Oct 20, 2006
Operator
Good day everyone, and welcome to Merck’s third quarter 2006 earnings conference call. Today’s call is being recorded.
At this time, I would like to turn the call over to Mr. Graeme Bell, Senior Director of Investor Relations with Merck.
Please go ahead, sir.
Graeme Bell
Thank you, Cynthia, and good morning. Welcome to our call this morning to review our business results for the third quarter of 2006.
I am Graham Bell, head of investor relations. Joining me on the call today are our CEO and President, Dick Clark, and Judy Lewent, our Executive Vice President and Chief Financial Officer.
Before we get into the details, I would like to go over some logistics. On this call, we will review the results of the third quarter of 2006, released at 7:30 this morning.
You can access the earnings press release and supporting material through the Merck website. This conference call is being webcast live and recorded for replay later today via phone, webcast, and podcast.
As you begin to review 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 Act of 1995. These statements are based on management’s current expectations and involve risk and uncertainty, which may cause results to differ materially from those set forth in the statements.
The forward-looking statements may include statements regarding the 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 in this call should be evaluated together with the many uncertainties that affect Merck's business, particularly those mentioned in Merck's most recent 10-K, or on Form 10-Q, that are posted on our website.
We will begin with some brief remarks from our senior management, and then open the call for questions. We expect the total call to last approximately an hour.
With that, I will turn the call over and we will begin with remarks from our CEO and President, Mr. Dick Clark.
Richard T. Clark
Thank you, Graeme. Good morning, everyone, and thank you for joining us.
I am pleased to report that Merck's strong performance in 2006 has continued right through the third quarter. Let me take a few moments to review the highlights of the quarter, which are led by the performance of Singulair, Vytorin and Zetia, our vaccines, as well as our ongoing cost management initiatives.
It was another solid quarter for Merck. Our earnings per share for the quarter were $0.51, excluding restructuring charges.
This figure includes reserving an additional $598 million in the third quarter solely for future Vioxx legal defense costs. It excludes an $0.08 net charge for activities associated with the global restructuring plan we announced in November of last year, which continues to unfold as expected.
The Vioxx reserves are consistent with our commitment to defend these cases in a rigorous and responsible manner. We have both the financial strength and resolve to see our litigation strategy through.
Including the impact of the restructuring charges, our reported EPS for the third quarter were $0.43. We are pleased to report that Vytorin and Zetia achieved combined global sales of more than $1 billion in the third quarter.
Vaccine sales also realized strong growth, with Gardasil reaching $70 million in the quarter. Due to these strong results, we are raising our full-year 2006 guidance, and now anticipate an EPS range of $2.48 to $2.52, excluding restructuring charges.
We anticipate our reported 2006 EPS range to be $2.18 to $2.25. Judy Lewent will provide more details on the financial performance and guidance in a moment.
Our third quarter results reflect Merck's fundamental strengths and our determination to take full advantage of the opportunities that exist inside our company. We are establishing our credibility in delivering results our stockholders have every right to expect.
As we announced last year, our business model is changing in many ways. We are concentrating on nine therapeutic areas based on scientific opportunity and value to our customers.
We are focusing on research efforts on the most promising candidates, and reducing the time it takes to bring drugs to market. Our commercial model is becoming leaner, more nimble, more information- and value-driven, and much more cost-effective.
By investing in these areas that will drive our growth by reducing cost base in a strategic and targeted way, and by continuing to provide patients with the innovative products they want and they need for their health, we expect to continue to see Merck progress towards the goals I expressed last December, to regain the leadership position we so long enjoyed. As I mentioned, our established products remain strong.
I would like to take a moment to review the results of these products with you: The combined sales of Zetia and Vytorin topped $1 billion in the third quarter, the first time the combined sales of these products have exceeded that major milestone in one quarter. I should add that the strong growth of both of these products has been consistent through 2006.
Global sales of Zetia reached $1.4 billion for the first nine months of the year. Also, for the first three quarters of the year, sales of Vytorin also reached $1.4 billion.
As you know, Merck launched three new vaccines during the first three quarters of this year. To date, Gardasil has been approved in more than 30 countries, including the U.S., E.U., Australia, Brazil, and two countries in Africa.
In fact, as recently as this week, SPMSD has launched Gardasil in the United Kingdom. It is validation of how well this vaccine has been received as a new standard of care.
It is important to note that approximately 10,000 American women are diagnosed with cervical cancer every year, and an average of 10 women die each day from this disease. Being able to prevent cervical cancer is something all of us at Merck take pride in to provide those at risk of this terrible disease.
Besides Gardasil, Merck launched two other important vaccines, Rotateq and Zostavax. These vaccines represent significant medical breakthroughs in protecting infants and children from Rotavirus B and adults from shingles.
These three new vaccines and ProQuad have helped drive a 64% increase in vaccine sales for the quarter, compared to the same period a year ago. Before I turn it over to Judy, let me say that we are very pleased with the recent FDA approvals over the past two weeks of Januvia, our first-in-class drug to treat type 2 diabetes, and Zolinza, the first anti-cancer treatment approved for CTCL since 1999.
Merck is delighted that the FDA approved Januvia on Monday, October 16th -- the first and only DPP-4 inhibitor available in the United States for the treatment of type 2 diabetes. Januvia has been approved as mono-therapy as well as add-on therapy to either the two other types of oral diabetes medications, metformin or TZDs, to improve blood sugar control in patients with type 2 diabetes when diet and exercise are not enough.
Januvia is a potent and highly selective DPP-4 inhibitor. The recommended dose of Januvia is 100 milligrams once a day.
Januvia provides powerful A1C reductions as mono-therapy patients with type 2 diabetes and poor blood sugar control. Also, Januvia has a significant complementary affect when added to metformin or TZDs.
Januvia has an overall incidence of side effects comparable to placebo, and in phase III clinical programs, treatment with Januvia was not associated with weight gains or an increase of hypoglycemia. Regarding the launch of Januvia, we began taking orders from customers on Tuesday, began packaging product Wednesday, and shipped product to our distribution centers on Thursday.
Our customers will begin to have their orders filled today. The FDA approval clearly demonstrates our ability to deliver on our strategy of providing physicians and patients with innovative medicines that meet unmet medical needs.
We are prepared to ensure that Januvia reaches its full market potential. The Januvia approval letter this week marks the first new Merck medicine or vaccine approved for the United States in 2006.
That is an extraordinary record of success. As I look back over the most recent quarters, and over the first three quarters of 2006, I believe the evidence is clear that the course we have embarked on last year is proving to be the right path for Merck.
To restate, this approval of Januvia this week marks the fifth new Merck medicine or vaccine approved in the United States in 2006. Now, I am pleased to ask Judy to provide you with additional details about our strong third quarter.
Judy.
Judy C. Lewent
Thank you, Dick, and good morning. As mentioned, we are pleased with the third quarter results.
Our earnings in the quarter from ongoing operations reflects strong performance in a number of areas, particularly Singulair, vaccine, equity income, as well as the benefits of our ongoing cost management positions that are starting to have a positive effect on our bottom line. I will take the next few minutes to highlight the important underlying drivers of our performance, then I will discuss our full-year 2006 guidance and the elements we will change.
To briefly summarize the quarterly performance, our in-line franchises and the recently launched vaccines exhibited strong growth. When taken together, their performance offset the financial effect of the loss of patent exclusivity for Zocor and Proscar in the U.S.
We also saw strong performance of our partnerships and alliances, resulting in enhanced equity income and an upward move in interest income. These positive contributors were partially offset by an increase in the level of sales and marketing activity to support the recently approved vaccines and the imminent launch of Januvia.
In the third quarter, we recorded revenues of $5.4 billion, and that is comparable to the same period last year, including in the aggregate, an overall 2% decrease from price, offset by 1% growth in volume and 1% positive impact of foreign exchange. For the quarter, strong global growth in Singulair, vaccines, and other promoted products were offset by those products losing exclusivity in the U.S., namely Zocor and Proscar.
In the third quarter, the first full quarter following the loss of U.S. patent exclusivity, branded Zocor revenue in the U.S.
was $152 million, representing an 80% decrease year over year. During the quarter, Merck recorded revenue associated with the Dr Reddy’s arrangement for Simvastatin of approximately $80 million, and please note that Merck records this revenue on the top-line as part of other revenue, not within branded Zocor.
It remains unclear whether the whole 180-day exclusivity will be awarded to the first filer for Simvastatin. The issue of exclusivity is not yet decided and is pending the court’s decision.
As you know, we have no influence over the outcome. Total sales of Merck's other promoted medicines and vaccines were $1.8 billion for the third quarter, representing growth of 15% as compared with the third quarter of 2005.
A major contributing factor to the 15% growth in the other promoted medicines was the strong growth in our vaccines business, and that was up 64% compared to the base period. Part of the $555 million of revenue we recorded was driven by the uptake of Gardasil, Rotateq, Zostavax, and ProQuad, for which we collectively recorded $226 million in the quarter.
To assist in your modeling, we are providing a breakdown of the new product revenues on our other financial disclosure. You will see the global sales for Rotateq in its second full quarter on the market reached $62 million.
Regarding Gardasil, since FDA approval on June 8th, managed care plans representing over 90% of covered lives in the U.S. have made positive coverage decisions on the product, and U.S.
sales of $70 million in the quarter. Also contributing to our top-line, our revenues from our alliances, primarily AstraZeneca LT.
In the third quarter, revenue recorded by Merck from the company’s relationship with AZLT was $442 million, and that is flat compared to third quarter ’05, but keep in mind that there is inherent variability relating to this revenue, given that Merck is not actively managing these products. Our revenue recognition takes into account inventory levels at AZLT for PTI and non-PTI products, as well as their product shipments.
Taking the third quarter revenue announced today and adding 50% of the revenues from the Merck/Schering-Plough, Merial, Sanofi Pasteur MSD, and Johnson & Johnson Merck joint ventures and partnerships, third quarter 2006 revenue would have been $6.3 billion. If you do the same adjustment in third quarter ’05, the growth rate from that baseline was 3%.
Keep in mind the base period has a full quarter of branded Zocor sales. Year-to-date, that growth rate would be 5%.
As we move into the next three lines on the income statement, recall that they include the consequences of FAS-123R, or expensing stock options, consistent with where payroll costs are incurred. For this third quarter of 2006, our total stock option expense was $42 million, and year-to-date, that expense has been $183 million.
We remain on track and stock option expense is expected to be approximately $220 million in 2006. Moving down the P&L, materials and productions came in at $1.5 billion.
The actual reported product gross margin in the quarter was 71.5%, but this includes restructuring costs of $200 million, primarily related to accelerated depreciation and asset impairment costs associated with Merck's global restructuring program announced in November, 2005. It also includes $5 million recorded in accordance with the adoption of FAS-123R.
Excluding the restructuring costs, but including stock option expensing that will be an ongoing cost, PGM in the quarter was 75%, and just as in previous quarters, this result was affected by the final product mix. We are reaffirming our guidance for the full year of 76% to 78%, and keep in mind that we anticipate PGM rates after 2008 to return to pre-Zocor patent expiry levels.
Turning to marketing and administrative, third quarter expense came in at $2.4 billion, and that is up 43% over the same period last year. Per our financial footnotes in the press release, this includes a $598 million charge related to increasing the legal defense reserve and $25 million recorded in accordance with the adoption of FAS-123R.
Year-to-date, excluding the legal defense reserve charge taken in the third quarter, we showed 4% growth over the first nine months of 2005, reflecting an increase in activity to support the three recently approved vaccines and the imminent launch of Januvia, partially offset by reduced spending in support of Zocor. As you can appreciate, there are many factors affecting the marketing and administrative expenses, and during the quarter, we make decisions regarding the timing of commercial spending and reallocation of funds to initiatives scheduled throughout the year.
Regarding the legal defense reserve charge, the company accrued legal defense costs expected to be incurred in connection with a lawsuit contingency when such costs are probable and reasonably estimable. As of December 31, 2005, the company had established reserves of $685 million solely for its future legal defense costs related to the Vioxx lawsuit and the Vioxx investigation.
During the first nine months of 2006, the company spent $325 million in the aggregate in legal defense costs worldwide, related to Vioxx litigation. In the third quarter, the company recorded a charge of $598 million to increase the reserve solely for its future legal defense costs related to Vioxx, to $958 million at September 30, 2006.
In increasing the reserve, the company considered the same factors that it considered when it previously established reserves for the Vioxx litigation, and management now believes it has a better estimate of the company’s expenses and can reasonably estimate such costs through 2008. Some of the significant factors considered in the establishment and ongoing review of the reserve for the Vioxx legal defense cost were as follows: Events such as scheduled trials that are expected to occur throughout 2007 and into 2008, and the inherent inability to predict the ultimate outcomes of such trials, limits the company’s ability to reasonably estimate its legal costs beyond the end of 2008.
The company will continue to monitor its legal defense costs and review the adequacy of the associated reserves. The company has not established any reserve for any potential liability relating to the Vioxx lawsuit and the Vioxx investigation.
Regarding research and development during the third quarter, expenses were $945 million. That is flat year over year, inclusive of the $11 million for stock option expense taken in the period.
Merck continues its strategy of establishing strong, external alliances to complement our internal research, and for the first nine months of 2006, we have entered into 24 such transactions. Two recent examples of our commitment to strategic alliances are the Ambrilia Biopharma licensing agreement, in which Merck was granted the worldwide rights to Ambrilia’s HIV AIDS protease inhibitor program.
In late September, Merck and FoxHollow Technologies announced that they will expand the scope of their existing strategic collaboration for atherosclerotic plaque analysis. At this time, we are in discussions with approximately 40 companies regarding potential transactions, and are actively monitoring the landscape for a range of targeted acquisitions that meet the company’s strategic needs.
Moving on to restructuring, we continue to provide this breakout to assist in tracking the restructuring related expenses, and to ensure fair comparisons of the underlying business. This line captures all separation costs, and in accordance with GAAP accounting, it also includes asset related dismantling costs, demolition expenses, costs to relocate assets being put to alternative use, and any gains on facility sales.
Remember, any accelerated depreciation associated with our global restructuring program is being reported in the respective line items, namely materials and production and R&D. So in our third quarter results, the total charges related to the global restructuring program were $50 million, and $200 million of accelerated depreciation and asset impairment costs included in the materials and production lines.
The $50 million charge is for employee separation and other related costs associated with the approximately 500 positions eliminated, bringing the total to 3,900 to date in the global restructuring program, and we remain on track to eliminate 7,000 positions by the end of 2008. In reviewing equity income from affiliates, you will see $595 million in income related to the contribution from all our joint ventures -- AstraZeneca LT, Merck/Schering-Plough, Merial, Sanofi Pasteur MSD, and Johnson & Johnson Merck.
Regarding the Merck/Schering-Plough partnership, the third quarter combined MSP cholesterol franchise global revenue, as reported by the Merck/Schering-Plough partnership, surpassed $1 billion. In the third quarter, revenues of Zetia and Vytorin were $502 million and $527 million respectively.
Turning to other income within this line, interest income continues to come in at a higher level, as our portfolio benefits from the rising short-term rate environment. For the quarter, income before taxes was $1.2 billion.
Taxes on income in the period were $290 million, and the reported tax rate was 23.6%, but this included a favorable 160 basis points associated with the restructuring charge. The underlying effective tax rate of 25.2% reflects in general the changes in foreign and domestic mix and currency fluctuations, and these elements change throughout the quarter.
Moving down to net income and earnings per share, net income for the quarter was $941 million, down considerably when compared to the same period last year but recall that in this period, there was a $598 million legal defense charge. During the quarter, we spent $250 million in treasury stock, and now have $6.8 billion under the current authorization from the board, with no time limit.
In summary, earnings per share for the third quarter were $0.51, excluding a net charge related to the global restructuring, and on a reported GAAP basis, EPS was $0.43. With that result, let me briefly turn to our guidance.
Regarding 2006, continuing our previous practice, we provide detailed guidance for the full year and, as you will see in today’s release, we are raising our full-year 2006 range, and are raising several elements of our 2006 guidance. All the details of the guidance are provided to you in the release and, as stated, this guidance does not reflect the establishment of any reserves for any potential liability relating to the Vioxx litigations.
In summary, we are raising our full-year 2006 EPS guidance to capture the fact that we had another solid quarter, and to reflect our strong, year-to-date performance. Our revised expectations are that EPS will now be in the range of $2.48 to $2.52, excluding the restructuring charges related to site closings and position eliminations, and we anticipate reported full-year 2006 EPS of $2.18 to $2.25.
Now, regarding specific elements, we are increasing guidance on the following four items: As stated a moment ago, the company’s full-year 2006 EPS guidance is now anticipated to be in the range of $2.48 to $2.52, excluding restructuring charges, and reported 2006 EPS in the range of $2.18 to $2.25. I would also highlight that in 2006, the company remains on track to generate approximately $5 billion in free operating cash flow, after capital expenditures but before dividends and share repurchases.
I also want to emphasize that we have the financial strength to support our dividends, and we remain fully committed to maintaining it at the current level, while at the same time, continuing to fully fund our investment priorities. In addition, as Dick noted, our strategy is on track.
We remain committed to driving compound annual double-digit EPS growth, excluding restructuring cost, net tax charges, and the one-time gains associated with the AstraZeneca partnership and the establishment of any reserves for any potential liability related to the Vioxx litigation over the three- to five-year period, as well as adjusted compound annual revenue growth, including 50% of joint venture revenues of 4% to 6% through 2010 over our 2005 base. With that, I will turn the call back over to Graeme.
Graeme Bell
Thank you, Judy. We will now open the call to take your questions.
We will take the questions in the order they were received and try to get through as many as we possibly can. At this point, I will turn the call back over to Cynthia, who will communicate instructions for our Q&A format, then introduce the first question.
Operator
(Operator Instructions) Your first question comes from David Risinger with Merrill Lynch.
David Risinger
With respect to government rebate reversals, a number of other drug companies have recorded government rebate reversals that have benefited the top-line. I may have missed it, but if you could comment on whether Merck recorded any such benefit in its top-line this quarter, and if not, why not?
Then, with respect to Zostavax, I believe that there is upcoming reviews of Zostavax that could potentially accelerate market adoption of that product. If you could comment on that, and then finally, with respect to Gardasil, could you just characterize whether the up-take of Gardasil has been surprising on the upside in young girls, i.e., those aged 11 to 12, or whether Gardasil demand upside is more so being driven by the females between the ages of 16 and 26?
Thank you.
Judy C. Lewent
I will take the first question. I believe you are referring to the TRICARE decision, and this is based on the September decision of the U.S.
Court of Appeals to the federal circuit, where they determined that pharmaceutical companies do not owe rebates to the Department of Defense associated with TRICARE business for the period from the fourth quarter of 2004 to the third quarter of 2006. For Merck, this really generated minor third quarter 2006 discount rate favorability.
That has been reflected in Merck's net sales, and there is also a minor pick-up in the net sales of Vytorin and Zetia, which were reported by Merck/Schering-Plough.
Richard T. Clark
Relating to your question about Gardasil, it is too early for us to be able to answer that question. We will have more data as the year progresses.
With the Zostavax, we are pleased during the third quarter, sales of Zostavax reached $10 million, and there has really been extremely positive response from managed care organizations to Zostavax, and I think that was a major part of the up-tick. In addition, on October 25th of this year, ACIP, which develops written recommendations for the administration of vaccines, will vote to determine the recommendation for the use of Zostavax in the U.S.
I think that will be another critical part of it, and Zostavax is on the agenda.
Graeme Bell
Thank you. Next question, please.
Operator
Your next question comes from Chris Schott with Banc of America.
Chris Schott
Thank you. Just two quick questions.
First, on Gardasil, once we get through this initial launch stage, are you expecting seasonality with this vaccine, i.e. a strong summer season, as we see with Menactra vaccine, for example?
Second, on Januvia, could you comment on the initial market you are targeting with this product launch? One of your competitors has highlighted they are initially targeting the heavy TZD prescribers as compared to [inaudible] users.
Do you share this view? Any color there would be appreciated.
Thank you.
Richard T. Clark
On Gardasil, I do not see any seasonality with a vaccine that type of that indication. Certainly what we are looking at with our Januvia launch strategy, it is something that is proprietary and it is really across the whole type 2 diabetes drug therapy.
Graeme Bell
Next question, please.
Operator
Your next question comes from Mario Corso with Summer Street Research.
Mario Corso
On Gardasil, could you comment on where the VFC process may be at this point, and what timing may look like? Then, in terms of the obesity drug, could you talk about how the mechanism or chemical structure might be different than the first generation molecule that is being developed?
Thanks.
Richard T. Clark
On the issue with Gardasil, as you know, we received ACIP recommendations on June 29th, with supply to girls and women ages 9 to 26, which is very, very important. We are currently in negotiations and finalizing the CDC contract as we speak.
What is also important to realize with that lobby, and then WR publication is currently pending. The American College of Obstetricians and Gynecologists, the American College of Health Associates, and the Society for Adolescent Medicine has already published their support for the vaccine, so I think that has been very, very important.
Obviously, finalizing the CDC contract is important, and that is under discussion as we speak.
Judy C. Lewent
Regarding the obesity compound, it is way too early, as we noted, to really provide any insight into the profile of that product whatsoever.
Graeme Bell
Next question, please, Cynthia.
Operator
Your next question comes from Tim Anderson with Prudential.
Tim Anderson
Thank you. Back on the TRICARE decision, can I just clarify that is fully washed through the P&L, whether it occurred in this quarter or whether it might occur in future quarters, it is done for you guys?
Then, on the general topic of sales, it seems like a few products came in ahead of where prescription trends would suggest. I did not see anything in your press release that talks about this, so I am wondering if there was anything else that may have boosted sales this quarter that we may not be seeing.
A second question, on your obesity product, seeing as you had the CV1 receptor product, did you see any depression in your Phase II trail program?
Judy C. Lewent
First of all, the financial impact of TRICARE is fully reflected in the third quarter of 2006. It is completely taken account of and there is no impact in future periods.
In terms of the sales trends, globally, recognized versus the ordinary prescription trend, there continues to be substantial growth in the un-audited channels, and that is really across all of the major product lines. That needs to be factored into the performance.
Again, as noted in the answer to the prior question, on CV1, on the new anti-obesity compound, we really have nothing more to say than we put in the press release at this point in time.
Operator
(Operator Instructions) Your next question comes from James Kelly with Goldman Sachs.
James Kelly
Good morning. I have a question about the other products line.
If we take a look at that line, and even if we adjust it for the vaccines, that line seems to have gone from a modest decline a year ago to good growth going to this year. I am wondering if there are any important factors about the business away from the big four products and the new launches that we should be considering here?
Thank you.
Judy C. Lewent
It really just reflects the continuing contributions from supplies for supply sales for basically our joint venture relationships. Also, bear in mind my earlier comment that a major contributor there was the $80 million from our arrangement with Dr Reddy.
Graeme Bell
Next question, please.
Operator
Your next question comes from Jamie Rubin with Morgan Stanley.
Jamie Rubin
Thank you. Just a couple of Vioxx related questions.
The next big Vioxx case in Atlantic City is early next year, which my understanding is it is eight consolidated cases, which -- I am not a lawyer, but I think that would put you in an impossible position. Could you discuss what your legal options are?
Also, with respect to Judge Higbee to reverse your win on the Humeston case. Thirdly, on Gardasil, do not know if you spoke to this, but was there any stocking in the $70 million recorded this quarter?
Thank you.
Judy C. Lewent
There is no stocking, apart from normal wholesale inventory provision. There is nothing unusual in that Gardasil number whatsoever.
That reflects the up-tick of the product since its launch in June, in early June.
Richard T. Clark
The issue concerning Vioxx, certainly Merck is very concerned about the potential strategy of multiple cases, and our concern revolves around the fact that they involve different states, different period of ingestion, different risk factors, pre-existing conditions, et cetera, et cetera, so it makes it extremely very complex for a jury to understand all of that in a combined focus. Obviously we continue to work on convincing the judge that may not be the appropriate way to go.
With regard to the whole issue around Vioxx and some of the other issues, we will appeal as appropriate.
Judy C. Lewent
I am going to come back to my earlier comment. I just want to clarify.
Clearly the major place where we are shipping Gardasil is the physicians’ offices, so again, that is just based on the underlying demand.
Operator
Your next question comes from Stephen Scala with Cowen.
Stephen Scala
Thank you. I am intrigued by your legal strategy on Fosamax.
You dropped the inequitable conduct suit, and then I believe you sued the generics over a process patent. I am wondering, what is the best case outcome here?
Could generic Fosamax be substantially delayed by what I believe has been a recent suit?
Judy C. Lewent
We continue to expect that Fosamax is going to lose exclusivity in early ’08.
Graeme Bell
Thank you. Next question, please.
Operator
Your next question comes from [Seamus Fernandez] with Leerink Swann.
Seamus Fernandez
Thank you very much. Just a couple of questions here.
I was hoping that you could discuss, should we be thinking about the payment from Dr Reddy’s as basically 100% gross profit margins? So, assuming that, it has basically contributed roughly $0.02 to earnings in the quarter?
Then, second, could you just discuss, there was a news report about a manufacturing plant for cancer products in Germany. Was this for Zolinza or should we be thinking about it as something for other products?
That is it. Thank you.
Judy C. Lewent
Based on our agreement with Dr Reddy’s, we do not comment on any specifics of our contractual arrangement there. Those are proprietary.
Richard T. Clark
Concerning the manufacturing plant in Germany, that is really not a Merck facility, or maybe it is the German Merck versus ours, but we do not have any plants or manufacturing facilities in Germany.
Operator
Your next question comes from Roopesh Patel with UBS.
Roopesh Patel
Thank you. I have a couple of questions.
First, on gross margins, given that Merck has already recorded a significant erosion of Zocor and Proscar sales this quarter, would it be reasonable to assume that the gross margins recorded this quarter, notwithstanding the restructuring costs, should roughly be the forward run-rate? If not, what are the broad pushes and pulls that we should take into account?
Separately, I was just wondering if you could also broadly comment on the sales force support behind Januvia’s launch. Have you increased the size of Merck's overall sales force?
If not, is effort being diverted from any particular product? Thank you.
Richard T. Clark
Concerning the sales force, we really think about our launch for Januvia and other products as a very important part of proprietary information and certainly do not provide details on that. What I can reassure you is that we are providing the proper capabilities for promotion, as well as re-educating the physicians.
We did announce earlier that, as a part of our plans of looking at a new operating model for marketing and sales, that we were going to take 1500 sales representatives and reallocate them to vaccines and other activities.
Judy C. Lewent
Regarding thinking about progression on product gross margins, I think you need to take a few things into consideration. Obviously in the second-half of 2006, you are seeing, as you noted, the impact of Zocor on the product mix.
But as you also may recall, in our longer-term guidance, we had talked about our product gross margins returning to pre-Zocor patent expiry levels after 2008. That is a function of a lot of a lot of new product launches that we are talking about, and the major cost improvement initiatives that our supply strategy already has underway.
I think you need to factor all of that in at this point in time.
Operator
(Operator Instructions) Your next question comes from Craig Baskin with Loomis, Sayles.
Craig Baskin
Thanks for taking my question. I was wondering on Gardasil, since the rate at which you are able to ship the product out to physicians is probably significantly greater than the rate at which the insurance companies might choose to reimburse the physician, I was wondering what sort of terms you were giving.
Richard T. Clark
We are not going to discuss terms with physicians. I can tell you this though -- as of today, managed care plans representing over 90% of the covered lives of girls and women from the age of 9 to 26 in the U.S., have added Gardasil to their respected formularies.
I think that is a critical part, that we are up to 90%, which certainly was accelerated and it exceeded our expectation of where we would be on October 20th.
Operator
Your next question comes from Chris Shibutani with J.P. Morgan.
Chris Shibutani
Thanks very much. Two questions, if I may.
On MK-524A, timelines are still apparently on track. Can you comment about when we can expect to see a little bit more data in regard to the profile?
Can you also address where you are in terms of the formulation issues for the 524B? Secondly, a question on collaborations, 24 year-to-date.
Obviously the rhythm and pace of these can vary. I believe the numbers have been higher in the past, 40 to 50 per year, which is a considerable step-up.
Does this change in number reflect in any way your appetite or capacity to manage these, the quality of the deals you are seeing, or maybe the competitiveness or valuation that is out there, since everyone is obviously looking for in-licensing, et cetera? Thank you.
Judy C. Lewent
Relative to 524A, I will remind you that there will be papers presented at the American Heart Association, the week of November 13th. I think some of those have already been posted, so that is where those data are going to be discussed.
In terms of the formulation, as you note, we have not stipulated a timetable on the product of 524B at this point in time.
Richard T. Clark
In relationship to the licensing deals that we have focused on, and 24 compared to the previous number, there really is no change in strategy. We are still very aggressive.
We are still looking at the opportunity, and we will take advantage of each and every opportunity, so we are looking at quality and certainly not quantity.
Operator
Your next question comes from [Bob Yates] with Principle Capital.
Bob Yates
Thanks for taking my question. Just to follow on the questions on Vioxx, number one, it seems like there are more cases that came in this quarter.
Could you comment if there was a statute of limitations which expired in certain states during the quarter? Secondly, Judy, you sort of bumped your reserve here to $950 million.
Does that mean you expect you are going to spend most of those funds over 2007 and 2008?
Judy C. Lewent
Let me just address the process for the reserve. As you noted earlier, we continue to look at our ability to estimate, and part of that is a function of the progress in the litigation and our knowledge and visibility over a certain timetable.
At this point, all of that reflects is our best estimate. We can establish and make a reasonable estimation only through the end of 2008, so it is really just part of our, you know, the horizon that we have in our ability to forecast with the right rigor that we need to update the reserve, but it really does not stipulate anything else about the timetable.
It really was a progression of where this is going to go.
Graeme Bell
Cynthia, given the time, we will take one more question.
Operator
Your final question comes from Tim Anderson with Prudential.
Tim Anderson
Thank you. I just had a follow-up question, actually, two.
Judy, you mentioned higher sales in un-audited channels. Why, I guess is the question?
Is that a change in the strategy in terms of how you are contracting in those channels, or what exactly? Dick, at one point last year, you said Merck may actually get into the medical device business.
This morning, you reference the FoxHollow collaboration. My question to you is whether medical devices, or anything else outside the traditional pharmaceutical space, are areas in which you would potentially consider building up presence in?
Judy C. Lewent
Just to the first question, there is no change in strategy there. It is really just un-audited picked up and the fact that we continue to work to contract our product in the unordered channels.
There is nothing there. It just helps explain why from time to time you may see a slightly different trend in sales reported as opposed to the reported script track.
Richard T. Clark
I was just thinking about medical devices as a part of our strategy. We are certainly interested in the capabilities and technologies around medical devices diagnostics biomarkers when it helps us from a research standpoint, but not as a standalone business.
To go back to a previous question concerning Vioxx, one of the reasons you saw such an increase in the third quarter of suits is September 30th was the two-year date since we voluntarily recalled Vioxx, and that is significant from the standpoint that approximately two-thirds of the states have a two-year limitation. Obviously that is where the limitation took place, on September 30th.
There are obviously complexities around whether that can continue or not, but that is probably the major driver.
Graeme Bell
With that last question, it concludes this call. The information from today’s call, both the transcript and the replay, will be available on our website, and Mike and I will be available all day to take your calls.
I would like to now turn the call back to Dick Clark for some concluding remarks.
Richard T. Clark
Thank you, Graeme, and thank you for tuning in and listening to our call today. Judy and I are very pleased to continue to speak directly with you every quarter, and as we stated, we are very pleased with the third quarter results.
It exceeded consensus expectation, and we are certainly looking forward to updating you further on our progress at our annual business briefing that we will hold in White House Station on December 12th. We will be in touch to give you details on our meeting very soon.
Thank you again. We appreciate your interest and participation.
Operator, thank you very much, and that is the end of our call. Thank you.
Operator
Ladies and gentlemen, this concludes today’s Merck third quarter 2006 earnings conference call. You may now disconnect.