Apr 21, 2008
Operator
Good day, everyone, and welcome to Merck's First Quarter 2008 Earnings Conference Call. Today's call is being recorded.
At this time, I would like to turn the call over to Mr. Graeme Bell, Vice President, Head of Investor Relations.
Please go ahead, sir.
Graeme Bell
Thank you, Cynthia and good morning. Welcome to our call this morning to review our business performance for the first quarter of 2008.
We have a different line-up for you today, so let me make some comments on that. Joining me on the call today as always is our Chairman, President and CEO, Dick Clark.
We also have Ken Frazier, our Executive Vice President and President of Global Human Health, he will provide commentary on our revenue trend, several of our inline products, recently launched products, as well as to provide some perspective on recent news flows. One of the benefits of having Ken on the call today is that it will allow Peter Kellogg, our Executive Vice President and Chief Financial Officer to focus on the key financial takeaways from the quarter and provide an overview of the 2008 financial guidance and the rationale for it.
And we are also joined by Executive Vice President and General Counsel, Mr. Bruce Kuhlik.
Before we get into the details, let me go over some logistics. On this call we will review the results contained in the release we issued at 7:30 this morning.
You can access this through the Investor Relations section at merck.com and I would recommend that you do this and also follow along on the live webcast. The replay of the event will be available later today via phone, webcast and as always our podcast.
As we began our review of the results, let me remind you that some of the statements made during this call may discuss certain subjects that may contain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and involve risks and uncertainties, which may cause results to differ materially from those set forth in the statements.
The forward-looking statements may include statements regarding product development, product potential or financial performance. No forward-looking statement can be guaranteed and actual results may differ materially from those projected.
Merck undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements on this call should be evaluated together with the many uncertainties that affect Merck's business, particularly those mentioned in the risk factors and cautionary statements in Item 1A of Merck's Form 10-K for the year ended December 31, 2007 and in any risk factors or cautionary statements contained in the company's periodic report on Form 10-Q or current report on Form 8-K, which the company incorporates by reference and all of these are available and posted on our website.
We will begin with brief remarks from our senior management, then open the call for your questions. And expect the total call to last approximately 60 minutes with a stop time of 10 A.M.
With that, I will turn over the call and we will begin with our prepared remarks from our Chairman, President and CEO Mr. Clark.
Richard T. Clark
Thank you, Graeme and good morning everyone. Earlier this morning, we announced Merck's results for the first quarter of 2008 and we're joining you now to discuss them in greater detail.
Today, we reported another solid set of results, including growth of non-GAAP EPS and revenue from key products. We delivered those results even in the face of slowdown themselves from the Merck/Schering-Plough joint venture and a lot of market exclusivity for FOSAMAX.
As you know back in 2005, this management team outlined a strategic roadmap and called it our plan to win. Our plan has allowed us to improve efficiency while at the same time growing the top line.
That plan set the stage for our consistent performance throughout 2006 and 2007 and into the first quarter of 2008 as well. And that plan enabled us today to reaffirm financial guidance for the year and to revigorate our confidence in meeting our goal of double-digit compound annual EPS growth to 2010, excluding certain items.
Based on the strengths of our broad portfolio of established medicine on the launch of the eight new medicines in that field, we are well-positioned to sustain growth in 2008 and beyond. The result we reported today non-GAAP earnings per share of $0.89 exclude the certain items and the GAAP EPS of $1.52 show that Merck continues to deliver.
For the first quarter, we reported revenue of $5.8 billion, which represents top line growth of 1% compared to the first quarter of 2007. Key inline medicines and vaccines including SINGULAIR, COZAAR/HYZAAR and VARIVAX delivered solid year-over-year growth as did our newer products such as JANUVIA, JANUMET, GARDASIL and ISENTRESS.
Ken will discuss the product highlights in more detail. Our overall financial results for the quarter was supported by our partnerships and alliances.
Specifically the Merck/Schering-Plough joint venture which in the first quarter continued to drive our equity income. However, sales growth in the quarter from the joint venture was lower than expected.
At this point, we anticipate that the continued confusion in the market have caused sales of VYTORIN and ZETIA to be significantly lower than expected for the entire year. As a result, we are lowering our full year guidance for equity income of $700 million.
Ken, will go with a more detail about this issue in a few minutes. But I want to make a few comments now.
With Ken, I have been personally engaged in this issue and have strong feelings on this subject. First and foremost VYTORIN and ZETIA remain valuable treatment options to lower LDL cholesterol.
In addition, the lack of a scientific discussion debate at ACC regarding ENHANCE was disappointing to put it modestly. We are encouraged to see a growing course from the cardiology field, begin to seek out about how ENHANCE trial should not change constant at the tier or what we know about the importance of lowering LDL cholesterol.
Merck continues to engage directly with leaders in the field and what’s described as [inaudible] point of view. And we will continue to advocate for appropriate use of these important medicines.
Merck has been a leader in the cholesterol filed since introduction of MECTIZAN 20 years ago and we are committed to remain the leader in this field. I also want to assure you that we take the criticisms of our practices and our integrity very seriously.
Merck is committed to operating with the highest standards of ethics and scientific integrity. Those standards are the foundation of this company and we will not loose focus on our overarching mission delivering medicines and vaccines that safe and improve people’s life.
We are now more than halfway through the five-year plan that we first outlined in 2005. At the time when many were counting Merck out our strategy is working and we are moving ahead with a high sense of urgency.
Even though several of our plan to win initiatives are ahead of schedule, we're picking up the pace of change. We have already made good progress with a number of initiatives including, we are overhauling our supply networks, we originally said we would sale across five of Merck’s 31 manufacturing sites by the end of 2008.
Well, we have already done that, nine months ahead of schedule. Now we're identifying additional opportunities in our manufacturing networks to increase efficiencies.
We have moved up our plants to close, sell or reduce operations at four other sites outside of the US pending compliance for global [ph] obligation. This year we plan to close or sell the new lab [ph] facility in Italy.
In addition, we have entered into an agreement with a Pakistani pharmaceutical company under the ownership of Merck's entire business in Pakistan will be transferred to that company later this year. The facility in South Korea is scheduled to be sold or closed in 2009.
And finally we plan to phase out solid dose manufacturing operations in Australia over the next few years to focus that site on packaging. As a result of these concerted efforts, I believe Merck is leading the industry and creating a lean and flexible manufacturing pipeline.
In the lab we are reducing our cycle time relative to the rest of the fields, a leading indicator of the productivity of our research. On the commercial side in the US in particular we and others have known for some time that the current entity model is not sustainable.
Here too, I believe Merck is ahead of that field in accelerating to a new pharmaceutical business model that is centered around our customers. We look… we look every day for opportunities to improve our efficiency.
We’ve now eliminated more than 8,000 positions throughout the company as part of our strategy to reduce our cost structure and create a linear and vulnerable business model. In this new area for the pharmaceutical industry, we must create a new way of operating if we are to succeed.
We remain confident that our current portfolio and our pipeline along with the fundamental changes we are making in every aspect of our business position Merck well to drive against their goals now and in the long-term. To summarize, in the face of those expected and unexpected challenges, Merck delivered sound first quarter results.
Our ability to reaffirm our 2008 non-GAAP EPS guidance despite business set back in the challenging industrial environment shows that we have the right strategy in place to drive Merck's long-term growth. We remain confident that our customers will continue to find value in our medicines and vaccines.
In spite of the quarter’s solid performance and performance in the past prior few years make no mistake, we are not content. We are accelerating the pace of change in every area of Merck’s business.
We have much to do to reach our 2010 goals and we need to do even more to achieve and sustain the benefit of our strategy through 2010, 2015 and beyond. Though we must and we will to ensure that Merck keeps doing what Merck does best, bringing forward medicines and vaccines that save and improve people's lives.
Now I would like to first turn to... the call over to Ken and then Peter.
After their brief remarks, we will take your questions. Ken?
Kenneth C. Frazier
Thank you Dick and good morning everyone. Merck's top line performance in the first quarter reflects continued strength across our diverse portfolio of product and in markets around the world.
As Dick said, in the quarter where we sustained the impact of the loss of U.S. marketing exclusivity for FOSAMAX, total revenue in the quarter was up 1%, thanks to the positive contributions from both our in line and new products.
In the first quarter, our international business performed very well increasing by 12%. While we clearly benefited from the prevailing exchange rates, we saw volume growth of 5% outside the U.S.
driven by strong results in Japan, Asia and Europe. To drive further growth we will continue to roll out our new product globally and we anticipate conducting approximately 300 launches this year.
In the U.S., when we exclude all products that recently lost patent protection and I remind you that FOSAMAX, COZAAR and ZOCOR sales were up 12%. Before discussing some of the specific product highlights for the quarter, I would like to take a moment to add to some of this comments regarding our cholesterol JV with Schering-Plough.
The use of clinical trials and treatment guidelines for high cholesterol recognize LDL-C as the primary target of lipid-altering therapy. Both VYTORIN and adding value of simvastatin lower LDL more than simvastatin alone and get more patients to their LDL goals.
Of greatest concern to Merck is that in the 10 weeks since the ENHANCE summary results were first provided, tens of thousands of patients have switched from VYTORIN to therapies that on average are less effective than VYTORIN at lowering LDL. And some patients, have simply stopped taking their medication altogether.
This reaction directly contributing to what we know about the importance of lowering LDL. Together with our joint venture partner, we are doing as much as we can to remedy this situation.
We are engaging directly with our customers to set the record straight about ENHANCE and the value that VYTORIN and that will bring to lipid management therapy. Within the first week after AETC, we reached out to or visited all managed-care customers and sent a letter and the press release directly to approximately 500,000 healthcare professionals.
We also provided our sales representatives with appropriate materials for physicians so that the physicians felt informed about results of ENHANCE and were prepared for discussions with their patients. Managed Care organizations understand that simvastatin alone is not enough to get many patients to goal.
Which is why patients need to have access to the LDL lowering benefits of VYTORIN and ZETIA. As of today, most of our Managed Care customers have reviewed the ENHANCE data and there has been no changes to the second tier status for VYTORIN and ZETIA.
Many physicians put this study into the right context to feel that the AETC discussion has created confusion in the field. Most we expect will continue to prescribe VYTORIN and ZETIA but may increasingly reserve these medicines for their high-risk patients or for patients who cannot tolerate high doses of statin at least in the short term.
Following January 14th, NRS [ph] market share dropped for about two weeks then began to stabilize. Unfortunately the events at AETC at the end of March created further confusion and although the reduction in share was not as steep as what we thought for January 14, we were already starting from a lower share.
In the quarter worldwide sales of ZETIA and VYTORIN as reported by the Merck/Schering-Plough joint venture were $582 million and $651 million respectively in the quarter. In the US, sales of ZETIA were $395 million, down 3% and sales of VYTORIN were $456 million, down 7%.
Ex-US, sales of ZETIA were $186 million, an increase of 37% and sales of VYTORIN were $196 million, an increase of 45%. In a few minutes, Peter will provide you with the financial implication of these events when he discusses the changes to our equity income guidance.
But I want to reiterate what Dick said on this. We are very much engaged in this issue and are committed to helping our customers appreciate the unique values that these two medicines provide.
Now I would like to discuss some of the key drivers of Merck's business in the first quarter beginning with our HPV vaccine GARDASIL. We're pleased with the global performance of GARDASIL in 1Q '08.
Sales in the first quarter were $390 million, a 7% increase when compared to the first quarter of last year. In addition, during this first quarter our vaccine joint venture Sanofi Pasteur MSD recorded end market sales for GARDASIL of $240 billion.
Taken together, global end market sales for GARDASIL reached a new high in 1Q, up 11% sequentially from the fourth quarter of 2007. I would like to update you on doses sold since approval for those who are tracking this measure.
As of the end of the first quarter more than 26 million doses of GARDASIL have been sold since March. In the US, we estimate that more than 8 million 9 to 26 year-old females or roughly 23% of the eligible cohort have received at least their first dose.
Peter will provide you with some details regarding our financial expectations for GARDASIL in 2008 but I would like to review for you some of the things we're doing to grow this important franchise for Merck. In the US, sales in the quarter reflected underlying market demand for GARDASIL and we saw continued growth in origination and utilization versus first quarter 2007.
Allow me to remind you that our first quarter revenue last year benefited from initial purchases from a number of the VFC projects as they ramped up vaccination programs. Throughout the rest of this year we anticipate quarterly purchasing from the VFC to be more in line with the underlying demand.
In the private sector GARDASIL experienced strong growth in the quarter increasing by 29% over the prior year. As we have previously mentioned, there is a seasonal component to the GARDASIL business in the US, in that nearly two thirds of well visit for 9 to 18 year olds occurred during the second and third quarters, with the third quarter being the highest.
We continue to anticipate robust 2008 growth for GARDASIL in US and to see the seasonality again. We are focused on increasing vaccination rates across the entire 9 to 26 year old cohorts with specific emphasis on the 19 to 26 year olds.
First, we are addressing the awareness versus action gap. While we have achieved high levels of awareness of the vaccine among 19 to 26 year olds, origination levels are not nearly as highly as those levels of awareness.
We recently developed and launched new DTC ads, an interactive web portal to assist in this regard. We are also continuing to help OBGYN and primary care offices establish vaccination as part of their practices including addressing reimbursement.
Although 99% of privately insured 19 to 26 olds have some level of coverage, there is a lack of consistency of vaccination coverage in many benefit plans and we're working to address this with our customers. We also continue working to increase compliance levels with for example, our “3 IS KEY” program and partnership with MCOs.
“3 IS KEY” is being enhanced to make it easier for our customers to participate in this reminder program. Compliance rate for GARDASIL remain high compared to historical norms and private practices.
Compliance rates are about 75%, for second dose and 50% for third dose. To drive further growth, we are expanding into other cohorts as well.
Later this year, we anticipate launching GARDASIL for use by woman aged 26 through 45 and we plan to submit a regulatory application for use in males later this year. On a global basis, GARDASIL has been approved in 101 countries, most under accelerated review and based on the international approvals, recommendations, reimbursement, and launches, we are well positioned to continue to build on this success of this franchise in 2008.
While GARDASIL continues its unprecedented launch, our other new and established vaccines are also performing extremely well and I note that this quarter our vaccine business nearly made it to the 1 billion mark. The launches for ROTATEQ and ZOSTAVAX continue to progress as reflected in the strong quarterly results.
Please note that the sales of the ROTATEQ in 1Q08 benefited from a $41 million purchase to support the CDC stockpile. Moving to two more of our growth drivers, global revenue for JANUVIA and JANUMET reached $330 million in the first quarter reflecting the high-value that physicians, patients, and payers are placing on these personal medicines.
We continue to build on the momentum we achieve with our product launch over the last 18 months. In the US, JANUVIA remains the second leading branded oral anti-diabetic agent in terms of the new prescription share behind only Actos.
Our diabetes franchise continues to grow in both volume and market share. Both products continue to enjoy excellent position on formulary and the response from patient disposition continues to be positive.
As you may have noticed, last week we initiated broadcast DTC for JANUVIA. With JANUVIA well established as a valuable treatment option, we believe the time is right to encourage patients with Type 2 diabetes to discuss their condition and available treatment options with their physician.
Outside the US, sales for JANUVIA and JANUMET were $48 million, a two-fold increase over the fourth quarter 2007. In the first quarter, we launched JANUVIA at a number of major markets such as France, Spain, Italy and Canada.
Based on early feedbacks from these markets we are off to a great start. We continue to focus on the global rollout for JANUVIA and JANUMET and we look forward to additional regulatory approvals, reimbursement decisions and market launches during the remainder of this year.
Now I'd like to turn to ISENTRESS. We are extremely pleased with the uptake of ISENTRESS, the first-in-class integrase inhibitor since launched in the fourth quarter of 2007.
First quarter sales of ISENTRESS was $47 million, up 58% sequentially. In the US the weekly NRS market share for ISENTRESS has already surpassed the weekly share of the last five new products introduced into the HIV market.
ISENTRESS continues to benefit from strong managed care access that is available through AIDAC and Medicaid in all 50 states. In the quarter, ISENTRESS became available in 11 additional markets including the UK, Germany, France and Spain.
By the end of the first quarter, ISENTRESS had received regulatory approval in a total of 43 countries on five continents. Uptake in our largest market has been strong already and we look forward to the continued success in 2008 to filing our application to expand the use of ISENTRESS to treatment-naïve patients.
To ensure this breakthrough medicine gets to those who need it most, we continue to work closely with all stakeholders to foster patient access to ISENTRESS here in the US and around the world. We were very pleased with the global performance of SINGULAIR in the first quarter and sales grew 10%.
The US Allergy scene has been somewhat slow to start this year compared to recent years and so far it also appears to be mild, although it's still early in this season. SINGULAIR is...
and we expect it to remain the number one product in US respiratory market. The continued strong growth of SINGULAIR is a testament to the need for an effective non-steroidal medicine and it's effectiveness in adult and children with asthma or allergic rhinitis.
Now I would like to take a couple of minutes to provide an update on the progress we're making in implementing our new commercial model. As I mentioned at the annual business briefing in December, our US pilot program spans six state and 11% of Merck's primary care business and involve some 700 Merck’s field and headquarters employees.
In the pilot, we re-aligned our sales teams based on input from our customers and have begun creating new capabilities within the field in that headquarters. Our teams have also been gathering feedback from customers and employees involved in the pilot.
We are now seeing the results of the pilot and we are finding that our new approaches are working. The early progress we have seen in the pilot has increased our confidence in our new customer-facing model and we have decided to move quickly to the next phase of our plan and begin working towards national deployment.
Similar initiatives are also underway in international markets across our commercial organization with the same goal of evolving to a new business model that is centered around customers. A model designed to build trust and demonstrate value that is efficient and effective, expands Merck’s opportunities, fortifies our product performance and provides a platform for long-term business success.
In closing, Merck's overall commercial operations continue to perform well. Merck enjoyed a leadership position in most of the therapeutic categories in which we have products.
Our more established products continue to deliver strong performances including SINGULAIR, COZAAR/HYZAAR and VARIVAX. Taken together these established franchises along with our new first-in class vaccines and medicines such as GARDASIL, ROTATEQ, JANUVIA, JANUMET and ISENTRESS give us a diverse and broad product portfolio well positioned to drive revenue growth through 2010 and beyond.
In addition, we are accelerating the deployment of our new customer-centric commercial model that we strongly believe will help deliver continued strong future performance. So with that, I'll turn the call over to my colleague, Peter Kellogg.
Peter N. Kellogg
Thank you, Ken and good morning everybody. And as Dick and Ken have both mentioned, Merck posted a solid first quarter results despite the loss of patent protection for FOSAMAX as well as a decline in the expected sales from our Merck/Schering-Plough joint venture.
The business is performing well. Merck reported first quarter non-GAAP earnings per share of $0.89, excluding $1.4 billion net after-tax gain from distribution received from the AstraZeneca Limited Partnership and restructuring charges.
On a GAAP basis, as Dick mentioned earlier EPS for the quarter was $1.52. Now given the perspective that Dick and Ken have just provided and the extent of the details contained in our sales and earnings release, I'm not going to walk through all of the line items today.
Instead, I will focus on how the key elements in the quarter has been incorporated into our full-year guidance. We have done a fair bit of work on this and after a lot of exhausted evaluation of all of our business drivers we've refreshed our financial guidance.
I would like to discuss this and focus on how we thought about the business relative to our guidance. I will cover our guidance changes in four areas: first, how we have updated our revenue ranges for the current trends and expectations, many of which Ken just walked through.
Second, how our cost performance to date has reflected in our guidance. Third, the implications of the Merck/Schering-Plough joint venture's revised forecast on equity income guidance and fourth the revised 2008 tax rate.
Now let's begin with how we've changed our 2008 revenue guidance. As Ken talked about the health of the business, he provided context on the current trends and dynamics.
As always to assist your modeling, we provide a breakdown of the product revenues in our other financial disclosure schedule attached in the press release issued this morning and you will note the following changes. Regarding 2008 revenue guidance, we are increasing several lines and reducing one element of our full-year revenue guidance.
Net-net we increased our revenue guidance by $0.5 billion. So let me walk through that.
On COZAAR and HYZAAR, we are increasing our expectation for 2008 by $200 million and now anticipate revenue in the range of $3.4 billion to $3.6 billion. This is primarily driven by the positive effect of foreign exchange considering the geographic segmentation of revenue for these products.
Regarding FOSAMAX, we are pleased with the performance of the domestic FOSAMAX plus vitamin D product in the first quarter and the strength of our business internationally. And as a result, we are increasing our full-year guidance by $200 million to $1.3 billion to $1.6 billion.
Considering the portfolio of key growth drivers captured within other reported products, we are increasing our expectation by $300 million and now anticipate revenue in the range of $7.8 billion to $8.2 billion for these products. This increase is supported by the positive effect of foreign exchange on these products as well.
Given the non-complexity of the end market for vaccine and that there is no routine way to monitor utilization and importantly the fact that GARDASIL is becoming an increasingly large contributor to our vaccine revenue, we recognize that it's valuable to provide product specific guidance on GARDASIL. So to assist with your modeling we are now providing further breakdown.
For GARDASIL, we anticipate full-year revenue as recorded by Merck to be in the range of $1.9 billion to $2.1 billion. We foresee robust growth for GARDASIL in the US in 2008 and quarterly purchasing from the VFC to be more in-line with underlying quarterly demand.
To provide additional perspective, as Ken mentioned earlier, historically 63% of all penetration in the 9 to 18-year-old cohort occurred in the second and third quarter with the third quarter being the highest as Ken mentioned. And I think that perspective is very important to help you model out the quarters and understand the seasonality that we expect to see this year.
By isolating GARDASIL for you, by difference, we anticipate the full-year revenue as recorded by Merck for other vaccines to be in the range of $2.9 billion to $3.1 billion. Regarding our agreement with AstraZeneca based on the Q4 results of supply sales to AZN and the Q1 performance of NEXIUM, we anticipate incremental pricing pressures in 2008 to negatively affect the revenue that Merck records from AZN.
As a result, we are lowering our 2008 guidance for AZN supply sales by $200 million to reflect the current market conditions and now anticipate that these revenues will be approximately $1.3 billion to $1.5 billion. This lowering of guidance is solely attributable to the current market conditions for NEXIUM and in no way it signals a loss in economics following the settlement agreement and the patent-infringement litigation announced last week.
Now let's turn to talk about how cost have been incorporated into our guidance, beginning with product gross margins. As a result of the strong PGM performance in the first quarter, we are increasing our full-year PGM guidance by 0.5%.
The new range is now 77.5% to 78.5%. This increase in PGM was driven by favorable product mix in the first quarter.
In addition, our gross margin improvements continue to be driven by establishing lean supply chains, leveraging low cost in external manufacturing and consolidating our manufacturing plant network much of which Dick commented on earlier. During the remaining three quarters in 2008, we anticipate a less favorable product mix to negatively affect PGM compared to the first quarter and particularly over the next three quarters, we will experience the full impact of the loss of marketing exclusivity for FOSAMAX on PGM.
As always, this guidance excludes the portion of the restructuring cost that will be included in product cost and will affect reported PGM in 2008. So let's move down the P&L to marketing and administrative guidance.
In 2008, we continue to anticipate marketing and administrative expense to be approximately $7.8 billion to $8 billion. For R&D, we reaffirm our 2008 R&D guidance of $4.7 billion to $4.9 billion and on the restructuring line as part of the company's restructuring of its operations additional cost related to site closings, physician eliminations and related costs will be incurred in 2008 and Dick discussed many of these earlier.
We anticipate the aggregate 2008 pre-tax expense related to these activities to be in the range of $100 million to $300 million. Now let's turn to equity income.
The disappointing events surrounding the ENHANCE results that Ken reviewed earlier has caused us to evaluate what scenario regarding the potential impact of the franchise is appropriate. As Ken mentioned, following the January 14th announcement market share dropped for about two weeks, then prescribing behavior moderated and share trends began to stabilize.
Unfortunately the more recent statements and opinions expressed at the ACC at the end of the March created further confusion in the marketplace. So the Merck/Schering-Plough joint venture builds its new view of the 2008 outlook, it had to consider the following factors.
Now let me go through them all. One, it appears that in both cases of share drop the NRS trends quickly stabilized and defined a new steady prescribing level as we have seen in the daily and weekly script data.
Two, we have seen the more recent drop and share appears to stabilize although it is really still quite early, but it is not as much of a drop as we saw post January 14th. Three, in Q1 customers did reduce inventories in line with the lower demand in the US as well as inventory build that sometimes occurs when we are in the holiday period in the fourth quarter.
That said, there may be some further adjustment in inventory in the second quarter in the US based on any additional decline in demand post ACC. Now just a note, we don't expect any change in the weeks of supply in the inventory channel.
This is just a response to any changes in market share. Fourth, following the events of January 14th the Merck/Schering-Plough joint venture had carefully evaluated its entire cost base in an effort to optimize the income contribution to both its parents.
We continue to carefully assess our investment strategy and we have incorporated our plan into this guidance. Now we do consider these further details on our investment and proprietary strategies to be proprietary so we won't be covering details of those today.
And five, outside the US, the coverage and the impact following the January event was relatively minor and the international media coverage following the ACC Conference was somewhat higher but it really is too early to tell how full year results may be affected. Sales growth outside the US was up 41% versus Q1 in 2007 and we expect ex-US revenue to continue to grow.
Accordingly with all of these factors considered, we are now incorporating revised Merck/Schering-Plough joint venture outlook into our 2008 equity income guidance. We now expected to be approximately $2.3 billion to $2.6 billion for 2008.
The $700 million decrease in equity income guidance is solely attributable to lower anticipated contribution for the Merck/Schering-Plough joint venture. Just to be clear as previously disclosed the equity income guidance already included the impact of the reduction of the AZLP priority return and the buyout of the Astra USA products which occurred in March of 2008.
So moving down the P&L, let's talk about taxes. As you can see our Q1 tax rate included two impacts.
First the impact of the gain on distribution from the AstraZeneca Limited Partnership and restructuring charges. And both of these are taxed at roughly US domestic rates.
Second we included the first quarter benefit of approximately 8 percentage points related to the realization of foreign tax credits. This is a discreet event based on operational aspects of our business and the full benefit of this change was captured in Q1.
As a result of these two impacts, the first quarter effective tax rate on the GAAP P&L was 25.1% and the effective tax rate on the non-GAAP P&L excluding the impact of these items was 14.5%. Now I'd like to take a second to explain the revised tax guidance.
The foreign tax credits rose as a result of prior year tax payments made outside the US in several countries in the normal course of conducting our business. The company was not able to recognize the benefits of these foreign tax credits in prior periods.
However, based on the change in the planed distribution of certain prior year’s foreign earning, the company has determined that such credits are now realizable. So with these impacts incorporated into our P&L in the first quarter, this affects the full-year rate.
There are no other changes anticipated to our tax rate in 2008 but the implication of this Q1 impact is that our rate for each of the next three quarters will be changed to drive the full-year rate. We are reducing our full-year 2008 non-GAAP tax rate guidance range to be approximately 20% to 23%.
This guidance does not reflect the tax impact of the gain on distribution from AstraZeneca or restructuring costs. Now moving to share repurchase.
Merck has been actively repurchasing shares. During the first quarter, the company continued its stock buyback program and purchased approximately $1.4 billion of treasury stock.
This level of purchasing was triggered by the following factors. We do not repurchase in the second half of 2007 very many shares and we pulled forward some of our 2008 planed activity as we saw the value of the Merck equity debt and we viewed it as a buying opportunity.
So in total to recap our 2008 guidance, the company continues to anticipate that many of our in-line and newer franchises will maintain their solid performance. We anticipate that worldwide revenue will be driven by additional indications of the company's product, the continued market uptick in global rollout of our new products, as well as other potential new introductions.
On earnings per share, we are confident in our ability to execute against our plan and are reaffirming our full-year 2008 non-GAAP EPS range of $3.28 to $3.38 excluding certain items. We're making a slight revision to our 2008 GAAP EPS, which we now anticipate to be in the range of $3.84 to $4 per share.
Now, given that we had an $0.89 non-GAAP EPS first quarter, we have analyzed the trends quarter-to-quarter and the company expects a generally even distribution of non-GAAP EPS across the remaining quarters in 2008. So in summary the company remains on track in terms of both strategy and performance to deliver a long-term double-digit earnings per share growth from 2005 to 2010 excluding certain items.
We have financial strength, and remain fully committed to maintaining our dividend at the current level. At the same time, we continue to fully invest in our key strategic priorities.
2008 represented an important step in the multi-year journey to return Merck to its leadership position in the pharmaceutical industry. While we have faced certain challenges in the first three months of this year, it is important to note that much has been accomplished over the last 24 months.
Many opportunities still remain and we look forward to capitalizing on them in 2008 and going forward. Thank you very much.
Now, I’d like to turn the call back over to Graeme.
Graeme Bell
Hey, thank you Peter. We will now open the call to take your questions.
We will take the questions as always in the order they are received and try to get through as many as possible. So, at this point, I will turn the call back over to Cynthia, who will communicate instructions of our Q&A format and introduce the first question.
Question and Answer
Operator
[Operator Instructions]. Your first question comes from Tim Anderson with Sanford Bernstein.
Tim Anderson
Thank you, a couple of questions. SINGULAIR is now your biggest product and if I look at script growth in the US it’s recently slowed quite a bit.
I think it's down in negative territory by about 15% or so and I'm hoping you can parse out that slowed growth rate by seasonality versus the safety issues that came up recently, what to expect from here in the US specifically? And then on VYTORIN and ZETIA I think Ken’s comments I am assuming formulary positioning that was for 2008 and with contracting from Managed Care for 2009 being essentially done, I am hoping you can give us an idea of how much 2Q slippage you might see with those products in 2009?
Kenneth C. Frazier
Thank you for those questions, Tim. Let me start with the second question.
We continue to see from our Managed Care customers very strong understanding of the unique and valuable role of these two agents and we don't foresee significant changes at all in our Managed Care position. We've seen no changes and so we have no basis to actually predict changes going forward.
We're very... we're very pleased with the reception that we've gotten in Managed Care, we've reached out to them.
I think the Managed Care providers understand the limitations of the ENHANCE study and they understand the importance of these drugs are for their patients. On a SINGULAIR issue, we believe that the changes that you've seen largely at this time or the slow start if you will, has to do with the relatively late start for the Allergy season as well as a sort of a modest impact of the new NIH guidelines which gave a little bit of boost to inhaled corticosteroids.
As it relates to the safety issue, I will remind you that those label changes were made in the fall of last year. Merck has been communicating those changes to it's customer base since that time and while I can't say that there is no impact yet because it's too early to say that there will be no impact of the concerns from the safety perspective we have not yet seen any substantial impact on SINGULAIR as a result of that.
It's a drug that has 10 years of excellent experience on the market, it's got strong clinical trial data in the background, 32 million patient years of good faith experience that we continue to anticipate that it will continue to be the number one drug in the US respiratory market.
Graeme Bell
Next question, please.
Operator
Your next question comes from Roopesh Patel with UBS.
Roopesh Patel
Thank you. Just a couple of questions.
First on GARDASIL, I was wondering if you could just clarify if the VFC purchase in this quarter was in line with underlying demand or was it higher or lower? And then separately on the tax rate, I just wanted to clarify, is the change in the full year guidance all due to the benefit of the foreign tax credits that has been recorded this quarter.
I am trying to understand what could be the sustainable tax rate beyond 2008? Thank you.
Peter N. Kellogg
Great. This is Peter.
First let me answer the second question first, if I can on the tax rate. So yes, the full...
the full year impact on our tax rate is solely driven by the impact of the foreign tax credit that we're now being able to recognize the benefit for. And the impact is larger than first one because it does capture, add a little bit of catch-up element to it and that will affect the...
it obviously affected the first quarter tax rate but it will affect Q2, Q3 and Q4 because you're driving now the tax rate towards the full year rate. It will have a slight impact going forward beyond that because obviously this is now...
these foreign tax credits we anticipate being benefit to us but if we are not getting guidance and it won't be anything of this magnitude going forward. Related...
as regarding to the question on tax, now on GARDASIL Ken, do you want to --
Kenneth C. Frazier
Yes. With respect to VFC, as I mentioned earlier, last year's first quarter had the substantial benefit of the initial stocking in the public sector as programs ramped up for GARDASIL vaccination.
We did not have a similar impact this first quarter and I would say that one of the issues that we continue to watch closely is the timing of large government orders which are not as predictable as the underlying demand. And that's why I pointed out, if you look at the underlying demand as measured by what’s happening in the private sector, we saw very strong growth year-on-year of almost 30% and that gives us confidence that GARDASIL is still a vaccine that is beginning a strong reception by patients, by women, their mothers and their caregivers.
Graeme Bell
Thank you, Ken. Next question please.
Operator
Your next question comes from Jami Rubin with Morgan Stanley.
Graeme Bell
Jami, please go ahead.
Jami Rubin
Can you hear me?
Kenneth C. Frazier
Please go ahead, yes.
Jami Rubin
Can you hear me?
Peter N. Kellogg
Yes, we can, now we can.
Jami Rubin
Okay, great. Just a question, sort of a policy question.
To what extent do you view the recent action surrounding the ENHANCE trial involving the government investigation, the media attack, the ACC curveball etcetera as a passing storm or is this the brave new world that pharma executives have to come to terms with and make significant changes in the way you allocate capital to outcomes trials etcetera? I mean it seems to me that in this world, in this brave new world, the cost of failure in an outcome trial is obviously way too high.
You've lost $40 billion of market cap over this among other things. So I'm just wondering if you could kind of talk around that?
And secondary, if you could talk about plans for DTC for VYTORIN going forward?
Kenneth C. Frazier
Good morning, Jami, this is Ken Frazier. I think we all are looking into the future and through sort of a murky crystal ball now as it relates to policy.
It is clear that the world has changed to some degree. It is clear that outcome studies are going to continue to be important going forward.
But I think when the dust settles around ENHANCE people will come back to the primary goal of treatment which is LDL lowering and I think that people will continue to recognize that these drugs lower LDL more than simvastatin alone and will therefore continue to be very valuable drug and we will continue to go forward. As you know Merck has always been a company that believed in investing behind its products, investing in outcome studies.
And so that will continue to be something that was important. We did that before.
You remember going back to the 4S study we did those kinds of studies. We had those studies around COZAAR.
We will continue to do those studies because we think they are important to patients as well as to the marketing of these drugs going forward and then what's the second question? I am sorry.
Graeme Bell
DTC VYTORIN.
Kenneth C. Frazier
Oh, I am sorry. On DTC, we made a decision to voluntarily suspend DTC advertising in the current environment.
I will only say that we will continue to invest behind these two products as appropriate. We have not made any specific decisions as to when will we resume our DTC advertising at this time.
Graeme Bell
Thank you. Cynthia, could we have the next question please.
Operator
Your next question comes from Norman Fidel with Alliance Bernstein.
Norman Fidel
Thank you, it was already asked.
Graeme Bell
Next question please, Cynthia.
Operator
Your next question comes from Tony Butler with Lehman Brothers.
Tony Butler
Thank you. Two brief questions.
One, Peter you commented quite extensively on the tax rate, but could you say if in fact the tax credits were variable? That is to say, could you have taken less of a credit this quarter and spread it more evenly throughout the remainder of the year or did you need to take as much as you did and then the second...
and if so why? And the second question, Ken you may be able to ask is, when you...
assuming you do receive approval for GARDASIL for those over the age of 26 or 26 to 45, how does the message then to OBQ volumes and toward that population change, if at all? Thank you.
Peter N. Kellogg
Great. Tony, it's Peter.
I will take the first one. So, basically when you have an [inaudible] outlook for foreign tax credits like this, these foreign tax credits are basically taxes paid in other countries outside the US and then getting the benefit, an offset for those against US taxes.
And basically when you conclude as you do a change in your plan distribution of earnings which then allows you to take a benefit of these foreign credit, you from an accounting standpoint, from a GAAP standpoint you actually have to book the full amount right there in the first quarter. It becomes as soon as discreet event from accounting problems.
Obviously, it does affect the full-year tax rate though in fact you get the full-year tax rate impact but you do have to book it in the first quarter and that's appropriate and it's been reviewed by everybody. So we're very comfortable with that.
And so we really don't have a choice per se, for example to spread it out during the year but obviously it does, it is an impact that rolls through the year. I hope that answers your question.
The second question was related to the 26 to 45-year-old GARDASIL, the answer is --.
Kenneth C. Frazier
Hi, Tony thanks for your question, let me start by saying that we do recognize that there are significant differences among audiences and we continue to learn as we do our market research from our customers about the kinds of programs and messages and materials that resonate well across these different age groups. As you might be able to see in our new television and advertising and our web presence, we continue to remain focused on providing innovative and large-scale initiatives that highlight the benefits of this vaccine for cervical cancer for general wards but actually tailor them to the lifestyles and interests and concerns of different age groups as well as their position within the coverage spectrum.
So while I won't be able to say at this time for proprietary reasons what our specific messages are to this most senior cohort among our patient population, I will say that we recognize that there are differences in how they approach things but the core value of proposition of the product remains the same.
Graeme Bell
Next question please, Cynthia.
Operator
Your next question comes from Barbara Ryan with Deutsche Bank.
Barbara Ryan
I am sorry, mine was answered. Thank you.
Graeme Bell
Thank you, Barbara. Next question please.
Operator
Your next question comes from Catherine Arnold with Credit Suisse.
Catherine Arnold
Good morning. I had two questions.
First of all, if you could just give us some perspective on the change in equity income you had talked about some give-and-take on prescription trends and how it did seem like you've settled out after January pretty quickly and although you made the comment that the prescription trends after ACC dropped, but now seem to have stabilized again, is your assumption in the equity income forecast change that there is another drop to add some conservatism or are you assuming that we have reached bottom in terms of market share trends? And my second question is related to share repurchase, it looks like you've bought as much stock in the first quarter as you'd almost...
pretty much comparable to last year's total. So given the share price and given what you have done, I guess it’s safe to say that your share repurchase might be much higher this year.
Peter N. Kellogg
Catherine, let me take first. So first of all on the...
second one, I think that is quicker and easy to take. The share repurchase you are right.
So last year we actually... if you went to the second half of last year we did not repurchase a lot of shares.
I mean, some ways were blocked as we went through the lot of the VIOXX dynamics. And so we had a much lower share repurchase activity last year.
As we came into our 2008 planning and this was obviously get in sort of the capital planning for the company, we had a certain amount that we'd anticipated repurchasing and we didn't buy the whole amount in the first quarter but we did put forward some of what you might have considered to be a smooth purchase rate. We took some of the amount that we would have purchased in the balance of the year into the first quarter and blow it a little bit more heavily because we felt the value within, there had been some reaction perhaps in stock price.
So I think that our ongoing share repurchase program is characterized more by stabilizing the number of shares outstanding and what we're seeing just as more of the timing and phasing when we actually made the purchases. But you're correct in that it did result and because of those two factors, a much heavier purchase activity in the first quarter.
Regarding the equity income forecast and how we looked at that so obviously this is a sort of complex situation. I would just caution everybody.
I think everyone in the call is [inaudible] this with this but obviously we have daily scripts, weekly scripts and monthly scripts and if you go from one or the other, you have to be careful what you look at. And we tend to work much more with the weekly and monthly scripts because it includes… the monthly includes the mail order and the weekly includes the long-term care channels.
But as we have evaluated that, we did see a slight drop after ACC. We feel that that has stabilized somewhat, particularly on the new script side and we have modeled out what our expectations for the balance of the year.
We don't really anticipate a dramatic further drop at any point. In fact, we feel that there has been a very strong reaction in the market already and I think Ken talked to that quite a bit in terms of the actions and communications that are important for patients who are trying to lower LDL.
So, as we have modeled that out, we actually feel that at this point we've seen the reaction from ACC and we realize it is early but we had to make a call relative to how we forecasted and how we made our guidance.
Graeme Bell
Next question please, Cynthia.
Operator
Your next question comes from David Risinger with Merrill Lynch.
David Risinger
Yes. Thanks very much.
I have a couple of questions. First, would Merck management be surprised if Cordaptive is not approved at the end of the month?
Second, could you just comment on how much US wholesaler inventory was worked down for VYTORIN and ZETIA in the first quarter? And then on ex-US VYTORIN and ZETIA sales were flat sequentially.
Can you discuss the prescription trends since ENHANCE and whether prescriptions are flat on a month-by-month basis ex-US? Thank you.
Richard T. Clark
Let me take the first and this is Dick Clark concerning Cordaptive. Obviously and this has been our policy from the beginning, the status of the pending application is really considered proprietary and therefore we can't make any comments on and so the FDA has taken action.
But we do continue to anticipate an FDA action by the end of this month.
Kenneth C. Frazier
On the two VYTORIN questions, first let me take the inventory question. In the first quarter of this year we noticed that customers were reducing inventories in line with the lower demand in the US as well as inventory build that occurred around the holiday quarter...
holiday period in the last quarter. There may be some further adjustment in inventory in the second quarter in the US associated with any additional decline in the demand post-ACC.
So that's basically what we know about the inventory levels. On the ex-US business as was mentioned earlier the immediate coverage and the impact following the January press release were minor.
There was somewhat more extensive and more negative media coverage following the entire ACC conference, which could impact performance. But it is much too early to tell how the full year results might be affected.
Sales outside the US or non-US, 41% versus the first quarter of 2007. So despite the controversies around ENHANCE, we expect sales to continue to grow ex-US.
There was a modest sequential decline ex-US from the fourth quarter to the first quarter. And that trend reflects the typical seasonal pattern of stable franchises rather than I believe indicating any adverse effect from ENHANCE.
Graeme Bell
Thank you, Ken. Next question please, Cynthia.
Operator
Your next question comes from Jim Kelly with Goldman Sachs.
Jim Kelly
Great, thank you very much. First on GARDASIL, if you said this and I missed it I apologize, is there any assumptions inside your guidance for the cohort of 26 to 45?
And then secondly, cost of goods, very impressive decline year-on-year at a time when a lot of the other companies are seeing some more currency pressures, is there something different about the amount of currency or with currency adjusted that would the decline have been even more material year-on-year? Thank you.
Kenneth C. Frazier
On GARDASIL, we anticipate FDA action on the 26 to 45 year-old. But we can't speculate on the exact timing of the FDA's response and so we're not in a position to talk about any estimates around our marketing expectations for that cohort.
Peter N. Kellogg
And on the cost of good Jim, thanks. So there is a lot of questions involved in the cost of goods sold and I do think that actually as we planned and managed our cost of goods around the world, we don't tend to see an big FOREX impact relative to revenue and so forth and so I don't think it was a bigger driver.
There is some impact and we can follow-up on that point but in general, we tend to have a little bit more US denominated cost of goods sold. But I think, as I mentioned, this quarter and as you go through this year, you will see a fair bit of product mix effect and so you're seeing the combination of efficiencies that we have been talking about for quite some time and ENHANCE off to the whole Merck manufacturing division team on that, they have done a great job.
But also you know, as you have FOSAMAX going on patent, as you have the very rapid growth of vaccines, and you also have the mix effects as well. So I think those are probably the bigger dive...
the biggest drivers of all.
Graeme Bell
So, given the time, we might have time for one or two more questions here. So Cynthia could we have the next question?
Operator
Your next question comes from Seamus Fernandez with Leerink Swann.
Seamus Fernandez
Hello, and thanks very much. Just hoping that you could gives us a couple of data points.
One, it's our understanding that the Phase... first Phase III data on the migraine drug MK-0974 could be presented in the near future.
Could you confirm whether or not those data will be presented at the American Headache Society or is that still unclear? And then separately just on cordaptive, as you kind of think about your expectations coming into the year and guidance that you provided in late last year, can you just give us your expectations?
Have those expectations changed at all given the volatility in the current environment assuming that cordaptive is approved?
Kenneth C. Frazier
Yes, Seamus, let me take the first... the second one rather on cordaptive relative to guidance.
So, we... yes we have included some prospective on cordaptive in their guidance, but I would caution everybody it’s very minor.
This is a year of launch, it’s initial year so it’s a very minor impact. So I think our 2008 guidance does not inch one way or the other on the...
any outcome here this month with the FDA. Obviously there was an impact going forward.
But right now, it really isn't a big 2008 factor, relative to the migraine drug, Graeme?
Graeme Bell
Yes, I can confirm these changes, you are correct, June 26 through the 29 is indeed The American Headache Society and we will be presenting Phase III data on MK-0974 in that scientific forum. So Ken and Peter given the time, we will take the last question, please.
Operator
Your final question comes from Stephen Scala with Cowen. Stephen Scala - Cowen and Company Oh, thank you.
Two questions. First, what is the status of varicella manufacturing validation efforts?
And secondly, I am not clear why the change in the tax guidance is not due in part to the sizable cut in the guidance for cholesterol franchise equity income or are you saying that there are operational offsets that have boosted the tax rates to a similar extent? Thank you.
Peter N. Kellogg
Okay. So, Steve I can take the second question first and then pass the varicella manufacturing to others.
On the tax rate, there are... it's a fair question, there are always pushes and pulls and our different profit lines do have basically different tax rates.
And so it's a different product mix, yes, you do have mix effect within our tax rate. We've always modeled that.
Obviously, some of these things come up as surprise such as ENHANCE that we can deal with that. But those...
and so, yes, we incorporate that. That's why we always give range of tax rates that we plan for.
In fact, perhaps the ENHANCE results and the impact that had on the joint venture has actually perhaps hurt the tax rate probably. But the bigger factor really is the fact that we are now getting the benefit of these foreign tax credits for taxes paid overseas in our core operations.
And this is obviously just for a select number of countries. So I'd say it's more of that event, the foreign tax credit utilization benefit than anything related to the Merck/Schering-Plough joint venture.
On the varicella manufacturing.
Richard T. Clark
Steve, in relationship to your question about varicella, the FDA is in the process of reviewing our regulatory submissions. We cannot provide a specific approval date.
However, we expect to hear back from the FDA regarding the status of the review in the next few months. So, it's positive from the standpoint of our manufacturing process standpoint.
Graeme Bell
Thank you, Dick. So that last question concludes the Q&A session of the call.
The information from today's call, both the transcript and replay will be available on our website for the next several months. And as always, Mike and I will be available whole day to take your calls and any incremental questions.
So let me now turn it back to Dick Clark for some final comments.
Richard T. Clark
Thank you Graeme and thank you all for joining us on the call today. The plan-to-win strategy we put in place back in 2005 has enabled us to improve efficiency while at the same time growing the top line.
2008 represents the half-way point of our plan and we are on track. Of course, new challenges will always emerge.
So we have proven before that Merck is a resilient company and I am confident that this management team along with the entire organization has the sense of urgency and the sharp focus that are essential to our success. We'll continue to work hard to grow our pipeline and re-engineer our business.
We'll lead to deliver sustained revenue and earnings growth through 2010 and beyond. So thank you again.
We appreciate your interest and your participation. Have a good day.
Operator
Ladies and gentlemen, this concludes today's Merck first quarter 2008 earnings conference call. You may now disconnect.