merck (mrk) earnings report: q3 2014 conference call...

CompanyName:Merck&CoIncCompanyTicker:MRKSector:HealthCare

Industry:DrugsEventDescription:Q32014 EarningsCall

©2014TheStreet,Inc.AllRightsReserved Page1of 21

Merck(MRK)EarningsReport:Q32014ConferenceCallTranscriptThefollowingMerckconferencecalltookplaceonOctober27,2014,08:00AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

JosephRomanelli;Merck&Co;VPofIRKenFrazier;Merck&Co;ChairmanandCEOAdamSchechter;Merck&Co;EVPandPresidentGlobalHumanHealthRobDavis;Merck&Co;EVPandCFORogerPerlmutter;Merck&Co;EVP

OtherPart icipants

ChrisSchott;JPMorgan;AnalystSeamusFernandez;LeerinkPartners;AnalystMarkSchoenebaum;ISIGroup;AnalystAlexArfaei;BMOCapitalMarkets;AnalystJohnBoris;SunTrustRobinsonHumphrey;AnalystJamiRubin;GoldmanSachs;AnalystTimAnderson;SanfordC.Bernstein;AnalystMarcGoodman;UBS;AnalystAndrewBaum;Citigroup;AnalystColinBristow;BofAMerrillLynch;AnalystGreggGilbert;DeutscheBank;AnalystTonyButler;GuggenheimPartners;AnalystVamilDivan;CreditSuisse;AnalystJeffHolford;Jefferies&Co;AnalystDavidRisinger;MorganStanley;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator:

Goodday,everyone.WelcometoMerck'sthird-quarter2014earningsconferencecall.

Today'scallisbeingrecorded.

AtthistimeIwouldliketoturnthecallovertoJosephRomanelli,VicePresidentofInvestorRelations.

Pleasegoahead.

JosephRomanelli(VPofIR):

Thankyou,Jackie.Goodmorning,everyone.

IwouldalsoliketosaygoodafternoonandgoodeveningtoeveryonelisteningoutsidetheUnitedStates.WelcometoMerck'sthird-quarter2014conferencecall.




BeforeIturnthecallovertoKen,Iwanttoremindyouofacoupleofitems.

First,thereareanumberofitemsintheGAAPresultssuchasacquisition-relatedcharges,restructuringcostsandcertainotheritems.Wehaveexcludedtheseitemsinournon-GAAPreconciliationtablesandyoucanseetheminourpressreleaseinTable2.Thiswillgiveyouabettersenseofourunderlyingbusinessperformance.

Therearethreetablesinthepressrelease.ThefirsttableprovidestheGAAPresults.Tablenumber2reconcilesourGAAPP&Ltothenon-GAAPresultsandTable3providessalesperformanceforthecompany'sbusinessunitsandourproducts,bothonareportedbasisandexcludingforeignexchange.

DuringthecallwewillbereferringtoTable2whenwediscusstheP&L,andTable3whenwetalkaboutrevenueperformance.

Finally,I'dliketoremindyousomeofthestatementswemakeduringtoday'scallmaybeconsideredforward-lookingstatementswithinthemeaningoftheSafeHarborprovisionoftheUSPrivateSecuritiesLitigationReformActof1995.SuchstatementsarebaseduponMerck'scurrentbeliefandaresubjecttosignificantrisksanduncertainties.Ifunderlyingassumptionsproveinaccurateoruncertaintiesmaterializeactualresultsmaydiffermateriallyfromthosesetforthintheforward-lookingstatements.

Thecompany'sSECfilingsincludingItem1Ainthe201310-Kidentifycertainriskfactorsandcautionarystatementsthatcouldcausethecompany'sactualresultstodiffermateriallyfromthoseprojectedinanyforward-lookingstatementsmadethismorning.Merckundertakesnoobligationtopubliclyupdateanyforward-lookingstatement.OurSECfilingscanbefoundonthewebsiteatMerck.comandyoucanalsofindourearningsreleaseandallthetablesthereaswell.

Nowwiththat,IwouldliketosaygoodmorningtoKenFrazier,ourChairmanandCEO;RobDavis,ourCFO;AdamSchechter,HeadofGlobalHumanHealth;andDr.RogerPerlmutter,HeadofMerckResearchLabs.WiththatIwillturnthecallovertoKen.Ken?

KenFraz ier(ChairmanandCEO):

Thanks,Joe.Goodmorning,everyone.Ithankyouallforjoiningthecalltoday.

WeagainreportedsolidearningsthismorningbutbeforeIdiscussourperformance,pleaseallowmetoremindyouofthestrategythatconsistentlyguidesus.Merckremainsfocusedonbringingforwardmedicinesandvaccinesthatmakeadifferencetopatients,payersandhealthcaresystemsaroundtheworld.Inahealthcaremarketplacewhereresourcesareincreasinglyscarce,ourstrategycontinuestobeallaboutmeaningfulinnovation.

Toaccomplishthis,lastOctoberweannouncedourglobalinitiativetosharpenourcommercialandR&Dfocus,redesignouroperatingmodelandreduceourcostbase.WelaunchedthismultiyearinitiativetotransformMerckintoamorecompetitive,moreinnovativecompanyandtobuildaplatformforsustainedfuturegrowth.

Now,oneyearlater,I'mpleasedtoreportthisquarter'sresultsreflectthesteadyprogresswehavemadeineachoftheseareas.Weidentifiedfourareasoffocuswherewewillcompetetowinandourinvestmentsarepayingoff.

Inourdiabetesbusiness,wereallocatedresourcesandinvestedsignificantlyinJanuviaandhavenowreportedoursecondconsecutivequarterofgrowthintheUSandininternationalmarkets.Thismarksanimportantturnaroundfromwherewewerelastyear.

Ouracutecarebusinessgrewbydoubledigitsthisquarteraswearenowseeingtheimpactofour




investments.Thesebrandswillcontinuetobekeydriversofgrowthinemergingmarkets.

OurvaccinesbusinessremainsafundamentalcontributortoMerckdespiteadeclinethisquarterduetothetimingofUSpublicsectorpurchases.WearealsolookingforwardtoregulatoryactionforV503,ournext-generation9-valentvaccineforHPV.Andinoncology,ourintegratedbusinessunithasmadestridestofileandlaunchKEYTRUDA.

ThisquarterwereceivedapprovalfromtheFDAforKEYTRUDA,thefirstanti-PD-1therapyapprovedintheUSforadvancedmelanoma.AndI'mhappytoreportthatwealsorecentlyreceivedbreakthroughdesignationfromtheFDAforKEYTRUDAasapotentialtherapyforadvancednon-smallcelllungcancer.WecontinuetostudyKEYTRUDAinmorethan30differenttumortypesandareencouragedbyrecentdatapresentedattheEuropeanSocietyforMedicalOncologyinfivedifferentcancers.RogerwilltalkmoreinafewminutesabouttheprogresswecontinuetomakewiththeKEYTRUDAprogramandAdamwilldiscusstherecentUSlaunchinadvancedmelanoma.Alsodoingthethirdquarter,wereceivedUSapprovalfromtheFDAforBELSOMRA,ournoveltreatmentforinsomniawhichweanticipatelaunchingearlynextyear.

Inadditiontoincreasingourfocusonthekeytherapeuticareasthatrepresentourbestopportunities,wecontinuedtorigorouslyprioritizeourportfoliotoensurethatallofourbusinesseshavethepotentialtobemarketleadersandcreatevalueforshareholders.Thisapproachledustodivesthumanhealthproductsandbusinessareasthatamountedtonearly$1billioninannualrevenue.

Thatfocusalsoledtotherecentlycompletedsaleofour$2billionrevenueConsumerCarebusinesstoBayer.WethenemployedtheproceedsofthatsaletocompletetheacquisitionofIdenixandtoincreaseourreturnofcashtoshareholdersthisyear.

ThesameapproachledustoadifferentconclusionwithregardtoourAnimalHealthbusinesswhichwebelievewillcontinuetogeneratelong-termvalueforMerck.AnimalHealthsawstronggrowththisquarteracrossallspecies.WelookforwardtoadditionalinnovationcomingoutofourAnimalHealthpipelineandremaincommittedtogrowingthisbusinesswhichisalreadyamarketleaderinkeysegmentsoftheglobalAnimalHealthmarket.

LetmenowturntotheprogresswehavemadeinsharpeningthefocusofourR&Dorganization.AlongwiththestrongprogresswehavemadeonourKEYTRUDAprogram,wecontinuetoadvanceourworktodevelopahighlyeffectiveonce-dailyoralpan-genotypicregimenforthetreatmentofhepatitisC.AsImentionedearlier,wealsocompletedtheacquisitionofIdenixPharmaceuticalsanditspromisingportfolioofhepatitisCcandidateswhichcomplementourinternaldevelopmentefforts.

Wewillcontinuetofocusonourhighestpotentialgrowthopportunitieswhilerigorouslyprioritizingourpipelinebolsteringitwithexternalassetswhiledivestingourout-licensingprogramsandcandidatesthatarebettersuitedtocreatevalueelsewhere.

Forexamplethisquarter,weenteredintoanagreementtoout-licenseMK-3222,ourinvestigationaltreatmentforchronicplaquepsoriasistoSunPharma.Alloftheseactionsareinkeepingwithourintentiontobethepremierresearchintensivebiopharmaceuticalcompany.

Lastly,wehavemadesignificantprogressinredesigningouroperatingmodelandreducingourcostbase.YouwillrecallthatlastOctoberwetargetedanetreductioninannualoperatingexpensesofapproximately$2.5billionoffourfull-year2012expenselevelsbytheendof2015.

Asaresultofdisciplinedcostmanagement,I'mpleasedthatweremainontracktoachieveourtargetfor2015andouroverallsavingsgoalbytheendof2015.ThesesavingshaveenabledustobettertargetresourcestokeepprioritiesacrosstheenterpriseandtoaccomplishthegoalsImentionedtoday.




Atthesametimethisdisciplineallowsustoreturnahighlevelofcashtoshareholdersthroughbothadividendandourstockrepurchaseprogram.Overthepast12months,wehavereturnednearly$11.5billiontoourshareholders.

WearerebuildingMerckforsustainablefuturegrowth.Wehavesharpenedourcommercialfocusandarelaunchingproductswiththepotentialtomakeasignificantdifferencetopatientswhileprovidingvaluetopayers,providersandhealthcaresystems.

We'vefocusedandprioritizedourR&Deffortssothatwemaycontinuetotranslatecutting-edgescienceintomedicinesandvaccinesthathavemeaningfuldifferentiatedattributesandwehavecontinuedtoaggressivelymanageourcosttoensurethatourresourcesarefocusedonourmostpromisingopportunitiesforgrowth.Takentogether,theseactionshavecreatednearandlonger-termopportunitiesthatwillallowMercktocontinuetodrivevalueforbothshareholdersandsociety.

NowIwouldliketoturnthecallovertoAdamSchechter.

AdamSchechter(EVPandPresidentGlobalHumanHealth):

Thankyou,Ken.Goodmorning,everyone.

ThismorningI' llprovideyouwithanoverviewofglobalhumanhealththird-quarterresultsandalsoprovidesomecommentaryontheearlydaysoftheKEYTRUDAlaunch.Mycommentarywillbeonaconstantcurrencybasis.

Overallsalesreached$9.1billionreflectingthefollowing,growthincoreareassuchasdiabetes,immunologyandacute-carewhichwereoffsetbymorethan$150millioninproductdivestitures,hepatitisCmarketdynamicsandpatentexpiries.First,IwillreviewourcoreproductareasandthenIwillprovideanupdateonourregionalperformanceandIwillstartwithprimarycare.

TheJanuviafranchisereachedmorethan$1.4billioninsalesandgrew5%inthequarterreflectinggrowthintheUSandinternationalmarkets.IntheUS,salesgrew6%oncontinuedvolumeincreases.WeareencouragedbythegrowthtrendswesawinthethirdquarterandthemonthofOctober.Weareseeingpositiveresultsfromoureffortstodefendour75%marketshareandtogrowtheDPP-4class.

Inourinternationalmarkets,salesgrew4%drivenbyEuropeandtheemergingmarkets.SalesdeclinedinJapanduetoa10%repricingthatoccurredinAprilandtheoverallcompetitiveenvironmentforDPP-4s.WeareconfidentthatwewilldeliverglobalsalesgrowthforJanuviafranchisein2014.

Nextinhospitalandspecialtycare,salesofIsentresswereapproximately$410millioninthethirdquarter,adeclineof3%.InternationallyourgrowthinEuropewasbalancedbythetimingoftendersintheemergingmarkets.IntheUS,IsentresssaleswereimpactedbycustomerbuyingpatternsandthecompetitivedynamicsintheHIVmarket.

Salesofourimmunologyproductsreachedmorethan$770millioninthethirdquartergrowing9%.WeareseeingcontinuedstronguptakeofSimponiacrossmultipleindicationsandSimponiremainsthefastestgrowinganti-TNFinmarketswherewepromote.Remicadegrew3%reflectinggrowthincoremarketsandoffsetbybiosimilarcompetitioninsomeofthesmallerEUmarkets.

Inacutecare,salesexceeded$600millionandgrewby17%thisquarter.GrowthwasdrivenbycontinueduptakeofBridioninJapan,Europeandemergingmarketsandsolidperformancesacrossourportfolioofantibioticsandantifungals.Whilegrowthratesmayvaryfromquartertoquarterduetotimingoftenders,wecontinuetoexpectthiscoreareatobeanimportantcontributortofuturegrowth.

Now,turningtoourvaccinebusiness.




Inthethirdquarter,vaccinesaleswereapproximately$1.7billion,adeclineof6%primarilyduetoroughly$100millionofUSpublicsectorpurchasesofGardasilandRotaTeqinthethirdquarteroflastyearthatdidnotoccurinthethirdquarterofthisyear.

SalesofZostavaxwereapproximately$180millioninthequarterdeclining2%comparedtolastyear.AsweenterthefluseasonintheUnitedStates,wehaveinitiatedpromotionaleffortsincludinganewdirecttoconsumercampaigntoeducateconsumersoftheimportanceoftalkingtotheirphysicianandtheirpharmacistaboutshingles.WehavebroadaccessforZostavaxandweareworkingwithcustomerstohelpthemunderstandthereimbursementprocess.

Now,turningtosomegeographichighlightsinthethirdquarter.

IntheUnitedStates,salesdeclined8%asgrowthintheJanuviafranchiseandDulerawasoffsetbylowervaccinesales,thelossofexclusivityofTEMODARanddeclinesinourHCVportfolio.InEuropesalesfell1%.Wedrovecontinuedgrowthindiabetes,immunologyandIsentressbutsaleswereimpactedbythedivestitureofourophthalmologyproducts,continueddeclinesintheHCVportfolioandagenericerosionforNasonex.

SalesinJapandeclined14%primarilyduetobiannualpricedecreasesandophthalmologyproductdivestitures.

Salesinemergingmarketsgrew8%.Chinagrew33%inpartduetotimingofpurchases.DemandinChinaremainsstrongforourbroadportfolioofinnovativeandalsoestablishedproducts.OtherimportantemergingmarketssuchasTurkeyandMexicoalsodeliveredsolidgrowthinthequarter.Forthefullyear,wecontinuetoexpectthattheemergingmarketswillbegoodgrowthdrivers.

Now,I' llspendafewmomentsspeakingabouttheearlydaysoftheKEYTRUDAlaunch.

First,letmesayweareveryexcitedtolaunchthefirstandtheonlyanti-PD-1therapyapprovedintheUnitedStates.Wearestillintheearlydaysoflaunchbutwehavebeenmovingrapidlytoensurethemedicineisavailabletopatientsandfeedbackfromourcustomersisveryencouraging.UponapprovalwesaidKEYTRUDAwouldbeavailablewithinaweekandweweretakingordersandshippinginjustacoupleofdays.Ourcolleaguesinmanufacturingworkedtirelesslytoensurethatpatientswouldhaveaccesstothisimportantmedicationassoonaspossible.

Onthecommercialside,wereachedthetopipilimumabprescribersinamatterofdaysfromapproval.Wehavenowexpandedourreachintocommunitypractitioners.Wehavereachedmorethan75%ofthekeyphysiciansandwehavemademultiplecallsintomanyofthehigh-volumeprescribers.

Regardingaccess,mostpayersarecoveringthecostofKEYTRUDAforitscurrentindicationwithoutrestrictions.Additionally,weofferpatientassistanceforpatientsrequiringreimbursementassistance.Aswesaidatapproval,webelievethereareabout1200patientsintheUSwhoareeligibleforKEYTRUDAbaseduponourcurrentlabel.Additionally,weexpectafewhundrednewpatientstobecomeeligiblefortreatmentwithKEYTRUDAeachmonth.

SinceapprovalinearlySeptember,webelievethatapproximately900patientsarebeingtreatedwithKEYTRUDA.ManyofthesepatientswerepreviouslypartoftheexpandedaccessprogramandarenowinaprocessofmovingfromtheEAPtocommercialproduct.

OurglobaloncologybusinessunitispassionatelyengagedonmaximizingthepotentialforKEYTRUDAforappropriatepatients.Wearelookingforwardtosharingmorelaunchdetailswithyouinthefourthquarterearningscall.

Insummary,globalhumanhealthistransitioningthroughaperiodofpatentexpiriesanddivestitures.Sincelatelastyear,wehaveconsciouslyredirectedourfocustocoreproductareastocoremarketsandtonew




productlaunches.WedrovegrowthinmanyofthesecoreareasandwearesuccessfullyintroducingKEYTRUDAtotheUSmarketforpatientssufferingfromadvancedmelanoma.

Wecontinuetoprioritizeourinvestmentsandweareintentondrivingfuturegrowthandbroadeningourimpactinglobalhealth.

NowIwouldliketoturnthecallovertomycolleague,RobDavis.

RobDavis (EVPandCFO):

Thanks,Adam.Goodmorning,everyone.

Wehavehad(nice)resultsinthefirstninemonthsoftheyear.Ourthird-quarterresultsdemonstratethatwecontinuetosharpenourfocusasacompanyandasKenmentioned,ourcostreductionprogramisontrack.ThismorningIwillprovideadditionalcoloronourP&Landcommentonouroutlookfortherestoftheyear.Myremarkswillfocusonournon-GAAPfinancials.

Totalcompanyrevenueswere$10.6billionforthequarter,adecreaseof4%year-over-yearwitha1%benefitfromforeignexchange.Thisdecreasereflectsinpartthelossofmorethan$400millionofsalesintheprioryearfromdivestituresandthenowendedjointventurewithAstraZeneca.

AsAdamstated,oursalesinthepharmaceuticalbusinessweredrivenbysolidperformanceinourkeybrandswhichhavebenefitedfromcontinuedresourceallocationtoourprioritytherapeuticareaslikediabetesandacutecare.

AnimalHealthrevenuesincreased$83millionor10%year-over-yearexcludingexchange.Theseresultsweredrivenbystrongperformanceacrosstheportfolioincludingsignificantgrowthinourcompanionanimalandpoultrybusinesses.

ConsumerCarerevenuesdecreased9%excludingexchange.Asareminder,thisisthelastquarterinwhichwewillrecordresultsfromtheconsumercarebusinesssincethetransactionwithBayerclosedonOctober1.

Movingnowtoexpenses,grossmarginwas74.3%inthequarterwhichrepresentsa30basispointincreaseyear-over-year.Wecontinuetoexpectthe2014full-yeargrossmargintobeslightlylowerthan2013'sfull-yearratioof74.3%.

Marketingandadministrativeexpenseswere$148millionlowerthantheprioryeardrivenbyreductionsindirectsellingandpromotioncosts.WecontinuetofocusourresourcesonkeymarketsandcoreproductswhileensuringweappropriatelyinvestinourproductportfoliolaunchesandinsupportoftheseeffortswewouldexpectM&Aexpensestobesequentiallyhigherinthefourthquarter.

Researchanddevelopmentexpenseswere$1.5billioninthequarter,$109millionlowerthanprioryear.WeexpectR&Dexpenseinthefourthquartertobehigheryear-over-yearasweinvestinourportfolio.

Finally,regardingthetaxrate,ournon-GAAPeffectivetaxratewas26.5%inthequarterwhichwasinlinewithourexpectations.Wecontinuetoanticipatethetaxrateforthefullyeartobebetween24%and26%.

Intermsofourbottom-lineperformance,weearned$0.90pershareinthethirdquarterascomparedto$0.92pershareintheprior-year.

Nowouroutlookfortherestoftheyear.Onthetopline,wearenarrowingourrevenueguidanceto$42.4billionto$42.8billionatcurrentexchangerates.ThistakesintoaccountrecentcurrencymovementsaswellasapublicsectorvaccinepurchaseinthethirdquarteroflastyearthatdidnotoccurthisyearwhichAdamdescribedearlier.




Wearealsonarrowingournon-GAAPEPSrangeraisingthebottomendoftherangeto$3.46andloweringtheupperendto$3.50whilemaintainingthesamemidpoint.OurEPSrangereflectsourstrongperformanceinthefirstninemonthsoftheyearandincludestheabsorptionofroughly$0.06to$0.09ofdilutionfromtheconsumercaredivestitureandtheIdenixacquisition.

OnaGAAPbasis,weexpecttoearnbetween$4.06and$4.29in2014.BothM&AandR&Dexpensein2014areexpectedtobelowerthan2013andasIsaidearlier,weremainontracktoachieveourtargetofa$2.5billionreductioninexpensesoffofthe2012basebytheendof2015.

Nowtouchingbrieflyoncapitalallocation.Bytheendoftheyear,wewillhavedeployedthebalanceoftheafter-taxproceedsfromtheBayertransactionnetofcashusedfortheIdenixacquisitionforsharerepurchase.Wecontinuetoprojectouraveragedilutedsharesoutstandingwillbeslightlylowerthan2.95billionsharesfor2014.

WeremainfocusedonourcommitmenttoreturncashtoshareholdersandasKensaid,wehavereturnedover$11billiontoshareholdersoverthepast12monthsintheformofdividendsandsharerepurchases.

Aswelookatcapitalmarketsmorebroadly,werecentlytookadvantageoffavorablemarketconditionsandrestructuredsomeofourdebtthroughatenderofferandaEUR2.5billiondebtoffering.Wearepleasedwiththeresultsofthetransactionswhichcreatedeconomicvalueforthecompanyandwillbenefitannualinterestexpensein2015andbeyond.

Insummary,thethirdquarterwasanothersolidquarterforMerck.Sinceourannouncementatthistimelastyear,wehaverefocusedourbusinessanddivestednon-coreassetswith2013full-yearsalesofapproximately$3billion.Inaddition,wecontinuetotrimourexpensebaseputtingussolidlyontracktoachieveourexpensereductionsbytheendof2015whilealsoinvestinginourpromisingnewproductlaunchesandpipeline.

NowIwillturnthecallovertoRoger.

RogerPerlmut ter(EVP):

Thanks,Rob.Thethirdquarterwasanespeciallybusyoneforourregulatoryaffairsgroupwithmultipleproductapprovalsinseveralimportantareas.InAugust,ournovelfirst-in-classorexinreceptorantagonist,BELSOMRA,wasapprovedbytheUSFDA.BELSOMRAactstoimprovesleepinitiationandsleepmaintenanceinpatientssufferingfrominsomnia.AsKenmentioned,theBELSOMRAlaunchwillbeginearlynextyear.

InSeptemberwegainedapprovalofBELSOMRAinJapanwherewealsogainedapprovalofVaniprevir,apotenthighlyselectiveproteaseinhibitorforthetreatmentofgenotype1hepatitisCvirusinfection.AlsoinSeptember,wereceivedapprovalforKEYTRUDA,ourmonoclonalantibodydirectedagainstPD-1forthetreatmentofpatientswithadvancedmalignantmelanomarefractorytocurrentlyavailabletherapies.AsIpreviouslymentioned,ourdevelopmentprogramforKEYTRUDAhasexpandedtoincludemorethantwodozenstudiesaroundtheworldinvolvingmorethan6000patientsandaddressingmorethan30differenttumortypes.

AttheEuropeanSocietyforMedicalOncologymeetingsearlierthismonth,wepresenteddatadocumentingtheactivityofKEYTRUDAinpatientswithgastric,bladderandheadandneckcancersandalsopresentedmorecomprehensivedatadescribingtheactivityofKEYTRUDAinpatientssufferingfrommalignantmelanomaornon-smallcelllungcancer.

TodayweannouncedthattheUSFDAhasgrantedbreakthroughdesignationtoKEYTRUDAforthetreatmentofnon-smallcelllungcancerinpatientswhohavefailedplatinumbasedtherapiesandwhosetumorsdonotbearEGF-receptoror[ALK]genemutations.WeareworkingcloselywiththeFDAtodefineanoptimaldataset



©2014TheStreet,Inc.AllRightsReserved Page8 of 21

thatwouldpermitregistrationofKEYTRUDAforthisimportantindication.

Laterintheyearweexpecttohaveachanceto(prescribe)ourstudiesofKEYTRUDAinpatientswithso-calledtriplenegativebreastcancerattheSanAntonioBreastCancerconferenceandthensomehematologicmalignanciesattheAmericanSocietyof(inaudible)meeting.

CombinationstudiesemployingKEYTRUDAforthetreatmentofavarietyofdevastatingmalignanciesarealsounderway.ThesestudiesemployingconventionaltherapeuticmodalitiesaswellasnoveltargetedagentswillbenefitenormouslyfromthebroadunderstandingofKEYTRUDAmonotherapythatwearedeveloping.

Turningnowtoinfectiousdiseases,wearelookingforwardtotheupcomingAmericanAssociationfortheStudyofLiverDiseasesmeetingnextmonth.DuringthemeetingweplantopresentcompletedatafromPhase2studiesofourMK-51728742doublet.IremindyouthattheFDAhasgrantedbreakthroughdesignationtotheseagentsforthetreatmentofhepatitisCvirusinfection.IndeedthePhase3registrationprogramforMK-51728742isnowcompletelyenrolledandweexpecttoseedatafromthesestudiesinthefirsthalfof2015.

AtAASLD,wewillalsopresentearlydatafromtheC-SWIFTstudywhichpairstheMK51728742doubletwiththenucleosidepolymeraseinhibitor,Sofosbuvir.ThegoalofthesestudieswhichweannouncedfivemonthsagoatourbusinessrevealsistoadvancethecaseforanalloralRibavirinfreegenotypeindependentregimenthatcanbeusedinpatientsirrespectiveofcomorbiditiesforexampleinpatientswithestablishedcirrhosis,simultaneousinfectionwithhumanimmunodeficiencyvirusand/orrenalinsufficiencyandthatwillachievesustainedvirologicresponsesoverashortercourseoftherapy.

Becauseofthedifficultiesinensuringpatientadherenceintherealworld,shortercourseoftherapyisclearlydesirable.OurtripletherapyregimenshavebeenenabledbyourrecentlycompletedacquisitionofIdenixPharmaceuticalsthroughwhichwegainedaccesstoapotentnucleosidepolymeraseinhibitorthatwenowcallMK-3682.DatadescribingtheeffectivenessofMK-3682monotherapywillalsobepresentedattheAASLDmeeting.

BeyondHCV,wecontinuetomakeverygoodprogressenrollingotherPhase3infectiousdiseasetherapeuticsprogramsincludingonce-dailyIsentressandletermovir,atreatmentforpatientsatriskfromdisseminatedcytomegalovirusinfection6.

DuringNovemberwealsoexpecttopresenttheresultsofIMPROVE-IT,ourstudytestingwhetheracholesterol-loweringregimenofezetimibeplussimvastatinversussimvastatinaloneimprovesoutcomesinpatientsathighriskformajorcardiovascularevents.Thefirstpatientwasenrolledinthistrialexactlynineyearsago.Withdesignandprotocolreview,ithasbeenadecadesincethequestionthatthetrialaddresseswasfirstposed.

Inall,IMPROVE-ITenrolled18,145patientspresentingwithstabilizedacutecoronarysyndromes.Therehavebeenmorethan5000compositeeventsthatwillsoonbereviewed.TheMROclinicalteamandI,alongwiththerestofMerckmanagementremainblindedtothedataandourstatisticianshaveonlyaveryshortperiodtoconductanalysesbeforethepresentationinmid-November.MynumberoneconsiderationregardingthisstudyhasbeentoensurethatweworkcloselywithouracademiccolleaguestoobtainacompleteandrobustdatasetgeneratedduringthedecadethatithastakentoconductIMPROVE-IT.

Giventhesizeandcomplexityofthisstudy,IexpectthattheIMPROVE-ITdatawillprovideimportantinsightsintotheappropriatecareofpatientsathighriskformajorcoronaryadverseevents.

Returningbrieflytoregulatoryaffairs,wehavenowsubmittedourcompleteresponsetoFDAquestionsregardingsugammadex,ourparenteralagentforthereversalofneuromuscularblockadeduringanesthesia.Includedinthisresponsearenewstudiesdesignedtoexaminehypersensitivityreactionsthatcanoccurwith




sugammadexadministrationaswellasanupdatedreviewofourpharmacovigilanceexperiencewithsugammadexwhichismarketedinmorethan50countriesasBridion.

Separatelywehavehadapre-NDAmeetingwiththeFDAtodiscussourodanacatibresults.Wehaveagreedtogetheruponaplantocharacterizemorecompletelytheadjudicatedadverseeventreportinginthisstudywhichwillmeanthatourfilingwillbedelayeduntil2015.ThedatathatwepresentedattheASBMRmeetinginSeptemberdemonstratethatodanacatibcouldprovideameaningfultherapeuticoptiontoreducethefrequencyofosteoporoticfracturesinwomenathighriskfortheseevents.

FinallyasKenmentioned,wecontinuetoworkcloselywiththeFDAonthereviewofV503,our9-valenthumanpapillomavirusvaccineforthereductionofcervicalmalignancy.WeexpectthattheFDAwillcompleteitsreviewbeforetheendoftheyear.

Joe?


Great.Thankyou,Roger.

Jackie,IthinkwearegettingreadytostarttheQ&Asegmentofthecall.Justasareminderifyoucanlimityourselftooneortwoquestionsthatwaywecangettoasmanycallersaspossible.

So,Jackie,Ithinkwewillturnitovertothefirstcaller.

QUESTIONS&ANSWERS

Operator:

ChrisSchott,JPMorgan.

ChrisSchot t (Analyst-JPMorgan):

Justtwoquestionshere.

First,withthebreakthroughstatusinlungforKEYTRUDA,canyoujustupdateusonanythingaboutyourfilingstrategyoratleastkeydatapointsweshouldbewatchingforthatcouldsupportafilinginlung?

Andthensecond,justyourthoughtsonTECOSandriskofheartfailurewithJanuvia.ThereisobviouslybeenalotofdiscussionaroundthispointasoflateandwewouldlovejusttogetMerck'sperspectiveontherisksassociatedwiththatstudy.Thanksverymuch.


Yes,Chris.

Justwithrespecttothefilingstrategy,Ithinkwecertainlyarepleasedtohavegainedbreakthroughdesignationfornon-smallcelllungcancer.Asyouknow,wehaveanumberofstudiesunderway,largestudiesandwehavetheopportunitytolookatthosestudiesandweareworkingcloselywiththeagencytodevelopanideaofregistrationstrategyasIindicated.Sowewon'thaveanymoretosayaboutthatthanwhatIhavesaidtothispoint.

WithrespecttoTECOS,youknowIthinkthatwedoexpectthatthefinalpatientwillbeavailable,patientdatawillbeavailable,lastpatient,lastvisitbytheendoftheyear.Thisisofcourseastudythatisbeingconductedledbyacademicinstitutionssowewillbemadeawareofthosedata.

IthinkitisimportanttorecognizethataDataSafetyMonitoringBoardhasbeenfollowingthisstudyextremely




carefully.TheobservationsthathavebeenmadeinotherstudiesemployingregimenstotreatdiabetesarewellknowntotheDataSafetyMonitoringBoard.ThelastDataSafetyMonitoringBoardreviewwasinDecemberoflastyear.GiventhatthefactthattheDSMBcamebackandsaidthestudyshouldbecontinuedwithoutchangeIthinkprovidessomereassurancewithrespecttotheoverallconductofthestudy.Itisalargestudy,willprovideimportantanswerstoquestionsaboutthemeaningfulnessofinterventionwithsitagliptininpatientswithtype2diabetes.


Great.Thankyou,Roger.

Jackie,nextcaller.

Operator:

SeamusFernandez,Leerink.

SeamusFernandez (Analyst-LeerinkPartners):

Thanksforthequestion.SoacoupleofquickquestionsforRoger.

Roger,canyoutalktousalittlebitabout--Idon'tseePD-L1statushighlightedforthebreakthroughdesignationforKEYTRUDAbutmyunderstandingisthatmuchofthedatathatwasgeneratedinnon-smallcelllungcancerwasinthePD-L1positivepatientpopulation.CanyoujustclarifyforusifthisindicationisspecifictothePD-L1patientpopulationorifitisnotanditisactuallyforthebroaderpatientpopulation?

AndthenaswethinkaboutthenextdatapointsintheKEYNOTE-010study,canyoujustupdateusonwhetherornotyouhaveofficiallytakenthelookattheresponserateswhichissortofspecifiedonclinicaltrials.govrelativetothe2mgand10mgdoseandifthatlookincludedacomparisontoTaxotere?ThereasonIaskisifthatcouldbeutilizedassupportiveevidenceforapotentialfiling?Thanks.


Firstofall,thebreakthroughdesignationisnotspecifictoPD-L1positivepatientsandasyouknow,wehavedonequitealotofworkontryingtounderstandthemeaningfulnessofPD-L1positivitywhatwehaveshowninawholevarietyofsettingsisthatpatientswhosetumorsarejudgedPD-L1negativeormorepreciselythatfallintothePD-L1staininglessthan1%categoryneverthelessdodemonstratesomeresponsesandweandothergroupsthatarestudyingthisarestillinthemidstoftryingtounderstandexactlyhowtocorrelatePD-L1expressionstatuswithoutcomes.

WeknowthereisarelationshipbutexactlywhatthemeaningfulnessofthatisIthinkremainstobeelucidated.

WithrespecttotheKEYNOTE-010study,asIhaveindicated,wehaveavarietyofdifferentwaysthatwecanlookatthesedatainordertocomeupwithanoptimalregistrationstrategyandthatissomethingthatthroughthecloseinteractionthatwehavewiththeFDAandwillhavemoreparticularlybecauseofthebreakthroughdesignationthatwearegoingtobedoinginordertocomeupwiththebestpossiblestrategy.


Thankyou,Seamus.

Jackie,nextcaller.

Operator:




MarkSchoenebaum,ISI.

MarkSchoenebaum(Analyst-ISIGroup):

Hey,guys.Thankyoufortakingthequestion.

Maybejustafollow-uponSeamus.TheKEYNOTE-010trial,Roger,whatisthetimelineforadatareadoutonthat?Canyouupdateus?Ibelievelasttimeyouspokeaboutityouhadtalkedaboutlate2015.Couldyoujustremindmeifthatiscorrectorincorrectdata?

AndthenonhepatitisCifImay,Roger,lastcallyouexpressedagreat--whatIinterpretedtobeagreatperiodofoptimismforthefour-weekregimen.Obviouslythebarisvery,veryhighgiventheGileaddatathatisoutthere.Iwaswonderingifyoucouldupdateusonyourexpectationsforthefour-weekdata?

Iknowthisisthethirdbutthisisjustayesorno.Justtobeclear,thebreakthroughdesignationwasfor--ifIamreadingthepressreleaseright,wasactuallyforsecondlineandlaterlung.Isthatcorrect?


Mark,sofirstofall,thebreakthroughdesignationdoesn'tspecifylineoftherapy.Thebreakthroughdesignationisforpatientswhohavefailedplatinum-basedtherapies.Andthatisunderstandableofcoursebecauseyougetbreakthroughdesignationforthosecircumstancesunderwhichthereisa--theanticipationofameaningfulinterventionbeyondwhatexistsasstandardcare.SothatisunderstandableIthink.

WithrespecttotheKEYNOTE-010studyagainIthinkthetimingremainsasbefore.Wecontinuetomarchforwardwiththatstudy.We,asIsaid,haveopportunitiestoexaminethatdataatdifferenttimesandoneofthethingsthatwewillbedoingisdiscussingthatwiththeagencybutwedoexpecttohavedataavailablebytheendofnextyearforsure.

ThenwithrespecttohepatitisC,IthinktheimportantthingtorememberhereisthatwhatweproposedwhenwedescribedthestudybackinMaywasthatatripletregimenwouldprovidetheopportunitytotestwhetheritwaspossibletogetsustainedvirologicresponsesthatiseradicationwithveryshortregimens.Wedon'tknowwhatthenatureofthoseregimenswouldbeuntilwehavetriedtobook-endthosefourgenotype1andgenotype3intheC-SWIFTstudy.

Wehaveaccessnowofcourseto3682,ourownnucleosidepolymeraseinhibitorandthethingsthatwelearnfromourstudieswasSofosbuvircanthenbeappliedtoourtripletstudieswith3682recognizingofcoursethatnotwopolymeraseinhibitorswillbehaveinexactlythesameway.ButitbasicallyprovidesthekindofguidancethatweneedinordertodesigneffectivePhase3studies.Sowearelookingforwardtohavingtheopportunitytoreviewthosedataindetail.


Thankyou,Mark.

Jackie,nextcaller.

Operator:

AlexArfaei,BMOCapitalMarkets.

AlexArfaei(Analyst-BMOCapitalMarkets):

Goodmorning.Thankyoufortakingthequestions.

Roger,justafollow-uponthosecomments.




Couldyoupleasereminduswhatthesimilaritiesanddifferencesarefromwhatyoucantellfromyournew(inaudible)?

Adam,couldyoupleasegiveusalittlebitmoreontheGardasilperformanceandyouroutlook.Itseemedtohavebeenalittlebitlowerthanexpectations.Thankyou.


So,Alex,youwillhavetheopportunitytoseePhase1bdataforMK-3682atAASLDwhichwillbeinterestingbutofcourseitisverydifficulttocomparetwodifferentagentswhentheyarenotstudiedinahead-to-headcontextbecauseofdifferencesinpatientpopulation.Ican'treallyspeculateaboutthat.WewillhavetheopportunitytolookatthosekindsofdatasometimelaterbutrightnowIthinktheimportantthingwillbetolookatthedata,thePhase1bdatawhichIthinkyouwillfindintriguing.


Alex,regardingGardasil,letmeprovidesomeadditionalcontext.Thesalesintotalwere$590millionforthequarter.TheUSdeclined7%.TheUSdeclinesweremostlyduetohigherpublicsectorpurchasesin2013thatdidnotoccurin2014.

Ifyoulookatthecumulative15-to18-year-oldpenetrationratesintheUS,itisabout65%forfemalesandabout50%formales.Sothereisstillroomtogrowthere.Ifyoulookatmales,wecontinuetohavegooduptakeandifyoulookattheprivatesectordataitsuggeststhatabout50%to55%offirstdosesarenowbeingadministeredtomales.

IfyoulookoutsidetheUS,thedeclineswereduetoKoreaandalsothereistheendofthecatch-upcohortsinseveralofthesmallermarkets.Butoverallwecontinuetobepleasedwithourmarketshare,greaterthan90%onaglobalbasisand99%intheUSandwebelievethatthereisstillroomforadditionalgrowthinthefuture.


Great.Thankyou,Alex.Jackie,nextcaller.

Operator:

JohnBoris,SunTrust.

JohnBoris (Analyst-SunTrustRobinsonHumphrey):

Thanksfortakingthequestions.Firstquestion,justforKen.Ithinkyoutraditionallygothroughyourplanningprocessthistimeofyear.Iknowyoucan'tgiveoryouarenotreadytopreparetogiveguidancefor2015butifyoucanjusthelpusunderstandwhatsomeofthepushesandpullsareespeciallysince2015youhaveindicatedasareturntogrowthyeargoingintothatyear.Sothatwouldbeveryhelpful.

ThenforRoger.Ifyoucanjustcharacterizewhyit'ssodifficulttopotentiallytogettofourweeksoftherapyintheHCVpopulationeitherfouroreightweeksgoingforwardthatwouldberealhelpful.

Thanks.


Thanks,John,forthequestion.

Soletmestartbysayingofcoursewearenotgiving2015guidancetoday.Wewilldothatonourfourth-quartercall.Butyouarecorrect.Westillexpecttogrowoffour2014baseandthereareanumberoffactors




thataregoingonoutsiderightnow.Forexample,therehasbeenachangeincurrencyrateswhichwillhaveanimpacton2015.Butalsoonanoperationalstandpoint,wearelookingforwardtoseverallaunches.Wearelookingforwardtothecontinueddevelopmentofseveralkeyprogramsinourpipeline.

Sofromanoperationalstandpoint,wearepleasedwiththeprogressthatisbeingmadeinourpipelineandwiththeupcominglaunchesandobviouslytheywillhavetobelookedatinthecontextoftheoverallheadwindsthatIthinkeveryoneisexperiencingfromthingslikecurrency.Roger?


Yes,John.

Thedurationoftreatmentininfectiousdiseaseisalwaysadifficultprocesstoassess.Ithinkfirstofall,thereareaspectsofmolecularcellbiologytoconsiderthatyouhavehepatocytesthatareinfectedwithHCV.Theydifferalmostcertainlyonecellfromanotherintermsofreplicationrate.Thosethatarereplicatingmoreslowly,itcanbedifficulttoinhibitthatprocessandtherewillbevariabilityintermsofthedegradationoftheviralnucleicacid.Sothereisalotofheterogeneityintheliveritselfandthenthereisalsovariationintermsoftheexposuretodruginindividuallivercells.Andbeyondthosesortofmolecularcellularconsiderations,thereisalsotheclinicalcontext.

Soweallrecognizethatdespitethefactthatwehavemoreorlessunderstoodthenatureofforexamplejusttopickone,thenatureofosteomyelitis,bacterialinfectioninbone,thelengthoftreatmentintheclinicalsettingisdifferentindifferentpartsoftheworldindifferentregions.Wereallydon'thaveanestablishedlengthoftreatmentthatwecanjustifywithgoodclinicaldata.AndonecanexpectthatitwillbeeasierinHCVbecausewecanmeasureviralburdenmuchmorereadily.Butstilltheclinicalcontextwillchangedependinguponforexample,thedegreeofliverdisease.Soyoucanimaginewherethereisalotoffibrosisanditisdifficulttogetdrugpenetrationthatthatwillmakethingsmorechallenging.

Allofwhichmeansthatitmaybehardtogettoasingleshortcourserecommendationforallpatientsbutinsteadpatientswillhavetobestratifiedandmaybethestratificationcanbedeterminedbeforetreatmentbeginsbutmostlikelyitwillbeinresponsetotherapy.

ThesearethethingsthatwehavetolearnnowthatwehavethesepotentdirectactingantiviralsandourC-SWIFTstudiesIthinkwillprovideimportantdataonthis.


Thanks,John.

We'lltakethenextcaller.

Operator:

JamiRubin,GoldmanSachs.

JamiRubin(Analyst-GoldmanSachs):

Thankyouverymuch.Justafewquestions.

Roger,doyouexpecttoreceivepriorityreviewforyourdoublethepatitisCtherapy?Iknowyoumentionedyouhavecompletedenrollment.Thosetrialsshouldbecompletedbytheendof--sortof,Iguess,middleofnextyearshouldweanticipatepriorityorreviewandtimingofapproval?

SecondquestiononKEYTRUDAforlung.WhenistheearliestwecanexpecttoseerandomizeddatashowingoverallsurvivalforKEYTRUDA?




Thenthirdly,aquestionforyou,Ken.WehadreadIguessrumorsinthepressaboutMerckconsideringsellingitsdiversifiedproductlineoritslegacybusiness.Canyougiveusanupdateintermsofhowyouarethinkingaboutthat?Therehavebeenacoupletrades,asyouknow,ofthosebusinesses.IamjustwonderinghowweshouldthinkaboutthatforMerck.Thanksverymuch.


Thefirstquestion,ofcoursewedohavebreakthroughdesignationforthedoublet,andthatdoesn'tbyanymeansstipulatethatthepriorityreviewwouldoccur.Ithinkitwillbedriveninlargepartbythestrengthofthedataandassessmentofmeaningfulness.SowewillgettothatpointwhenwehaveachancetoevaluateallofthePhase3dataandgetitsubmitted.

Withrespecttotherandomizedoverallsurvival,again,wedohavedatacomingfromtheKEYNOTE-010study.Thereareotherpossibleapproachestothis,butcertainlyonewouldexpecttowardstheendofnextyear,sowewouldhaveanearlylookatthat.Again,alotdependsofcourseonthesurvivalstatisticsforthepopulation,butwewillhavedataaroundthattime,Jami.


Thanks,Jami,forthequestion.Letmestartwithabroaderfocusonit,andthatisthis.Wecontinuetoprioritizeandfocuswithinourbusiness.AndaswecommunicatedlastOctober,thathasrequiredustolookacrosstheentirebusinesstodeterminewhichassetsmighthavemorevalueoutsideMerckversusinsidethecompany.Aspartofthat,youhaveseenustakeactionanddivestassetswithapproximately$3billionin2013sales,includingMCCandcertainGHHproducts.

Wewillcontinuetoevaluateopportunitiesasappropriatebutspecificallywithrespecttothediversifiedbrands,wewillalsobeconsiderateofthefactthatalllotofthesemorematureassetsalsoprovidestrongcashflowwhichenablesustocontinuetoinvestbehindameaningfulinnovationthatisattheheartofourstrategy.

Sowewillcontinuetolookatopportunitiesaswemoveforwardbutwe'vegottobalancethecashflowconcernsaswellaswhatwecandotomonetizeassetswhereappropriate.


Thanks.Nextcaller.

Operator:

TimAnderson,SanfordBernstein.

TimAnderson(Analyst-SanfordC.Bernstein):

IwouldlovetogetyourthoughtsontheKEYNOTE-006trial,prettyimportantinthatitcomparesyouranti-PD-1head-to-headversusitbeinfirst-linemelanomaandIamwonderingifyoucanupdateusontimingofreadoutandjustmoregenerally,yourviewsofCTLA-4antagonistandspecificallyyourviewsofthoseproductsfromarisk-benefitstandpointaspartofcombinationtherapywithPD-1sintwosettings,melanomaandlung?

AndthejustaquickquestiononTECOS,isitpossibleyouwouldtoplinethoseresultsbylate2014andmoregenerallyhowwehandledatadisclosurewhenyoudohavethoseresults?


ForKEYNOTE-006yes,wedoexpectthatthedatamovingalongandwewillhavecomparativedataversussifalimumabandthereisnothingparticularlytoupdatewithrespecttoKEYNOTE-006.Whatyouseeonclinicaltrials.govisafairreflectionofwhatwehaveandweareexpectingtohavedatanextyear.




YouaskedamoregeneralquestionofhowweviewPD-1antagonismversusCTLA-4ipilimumabinparticularandtherehasbeenalotofdiscussionofthisasyouknowverywell.TherehasnotbeenanopportunityforustocompareKEYTRUDAvis-a-visipilimumabdirectlytothispointalthoughultimatelywewillhavethosekindsofdata.

Ithinkwhatwehaveseenfromtheregistrationmaterialsforthesedrugsisthatatthecurrentexposurelevels,thereisasubstantialamountofsystemictoxicitythatisseenwithCTLA-4antagonistsbuttimewillreallytellhowthatplaysoutparticularlyastherearedoseadjustmentsanddifferentapproachestocombinationtherapy.SoIdon'tthinkwecansaythatthatisgoingtoturnouttobeanimpossibility.

Ithinkthattheimportantthinginordertodesigncombinationscorrectly,speakingnotjustforipilimumaborCTLA-4butspeakingforthetotalityofcombinations,iswehavetohaveafirmunderstandingofhowthesemoleculesbehaveasmonotherapy.AndwehaveaverylargemonotherapyprogramforKEYTRUDAwhichinvolvesmorethan6000patientsasIhavenoted.

Inaddition,wehave17combinationstudiescurrentlyunderwaywhichexploreKEYTRUDAinavarietyofothersettingsusedwithotherdrugs.SowewillhavetheopportunitywiththisfirmfoundationofmonotherapyresultstounderstandthemeaningfulnessofcombinationtherapiesincludingcombinationswithCTLA-4antagonistslikeipilimumab.

Ohyes,TECOS,sotheTECOSdataasIhaveindicated,weshouldhavelastpatientlastvisit,Iremindyouthisisastudythatiscoordinatedbyanacademicgroup.Theyaremanagingthestudybutweshouldhavelastpatientlastvisitbytheendofthisyearwehopeandthedatawillbepresentedin2015.Thatisallweknowaboutit.ImentionedbeforetheDataSafetyandMonitoringcommitteethatisoverseeingthestudyaswellbutwedon'tknowanythingmorethanthat.


Thankyou,Tim.

Jackie,nextcaller.

Operator:

MarcGoodman,UBS.

MarcGoodman(Analyst-UBS):

Ken,obviouslytherestructuringprogramtakesyourexpensesdownprettysignificantlybytheendofnextyearandIamjustcuriousfromthere,arewenowresetandaswestarttoseethistoplinefromthenewlauncheskickin,willwegettheoperatingleveragethatwewouldexpecttoseegiventhathepatitisC,oncology,thesebusinessesthatarenotprimarycarekindofdrivethetopline?Iamcurioushowmuchinvestmentyouneedtomakeinthoseareasthatwouldoffsetandthatwewouldn'tseethatoperatingleverage?

Andthen,Adam.Ifyoucouldjusttalkabouttheemergingmarketsjustalittlebitmore.ObviouslyChinawasreallystrong.Whattypeofone-timerwasthereorwasthiskindofthecatch-upfortheyear?Andmaybeyoucouldtalkaboutjustsomeofthekeydriversandwhatisgoingonintheemergingmarkets.


Soifyoulookattheemergingmarkets,Ihavealwayssaidthatgrowthcanvaryfromquartertoquarterandtimingoftendersbecomesverysignificantintheemergingmarkets.Chinaasyoumentioned,hadstronggrowthof33%.Alotofthatwasintheacutecareproductsofwhichtimingplayedapartinandalsothe




diversifiedbrandscontinuedtoshowgoodgrowthwhichwasnotrelatedtotiming.

IalsomentionedthatinTurkeyandMexicowehadaverygoodquarteraswellandthatwasdrivenbyspecialtyproductsbutalsocardiovascularproducts.


Ontheoverallissueswithrespecttoourcoststructureandhowweareapproachingit,wehavebeenprettyaggressiveinthefirstninemonthstoreducecostsandchangeouroperatingmodelandweareontrackfortheoverall$2.5billionincostsavingsby2015.Andsowethinkthatactuallypositionsuswellaswemoveintothefuture.BeyondthatIcan'tsaymuchbecausewearenotprovidingguidanceintoday'scall.


Jackie,nextcaller.

Operator:

AndrewBaum,Citi.

AndrewBaum(Analyst-Citigroup):

Morning.Regardinganacetrapib,aquestionforRoger.

WouldapositiveprotocolanalysisforIMPROVE-ITatAHAmakeyouanymoreconfidentabouttheanacetrapibtrialgiventhebetaaboutitsproposedLDLmediatedmechanismofaction?AndIknowyouareawaretherearetwopresentationsarescheduled.

Second,justfollowinguponaKEYNOTE-010trial,shouldIbethinkingaboutanearlierinterimanalysisforyourtrialcomparedtoBristol'sequivalentgivenyouareselectingPD-L1patientsanditisobviouslymuchlargerandthereforewherewouldthatputtheinterimjustonyourmodeling?

Andthenjustanadjuncttothat,doyoustillremainconvincedthatlookingatPD-L1expressionontumorsratherthanonthedifferentcohortsofwhitebloodcellsistherightwaytogotooptimallyselectpatients?


Andrew,threequestions.Firstofallforanacetrapib,youknowofcoursewedon't,asIhavebeenindicated,wehavenoideawhattheresultsoftheIMPROVE-ITaregoingtobe.IMPROVE-ITteststhequestionasyouknowofwhetherornotonecanbyaggressivelyloweringLDLcholesterollevelsinpatientswhoalreadyareoptimallymanagedwithsimvastatinonecanachieveabeneficialeffectoncardiovasculareventsandthemagnitudeofthateffect.Ourstudieswithanacetrapibaredifferentandbecausewehaveananacetrapib,boththesignificantLDLcholesterol-loweringeffectbutalsotheHDLelevatingeffect,I'mnotsurethatIcouldreadoutmuchofanythingfromIMPROVE-ITtoanacetrapib.IthinkanacetrapibistestingreallyquiteadifferentquestionandwewilljusthavetowaitfortheresultsoftheREVEALstudy.

WithrespecttotheKEYNOTEtiming,Ican'tspeculateabouthowBristol-Myersispursuingtheiranalysesversusourown.Ihaveindicatedwhenweexpectourdatatobecomeavailableandwearegoingtoexaminethoseandmakedecisionsbasedonthat.

WithrespecttoPD-L1,wehavepresentedreallyquitealotofdatausingourproprietaryPD-L1antibodytolookatexpressionintumorsandwhatwehaveshownisthatthereissubstantialassociationbetweenPD-L1expressionintumorswhichisjustadifferentcutpointsandresponsestoKEYTRUDAandwehaveshownthatinanumberofdifferenttumorsandmostrecentlyweshoweditinourpresentationsatESMO.




TheimportantthingtorecognizeasIsayisthatdoesn'tmeanthattherearenoresponsesinthosewhoarePD-L1negative.Itissimplyanassociation.Itisanassociationthatisbiologicallyplausiblebutwedon'tbyanymeansfeelthatweareabletoinventoryallofthePD-L1thatisexpressedinandaroundthosecellsthatmightberesponsiblefortumorkillingandsonomatterwhat,weonlygetapartialpictureofit.

MyfeelingisthatPD-L1assessmentinthetumorismuchmorelikelytoberevealingthanPD-L1assessmentoncirculatingwhitebloodcellsasanexampleandcertainlythatisourexperience.


Okay.Jackie,nextcaller.

Operator:

ColinBristow,BankofAmericaMerrillLynch.

ColinBristow(Analyst-BofAMerrillLynch):

Goodmorning.Thanksfortakingthequestions.

SorryifImissedthis--butonhepatitisC,howimportantdoyouviewhittingfourweeksfromacommercialstandpoint?Itfeelslikephysicianfeedbackhasnotindicatedahighlevelofimportanceasperhapswewouldexpect.

AndthenjustasecondoneonIMPROVE-ITstudy.Ifthetrialdoesnotmeettheprimaryendpoint,howdoyouthinkaboutthelevelofinvestmentinthefranchisegoingforward?Thanks.


ThisisAdam,Colin.WithregardtohepatitisC,thisisaverylargemarket.IntheUSalonethereisabout3.2millionpeoplewithchronicHCVofwhichonlyabout50%arediagnosedandonlyabout150,000,200,000arecuredsothemarketisverylarge.Ibelievethatfourweekswouldbehelpfulbutaslongasinthecompetitivedynamicsthereisequalityintermsoftheregimens,Ithinkthatyoucanbesuccessfulcommerciallyundereithercircumstance.

AtthispointwearenotcommentingspecificallyonIMPROVE-IT.WecontinuetobelieveintheLDLcholesterolhypothesisandofcourseweprepareforallscenariosbutthereisnothingspecificatitthismoment.


Jackie,nextcaller.

GreggGilbert (Analyst-DeutscheBank):

GreggGilbert,DeutscheBank.

GreggGilbert (Analyst-DeutscheBank):

Thanks.Ihavetwo.

Adam,youmentionedthatroughly900patientsarebeingtreatedwithKEYTRUDA.Iwascuriousifyouareseeingordersinshipmentsthatareprettyconsistentwiththat?Isitaprettytightrelationshipbetweenindividualpatienttomanageshipmentsoristhesystemkindofgearingupforbroaderusageeventhoughyoucan'ttalkaboutbroaderusagefromMerck'sstandpoint?

Roger,howconfidentareyouandthescientificcommunityifyoucanspeakforthecommunityinthe



©2014TheStreet,Inc.AllRightsReserved Page18 of 21

reproducibilityofaparticularpatient'sPD-L1status?Itsoundslikeinvestorskindofwantthingsinneatboxes.Iamnotsosureitisactuallygoingtoplayoutthatwaybutcuriousonyourthoughtsthereonthetestingandthestatusandwhetherthatcouldfluxwithinpatients?

Thanks.


SofirstofallasIsaidbefore,wearepleasedwiththeuptakeincustomerfeedbackthatwehaveearlyinthelaunchbutwearestillveryearlyinthelaunch.WearetakingordersfromKEYTRUDAsincethefirstdayofavailability.Nearlyallofthetop50accountshavepurchasedsincewelaunchedtheproductandthemajorityhavemaderepeatpurchases.Atthispointintimewebelievewehaveabout900patientsthatarebeingtreatedwiththeproduct.


YouareabsolutelyrightwithrespecttoPD-L1statusandthatthePD-L1geneitselfisresponsivetoavarietyofdifferentstimuliincludingcytokinessotheinflammatory(inaudible)couldeasilyinfluencehowmuchPD-L1isexpressedandthatcouldbedifferentfromoneforexamplesiteofmetastasistoanothersotherecouldbequiteabitofvariability.ThatvariabilitymayunderliethechallengesthatpeoplehaveexperiencedintryingtodissecttherelationshipbetweenPD-L1expressionandresponsivenesstoanti-PD-1therapy.

Neverthelessthefactisthereissuchanassociationsosummingovereverything,therestillisageneralrelationshipbetweenPD-L1expressionintumorsandresponsivenessthathasbeenseenmanytimes.


Jackie,nextcaller.

Operator:

TonyButler,GuggenheimPartners.

TonyBut ler(Analyst-GuggenheimPartners):

Thanksverymuch.Twobriefquestions,Roger,wehavetalkedabout010inplatinumfailures.Thequestioniswhatisthedifferencebetween024and042inthePhase3settingatleastinfirst-lineadvancednon-smallcelllung?

Thesecondquestion,Adam,thetop50accountshavingorderedKEYTRUDA,canyouprovideanyadditionalcoloronthepercentageofpatientswhowerealreadyontherapyintheaccessprogramandhavemovedontoifyouwillasapayingcustomerandthosethatareactuallynewtotherapy?Thankyou.


Sorightnowaswesaid,webelievethereisabout900patientsthatarebeingtreatedwiththeproduct.Manyofthose,manyofthosewebelievearecomingfromtheEAPprogram.

Ifyoulookatthetop50accounts,itisnoteasytotellwherethepurchasesgo,towhichpatientsexactlysoyoucan'tcommentonthat.ButIthinkthebottomlineisweareontrackforallin60daystomovefromtheEAPprogramintothecommercialarea.Soweareworkinghardonthatandweareontrackforthat.


Ifyoulookat024and042,youwillseethatwearetalkingaboutsimilarkindsofstudiesbuttheydifferinsizeandtheydifferinprimaryoutcomesandthatiskindofunderstandableandnotatypicalforregistration




strategiesinthesesortsofsettings.


Nextcaller.

Operator:

DavidRisinger,MorganStanley.

DavidRisinger(Analyst-MorganStanley):

Yes.Thanksverymuch.Ihaveacouplequestions.

First,withrespecttoyourhepatitisCprogram,couldyoutalkaboutyourdevelopmentvisionfortheIdenixnukeincludingthetimingforPhase3?

Second,IhavealittlebitofalengthyquestiononKEYTRUDAandthisrelatestotheKEYNOTE-006trial.SotheapproveddoseofKEYTRUDAis2mgperkilogrameverythreeweeksanditcosts$150,000ayearbutinKEYNOTE-006,theKEYTRUDAdosingis10mgperkilogrameverytwoorthreeweekswhichwouldcost$1.15millionor$750,000ayearrespectively.

SosinceKEYNOTE-006issupposedtoreadoutearlynextyearandassumingthatitshowsthatKEYTRUDAissuperiortoYervoyinfirst-linemelanoma,itshouldgetCompendialistedat10mgperkilogrambuthowshouldwethinkaboutactualuseintherealworldandhowshouldwethinkaboutpricingforthatcompound?Thankyou.


Yes.SoIguessthequestionisfirstofallwithrespecttoMK-3682andthetiming,IshouldnotethatforMK-3682andagainthedatawillbe--Phase1bdatawillbeatAASLD,wedohaveanINDnowintheUnitedStatesforthatmoleculeandPhase2studieswillbeginshortly.Andthereafterbasedontheresultsofthat,wewillbegintodecidehowbesttoconductregistrationstrategiessothatismoreorlesshowwearethinkingaboutit,fairlyconventional.

AndthenwithrespecttoKEYNOTE-006,asyouknow,webeganourstudiesofpembrolizumabinavarietyofdifferentdoses,at2mgQ3,at10mgQ2,at10mgQ3andwhatwehavelearnedinthecourseofthosestudiesisthatthedoseresponsecurveisrelativelyflatand2mgQ3wasselectedasthedosetogoforwardinmelanoma.Wearealsoworkingonafixeddoseat200mgQ3whichwillgivetheequivalentexposureof2mgQ3formostpatientsanddoesn'trequiretheweightcalculation.

Myexpectationisthatbecausewewillhavealargeamountofdatafromallofthesedifferentsettingswewillbeabletomaketheappropriateanalysis.Ican'tspeakofcoursetohowCompendiawilllookatthisandanyotheraspectofthecommercializationprocess.


WhatIwouldsayiswehavebeenveryactivetoensurethepatientsthatareinneedofKEYTRUDAhaveaccesstoitandclaimsarebeingpaidforKEYTRUDAconsistentwiththeindicationwithoutrestrictionsandwehavegotourclinicalpresentationswithallofourtop30targetedhealthplanseitheroccurredoraregoingtooccur.

Soaswelookatthefutureofcoursewecontinuetoworktomaintainaccessasappropriate.





Jackie,Ithinkwehavetimeforjusttwomorecallers.

Operator:

VamilDivan,CreditSuisse.

VamilDivan(Analyst-CreditSuisse):

Thanksfortakingthequestion.Acouplehere.OneonJanuviaandJanumet.FromwhatweunderstandIthinkthatproductstartingin2015isnotgoingtobeavailabletopeoplewithUnitedHealthcarecommercialplans.Canyoujustconfirmifthatisindeedthecaseiftherehasbeenachangethere?AndwhileIassumethatlosingoneplanisnotlikelythatmaterialtoyouguys,arethereanyotherchangestotheaccessofthatfranchisethatweshouldbeawareofaswestartthinkingabout2015?

AndthenthesecondquestionjustonthePD-1sideofthings,anyupdateyoucanprovideonthestatusofthelawsuitthatyouguysfiledagainstBristolinEuropeandalsotheonethatBristolhasfiledintheUSagainstyouguysonceyougettheapprovalforKEYTRUDA.Thanks.


Januviacontinuestohavegoodaccessin2014andbaseduponpreliminaryreviewsin2015,weexpecttocontinuetohavegoodaccess.JanuviaisstillonformularyforUnitedPartDplanin2015andcontinuestohavepreferredaccess.ThecontractwithUnitedwassignedrecentlybutsinceithadnotbeensignedwhenUnitedfiledtheir2015formularywithCMS,theUnitedPartDwebsiteandCMSrequirednoticetoinsureesthatdidnotlistJanuviaasonformularybutIjustwanttorepeatthatitstillisonformularyforPartDin2015.


Thanksfortheotherquestion.WeareconfidentwithrespecttoPD-1andthelitigationassociatewiththepatents.WeareconfidentwewillbeabletomarketKEYTRUDAtoanycountryinwhichitisapproved.Litigationappeals,theyareamultiyearprocesssoyouwon'thearanythingfromusforawhile.Ifthereareanyupdates,wewillprovidethoseintheQ.

Jackie,Ithinkwehavetimeforthelastcaller.

Operator:

JeffHolford,Jefferies.

Jef f Holford(Analyst-Jefferies&Co):

Thanksfortakingmyquestion.IwonderedifyoucouldjustgiveusabitmorecoloronwhatthebiosimilarsituationinEuropelookslike,whatyouarereallylearningfromtheearlystagesofthisandwhatyouaregoingtotakeforwardasaccesstobiosimilarsbecomesmoreprevalentinEurope?Thankyou.


SoifyoulookatRemicadeandSimponiasIsaid,wehadabout$775millionofsales,about9%growth.WecontinuetohavegrowthofRemicadeofabout3%.ThatwasdrivenbythecoreEUmarketsdrivenbyGastroindicationsbuttherewassomeoffsetduetobiosimilarcompetitioninthesmallermarkets.

Ifyoulookatthebiosimilarsspecifically,therehasbeenrelativelylimiteduptakeofeitherbiosimilarproductoracceptanceontendersinformulariesandwhatwehaveseensofariswheretherehasbeenmovementofthebiosimilars,ithaslimitedtonewpatientsonly.However,wehaveseenincreasedpricingpressuresthatarerequiredinorderforustocompetewiththebiosimilars.Soweexpectthepressuretocontinueinthesmall




marketsthisyearandthenweexpecttheretobesomepricingpressureandnewpatientsinthecoreEUmarketsafterFebruary2015lossofexclusivity.


Thankyou,Adam.Ken?


Sojustinclosing,wereportedanothersolidquarterofcompanyperformance.AsImentionedearlier,wearemakinggreatprogressonourstrategicinitiativesweannouncedlastyear.Wearenowseeingthebenefitofinvestinginourcoretherapeuticareaslikewehaveseenindiabetes.WehavemadesignificantadvancementsinsomeofourmostimportantresearchprogramsincludingthelaunchofKEYTRUDAandreceivingbreakthroughtherapeuticdesignationinnon-smallcelllungcancerandasRogermentionedthismorning,wearemakingsteadyprogressinhepatitisCasourregistrationstudyforthedoubletisnowfullyenrolled.

Wealsocontinuetofocusonimprovingouroperatingmodel.Overthepastyearwehaveseenouroperatingexpensesdeclinesignificantly.Wewillremainontracktoachieveour$2.5billionofcostsavings.

Ourprioritizationhasalsoledustodivesting$3billioninsalesthroughtheMCCtransactionwithBayerandotherdivestituresinhumanhealth.WehaveusethoseproceedstofundtheIdenixacquisitionandrepurchasesharesthisyear.Overthepast12months,wehavereturnedmorethan$11billionviathedividendandsharerepurchaseprogram.Weremainstronglycommittedtoreturningcashtoourshareholders.

Soagain,thankyouforjoiningus,hanginginwithusforalittlebitofalengthycallandwelookforwardtoupdatingyouagainonourfourth-quarterearningscall.

Operator:

Thankyou.Thisconcludestoday'sconferencecall.Youmaynowdisconnect.

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