Oct 22, 2008
Operator
Good day, everyone and welcome to Merck's Third Quarter 2008 Earnings Conference Call. Today's call is being recorded.
At this time, I'd like to turn the call over to Ms. Eva Boratto, Vice President of Investor Relations.
Please go ahead.
Eva Boratto
Thank you Tella, and good morning. Welcome to our call to review our business performance for the third quarter of 2008.
Joining me on the call today as always is our Chairman, President and CEO, Rick Clark; Ken Frazier, our Executive Vice President and President of Global Human Health, And Peter Kellogg, our Executive Vice President and Chief Financial Officer. Before we get into the details, I'd like to 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 on merck.com and I would remind you that this conference call is being webcast live and recorded.
The replay of this event will be available later today via phone, webcast and broadcast. As we begin our review, 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 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 statement. The forward-looking statements may include statements regarding product development, product potential or financial performance.
No forward-looking statements 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 in this press release 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 reports on Form 10-Q or current reports on Form 8-K, which the company incorporates by reference.
We will begin the call with brief remarks from our senior management, and then open the call for all your questions. And, we expect the total call to last about an hour.
Given there are other earnings call today, we will be mindful of our time and will finish up by 10 AM. With that I'll turn the call over, and we will begin with remarks from our Chairman and President, CEO, Mr.
Clark.
Richard T. Clark
Thank you, Eva, and good evening everyone. Earlier this morning, we announced Merck's third quarter results and updated our 2008 and 2010 long-term guidance.
For this mornings call, we can provide more detail about our most recent performance and our near term outlook and answer your questions. Today, we reported another solid set of quarterly results, including growing non-GAAP EPS and revenue from key products.
We delivered those results even in a phase of a slow down in sales. Our Merck/Schering-Plough joint venture, and the continued impact with the loss of market exclusivity for FOSAMAX in United States.
Since 2005, Merck has anticipated and aggressively prepared for the changing industrial environment. And restructuring our business and transforming the way in which we discover, manufacture and market our products.
All of this was part of the plan to win strategy that I introduced shortly after becoming CEO. For three years, Merck has clearly seen our shares of positive and negative as the industry has overall.
In terms of growth and new product introductions, in 2006 and 2007 were outstanding years for Merck. This year thus far has been a more complicated story.
We have faced an unusual set of challenges some of them expected and others unexpected, some of them unique to Merck and others affecting many in the pharmaceutical industry. And, of course, global economic conditions are very dynamic at this time and could potentially continue to disrupt many industries for many times to come.
We have made good progress on many fronts since 2005. However, our most recent sales trends for key products compounded by known industry and emerging economic factors have led us to reassess the environment in which we expect to be operating between now and 2010.
And by the least considerations we have decided to lower our financial guidance over this period. As we look at our business today, we expect adjusted full year 2008 EPS to come in at the lower end but still within our previously disclosed range, the 2008 non-GAAP EPS of $3.28 to $3.32 excluding certain items.
We now anticipate reported GAAP full year 2008 EPS of $3.45 to $3.55. And for the longer term, we expect revenues will have a compound annual growth rate, of plus 2% to plus 4% from 2005 to 2010, including 50% of the revenue from our joint ventures.
Looking at non-GAAP EPS compound annual growth we now expect it to be at the mid to high single digit range over the same period excluding certain items. I take to deliver you on our commitments to you very seriously and I'm proud of Merck's track record in that regard.
That's why I'm disappointed about the changes we needed to make today in our short and long term guidance. We've always been straightforward and realistic when speaking to investors about Merck's business and intend to continue to communicate openly and candidly about where we stand and what we plan to do to accomplish moving forward.
The experiences and events of 2008 have been instructive to me and the leadership team. We will be proactive in addressing all challenges facing our business.
One of the factors that has led us to moderate our outlook is the manufacturing challenges that have attracted availability of certain of our vaccines. Let me provide some context on this critical aspect our business.
As accretive for the results and guidance discussions we will have later on this call. As we have previously discussed vaccine manufacturing is inherently complex.
The process is complicated so it can take many months to manufacture vaccines from start to finish. And it can also take several months to complete the necessary testing before the vaccine is ready for the distribution to customers.
From time-to-time issues arise, where there is a need to make a change in the manufacturing process. Due to the complexity involved, each issue has its own unique circumstances and can affect vaccine availability.
We have recently encountered some of these issues and as a result, availability of certain vaccines will be delayed from the dates previously communicated. We now anticipate having enough supply of the Zostavax to clear the current back quarters by the end of this year.
And ongoing supply to enable return the full promotion of Zostavax in United States, launching ProQuad and ZOSTAVAX outside the U.S. beyond 2009, and re-launching our HIV containing vaccine in mid 2009.
While these delays are frustrating, we are making encouraging progress. We have resolved the issues regarding our varicella bulk production.
Also, we have recently added an additional varicella bulk manufacturing facility, which has been approved by FDA. To support of long-term plans and to ensure we have consistent robust processes and practices that meet increasing demand, both of our existing vaccines and for the next generation of vaccines in development.
Merck is investing approximately $1 billion to expand our capacity, and to make improvements to existing processes and infrastructures. That includes two new plans one in Durham, North Carolina, which we dedicated last week and then another in Carlow, Ireland, where we have just began construction.
Despite the business challenges we face, I continued to believe that Merck had the right strategy focused on the core pharmaceutical business. We have a broad portfolio, the products that include many of first investment class products with marketing exclusivity that extends well into the next decade; Januvia, Isentress, GARDASIL, Zostavax, and Rotateq.
We have a best in class research and development capability, not early in late stage pipeline, and from investigational candidates that address critical unmet medical needs. In addition, our industry leading R&D capability helps strength Merck to partner of choice with new external scientific collaborators to discover, develop, and distribute important therapies.
Lastly, we are moving forward on several immediate and long-term steps designed to accelerate our revenue growth including significant investment in expanding our presence in emerging markets, brightening our business development focus to improve de-leveraging of opportunities in regions and countries outside the United States and accelerating development programs for novel mechanisms and fixtures combinations in some of our key therapeutic areas. In addition, we are leveraging our acquisition of GlycoFi to pursue follow-on biologics actively in multi-therapeutic areas, with a goal becoming a leading player.
All of these moves has significant incremental revenue potential. We expect to provide greater details concerning these key growth levers at our December Analyst Meeting.
In the mean time it is vital that we continue to ensure that we are operating our business in most lean and flexible way. As we move thorough the process we must gain and make significant but necessary changes in our business.
Earlier this year, I explained how we would accelerate efforts in 2008 to further optimize our cost base, transform our business model and maximize performance across all of our products. Today, we are moving ahead to the next step in our restructuring efforts.
Like its predecessor, this program is focused on continuing to transform our business model, lower our fixed cost, eliminate redundancy and increase the speed at which we make decisions, especially when it comes to taking advantage of growth opportunities. So, for example, Merck is accelerating the roll-out for more customer-centric selling model that we believe will yield a meaningful competitive advantage to Merck, will help physicians, patients and payers improve patient outcomes.
Merck's research laboratory is deploying a new operating strategy for basic research which will improve the company's ability to manage increases research program, complexity, expand its access to worldwide external research and relocate resources to translate... to late stage clinical success.
Merck's manufacturing division will further focus its capabilities on core products and outsourcing non-core manufacturing needs. And Merck will make greater use of outside technology resources, centralize sales and marketing activities and consolidate and streamline its operations.
We expect the 2008 restructuring program to yield cumulative pre-tax savings of $3.8 billion to $4.2 billion from 2008 to 2013. These cost savings are an addition to the cumulative $4.5 billion to $5 billion which the company announced in 2005 and remains on track to achieve the 2010 target.
As part of the 2008 restructuring plan, we expect to eliminate approximate 7200 physicians worldwide across all areas of company by the end 2011. Streamlining Merck to meet the demands of ever changing business environment, includes the painful reality of losing employees, whose contribution that helped our company accomplish so much throughout the years.
But no matter how difficult the decisions are today, we know our long-term strategy is right. We took a leadership position in the industry and began reshaping our company ahead of our competitors, I am confident that we can overcome our short-term challenges and continue to position this company for success in the future.
I recognize the change to guidance is not what our investors expect, nor what we wanted to deliver. That is why we remain committed to doing everything we can to improve this outlook.
We are determined to deliver to our investors and we believe our 2008 restructuring program announced today, will help us do so. In closing, let me acknowledge that we are in the midst of an extraordinary time for the business world in the world economy, uncertainties involved in all areas of the market bound.
However, I have full confidence in the fundamentals of Merck's business, our strong balance sheet and cash flow. Our product portfolio, our deep strength in research and development, our great people in an excellent management team across the globe.
Now, I will turn to Ken, who provides an overview the performance of our product portfolio during the quarter Ken?
Kenneth C. Frazier
Thank you, Dick. And good morning everyone.
Merck's revenue performance in the third quarter reflects continued strong growth of a number of recently launched new products including Januvia, Janumet and Isentress. This growth was offset by as discussed, supply shortfalls of some of our vaccines and continued challenges to driving demand for SINGULAIR and GARDASIL.
Overall revenue was down 2% in the third quarter, excluding the impact of the loss of marketing exclusively for FOSAMAX revenue in the third quarter increased by 5%. Our international business showed strong growth with an increase of 13%.
This was driven by volume increases of 6% as a result of the continued rollout of our new products as well as the prevailing exchange rates. Let me provide you with some perspectives on our top line results this quarter focusing on our key brands.
Beginning with our HPV vaccine GARDASIL. Reported Merck failed in the third quarter were $401 million, a 4% decrease when compared to the third quarter of last year.
In the U.S., sales declined 16% while Ex-U.S. sales increased 37%.
Ex-U.S. sales were aided by the adoption of school based programs in all Canadian provinces, which resulted in a $34 million increase in sales in Canada compared to the base period.
We are very pleased that the provinces have adopted this approach for an annual back-to-school based vaccine routine. The U.S.
third quarter performance for GARDASIL was driven by three factors. First, we observed the consistent monthly vaccination rate among 19 to 26 year old women over the past year.
While we've implemented many programs to increase vaccination in this age group, it will take time to address the barriers and significantly change behaviors of physicians and consumers. I will provide update on the status of some of our key efforts in a moment.
Second, while the annual vaccination rate of the remaining 30 to 18 year old increased, the overall number of first dose vaccinations declined because of the early success in vaccine in this age group following launch. Considering the strong cumulative utilization among to 13 to 18 year old since launch continued growth requires substantially higher rates among the remaining eligible population.
The vaccination rates for GARDASIL among adolescence remained higher than the average vaccination rates from Menactra and Pedec and comparable points in lifecycle. And third, utilization during back-to-school season was tampered somewhat by negative media coverage over the summer on slightly misperceptions which dampen consumer acceptance.
As mentioned on the second quarter call, we have implemented a number of programs aimed at driving utilization among 19 to 26 year old women. I'll share a few early results.
More than 5000 OBGYN and primary care locations have enrolled in the dose replacement program that we launched and first discussed last quarter, to address reimbursement concerns. We've already observed the approximate 8% to 10% lift in sales at these locations versus other locations, in the first two to four months since enrollment.
Our in-office patient outreach program, which helps physicians reach out to unvaccinated females and mothers, rolled out during September. In this first few weeks of enrollment, more than 1000 locations enrolled and more than 200,000 patient mailers were ordered in those locations.
Our outreach through managed care organizations to inform eligible patients about coverage of GARDASIL has reached more than 2 million enrollees in those plans. And finally, just this month we launched two programs to reach young adult females, a multi-channel consumer disease awareness campaign, and a patient program for OBGYN offices.
While we are encouraged by the initial progress of these programs, we recognize that it will take time to have a significant impact on the overall vaccination rates of this important 19 to 26 year old group. I'd like to take a moment now to discuss the performance of our two other recently launched vaccines; Zostavax and Rotateq.
First, despite significant demand, Zostavax performance in the quarter was hindered by the lack of bulk bearer seller supply. Looking forward, we expect to have enough supply to clear the current back orders for Zostavax by the end of the year.
As new orders are received, we will fill in as quickly as possible but it is possible that depending on demand levels, some new orders will be back ordered and filled in early 2009. Throughout this period of constrained supply, we have focused our marketing efforts on reducing many of the logistical and reimbursement barriers to vaccination with Zostavax.
We remained extremely excited about the potential of Zostavax, and we look forward to ensuring adequate supply of this important vaccine for our customers. Next, underlying demand for Rotateq continues to be strong.
More than 75% of U.S. at risk can now been vaccinated with Rotateq, which was the only rotavirus vaccine available in the U.S.
into the middle of this year. When you adjust for the $50 million stock pile purchased by CDC in third quarter 2007, sales in third quarter of '08 were up 11%.
As you model the future performance, you should keep in mind that our fourth quarter '07 results included a CDC stockpile purchase of $26 million. Rotateq continues to perform well in the U.S.
market, and we have not seen a significant impact to date from the recent introduction of competition. Turning to SINGULAIR, sales in the third quarter were up 1% versus the prior year.
SINGULAIR performance in 3Q08 was driven by strong growth in Europe, Middle East and Africa and Asia. And offset by the decline in the U.S.
business. Ex-U.S.
sales of SINGULAIR grew 12 % as a result of continued growth in EMEA and Asia. U.S.
prescriptions for SINGULAIR, that is total prescriptions, were down approximately 8% in the third quarter versus third quarter '07. Similar to the decline in the overall respiratory market.
The combined allergy and asthma market without Zyrtec, which was down approximately 6%. As I have mentioned in previous quarters, the U.S.
performance for SINGULAIR continued to be effected by the switch of Zyrtec OTC, the weak spring allergy season, and the FDA early communication, this spring. We are determined to improve the performance of SINGULAIR in the U.S.
in the fourth quarter and we have significant resources and plans underway to grow SINGULAIR during the fall allergy season and the end of year asthma season. Our sales force has new material to use with physicians including very specific patient profiles, leveraging on efficacy and safety, new trial and coupon kits for new patients, and educational materials for patients.
We are using a multi-channel approach with consumers which includes press, television and online DTC including digital banners and e-coupons and office branded marketing programs, pharmacy programs and adherent initiative and an updated website. Looking outside the U.S.
SINGULAIR continues to show strong performance for the year so far. SINGULAIR grew 20% outside the U.S.
and Europe and other markets such as Japan which illustrates the strong positive perceptions about SINGULAIR held by provisions around the world. Moving to two of our newest growth drivers, global revenue for Januvia and Janumet reached $479 million in the third quarter up 18% sequentially versus second quarter '08.
In the U.S. JANUVIA continues to be the second leading branded oral anti-diabetic agent in terms of new prescription share.
Despite the slowdown in the overall U.S. diabetes market the Januvia, Janumet franchise continues to grow in both volume and market share.
In addition, we are extremely pleased with the Ex-U.S. performance of Januvia, Janumet in the third quarter.
In the EU, Januvia is the only DPP for inhibitor approved for dual and triple therapy with the sulfonylurea or sulfonylurea plus metformin remains the only marketed DPP for that is once daily. Worldwide more than 8 million prescriptions have been written today, and we just stood these two benefits to be major growth drivers for Merck in the short-term and in the long-term.
And we are investing significantly in them to ensure that we realize their full potential. Now, I would like to take a moment to provide an update on the performance of our cholesterol JV.
Worldwide sales of Zetia and Vytorin as reported by the Merck/Schering-Plough joint venture for $534 million and $567 million respectively in the third quarter. Sales of Zetia were down 12% and sale of Vytorin were down 18% versus the prior year.
Sales declines in the U.S. were partially offset by continued strong growth outside the United States.
Market share for Zetia and Vytorin in the U.S. appears to be stabilized and post ESC.
Although we've seen an additional 8% decline in new prescriptions since the initial release of the SEAS results, the rate of volume and share declines for the JV has slowed throughout the year. However the overall cholesterol market growth has been slower than expected.
And while we expected the JV brands will remain competitive in terms of managed care, provisioning in 2009. We anticipate a reduction in formulary coverage from 2008 levels.
We remain stepped back in our support for Zetia and Vytorin continue to be valuable treatment options for physicians by helping to get more of their patients to their LDL goals. Before turning the call over to my colleague Peter Kellogg, I would like to take a moment to update you on the progress we are making on our efforts to evolve our commercial models and to optimize our cost base to better position Merck to grow the top line.
With Merck's portfolio both, inline in new parasitic vaccines, and with the number of people around the world who can still benefit from our products, we have ample opportunities for future growth. The challenge to us is to create a process that can go after these opportunities in an effective and efficient way.
We've already changed our headquarters and sales leadership structure, to prepare for the full implementation of the new commercial model in the U.S. in March of next year.
The results from our year long palate give us confidence that the new customer centric model provides the right level of support for our new products and can drive revenue and margin improvements. As Dick, mentioned, we have continued the effort that we started back in 2005, to optimize our cost base and improve Merck's effectiveness and efficiency.
In Q3, we started to realize the saving of the U.S. sales force actions we announced in May of this year.
Overall, for the quarter, marketing and administrative expense excluding the legal defense reserve in the base period, was down 8% versus the third quarter of 2007. But I should note, that promotional spending was up, which is the reflection of the support that we continue to put behind our growth brand and our growth market.
We are also realizing savings outside the U.S. as we begin implementing our new commercial models and streamline our sales and marketing operations.
What we are doing with these actions, is reducing our fixed cost base. So that we have the flexibility to invest in growth brand and growth markets around the world.
And I believe we have laid a great deal of progress here. Turning to our long-term revenue guidance.
As, Dick, mentioned, we have reduced our 2010 compound annual revenue guidance including 50% of our joint ventures, to 2% to 4%. As we work through our bottoms up planning process, we needed to assess our underlying product trends as well as project future challenges and opportunities, in a rapidly changing external environment.
Based on our assessment, the key drivers for the reduction in revenue guidance since July are as follows. First, since we last gave guidance in July, there has been a 10% to 15% reduction in the euro to dollar exchange rate.
Because 40% of our sales are from outside the U.S., the decline in exchange significantly dampens our outlook. Second, supply shortfalls for some of our back hands will affect our ability to meet market demand, and as you know, we are investing heavily in our manufacturing capacity for our vaccines to address this key issue.
As Dick, said, we remain confident both, in the alternate revolution of our supply issues, and important benefits provided by these unique vaccine products to our customers. However, the supply issues will affect our future performance.
Third, we continue to anticipate that we will have challenges to drive an increased demand trends for our joint venture cholesterol management's GARDASIL and SINGULAIR. While we have comprehensive plans in place to address these challenges, and return these products to higher growth trends, our overall expectations for performance over this period, are now lower.
In closing, while we are disappointed in the reductions to our long-term revenue guidance, I assure you that the entire Merck Organization is focused on improving that picture for the top line as well as the bottom line. We continue to believe that tremendous commercial opportunities exist for our established franchises along with our new first in class vaccines and medicines such as GARDASIL, Rotateq, Januvia, Janumet, Zostavax and Isentress.
We are confident that our continued focus on efficiencies on the marketing and the administrative line, demonstrated throughout 2008 will help drive overall margin improvement and that the plans we have in place fundamentally to change our business model will enable us to drive the top line for our medicines and vaccines for years to come. So with that I will turn the call over to my colleague Peter Kellogg.
Peter N. Kellogg
Thank you Ken. And good morning everybody.
Before we start to Q&A potion of the call I just want to touch on three items very quickly. First discuss the other key elements of our Q2 results that haven't been previously discussed.
Secondly, providing the overview of our 2008 and 2010 guidance. And then finally provide an overview of some other financial matters.
Let's get started. Merck reported third quarter of non-GAAP earnings per share of $0.80 per share which represented a growth of 7% over the third quarter of 2007 on a GAAP basis EPS for the third quarter was $0.51 per share.
Both the GAAP and non-GAAP third quarter results include the impact of $88 million of recognized loses in the company's investment portfolio. Now Ken, just walk you through the key elements of revenue performance for the quarter.
So I'd like to now cover the other elements of the P&L beginning with product gross margin or PGM. Our third quarter PGM was 76.1% excluding restructuring the decrease of 1.1 percentage points versus the prior quarter.
The sequential reduction in PGM is primarily driven and secondarily discard. In the third quarter sales of SINGULAIR and FOSAMAX both high margin products were lower than in Q2 of 2008 while sales GARDASIL a lower margin product were higher than prior year.
In addition PGM was negatively affected by discard associated with vaccine. Moving to research and development.
R&D expense for the third quarter was $1.1 billion when you adjust for the $325 million as required research which is a charge associated with the purchase of NovaCardia in the third quarter of last year and the 2008 restructuring cost R&D expenses were up 2%. Turning to restructuring, our 2005 restructuring program is nearing completion at year-end.
But we continue to transform Merck into a lean and flexible company appropriately sized and scaled for the future pharmaceutical operating environment. Accordingly the company announced a new 2008 restructuring program.
Included in our Q3 results were total restructuring charges of $847 million. Now that's made up of $720 million for the new 2008 program and $127 million for the 2005 program as winding down.
In the aggregate the cost of the 2008 program is expected to be $1.6 billion to $2 billion. As expected to very substantially complete by the end of 2011.
Now as Dick, has already mentioned this effort is expected to yield cumulative pre-tax savings of $3.8 billion to $4.2 billion from 2008 to 2013. This is a critical next step in our journey to establish a more a variable cost structure.
Next in the third quarter we continue to face pressure on the equity income line as a result of 2 factors. First, the equity income contribution for the Merck/Schering-Plough joint venture was down 17% or $81 million.
As a result of Zetia and Vytorin market share losses in the U.S. The lower revenue in the U.S.
was partially offset by strong growth outside the U.S. Secondly, the equity income contribution from the AVN joint venture was $42 million lower in the third quarter compared to the prior year.
The decrease in the equity contribution from the AstraZeneca partnership is attributable to the previously disclosed events surrounding the JV restructuring that incurred to at the end of first quarter this year and we discussed that previously. As well as always we had some inherent variability in the timing of payments from AstraZeneca.
As a reminder Merck's prior year returning was decreased to $55 million for quarter from $75 million and Merck no longer received the 10% royalty payments from the Astra USA products. Moving to the other income and expense line, net for the third quarter were $62 million in expense, which declined to $243 million versus Q3 2007.
The year-over-year decline is attributable to first, recognize losses of $88 million in our investment portfolio as I mentioned earlier, and that's a result of Merck's exposure primarily to Lehman Brothers and AIG in Q3 2008. Secondly, there were balance sheet translation losses of $52 million in Q3 2008 due to foreign exchange movement and how they impact our balance sheet.
And thirdly, income of approximately $100 million occurred last year from the one time net gain that resulted from the settlement of certain patent disputes that we discussed last year. Now moving to our 2008 guidance.
Our 2008 non-GAAP EPS guidance is for $3.28 to $3.32 as Dick covered earlier. This guidance is at the low end of the previous range.
Our corresponding 2008 GAAP guidance is now $3.45 to $3.55. Now as always, to assist your modeling, we provide a breakdown of the product revenue guidance in our other financial disclosures schedule attached to the press release that we issued earlier today.
But let me briefly walk you through the changes that occurred there. On the revenue line SINGULAIR has the full year range lowered by $100 million, for the range now stands at $4.3 billion to $4.5 billion.
Other vaccines, also had their full year range lowered by $100 million. So that means now its $2.6 billion to $2.8 billion.
And as Ken and Dick mentioned, that's largely attributable to delays and supply. Finally, the Astra component, was increased on a full year basis by $200 million.
So that now stands at $1.5 billion to $1.7 billion and that's due to the strong net in performance that we have seen year-to-date. Now regarding, marketing and administrative expense.
We are reducing our guidance by $100 million to $7.4 billion to $7.6 billion. This reduction is possible because of our ongoing, companywide, aggressive expense management that Ken covered a few minutes ago.
And during the restructuring as a result of the charges associated with additional restructuring program that we announced today, restructuring guidance for 2008 is increased to $1.3 billion to $1.5 billion. Now turning to the 2010 guidance.
As Dick, and Ken, mentioned, a number of factors that led to the revised 2005 to 2010 guidance, that we issued this morning. Since we last provided guidance long term guidance in July, foreign exchange rates have clearly moved against us, and that coupled with the manufacturing and supply issues, and product specific changes, has led to the change in outlook.
As an organization, we are committed to maintaining focus on cost control and the restructuring program announced this morning will help us move toward a variable cost structure. We have a clear plan in place to enable us to achieve the long term guidance we provided this morning.
Now moving to the shares repurchases. Merck, has been actively repurchasing shares.
During the third quarter, the company continued its stock buyback program, and purchased approximately $1 billion of treasury stock. And during the first nine month of 2008, we have now purchased $2.5 billion of treasury stock.
This program will continue in Q4. The company considers a variety of factors in share repurchase decisions, including our strategy, the long term capital structure, market condition, the impact of actual and anticipated employee stock option exercises, and EPS implications of repurchases.
As of September 30th the company has $2.6 billion remaining under the July 2002, treasury stock purchase authorization. Now let's turns to some other financial matters.
And I'd like to take a minute to speak about Merck's overall financial strength. As you know, Merck has always had a strong balance sheet, and a conservative investment philosophy.
As of September 30th our current cash and investment portfolio totals $19 billion, including $6 billion pledged as collateral for bank guarantees related to certain items, including Vioxx product liability settlement. The portfolio contains a diversified mix of high quality, short term, less than 90 days, and medium term, less than five years.
Fixed income, government, agency, corporate, asset backed, agency guaranteed mortgage back, and the municipal securities. Our investment philosophy had served shareholders very well.
Since 2001, our benchmark investment portfolios have earned 1.4% per annum more than a Treasury bill portfolio, providing company with incremental interest income in excess of $1.2 billion over this period. Merck's strong financial profile, as indicated by our AA minus credit rating, provides Merck with a distinct advantage in accessing funding during difficult markets.
In the current market environment, we continue to have more than sufficient access to the commercial paper markets at attractive pricing, and across all maturity spectrums. 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 and our pipeline. So in summary, Q3 was a solid quarter.
Januvia, Janumet and Isentress continued to perform very well globally. We also continue aggressively manage our overall cost structure, as demonstrated by the reduction in marketing and administrative guidance.
And, we believe that our 2008 restructuring program will enable Merck to continue to drive toward a more lean and flexible model. Thank you and now I'll like to turn the call back to Eva.
Eva?
Eva Boratto
Thank you, Peter. We will now open the call to take your questions.
We will take your questions in the order they are received and try to get through as many as possible. Joining us for the Q&A session is Bruce Kuhlik, our Executive Vice President and General Counsel.
At this point, I'll turn the call over to Tella, who will communicate instructions for our Q&A format and then introduce the first question, Tella? Question And Answer
Operator
[Operator Instructions] Your first question comes from the line of Tim Anderson of Bernstein.
Tim Anderson
Hi. Thank you.
A couple of questions. Dick, I am hoping you can talk about the notion of having a so called established products group, like one of your competitors who is recently have been talking whereby a higher level of marketing resources are dedicated off patent drugs.
I am wondering if this makes sense and if Merck has a similar effort underway and if not, does Merck plan on doing anything differently? And then Ken, when you say you expect Vytorin and Zetia to continue to have competitive formulary positioning going into 2009, how do you define competitive because it sure looks like Vytorin and Zetia will be at disadvantage relative to other products much more often than not based on the date that CMS has on their website?
Richard T. Clark
Okay. So, let me start with the second question which is where we believe would the case for our managed care access.
As you know, right now we believe that we remain competitive in 2008 as it relates to our managed care placement, especially as it relates to unrestricted access to second tier and major plans. As we move forward into next year in 2009, we will believe that we'll continue to be competitive but we actually believe that will have somewhat less access, than we have during this year.
So, next year we believe that Vytorin and Zetia will be reimbursed without restriction for about for two thirds of patients in commercial and Medicare Part D. I don't know exactly if that's what you are referring to but some of those most recent decisions made in Medicare Part D have been not as positive for Vytorin and Zetia but its also important to keep in mind that they represent only 20% of the book of business.
So today we reimburse without restriction or about 75%, next year we believe it will be about two thirds. The other question, relates to how we are thinking about an established products group.
We are booking overall at our entire business including how we should apportion funds, scarce funds between all of our products. We have a number of very strong growth drivers that are early in their lifecycle.
And our primary focus is ensuring that those products get up to a very fast growth curve. On the other hand, we have plans that are in place which we'll talk about in greater detail in December, for our emerging market strategy, and in those markets as you know, somewhat more established products including product that don't enjoy patent protection, continue to be valuable contributors to portfolios in that part of the world.
And we are certainly looking at our entire portfolio, including established products, across various geographic markets and looking at, how to actually maximize the return of the entire portfolio to Merck shareholders.
Eva Boratto
Next question please.
Operator
Your next question comes from the line of Chris Schott of J.P. Morgan.
Chris Schott
Great, thank you. If we look at the cost savings outlined in to the new restructuring program, can you give us more color of this segmentation between our cogs, SG&A and R&D on that one, and may be just a little bit more clarity on the timing of some of these headcount reductions that are way out with these plan?
And then may be a final question on GARDASIL, with dose replacement program at the end during the quarter, just quantify how many doses have been provided to physicians at that program? Thank you.
Peter N. Kellogg
Hi Chris it's Peter Kellogg. So let me quickly recap some of the dimensions of this restructuring program.
Then I'll pass the GARDASIL question over to my colleagues but. First of all in terms of where the cost will occur.
Because good portion of this restructuring is related to real cash items and they are primarily headcount related. Probably that 65% of the cost that you'll see while go though the restructuring line.
And then rest of cost will be split between cost of goods and R&D. In terms of where the benefit will flow, we haven't broken that in great detail.
But in general, probably about 70% or so of the benefits will come to what we call the M&A line, the SG&A area. And because the largely the impacts are primarily head count related the benefits of this program are fairly evenly spread over time.
And so our expectations will probably get about the third of the benefits from this program through 2010 and downs after that. So I can hope that I give you some dimensions of the restructuring and then I guess for Ken for GARDASIL?
Kenneth C. Frazier
So I think it's important to recognize that we're still very early in the dose replacement programs like. It's been in place for about two to four months.
As I mentioned we are pleased that there has been a reasonably strong uptake in terms of participation by all the guys and primary care providers. We see in the early days an approximate 8% to 10% lift.
So those are all things that all go well particular approach to that barrier around reimbursement. We don't however provide the actual number of doses that we've provided in those locations.
But again we're pleased that we are seeing where there is participation in impact on GARDASIL use.
Eva Boratto
Next question please.
Operator
Your next question comes from the line of Roopesh Patel of UBS
Roopesh Patel
Thanks for taking my question. Just a couple of questions first on the cholesterol franchise.
Just given the pushes and pulls U.S. versus international.
Could you please clarify if you expect the overall global Vytorin and Zetia revenues to grow or decline in 2009. And then secondly on the vaccines business if you could kindly elaborate on the progress of resolving manufacturing issues for the Hepatitis vaccines backed [indiscernible] also for ProQuad thank you?
Kenneth C. Frazier
Okay. So I will start with the first question.
As I said we are seeing very strong growth outside the U.S. for Zetia and Vytorin.
We are experiencing difficulties in the U.S. as you know we saw 8% decline in NRX we're seeing an issue with respect to the overall market growth of the cholesterol franchise but of those out at this point in time I am not in a position to say whether the franchise will grow globally next year.
All I can say is that we continue to provide investments behind Zetia and Vytorin in the U.S. where we've seen the grades decline and we continue to believe that the products will have the right kind of support going forward.
As it relates to the other vaccine that you describe feedbacks and comebacks should be available again in mid 2009 and as it relates to vector based on the latest information we expects the ADA formulation would be here on Q1 2009 and pediatric in the fourth quarter of 2008.
Eva Boratto
Next question please.
Operator
Your next question comes from the line of John Boris of Citigroup.
John Boris
Thanks, for taking the questions Dick just a question on investment and R&D you obviously had trend out delayed while back you had to discontinue relatively expensive program on taranabant the obesity compound. Then you announced recently the Hepatitis B vaccine obviously also has issues.
Can you just talk about what is going on with at least you believe that the FDA currently from a safety stand point view. You obviously have eight other assets in Phase III clinical development.
How can we be assured that you have adequately designed those to meet a much more rigorous FDA from a safety stand point and second question on licensing and business development Dick and Peter. Over the last couple of years the velocity of your licensing and business development activities has been extremely robust.
Can you just highlight what that activity has been year-to-date in '08 and how that contrasts with '07 and '06 thanks.
Richard T. Clark
Well thanks for the questions. So we are considering some of the challenges we had with our late stage pipeline I always put it in perspective that this same agency that we are discussing was able to approve non-products over the past two years or so.
And these have been first in class differentiated products unmet medical needs. And truly it's going to be the foundation for the company from the revenue standpoint moving forward throughout the world and while products had that we are getting fair and reasonable pricing globally as we speak.
I think that's the good news. I have a lot of confidence in our scientific capabilities within Merck I think it is our strong points as a company and I think we have the ability to interact and communicate with the agency to make sure we understand if there are any changes or signals that we received that were able to make sure that we proactively answer those questions.
And I think we've been able to do that I think the reasons is Januvia is on the market as we proactively started the questions that they are going to ask and we are able to accomplish those and the fact that GARDASIL on market allows us to do. So there is no doubt that we have to continue to look at clinical development and make sure that we communicate and we listen to what any potential signals or standard changes could exist but I think all effects to do that we've done in the past regard our outstanding scientific leadership.
And I think that puts us in a quite competitive position in relationship to I call it in the industry.
Peter N. Kellogg
Just let me take the question. I can on the business development front.
The question is specifically I think John, ask was is there pace in '08 comparable what we did in '07, '06 and obviously year is not going yet. But at this point actually we have been very active in the business development front.
As you're well aware we did neighborhood of roughly 50 or more deals in each of last prior years. We've done a good number this year.
We've announced quite a few we already heard. And we remain very active as we speak today.
And our focus is to look at all ways to doing deals whether be in licensing or collaboration and also a truly innovative and novel mechanism that could really add to our portfolio. We tend to look at biotech companies that also bring different kinds of mechanisms into the play and we obviously think about it from the franchise standpoint.
So our business development activity is very well integrated with the R&D organization and their franchise team. So increasingly you'll see a stuffing of that activity.
I think you'll also see us broadening perhaps some of the scope of what we've done in the past not only to do the classic pipeline and licensing deals but also include as we discussed in the last earnings call more activity on the business development front with commercial products and global companies that may have only regional presence. But we're I think can hand our international portfolio.
So I think this will be another robust year. We have full expectations it is one of our corporate goals and certainly one of our finance and R&D goals to have a very strong and licensing activity and I think increasingly we will see more of Ken's organization really diving in as well.
So I think it is a big opportunity for us.
Eva Boratto
Next question please
Operator
Your next question comes from line of Dave Risinger of Merrill Lynch.
David Risinger
Thanks very much I have three questions. First regarding Vytorin and Zetia how do you define unrestricted?
Do you mean Tier II or are you talking about Tier II and Tier III? The second question is I will just read from your press release the second bullet that I don't understand so I am hoping that you can explain it.
It says cumulative savings of $3.8 billion to $4.2 billion expected from 2008 to 2013 and pre tax cost of $1.6 billion to $2.0 billion thorough 2011. Can you just reconcile those two?
And then finally and I may have missed this, but where does GARDASIL for 27 to 45 year old females stand? Thank you.
Peter N. Kellogg
So, Dave... this is Peter.
If I can start off with your specific question on the bullet point. So we look at restructuring what we trying these exact vernacular is place in the timeframes that we used in the past.
And so our cost that will go through the P&L as restructuring charges, we expect to be in the range of $1.6 billion to $2 billion cumulatively between now and 2011. And obviously we'll be incurring those costs as we go along as different activities are taken.
As I mentioned earlier, more than half of those costs will be head count related and so those will be severance program charges and so forth. And the rest will be probably either accelerated depreciation for facilities that are being closed or other related cost that are between different investment areas or whatever.
So that's the cost side, that's the $1.6 billion to $2 billion. From these restructuring moves, we will then realize savings in the operations of our P&L and what we look for is in the range of $3.8 billion to $4.2 billion of operating savings that'll flow through the P&L on a cumulative basis over the next five years and that's the '08 to 2013 timeframe.
And as I mentioned on an earlier question, we expect those savings to come true on a fairly steady basis as we go along because of the size of the program changes we are making right away. So, as I mentioned we would expect about a third of those savings to come in, in the 2009 and 2010 timeframe.
Let me hand over to Ken next?
Kenneth C. Frazier
Yes.First of all I apologize for any lack of clarity in my previous response. When I was talking about our access to managed care formularies, I was referring to Tier 2.
So, when I said that we have 75% access with no restrictions, this year I was referring to Tier 2 and when I made my comment about two thirds next year, they also related to Tier 2 access without restrictions. With respect to your other question, as you know, we have responded to the FDA complete response letter in July.
The agency has informed us that the response was a class two response though typically those responses take about six months to work through.
Eva Boratto
Next question please.
Operator
Your next question comes from the line of Barbara Ryan from Deutsche Bank.
Barbara Ryan
Good morning and thanks for taking my question. Most of them were asked but may be Dick, I wonder if in the targeted cost cutting that you have and specifically that 12% head count reduction through 2013, if within that you have assumed any kind of what I'll call fundamental changes in the marketing model of the company?
I mean its probably not the right form to go in to all of those things but just in a generic sense?
Richard T. Clark
Yes, I'll let Ken answer that and then to Barbara but I think one of the important distinctions I want to make that Merck is doing with their restructuring program that we put together today. This is not a reaction to having challenges in 2008 or a reaction to 2010.
What this is, is taking a look at our basic strategy and saying, we need a new fundamental business model and globally we've been help in marketing and sales. We need to take a look at our manufacture and supply strategy.
We need to take a look at what we can do better in basic research and clinical development. And based on that, the new models what putting in place, what is the outcome of those?
So it's much more strategic in nature, its much more process in nature versus just a reaction that we have had a concern in 2008, therefore we have to reduce cost by $2 billion. That's not the way we run Merck and that doesn't put us on the path of regaining our leadership.
This is very strategic. It's driven from a business model change that we know have to be responsible from an innovation standpoint in the new business models because if we don't change its business models we are not going to survive as an industry let alone a company.
So it's much more than a reaction and I think we are doing it differently than other companies are and I will let Ken make a comment about the marketing part of it.
Kenneth C. Frazier
So I will just join what Dick just said, we are able to accelerate our U.S. in the commercial model because we have learned a lot from the pilot that we had in place and what we learned is giving us a lot encouragement.
That we can do that in the U.S. in Europe and other mature markets.
At the same time we will be adding head count in some of the emerging markets because we see the growth opportunity is there and just freeze up resources to invest behind our key growth drivers for example, SINGULAIR at the fourth quarter we are able to put even more money behind our DGC campaign.
Eva Boratto
And we have time for one more question please.
Operator
Your final question comes from the lines of Tony Butler of Barclays Capital.
Tony Butler
Good morning and thank you very much. Two brief questions, number one and apologies going back to Vytorin and Zetia but Ken as you look at the equity income from affiliate of 23 to 25 the guidance, it is not necessarily changed from that, that I...
only marginally at the top end from that, given back in Q1. And I guess as we look out and I realize we are a few weeks into the fourth quarter at American Hearts there will be a presentation at AstraZeneca will make around the trial called Jupiter with and I am curious, do have an view and clearly because the trial stopped, it must have had some positive benefits.
But I m curious of the view, you may have on its effect for not only the overall cholesterol market. But more importantly how that might effect Vytorin and Zetia and if you prepared, for how your message should, change should it need to change post that meeting.
And the second question, a little more mundane and forgive me, if it was stated before. But what exactly is the issue with the manufacturing hang ups for in Europe?
Thanks very much.
Richard T. Clark
Okay. So very briefly with respect Jupiter we are aware of the fact that trial was stopped early, there is going to be a presentation at AHA, I can only tell you that we continue to believe that by Vytorin and Zetia will be important to physicians.
We are looking at that particular trial and developing competitive responses to that trial and I can't go into further detail about those right at the moment. As it relates to the adaptive delay in Europe.
All I can say that we haven't countered a delay in the availability of trudaptive to support our pending launches in Europe and other markets due to a manufacturing related issue. We will continue to work quickly to fix that issue by continuing...
and analyzing commercial product the commercial product supply and the last thing is, I want to underscore it's business not a safety related issue. It's a manufacturing issue, that we hope to resolve quickly.
Eva Boratto
That last question concludes today's conference call. The information from today's call, both the transcript and the replay will be available at our website for the next several months and my colleague and I will be available to take your calls and any incremental questions.
Operator
Thank you. This concludes today's third quarter 2008 earnings conference call.
You may now disconnect. .