to be in the range of 22% to 23%.

Now turning to the outlook for the rest of the year, on the bottom line, as I noted earlier, we are narrowing our 2013 non-GAAP EPS guidance to $3.48 to $3.52.

On a GAAP basis we expect to earn between $1.61 and $1.79.

Regarding capital allocation, while we remain ready to bolster the pipeline with external innovation at any time, we maintain a strong balance sheet and an efficient capital structure which has enabled us to return cash in a shareholder friendly manner.

As I noted a few weeks ago, we have returned roughly 100% of free cash flow over the last five years through the combination of a strong dividend and a focused share repurchase program.

This year, you can see the impact of our accelerated share repurchase in our average shares outstanding.

We remain on track to repurchase $7.5 billion of stock in the first 12 months of the new $15 billion repurchase authorization announced in May, inclusive of the ASR.

Beyond May 2014, you should expect ongoing share reductions where consistent with historical patterns and continued commitment to a strong dividend.

So in conclusion, this was a strong quarter.

I would like to clarify that I may have misspoken earlier; I said $0.93 earned in the quarter on a non-GAAP basis.

We earned $0.92 per share this quarter, and that is what is shown in the press release.

It was a solid quarter where we continued to drive growth across the base of the business in the midst of generic erosion and competitive challenges.

We aggressively managed costs, and we will continue to do, so as outlined in the new global initiative.

We are committed to maintaining this focus while investing in innovation and driving future growth.

Thank you.

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

Roger?

Thanks, Peter.

During the third quarter we made considerable progress in advancing the goals of Merck Research Laboratories while focusing intently on aligning investment with the best opportunities in our portfolio.

In the vaccines area we were certainly pleased to receive the Prix Galien this year for Zostavax, our innovative shingles vaccine.

We also announced last week that the V503 program, our 9-valent human papillomavirus vaccine, met its primary endpoints with respect to prevention of pathology associated with five HPV serotypes not covered by Gardasil.

Detailed results will be presented at the EUROGIN conference in November in Florence.

The distribution of cancer-associated HPV serotypes varies substantially among human populations, even in the United States.

The V503 vaccine should provide protection against nearly 90% of these strains.

As previously mentioned, we expect to file for FDA approval of V503 before the end of this year.

Also from a regulatory perspective, we continue to make progress in developing lower-dose formulations of suvorexant, our orexin antagonist for insomnia.

We remain on track to complete our response to questions from the FDA during the first half of 2014.

In September, the Company announced that it received a Complete Response Letter from the US FDA for the resubmission of the new drug application for sugammadex sodium injection, Merck's investigational medicine for the reversal of neuromuscular blockade induced by rocuronium or vecuronium.

To address the Complete Response Letter, the Company intends to start a confirmatory hypersensitivity study as soon as practicable, based on forthcoming discussions with the FDA.

This will, of course, impose a delay on our FDA submission.

We expect to provide more detail on the nature of this delay following additional discussion with the agency.

Separately, we're looking forward to the advisory committee meeting for our review of oral immunization therapy for grass allergy, which has now been rescheduled for December 12.

We had previously submitted a separate BLA for a ragweed allergen tablet and are working closely with our partner in this area, ALK-Abello, on a more comprehensive program for house dust mite allergy.

From a development perspective, as Ken mentioned, we will present interim data on the effect of MK-3475, our antibody directed against PD-1, in patients with refractory non-small cell lung cancer at the World Conference on Lung Cancer in Sydney, Australia.

The MK-3475 program is now quite broad and it includes studies in patients with squamous cell carcinoma of the head and neck, triple-negative breast cancer, uroepithelial tumors, colorectal cancer, and hematologic malignancies in addition to non-small cell lung cancer and, of course, malignant melanoma.

The breadth of this program highlights the opportunity that we see for this new agent, which we hope will prove effective in a large number of malignancies.

Among novel therapeutic categories earlier this month, the FDA granted breakthrough designation to MK-5172 and MK 8742, our HCV protease inhibitor, coupled with an inhibitor of viral assembly, which are lead elements in the broader MLR program for treatment of chronic hepatitis C virus infection.

Interim data describing virologic responses in genotype 1 infected patients treated with these agents will be presented at the American Association for the Study of Liver Diseases meeting in Washington, DC, next week.

These results should give hepatologists a sense of our enthusiasm for the new hepatitis C treatment regimens that we are exploring, including those involving other potent direct-acting antiviral agents that are at earlier stages in development.

Finally, in development we've initiated Phase III studies of ertugliflozin, an investigational oral SGLT2 inhibitor, in partnership with Pfizer.

As previously discussed, this compound has very favorable pharmaceutical properties which should enable exploration in combination with sitagliptin and other antidiabetic agents.

I wish to note that we are making very good progress in focusing our expenditures on the most promising new programs in our portfolio.

We regret that we have found it necessary to eliminate a number of positions as part of this organizational realignment.

Nevertheless, as Ken has made plain, our actions do not signal a softening and our commitment to research and development.

It is my firm belief that breakthrough research provides the only sustainable competitive advantage for our Company, and I intend to husband our resources with great care to ensure that the most important programs receive phase appropriate support.

Ken?

All right.

Thank you, Andrea -- and thank you, Roger.

So, Andrea, before we move into Q&A, just a reminder.

So we can get to as many questions as possible, please limit yourself to just one or two questions.

If you have additional questions, please feel free to rejoin the queue.

So with that, Andrea, we will start the Q&A session.

Gregg Gilbert, Bank of America Merrill Lynch.

On PD-1, as the data set continues to evolve, Roger, do you have a view yet on what the duration of therapy will be in the real world?

And then perhaps for Adam, on Januvia US; is 2014 shaping up to be a better or a worse year from a rebating and discounting standpoint relative to 2013?

I believe a fourth competitor was coming into the mix as contracting was being done for 2013.

Thanks.

So, Gregg, we don't know what the length of the therapeutic regimen will be.

We have sort of taken a swag at in our studies.

We have two years of therapy in our current study protocols.

But we really -- we are not sure what the durability will be like and we are also not sure what it would be like to engage in retreatment in individuals who may have failed.

So those are the questions that we will have to get at in the future.

At the moment we are still trying to establish what the fundamental response rates are and the durability response in a variety of different tumor settings.

And then, Gregg, with regard to 2014, we are not giving specific guidance at this time (technical difficulty) and we don't typically give discounts and rebates on individual products.

But what I will say is, if you look at where we are today, we have about 80% access in managed care.

So we have a very strong formulary position, and we believe that we will have a similar, very strong formulary position in 2014 with greater than 80% access, and that the rebate and discounting will continue to be aggressive in the marketplace but with that said, we are going to maintain a very strong access position for Januvia in 2014.

Jami Rubin, Goldman Sachs.

Hi, thank you.

Just a couple questions.

First on the Januvia/Janumet franchise, Peter, if you can provide us a little bit more granularity on what you are seeing in terms of volume and price.

Obviously you have the largest share of over 70%, but with other DPP-4s on the market and SGLT2s, can you give us a sense for where you would expect that 70% to go?

And can you reconfirm whether or not you expect this franchise to still grow in the mid single digits?

I think that was your guidance in the previous call.

Then secondly on the gross margin, 74%, remind me what was the hit from FX.

And how should we think about the gross margin going forward?

Is there any reason why that gets better in 2014?

Thanks very much.

Jami, hi.

Why don't I let Adam take the first couple questions related to Januvia/Janumet and the franchise outlook, and then I will come back to the PGM.

So, Adam?

Yes, so let me give you some context, Jami, to Januvia and Janumet.

I am going to start first at a high level and a global high level, which says -- and it is clear that diabetes is a growing epidemic, that it is a significant concern in almost every market around the world, including the United States.

If you talk to any government they would tell you that they are very concerned about the growth of expenditures due to diabetic patients.

So the market underlying demographics remains very strong.

If you look at the United States, we had a decline of 8% year-over-year, but that was almost entirely due to customer inventory levels where we saw a greater than $60 million decrease in the inventory levels.

If you focus on TRx volume in the US you saw about a 2% decline in volume.

We did see a benefit from price; but with the continued pressure on rebates and discounts we saw several percentage points that could be attributed to price.

When you think about guidance in the US, what you are seeing is it is very difficult to predict the channel movements.

You saw last quarter we had 9% growth; this quarter we had minus 8%.

And that is primarily due to the changes in wholesalers and channels.

So what I am focusing on are putting the right resources behind Januvia in order to change the current TRx trend.

And I believe the most important thing to watch is the TRx trend.

What we need to do as we go into 2014 is to ensure that we don't continue to see TRx volume losses.

The fact that we still have greater than 70% market share, despite four DPP-4s in the marketplace, tells you that we have a very strong position.

We are losing a little bit of market share each month, but you would expect that with four competitors.

The real key is that the DPP-4 market and the branded oral antidiabetic market isn't growing.

Typically when you have four or five new branded products in the market you see growth in the market and you see expansion of the market.

We are not seeing that right now in the United States.

So we have to focus on moving patients that are currently on sulfonylureas to Januvia, or make sure that Januvia is seen as the likely next step after metformin, before sulfonylureas.

Outside the US it is a very different story.

Outside the US we still have about 70% market share.

We saw 15% growth year-over-year.

And despite losing a little bit of market share in markets here and there, the overall market is continuing to grow.

So with the market growth that we are seeing outside the US, that is why we are still able to see very strong volume growth, despite losing a small amount of market share.

Thanks, Adam.

So, Jami, I will come back on your PGM question.

In fact, just to restate, in the third quarter this year our PGM was about 74%, and that is compared to 75.2% last year.

Really most of that year-over-year impact is what we've been indicating all along, which is the generic impact of having Singulair go off-patent both in the US and in Europe.

Obviously, Singulair was a very high PGM product, so that is primarily the driver of that.

On a sequential basis, we actually had some additional product mix as we went from the second to third quarter.

In the second quarter we actually benefited from some productivity gains.

Now, foreign exchange was really a minor impact actually in the third quarter year-over-year, so that is not a big driver this time.

It is much more the impact of these patent expirations.

But I do want to mention, while we are talking about PGM, is we do have an ongoing multiyear effort to run our manufacturing network in a more and more efficient manner.

We have made great progress so far.

You recall, back at the time of the merger we had 95 plants around the world.

And today we are down to about 68 sites around the world, so great progress already and the productivity from that continues to come through.

So at this point, what you are seeing on the PGM line is nice productivity gains from all that work and those actions.

But we do see, on the other hand, the impact of the expiries as well as pricing pressure that we have all talked about, which tightens up the PGM line as well.

So it is a bit of a balancing.

And what we have indicated is that for this year, for 2013, we expect PGM to be down at least or more than 1 point versus prior year on a full-year basis.

We haven't given guidance yet for next year, but obviously we are down now at this point, where we are out of a lot of the Singulair expiry impact.

You know, Singulair went off-patent and actually the sales declined very rapidly, as you know.

So as we go into 2014, we will see other things coming into effect, such as the AstraZeneca joint venture and others.

But basically most of that LOE impact is done as far as Singulair is concerned.

Thanks.

Steve Scala, Cowen.

Thank you.

A couple questions, please.

The Company reiterated that both R&D and SG&A would be below 2012.

But with only one more quarter to go, I am wondering if you could say how much below they would be.

Secondly, to what do you attribute the weakness in China?

Other than GlaxoSmithKline, most other companies have continued to deliver good growth in China, despite the investigation.

So what can you tell us about China?

Thank you.

Hi, Steve.

It's Peter.

Why don't I take the first question on the operating expenses?

At this point we haven't given guidance further than that.

The one thing I would like to highlight, Steve, and I mentioned it on the call in my comments earlier, is that in R&D we did have some timing impacts that actually -- our guidance on a full-year basis hasn't changed much; it has just tightened the range.

So really in that regard the second half of the year is pretty much as our guidance had stood previously.

It is just that we actually got a little lighter spending in the third quarter; and we expect with the startup of some of the activity on SGLT2 as well as our growing drive against PD-1 and the broadening clinical trial base that's going on in that program we expect to see R&D pick up some of that.

So on a full-year basis we are still in the same neighborhood.

On China, I will turn that over to Adam.

Hi, Steve.

In China, our underlying demand remains strong.

We did see some hospital inventory declines associated with the current situation there.

There is nothing specific to Merck versus the other multinational companies.

There was some timing of tenders that occurred, but overall we are seeing better performance this month than we did last month versus the prior month.

So there is nothing that you should think of different for us versus the other multinational companies and what they face in China.

The other thing affecting our emerging markets' performance this quarter was wholesaler inventory levels in Mexico.

We saw very strong growth in Brazil, Korea, Russia, and Turkey; and we expect you will see better emerging market growth in the fourth quarter of this year.

Marc Goodman, UBS.

Yes, Ken, you mentioned you're focused on what is strategic, what is nonstrategic.

I was wondering if you could just remind us exactly what is strategic and what is nonstrategic.

And then is there any way you can help quantify us the tender?

So we understand how much moved third to fourth quarter for some of these emerging markets.

Thanks.

Okay.

Thank you very much for the question, Marc.

Let me take a step back and try to frame the strategy issues from my perspective.

I would start with what we announced on October 1, which was that we intend to drive additional efficiencies while sharpening our focus on R&D and within the commercial business to prioritize what we believe are the key programs and markets that will drive our future growth.

So we talked about the importance of vaccines going forward; we talked about the importance of diabetes going forward; we talked about the importance of our oncology portfolio, which is driven largely by the anti-PD-1 opportunities that we believe we will be working on for the next decade, frankly.

And we also talked about our hospital products area.

So those would be four that we actually cited as being the most important to our future growth.

And as we go through this, I think what we are also focusing on is we are now getting past our major loss of exclusivity period as well as the end of our JV with AstraZeneca.

So as part of all of that prioritization you should expect to see us focus more on those areas that I identified; but at the same time you might look to see us divest products and programs and potentially businesses such as our recent announcement with Aspen which will impact 2014.

Our strategic plan has multiple levers for running the business over the long term while being mindful that there are still short-term opportunities.

Let me be clear, as I said, we are evaluating all of our options to fund the right programs for the future of the Company, because we know that successful R&D will be our long-term competitive advantage.

As Peter Kellogg mentioned, another strategic asset we have is that we have a strong balance sheet that will afford us the opportunity to accelerate business development, which is a real and important opportunity for Merck.

We will also look for ways to continue to return cash to our shareholders.

You have seen us raise our dividend over the past two years; we are constantly evaluating if we can do more, because this is the primary way that we return cash to our shareholders.

And we announced a $15 billion buyback and accelerated effort through the ASR.

So we are also finally, as I mentioned, looking at our complementary businesses of Animal Health and Consumer Care, always to determine whether these businesses are more advantageous inside or outside the Company.

So as I would say, we have multiple levers we can pull to fund our growth over the long term while being mindful of the short-term needs.

But the most important ones are the areas of major focus in R&D and the main programs that Roger has talked about like our anti-PD-1 program and our HCV portfolio.

And, Marc, with regard to tenders, we don't break out our specific tender sales.

And in fact we are still working to win some for the fourth quarter.

So you are always working through the quarter to win as many of the tenders as you can; and then once you win them it is how fast you can ship and whether you ship in the fourth quarter or the first quarter for those winning in tenders.

But what I ask you -- just from a bigger picture perspective, in the first quarter we grew 8% in emerging markets.

In the second quarter we grew 10% in emerging markets.

I am saying the third quarter is an anomaly at 2%, that we believe that the fourth quarter will be stronger growth than what you saw in the third quarter, which will be partially due to tenders but there will be other reasons, with the underlying dynamics of our business.

Seamus Fernandez, Leerink.

Just a couple of questions for Ken, maybe.

First off, can you walk us through a little bit of the sales and the weakness in the Animal Health business?

And your thoughts there on the timing issues and what the underlying trends are in that business that are specific to the Intervet business -- or, sorry, the Merck Animal Health business.

And then separately, for Roger.

Roger, can you give us again a little bit of your thoughts on odanacatib?

I think at a recent meeting that you held with sell-side analysts you mentioned that you were trying to push to bring a resolution to that program, whether it be a positive or a negative resolution, associated with the ongoing trial for odanacatib.

So just wondering if you could provide us with an update there.

Thanks very much.

Thanks, Seamus.

I will start with Animal Health.

The first thing, as I said, is the underlying fundamentals of the business remain solid despite what we saw this quarter.

As you know, we voluntarily implemented the temporary sales suspension of Zilmax in the United States and Canada to work with our industry partners to provide the data that will reaffirm confidence in Zilmax, which remains an FDA-approved product.

It is too early to speculate on when we will resume Zilmax sales in the United States and Canada.

But again, from my perspective we continue to believe that there are favorable macro trends that will help us drive growth in our Animal Health business going forward.

So, Roger?

Yes, Seamus, with respect to odanacatib, yes; exactly.

Just keep in mind -- again, as was announced some time ago -- we have the Data Safety and Monitoring Committee that halted the base study early for robust efficacy and a favorable benefit/risk profile.

Those were the words they used.

So we have to take that seriously.

We know what is underlying all of this.

The point is, though, that in order to complete the odanacatib study we need to have a full intention-to-treat data set that captures all individuals who were enrolled and exposed to investigational product and provides the basis for adjudication of all effects in those patients.

To that end, we have been pursuing that.

We're making very good progress.

We will get all of that information tidied up.

At that point, I think we are prepared to say -- all right, we have got it in hand; now let's actually look in detail at the benefit/risk profile and know therefore how the drug can be used.

Our expectation is still that we should be in a position to file in 2014, as we had indicated previously.

We are continuing along that path, and I think we are making good progress now in getting the last few bits of data from the many, many sites, of course, that were involved in this 16,000-patient study.

Tin Anderson, Leerink (sic).

Hi, yes, this is Tim Anderson at Sanford Bernstein.

A couple questions, both for Roger.

On your BACE inhibitor program, assuming that the safety trial, the Phase II trial, comes out clean, are you still fully committed to taking that into Phase III development?

The second question is on your PD-1.

Still trying to understand the rationale for Merck running a 1,000-patient Phase I trial.

With other companies that are doing similar dose-ranging cohort expansion studies, their studies are at a fraction of this size.

So I am wondering why yours would be so big and whether you are hoping that those cohorts could be big enough that you could potentially use this as an early-to-market strategy.

The reason I ask that question is because a couple of times in the past few months you sometimes alluded to the Januvia experience, where you surprised the market by being first to market in the US, when a lot of folks thought another company was ahead of you.

Okay, Tim.

First of all, on BACE we have a safety run-in study, which is then followed by the Phase III study in individuals with mild to moderate impairment.

That study is definitely going forward.

I guess I should just highlight here, the magnitude of the problem is something that we are all aware of.

The genetic data supporting the importance of beta-secretase processing of amyloid precursor protein and the production of the Abeta peptide simply couldn't be stronger.

The challenge is to know whether in individuals who have already suffered some degree of neurologic damage, whether inhibition of beta-secretase enhanced the reduction in a-beta production, which we have shown takes place in people in CSF, whether that is meaningful.

And I think we all need to know that.

We need to know the answer to that question.

It is hugely important for all of us.

And I think all of us should have our fingers crossed that it actually works, because there is a desperate need for a new therapy in this area.

And secondly, with respect to PD-1, yes; we do have an over 1,000-patient Phase I trial which was designed to have sub-studies that permit exploration of dose and schedule as well as looking at other tumor types.

And we have set it up in exactly that way in order to be able to acquire sufficient data to know exactly how to proceed in registration enabling studies.

It is, of course -- we have a very large number of patients, as you know, that we are now treating with our 3475.

The data are coming in.

And as we become persuaded that there is something there that would really provide a benefit to people, we will certainly be having those discussions with the agency.

Again, as you know, we have Breakthrough Designation and so we are in a position to have discussions fairly frequently and are certainly doing so.

But I can't tell you what that means in terms of our ultimate filing strategy.

Mark Schoenebaum, ISI Group.

Guys, thanks a lot for taking the question.

I would love to go back to some remarks that you made, Ken, about -- I don't have the quotes in front of me, earlier on the call, about possibly looking at possibly divesting certain businesses like Animal Health and Consumer.

I felt like that was the strongest language you have used to date, and I just want your comments on that.

Am I over-reading that?

Then if you were to make a decision on that, would that be something that you could -- do you think you could -- is that a decision that you think could be made in the 2014 time frame?

Or as shareholders and analysts should we be thinking about that possibly taking a little bit of a longer time?

Then for Roger if I might, back to the BACE, follow-up to Tim's question.

Notice that you started -- or at least you put up on ClinTrials.gov, a large MCI trial.

I was wondering if you could talk about the rationale for starting or at least putting that trial up on ClinTrials.gov.

I noticed also in that trial you cut the highest dose.

Maybe you could just talk about what we should read into the fact that you cut the highest dose, if anything.

Thank you.

Thank you, Mark.

Let me just say that what I was trying to convey is, just as we are looking across our R&D and commercial portfolio and sharpening our focus on each of the assets there, so too with respect to Animal Health and the Consumer Care.

I would say we are currently evaluating those businesses the way we are evaluating everything, to figure out whether those businesses produce the most value inside our portfolio or outside our portfolio.

I did not mean to imply anything whatsoever with respect to timing.

But I would say again we are currently evaluating those businesses just as we are sharpening our focus on every aspect of our business.

Yes, Mark, it's Roger.

With respect to BACE, there has always been the concern -- and we have discussed it in many different contexts on these calls -- that though beta-secretase inhibition may be enormously useful in delaying the onset of dementia, it may be necessary to go in quite early.

And the question is -- when do you go in?

The genetic data says we believe there would be a very strong effect of beta-secretase inhibition if you could start very, very early.

But on the other hand, we can't do a 20- or 30-year outcome study.

So the goal is to try and go early enough to make sure that we will see an effect; and hence we had always planned to do a prodromal study.

We posted the prodromal study -- it's on ClinicalTrials.gov -- as it is in the planning stage, and we are working to come up with exactly how that will be done.

And I don't think you should read anything more into it than that.

But I think we still, I still, regard this as a hugely important program for us and for people around the world.

Andrew Baum, Citi.

I am from Citi.

Two questions.

Firstly, I think, Adam, you said the DPP-4 TRx must grow, Januvia/Janumet franchise must grow.

It is doing minus 5 to minus 6 year-on-year right now.

Given the SABER data from one of your competitors, net-net, didn't exactly enhance the outlook for the class, and given the competitive pressures, what is there that is going to drive that growth?

Presumably it is not marketing.

You have obviously got the SGLT2 combination, but that is still somewhat far off.

Then suddenly, one of your competitors just took their LAG-3 into the [connect] in combination with a PD-1.

When should we expect the first combination trials with MK-3475?

Particularly if you could reference your intention to take vicriviroc back into the clinic in combination with a PD-1, again, timing.

Many thanks.

Andrew, I will discuss first the TRx trend for Januvia.

Currently if you look at the IMS data on a weekly basis, we are seeing about a 2% to 2.5% decline in TRx-es.

And I would encourage you to focus on the TRx volume, because that is what is most closely correlated to overall sales.

What I am trying to say is that in order for us to grow for next year what we have to do is see a change in that volume.

If that volume continues to decline, obviously it is going to be a problem for us to grow.

I do think there are some things that we are doing right now in order to help us find ways to grow, and I will give you a few examples.

Number one, we have spent a lot of our time defending our market share versus competition; and I think we have done a very good job of defending our market share.

I think you can see that by the fact that in the United States we have well over 70% share, closer to 75% share of the DPP-4 class.

What we have not been able to do is to get the class to grow by moving patients from sulfonylureas, or to use DPP-4s prior to sulfonylureas.

I think that our sales forces have been distracted by focusing on market share.

We now have representatives that are solely dedicated to focusing on market growth and trying to move share from sulfonylureas to Januvia, and I think that should help us.

In addition to that, we have seen the impact of the new competitors.

I think for the most part they've begun to level off, so I think that now we can start to focus again away from market share and more on market growth.

With regard to the outcomes trials I think that any positive outcomes trials in the DPP-4 class should be helpful to the entire class.

As you may recall our TECOS study will read out at the end of 2014.

The other thing that we have in the horizon is MK-3102, which I believe will be a very important compound and potentially could have people start on a DPP-4 even earlier than they do today.

Then you also mentioned that we have an SGLT2 as well as an SGLT2 combination with Januvia.

So I believe the diabetes class is an important one for us today, and it will be important for us in the future.

Today it is about maximizing Januvia and trying to move business from sulfonylureas over to Januvia.

In the future, we will be able to have 3102 as well as SGLT2 and an SGLT2 combination.

Let me just add that, as I said in my comments, we are very focused on strengthening Januvia in the United States for all the reasons that Adam just stated.

But it's also to important to remember that we have another set of opportunities in our portfolio including vaccines, immunology, HIV, and others.

So even in a quarter where we actually had less than positive growth in the US for Januvia we are still able to grow 4% GHH portfolio.

So I just want to make sure that we are also focused as a Company and ask others to remember that we have multiple things in our broad portfolio.

Yes, think that is an important note, Ken.

As we continue to focus on Januvia, of course we will find ways to ensure that we are maximizing the potential in the vaccine business, which showed very significant growth this quarter, to maximize Remicade and Simponi and the other products in the portfolio.

So I want to assure you that although we have significant focus on Januvia, we are also focusing on our other growth drivers.

Because I think that those enable us to show things like 7% underlying growth in the US when you adjust for the patent expiries, and it allows us to grow 4% on a global basis.

Roger?

Andrew, at a high level, first of all, the expectation is that having demonstrated that there is activity for 3475, that we want to look at combinations with conventional chemotherapies, and some of that is already underway; with targeted chemotherapies, more novel targeted chemotherapies; combinations with other immunomodulators; and then other novel agents that are active in relevant tumor types where we know that 3475 has some evidence of an effect.

Now, you should expect that you are going to see a number of those combinations getting posted very soon.

In particular as I have indicated before on prior calls, we have had a group working in the background before PD-1 actually on the sets of immunoregulatory molecules on the lymphocyte cell surface that could potentially be important in responses.

And a lot of that is coming to fruition and is right now in studies that are enabling for entry into humans.

So I would expect all of those things to be coming forward at more or less the same time, early on in 2014.

And that is when you should expect to start seeing a lot of those combinations come.

There is an enormous amount of work to be done.

And more or less to the point that Ken made, we are going to be studying this molecule and how best to use it for a very, very long time because it is responsive in a lot of tumor types.

So there is a huge amount of work to be done here to find out how best to use 3475 and to bring the benefits of this therapy to patients who so desperately need it.

David Risinger, Morgan Stanley.

Thanks very much.

I have two questions.

First on Animal Health, I understand that cattle was weak due to the recall of Zilmax.

But is there any way that you can break out Merck's growth in cattle excluding Zilmax?

Then second, for Dr. Perlmutter, could you please provide an update on MK-1293, your insulin glargine me-too that was moving into late-stage testing recently?

Are you moving that forward, or divesting it?

Also, maybe you could just comment on the insulin facility that you recently completed building in Virginia and whether that will be moved forward or divested.

Thank you.

On Animal Health, let me start with Animal Health.

Zilmax was a major issue.

I would also say that across-the-board this quarter it wasn't the strongest quarter.

But I'd come back to the point that I made before, which is that there are favorable macro trends for these businesses and we continue to expect very good growth going forward.

Roger?

Yes.

David, with respect to our programs, we have been looking at a variety of different ways to assist in the therapy of patients with diabetes.

We haven't disclosed any information about how we might move forward in that area, so I really don't have any comments about that.

I wonder if you were thinking about our recently approved vaccine production facility.

But in any case, we will have more information for you on advancing our diabetes franchise and therapy for diabetic patients in the future.

I should also point out on the Animal Health that this quarter we had plus-2% growth overall, if you adjust for exchange, etc.

Vamil Divan, Credit Suisse.

Thanks for taking the questions.

My first one is on the autoimmune franchise; it seems like you had a nice quarter there.

My question is really around the future and what impact do you think biosimilars might have, especially once we get into 2015.

And I guess specifically it is on the impact to Remicade a biosimilar might have on Remicade, but also on a related product like Simponi.

Then the second one is on hepatitis C. Obviously, positive news you have gotten there from the FDA, and the data does look good.

Just wondering if there is other answers you are going to need.

We have to wait, obviously, for the data, but just in terms of other answers you might need from Phase II; or is this something that might be moving to Phase III quickly?

Is 2017 a reasonable time frame to assume that this might be something that could get to the market?

Any color there would be helpful.

Thanks.

I will go ahead and take that Remicade and Simponi question.

If you look at Remicade and Simponi, we had combined growth of about 16% ex-foreign exchange this quarter, where Remicade was 12%, Simponi was about 40%.

If you look at the Remicade growth, there was some benefit due to timing and tenders.

If you exclude that, our growth rate was in the mid single digits.

I also believe that Simponi will represent the strongest growth opportunity, particularly with the UC approval that we had last month, and we are continuing to prepare for launch.

If you look at the biosimilars, we anticipate biosimilars in smaller markets next year.

If you look at those markets they represent less than 20% of our current Remicade business.

So we believe that we will continue to be successful overall with Remicade in the markets that are the largest markets, where there won't be biosimilars.

And we don't believe that having a biosimilar Remicade should necessarily impact the sales as we move forward with Simponi.

Roger?

Vamil, with respect to the HCV program, I can't provide explicit timing for you.

I would just say, as I mentioned, we have a portfolio of molecules.

We have Breakthrough designation, of course, as we have indicated for the combination of 5172 and 8742; but there are other molecules as well.

I think the key is getting to an all-oral pan-genotypic ribavirin-free regimen that is useful in patients irrespective of comorbidities.

And that is an important thing to keep in mind, right?

Because these patients who have chronic HCV infection are in general elderly patients who have other things going on.

So it would be important that whatever drug cocktails are used in these patients in order to cure them of HCV, that these be things that are tolerable and can be used even with a comorbid situation.

So we are focusing on all of that, very excited about where we are in the program, and we are going to move it forward just as quickly as we can.

Can I make a correction?

In response to Dave Risinger's question, I think I said that the Animal Health sales was 2%, ex-exchange.

It is ex-exchange and it is also excluding Zilmax.

John Boris, SunTrust.

Thanks for taking the questions.

First question for Ken.

As you look back and reflect on your 2013 plan and the pushes and pulls there, what are some of the things that you really like that materialized?

And then what are some of those things that you saw in the 2013 plan that could have been done better for the 2014 planning process?

And then a question for Roger Perlmutter.

If you look at Merck's regulatory track record historically, the Company has had an impeccable regulatory track record.

But if you look at the last seven programs that you put into registration, you received three Complete Response Letters including a request for additional data.

Very uncharacteristic of the Company.

What are you doing going forward to help improve that to basically your standard, which was an impeccable track record, especially in light of the new products that you are putting into clinical development?

Okay.

Why don't I start with the 2013 plan issues?

I would start to say the things that I guess were the most negative things versus assumptions, obviously Januvia US growth we had hoped would be stronger.

Also, the impact of our hepatitis C category in terms of Victrelis's growth and PegIntron's growth, given warehousing of patients, were things which we wish had gone better.

On the other hand, I think in a year of patent expiries being able to continue to drive underlying growth in vaccines, immunology, HIV, are all important.

Geographically, continuing to be in the emerging markets and doing well in the emerging markets year to date, I think is also a very positive thing.

The bigger things that make me excited though is I have to look past any particular quarter.

And when you see things like the Breakthrough designations for our anti-PD-1 and for our HCV program, those are things that I think are the most important to the Company going forward and those are the areas where we want to continue to be focused, where we can drive the greatest amount of growth going forward.

If I can add to that, Ken, the one thing that I would add also is that in 2013 we just saw an exceptionally strong impact from the Japanese yen ForEx.

We just probably didn't see that coming quite as much, and that is what caused us to -- that, combined with the devaluation in Venezuela, caused us to change our guidance earlier this year.

But again I think against that and some of comments, points you had, we have had a very proactive cost management response.

So that basically I think that is something we are now set up for as we go forward into 2014 to continue to manage well in this environment.

And the foreign exchange rates have stabilized.

The euro has come back a little bit.

So we will have to watch that.

Obviously, Venezuela continues to be a topic that we will all have to watch as we go forward in all years going forward.

But in general, I think that we shouldn't miss how big the impact was with the yen and the Venezuelan devaluation this year.

Roger?

Yes, John, I have to say that I think that you -- it is the case that I am not happy with where we stand in terms of how our organization has been able to deliver documents that meet regulatory guidelines.

I just am really not happy with that.

And as a result, I have been leaning into this process very, very heavily.

There is no single explanation for what has gone on over the last few years.

First of all, of course there are issues with respect to study design.

The complexity in study design always makes it challenging to deliver data sets that are interpretable on first pass.

There are also issues related to study execution.

There are complexities associated with this.

And then there is the fact that there have been many studies that have been large outcome studies, and those have their own challenges associated with them.

Suffice it to say that there are a number of issues that I have identified and that we are working to correct.

We are doing a lot to improve the management of our safety data and our good clinical practice approach.

I am very pleased that we have a new head of global safety who will be joining us next month.

We also are bringing in some additional people to shore this up.

I am confident that we can get to a point where we and the FDA can work together in a way to bring files forward that pass muster right from the beginning, and that is my goal.

Tony Butler, Barclays Capital.

Thank you very much.

Roger, just on 3475, tomorrow there will be some data presented in Sydney, and I am just curious.

What should we be mindful of looking at, given it is a Phase I trial?

Second, the SMR conference is in November.

Again, would you mind making some statements about what we should be mindful of that Merck will present at that point?

Then finally, will there be other data readouts between now and ASCO where Merck may present top-line data?

Thank you very much.

Yes, Tony, so with respect to the 3475 lung cancer data, again it is a small data set, but I think that what we are learning, as is plain from the abstract and as you will see is that there clearly is evidence of response.

And looking at the nuances of those responses -- in particular whether or not there are characteristics of patients that have predictive value with respect to response -- I think that could prove to be very important; and certainly I would look at that.

We're going to have more data that will be coming out at all the major scientific meetings including SMR.

AACR is going on, I believe in February, and there will be more data presented there before ASCO too.

So we have a lot of studies going on and we will have the opportunity to make sure that in the appropriate scientific forums we present data that place 3475 therapy in the context of what can be done for patients with a widely disseminated malignant disease.

Great.

Thank you, Tony.

Andrea, I think we have time for just one more caller.

Chris Schott, JPMorgan.

Great.

Thanks very much.

Just had a couple questions here.

Maybe the first one for Ken, just coming back to strategic alternatives on Animal Health and Consumer.

When you talk about evaluating whether it is more advantageous for these businesses to be part of Merck or not, can you just help us understand?

Is that decision based on whether these businesses could operationally perform better inside or outside of Merck, or whether these businesses would be worth more or be more valuable to shareholders inside or outside of Merck?

My second question was on PD-1.

It just was two questions.

Maybe the first one in lung, can you just elaborate a little bit more about how you are thinking about PD-L1 status and the role that is going to play in the development of the category?

I think there has been some debate on this topic given some of the responses in PD-L1-negative patients we have seen in some studies.

My second question was, when we think about additional tumors beyond melanoma and lung that you are looking at, what are you most excited about there?

And What does the science suggest in terms of likelihood of success relative to some of the initial tumors where we have seen activity so far?

I'm just trying to understand, again, when you look at those additional areas you are looking, which ones should we really be focused in on?

Thanks very much.

So, Chris, first with respect to your question about Animal Health and Consumer, whether it is the operational issues or the value to shareholders, it is both.

At the end of the day, our goal is to maximize long-term cash flow for our shareholders; and we are looking at these businesses like we do everything else versus other opportunities that would allow us to drive that long-term cash flow.

Chris, it's Roger.

For PD-L1, first of all I think we know already, as is typical in malignant disease, that PD-L1 is not an exclusive biomarker.

Right?

It is not the case that only those individuals whose tumors have expressed PD-L1 are going to be responsive.

And hence there is a reason, depending upon the magnitude of the response and the degree of the adverse effects, to think about treating with PD-1 even in those who are PD-L1-negative.

The question is -- what is the correlation, and does it differ from one tumor type to the other, and can you use it as a way to begin to focus your attention on different patient subsets?

I think more data are coming out on that.

I think there will be more data that will be available coming up at the lung cancer meetings and then at meetings after that.

So that is a useful thing to look at.

The second thing is when you think about where else to go with PD-1, one of the advantages of having a 1,000-patient Phase I study that focuses on many groups, but including all epithelial tumors, is that we have a chance to look at individuals in whom we see evidence of a response and ask -- can we tell from that whether there might be subsets of patients who would really benefit?

And from that we roll out more focused studies.

That is what we are doing, and you will have a chance to see those data.

As I indicated there is now quite a number of different tumors that we are exploring directly.

We have announced previously that we are doing work in triple-negative breast, for example, and head and neck cancer and uroepithelial tumors.

In all of these areas we have found evidence for a therapeutic effect.

The question is -- how good is it?

How do you use this drug in combination with others?

There is a lot of work to be done here.

But, I would just say from my perspective the breadth of responsiveness is quite impressive and suggests that we could have a very, very active agent here that would prove to be useful in a number of different settings.

Okay.

Let me just close by saying this was another solid quarter driven by vaccines, immunology, and HIV businesses going forward.

I have to say that none of us are pleased with the Januvia performance in the United States and we are going to continue to focus our efforts and our investments on making Januvia in the US stronger going forward.

We are obviously focusing on reducing costs, but reducing them in a way that doesn't compromise this Company's long-term ability to do that which is here to do, which is to do the innovation that actually makes a huge difference to patients and payers and to society in general.

In that regard, we are very pleased with the Breakthrough designation that we got for our HCV regimen.

We are also very excited and hopeful about the interim lung data for anti-PD-1 as well as the future for this therapy going forward.

So in the end, I would say that we continue to plug on here at Merck.

We are hoping to drive greater growth as we go forward, and we are very much focused on our pipeline as the main means for doing that, both our internal pipeline as well as a reinvigorated approach to business development.

Thank you very much and look forward to speaking to you soon.

Thank you, ladies and gentlemen.

This concludes today's conference.

You may now disconnect.