默克藥廠 (MRK) 2013 Q4 法說會逐字稿

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

Today's call is being recorded.

At this time, I would like to turn the call over to 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 fourth-quarter 2013 conference call.

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

First, you will see that we have items in our GAAP Results such as the acquisition-related charges, restructuring costs and certain other items.

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

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

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

This can be found in table 3 of our press release and the reconciliation table I mentioned earlier is in table 2 of the release.

During the call, we will be referring to table 2 for the P&L and table 3 as it relates to revenue.

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

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

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

Our SEC filings, including item 1A in the 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 of our forward-looking statements made this morning.

Merck underscores no obligation to publicly update any forward-looking statements and you can see our SEC filings, as well as today's earnings release, on Merck.com.

So with that, 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 the product and geographic performance; Peter Kellogg, our Chief Financial Officer, who will review our P&L and provide our outlook for 2014 and Dr. Roger Perlmutter, President of Merck Research Labs, who will provide you with an update on some of our key programs.

So with that, I'll turn the call over to Ken.

Thank you, Joe.

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

This morning, we reported earnings consistent with the guidance that we provided last year.

We did so by managing through faster than anticipated generic erosion, a significant impact of foreign exchange and other headwinds in our business environment.

At the same time, we took proactive steps to further sharpen our R&D and commercial focus, bolster our innovative pipeline and accelerate our efforts to redesign our operating model and reduce our cost base.

The events of last year underscore the imperative for Merck to remain both a highly innovative company and one that can respond to the fast evolving healthcare environment.

Now I'd like to take just a few minutes to reaffirm our strategy and the approach we will continue to take moving forward.

As we have consistently said, Merck remains committed to innovation, applying cutting-edge science in order to develop clinically meaningful medicines and vaccines that save and improve lives throughout the world.

It is only by bringing to market new products that make a meaningful difference to patients, healthcare providers and payers that will continue to drive value over the long term for patients, customers and of course, our shareholders.

Our goal is to position Merck at the forefront of introducing these kinds of important new products.

In this regard, we took an important step last year when Dr. Roger Perlmutter rejoined Merck as head of R&D.

Roger's mission is to help us improve our productivity and our pipeline execution with the firm intention of reestablishing Merck as a leading research intensive biopharmaceutical company.

I am delighted that we are already seeing progress with the kind of innovation that can make a life or death difference to patients like MK-3475, our anti-PD-1 immunotherapy for oncology.

Last month, we announced that we initiated the rolling submission of a BLA in the United States for this important investigational antibody, which we expect to complete in the first half of 2014.

And then, this morning, we announced that we have signed three additional collaboration agreements to evaluate MK-3475 in combination regimens to treat a broad range of cancers.

Last month, we also received a favorable recommendation from the FDA's advisory committee for vorapaxar and in 2013, we initiated Phase III trials for our base inhibitor and received breakthrough therapy designation from the FDA for our combination regimen for the treatment of chronic hepatitis C.

Looking ahead, we also anticipate completing regulatory applications for odanacatib, suvorexant, and sugammadex and may receive regulatory approvals from multiple others.

Each of these candidates is based on a novel mechanism that addresses the treatment of a disease or condition in an entirely new way.

Roger will talk more about our pipeline and the progress he and his team are making towards moving ahead promising pipeline candidates and increasing R&D productivity overall.

So 2013 was an important year for Merck.

We continued implementing our strategy of driving underlying growth while aggressively managing our costs to deliver bottom-line performance.

We focused on making the right investment decisions across our businesses while continuing to advance our near-term and late-stage pipeline.

The strength of our underlying portfolio, combined with our aggressive cost management and productivity initiatives, enabled us to deliver non-GAAP EPS of $3.49 for the year.

To ensure that we have a strong growth profile in years to come, we placed our efforts and resources behind the franchises that we believe will help us grow such as our diabetes and vaccines businesses and in many cases were able to drive double-digit growth.

We also continue to invest in the key geographies that will remain drivers of growth now and into the future, including in our key emerging markets where we saw another year of solid growth.

To maintain this momentum, we announced a strategic initiative in October designed to sharpen our focus on our best growth opportunities and to redesign our operating model while reducing our cost basis.

We have made solid progress on all of these fronts.

You will recall that following our merger with Schering-Plough after 2012, we achieved merger synergies resulting in $3.5 billion in net savings.

In addition to those synergies, we expect a further $2.5 billion in cost savings by the end of 2015 off our 2012 base.

This initiative will also increase our operating efficiency, provide us with the flexibility to take action on our best opportunities and to be responsive to the challenges of a dynamic healthcare environment.

This includes investing in new licensing and business development activities to acquire external innovation that will further strengthen our pipeline.

I remain confident that these actions will help make Merck a more competitive company, better positioned to drive innovation and growth.

We also will continue to return a high level of cash to our shareholders.

In 2013, we returned $11 billion through both the dividend and share repurchases.

Finally, I would like to remind you that we continue to evaluate all aspects of our business.

Our goal is for each of our priority businesses to be industry leaders.

We must determine whether particular assets are core to our strategy, whether they will provide strategic advantage going forward and whether they would generate greater long-term value as part of the Company or not.

Through this process, we are exploring strategic options for both our animal health and consumer care businesses.

We could reach different conclusions about the two businesses and anticipate that we will complete the process and take action, if any, in 2014.

In closing, in 2013, we took decisive action to revitalize our research and development, strengthen our pipeline and sharpen our focus.

As we look forward to 2014, I am confident that we are positioning the company for long-term growth and I'm excited about the potential of our near and long-term pipeline.

I am also confident that we are moving quickly to make Merck a leaner, more agile company focused on our best commercial and innovative product development opportunities.

And now, I'd like to turn the call over to my colleague, Adam Schechter.

Thank you, Ken.

Good morning, everyone.

This morning, I will provide you with an overview of Global Human Health results for 2013 and also touch on the 2014 outlook.

In 2013, Global Human Health took action, action to focus our resources on core markets and core therapeutic areas that provide the greatest potential for long-term growth.

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

However, we did have a number of areas of growth in 2013, including vaccines, immunology, diabetes and HIV.

Our underlying portfolio grew 4% on a constant currency basis for both the full year and in the fourth quarter, excluding the recent patent expiries.

Let me provide more details on the performance of our core products and our core markets.

My comments will be on a constant currency basis.

I will start with the JANUVIA franchise.

The franchise had sales of $1.6 billion and 6% growth in the fourth quarter.

In the United States, sales declined 3% driven by a slight decline in TRx volume.

A small benefit from price was offset by a reduction in customer inventory levels this quarter.

Our international markets, which now represent 50% of total sales, grew 15%.

We drove good volume growth in each region in Europe, the emerging markets and Japan and we maintained market leadership.

Globally, the diabetes market is significant and the macro trends support a growing market.

We will continue to focus significant resources around the world on this core franchise with about $6 billion in annual sales.

Moving to ISENTRESS, we had another good quarter with 16% 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 next to immunology, the combined immunology business consisting of REMICADE and SIMPONI grew 15% in the quarter.

Sales of SIMPONI grew over 40% to $146 million and reached $500 million on a full-year basis.

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

Lastly, moving to our vaccine business, in fourth quarter, vaccine sales grew 1%.

The timing of public sector purchases for GARDASIL and ROTATEQ had a negative impact on vaccine growth in the quarter.

In addition, last year's fourth-quarter sales included the launch of GARDASIL in Japan and PROQUAD in the US.

Demand for our vaccines portfolio remains strong with full-year sales growing 11% to over $5.5 billion.

Now let me touch on two core vaccines and I will start with GARDASIL.

GARDASIL sales declined by 9% in the quarter.

International sales growth of 12% was offset by a 19% decline in the US.

In the US, GARDASIL sales were affected by the timing of public sector purchases, which do not occur at the same level each quarter.

Public sector purchases were about $50 million lower this quarter than in the fourth quarter of 2012.

Internationally, GARDASIL sales grew 12%.

Strong growth in emerging markets benefited from the start of the national immunization program in Brazil.

Sales growth in the emerging markets more than offset the loss of off sales in Japan.

Sales in Japan reflected the government's decision in June to suspend proactive recommendation of HPV vaccines.

For reference, Japan sales were $40 million in the prior-year quarter.

Moving on to ZOSTAVAX, ZOSTAVAX sales were $264 million this quarter, the highest since launch.

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

Internationally, we now have launched ZOSTAVAX in select Asian markets and in the UK.

We are seeing good uptake in those markets.

But as an important reminder, our European vaccine results are reported through equity income.

We continue to see ZOSTAVAX as a growth driver in the future.

Now I'd like to touch on our overall performance at a regional level.

In the United States, Europe and Canada, sales continue to be affected by the loss of exclusivity of a number of brands, including SINGULAIR, MAXALT and TEMODAR..

Excluding these products, US sales increased by 2% and Europe and Canada sales increased by 5% compared to the prior year.

We expect continued pricing and rebate pressure in 2014 similar to prior years.

Japan sales declined 4% ex-exchange primarily due to lower sales of GARDASIL.

As we move into 2014, sales in Japan will be adversely impacted by the bi-annual price decreases and repricing of the DPP4 class in the first quarter.

Sales in the emerging markets grew 8% ex-exchange.

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

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

Looking ahead, we expect the emerging markets, including China, to be growth drivers for us.

In summary, in 2013, Global Human Health drove performance of our underlying portfolio of key brands.

These brands grew 4% in the fourth quarter, as well as for the full year.

We also continue to prioritize investments and sharpen focus on the best opportunities for long-term growth.

We have already made good progress, including the following -- building Merck's oncology business unit to execute the future launch of MK-3475.

We are recruiting external talent with deep scientific and deep commercial experience in oncology.

We also divested noncore assets like SAPHRIS, certain ophthalmology products in the US and some off-patent brands internationally.

In 2014, we will continue to prioritize and focus on our most promising investment opportunities.

In addition, we are prepared for multiple near-term launches.

We are anticipating regulatory actions for V503, our 9-valent HPV vaccine candidate, for vorapaxar, for vintafolide in the EU, for vaniprevir in Japan for HCV, for suvorexant in Japan and for the allergy immunotherapies, GRASTEK and RAGWITEK.

I believe that our strong portfolio, the actions we are taking to prioritize investment and our near and long-term opportunities position us well for future success.

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

Thank you, Adam and good morning.

As you heard from Ken and Adam, we took action in 2013 to ensure that we are resourcing our key underlying growth drivers and sharpening our focus to invest in our best pipeline opportunities.

We are starting to see the benefits of those actions.

Moreover, we are ensuring that the savings and efficiencies we are creating in our business are translated into continued focus on cash returns to shareholders.

This morning, I will highlight the financial elements of our fourth quarter, as well as discuss our outlook for 2014 and my remarks will focus on our non-GAAP financials.

With solid growth in our underlying business and strong cost management, we were able to deliver EPS growth of 6% this quarter.

Additionally, we delivered full-year EPS within our guidance range.

Adam has already discussed highlights from the top line, so let me discuss some of the other elements of the quarter.

First, product gross margin.

This declined on a year-over-year basis to 73% this quarter.

As outlined in prior quarters, generic erosion of high gross margin products created a headwind.

This is compounded by solid growth in some of our lower margin products such as vaccines and immunology.

We expect this mix shift to continue in 2014 with the first-half gross margin being at a similar level as the fourth quarter of 2013.

Later in the year, however, we anticipate improvement in PGM, particularly with the anticipated inclusion of the AstraZeneca joint venture.

Taken together, we expect the 2014 full-year gross margin ratio to be slightly lower than the 2013 full-year rate of 74.3%.

Moving to other areas of spending, during the fourth quarter, we continued to find opportunities to lower our cost base.

You can see the results of our efforts to reduce R&D spending at about $440 million.

Please note that this is in part due to a $150 million upfront licensing payment in the base period.

Also, in the fourth quarter, SG&A expenses were reduced by approximately $400 million compared to last year, including a roughly $60 million benefit from foreign exchange.

The fourth quarter also marked an important milestone for our capital allocation efforts.

We successfully completed the $5 billion accelerated share repurchase program that was announced earlier in the year.

Coupled with our ongoing share buyback activity, we repurchased approximately 5% of our shares this year.

Additionally, we increased our dividend for the third year in a row.

And as Ken said, our share repurchases and dividend payments amounted to over $11 billion being returned to shareholders in the year.

Now, turning to guidance and our outlook for 2014, our guidance reflects a reshaping of our portfolio, reductions in expenses and infrastructure and targeted investments to drive future growth and long-term shareholder value.

That said, at current exchange rates, we expect revenue of $42.4 billion to $43.2 billion.

Let me outline a few key factors and assumptions included in this guidance.

First, we anticipate AstraZeneca will exercise their option to end our long-standing partnership.

If they exercise the option, the JV would come to a close at the end of June.

At that time, we would no longer record supply sales nor equity income from the joint venture.

Furthermore, in the first half of the year, we continue to expect sharp year-over-year declines in both of these line items.

Second, while not as significant as in 2013, we still expect negative top-line impacts from patent expiries in 2014 and we expect that impact to be about $0.5 billion.

Third, in regard to divestitures, as we announced over the past several months, we began divesting non-core assets such as SAPHRIS and the ophthalmics products in the US, as well as other products.

Sales from these divested products contributed approximately $600 million in 2013.

Finally, our EPS guidance spans a wider range than in prior years.

This guidance range plans for a potential devaluation of the Venezuelan bolivar.

The higher end of the range assumes no devaluation, whereas the bottom end of the range accounts for a possible devaluation under certain scenarios.

As you may recall, the devaluation of this currency in 2013 led to a $0.07 negative impact.

We cannot predict the timing or the magnitude of this potential devaluation in 2014.

However, if it does occur, we do expect that the impact would be greater than the impact in 2013.

As a result, we expect non-GAAP EPS between $3.35 and $3.53.

Accordingly, as the year progresses, we would expect to narrow the EPS range.

The corresponding GAAP range is $2.15 to $2.47.

Taking into account the divestitures and the anticipated conclusion of the AstraZeneca joint venture, 2014 will be a trough year for earnings.

Now, I would like to provide some additional color on the other elements we have built into our EPS guidance.

On R&D, we expect our 2014 non-GAAP R&D expenses to be below 2013 levels despite heavy and focused investments in our anti-PD-1, hepatitis C, diabetes and Alzheimer's disease programs.

Similarly, for SG&A, we expect to be below 2013 levels as we continue to prioritize and focus spend in core productlines and the upcoming launches Adam mentioned earlier.

Regarding tax, we expect the full-year tax rate to be 24% to 26%.

As in prior years, our 2014 guidance does not include a renewal of the R&D tax credit.

Now let me outline how you should think about the spread of earnings across the quarters.

On an operating basis, we expect EPS in the first half of 2014 to be lower than in the second half with the first quarter being the lowest.

As I mentioned earlier, this is driven by the gross margin being lower in the first half of 2014.

Regarding capital allocation, we remain poised to bolster the pipeline with external innovation and we maintain a strong balance sheet and an efficient capital structure for the right opportunities.

In 2014, you can expect continued shareholder-friendly returns of cash through our $15 billion share repurchase program announced last May, as well as through the quarterly dividend.

So in conclusion, 2013 was a pivotal year for our Company.

We have emerged with a promising pipeline to deliver future growth.

Additionally, we committed to a strategic reshaping of the Company to maximize our core in-line assets and key pipeline programs.

Finally, we accelerated returns of cash to shareholders.

In 2014, we will continue to execute upon our strategic initiative of prioritization and focus.

And we will capitalize on opportunities to drive long-term shareholder value.

Thank you.

Now I'd like to turn the call over to Roger.

Thank you, Peter.

As Ken highlighted at the beginning of the call, we are making steady progress in MRL, crafting a more cost-effective organization focused on innovative products with meaningful differentiated attributes.

Our R&D expenditures in the fourth quarter, as Peter noted, declined by more than $440 million versus the prior year.

While reducing our cost base, we have simultaneously advanced important regulatory filings, made tangible progress in our late development programs and introduced significant new molecules into early clinical development.

I should also note that we have recruited key personnel into our development, regulatory and discovery groups and established a new licensing and business development function.

Each of these changes is having a significant favorable impact on our activities.

I will summarize some of our accomplishments in the fourth quarter and discuss our plans for 2014.

Beginning with our regulatory activities, we completed our filings for vorapaxar and for our grass and ragweed oral desensitizing therapies for allergic rhinitis.

All three of these received favorable reviews at their respective FDA advisory committees.

We have submitted potential labeling language for each to the FDA and look forward to discussions with the agency on further steps in the review process.

At the end of the fourth quarter, we filed a US biologics licensing application for V503, our 9-valent human papilloma virus vaccine, which we believe will extend protection substantially against this important cause of cervical cancer in women.

Also, I am pleased to report that the Japanese regulatory agency granted priority review to vaniprevir for the treatment of chronic HCV infection.

As most of you know, we received a complete response letter following our NDA submission for suvorexent based on the need for lower dosage forms that would permit reduced exposure to this novel orexin antagonist for the treatment of insomnia.

We have now completed the study suggested by the FDA and we expect to be able to submit our responses to their request by the end of the first quarter.

Similarly, we have initiated a definitive hypersensitivity study for sugammadex, our novel agent designed to reverse neuromuscular blockade employed during anesthesia.

Completion of this study will permit us to submit an updated application for this important product.

Turning from regulatory affairs to clinical development, we were active on many fronts.

Data presented at the Society for Melanoma Research meeting last fall demonstrated favorable overall survival trends in patients with advanced melanoma who received MK-3475, our PD-1-specific antibody that has received breakthrough designation from the FDA.

Currently, we have more than 4,000 patients enrolled in clinical trials for MK-3475 in multiple tumor types, including non-small cell lung cancer, triple negative breast cancer, uroepithelial tumors, head and neck cancer and some hematologic malignancies, among others.

Response rates in our large salvage studies encouraged us to initiate a rolling submission to the FDA with a goal of making this new therapy available to patients with advanced melanoma who have exhausted all other treatment options.

As we announced last month, we expect to complete the file for MK-3475 during the first half of 2014.

This morning, we announced further progress in the evaluation of PD-1 and other immunoregulatory targets.

First, we have opened a signal detection study seeking to identify other malignancies for which MK-3475 may provide therapeutic benefit.

The trial will enroll approximately 320 patients suffering from one of 20 different tumor types, which were selected based on a variety of attributes, including the pattern of expression of PDL-1.

In our experience to date, high levels of this PD-1 ligand appear to correlate with tumor responses.

Second, we announced significant new partnerships testing the ability of MK-3475 to add benefit to patients undergoing treatment with other investigational agents, including a 4-1BB-specific antibody from Pfizer, a small molecule IDO1 antagonist from Incyte and an oncolytic virus from Amgen, which has been shown to cause significant tumor shrinkage in many patients with malignant melanoma.

We believe that the scientific justification for each of these partnerships is very strong.

Moreover, the breadth of these partnerships added to our previously announced collaboration with GlaxoSmithKline demonstrates our substantive commitment to MK-3475.

Third, we also announced a new partnership with Ablynx to develop nanobodies that combine to other immunoregulatory molecules and in particular can be used to form multivalent complexes such that PD-1 antagonism is combined with specific binding to other important proteins on the lymphocyte cell surface.

The driving force of this collaboration derives from studies in our own Palo Alto laboratory, examining the molecular basis of checkpoint activity in T cells.

This effort with our colleagues at Ablynx will add considerably to our repertoire of immunoregulatory modulators, the cornerstone of our new approach to oncology therapeutics.

Beyond PD-1 and immunoregulation, we made significant additional progress in several important areas of development, including expansion of our hepatitis C virus portfolio.

We also advanced potential new therapies for human immunodeficiency virus infection and the development of compounds that act by novel mechanisms to augment glucose lowering in patients with diabetes.

Finally, in the fourth quarter, we announced progression of our base program into Phase III based on satisfactory evaluation by our independent data monitoring committee of the results obtained with a lead cohort.

Looking forward, as I indicated, we expect to complete or filing of the suvorexant response in the first quarter and the MK-3475 rolling submission before the middle of the year.

Our sugammadex filing will occur before the end of the year and depending upon the review of the final data, we hope to be able to proceed with our odanacatib filing as well.

These regulatory accomplishments will be augmented by additional progress in Phase III clinical studies, which I will describe in detail at our R&D day on May 6. And it is fair to predict that additional business development activity, principally in the form of collaborations and alliances, will emerge throughout the year.

I now turn the call back to Joe.

Thank you, Roger and Andrea, we will get ready to start the Q&A segment.

And for all the callers, if you can just limit your questions to one or two so we can get through as many callers as possible.

So with that, Andrew, I'll turn it over to the first caller.

Chris Schott, JPMorgan.

Great, thanks very much for the questions.

Just two here.

First -- first one for Ken maybe.

As you have had a chance to review your animal health division, can you share any updated views on how core of a franchise you see this business to Merck?

And then the second one is on immuno-oncology; I guess a two-part question.

First, what is your view at this point on how much of this market will ultimately be monotherapy versus a combination of immuno-oncology assets?

And then as you think about the combinations, how important is it for Merck to own both assets versus to working with partners as you look to maximize the value of this platform for the Company?

Thanks very much.

So Chris, I will start with your first question.

As we mentioned before, we are looking at our entire portfolio, but to respond specifically to your question about animal health, we have always viewed this as a very good business for Merck.

We think of it as being one of the industry leaders.

It is the second-largest.

It has good margins.

The science that we employee in our human health efforts often has application across species.

The underlying macroeconomic drivers, both on the companion side and on the production animal side, are very favorable.

So I can say that this is a very good business that we like very much and the question becomes what are the alternatives and is there something that actually makes that more valuable to our shareholders over the longer term.

Great and then Roger?

Okay, so Chris, with respect to monotherapy versus combination therapy, I think, again, as I've said previously, we are really at a very early point in the study of immunoregulatory molecules.

We are quite impressed with the data that we've been seeing using MK-3475 as monotherapy, but certainly the history of cancer therapy is that, over time, oncologists seek to employ combinations in order to get better benefit risk ratios and to get better responses in a larger fraction of patients.

With respect to owning both versus collaborations, well, obviously, under the best circumstances, you'd like to own both, but you can't expect to discover everything yourself and we want to do absolutely the best thing for patients and advance the best therapies.

Great, thank you, Chris for the questions and Andrea, next caller, please.

Seamus Fernandez, Leerink.

Thanks very much for the question.

So Ken, can you, first, maybe talk a little bit about the interest in expanding the animal health franchise to -- whether it be via swaps or other type of collaborations with other players in the space on the animal health side?

And then can you also provide some additional feedback on the -- on your interest in the consumer health business and how that fits overall?

We've seen a lot of speculation in the press in that regard.

Interestingly, we just met with Novartis's CEO and he expressed that the -- and this is the best time for the industry to be working together in terms of swaps and things like that.

Separately, Roger, just as a quick question, congratulations on the collaborations in particular.

Can you just give us a little bit of color into the whether or not you think that PD-L1 biomarkers are maximizing -- or basically when you have high PD-L1 expression that you fully maximize the efficacy of those products or if you will be pursuing combinations in high PD-L1 expressing patients as well?

And then just in terms of the IDO collaboration, and the 4-1BB in particular, what tumors do you think -- obviously, non-small cell lung cancer is one of strong interest, but what other tumor types should we be thinking about these mechanisms having interesting activity?

Thanks a lot.

Thanks, Seamus.

Let me try to respond to your first question.

So as I mentioned previously, we are exploring strategic options for both our animal health and consumer care businesses.

Getting a business versus getting cash is something that we obviously need to think about, but I am not going to comment on any one hypothetical swap or anything of that nature.

We are looking at all options, I can assure you, with the sole objective of maximizing long-term value to our shareholders.

I will also comment that, again, we think these are terrific businesses.

In animal health, we have the number two business in terms of sales and healthy margins I mentioned before.

In consumer, we have very attractive brands like Coppertone, Dr. Scholl's, Claritin.

I have said that this is a business that is geographically concentrated in the United States.

And so as I think about these things going forward, I've got to look at what the practical options are that present themselves and whether or not these assets are going to create more long-term value inside the portfolio or outside the portfolio.

Great.

Turn it over to Roger.

Yes, just for those two questions, the first with respect to PD-L1 expression and maximal efficacy, again, I think it is important to stand back from this and recognize that we are testing a hypothesis with respect to PD-1 activity.

What we believe is that there are resident cytotoxic T lymphocytes directed against tumors and that those T lymphocytes are inactivated or prevented from becoming activated by PD-1 engagement.

And hence, it stands to reason that PD-L1 as one of the two principal ligands for PD-1, PD-L1 expression would be an indicator of the degree of inactivation of those cells.

And if we could block that, we should activate T cells and destroy tumor.

That is a lovely hypothesis; it sounds great, but there are many parts of that that have yet to be tested experimentally, particularly in the human setting.

So there is a lot of work to be done to understand whether that is really what is going on.

Even if that is precisely what is going on, there is no reason to believe that PD-L1 engagement with PD-1 by itself is the only thing that controls T cell activation and hence tumor responses.

So I have every reason to believe that we can build on this and certainly we have preclinical data that indicate that we can do exactly that and we tend to pursue that very aggressively in patients.

The second question is what tumor types will we explore with our Incyte and Pfizer collaborations.

Obviously, there are a lot of tumors that we can look at and again, we are driven by both the pattern of 4-1BB expression in the Pfizer case and also early data that are becoming available through Incyte studies on their small molecule antagonist of IDO1.

So we will move forward together with them in those collaborations, but I am not going to specify tumor types for you at the moment.

Okay, Seamus, thanks for those questions.

And Andrea, we will take the next caller, please.

David Risinger, Morgan Stanley.

Hi, sorry about that.

I have questions on the P1 as well.

So I will just try to run through them pretty quickly.

Some of them are very simple, but they are under the umbrella of a single question, Joe, so don't cut me off please.

So first, in terms of the collaborations announced today, is there any way that you can frame the economics to each party if one of the combinations announced today were to be commercialized?

Is it something like 60/40 to Merck because your PD-1 is the core therapy?

Second, what is needed to complete the rolling submission for your PD-1 for your (inaudible) failures?

And then third with respect to ASCO, should we be expecting any interim data on your PD-L1 positive lung cancer trial, which is scheduled to complete in September or your Phase 1 triple negative breast, head and neck and gastric trial, which completes in October?

Thank you.

Okay, Dave, with respect to the collaborations' economics, we are not going to go into the details of that.

Suffice it to say that these are deals that are structured in a way that is very attractive for both parties.

What is needed to complete the file?

Well, each of the modules associated with a biologics application and obviously, there is a lot of detail there not only with respect to the clinical data, integrated safety summaries, but also CMC data, etc.

As I said, we are confident we can get this done and we will complete the rolling submission by the middle of the year.

And finally, for ASCO, we are going to have a lot of data that we will be able to present at ASCO and those -- we will move forward with those.

I am not going to presage that in any way, but I should also point out that there will be data presented at other scientific meetings, some of which come earlier, including the AACR meeting.

Okay, great.

Thank you, Dave and Andrea, next caller, please.

Jami Rubin, Goldman Sachs.

Jami Rubin.

Thanks.

Ken, just a first question for you.

Clearly, the Company talked about being poised to pursue external innovation, which signals M&A activity.

And I am wondering if you can just sort of size for us what size transaction you are looking to do.

Merck historically hasn't been that active in M&A in the last couple of years and just can you give us a sense for are you looking to do a big deal that is transformational, a pipeline deal in the $1 billion to $2 billion range and if you can just sort of help us size that?

And then, Roger, for you, just if you could give us a sense for the timing for readouts and potential filings in the new studies that were announced today, specifically Pfizer and Incyte.

And then just Incyte has not disclosed the data for IDO Yervoy in melanoma.

I'm just wondering if you can share with us what you have seen and what data led you to select lung cancer for your collaboration.

And then just finally, and I am sorry about this, but with the Amgen asset, Roger, is there any -- do you expect that that asset can work in other tumor types besides melanoma?

Thanks.

So thanks for your questions, Jami.

Good morning.

Let me just try to respond to your first question.

As I've said before, a major consolidation of the industry type transaction is not, not Merck's preferred strategy.

We would like to be much more focused on value-added bolt-on opportunities that provide meaningful, clinically meaningful products and obviously, we have to acquire those in a way that we believe will create value for our shareholders over the long term.

So you should know that business development is a major priority for us.

That is why Roger talked about creating a new subunit of MRL and I believe, as you move forward, you will see us demonstrate just how important a priority it is for Merck Research Labs.

Okay, Roger?

Yes, Jami, I can't give you too much color on the timing for readouts on the collaborations.

I mean these things we've just announced we are just getting started and obviously, it will take some time before that happens.

Nor, of course, can I comment on any data that Incyte might have accumulated in terms of their own studies.

They are obviously going to be speaking about that in the future.

With respect to the activity of TVEC in other settings, that oncolytic virus has been studied in other settings early on in its development and there was evidence of activity, for example, in squamous cell carcinoma of the head and neck.

So there has always been interest in that.

Over time, we will see whether or not that is an important area to pursue, but I think the important thing to point out is that this modified herpes simplex virus acts in part through direct destruction of tumor cells, but in large part because it stimulates an immune response.

The hypothesis which we are pursuing together with our colleagues at Amgen is that if we can permit that immune response to be even more robust, that we have now provided two sources of stimulation of the cells that are going to eradicate the tumor and it should be even more powerful.

If that proves to be true in one setting, it could prove to be true in many.

And that obviously is a very exciting possibility.

So the first thing, of course, is we have to demonstrate that the two can be used together safely.

That is the most important part of any of these collaborations, but, thereafter, we are going to be very aggressive about looking at opportunities to improve care for cancer patients.

Great.

Jami, thank you for your questions and Andrea, we will open up to the next caller.

John Boris, SunTrust Robinson Humphrey.

Thanks for taking the questions.

The first question just has to do with cost savings and your cost-saving initiatives that you have ongoing.

Peter, you have given guidance for below 2013 guidance.

Can you maybe add some color to that on the R&D front?

Roger, can you maybe shape how deep the cuts have been and how much additional cuts you still need to make within the R&D side of the equation?

And then for Adam on the SG&A side, understand you have a new leader running the US business.

Are you still a believer in feet on the street or have you reduced your primary care infrastructure within the US based on the evolution of where the US market is going?

On odanacatib, for Roger, what do you need to see in the risk benefit profile out of the five-year data that you will have in-house to make it a filable compound and is that potentially influencing how you are shaping your primary care infrastructure?

And then just on animal health, when will we see ZILMAX back in the marketplace?

Thanks.

Okay, John, this is Peter.

Good morning.

Let me take the first one.

I think just to talk a little bit about the overall cost savings program and where we are and how to think about it going forward.

What we indicated was that we would see both R&D and SG&A in 2014 to be below the levels reported in 2013.

That is our guidance.

But just to go back and recap the direction we have been going in and what we announced earlier in the year, we highlighted that we were launching a new program, which would expect $2.5 billion of annual net pretax cost savings by the end of 2015 compared to 2012 and of course, that is not taking into account foreign exchange, so this is on a constant currency basis.

As we have gone through 2013, the tail end of 2013, we actually made a lot of progress whether it be in SG&A or R&D throughout the organization, as well as manufacturing.

And we did report very nice numbers, I think very good improvement in 2013.

There was some ForEx benefit coming through that I would just highlight.

Some of those actions quite frankly were immediate cost savings and so forth.

Ex-foreign exchange, we actually, I would say, came through with about $1.3 billion of savings for that year.

So that is a great start.

That is a real jumping right into it.

As we move forward, I think you have heard Ken talk a lot about the focus of this program, not just being on cutting costs, but really thinking about structurally setting ourselves up to run the business very effectively in a very focused manner, but in a reengineered manner that really takes out permanent cost savings, allows us to operate -- pursue strategic opportunities whether they be geographic, therapeutic area or business line and yet still become more and more productive as we roll forward.

I would say that the savings are split between SG&A and R&D overall.

I think that I would highlight that in no way are those efficiencies in any way impeding our ability to invest in PD-1 or hepatitis C or any of the other high potential pipeline candidates.

It is being aided a bit by the fact that we have been divesting some assets both from the pipeline, as well as from our commercial franchise.

And so, in general, we think we are on track to achieve the $2.5 billion program by the end of 2015.

It is a little hard to say how BD&L will come into play against that.

Obviously, if there is an enormous opportunity that we go after then that would be a little bit different, but against normal levels of BD&L, I think the program would be -- that is kind of what we had anticipated in our planning.

So on the next question, there's a question about ZILMAX, I believe, right and in the animal health business and I think that what I would highlight is that -- just to back up for a second on that, we did voluntarily implement a temporary sales suspension of ZILMAX in the US and Canada to give us a little time to really work with our industry partners so that we provided real strong accurate data that will reaffirm confidence in ZILMAX and it remains an FDA-approved product.

We have worked with the advisory board and have developed a formal certification process for anyone who uses ZILMAX.

Certification has started in preparation for field evaluations for ZILMAX fed in controlled cattle and we are on track to begin all that in the first quarter here in 2014.

So progress, I think we are following a very thorough approach to this, very important and very responsible.

Overall, the animal health business continues to be a nice, a very nice business.

I would highlight that, around the world, many parts of the world grew very nicely last year.

Latin America, Canada, North America, Asia Pacific all on an ex-exchange basis did very well.

Really the softness in the business was primarily in the US based on this.

I would say overall animal health sales ex-ZILMAX in the fourth quarter, just as an analogy -- so if you take the total business sales ex-ZILMAX, it was up 4% in the fourth quarter.

So it still continues to do quite well.

Hi, John.

This is Adam.

If you look at 2013, we really did productize our investments and we made sure that we focused on the best opportunities for long-term growth.

So in areas like diabetes, we actually increased our spend in 2013.

In other areas, we significantly decreased our spend.

As we go into 2014, we are going to continue to prioritize and focus on the best investment opportunities that we have.

So I mentioned, for example, that we are building Merck's oncology business unit.

So we will be increasing in the United States significantly and other parts of the world as well the number of people that we have to prepare for the launch of that product.

At the same time, in other parts of our business where we are de-prioritizing, we will be reducing our SG&A pretty significantly.

Overall, in the United States, we have had significant reductions over the past several years in our field salesforce.

We think we are about rightsized now, but we will continue to look for opportunities for growth and make sure we prioritize them appropriately.

Yes, and John, it's Roger.

Just to comment on the R&D spend issue, which I think -- which Peter handled, but I want to emphasize that, from the beginning, we have focused on three aspects -- on processes, on portfolio and on staffing -- and we are working hard on all of those and it is a journey; we will continue to work on it.

Adam and I have worked very closely rationalizing the portfolio.

We have improved the processes whereby we make decisions and reduced frictional coefficients and it was necessary for us to reduce staffing.

The kinds of run rates that you are seeing now are the result of those efforts and we are going to keep at it.

And then with respect to odanacatib, again, to keep in mind that our data safety and monitoring committee did come back after the really actually early in the analysis and say that there was -- the study should be stopped because of an overwhelming efficacy and a favorable benefit risk profile.

So we know that based on their analysis we know unambiguously that there is a treatment effect.

The study was designed with an additional blinded extension and until we have the full intention to treat data set, we don't know what those data look like and hence exactly what a file would look like.

But I would say, based on just what the data safety monitoring committee had told us previously, that one has reason to be optimistic.

And I would just frame the whole issue around cost reductions.

This is Ken Frazier.

The way we are looking at this whole thing is if we can drive much greater efficiency in our infrastructure, then we can continue to invest assets where it is going to matter in the long run, whether that is in the commercial space or whether that is in the R&D space.

When you have an asset like PD-1, which I think you can already see, is an asset that we could be studying as monotherapy and in combination with various agents for quite some time, it is incumbent upon us to make sure that we don't, in any way, constrict our ability to reach the full potential of our pipeline because we haven't been very tough on our infrastructure.

And I would use the word tough because I would say that this is not an easy thing to do, particularly as it relates to the significant reduction in force of our employees, but I think it is an obligation we have as the external healthcare market looking for greater innovation and greater efficiency.

So too our business model has to be about greater innovation and greater efficiency.

Great, thank you, John for those questions.

Andrea, before we go to the next one, just so that we can get through as many questions as possible, please try to keep it to one or two going forward.

Thanks a lot.

Andrew Baum, Citi.

Yes, good morning.

A couple of questions.

Number one, regarding the IDO, as well as the other programs, are there any first-mover advantages here in doing collaboration deals with three high-profile products?

I am assuming there is no exclusivity precluding licensing to other owners of PD-1 assets, but just in terms of bandwidth, are there any advantages here?

And then second, I know it is not immunotherapy, but just in relation to anacetrapib, could you remind us how many interim analyses that compound or that trial has had and when will the next one be and when is it possible that you could potentially present unblinding if there was a strong efficacy signal?

Andrew, it's Roger.

First of all, with respect to the question of first-mover advantages, I think at the highest elevation, what we have to say is we are anxious to bring the potential benefits of PD-1 antagonism to every patient possible.

And that means we have to choose what we think would be the best combinations and try to pursue those aggressively.

I think when we do that, of course, we generate data sets that if they are attractive and promising provide a basis for moving forward commercially.

But the first thing is, number one, can these things be used together safely and then number two, do we really get a benefit from an efficacy point of view and we will find out and no, of course, these things would not be exclusive and should not be exclusive because you want to do the best thing for patients.

The second thing is, with respect to anacetrapib, keep in mind we do have a 30,000 patient outcome study that is going on right now.

The Data Safety Monitoring Board met recently recommended to us that the study be continued without any modification.

And there are three interim analyses that are planned.

The next -- the first interim analysis will be at this point in early 2015.

Now I just would like to mention here, it is important to know that this is a study that is being conducted by an independent academic-based group.

The steering committee for that study has control over the conduct of the study and so while we are involved on that steering committee, nevertheless, strictly speaking, the study is being run by the Oxford group and so that is just important to keep in mind.

Great.

Thank you, Andrew, for those questions.

Andrea, next caller.

Gregg Gilbert, Bank of America Merrill Lynch.

Thanks.

Roger, could you comment on how your all-oral HCV regimen stacks up versus Gilead and AbbVie's now that we've seen some more complete data sets?

Sort of a crystal ball question there, I understand.

And then for Ken, in the 1990s, many large pharma companies divested nonpharma businesses and many of those companies regretted those actions.

So at a high level, what do you think is different in this day and age?

Thanks.

So okay, Gregg, with respect to HCV, I think what everybody wants, of course, is to have a fully oral regimen that is ribavirin free and that is pan-genotypic and achieves sustained real logic load reductions of as close to 100% as possible.

Thus far, we are not there; nobody is there yet.

We don't have the data sets there, but I think that we are in a pretty attractive place with our 5172 molecule, which is a very novel protease inhibitor that has very desirable characteristics and can serve as the foundation for future combination regimens, including with our 5A antagonist, as well as with other molecules that we have in development.

So I think we definitely have a good regimen.

I think there's a lot of work yet to find the ideal regimen.

Obviously, the other companies, including Gilead and AbbVie and Bristol and others, are working very hard to find ideal regimens also.

But it is a competitive race.

Gregg, on your question about comparing the 1990s -- first of all, I appreciate the fact that you are implying that there is a lot to be learned by looking at what has happened in past periods and whether those decisions actually drove long-term shareholder value and that is why we are saying we are committed to doing what we believe will drive long-term shareholder value.

So you will see, first of all, within our pharma business, we've already started to focus on streamlining that business.

When you see the changes that have been made in neuroscience with SAPHRIS, with ophthalmology businesses, with the divestitures to Aspen in our (inaudible) facility, we are really looking at which assets give us the greatest opportunity to drive growth going forward.

And that is really the linchpin for us.

Is a particular asset going to create more long-term value inside our portfolio or outside our portfolio because everything that you have to devote capital to inside your portfolio has an opportunity cost somewhere else in your portfolio.

So we are really looking to have the kind of portfolio that actually drives the greatest long-term growth and value for our shareholders.

Great, thank you, Gregg.

Andrea, next caller, please.

Steve Scala, Cowen.

Thank you.

I have a couple questions.

First, for Peter, I believe you cited $500 million in [pan] pressures in 2014, which is far less than the impact from SINGULAIR, but with roughly similar, if not even more gross profit margin erosion that you are citing now.

So would you explain that dynamic?

Why are we seeing such extreme erosion with even less patent expiration pressures?

And then for Dr. Perlmutter, just stepping back, based on what your immuno-oncology competitors have said and done, what is your sense of where Merck stands competitively both in number of available combinations, number of tumor types explored, use of companion diagnostics and any other metric you wish to cite?

Thank you.

Okay, so Peter, on the first question on patent expiries and PGM?

Sure, Steve, thanks for your question.

So let me just recap kind of the background for your question.

So you are right; we did highlight that going from 2013 to 2014 we will see from lost exclusivity about a $0.5 billion impact.

And that is a tail on SINGULAIR in Europe, TEMODAR and a couple other products that are going off.

And I did highlight in the past that some of our -- a lot of our PGM effect has been driven by mix of the different products.

Now, in 2013, I mentioned that we saw SINGULAIR going away.

which is a very high gross margin product and very strong growth though in some other products that are very good gross margins, just not quite as high as our average, such as vaccines and immunology, REMICADE, SIMPONI in Europe and so forth.

I think the other thing I would say is that we have always commented over time that we are continually under margin pressure.

We see on a regular basis pressure in Europe and we also see next year anticipate, as Adam mention, a bi-annual price decrease that is kind of a standard practice in Japan.

And so all those kinds of items factor into our thinking and our modeling.

The last thing I would say though is that the AstraZeneca joint venture we do expect to wrap up in the second half of the year.

So while in the first half of the year, we will still be seeing supply sales going to AstraZeneca, albeit at a slightly lower level, but still those are lower gross margin products as you might imagine and that would go away in the second half.

So I did highlight that while the first half of the year would look a lot like the fourth quarter as we see volume picking up, which drives some productivity in manufacturing, as well as we see AstraZeneca going away, we will see kind of forces that also improve our PGM as we go through the second half of the year.

So I think net-net for the year, on average, it is a little bit -- we expect to be a little bit below on average the full-year 2013 but we do see it kind of bottoming out as we go through the first half of the year and starting to pick up as we go into 2014 and onward.

Great.

And Roger?

So Steve, again, at a high elevation, as you know, there is a lot less to be learned about how best to use PD-1 antagonists in the treatment of cancer.

We don't yet know the full impact of PD-L1 expression and how best to assay for it and different companies are using different assays.

As I say, our evidence is supportive of the idea that this could be an important marker for responsiveness.

We don't know which tumors are most responsive in the monotherapy setting, the range of tumors and the degree of response and the durability of response.

And we don't know how to make that better either through combinations with other immunoregulatory agents or through combinations with targeted therapies or even conventional cytotoxic therapy.

So still an enormous amount to learn.

When you look at our program, we have got more than a dozen studies, now we have got thousands of patients enrolled.

We are looking at a broad range of tumor types.

We have been enormously thoughtful about which combinations, how to look at biomarkers and how to proceed.

And I have to tell you I like our program; I really do.

On the other hand, I also recognize that we are treating a devastating illness that there is a lot of important information to get and there is room for many different companies to contribute.

And all of the groups are good and that is great for patients.

Great.

Thank you, Steve.

Andrea, next caller, please.

Tim Anderson, Sanford Bernstein.

Thank you.

A couple of questions.

You are running a Phase II/III trial in lung, looking at high expressors of PDL-1.

And if I look at the Roche and Genentech data, it would suggest that it is about 25% of non-small cell patients that are high expressors.

I am wondering what your data is using your assay and using your cut points?

Is it similar to that 25% figure for lung?

I am just trying to gauge the size of a commercial opportunity if biomarker kind of limits it.

And then second question unrelated to PD-1.

Ken, just a couple of years ago you resisted the idea of getting rid of consumer animal health, and now obviously those are on the table.

I am just wondering what changed in that fairly short timeframe?

And you are saying that all things are under consideration now.

So my question is, is it a realistic possibility that you might go even further and actually split up the drug side of the business into different companies like Pfizer is considering doing, or would it likely stop with reevaluation of the animal health and consumer health?

So let me start by responding to the second question, Tim.

Thanks for the question.

I'll start by going back to where we were before.

I would say what is consistent is I think these are terrific businesses.

I think what we have to say now, given the size of our company, given the opportunities that we have like PD-1, we have to look at where our capital should go from an allocation standpoint.

So what we are really doing is looking at all aspects of our company.

I will remind you that we have divested SAPHRIS; we have divested the ophthalmology business.

So we are not just looking at animal health and consumer.

We are looking at the sum total of what we have, where we should put our capital, where we can have the greatest amount of growth going forward.

So that is how we are looking at things and that is how I would answer those questions.

Great.

Roger?

So, Tim, just a couple of things.

First of all, the percent positive with non-small cell lung cancer with PDL-1, that moves a little bit as you accrue more data.

But just to be very clear, we have had no difficulty enrolling.

There are lots of patients out there who are PDL-1 positive, number one.

Number two, as we have explained, it is not the case that PD-L-1 expression is determinative.

There are responders in our data sets as we have presented that are PDL-1 negative, and that is true in different tumor types and others have presented the same thing.

Whether that reflects our improper setting of the cut point as you suggest, our inability to measure PDL-1 expression at the target where it is active or some other ligand that is involved, we don't know.

We can't say that.

But what we should recognize is in the first instance, one wants to look in patient populations where one can best characterize the treatment effect, and our data indicate that that is in the PDL-1 positive segment.

There will be patients, potentially quite a lot of patients, who don't score in that assay but nevertheless have responses.

That is a second issue and one which we want to address, because obviously you don't want to deny the benefits of this therapy, particularly if it is well tolerated, to patients who have no other alternatives.

Great, thank you, Tim, for those questions.

Andrea, next caller, please.

Mark Schoenebaum, ISI Group.

Thank you very much for taking the question.

And Peter, thanks for confirming that 2014 will be the trough EPS year.

That was helpful.

I know some people look for long-term guidance and that was at least a start.

And I actually have a question for Adam if he is awake after all the PD-1 questions.

My question is embedded in your 2014 guidance, Adam, do you anticipate that there will or will not be JANUVIA and JANUMET volume growth in the United States in 2014?

If you would be willing to provide any color on that, it would be great.

Then I guess for Roger, I will slip in one PD-1 question if I might.

A question I know you have gotten before, but since you have breakthrough status I know you are totally speaking to the FDA frequently.

And I was just wondering if you would be willing to provide any kind of update as to the earliest timeframe that you might be able to file for approval in any of the lung cancer settings.

And I know this is competitive and there may or may not be a lot you can say, but anything you can say we'd certainly appreciate.

Thank you very much.

So Mark, thanks for the question and talking about PD-1 gets me just as excited as Roger and I can't wait until I have more to say about that when we start to launch.

With regard to your question on JANUVIA, if you look at the full-year sales in 2013, we had 5% growth ex-exchange.

If you look at 2014, we expect growth in 2014, the macro trends support a growing market.

In the US, it looks like the decline has stabilized.

Now the question is can we get it to turn around and we are working hard to see if we can do that.

Internationally, the market is growing and we expect growth.

We have high penetration in some markets like in Japan, but we have other opportunities in the international markets where we believe we can get volume growth as well.

We expect some pricing pressure internationally.

You have heard about the repricing of DPP4s in Japan.

That will occur effective April, but it is going to affect the wholesalers in February and March and that will be a maximum of 15%.

Although we don't and won't have the exact number until March.

We also have good data in Germany where they looked at JANUVIA and said that there was incremental benefit versus the products in the market.

We don't know the magnitude of the price decrease, but there will be some price decreased we expect in Germany.

But net-net, we expect to grow in 2014.

And Roger?

And Mark, with respect to our discussions with FDA and breakthrough status, of course, FDA is interested to know what kinds of things we are seeing in all patient subsets, particularly for reasons of safety and exposure, but right now we are completely focused on completing the rolling submission with respect to melanoma in patients previously exposed to ipilimumab.

That is what we are doing.

We will get that done by the middle of the year.

Other discussions, of course, will occur after that.

Mark, in your preamble, you referenced our comment about the trough year for EPS.

What I want everyone to understand is that our team is very focused on and committed to driving growth and we expect to grow earnings off this new base in 2015.

Great.

Thank you, Mark, for those questions.

And I think, Andrea, I think we have time for two more questions.

Or two more callers, excuse me.

Jeff Holford, Jefferies.

(technical difficulty) strategy at least initially in the melanoma indication.

Will this be focused and built on PD-L1 selection in any way?

It just seems that there are many issues about limiting how broadly these treatments could be used doing that even though it's somewhat of a prognostic marker?

And then, secondly, on ZILMAX, what is the risk here that this is not to do with getting additional safety data?

What is the risk that it is companies like Tyson Foods and other companies that just worry about bad publicity using these products and really coming back is going to be difficult from there?

Thank you.

So Jeff, this is Roger.

With respect to PD-L1 expression and you were cut off a bit at the beginning, but I think the important thing to emphasize again is that, in terms of trying to understand the benefit risk profile of the drug, it's important to focus on populations where the responses are easiest to demonstrate.

We have been working hard on looking at the PD-L1 marker as a way of identifying sensitive populations.

But as we've said before, PD-L1 negative patients do have responses and in a patient population that has exhausted other treatment options, I don't -- it's not reasonable to withhold a therapeutic option that holds promise provided it's reasonably well tolerated.

So I think that is going to be the view always and with time, we will know more about how to select patients for this therapy and for other therapies.

So quickly on ZILMAX, I just want to stress again that we voluntarily implemented a temporary sales suspension in the United States and Canada so that we could work with our industry partners, so that we could reaffirm confidence in ZILMAX, which we really have.

And so we are now working with an advisory board, which includes some of the big players in the industry, to provide a process of certifying people who use it to show that the product actually is very helpful.

I think we also have to keep in mind the underlying dynamics, which is there is an increasing need for protein consumption around the world and that requires greater productivity going forward.

So this is an important product, it is a useful product and what we did was to ensure that everybody was onboard to understand the benefit of this product going forward and we are confident that this process will actually lead to a good outcome for ZILMAX.

Great, thanks, Ken.

Andrea, go ahead and queue up the last caller, please.

Alex Arfaei, BMO Capital Markets.

Good morning, folks and thank you for taking the question.

Roger, obviously you are taking a broad combination strategy for MK-3475 and I certainly appreciate your comments about how much we still don't know, but I am wondering if you could elaborate a little bit more on the strong scientific justification you mentioned in your prepared remarks and could we see data supporting this approach at AACR in April?

And a follow-up for Ken.

Last October, you mentioned an increased focus on your top 10 geographic markets.

What are your plans for the other markets as you prioritize resources?

Thank you.

Right, Alex, the scientific justifications are of several forms.

Clearly, we like to have preclinical data at a minimum that is supportive of the idea that PD-1 antagonism will work effectively with another therapy.

In many cases, we have exactly that.

In some cases, as we reported in our press release with Pfizer, we are seeking that kind of preclinical information and in other cases, we have -- there is data that has been developed, for example, with TVEC that -- with respect to the underlying mechanism of action and the expansion of T cell subpopulations that is extremely supportive for the idea that those two will work in combination.

We will have the opportunity to talk about some of those data coming up at AACR, for example and ASCO and of course, at our May 6 business review, R&D review, which is not too far away.

This is Adam.

With regarding the top 10 markets, the top 10 markets represent a very significant amount of our total sales.

So what we were signaling is we have to be successful in those markets in order to grow in the future.

That does not mean that there aren't other markets that remain important for growth opportunities.

So we will make sure that we invest in the top 10 markets and we first and foremost have the right promotional resources and resources in those markets and then we will look at the other markets on an individual basis to ensure that we maximize those.

Albeit we might use different models and different approaches in those markets.

Let me just summarize.

First of all, I thank you all for staying on the phone so long as you did.

Really quickly, as a management team, we are very excited about where Merck is today.

Our goals are two.

One is growth, the second is innovation.

Everything that we have talked about with respect to our portfolio is to put together the right combination of assets that will allow us to drive the greatest amount of growth going forward.

We are pleased that we have some very strong assets in our pipeline -- in our business now.

Eight of our top 10 brands grew double digit last year.

We want to continue to grow our Company and I restate that we expect to grow earnings off the new 2014 base going forward.

But the most important thing in our business for the long term is innovation and we are excited by the evidence of progress that we are seeing in the Merck Research Labs.

MK-3475 obviously is one of the first and most important of those things, but HCV, vorapaxar, additional catalysts like suvorexant, odanacatib and other things coming forward this year, we are extraordinarily excited by what can happen for Merck in the near future and we would just say stay tuned.

We believe that we are going to have very exciting things to report.

Thank you.

Thank you for participating in today's Merck fourth-quarter 2013 earnings call.

This call will be available for replay beginning at 11 AM Eastern standard time today through 11.59 PM Eastern standard time February 12, 2014.

The conference ID number for the replay is 26402847.

Again, the conference ID number for the replay is 26402847.

The number to dial for the replay is 1-855-859-2056 or 404-537-3406.

Thank you.

This concludes today's conference.

You may now disconnect.