默克藥廠 (MRK) 2014 Q2 法說會逐字稿

Good day, everyone, and welcome to Merck's second-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, Jackie, and good morning, everyone. We would also like to say good afternoon and good evening to everyone listening outside the United States. Welcome to Merck's second-quarter 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 our 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 provide 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 provision of the US Private Securities Litigation Reform Act of 1995. Such statements are based upon Merck's current belief and are subject to significant risks and uncertainties. If underlying assumptions prove inaccurate or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements.

The Company's SEC filings, including Item 1A in the 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, this morning I am joined by Ken Frazier, our Chairman and CEO; Rob Davis, our CFO; Adam Schechter, head of Global Human Health; and Dr. Roger Perlmutter, head of Merck Research Labs. 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. Our performance this quarter reflects our continuing progress towards transforming Merck and building a platform for future growth and innovation.

Our underlying portfolio is growing, and we are particularly pleased to have reported solid growth in our top five brands. We have now delivered a strong first half of the year, which we believe positions us well to deliver on our full-year non-GAAP EPS guidance.

I am excited that as we move into the second half of the year we are preparing for a series of promising product launches and data presentations. These represent near- and longer-term opportunities that will allow Merck to drive value for shareholders and society.

They include pembrolizumab, our anti-PD-1 antibody; new treatment options for hepatitis C; Zontivity for post MI or PAD patients; sugammadex for the reversal of neuromuscular blockade; suvorexant for the treatment of insomnia; odanacatib for the treatment of osteoporosis; and V503, our nine-valent HPV vaccine.

Importantly, each of these candidates underscores Merck's commitment to translating cutting-edge science into medicines and vaccines that have meaningful, differentiated attributes. Additionally, they represent the kind of innovation that, while making a potentially significant difference for patients, also can provide strong value to payers, providers, and healthcare systems.

This quarter we further sharpened our commercial and R&D focus by continuing to rigorously prioritize our portfolio to ensure that all of our businesses have the potential to be market leaders and create value for shareholders. This approach led us to enter into an agreement with Bayer for the sale of our Consumer Care business for $14.2 billion and, concomitantly, to establish a worldwide collaboration with Bayer to develop and market Adempas, a novel sGC modulator for the treatment of pulmonary arterial hypertension, as well as other novel compounds in development.

We also entered into an agreement to acquire Idenix Pharmaceuticals and its promising portfolio of hepatitis C candidates. These candidates will both complement our hepatitis C therapies currently in development and advance our work to develop a highly effective, once-daily, oral pangenotypic regimen that could benefit millions of patients around the world. We remain on track to complete this acquisition in the third quarter.

These transactions are in keeping with our intention to be the premier research-intensive biopharmaceutical company, by focusing on our high-potential growth opportunities and augmenting our pipeline with external assets that can create value and continue to provide an industry-leading return of capital to our shareholders.

In closing, as I said last quarter, this is an exciting time at Merck as we prepare to commercialize the next wave of innovation coming out of our labs. This innovation represents a suite of near- and longer-term opportunities that will make a meaningful difference to patients, healthcare providers, and payers, while also creating value for our shareholders.

And now I would like to turn the call over to Adam Schechter.

Thank you, Ken. Good morning, everyone. This morning I will provide you with an overview of Global Human Health's second-quarter results. My commentary will be on a constant-currency basis.

Overall, sales reached $9.1 billion. Immunology, diabetes, and vaccines continue to be areas of growth. However, these areas were offset by the continued impact of loss of exclusivity of several brands; product divestitures that we announced previously; and the biennial price declines in Japan. As we move through 2014, I look forward to speaking with you about our core business and also multiple launches that we are planning for, including pembrolizumab, suvorexant, and others.

I would now like to discuss results from some of our core product areas, and I will start with the Januvia franchise. The Januvia franchise had sales that reached $1.6 billion and grew 2% in the quarter.

Growth was driven by our international markets, which represent about half of our total sales. These markets grew 4% as a result of strong growth in Europe and the emerging markets.

In the United States, sales declined 1%, but volume growth continues to improve. In fact, volume growth was 3% in the latest rolling 4-week average.

We are encouraged by the volume trends that we are seeing. We expect that volume growth will continue in the US over the remainder of 2014 as we defend our market share of nearly 75% and we work to grow the DPP-4 class. Importantly, we continue to expect global sales growth for the Januvia franchise in 2014.

Moving to Isentress. Sales grew 10%, driven by solid performance in Europe and emerging markets and some benefit from buying patterns in the US. Growth outside of the US remains an important driver for the brand to help offset slight volume declines we are seeing in the US. The STARTMRK study in treatment-naive patients provides long-term head-to-head data in our label that will help support the continued growth of Isentress.

Next, our immunology business consisting of Remicade and Simponi saw another strong quarter of growth. Sales grew 15%, driven by continued strong uptake of Simponi and steady growth of Remicade despite biosimilar entry in some of the smaller EU markets.

Now moving to our vaccine business. In the second quarter, vaccine sales grew 3%. Gardasil growth of 9% and Zostavax growth of 10% were partially offset by declines in Varivax and Pneumovax. Gardasil increases were driven by the US and emerging markets. Sales growth of 16% in the US reflects higher public-sector purchases of about $30 million.

Zostavax growth came from our ex-US launches. In the US, we remain focused on educating our customers on the reimbursement process, and we are also initiating promotional efforts ahead of the fall flu vaccine season. Zostavax is now available in over 25 markets, and we expect additional launches in 2014.

Now I will briefly outline sales performance on a regional level, beginning with the United States. In the US, sales growth of the Zetia franchise, Dulera, and Gardasil was more than offset by the loss of exclusivity of Temodar, HCV declines, and product divestitures.

And Europe, we drove strong growth in immunology, diabetes, and Isentress. We also saw continued generic erosion for Nasonex as well as declines for HCV products.

Japan sales declines 6% primarily due to the biennial price decreases and the negative impact of suspended promotion for HPV vaccines.

Sales in emerging markets grew 2%, on good growth from vaccines, acute care products, and Isentress. China grew 6%; and growth and other important emerging markets such as Brazil and Turkey were partially offset by continuing pressure in Mexico, Egypt, and Eastern Europe. For the full year, we continue to expect that the emerging markets will be good growth drivers for us.

Moving to the future, we are looking forward to important launches and we are investing in prelaunch preparations. First, on suvorexant, we are anticipating regulatory action in the middle of August. Following that, we need to await the DEA decision on product scheduling.

We anticipate launching late this year or early in 2015. We are very excited about the potential launch of suvorexant.

Second and importantly, we are ready to launch pembrolizumab as we continue to expect regulatory action by October 28 this year. We are resourcing the launch with a focus on critical capabilities that will help address the needs of oncologists, of payers, and of cancer patients.

We have built our capabilities with an emphasis on assembling the best internal and external talent. Upon approval, we will rapidly engage oncologists to ensure they are prepared to appropriately prescribe this potentially first-in-class breakthrough product.

We will partner with payers to ensure that pembro is readily accessible for patients. And we will have support for patients, with reimbursement assistance.

The anticipated approval of pembro would mark the first approval from our exciting clinical development immuno-oncology program. More importantly, this will be a tremendous opportunity for Merck to help make a difference for patients and their families. Let me be clear: we are ready to launch pembro.

In summary, Global Human Health drove growth of key franchises including diabetes, immunology, and vaccines. We are prioritizing our investments and we are intent on driving future growth with our core brands, with our core markets, and with our exciting new launch opportunities.

Now I would like to turn the call over to my colleague, Rob Davis.

Thanks, Adam; it's a pleasure to be here this morning for my first earnings call as CFO. We have had a strong first half of 2014, and our second-quarter results demonstrate that we continue to sharpen our focus as a Company.

This morning I will provide additional color on our P&L and comment on our outlook for the rest of the year. My remarks will focus on our non-GAAP financials.

On this basis, we earned $0.85 per share in the second quarter as compared to $0.84 per share in the prior quarter. Our EPS was driven by growth in key brands and effective cost management, which was partially offset by patent expiries and divestitures.

Turning to the top line, total revenue in the quarter decreased 1% year-over-year. Foreign exchange did not have a material impact on the revenues this quarter.

As Adam stated, our sales in the Pharmaceutical business were driven by solid growth in key brands. Animal Health revenues increased $27 million, 3% year-over-year excluding exchange, or 9% if we also exclude the impact of the Zilmax suspension. Our Animal Health results were driven by the strong performance of Bravecto, our newly launched oral flea and tick treatment for dogs in the US and Europe, and the strong growth from our poultry business.

Consumer Care revenues increased $100 million, or 20% excluding exchange. Sales in the quarter were driven by sales of Claritin and Coppertone.

As you may recall we had a one-time unfavorable adjustment to sales in the second quarter of 2013, which represents a single but significant percentage of the positive year-over-year comparison this quarter. Excluding those actions, Consumer Care global sales grew 4%, including 1 percentage point of negative impact due to foreign exchange. As a reminder, we expect the divestiture of the Consumer Care business to close this year.

Regarding the joint venture with AstraZeneca, revenue from the JV was $316 million and benefited from the timing of purchases in the quarter. As expected, Astra exercised its option to end our partnership on June 30. As a result, we will no longer record supply sales or equity income from the JV in the second half of this year.

Moving to expenses, gross margin was 72.6% in the quarter, representing a decline of about 300 basis points from last year. The decline was the result of product mix and inventory write-offs, primarily for Victrelis. We continue to expect the 2014 full-year gross margin to be slightly lower than 2013's full-year ratio of 74.3%.

Marketing and administrative expenses were $208 million lower than prior year, driven by reductions in promotion and direct selling costs. While we continue to focus our resources on key markets and core products, we were also preparing for additional product launches later this year. We will invest in these launches to maximize our opportunity for growth. We are also making resource allocation decisions so that we remain on track for full-year marketing and administrative reductions versus 2013.

Likewise, research and development expenses were $232 million lower year-over-year as a result of our continued prioritization and rationalization efforts. As we said last quarter, our R&D expense for our current portfolio will increase in the back half of the year.

In addition, we will also invest in the HCV assets we will acquire from Idenix and the research collaboration with Bayer. As a result, we now expect our R&D expense in the second half of 2014 to be a few hundred million dollars higher than the second half of 2013. Overall, we continue to expect our full-year R&D expense to be below 2013 levels.

Finally, on our tax rate, our non-GAAP effective tax rate was 24.2% in the quarter, which was 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 our outlook for the rest of the year. On the top line, we are reconfirming our revenue guidance of $42.4 billion to $43.2 billion at current exchange rates.

We are narrowing our non-GAAP EPS guidance to a range of $3.43 to $3.53, which excludes the potential impact from a devaluation of the Venezuelan bolivar. This range reflects our strong performance in the first half of the year and includes roughly $0.06 to $0.09 of dilution from the divestiture of the Consumer Care business, the resulting research collaboration with Bayer, and the acquisition of Idenix and its HCV assets.

On a GAAP basis, we now expect to earn between $4.44 and $4.77 in 2014. As noted earlier, both marketing and administrative and R&D expenses in 2014 are expected to be lower than 2013. Due to the strength of the results in the first 6 month of the year and the additional developmental costs associated with the Bayer collaboration and Idenix portfolio, we now expect EPS in the second half of the year to be generally consistent with the first half of 2014.

With that, I would like to provide a quick update on capital allocation. While we continue to focus on improving our productivity and transforming our business model, we also remain committed and focused to return cash to shareholders.

As we said during the investor briefing in May, we're going to use the proceeds from the Bayer transaction to augment our pipeline with business development activity and return capital to shareholders. We have delivered on that commitment by agreeing to acquire Idenix for $3.85 billion, and we expect to deploy a significant amount of the after-tax proceeds to repurchase shares this year. We now project our average diluted shares to be slightly lower than the 2.95 billion share count we gave last year for 2014, depending on the timing of the purchases.

In summary, we feel good about the results and are reassured by the strength of the performance in the first half of the year. That strength is allowing us to invest in the business in the second half of 2014, meet our guidance targets despite the dilution of two transactions, and return cash to shareholders.

Now I will turn the call over to Roger.

Thanks, Rob. During the second quarter, our R&D organization made substantial progress in advancing important new therapies. In April, our regulatory affairs group obtained FDA approval for Zontivity, the first thrombin receptor antagonist ever introduced into clinical practice.

Zontivity has been shown to reduce the risk of cardiovascular death, heart attack, stroke, and the need for procedures to restore blood flow to the heart in patients with a history of heart attack or of peripheral arterial disease who are already receiving optimal therapy. Because of the increased bleeding risk associated with this antiplatelet therapy, Zontivity should not be used in patients with a history of stroke or transient ischemic attacks.

We are excited about the potential for Zontivity to improve outcomes in patients at high risk for heart attacks and are working assiduously to make certain that heart specialists are aware of the clinical data supporting the use of Zontivity. In Europe, we are engaged with the Committee on Medicinal Products for Human Use of the European Medicines Agency, who are evaluating our file for this product.

Meanwhile, during the second quarter we advanced the regulatory review of suvorexant, our orexin antagonist for improving sleep in patients with insomnia. You will recall that we submitted our response to the FDA's Complete Response Letter in February; we have worked closely with the agency and are now discussing features of product labeling. The PDUFA date for action by the FDA with respect to suvorexant is August 14.

We are also making progress in supporting the regulatory review of V503, our nine-valent human papillomavirus vaccine, designed to extend protection from the risk of cervical cancer across approximately 90% of vaccine genotypes associated with this disease. We are eager to bring this important new vaccine to world markets.

During the second quarter, the FDA accepted our filing for pembrolizumab in the treatment of patients with advanced melanoma refractory to all available therapies. FDA review of our filing, including a number of clinical and manufacturing inspections, is proceeding in advance of the PDUFA date of October 28.

During the second quarter, we also filed for approval of pembrolizumab in the treatment of advanced melanoma in Europe. This file has been accepted for review by the European Medicines Agency.

At the American Society for Clinical Oncology meeting in June, we summarized the very large body of information that we are assembling regarding the use of pembrolizumab both by itself and in combination with other agents in the treatment of malignant disease. Currently, we have pivotal studies underway or in planning for the treatment of malignant melanoma, non-small cell lung cancer, head and neck cancer, and bladder cancer; and we have early evidence of activity in several other important tumor types. In all, we are testing pembrolizumab in the treatment of more than 30 different malignancies.

Our clinical development organization, working closely with the bioprocess groups involved in supplying clinical material, has managed to maintain a very challenging schedule of patient enrollment with the goal of determining the full spectrum of activity of pembrolizumab. We have submitted numerous abstracts for the European Society for Medical Oncology meetings in September and will hope to share quite a bit of new data with you regarding pembrolizumab at that time.

At our May 6 business review in Boston we described our plans for the development of novel treatment paradigms for patients infected with hepatitis C virus. We have made excellent progress in advancing our registration-enabling program using a fixed-dose combination of MK-5172 and MK-8742 in treatment-naive and previously treated patients, and those with and without evidence of significant liver injury, and in more complicated patients with renal insufficiency or who have simultaneous infections with human immunodeficiency virus.

Our goal, as I have made plain, is to advance an effective therapy for all patients, irrespective of the genotype of their HCV infection and regardless of comorbidities, and to achieve a very high rate of sustained virologic response following less than 6 weeks of active therapy. To this end, we have initiated studies combining the MK-5172/8742 doublet regimen with Gilead's sofosbuvir.

We will use information from this triplet regimen to advance our internal programs that employ a uridine analog HCV polymerase inhibitor to complement MK-5172/8742 therapy. Of course, this is the reason that we pursued the acquisition of Idenix, to gain access to their advanced nucleoside-based polymerase inhibitors. We are looking forward to working with our new colleagues at Idenix, and we are very encouraged by what we have seen to this point.

We believe quite strongly that these new regimens, which are advancing quickly in the clinic, will form the basis of rapid genotype-independent definitive therapy for millions of patients at risk for liver failure as a result of HCV infection.

We also announced in May that through the sale of our consumer products division to Bayer we will gain access to a set of soluble guanylate cyclase activators, including Adempas. We are working closely with our colleagues at Bayer as we assume shared responsibility for the development of Adempas, which is approved in the United States for the treatment of pulmonary hypertension in two different settings and which is being studied as a possible treatment for pulmonary hypertension in a third setting in patients with idiopathic interstitial pneumonia.

Meanwhile, we continue to actively prosecute our C. difficile toxin antibody program; our novel non-nucleosidal reverse transcriptase inhibitor, doravirine, for HIV therapy; letermovir for the prophylaxis and treatment of cytomegalovirus infection in patients undergoing bone marrow transplantation; our beta secretase program in patients suffering from or at risk for Alzheimer's disease; our development of long-acting DPP-4 inhibitors for diabetes; and our late-stage program testing the ability of anacetrapib to reduce cardiovascular risk in patients on optimal cholesterol-lowering therapy, among many, many others.

Despite this deep clinical agenda we have managed to reduce expenses versus 2013, largely through operating efficiencies. As Rob noted, we do expect that clinical trial expenses will increase in the second half of the year, principally as a result of the large set of late-stage opportunities in cancer treatment that we see for pembrolizumab. Nevertheless, through rigorous portfolio prioritization, we will ensure a highly disciplined approach to expense management. Joe?

Thank you, Roger, and thank you, Jackie. Before we open up the line to Q&A, just a quick reminder: to get through as many callers as possible, please limit your questions to one or two. That way we can try to make sure we cover everyone. Okay, Jackie, why don't we go ahead and take the first caller?

John Boris, SunTrust Robinson Humphrey.

First question, Roger. Just possible to maybe articulate -- obviously there is an upcoming oncology meeting, ESMO, and then AASLD -- what we might be looking to see coming out of those conferences in terms of additional data that you could be presenting?

Then a question for Ken and Rob. Certainly been some speculation in the press about divestiture of additional non-core late-lifecycle pharma-type assets. Can you walk us through where you might be within that process and, upon a sale of such assets, what you might be using the proceeds for? Thanks.

John, yes, with respect to ESMO, we have submitted a substantial number of abstracts; but so far we don't know exactly which ones of those will be accepted. Suffice it to say that we will have the opportunity to present a substantial amount of new data with respect to pembrolizumab.

And similarly for AASLD, where, as you know our C-SWIFT regimen that I mentioned, which is a triplet regimen that will give us a sense of where we stand with respect to a short-duration active therapy, we won't have all the data by then, but we should have some available data. And we will hope to have the opportunity to describe that to you at that time.

Great. Thanks, Roger. Ken?

John, thanks for the question. So with respect to what has been reported in the press, we obviously can't comment on those rumors. But what I can say, that as a broader question about focus of prioritization, we communicated last October that we are going to look across the entire business to determine if assets might have more value outside the Company or as part of our business.

So, for example, with these diversified brands, as they are known inside Merck, those products can be very important to our business in the emerging markets. We have to look at whether or not selling all or part of those brands is going to make sense to our business over the longer term.

You have already seen us take action with respect to MCC, Saphris, ophthalmology, and some select diversified brands as part of our Aspen deal. All I can say is that we will continue to evaluate opportunities as appropriate going forward.

Great. Thanks, John. Jackie, next caller.

Colin Bristow, Bank of America Merrill Lynch.

Morning. Thanks for taking the questions. On hep C, can you outline the development plan for the Idenix nuc and when we should next see data on this asset? Then perhaps, while we are on the nuc, can you remind us of what gave you comfort to acquire this, in light of the turbulent history with that class?

Then on M&A, can you just talk about your appetite for large-scale M&A, particularly in the context of a tax inversion? Thank you.

Roger, why don't you talk about (multiple speakers)?

Yes, Colin, thanks for the question. With respect to hep C, now as you mentioned there is a turbulent history that you described for nucleoside polymerase inhibitors in hep C. What we have learned over time is that certain structural features of those give one more comfort with respect to their safety characteristics; and the Idenix nucleoside inhibitor has those characteristics, as we learned.

In addition, we had exposure to nearly 100 subjects, some of it for a reasonable period of time, without evidence of significant hepatotoxicity. So that gives us some confidence going forward.

We of course also know, as they presented the data, that there is a very substantial reduction in viral burden across numerous genotypes using their nucleoside polymerase inhibitor. So in many respects it is sort of the ideal nucleoside polymerase inhibitor.

We will be studying that in combination with ours just as soon as we can gain access to the molecule. But of course, we don't have access to it until the time that the deal actually closes. So that is the general plan; and we will hope, of course, to be able to present quite a bit of data at AASLD, as I mentioned.

Great. Ken?

Related to the other question on M&A, I would say that Merck is not interested in pursuing a business development deal either solely or primarily for the specific purpose of tax inversion. Obviously, every company takes a very different path to drive long-term shareholder value.

As we have said before, our goal is to be the premier research-driven biopharmaceutical company. Our strategy is built on innovation in the pipeline. So from our perspective, that is what we are focusing on: delivering novel programs like our anti-PD-1 program and our HCV program.

We believe this is the best path for Merck to drive sustainable growth and shareholder value over the long term. So we are not focusing on a major consolidation of the industry type transaction as a preferred strategy. We continue to look for value-adding bolt-on opportunities to augment our pipeline, like Idenix.

Great. Thank you, Colin. And, Jackie, our next caller, please.

Vamil Divan, Credit Suisse.

Thanks for taking the question. First, just on the DPP-4 side, it's interesting you mentioned you expect, I think you said, global growth in 2014 for the franchise, which, compared to where we were a few months or a year or so ago, would not really be news; but interesting.

Just thinking about how you would forecast that going forward, is that something again where we might see just flat or lowish single-digit growth like we saw this quarter? Or do you see any of the investments you and some of your competitors are making in regenerating the growth of that franchise to make more of an impact as we go forward here?

Then the second question I just have, related to one of the other questions, from the future data later this year. Just curious about ASH and also the San Antonio breast convention. Do you think you guys will have anything on immuno-oncology assets in those, the hematology side or on breast cancer, later in the year? Thanks.

Yes, so why don't I -- this is Adam. Vamil, thanks for your question on the DPP-4 class. Let me give you some additional context on the Januvia franchise and where we stand.

As I said before, our second-quarter sales were $1.6 billion, which was 2% growth, and that was from 4% growth outside the US and minus 1% growth in the US. So let me focus on the US first.

We have always said that what is most important is to watch TRx volume. There is going to be wholesaler buying pattern changes that occur over a year. If you look at the second quarter this year we had a tough comparison to second quarter last year which, as you may recall, we grew 9% over the prior year. So that is why I always focus on the underlying volume.

The good news is that the TRx trends right now are more positive than they have been. We have 3% growth over the rolling 4 weeks; and if you look at the past 2 weeks we actually had 4% growth versus the same week prior year. So we expect the growth in TRXes to continue as we go through the second half of the year, and that is why we are cautiously optimistic on the volume increases that we are seeing in the United States.

In the international markets we had good volume growth in Europe, Canada, emerging markets; and we maintain our strong market leadership position. Those were partially offset a bit by the April 1 price reductions that occurred in Japan.

When you look at the strength of our franchise, we have maintained about a 65% share globally and about a 75% share of the class in the US. So it really is about getting patients to be considered for DPP-4s prior to sulfonylureas, and that is where we think we are beginning to see some progress in the US and remain cautiously optimistic as we expect growth for the second half of the year.

With respect to presentations at ASH and the San Antonio Breast Cancer Conference, we have studies in both hematologic malignancies and in breast cancer, and we do expect that we will have an opportunity to present some of those results. Again, the pembrolizumab program is far-ranging.

So we are looking forward to those as well. Of course, they occur somewhat later in the year or beginning of next year.

Great. Thank you, Vamil. Jackie, can we turn it over to the next caller, please?

David Risinger, Morgan Stanley.

Yes, thanks very much. My question is, could you just update us, please, on the expected readout timing, so when investors should expect to see a press release on the results of three cardiovascular trials, IMPROVE-IT, TECOS, and the anacetrapib Phase III? Thank you.

Yes, Dave, it's Roger. With respect to IMPROVE-IT, we are expecting that the last patient visit will occur sometime in September. Of course, this is a very large study -- more than 18,000 patients -- a study conducted over nearly a decade; so it will take a long time to pull together all the data, clean the files, have all the queries go out to the sites, etc.

But over a period of some weeks thereafter, that will get done. The data base lock will take place, and then we will analyze it. And then, of course, top-line data will be shared with you.

The situation with TECOS is similar, except that their last patient visit is in December. So again we are not going to be able to share data from that -- and of course, that is under supervision of an academic group that will do it -- until after that data base has been cleaned up and all that is done. So that you will see next year.

Then with respect to anacetrapib, there of course we are conducting interim analyses, and the first interim analysis is not going to be available to us until the early part of next year. Sometime during the first half of next year is the expectation. And we will share all of these things with you just as soon as we have them available.

Great, thank you.

Dave, appreciate it. Jackie, next caller?

Jami Rubin, Goldman Sachs.

Adam, on pembrolizumab. Roger, just curious to know if, with the European filing, were you granted accelerated assessments? Can you give us a sense for timing of that approval?

Adam, for you, can you just help to frame the market opportunity for pembro in the US? Patients resistant to Yerboy, what is the market opportunity size for that? What would you expect the launch to look like?

And would you anticipate that there would be some off-label use? Thanks.

Roger?

Yes, Jami, for pembrolizumab in the EU, we are working with our rapporteurs there in order to get a closer assessment of what the timing will be for the filing. In Europe there is a different strategy, as you know, in terms of the timing of assessment; so I can't really speak to that.

I think the best thing to plan for is a traditional standard review, and we will let you know as we hear more from our rapporteurs. They have just accepted the file.

Hi, Jami, this is Adam. As we said before, we expect regulatory action by October 28 this year in the US, and we are preparing for the launch, obviously. We realize that with the label that we get from the FDA, we will have to be very clear on the appropriate utilization and where physicians need to use the product, based upon the label that we get from the FDA, which will be in ipi-refractory patients.

So we are going to be very clear on the appropriate utilization of the product.

Now if you look at physicians that prescribe Yervoy, which is primarily for melanoma, you can see it is a very small fraction of the total number of oncologists across the United States. In fact, if you look at the total number of oncologists, the ones that are really prescribing Yervoy are less than 15%, 20% of the total.

So we are really going to focus in on the physicians that are prescribing Yervoy to really know who the ipi-refractory patients -- where they will be seen and where we will be best able to reach them. We believe we will be able to get to each of those physicians within 7 to 10 days after the launch of the product.

With regard to off-label utilization, we will not promote nor will we do anything to encourage off-label utilization. However, we realize in certain situations with cancer patients that that does occur.

Our manufacturing facilities will be able to supply, if need be, the utilization; and we have enough supply. But we don't look to try to encourage that, nor do we try to forecast what that can be. We just want to make sure, if it happens, that there is supply for it.

Okay, great. Thank you, Jami. And Jackie, next caller, please?

Mark Schoenebaum, ISI Group.

Maybe a couple for Roger if I might. Also, welcome, Rob, to the call; it's nice to hear your voice.

Roger, on hepatitis C, a lot of us on Wall Street I think are waiting for the data that you might have at AASLD, which is looking at the doublet-plus-Sovaldi in a 4-week regimen. I would just love to get your thoughts -- I think everybody would love to get your thoughts -- on whether or not you think that generating high SVR rates at 4 weeks is a high-probability event. Just scientifically what your thoughts around 4 weeks are.

Then number two, I and at least some other Merck observers always felt like you guys have felt like it is at least a possibility you might be able to accelerate the pembro lung filing. I just, Roger, would love to get your updated comments on that, since I haven't heard you speak about it since the analyst meeting. Thanks so much.

Okay, Mark. First of all, with respect to the hep C data, we do expect that we will have a chance to share at least some of the data from C-SWIFT at the AASLD meeting. And my view is that there is a high likelihood, actually, that there will be good responses at 4 weeks in a triplet combination, based on the potency of the drugs that are being used and the information that we already have available from combination regimens that have a 6-week endpoint.

As you know, the determination of what optimal duration of therapy is for infectious diseases is often empirical, and we struggle with that. We still look at those kinds of things, for example, for the question of how long one treats bacterial osteomyelitis, as an example.

So we don't know what the ideal treatment regimen is. But my guess is that we can get to a 4-week regimen; and that is, of course, why we are doing the study, and we are eager to see what the results look like.

With respect to pembrolizumab in lung, we have a lot of opportunities to evaluate potential filing strategies. We have quite a number of ongoing studies in non-small cell lung cancer. We are not going to go through what that filing strategy could be, but as we see the data we are certainly working very closely with FDA to understand how we could get this drug to market sooner, if in fact the data support it.

Thanks.

Thanks, Mark. Jackie, we can go ahead and open up the line to the next caller, please.

Tim Anderson, Sanford Bernstein.

If I could just go back and clarify the answer to the question about M&A and potential targets, Ken, is it safe to assume that you are looking primarily at bolt-ons? That's the term you used in answering that other question.

Second question is on Animal Health. Earlier in the year you talked about having potentially very different outcomes with Consumer Health versus Animal Health.

Should we assume that you are keeping the Animal Health business? Is that the safest assumption?

Then last question is just Merck's opinion in general on the CTLA-4 antagonists and whether you viewed those as promising in terms of combining them with the PD-1s. You have at least one trial where you are looking at a combination regimen, I believe.

Okay. Ken?

Thanks for the questions, Tim.

As we tried to say before, we are not interested in pursuing a major consolidation of the industry type transaction as our preferred approach. We are much more focused on value-added bolt-on opportunities and business developments that augment our pipeline. And I would say Idenix is an exemplar of that.

I also think you should look in the future to see us continue to demonstrate that kind of value-creating business development deal is really a priority for us as a Company, to augment our pipeline.

Turning to Animal Health, when we made the Consumer announcement we also said that we planned to augment our Animal Health business with additional business development. We continue to look at this business as a key growth driver that has industry leadership, healthy margins, and a strong market outlook. So we will look for opportunities to supplement our diverse portfolio in that business, again, in ways that create long-term shareholder value.

Roger?

Yes. With respect, Tim, to see CTLA-4, as you know, we have embarked upon a number of different combination studies using a variety of different sorts of molecules with pembrolizumab: standard chemotherapeutic regimens, oncolytic vaccines, as well as immunomodulatory agents, our own and others'.

And CTLA-4 is in the mix. I think the question really will be: How much additional efficacy do you get? And is the toxicity of the regimen tolerable?

And I think there are concerns with respect to both of those, but there may be opportunities. We are just eager to see the results; and no one should expect that the results are predictable with a new regimen until you have actually done the studies. That is what we are going to do.

Great. Thank you for the questions, Tim. Jackie, next caller?

Seamus Fernandez, Leerink.

Thanks very much for the questions. I actually have three for Roger.

With regard to KEYNOTE-006 in melanoma, can you just update us on the timing? If there is an interim analysis, the timing of that.

And how important, can you tell us, is comparative data of pembro versus ipi in the treatment-naive melanoma setting, and why this wouldn't happen very soon, considering the pace at which your competitor is filing in melanoma?

Second is pembro in lung cancer. Has the interim evaluation of response rates in KEYNOTE-010 yet occurred? Or are we waiting for that?

I believe it says that there is a response rate evaluation. And can you just update us on whether or not those data could be provided to FDA for a potential early lung filing?

Then lastly on C-SWIFT, when would you start or hope to start a triple combination with the Idenix nuc? And would you consider going head-to-head if C-SWIFT is meaningfully positive with the Idenix nuc? Thanks a lot.

Okay, Seamus, great questions. First of all, with respect to KEYNOTE-006, we are expecting to have the data in February of next year. That is what we have described, and we are moving along very well on that.

With respect to the KEYNOTE-010 interim analysis, we will have an interim analysis for KEYNOTE-010; we do not have the data in front of us right now. And those data, like all of our data, particularly since we have a file under regulatory review, all of our data will be shared with the agency.

That is one of a number of options that we have looking at the potential for demonstrating to regulatory authorities that there is an opportunity to introduce pembrolizumab in non-small cell lung cancer. We will look carefully at all of those.

For C-SWIFT, again, we will be presenting some of those data at AASLD. We will have the opportunity to study the Idenix compound once we gain access to it; of course, that depends upon the completion of the acquisition of Idenix. We will move just as quickly as we can.

And yes, of course, my expectation is that when we have access to the compound, if we are encouraged by those results, we are prepared to go head-to-head against any regimen, because our belief is it is going to be superior. That is why we are doing the study.

Thanks so much.

Thanks, Seamus. Jackie, next caller, please.

Marc Goodman, UBS.

Morning, Roger. If you could talk about the progress you are making for the internal development of some of these non-PD-1 checkpoint inhibitors.

Second, Adam, can you talk about emerging markets a little bit? China just seems to be a little weaker than we'd think it would be, and you mentioned some of the other countries, Eastern Europe. What is going on there and Mexico? Obviously, we know what is going on in Egypt.

Then, for 2015 the formulary changes should be announced pretty soon. I was curious if you can maybe preview that a little bit. Are there any major changes that we should be expecting for 2015?

And specifically we're definitely focused on Januvia. Have you been as aggressive this year as last year, make sure you're maintaining that on formulary and not getting kicked off any exclusionary formularies? Thanks.

That we turn to Roger.

Marc, with respect to other checkpoint approaches beyond pembrolizumab, we mentioned the anti-GITR approach. Again, that is a stimulatory agent, and that program is just beginning.

So we are starting that program now and we have numerous others that are moving along, heading towards clinical trials. So a lot of good progress had been made in characterizing those agents and, in particular, in identifying those that we think are most promising based on a set of clinical samples and preclinical studies that we can do. So we are doing quite well on those and looking forward to seeing the data as we go forward.

Marc, this is Adam. With regard to emerging markets, we had 2% growth ex-ForEx. And as I have said in the past, there are certain things that happen in terms of timing of tenders and lumpiness in the emerging market business.

But in addition to that, we are seeing some pressure in Egypt but also in Eastern Europe, in the Ukraine, for example. At the same time, we are seeing strength in certain markets like Turkey and Brazil.

We continue to believe that the emerging markets will be growth drivers for us. We continue to invest significantly across the emerging markets.

And if you look at China, the 6% growth actually is a bit better than the growth we have had in the past couple quarters, and we expect that China will continue to be a good growth driver for us in the second half of the year. In addition, Mexico, we believe, will be an accelerator for us in the second half of the year.

So, although this quarter was a little bit lumpy versus other quarters, we expect that we will have good growth in the emerging markets.

With regard to formulary changes in the US, those are still in progress as we speak. We have had very good access capabilities across managed care for the portfolio of products that we have in the United States. And we continue to work very closely with our managed care customers, and we expect that in 2015 we will have good formulary access for Januvia and other products as well.

It is too early to have exact numbers on access. But overall, we feel that things are moving forward in a good way.

Great. Thanks, Marc. Jackie, if we could open up the line to the next caller, please.

Alex Arfaei, BMO Capital Markets.

Good morning. Thank you for taking the questions and congrats on a good quarter. Adam, could you provide us a little bit more color on Remicade and Simponi? Both were very strong. Just wondering if you could just talk about the key drivers in the major markets and also what kind of penetration you are seeing from the biosimilar.

I apologize if you mentioned this already, but on Gardasil in Japan I believe there were some safety concerns. I am just wondering if there has been any update on that. Thank you.

Yes, sure. Let me start with Remicade and Simponi. We had combined growth of the franchise of 15%, excluding ForEx. If you look more specifically, Simponi grew 37% and Remicade grew 9%.

We continue to see strength as we are launching Simponi around the world. And if you look at our growth for Simponi, it is faster than any of the other anti-TNFs in the marketplace. As we continue to launch, we are seeing increased market share, patient days of therapy, and penetration rates with the UC indication that we have for Simponi as well.

As you look at Remicade, we continue to have good growth, but it is driven by the gastro indications. If you look, in about 20% of the smaller European markets biosimilars are available, up until now we have been very aggressive and we have been able to maintain a good bit of our share despite the entry of the biosimilars.

It will continue to be tough. We continue to expect increasing competition from the biosimilars. But we have been very successful to date, and we will continue to be successful we believe as we move forward.

But the real growth driver as we move forward is going to be Simponi, particularly in markets where biosimilars of Remicades are available.

If you look at Gardasil, there was last year suspended promotion in Japan, and that occurred in 2013, and it was due to a government decision that they made. We continue to believe in the large amount of safety data that we have for Gardasil, and we continue to work with the government in order to see how they can move forward to have the proactive recommendation moving forward.

We are excited about both HPV vaccines and also the launch of V503 as we move forward.

The second thing I would say is that we will be lapping the Japan issue in the second half of this year. So we expect in the second half we won't have that as a reduction in the ability to grow Gardasil, because we will lap it in June.

Great, thanks, Alex. Jackie, next caller, please.

Jeff Holford, Jefferies.

Give this maybe to Roger. Your latest thoughts on your combination strategy in immunotherapy, and whether you think you will need to acquire or make more exclusive in-licensing deals to support that strategy.

Then just secondly on CART-I immunotherapy, just give us a sense of your level of enthusiasm for this approach. Thank you.

Yes, Jeff, we have adopted the approach of looking as closely as possible at pembrolizumab in monotherapy, because my view is that we need to understand how well pembrolizumab works as monotherapy before we can put into context how combinations might work. To be clear, there is also a mechanistic issue: to the extent that we understand how pembrolizumab actually works, we will do a better job of picking combinations.

I don't doubt that combinations will be used. That is what happens in cancer therapy. The question is which ones.

One can argue that radiotherapy or conventional cytotoxics might be good, or vaccines might be good, or other checkpoint inhibitors. And to really sort that out we need to understand what is the base of monotherapy, and then to understand what mechanistic improvements can we engineer to actually drive higher response rates and more durability beyond what we already have.

So we are looking at all of those things. We are doing strategic combinations in the clinic based on what we see preclinically. I don't see right now a need for us to acquire other molecules for combinations; but I do not have any hesitation about acquiring them, either through licensing or through acquisition, if that turns out to be the right thing to do. So we are definitely going to move forward with those kinds of programs.

And with respect to the CAR approach, I think in the setting of hematologic malignancy for a certain number of individuals there is no doubt that engineering of T-cells, introducing them into patients, can have a dramatic effect. I think we don't know yet from the limited studies that have been published what the balance of efficacy and safety might be and whether that approach will have a greater breadth in, for example, solid tumors.

Time will tell. That work is being pursued in other organizations and, of course, largely in academic centers; and we are certainly interested in following them.

Thanks very much.

Okay, great. Thanks, Jeff. Jackie, I think we have time for two more callers.

Steve Scala, Cowen.

Thank you. I have two questions. First for Dr. Perlmutter, should Merck look at and file the Phase II subset of KEYNOTE-010, would that in any way inhibit the ability to file the full Phase III data when the study concludes in September 2015?

Then the second thing, the second question is: Is Merck prohibited in any way from purchasing the Novartis flu vaccines business and selling flu vaccines on a global basis, given the vaccines JV with Sanofi, since they are a major flu provider? Or is Merck not interested in flu? Thank you.

Okay, Roger?

First with respect to KEYNOTE-010 and more generally, regulatory agencies are always interested in more data. So are we. So as we have more data available, we make those data available to FDA and other regulatory agencies.

And there is no prohibition based on, for example, an early filing, if that were to be performed, on coming back with subsequent filings. So in general, without getting into details, there is nothing about an early strategic approach that limits what you can do later, if that is the gist of your question.

With regard to flu vaccine, outside of the EU where we have the JV, we would have freedom to operate. Within the JV area we would have to work with the JV to see if it is a possibility.

Flu is of interest in certain areas, but it is not something that we have aggressively pursued in the past.

Great. Thanks, Steve. Jackie, I think we have time for one last call.

Chris Schott, JPMorgan.

Just two here. First I just would love to get your updated thoughts on the HCV market and the durability of that opportunity. I guess, based on the rapid adoption of Sovaldi this year, does that change your view at all in terms of the HCV adoption curve over time?

The second question, it is a follow-up on the established products unit, and I don't know if it's one you will answer; but what are the factors that weigh into a decision here? I guess my question is: How much of this is based on the performance and health of Merck's core business and pipeline? So continue to pipeline success would suggest a greater likelihood of further divestitures; versus a decision on that unit that is solely based on the value you believe you could achieve for those assets in the market. Thanks so much.

Let me start with the HCV market. The HCV market is a very large market in the United States, but also globally. Although there has been success from competition there recently, we still believe there will be a significant amount of potential for additional agents moving into the future, particularly shorter-acting agents.

There's 3 million patients if you look at number of patients in the USA alone; and in fact only a certain number of patients can get through the physicians that treat hepatitis C in any point of time. Also, if you look, we believe that you can only get about 90,000 patients through the system in a given year. So when you have 3 million patients and you've got 90,000 to 100,000 get through the year, it tells you that you're going to have a market for quite some time.

In addition to that, there will be a cirrhosis wave that we believe will occur over the years, of patients that have HCV and then develop into cirrhotic patients. So there will be a new rational reason to treat these patients as they go through the system over time. So we believe in the long-term growth for this market.

With regard to diversified brands, we look at the diversified brands on a global basis, and we look at brands that fit into our therapeutic categories. So, for example, if we have a primary care business, and we have diversified brands in primary care, and we are in the physicians' offices anyway, there is reason for us to continue to maintain those brands.

On the other hand, when we looked at ophthalmology for example, we had brands that we weren't in the office for any other reason but for a few products for ophthalmology. We didn't have any new products coming in the future in ophthalmology. We didn't have a pipeline in ophthalmology. Therefore it makes sense for us to divest those products.

Same thing with Saphris. We didn't have a reason to call on many of those physicians in the future based upon our pipeline.

So we looked at them as whether they fit into our core today or in the future, whether we had pipeline in the future for calling on those physicians that we are calling on with those brands today. And of course we look at the potential growth of those, particularly in the emerging markets.

Great. Thanks, Adam; and, Chris, thank you for your questions. With that I will turn it over to Ken.

Thanks, Joe. We had a strong first half. We are very reassured by the outlook for the full year.

We have been able to reconfirm our top-line guidance despite divestitures, and we have been able to narrow our EPS guidance while covering the $0.06 to $0.09 dilution from the two deals we've talked about.

What is more important, what is more critical, what is more exciting for us is the innovative momentum in our pipeline. And we look forward to regulatory updates in the second half of the year with respect to pembro, suvorexant, and also filing odanacatib, Bridion, and other things in the second half of the year. This business is ultimately about innovation, and we are pleased that we are seeing innovation momentum at Merck. Thank you very much.

This does conclude today's conference call. You may now disconnect.