merck Earnings Transcript

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merck Earnings Transcript

  1. 1. FINAL TRANSCRIPT MRK - Q1 2008 Merck & Co., Inc. Earnings Conference Call Event Date/Time: Apr. 21. 2008 / 9:00AM ET www.streetevents.com Contact Us © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  2. 2. FINAL TRANSCRIPT Apr. 21. 2008 / 9:00AM, MRK - Q1 2008 Merck & Co., Inc. Earnings Conference Call CORPORATE PARTICIPANTS Graeme Bell Merck & Co., Inc. - VP, Investor Relations Richard Clark Merck & Co., Inc. - Chairman, President & CEO Ken Frazier Merck & Co., Inc. - EVP & CFO Peter Kellogg Merck & Co., Inc. - EVP, CFO Bruce Kuhlik Merck & Co., Inc. - EVP, General Counsel CONFERENCE CALL PARTICIPANTS Tim Anderson Sanford Bernstein - Analyst Roopesh Patel UBS - Analyst Jami Rubin Morgan Stanley - Analyst Norman Fidel Alliance Capital - Analyst Tony Butler Lehman Brothers - Analyst Barbara Ryan Deutsche Bank - Analyst Catherine Arnold Credit Suisse - Analyst David Risinger Merrill Lynch - Analyst Jim Kelly Goldman Sachs - Analyst Seamus Fernandez Leerink Swann - Analyst Steve Scala Cowen and Associates - Analyst PRESENTATION Operator Good day, everyone, and welcome to Merck's first quarter 2008 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to Graeme Bell, Vice President, Head of Investor Relations. www.streetevents.com Contact Us 1 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  3. 3. FINAL TRANSCRIPT Apr. 21. 2008 / 9:00AM, MRK - Q1 2008 Merck & Co., Inc. Earnings Conference Call Graeme Bell - Merck & Co., Inc. - VP, Investor Relations Thank you Cynthia and good morning. Welcome to our call this morning to review our business performance for the first quarter 2008. We have a different line-up for you today so let me make some comments on that. Joining me on the call as always is our Chairman, President, and CEO Dick Clark. We also have Ken Frazier, our Executive Vice President and President of Global Human Health, here to provide commentary on our revenue trend, several of our in-line products, recently launched products, as well as to provide some perspective on recent news flows. One of the benefits of having Ken on the call today is that it will allow Peter Kellogg, our Executive Vice President and Chief Financial Officer to focus on the key financial take-aways from the quarter and provide an overview of the 2008 financial guidance and the rationale for it. And we are also joined by Executive Vice President and General Counsel, Mr. Bruce Kuhlik. Before we get into the details, let me go over some logistics. On this call, we will review the results contained in the release we issued at 7:30 this morning. You can access this through the Investor Relations section of merck.com and I would recommend that you do this and also follow along on the live webcast. The replay of the event will be available later today via phone, webcast, and as always, our pod cost. As we begin our review of the results, let me remind you that some of the statements made during this call may discuss certain subjects that may contain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements are based on Management's current expectations and involve risks and uncertainties which may cause results to differ materially from those set forth in the statements. The forward-looking statement may include statements regarding product development, product potential or financial performance. No forward-looking statement can be guaranteed and actual results may differ materially from those projected. Merck undertakes no obligation to publicly update any forward-looking statement whether as a result of new information, future events or otherwise. Forward-looking statements on this call should be evaluated together with the many uncertainties that affect Merck's business particularly those mentioned in the risk factors and cautionary statements in item 1-a of Merck's Form 10K for the year ended December 31st 2007 and in any risk factors or cautionary statements contained in the Company's periodic report of Form 10Q or current report on Form 8K which the Company incorporates by reference and all of these are available and posted on our website. We will begin with brief remarks from our senior management then open the call up for your questions and expect the total call to last approximately 60 minutes with a stop time of 10:00 a.m. With that I will turn over the call and we will begin with our prepared remarks from our Chairman, President, and CEO Mr. Clark. Richard Clark - Merck & Co., Inc. - Chairman, President & CEO Thank you, Graeme, and good morning everyone. Earlier this morning we announced Merck's results for first quarter 2008. We are joining you now to discuss them in greater detail. Today we reported another solid set of results including growth of non-GAAP EPS and revenue from key product. We delivered those results even in the face of slowdowns in sales from the Merck/Schering-Plough joint venture and the loss of market exclusivity for Fosamax. As you know, back in 2005 this management team outlined a strategic road map and called it our quot;Plan to Win.quot; Our plan has allowed us to improve efficiency while at the same time growing the top line. That plan set the stage for our consistent performance throughout 2006 and 2007 and into the first quarter of 2008 as well. And that plan enabled us to reaffirm financial guidance for the year and to reiterate our confidence in meeting our goal of double-digit compound annual EPS growth through 2010 excluding certain items. Based on the strength of our broad portfolio of established medicines and the launch of the eight new medicines and vaccines, we are well positioned to sustain growth in 2008 and beyond. The results reported today, non-GAAP earnings per share of $0.89 excluding certain items, and GAAP EPS of $1.52 shows that Merck continues to deliver. For the first quarter we reported revenue of $5.8 billion which represents top-line growth of 1% compared to first quarter of 2007. Key in-line medicines and vaccines including Singulair, Cozaar, Hyzaar and Varivax delivered solid year-over-year growth as did our newer products such as Januvia, Janumet, Gardasil and Isentress. Ken will discuss the product highlights in more details. Our overall financial results for the quarter were supported by our partnerships and alliances. Specifically, the Merck/Schering-Plough joint venture which in the first quarter continued to drive our equity income. However, sales growth in the quarter from the joint venture was lower than expected. At this point, we anticipate that the continued www.streetevents.com Contact Us 2 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  4. 4. FINAL TRANSCRIPT Apr. 21. 2008 / 9:00AM, MRK - Q1 2008 Merck & Co., Inc. Earnings Conference Call confusion in the market will cause sales of Vytorin and Zetia to be significantly lower than expected for the entire year. As a result we are lowering full-year guidance for equity income by $700 million. Ken will go into more detail about this issue in a few minutes but I want to make a few comments now. With Ken I've been personally engaged in this issue and have strong feelings on this subject. First and foremost, Vytorin and Zetia remain valuable treatment options to lower LDL cholesterol. In addition, the lack of a scientific discussion and debate at ACC regarding ENHANCE was disappointing, to put it mildly. We are encouraged to see a growing course from the cardiology field begin to speak out about how ENHANCE trials should not change current standards of care or what we know about the importance of lowering LDL cholesterol. Merck continues to engage directly with leaders in the field and with prescribers to convey our point of view. And we will continue to advocate for appropriate use of these important medicines. Merck has been a leader in the cholesterol field since the introduction of Mevacor 20 years ago and we are committed to remain the leader in this field. I also want to assure you that we take the criticisms of our practices and our integrity very seriously. Merck is committed to operating at the highest standards of ethics and scientific integrity. Those standards are the foundation of this Company and we will not lose focus on our overarching mission, delivering medicines and vaccines that save and improve people's lives. We are now more than half-way through the five-year plan that we first outlined in 2005 at a time when many were counting Merck out. Our strategy is working and we are moving ahead with a high sense of urgency. Even though several of our quot;Plan to Winquot; initiatives are ahead of schedule, we are picking up the pace of change. We've already made good progress with a number of initiatives including we are overhauling our supply network. We originally said we would sell or close five of Merck's 31 manufacturing sites by the end of 2008. We've already done that nine months ahead of schedule. Now we are identifying additional opportunities in our manufacturing network to increase efficiencies. We have moved up our plans to close, sell, or reduce operations at four other sites outside of the U.S., pending compliance with legal obligations. This year we plan to close or sell the pharma facility in Italy. In addition we have entered into an agreement with a Pakistani pharmaceutical company under the ownership of Merck's entire business in Pakistan will be transferred to that company later this year. The facility in South Korea is scheduled to be sold or closed in 2009. And finally, we plan to phase out solid dose manufacturing operations in Australia over the next two years to focus that site on packaging. As a result of these concerted efforts, I believe Merck is leading the industry in creating a lean and flexible manufacturing platform. In the labs, we are reducing our cycle time relative to the rest of the field, a leading indicator of the productivity of our research. On the commercial side, in the U.S. in particular, we and others have known for sometime that the current industry model is not sustainable. Here, too, I believe Merck is ahead of the field in accelerating to a new pharmaceutical business model that is centered around our customers. We look every day for opportunities to improve our efficiency. We've now eliminated more than 8,000 positions throughout the Company as part of our strategy to reduce our cost structure and create a leaner and more nimble business model. In this new era for the pharmaceutical industry, we must create a new way of operating if we are to succeed. We remain confident that our current portfolio and our pipeline, along with the fundamental changes we are making in every aspect of our business, position Merck well to delivering against our goals now and in the long-term. To summarize, in the face of both expected and unexpected challenges, Merck delivered sound first quarter results. Our ability to reaffirm our 2008 non-GAAP EPS guidance, despite business setbacks and the challenging industrial environment shows that we have the right strategy in place to drive Merck's long-term growth. We remain confident that our customers will continue to find value in our medicines and vaccines. In spite of the quarter's solid performance and the performance in the past prior two years, make no mistake, we are not content. We are accelerating the pace of change in every area of Merck's business. We have much to do to reach our 2010 goals and we need to do even more to achieve and sustain the benefits of our strategy through 2010, 2015, and beyond. But we must, and we will, to ensure that Merck keeps doing what Merck does best, bringing forth medicines and vaccines that save and improve people's lives. Now I would like to first turn the call over to Ken and then Peter. After their brief remarks we will take your questions. Ken. www.streetevents.com Contact Us 3 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  5. 5. FINAL TRANSCRIPT Apr. 21. 2008 / 9:00AM, MRK - Q1 2008 Merck & Co., Inc. Earnings Conference Call Ken Frazier - Merck & Co., Inc. - EVP & CFO Thank you, Dick, and good morning, everyone. Merck's top-line performance in the first quarter reflects continued strength across our diverse portfolio of product and in markets around the world. As Dick said, in a quarter where we sustained the impact of the loss of U.S. marketing exclusivity for Fosamax, total revenue in the quarter was up 1% thanks to the positive contributions from both our in-line and new products. In the first quarter, our international business performed very well, increasing by 12%. While we clearly benefited from the prevailing exchange rates, we saw volume growth of 5% outside the U.S. driven by strong results in Japan, Asia, and Europe. To drive further growth, we will continue to roll out our new product globally, and we anticipate conducting approximately 300 launches this year. In the U.S., when we exclude all products that recently lost patent protection, and I remind you that Fosamax, Proscar and Zocor, sales were up 12%. Before discussing some of the specific product highlights for the quarter, I would like to take a moment to add to some of Dick's comments regarding our cholesterol JV with Schering-Plough. Years of clinical trials and treatment guidelines for high cholesterol recognize LDL-C as the primary target of lipid-altering therapy. Both Vytorin and adding Zetia to Simba statin lower LDLs more than Simba statin alone and get more patients to their LDL goals. Of greatest concern to Merck is that in the ten weeks since the ENHANCE summary results were first provided, tens of thousands of patients have switched from Vytorin to therapies that on average are less effective than Vytorin at lowering LDL. And some patients have simply stopped taking their medication altogether. This reaction directly contravenes what we know about the importance of lowering LDL. Together with our joint venture partner, we are doing as much as we can to remedy this situation. We are engaging directly with our customers to set the record straight about ENHANCE and the value that Vytorin and Zetia bring to lipid management therapy. Within the first week after ACC, we reached out to or visited all managed care customers and sent a letter and press release directly to approximately 500,000 health care professionals. We also provided our sales representatives with appropriate materials for physicians so that the physicians felt informed about the results of ENHANCE and were prepared for discussions with their patients. Managed care organizations understand that Simba statin alone is not enough to get many patients to goal, which is why patients need to have access to the LDL lowering benefits of Vytorin and Zetia. As of today, most of our managed care customers have reviewed the ENHANCE data and there have been no changes to the second tier status for Vytorin and Zetia. Many physicians have put the study into the right context but feel that the ACC discussion has created confusion in the field. Most, we expect, will continue to prescribe Vytorin and Zetia, but may increasingly reserve these medicines for their high risk patients or for patients who cannot tolerate higher doses of statins, at least in the short term. Following January 14th, NRF market share dropped for about two weeks then began to stabilize. Unfortunately, the events at ACC at the end of March created further confusion and although the reduction in share was not as steep what is we saw at the January 14th, we were already starting from a lower share. In the quarter, worldwide sales of Zetia and Vytorin as reported by the Merck/Schering-Plough joint venture were $582 million and $651 million respectively in the quarter. In the U.S., sales of Zetia were $395 million, down 3%, and sales of Vytorin were $456 million, down 7%. Ex U.S., sales of Zetia were $186 million, an increase of 37%, and sales of Vytorin were $196 million, an increase of 45%. In a few minutes, Peter will provide with you the financial implications of these events when he discusses changes to our equity income guidance. But I want to reiterate what Dick said on this. We are very much engaged in this issue and are committed to helping our customers appreciate the unique values that these two medicines provide. Now, I'd like to discuss some of the key drivers of Merck's business in the first quarter beginning with our HPV vaccine, Gardasil. We are pleased with the global performance of Gardasil in 1Q '08. Sales in the first quarter were $390 million, a 7% increase when compared to the first quarter of last year. In addition, during this first quarter our vaccine joint venture Sanofi Pasteur MSD recorded end-market sales for Gardasil of $240 billion. Taken together, global and market sales for Gardasil reached a new high in 1Q up 11% sequentially from the fourth quarter of 2007. I'd like to update you on doses sold since approval for those who are tracking this measure. As of the end of the first quarter more than 26 million doses of Gardasil have been sold since March. In the U.S., we estimate that more than 8 million 9 to 26-year-old females, or roughly 23% of the eligible cohort, have received at least their first dose. www.streetevents.com Contact Us 4 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  6. 6. FINAL TRANSCRIPT Apr. 21. 2008 / 9:00AM, MRK - Q1 2008 Merck & Co., Inc. Earnings Conference Call Peter will provide you with some details regarding our financial expectations for Gardasil in 2008 but I'd like to review for you some of the things we are doing to grow this important franchise for Merck. In the U.S., sales in the quarter reflected underlying market demand for Gardasil, and we saw continued growth in origination and utilization versus first quarter 2007. Allow me to remind you that our first quarter revenue last year benefited from initial purchases from a number of the VFC projects as they ramped up vaccination programs. Throughout the rest of this year we anticipate quarterly purchasing from the VFC to be more in line with the underlying demand. In the private sector, Gardasil experienced strong growth in the quarter, increasing by 29% over the prior year. As we previously mentioned there is a seasonal component to the Gardasil business in the U.S., in that nearly two-thirds of well visits for nine to 18-year-olds occurred during the second and third quarters, with the third quarter being the highest. We continue to anticipate robust 2008 growth for Gardasil in the U.S. and to see this seasonality again. We're focused on increasing vaccination rates across the entire 9 to 26-year-old cohort with specific emphasis on the 19 to 26-year-olds. First, we're addressing the awareness versus action gap. While we have achieved high levels of awareness of the vaccine among 19 to 26-year-olds, origination levels are not nearly as high as those levels of awareness. We recently developed and launched new DTC ads and an interactive web portal in this regard. We are also continuing to help ob-gyns and primary care offices establish vaccinations as part of their practices, including addressing reimbursement. Although 99% of privately ensured 19 to 26-year-olds have some level of coverage, there is a lack of consistency of vaccination coverage in many benefit plans and we are working to address this with our customers. We also continue working to increase compliance levels with, for example, our three of key programs and partnership with NCOs. Three of key is being enhanced to make it easier for our customers to participate in this reminder program. Compliance rate for Gardasil remained high compared to historical norms in private practices. Compliance rates are about 75% for second dose and 50% for third dose. To drive further growth, we are expanding into other cohorts as well. Later this year we anticipate launching Gardasil for use by women age 26 through 45, and we plan to submit a regulatory application for use in males later this year. On a global basis, Gardasil has been approved in 101 countries, most under accelerated review. And based on the international approvals, recommendations, reimbursement and launches, we are well positioned to continue to build on the success of this franchise in 2008. While Gardasil continues its unprecedented launch, our other new and established vaccines are also performing extremely well and I note that this quarter our vaccine business nearly made it to the $1 billion mark. The launches for RotaTeq and Zostavax continue to progress as reflected in the strong quarterly results. Please note that the sales of RotaTeq in 1Q '08 benefited from a $41 million purchase to support the CDC stockpile. Moving to two more of our growth drivers, global revenue for Januvia and Janumet reached $330 million in the first quarter reflecting the high value that physicians, patients, and payers are placing on these versatile medicines. We continue to build on the momentum we achieved with our product launches over the last 18 months. In the U.S., Januvia remains the second leading branded oral antidiabetic agent in terms of new prescription share behind only Actos. Our diabetes franchise continues to grow in both volume and market share. Both products continue to enjoy excellent position on formularies, and the response from patients and physicians continues to be positive. As you may have noticed, last week we initiated broadcast DTC for Januvia. With Januvia well established as a valuable treatment option, we believe the time is right to encourage patients with type 2 diabetes to discuss their condition and available treatment options with their physician. Outside the U.S., sales for Januvia and Janumet were $48 million, a two-fold increase over the fourth quarter 2007. In the first quarter, we launched Januvia in a number of major markets, such as France, Spain, Italy, and Canada. Based on early feedback from these markets, we're off to a great start. We continue to focus on the global rollout for Januvia and Janumet and we look forward to additional regulatory approvals, reimbursement decisions and market launches during the remainder of this year. Now I'd like to turn to Isentress. We are extremely pleased with the uptake of Isentress, the first in class integrase inhibitor since launch in the fourth quarter of 2007. First quarter sales of Isentress were $47 million, up 58% sequentially. In the U.S., the weekly NRF market share for Isentress has already surpassed the weekly share of the last five new products introduced into the HIV market. Isentress continues to benefit from strong managed care access and is available through ADAP and Medicaid in all 50 states. In the quarter, Isentress became available in 11 additional markets, including the U.K., Germany, France, and Spain. By www.streetevents.com Contact Us 5 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  7. 7. FINAL TRANSCRIPT Apr. 21. 2008 / 9:00AM, MRK - Q1 2008 Merck & Co., Inc. Earnings Conference Call the end of the first quarter, Isentress had received regulatory approval in a total of 43 countries on five continents. Uptake in the largest markets has been strong already, and we look forward to the continued success in 2008 to filing our application to expand the use of Isentress to treatment naive patients. To ensure this breakthrough medicine gets to those who need it most, we continue to work closely with all stakeholders to foster patient access to Isentress here in the U.S. and around the world. We were very pleased with the global performance of Singulair in the first quarter as sales grew 10%. The U.S. allergy season has been somewhat slow to start this year compared to recent years and so far it also appears to be mild although it is still early in the season. Singulair is and we expect it to remain the number one product in the U.S. respiratory market. The continued strong growth of Singulair is a testament to the need for an effective nonsteroidal medicine and its effectiveness in adults and children with asthma or allergic rhinitis. Now, I would like to take a couple of minutes to provide an update on the progress we are making in implementing our new commercial model. As I mentioned at the annual business briefing in December, our U.S. pilot program spans six states and 11% of Merck's primary care business and involves some 700 Merck field and headquarters employees. In the pilot, we realigned our sales teams based on input from our customers and have begun creating new capabilities within the field and at headquarters. Our teams have also been gathering feedback from customers and employees involved the pilot. We are now seeing the results of the pilot and we are finding that our new approaches are working. The early progress we have seen in the pilot has increased our confidence in our new customer phasing model, and we have decided to move quickly to the next phase of our plan and begin working towards national deployment. Similar initiatives are also underway in international markets across our commercial organization with the same goal of evolving to a new business model that is centered around customers. A model designed to build trust and demonstrate value, that is efficient and effective, expands Merck's opportunities, fortifies our product performance and provides a platform for long-term business success. In closing, Merck's overall commercial operations continue to perform well. Merck enjoyed the leadership position in most of the therapeutic categories in which we have products. Our more established product continues to deliver strong quarter performances including Singulair, Cozaar, Hyzaar, and Varivax. Taken together, these established franchises, along with our new first-in-class vaccines and medicines such as Gardasil, RotaTeq, Januvia, Janumet and Isentress give us a diverse and broad product portfolio well positioned to drive revenue growth through 2010 and beyond. In addition, we are accelerating the deployment of our new customer-centric commercial model that we strongly believe will help deliver continued strong future performance. So with that, I will turn the call over to my colleague, Peter Kellogg. Peter Kellogg - Merck & Co., Inc. - EVP, CFO Thank you, Ken, and good morning, everybody. As Dick and Ken have both mentioned, Merck posted solid first quarter results despite the loss of patent protection for Fosamax as well as a decline in the expected sales from our Merck/Schering Plough joint venture. The business is performing well. Merck reported first quarter non-GAAP earnings per share of $0.89, excluding a $1.4 billion net after-tax gain from distribution received from the AstraZeneca limited partnership and restructuring charges. On a GAAP basis, as Dick mentioned earlier, EPS for the quarter was $1.52. Now, given the perspectives that Dick and Ken have just provided and the extent of the details contained in our sales and earnings releases, I'm not going to walk through all the line items today. Instead, I will focus on how the key elements in the quarter have been incorporated into our full-year guidance. We have done a fair bit of work on this and after a lot exhaustive evaluation of all our business drivers, we have refreshed our financial guidance. I'd like to discuss this and focus on how we thought about the business relative to our guidance. I will cover our guidance changes in four areas. First, how we've updated our revenue ranges for the current trends and expectations many of which Ken just walked through. Second, how our cost performance to date has been reflected in our guidance. Third, the implications of the Merck/Schering-Plough joint venture's revised forecast on equity income guidance. And fourth, the revised 2008 tax rate. Now let's begin with how we've changed our 2008 revenue guidance. As Ken talked about the health of the business, he provided context on the current trends and dynamics. As always, to assist your modeling, we provide a breakdown of the product revenues in our other financial disclosure schedule attached to the press release issued www.streetevents.com Contact Us 6 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  8. 8. FINAL TRANSCRIPT Apr. 21. 2008 / 9:00AM, MRK - Q1 2008 Merck & Co., Inc. Earnings Conference Call this morning, and you will note the following changes. Regarding 2008 revenue guidance we are increasing several lines and reducing one element of our full-year revenue guidance. Net-net we increased our revenue guidance by $0.5 billion dollars. So let me walk through that. On Cozaar and Hyzaar, we are increasing expectation for 2008 by $200 million and now anticipate revenue in the range of $3.4 to $3.6 billion. This is primarily driven by the positive effect of foreign exchange considering the geographic segmentation of revenue for these products. Regarding Fosamax we are pleased with the performance of the domestic Fosamax plus vitamin D product in the first quarter and the strength of our business internationally and, as a result, we are increasing full-year guidance by $200 million to $1.3 to $1.6 billion. Considering the portfolio of key growth drivers captured within other reported products, we are increasing our expectation by $300 million and now anticipate revenue in the range of $7.8 to $8.2 billion for these products. This increase is supported by the positive effect of foreign exchange on these products as well. Given the known complexity of the end market for vaccine, and that there is no routine way to monitor utilization, and, importantly, the fact that Gardasil is becoming an increasingly large contributor to our vaccine revenue, we recognize that it is valuable to provide product-specific guidance on Gardasil. So to assist with your modeling, we are now providing further breakdown. For Gardasil we anticipate full-year revenue as recorded by Merck to be in the range of $1.9 to $2.1 billion. We foresee robust growth for Gardasil in the U.S. in 2008 and quarterly purchasing from the VFC to be more in line with underlying quarterly demand. To provide additional perspective as Ken mentioned earlier, historically 63% of all penetration in the 9 to 18-year-old cohort occurred in the second and third quarter with the third quarter being the highest, as Ken mentioned. And I think that perspective is very important to help you model out the quarters and understand the seasonality that we expect to see this year. By isolating Gardasil for you by difference we anticipate the full-year revenue as recorded by Merck for other vaccines to be in the range of $2.9 to $3.1 billion. Regarding our agreement with AstraZeneca based on Q4 results of supply sales to AZN and the Q1 performance of Nexium, we anticipate incremental pricing pressure in 2008 to negatively affect the revenue that Merck records from AZN. As a result, we are lowering our 2008 guidance for AZN supply sales by $200 million to reflect the current market conditions and now anticipate that these revenues will be approximately $1.3 to $1.5 billion. This lowering of guidance is solely attributable to the current market conditions for Nexium and in no way signals a loss in economics following the settlement agreement in the patent infringement litigation announced last week. Now let's turn to talk about how costs have been incorporated into our guidance beginning with product gross margin. As a result of the strong PGM performance in the first quarter we are increasing our full-year PGM guidance by 0.5%. The new range is now 77.5% to 78.5%. This increase in PGM was driven by favorable product mix in first quarter. In addition, our gross margin improvement continues to be driven by establishing lean supply chain, leveraging low cost and external manufacturing and consolidating our manufacturing plant network, much of which Dick commented on earlier. During the remaining three-quarters of 2008 we anticipate a less favorable product mix to negatively affect PGM compared to the first quarter. In particular, over the next three-quarters we'll experience the full impact of the loss of marketing exclusivity for Fosamax on PGM. As always this guidance excludes the portion of the restructuring costs that will be included in product costs and will affect reported PGM in 2008. So let's move down the P&L to marketing and administrative guidance. In 2008 we continue to anticipate marketing and administrative expense to be approximately $7.8 to $8 billion. For R&D, we reaffirm our 2008 R&D guidance of $4.7 billion to $4.9 billion. And on the restructuring line, as part of the Company's restructuring of its operations, additional costs related to site closings, position eliminations and related costs will be incurred in 2008 and Dick discussed many of these earlier. We anticipate the aggregate 2008 pretax expense related to these activities to be in the range of $100 to $300 million. Now let's turn to equity income. The disappointing events surrounding the ENHANCE results that Ken reviewed earlier has caused us to evaluate what scenario regarding the potential impact of the franchise is appropriate. As Ken mentioned following the January 14th announcement, market share dropped for about two weeks. Then prescribing behavior moderated and share trends began to stabilize. Unfortunately, the more recent statements and opinions expressed at ACC at the end of March created www.streetevents.com Contact Us 7 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  9. 9. FINAL TRANSCRIPT Apr. 21. 2008 / 9:00AM, MRK - Q1 2008 Merck & Co., Inc. Earnings Conference Call further confusion in the marketplace. So when the Merck/Schering-Plough joint venture built its new view of the 2008 outlook, it had to consider the following factors and I'd like to go through them all. One, it appears that in both cases of share drop the NRF trends quickly stabilized and defined a new steady prescribing level as we've seen in the daily and weekly script data. Two, we have seen a more recent drop in share appear to stabilize, although it is really still quite early. But it is not as much of a drop as we saw post-January 14th. Three, in Q1 customers did reduce inventories in line with the lower demand in the U.S. as well as inventory build that sometimes occurs around the holiday period in fourth quarter. That said, there may be some further adjustment during the second quarter in the U.S. based on any additional decline in demand post-ACC. Now just to note, we don't expect any change in the weeks of supply in the inventory channel. This is just a response to any changes in market share. Fourth, following the events of January 14th, the Merck/Schering-Plough joint venture has carefully evaluated its entire cost base in an effort to optimize the income contribution to both its parents. We continue to carefully assess our investment strategy and we've incorporated our plan into this guidance. Now we do consider these further details on our investment and proprietary strategy to be proprietary so we won't be covering details of those today. And five, outside the U.S., the coverage and the impact following the January event was relatively minor and the international media coverage following the ACC conference was somewhat higher but too early to tell how full-year results may be affected. Sales growth outside the U.S. was up 41% versus Q1 in 2007 and we expect ex U.S. revenue to continue to grow. Accordingly, with all these factors considered, we are now incorporating the revised Merck/Schering-Plough joint venture outlook into our 2008 equity income guidance. We now expect it to be approximately $2.3 to $2.6 billion for 2008. The $700 million decrease in equity income guidance is solely attributable to lower anticipated contributions for the Merck/Schering-Plough joint venture. Just to be clear, as previously disclosed, the equity income guidance already included the impact of the reduction of AZLD priority return and the buy-out of the astra U.S. product which occurred in March 2008. So moving down the P&L, let's talk about taxes. As you can see, our Q1 tax rate included two impacts. First, the impact of the gain on distributions from the AstraZeneca limited partnership and restructuring charges. And both of these are taxed at roughly U.S. domestic rates. Second, we included the first quarter benefit of approximately 8 percentage points related to the realization of foreign tax credits. This is a discrete event based on operational aspects of our business and the full benefit of this change was captured in Q1. As a result of these two impacts, the first quarter effective tax rate on the GAAP P&L was 25.1%. And the effective tax rate on the non-GAAP P&L excluding the impact of these items was 14.5%. I'd like to take a second to explain the revised tax guidance. The foreign tax credits arose as a result of prior year tax payments made outside the U.S. in several countries in the normal course of conducting our business. The Company was not able to recognize the benefits of these foreign tax credits in prior periods. However, based on a change in the planned distribution of certain prior years' foreign earnings, the Company has determined such credits are now realizable. So with these impacts incorporated into our P&L in first quarter this affects the full year rate. There are no other changes anticipated to our tax rate in 2008 but the implication of this Q1 impact is that our rate for each of the next three quarters will be changed to drive the full-year rate. We are reducing our full-year 2008 non-GAAP tax rate guidance range to be approximately 20 to 23%. This guidance does not reflect the tax impact of the gain on distribution from AstraZeneca or restructuring costs. Now moving to share repurchase. Merck has been actively repurchasing shares. During the first quarter, the Company continued its stock buy back program and purchased approximately $1.4 billion of treasury stock. This level of purchasing was triggered by the following factors. We did not repurchase in the second half of 2007 very many shares, and we pulled forward some of our 2008 planned activity as we saw the value of the Merck equity dip and we viewed it as a buying opportunity. So in total, to recap our 2008 guidance, the Company continues to anticipate that many of our in-line and newer franchises will maintain their solid performance. We anticipate that worldwide revenue will be driven by additional indications for the Company's product, the continued market uptake in global rollout of our new product as well as other potential new introductions. On earnings per share, we are confident in our ability to execute against our plan and are reaffirming full-year 2008 non-GAAP EPS range of $3.28 to $3.38, excluding certain items. We are making a slight revision to our two 2008 GAAP EPS which we now anticipate to be in the range of $3.84 to $4 per share. Now, given that we had an $0.89 non-GAAP EPS first quarter, we have analyzed the www.streetevents.com Contact Us 8 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  10. 10. FINAL TRANSCRIPT Apr. 21. 2008 / 9:00AM, MRK - Q1 2008 Merck & Co., Inc. Earnings Conference Call trends quarter to quarter and the Company expects a generally even distribution of non-GAAP EPS across the remaining quarters in 2008. So in summary, the Company remains on track in terms of both strategy and performance to deliver long-term double digit earnings per share growth from 2005 to 2010 excluding certain items. We have financial strength and remain fully committed to maintaining our dividend at the current level. At the same time we continue to fully invest in our key strategic priorities. 2008 represented an important step in the multi-year journey to return Merck to its leadership position in the pharmaceutical industry. While we have faced certain challenges in the first three months of this year, it is important to note that much has been accomplished over the last 24 months. Many opportunities still remain and we look forward to capitalizing on them in 2008 and going forward. Thank you very much. Now I'd like to turn the call back over to Graeme. Graeme Bell - Merck & Co., Inc. - VP, Investor Relations Thank you, Peter. We will now open the call to take your questions. We'll take the questions as always in the order they are received and try to get through as many as possible. So at this point I'll turn the call back over to Cynthia who will communicate instructions about Q-and-A format and introduce the first question. QUESTIONS AND ANSWERS Operator [OPERATOR INSTRUCTIONS] Your first question comes from Tim Anderson with Sanford Bernstein. Tim Anderson - Sanford Bernstein - Analyst Thank you. Couple questions. Singulair is now your biggest product, and if I look at script growth in the U.S. it's recently slowed quite a bit. It's down in negative territory by about 15% or so. I'm hoping you can parse out that slowed growth by seasonality versus the safety issues that came up recently, what to expect from here in the U.S. specifically. And then on Vytorin and Zetia I think Ken's comments I'm assuming formulary positioning that was for 2008 and with contracting for managed care for 2009 being essentially done, I'm hoping you can give us an idea of how much Q2 slippage you might see with those products in 2009. Ken Frazier - Merck & Co., Inc. - EVP & CFO Thank you for those questions, Tim. Let me start with the second question. We continue to see from our managed care customers very strong understanding of the unique and valuable role of these two agents and we don't foresee significant changes at all in our managed care position. We've seen no changes and so we have no basis to actively predict changes going forward. We're very pleased with the reception we've gotten in managed care. We've reached out to them. I think the managed care providers understand the limitations of the ENHANCE study and they understand the importance of these drugs for their patients. On the Singulair issue, we believe that the changes that you've seen largely at this time or the slow start, if you will, has to do with the relatively late start for the allergy season. As well as sort of a modest impact of the new NIH guidelines which gave a little bit of a boost to inhaled corticosteroids. As it relates to the safety issue, I will remind you that those label changes were made in the fall of last year. Merck has been communicating those changes to its customer base since that time, and while I can't say that there is no impact yet, because it's too early to say there will be no impact of the concerns from a safety perspective, we have not yet seen any substantial impact on Singulair as a result of that. It's a drug that has ten years of excellent experience www.streetevents.com Contact Us 9 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  11. 11. FINAL TRANSCRIPT Apr. 21. 2008 / 9:00AM, MRK - Q1 2008 Merck & Co., Inc. Earnings Conference Call on the market. It's got strong clinical trial data in the background, 32 million patient years of good faith experience and we continue to anticipate that it will continue to be the number one drug in the U.S. respiratory market. Graeme Bell - Merck & Co., Inc. - VP, Investor Relations Next question, please. Operator Your next question comes from Roopesh Patel of UBS. Roopesh Patel - UBS - Analyst Thank you. Just a couple of questions. First on Gardasil, I was wondering if you could just clarify if the VFC purchase in this quarter was in line with underlying demand or was it higher or lower? And then separately on the tax rate, I wanted to clarify is the change in the full-year guidance all due to the benefit of the foreign tax credit that's been recorded this quarter? I'm trying to understand what could be the sustainable tax rate beyond 2008. Thank you. Peter Kellogg - Merck & Co., Inc. - EVP, CFO Great. This is Peter. Let me answer the second question first if I can on the tax rate. So, yes, the full-year impact on our tax rate is solely driven by the impact of the foreign tax credits that we're now being able to recognize the benefit for. And the impact is larger than first one because it does capture -- it had a little bit of a catch-up element to it, and that will affect the -- it obviously affected the first quarter tax rate. But it will affect Q2, 3, and 4 because you're driving now the tax rate towards the full-year rate. It will have a slight impact going forward beyond that because obviously this is now -- these foreign tax credits we anticipate being a benefit to us but we are not giving guidance and it won't be anything to this magnitude going forward. I hope that answers the question on tax. Now on Gardasil, Ken, do you want to -- Ken Frazier - Merck & Co., Inc. - EVP & CFO Yes. With respect to VFC, as I mentioned earlier, last year's first quarter had the substantial benefit of the initial stocking in the public sector as programs ramped up for Gardasil vaccination. We did not have a similar impact this first quarter. And I would say that one of the issues that we continue to watch closely is the timing of large government orders, which are not as predictable as the underlying demand. And that's why I pointed out, if you look at the underlying demand as measured by what's happening in the private sector, we saw very strong growth year-on-year of almost 30%, and that gives us confidence that Gardasil is still a vaccine that has been getting a strong reception by patients, by women, their mothers, and their caregivers. Graeme Bell - Merck & Co., Inc. - VP, Investor Relations Thank you, Ken. Next question. Operator Your next question comes from Jami Rubin with Morgan Stanley. www.streetevents.com Contact Us 10 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  12. 12. FINAL TRANSCRIPT Apr. 21. 2008 / 9:00AM, MRK - Q1 2008 Merck & Co., Inc. Earnings Conference Call Graeme Bell - Merck & Co., Inc. - VP, Investor Relations Jamie, please go ahead. Jami Rubin - Morgan Stanley - Analyst Can you hear me? Graeme Bell - Merck & Co., Inc. - VP, Investor Relations Please go ahead, yes. Jami Rubin - Morgan Stanley - Analyst Can you hear me? Graeme Bell - Merck & Co., Inc. - VP, Investor Relations Yes, we can. Jami Rubin - Morgan Stanley - Analyst Okay, great. Just a question, sort of a policy question, to what extent do you view the recent actions surrounding the ENHANCE trial involving the government investigation, the media tack, the ACC curve ball, etc, as a passing storm or is this the brave new world that pharma executives have to come to terms with and make significant changes in the way you allocate capital to outcomes trials, etc? It seems to me in this world, in this brave new world, the cost of failure in an outcome trial is obviously way too high. You've lost $40 billion of market cap over this, among other things. So I'm just wondering if you could kind of talk around that. And secondly, if you could talk about plans for DTC for Vytorin going forward. Ken Frazier - Merck & Co., Inc. - EVP & CFO Good morning, Jami. This is Ken Frazier. I think we all are looking into the future into sort of a murky crystal ball now as it relates to policy. It is clear that the world has changed to some degree. It is clear that outcome studies are going to continue to be important going forward, but I think when the dust settles around ENHANCE, people will come back to the primary goal of treatment, which is LDL lowering. And I think that people will continue to recognize that these drugs lower LDL more than Simba statin alone and will therefore continue to be very valuable drugs. And we will continue to go forward. As you know, Merck has always been a Company that believed in investing behind its products, investing in outcome studies, and so that will continue to be something that was important. We did that before. You will remember going back to the four-S study, we'll continue to do those kinds of studies. We had those studies around Cozaar. We'll continue to do those studies because we think they're important to patients as well as to the marketing of these drugs going forward. And then the second question? I'm sorry. Richard Clark - Merck & Co., Inc. - Chairman, President & CEO DTC Vytorin. www.streetevents.com Contact Us 11 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  13. 13. FINAL TRANSCRIPT Apr. 21. 2008 / 9:00AM, MRK - Q1 2008 Merck & Co., Inc. Earnings Conference Call Ken Frazier - Merck & Co., Inc. - EVP & CFO On DTC, we made a decision to voluntarily suspend DTC advertising in the current environment. I will only say that we will continue to invest behind these two products as appropriate. We have not made any specific decisions as to when we will resume our DTC advertising at this time. Graeme Bell - Merck & Co., Inc. - VP, Investor Relations Thank you. Cynthia, could we have the next question, please. Operator Your next question comes from Norman Fidel with the Alliance Capital. Norman Fidel - Alliance Capital - Analyst Thank you. It was already asked. Graeme Bell - Merck & Co., Inc. - VP, Investor Relations Next question, Cynthia. Operator Your next question comes from Tony Butler with Lehman Brothers. Tony Butler - Lehman Brothers - Analyst Thank you. Two brief questions. One, Peter, you commented quite extensively on the tax rate, but could you say if, in fact, the tax credits were variable, that is to say, could you have taken less of a credit this quarter and spread it more evenly throughout the remainder of the year, or did you need to take as much as did, and then the second -- and if so, why. And the second question Ken, when you -- assuming do receive approval for Gardasil for those over the age of 26 or 26 to 45, how does the message to ob-gyns and/or to that population change, if at all? Thank you. Peter Kellogg - Merck & Co., Inc. - EVP, CFO Tony, this is Peter. I'll take the first one. Basically when you have a change in your outlook for foreign tax credits like this, these are basically taxes paid in other countries outside the U.S. and then getting the benefit, an offset for those against U.S. taxes. Basically when you conclude as you do a change in your planned distribution of earnings, which then allows to you take a benefit of these foreign tax credits, you from an accounting standpoint, from a GAAP standpoint, you actually have to back the full amount right there in the first quarter and it becomes what's know as a discrete event in accounting parlance. Obviously it does affect the full-year tax rate. So in effect, you get the full-year tax rate impact but you do have to book it in the first quarter and that's appropriate and that's been reviewed by everybody. So we're very comfortable with. And so, we really don't have a choice per se, for example, to spread it out during the year but obviously it does -- it is an impact that rolls through the year. I hope that answers your question. The second question was related to 26 to 45-year-old Gardasil. www.streetevents.com Contact Us 12 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  14. 14. FINAL TRANSCRIPT Apr. 21. 2008 / 9:00AM, MRK - Q1 2008 Merck & Co., Inc. Earnings Conference Call Ken Frazier - Merck & Co., Inc. - EVP & CFO Thanks for your question. Let me start by saying we do recognize that there are significant differences among audiences and we continue to learn as we do our market research from our customers about the kinds of programs and messages and materials that resonate well across these different age groups. As you might be able to see in our new television advertising and our web presence we continue to remain focused on providing innovative and large-scale initiatives that highlight the benefits of this vaccine for cervical cancer, for genital warts, but actually tailor them to the lifestyle, the interests and concerns of different age groups as well as their position within the coverage spectrum. So while I won't be able to say at this time for proprietary reasons what our specific messages are to this most senior cohort among our patient population, I will say we recognize there are difference in how they approach things but the core value of the proposition of the product remains the same. Graeme Bell - Merck & Co., Inc. - VP, Investor Relations Next question please, Cynthia. Operator Your next question comes from Barbara Ryan with Deutsche Bank. Barbara Ryan - Deutsche Bank - Analyst Sorry, mine was answered. Thank you. Graeme Bell - Merck & Co., Inc. - VP, Investor Relations Thank you, Barbara. Next question please. Operator Your next question comes from Catherine Arnold with Credit Suisse. Catherine Arnold - Credit Suisse - Analyst Good morning. I have two questions. First of all, if you could just give us some perspective on the change in equity income, you had talked about some give and take on prescription trends and how it did seem like you settled out after January pretty quickly. And although you made the comment that prescription trends after ACC dropped, but now seem to have stabilized again, is your assumption in the equity income forecast change that there's another drop to add to conservativism or are you assuming that you have reached bottom in terms of market share trend? And my second question is related to share repurchase. It looks like you've bought as much stock in the first quarter as you almost -- it's pretty much comparable to last year total. So given the share price, and given what you've done, I guess it's safe to say that your share repurchase might be much higher this year. Peter Kellogg - Merck & Co., Inc. - EVP, CFO Catherine, let me take both these. First of all, on the second one, I think that's quicker and easier to take, the share repurchase, you're right. So last year we actually -- we went to the second half of last year. We did not repurchase a lot of shares. We in some ways were blocked as we went through a lot of the Vioxx dynamics and so we had a much lower share repurchase activity last www.streetevents.com Contact Us 13 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  15. 15. FINAL TRANSCRIPT Apr. 21. 2008 / 9:00AM, MRK - Q1 2008 Merck & Co., Inc. Earnings Conference Call year. As we came into our 2008 planning, and this obviously gets into sort of the capital planning for the Company, we had a certain amount that we anticipated repurchasing and we didn't buy the whole amount in the first quarter but we did pull forward some of what you might have considered to be a smooth purchase rate. We took some of the amount that we would have purchased in the balance of the year into the first quarter and bought a little bit more heavily because we felt the value had been -- there had been a reaction perhaps in the stock price. So I think that our ongoing share repurchase program is characterized more by stabilizing the number of shares outstanding, and what we are seeing just is more the timing and phasing of when we actually made the purchases, but you are correct in that it did result, because of those two factors, a much heavier purchase activity in the first quarter. Regarding the equity income forecast and how we looked at that, so obviously this is a bit of a complex situation. I would just caution everybody -- I think everyone on the call is very familiar with this, but obviously we have daily scripts, weekly scripts and monthly scripts and if you go from one to the other, you have to be careful what you look. And we tend to work with the weekly and monthly scripts because it includes -- the monthly includes the mail order and the weekly includes the long-term care channels. But as we have evaluated that, we did see a slight drop after ACC. We feel as if that has stabilized somewhat, particularly on the new script side, and we have modeled out what our expectation is for the balance of the year. We don't really anticipate a dramatic further drop at any point. In fact, we feel that there's been a very strong reaction in the market already. And I think Ken talked to that quite a bit in terms of the actions and communications that are important for patients who are trying to lower LDL. So as we have modeled that out, we actually feel as if at this point we've seen the reaction from ACC, and we realize it is early, but we had to make a call relative to how we forecasted it and how we made our guidance. Graeme Bell - Merck & Co., Inc. - VP, Investor Relations Next question please, Cynthia. Operator Your next question comes from David Risinger with Merrill Lynch. David Risinger - Merrill Lynch - Analyst Yes, thanks very much. I have a couple of questions. First, would Merck management be surprised if Cordaptive is not approved at the end of the month? Second, could you comment on how much U.S. wholesaler inventory was worked down for Vytorin and Zetia in the first quarter? And then on ex-U.S. Vytorin and Zetia, sales were flat. Can you discuss the prescription trends since ENHANCE and whether prescription trends are flat on a month-by-month basis ex-U.S.? Thank you. Richard Clark - Merck & Co., Inc. - Chairman, President & CEO Let me take the first one. This is Dick Clark, concerning Cordaptive. Obviously, and this has been our policy from the beginning, the status of a pending application is really considered proprietary and therefore we can't make any comments on it until the FDA has taken action. But we do continue to anticipate an FDA action by the end of this month. Ken Frazier - Merck & Co., Inc. - EVP & CFO On the two Vytorin questions, first let me take the inventory question. In the first quarter this year, we noticed customers were reducing inventories in line with the lower demand in the U.S. as well as inventory build that occurred around the holiday quarter -- holiday period in the last quarter. There may be some further adjustment in inventory in the second quarter in the U.S. associated with any additional decline in the demand post-ACC, so that's basically what we know about the inventory levels. On the ex-U.S. business, as was mentioned earlier, the media coverage and the impact following the January press release were www.streetevents.com Contact Us 14 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  16. 16. FINAL TRANSCRIPT Apr. 21. 2008 / 9:00AM, MRK - Q1 2008 Merck & Co., Inc. Earnings Conference Call minor. There was somewhat more extensive and more negative media coverage following the entire ACC conference, which could impact performance, but it is much too early to tell how the full year results might be affected. Sales growth outside the U.S. I remind you was 41% versus the first quarter 2007. So despite the controversies around ENHANCE we expect sales to continue to grow ex U.S. There was a modest sequential decline ex-U.S. from the fourth quarter to the first quarter and that trend reflects the typical seasonal pattern of stable franchises rather than, I believe, indicating any adverse effect from ENHANCE. Graeme Bell - Merck & Co., Inc. - VP, Investor Relations Thank you, Ken. Next question, please, Cynthia. Operator Next question, Jim Kelly with Goldman Sachs. Jim Kelly - Goldman Sachs - Analyst Great, thank you very much. First on Gardasil, if you said this and I missed it, I apologize. Is there any assumptions inside your guidance for the cohort of 26 to 45? And then secondly, cost of goods, very impressive decline year-on-year at a time when a lot of the other companies are seeing some more currency pressure. Is there something different about the amount of currency or if we currency adjusted that would the decline have been even more material year-on-year? Thank you. Ken Frazier - Merck & Co., Inc. - EVP & CFO On Gardasil, we anticipate FDA action on the 26 to 45-year-olds, but we can't speculate on the exact timing of the FDA's response, and so we're not in a position to talk about any estimates around our marketing expectations for that cohort. Peter Kellogg - Merck & Co., Inc. - EVP, CFO And on the cost of goods, Jim, thanks. So there's a lot of pushes and pulls in the cost of goods sold and I do think that actually as we plan and manage our cost of goods around the world, we don't tend to see a big 4 X impact relative to revenue and so forth. And so I don't think it was as big a driver. There is some impact and we can follow up on that at some point, but general we tend to have a little bit more U.S.-denominated cost of goods sold and I think that, as I mentioned, this quarter and as you go through this year, you will see a fair bit of product mix effect. And so you're seeing a combination of efficiencies that we've been talking about for quite some time and hats off to the whole Merck manufacturing division team on that. They've done a great job. But also as you have Fosamax going off patent and you have the very rapid growth in vaccines, you also have some mix effects as well. So I think those are probably the biggest drivers of all. Graeme Bell - Merck & Co., Inc. - VP, Investor Relations So given the time, we might have time for one or two more questions here, so Cynthia could we have the next question? Operator Your next question comes from Seamus Fernandez with Leerink Swann. www.streetevents.com Contact Us 15 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  17. 17. FINAL TRANSCRIPT Apr. 21. 2008 / 9:00AM, MRK - Q1 2008 Merck & Co., Inc. Earnings Conference Call Seamus Fernandez - Leerink Swann - Analyst Thank very much. Just hoping that you could give us a couple of data points. One, it's our understanding that the first Phase-III data on the migraine drug, MK-0974, could be presented in the near future. Could you confirm whether or not those data will be presented at the American Headache Society or is that still unclear? And then separately, just on Cordaptive, as you kind of think about your expectations coming into the year and guidance that you provided in late last year, can you just give us your expectations? Have those expectations changed at all given the volatility in the current environment, assuming that Cordaptive is approved? Peter Kellogg - Merck & Co., Inc. - EVP, CFO Yes, so let me take the second one on Cordaptive relative to the guidance. Yes, we have included some perspective on Cordaptive in our guidance, but I would caution everybody, it's very minor. This is a year of launch, it's an initial year, so it's a very minor impact. So I'd say our 2008 guidance does not hinge one way or the other on any outcome here this month with the FDA. Obviously, a lot of impact going forward but right now it really isn't a big 2008 factor. Relative to the migraine drug, Graeme? Graeme Bell - Merck & Co., Inc. - VP, Investor Relations Yes I can comment, Seamus, you're correct. June 26th through the 29th is the American Headache Society, and we will be presenting Phase III data on MK-0974 in that scientific forum. So, Cynthia, given the time, we will take the last question, please. Operator Your final question comes from Steve Scala with Cowen. Steve Scala - Cowen and Associates - Analyst Thank you. Two questions. First, what is the status of the [Varicel] manufacturing validation efforts? And secondly, I'm not clear why the change in the tax guidance is not due in part to the sizable cut in the guidance for the cholesterol franchise equity income or are you saying that there are operational offsets that have boosted the tax rate to a similar extent. Peter Kellogg - Merck & Co., Inc. - EVP, CFO Steve, I'll take the second question first then. Attack the [Varicel] manufacturing with these others. On the tax rate, it's a fair question. There are always pushes and pulls and our different product lines do have different tax rates. And so as the different product mix shifts, you do have mix effect within our tax rate. We've always modeled that. Obviously, some of these things come up as a surprise us, such as ENHANCE and we can't deal with that. And so we always incorporate that. That's why you always see a range of tax rates that we plan for. In fact, perhaps I'd say that the ENHANCE results and the impact that's had on the joint venture has actually perhaps even hurt our tax rate, but the bigger factor is the fact we're now getting the benefit of these foreign tax credits for taxes paid overseas in our core operations. And this is obviously just for a select number of countries. So I'd say it's more that event, the foreign tax credit realization benefit, than anything related to the Merck/Schering-Plough joint venture. On the [Varicel] manufacturing? www.streetevents.com Contact Us 16 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  18. 18. FINAL TRANSCRIPT Apr. 21. 2008 / 9:00AM, MRK - Q1 2008 Merck & Co., Inc. Earnings Conference Call Richard Clark - Merck & Co., Inc. - Chairman, President & CEO In relationship to your question on [Varicel], the FDA is in the process of reviewing regulatory submissions. We cannot provide the specific approval date. However, we expect to hear back from the FDA regarding the status of the review in next few months, so it's positive from the standpoint of a manufacturing process. Graeme Bell - Merck & Co., Inc. - VP, Investor Relations Thank you, Dick. So that last question concludes the Q-and-A session of the call. The information from today's call, both the transcript and replay will be available on our website for the next several months, and as always, Mike and I will be available all day to take your calls and any incremental questions. So let me turn it back to Dick Clark for final comments. Richard Clark - Merck & Co., Inc. - Chairman, President & CEO Thank you, Graham, and thank you all for joining you us on the call. The quot;Plan to Winquot; strategy we put in place back in 2005 has enabled us to improve efficiency while at the same time growing the top line. 2008 represents the half-way point of our plan and we are on track. Of course, new challenges will always emerge, but we have proven before that Merck is a resilient company and I am confident that this management team, along with the entire organization has the sense of urgency and the sharp focus that are essential to our success. We'll continue to work hard to grow our pipeline and reengineer our business to deliver sustained revenue and earnings growth through 2010 and beyond. So thank you again. We appreciate your interest and your participation. Have a good day. Operator Ladies and gentlemen, this concludes today's Merck first quarter 2008 earnings conference call. You may now disconnect. DISCLAIMER Thomson Financial reserves the right to make changes to documents, content, or other information on this web site without obligation to notify any person of such changes. In the conference calls upon which Event Transcripts are based, companies may make projections or other forward-looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statement based on a number of important factors and risks, which are more specifically identified in the companies' most recent SEC filings. Although the companies may indicate and believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate or incorrect and, therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realized. THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES THOMSON FINANCIAL OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. ©2008, Thomson Financial. All Rights Reserved. 1762804-2008-04-21T11:43:18.437 www.streetevents.com Contact Us 17 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.

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