默克藥廠 (MRK) 2014 Q1 法說會逐字稿

Good day everyone and welcome to Merck's first-quarter 2014 earnings conference 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, Stephanie, and good morning, everyone.

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

Welcome to Merck's first-quarter 2014 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 in table 2. This will give you a 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 first 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 of the US Private Securities Litigation Reform Act of 1995.

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

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

The Company's SEC filings including Item 1A in the 2013 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 statement.

Our SEC filings can be found on the website at Merck.com and you can also find our earnings release and all the tables there as well.

Now since it is a busy morning for earnings and we will be together next week for the investor briefing in Boston, we are going to have a shorter call today.

Now this morning I am joined by Ken Frazier, Peter Kellogg, Adam Schechter, Roger Perlmutter, and Rob Davis, our newly appointed CFO.

So with that I would like to introduce Ken Frazier.

Ken?

Thank you, Joe.

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

As expected, we delivered another solid operational quarter with growth in several key brands and disciplined cost management.

The fundamentals of our business remain strong which we believe will keep us on track to deliver on our full-year non-GAAP EPS guidance.

Looking beyond the first quarter, this is an exciting time at Merck as we prepare to commercialize the next wave of innovation coming out of our labs over the next few years.

Our commitment to innovation remains strong as it is only by bringing to market new products that make a meaningful difference to patients, healthcare providers and payers that will continue to create value for society and shareholders.

This quarter we delivered on this commitment in a number of important areas including oncology where we continue the rolling submission of a BLA for MK-3475, our anti-PD-1 immunotherapy in advanced melanoma.

MK-3475 is currently being studied in 17 clinical trials estimated to enroll over 4000 patients across more than 30 types of cancer.

Earlier this month we presented promising Phase II data from our investigational hepatitis C treatments which has accelerated our path to Phase III development.

We also presented Phase II data for MK-1439, our investigational next-generation HIV therapy which will move into Phase III development by the end of the year.

Each of these candidates represents the kind of innovation that has the potential to make a meaningful difference to patients.

Roger will talk more about our pipeline and the status of our regulatory applications for our near-term candidates later in the call.

We look forward to providing a more comprehensive update regarding these and our other promising pipeline programs at our upcoming investor meeting on May 6, at our research campus in Boston.

For now I will reiterate that we are excited by our pipeline and what is to come.

Turning back to the first quarter, we saw growth in many key areas of our human health portfolio including diabetes, immunology, vaccines and ISENTRESS.

We are preparing for many upcoming product launches.

In March, we announced the appointment of Robert Davis as Chief Financial Officer succeeding Peter Kellogg who has served in that role since 2007.

Peter has been an important member of our leadership team and instrumental in helping guide Merck during a period of significant change in our Company and in our industry.

Peter will leave Merck a stronger Company and we are grateful for his many contributions.

As we announced previously, Peter will remain at Merck through mid-May to ensure a seamless transition and is with us today to discuss our first-quarter's results and to answer your questions.

Rob joins us from Baxter where he most recently served as Corporate Vice President and President of that company's Medical Products Business.

He previously served as the company's Chief Financial Officer.

Rob is an accomplished executive with significant financial expertise both in pharma from his time at Lilly and in broader healthcare from his time at Baxter.

I believe his broad global business, financial and healthcare experience makes him a great addition to our team.

Rob?

Thanks, Ken, and good morning, everyone.

I must say it is a privilege to be a member of the Merck team.

I've spent many years in the healthcare industry and I have long viewed Merck as the premier research company in the pharmaceutical industry.

There is a strong legacy here of translating science into medicine so when Ken called to discuss the opportunity with me, I jumped at the chance.

I look forward to working with the management team and leading the financial organization.

This is my fifth day on the job but know that I'm excited to be here and I look forward to seeing many of you next week at the investor briefing in Boston.

Ken?

Thank you, Rob.

We are also excited to have you here.

In closing, our strategy of focusing on our best opportunities while being disciplined about managing our costs continues to deliver bottom-line performance.

Our robust pipeline contains many promising candidates representing a suite of near- and long-term opportunities that will continue to drive growth and shareholder value.

I look forward to seeing all of you at our upcoming investor briefing where we will share more about how we are sharpening our commercial and R&D focus, bolstering our innovative pipeline and preparing to launch and commercialize our many near-term opportunities.

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

Thank you, Ken.

Good morning, everyone.

This morning I will provide you with an overview of first-quarter Global Human Health results.

My comments will be on a constant currency basis.

As we anticipated, immunology, diabetes and vaccines continue to be areas of growth.

Sales growth in these areas were offset by a few things, the continued impact from the loss of exclusivity of several brands, product divestitures that we previously announced and the biannual price declines in Japan.

We continue to take action to focus our resources on areas that provide the greatest potential for long-term growth.

Those include our top markets, our core therapeutic areas and our launch opportunities.

We are making critical choices and we are prioritizing our resources and you can see these efforts reflected in our reduced expenses.

Let me provide more details on the performance of our core products and core markets and I will start with the JANUVIA franchise.

The franchise had sales of $1.3 billion and 5% growth in the first quarter.

In the United States, sales increased by 4%.

Our international market sales which now represent about 50% of our total sales grew 6%.

We drove double-digit growth in Europe and the emerging markets but we also saw the impact of customers reducing their inventory levels in Japan ahead of the April 1 price reductions.

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

We will continue to focus resources around the world to ensure continued leadership in the branded global diabetes market.

Moving to ISENTRESS, we had another good quarter with ISENTRESS with 8% global growth.

That is despite new competition.

Turning to immunology, the combined immunology business consisting of REMICADE and SIMPONI grew 13% in the quarter.

Sales of SIMPONI alone grew over 40%.

SIMPONI is the fastest-growing immunology biologic in the markets where it is available.

Sales of REMICADE grew 7% and that is despite biosimilar entry in some of the smaller EU markets.

As an important reminder, we maintain patent protection for REMICADE in markets that represent 80% of our sales until early 2015.

Lastly moving to our vaccine business.

In the first quarter, vaccine sales grew 4%.

Demand for our vaccines portfolio remains strong and there are many global growth opportunities.

GARDASIL sales increased by 2% in the quarter.

10% sales growth in the US and strong sales in the emerging markets were offset by the loss of sales in Japan.

Looking now at ZOSTAVAX, ZOSTAVAX sales were $142 million this quarter.

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

As you may recall, last year we saw benefit to sales from flu season extending into the first quarter.

This year the flu season did not extend into the first quarter.

In addition, we are continuing to educate customers on the broad managed care coverage for ZOSTAVAX and the process for getting reimbursement.

Internationally we have launched ZOSTAVAX in select Asian markets and the UK and we are seeing good uptake in those markets.

Now I would like to briefly touch on our performance at a regional level beginning with the United States.

In the US, growth in our core areas of diabetes and vaccines was offset by the TEMODAR loss of exclusivity, revised cholesterol guidelines and the changes in the HCV market.

In Europe, we drove strong growth in immunology and diabetes and with ISENTRESS.

We also saw a generic entry for NASONEX and pricing pressure continues throughout the region.

Japan sales declined 7% primarily due to wholesalers reducing inventory levels ahead of the April 1 biannual price decreases and GARDASIL.

Sales in emerging markets grew 3%.

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

The timing of tenders affected our performance this quarter as well.

Looking ahead this year, we continue to expect that the emerging markets will be strong growth drivers for us.

In summary, in the first quarter Global Human Health drove growth of key franchises including diabetes, immunology and vaccines.

As we anticipated, there were headwinds including loss of exclusivities, divestitures, and buying patterns in anticipation of the biannual price declines in Japan.

We continue to prioritize our investment with sharpening our focus on the best opportunities for long-term growth which includes our core products, our core markets and our launches.

We have multiple near-term launch opportunities.

I look forward to discussing these with you next week at our investor briefing.

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

Thank you, Adam.

Thank you Ken for the kind words.

Good morning, everybody.

Our first-quarter results demonstrate that we are on track and executing against our plan to reshape and refocus the Company for future growth.

This morning I will provide additional color on our accomplishments in the first quarter and I will comment on reconfirming our outlook for the rest of the year.

My remarks will focus on our non-GAAP financials.

On this basis, we earned $0.88 per share in the first quarter as compared to the $0.85 per share in the prior year.

EPS growth was driven by growth in key brands, effective cost management and contributions from asset sales.

Now I would like to walk through the P&L starting with revenues.

On an ex-exchange basis, total Company revenues in the first quarter decreased 2%.

As expected, this decline reflects several moving parts including the impacts of divestitures, loss of exclusivity of certain brands, partially offset by growth in core products.

Building on Adam's discussion of Global Human Health results, I will speak to the other revenue elements in the quarter on in ex-exchange basis.

Animal health revenues were flat year-over-year, however excluding ZILMAX, sales in Animal Health grew 5% in the quarter.

Consumer care revenues declined by 3% as a result of product divestitures and a shorten allergy season in North America this quarter.

Other revenues increased by approximately $85 million this quarter driven by proceeds from the divestiture of US SAPHRIS rights.

These proceeds were partially offset by the continued decline of supply sales to the AstraZeneca joint venture.

Regarding the joint venture, we continue to expect AstraZeneca to exercise its option which would bring the long-standing partnership to a close on June 30.

Moving to expenses and starting with product gross margin, PGM was 74.1% this quarter which was slightly higher than expected due to exchange and the SAPHRIS proceeds.

As noted in February, we still expect the 2014 full-year gross margin ratio to be slightly lower than in 2013 full-year ratio of 74.3%.

Our SG&A expenses were about $250 million lower than prior year driven by reductions in promotion, direct selling and administrative expenses as well as some foreign exchange benefit.

While we are focusing our resources on key markets and core products, we are also preparing for several product launches this year.

While we will invest in the launches to maximize these opportunities, we do remain on track for full-year SG&A reductions versus 2013.

Similarly, research and development expenses were about $340 million lower year-over-year as a result of continued prioritization of R&D programs and some phasing of spend that we now expect to occur in the second half of the year.

As communicated over the last few weeks, we are initiating a broad Phase III program for our investigational hepatitis C regimen and we are continuing to invest heavily in immuno-oncology.

But as with SG&A we continue to expect full-year reductions in R&D spend compared to 2013.

Moving to other income and expense, this quarter we had other income of $39 million reflecting a gain from divesting Sirna.

Also recall that in the prior year we had significant foreign exchange losses as a result of the devaluation of the Venezuelan Bolivar.

Moving to tax, our non-GAAP tax rate was 26.1% in the first quarter.

This is in line with our expectations for the year.

We continue to anticipate the tax rate for the full year to be between 24% and 26%.

Now turning to the outlook for the rest of the year, on the top line we continue to expect revenue of $42.4 billion to $43.2 billion at current exchange rates.

Similarly, we are maintaining our bottom-line guidance for earnings of $3.35 to $3.53.

On a GAAP basis, we expect to earn between $2.15 and $2.47.

Both of these EPS guidance ranges reflect a potential devaluation in Venezuela this year although the timing and magnitude of such a devaluation remains uncertain as we indicated in February.

Also as noted earlier, both SG&A and R&D expenses will be lower than 2013 but the timing of some of these expenses has shifted from the first quarter into the second half of the year.

However, we still expect earnings for the second half of the year to be stronger than the first half of the year.

Now touching briefly on capital allocation.

A year ago we announced a new $15 billion share repurchase program with the intention to repurchase $7.5 billion over the first 12 months.

We have now accomplished that milestone.

In fact, over the past 12 months, we have returned over $12 billion in total to shareholders through these repurchases and the dividend.

These accomplishments place Merck as one of the top performers in the industry in returning cash to shareholders.

So in conclusion, Merck is entering a new phase of innovation and launches and we are preparing to drive growth in the future.

You can see the results of our efforts in the form of a lower cost base, growth in core product franchises, an acceleration of key pipeline assets such as our anti-PD-1 and hepatitis C programs.

With our first-quarter results in hand, we are on track to accomplish the goals set forth to reshape Merck for future growth.

Now I would like to turn the call over to Roger.

Roger?

Thanks, Peter.

The first quarter was an especially busy one for the regulatory affairs group at Merck Research Laboratories.

During the last two months we obtained FDA approval for both GRASTEK, our sublingual desensitizing tablet for patients suffering from grass induced allergic rhinitis and RAGWITEK, a similar tablet for patients suffering from ragweed allergies.

Both agents developed in collaboration with our colleagues at ALK-Abello demonstrated significant efficacy in alleviating the troubling symptoms of patients suffering from seasonal rhinitis.

As with some other desensitizing agents, patients prescribed these drugs are to have access to an epinephrine pen to ensure that the severely allergic patients are protected against the possibility of and anaphylactic reaction.

Also in the first quarter, the Committee for Medicinal Products for Human Use, or CHMP of the European Medicines Agency, provided a favorable opinion regarding the conditional approval of vintafolide for the treatment of advanced folate receptor positive platinum resistant ovarian cancer when used in combination with pegylated doxorubicin.

We are developing vintafolide in collaboration with colleagues at Endocyte, the lead responsibility for our companion imaging reagent, etarfolatide, used to assess the degree of folate receptor expression on tumor cells.

Vintafolide binds to the folate receptor and thereby delivers a cytotoxic vinca alkaloid resulting in significant tumor cell destruction.

Conditional approval of vintafolide requires ratification by the European Commission which should provide an opinion in the second quarter.

Meanwhile we're making good progress advancing the review of vorapaxar with the FDA.

As you will recall, vorapaxar, an antagonist of the thrombin receptor on platelets, was evaluated in a large outcome study in combination with aspirin and clopidogrel as a means of reducing atherothrombotic events in patients who previously sustained a myocardial infarction and who are considered to be at high risk for subsequent events.

Details of potential vorapaxar labeling language are currently under review.

We are optimistic that it will be possible to gain agreement on this language in the very near future.

There are numerous other products for which regulatory evaluation is proceeding.

The FDA has accepted our application for V503, our new 9-valent papilloma virus vaccine, which we have demonstrated can expand the protection offered by GARDASIL to five additional viral serotypes.

We are eager to bring this important new vaccine to patients around the world.

Also in the first quarter, we resubmitted our application for suvorexant, an orexin antagonist for the treatment of insomnia for which we received a complete response letter last year.

Our resubmission provides data regarding new lower starting doses for this drug in accord with FDA recommendations.

Suvorexant is also under review in Japan and other jurisdictions.

And in Japan, we are pursuing registration for Vaniprevir for the treatment of hepatitis C virus infection when used in combination with pegylated interferon and ribavirin.

We have received priority review from the Japanese PMDA for this agent.

Finally, we made very good progress in the first quarter advancing the rolling submission of MK-3475, our PD-1 specific antibody for the treatment of patients with advanced melanoma refractory to other therapies.

Details about this program will be presented as part of our business review meeting next week so I will not cover them here.

I do wish to say however that the prioritization process that we introduced last year is clearly bearing fruit as can be seen in the reduced R&D expenses that we are reporting this quarter.

These expense reductions were not achieved without substantial effort and I'm grateful to all of my colleagues for their diligence in focusing our investments on programs that can make a real difference for the patients whom we serve.

Finally, we are looking forward to the business review next week where we intend to review some of our most important programs addressing metabolic disease and diabetes, hepatitis C virus infection, improved therapies for patient suffering from human immunodeficiency virus infection, and cancer.

We are building in each of these cases on a long legacy of scientific achievement which positions us well to make further contributions to human health.

Joe?

Great.

Thank you, Roger.

Before we open up the call to your questions, Stephanie, just please as a reminder, please limit your questions to one or two so we can get through as many callers as possible.

So with that, Stephanie, if we can open up the lines for the first caller.

(Operator Instructions).

Mark Schoenebaum, ISI Group.

Thanks a lot for taking the question.

First of all, hats off to Peter.

Thanks for everything you have done for the biotech and now the pharma community and welcome Robert.

We are all looking forward to working with you.

Number one, maybe on PD-1, if I may, I suspect I'm going to get an unsatisfying answer to this, Roger, but I'm going to try anyway.

But we learned today that Bristol I guess is going to file for lung cancer around the end of year it sounds like probably in 4Q.

And I am just wondering if you could give us any kind of an update -- I know we hear about this next week but on your potential filing timelines in lung cancer base case and then upside case?

Then maybe for Peter, these assets sales that helped boost EPS this quarter, was that something that you had planned for when you issued 2014 earnings guidance?

Then maybe for Ken, just big M&A, obviously what is going on at Pfizer has created a lot of discussion around the merits or lack thereof of big M&A.

Merck is a big company, capable of doing big M&A.

I think it would be a good time for the investment community to hear your updated views on such transformative deals.

Thank you.

Thanks, Mark, for the questions.

Let me take a crack at the third question.

So our strategy is to remain true to who we are, a research intensive biopharmaceutical company that seeks to make a long-term difference through cutting-edge science.

Our preferred route therefore driving long-term shareholder value was through innovation rather than consolidation and we believe Merck is at its best when it is inventing new treatments such as anti-PD1.

Therefore, we will remain focused on the opportunities that are right before us in advancing our pipeline.

We also announced a new global initiative last October as you know to sharpen our commercial and R&D focus and we are making critical choices about the areas where we will compete and the investments that are required.

In doing so, we are also reducing our cost base by $2.5 billion and this is on top of the $3.5 billion worth of synergies from the merger.

As you heard this morning, the initiative is already showing promise and we are divesting assets and making structural changes to increase our operating leverage and we are also exploring strategic options for consumer and animal health.

So while we continuously evaluate external opportunities, our preference is to enhance our pipeline commercial business with smaller bolt-on acquisitions versus large mergers for consolidation purposes.

On the other hand of course, we carefully monitor and evaluate what is happening in the industry and we will continue to be objective and comprehensive in our sentiment.

But to be clear, our strategy is one of innovation.

Yes, Mark, with respect to non-small cell lung cancer, we have quite a lot of studies going on as you know with nearly 1500 patients under study.

We will have the opportunity to go through all of that and to describe our registration strategy next week and I think that is probably the right way to approach this.

Suffice it to say that we look for every opportunity that we can to bring the benefits of MK-3475 to patients who need this drug and where we see substantial evidence of efficacy we are going to pursue the most accelerated kind of registration program that we can imagine.

We think it is that important.

Mark, this is Peter.

Thanks for your comments.

So relative to the asset sales and the sale of the commercial rights for SAPHRIS, yes, we did.

As you will recall last fall, we announced our strategy of focusing on growth opportunities whether it be by franchise or geography and we also at that time announced that we would be taking some of our lower prioritized areas and potentially divesting them if they were better off in someone else's hands.

As we put together guidance for this year we were well aware of all these transactions and we incorporated that into our guidance and so on the one hand, we are getting some benefits from the sale of the US SAPHRIS rights in the other revenue line and the gains on the sale of Sirna in the other income expense.

The flip is of course we are giving up the revenue of some of these assets that we are divesting.

So just as an example for Q1, the loss of revenue on divested assets was about $120 million and on a full-year basis this year which is incorporated in our guidance, the total is about $600 million based on 2013 sales.

So as you implement this sort of a focused portfolio strategy, you are going to end up with a little bit of period where you are getting some reductions in revenue, and in the other hand, you are getting the impact of the transactions in the P&L.

Great.

Thanks, Mark, for the questions and Stephanie, next caller.

Chris Schott, JPMorgan.

Thanks very much, and Peter, just wanted to wish you the best of luck with everything.

It has been great working with you.

So a couple of questions here.

Maybe first coming back on the capital deployment priorities, there obviously has been a lot in the press about potential to sell the consumer franchise.

Can you just give us an update of should we think about repo as the preferred use of capital to the extent that you are to monetize one of these businesses?

The second question was on the HCV program.

Can you just comment a little bit on how you see differentiating your combo relative to the two primary competitors who are going to have a little bit of a head start in terms of time to market here?

Would you be willing to comment on any type of market share targets that you think you would be able to take as you look to commercialize this product looking out a few years?

Thanks very much.

Thanks, Chris.

I will take your first question.

So as you know, it is pretty well established that we have said we are going to evaluate our consumer care business and our animal health business.

We have also been clear that we might reach very different conclusions about the two businesses.

So with respect to your fundamental question you asked, I don't think we are in a position to comment on hypotheticals at this point.

In general, our framework for the utilization of cash has not changed.

First, we will allocate resources to those areas that we feel present the highest potential growth opportunity for example, our anti-PD1 program which we intend to be studying for multiple tumor types over time.

Second, we will execute on compelling business development opportunities to strengthen our pipeline and that can create value.

Third, we plan to return a high level of free cash flow to shareholders through both the dividend and the stock buyback and just note that we have returned over $12 billion in cash to shareholders over the past 12 months.

Thanks, Ken.

Roger?

So with respect to the HCV combo, Chris, just as you have the opportunity of course to see the data that we presented at the European meetings, 5172 8742 has a very desirable properties as a fixed dose combination and in particular we showed really quite impressive sustained virologic responses in patients with who are quite difficult to treat and those who have cirrhosis, who are co-infected with HIV.

And the other thing to note about the combination of course is that the drugs are can be used in patients with substantial comorbidities which is really quite important and something that I mentioned before.

So as a single agent in those settings, I think there is quite a lot of differentiation and obviously we are looking at every possible means of accelerating the process of completing the registration enabling trials and the registration of these drugs for which we have breakthrough designation.

And with respect to the market share, I guess I will speak for Adam.

What I would say is we have taken a hard look and we know this market pretty well.

We think it is a pretty large opportunity that is going to play out over many years.

It is not going to play out in just one or two years and it is going to play out over years across the globe.

There are some drugs obviously that are ahead of us but we are not thinking of it as a win or take all scenario in just a couple of years.

So there is going to be plenty of opportunity for promising drugs in our pipeline as we move forward and we will be talking a bit more about that next week.

Great.

Thanks, Chris, for the questions and Stephanie, next caller.

Jami Rubin, Goldman Sachs.

Just to follow-up on some of the M&A related questions, Ken, I mean what is going on in the industry is obviously very exciting.

Companies are getting more aggressive, increasing their focus on areas that they are good at, getting out of businesses where there is less focus, and as you said, we are all anxiously awaiting to see what happens to your animal health and consumer business.

But beyond those two businesses which are relatively smaller contributors to your topline, are there other strategies that you could pursue, other carveout opportunities that you see that would allow you to accelerate your shift in focus from primary care to specialty biologicals and we have seen a lot of this activity from many of your peers.

Secondly, Peter, to you and again I wish my congratulations to you as well and best of luck in your next opportunity.

But why wouldn't you raise at least the bottom end of your guidance a very wide range at this point you beat on the first quarter.

Just what should we be thinking about as we think about the rest of the year?

You did say I think second half would be stronger which is I think how we have always modeled it.

But just wondering why you wouldn't take the opportunity to raise the bottom end of guidance?

Thanks.

Thanks, Jami, for the questions.

Let me just go back to what we said back in October which is that we intended to sharpen our commercial and R&D focus as we move forward.

You have seen some of the things that we have already done and I think we will continue to look for those opportunities to focus in those areas where we know that we can compete and make investments where we know we can bring forward innovation like PD-1 and where we think we can win in the marketplace.

So we will continue to do that.

There are going to be opportunities and at the same time on the other side of the ledger, we are also looking to M&A to enhance our pipeline through the right kinds of value creating opportunities that may be out in the marketplace.

Thanks, Jami.

This is Peter.

So you are right in the guidance range we gave for this year, obviously we had a lot of the factors incorporated -- we recognize that we would be making a certain amount of investment for launch and for the pipeline.

We understood that the AstraZeneca joint venture would go away and that was included in our calculation.

We did know about the divestitures that have announced so far.

That was also put in there as well as the loss of exclusivity for certain products.

The bottom end of the range though is more defined actually by our trying to estimate what might happen with the Venezuelan Bolivar.

So quite frankly, you can think of the high end of the range as sort of our performance ex that impact and the low end of the range is just trying to make some estimate as to what might be the case.

You recall that last year that devaluation took place in the first quarter and it was about a $0.07 per share impact on us and we have tried to make some estimate.

It is very hard to estimate what that is so that is why we have left the range fairly wide.

And as we see what happens in Venezuela, we will see what that means to our P&L and if necessary or appropriate, we will adjust our EPS range accordingly.

Okay, great.

Thanks, Jami.

Stephanie, can we open it up to the next caller please?

Tim Anderson, Bernstein.

On JANUVIA, it came in a little bit weaker I guess than what we and I think consensus were looking for in the US, I believe more than 20% in price increases at least on a list price basis.

But you don't report that obviously in the US numbers.

I'm wondering if we can just talk about net US pricing trends going forward with the DPP-4s?

And then internationally, sales seemed to be on the weaker side.

I am wondering what the driver was of this.

And then can you talk about the timing of toplining TECOS trial?

Can we think about that possibly as a third-quarter event and can you discuss the what if scenario whereby TECOS may show a heart failure signal like we have seen with one or more of the other DPP-4 inhibitors in the category?

So, Time, let me start with the JANUVIA performance and ex-foreign exchange, we had 5% growth and if you look at the US, we had 4% growth.

We had a couple of points that came through on price and we had some increase in inventory as well.

That was partially offset by a small decline in TRX volume.

If you look at TRX volume in the US, we have seen this month better than last month and last month better than the prior three months so we have certainly seen a stabilization of the TRX volume when you look at it year over year and now we are looking to see if we can actually turn it around.

If you look at new to brand share, we are actually doing better and if you look at new to brand volume, we have actually seen an increase in the month of March which is the first time we have seen an increase in new to brand volume in a very long time.

So it is still early yet but we feel like we have certainly stabilized the US and now we are looking to see if we can actually growth TRXs again.

If you look outside the US, we had very good growth in the emerging markets and in Europe.

If you look where we saw some softness, it was in Japan and the reason why is because wholesalers stopped purchasing or reduced purchases prior to the repricing that took place and we have seen the wholesalers begin to purchase again after that repricing occurred in March so they are beginning to repurchase again in April.

Overall, the diabetes market continues to show reason for strong growth.

If you look at the epidemiologic incidence, if you look at governments around the world and the importance that diabetes plays in their overall healthcare expenditure, the market certainly shows why it should grow.

And we are going to continue to invest strongly in the marketplace to not only be successful outside the US, but do everything we can to increase our success in the US.

Great.

Thanks, Adam.

Roger?

Tim, with respect to the TECOS trial, we continue on track with that trial; it's a 14,000 patient study.

But I need to point out, of course, that it is an event-driven trial, and so those events ultimately drive timing.

We are not seeing anything that suggests to us that there will be an acceleration in terms of the readout of that trial earlier this year.

So it continues on track.

Then with respect to any signals that one might see in that trial, there has been an interest in the question of the specific finding of heart failure hospitalization based on other studies.

Understandably, we have looked at it both in terms of our pharmaco vigilance activities as well as the Data Safety an0d Monitoring Board has looked at it with respect to the TECOS trial because these are adjudicated events.

At their most recent meeting, which was at the end of last year just a few months ago, they reported no reason not to continue the study as planned.

And we've seen no evidence of a signal in our pharmaco vigilant study.

So we are not seeing anything there.

We will wait to see the final data.

We are hopeful that the trial will complete at the end of the year.

Okay, great.

Thanks, Tim.

Stephanie, next caller.

John Boris, SunTrust Robinson Humphrey.

Thanks for taking the questions.

Just have two.

First question for Roger.

If I look at your competitors PD-1 clinical development plans by trying to piece those together from clinicaltrials.gov, you can certainly see where there are certainly holes in some indications where you might be able to use your breakthrough designation to be able to file additional early-stage data if it comes out well.

So let me just focus on a couple of areas like hematology or head and neck as examples where you might be presenting data at ASCO.

Is there an opportunity to potentially file those additional data sets with the FDA and by using your breakthrough status getting potentially an accelerated approval on those?

Second question has to do with M&A for Ken.

Certainly tax inversion, a very important not only Company issue but certainly policy issue.

Just your thoughts about large-scale M&A versus franchise enhancing either asset swaps and/or franchise enhancing acquisitions versus large scale M&A just your thoughts on that and your thoughts on tax inversion.

And then certainly want to wish the best to Peter Kellogg on his new endeavors and welcome Rob Davis and look forward to meeting him.

Thanks.

Thanks for your questions, John.

I just have to repeat what I said before for us, a major consolidation of the industry type transaction is not our preferred strategy.

The best way for us to create sustainable value is through innovation and that is why we are focused on value-added bolt-on acquisitions as a priority for us.

With respect to the policy implications of inversions and the business implications, I think we will just all have to wait and see how that plays out and I don't have any particular comments on the strategies of other companies or what the government's reactions might be.

So I think that is it for me.

Again as I said before in response to Mark Schoenebaum, we are eager to bring the benefits of MK-3475 to patients wherever we can demonstrate them.

We have breakthrough designation in the melanoma setting based on the data that we obtained in patients with advanced melanoma refractory to other therapies.

That is not a broad breakthrough designation for any cancer and nevertheless, the opportunity exists always to pursue an accelerated approval where the results are favorable, where you have patients who are refractory to other treatments, have no other options and where you can bring something of real benefit, a meaningful benefit rapidly to the marketplace.

So we will continue to look at that.

We will have the opportunity to talk about the totality of our program next week at the business review and we will touch on a lot of these issues that you raise particularly with respect to squamous cell carcinoma to the head and neck and hematologic malignancies.

Great.

Thanks, John.

Stephanie, next caller.

Seamus Fernandez, Leerink.

Thanks for the questions and again, congratulations, Peter and good luck in your future endeavors.

Just very quickly as it relates to Roger, the question around HCV, is there any chance in your view to see this product actually achieve an 8-week duration and is there a material difference in your opinion between an 8-week duration and a 12-week duration for an HCV dual combination?

The second question, can you help us understand why you chose to work with Agenus for these Merck targets?

Maybe you can just walk us through the Agenus transaction and help us understand why Merck wouldn't be the one generating those targets internally?

And then lastly, is there anything written into your immunotherapy collaborations announced earlier this year with Pfizer, Insights, and Amgen that would allow you to continue working together?

And why I'm asking this question is do you have something written into these agreements to prevent a Pharmasset like outcome where one company helps generate lots of great data and then another company swoops in and basically prevents you from advancing those combinations?

Thanks.

Okay, let me try and get at these here.

First of all with respect to HCV treatment, I think we are always -- we and the entire community are always looking for more rapidly affected regimens that can -- in these patient populations and of course there are a large of patients infected with hepatitis C virus -- a sustained virologic response that can be achieved rapidly is a good thing.

We and the entire community have moved that back substantially from where we were previously and we have the expectation that we are going to be able to continue to drive that process using our drugs.

And we will have a chance to talk to about the additional molecules that we have in the HCV space at the business review next week so I think that will be a good time to get into that.

You asked about the Agenus transaction which we announced earlier this week.

We have been talking for some time now quite a long time with 4-Antibody which is a Swiss company that Agenus acquired in February so the transaction really was one that we spent a long time talking with 4-Antibody about.

They have a technique that enables them to generate human antibodies of high affinity against a variety of different targets and we have worked with them to look at that technology and to see if we could apply it to some of the more difficult targets in the immuno-oncology space.

This goes back a while that we have been doing this.

And so we were prepared to go forward with them to try and explore whether or not those antibodies could actually be useful.

They of course were acquired by Agenus and that led to the transaction that was announced, no other special details I think to be concerned about there.

Then with respect to can someone swoop in and take the data I guess is the question from our ongoing collaborations with respect to combination products, really I don't think so.

These data will give us the opportunity to ultimately see which kinds of combinations can be most effective with MK-3475 and we hope if there are some very effective ones to commercialize and get 3475 in combinations in those indications.

So no special things are written in that would have an impact on that.

Okay, great.

Thanks Seamus for the questions.

Stephanie, I think we have time for two more callers.

Steve Scala, Cowen.

I have two questions.

On the Q4 call, the Company said that H1 EPS would be lower than H2 and of course that was repeated today.

But at that point it was also said that Q1 would be the lowest quarter of the year.

Is Q1 also still expected to be the lowest quarter of the year or if not, is Q2 now expected to be the lowest quarter of the year?

Secondly, I am just curious what are your plans for full odanacatib data, what meeting is being targeted and will we get important new data at the meeting next week?

Thank you.

So, Peter, why don't you go ahead?

Thanks, Steve, for the questions.

Everything you said is correct relative to the second half still remains at the higher EPS quarter.

Really what happened in the first quarter was that our expenses came in even more favorably than we anticipated.

I think everything else was pretty much in line with our plans and our thinking.

Some of those are true efficiencies that will help us and some of them will be things that are just timing related that will show up in the second half of the year.

Very specifically to your second question, which is Q2, we didn't actually provide any specific update on that so I'm going to hesitate to do it right now.

But in general I think you can kind of see that the operating expense benefit allowed Q1 to look a little better and so I think we are very much on track to be in the range for the full year.

So we haven't given specific guidance for Q2.

Thank you, Peter.

Steve, with respect to odanacatib, we do have the full data set in house and so we are in the process of now looking through that, cleaning up that dataset and evaluating it with assuming things go well and I hope we will be in a position where we can say something at the business review about it because we have the data set and that is what we are trying to do and then we will be able to give a full discussion of what our plans are with respect to that molecule but we need to make our decisions here first.

Great.

Thanks, Steve.

I think, Stephanie, we have time for one last caller.

Marc Goodman, UBS.

Peter, congrats from me as well.

Good luck.

Just a follow-on to the last comment you were making about expenses.

Can you give us a flavor for the beat was more in efficiencies or was it your timing of things, was it 50-50?

Just give us a sense on how we should think about the spending gating throughout the year would be helpful.

And then on the allergy pills, I was kind of curious what the strategy was for that product.

No one really talks about the product and your level of excitement and obviously the doctors make money on these shots so I was curious what the strategy is with this product?

So let me take the OpEx question first, Marc.

Thanks.

So there is a lot of different moving parts obviously in the operations of a company the size of Merck.

Let me take first R&D.

I think R&D in general, Roger is managing quite a broad portfolio.

I would say there it is probably more timing related, that study is still targeting to the below prior year overall but he's got a lot -- I won't speak for Roger but there's a lot of things gearing up in the focus areas both in oncology as well as hepatitis.

There is a lot of clinical work going on.

In SG&A, I think we have made a lot of effort that we announced last fall to retune our cost structure and take headcount out as well as take some operating expenses out.

That is a very global effort.

I think that we made a big effort to try and move ahead of schedule if you will as we went through this year.

So I think that that is very broad-based in SG&A.

That said, as we go through this year, we do (inaudible) we already know we've got a couple of launches, we anticipate perhaps more and so we are recognizing we are going to have to make the investments to really launch these products extremely well.

So I would think of it in terms of overall efficiency in SG&A and then some very focused efforts to drive growth opportunities as we go through the second half of the year.

And, Marc, to answer your question regarding GRASTEK and RAGWITEK, our launch strategy is really focusing on introducing those two products to a specialist audience of allergists and (inaudible) doctors.

We are trying to do that while we get access quickly with the payers and we have some education and market development work that we have to do.

Frankly we missed the grass season this year so we will have to try to do a lot of work to get ready for the grass season next year.

But as you look at the overall market, there is about 25 million people that have severe allergy, moderate allergies in the United States and only about three million people get immunotherapy shots today.

But if you look at that, we still estimate about three million people that refuse shots all together so the three million that refuse shots are definitely a target for us.

But of the three million that get shots, it is estimated that about 50% of those stop getting their shots after one year so that will be another target audience for us as we move forward.

So every launch is important to us.

I am actually heading out to a launch meeting this week and we are looking forward to doing a lot of market development work as we go through this year to prepare for next.

Great.

Thanks, Adam, and I will turn it over to Ken.

Let me just summarize very quickly.

So in the first quarter, we ended up more or less where we expected to be and we are on track for the full year.

We saw solid growth from JANUVIA, immunology, vaccines and ISENTRESS and we are also seeing strong progress from our initiative to sharpen the focus on our commercial and R&D expenditures including evaluating what assets are core to our strategy.

The more exciting thing for us is as we look to the future, we see steady and substantial progress in the pipeline and so we are looking forward to meeting all of you at the business briefing on May 6 so that we can talk about our future in more detail.

Thank you very much and we look forward to seeing you.

Thank you.

This concludes today's conference.

You may now disconnect.