Feb 3, 2011
Operator
Good day, everyone, and welcome to Merck's Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] At this time, I'd like to turn the conference over to Alex Kelly, Senior Vice President of Investor Relations.
Please go ahead.
Alex Kelly
Thank you, Brooke, and good morning, everyone. And welcome to Merck's 2010 Fourth Quarter and Full Year Conference Call.
Before I turn the call over to Ken Frazier, I want to point out a couple of things this morning. First, there are a number of items in the GAAP results such as purchase accounting adjustments, merger-related expenses, restructuring costs and other charges and we have excluded those items in our non-GAAP results.
You can find our non-GAAP reconciliation tables in our press release and also in our financial supplements so you can get a better sense of the underlying performance. Next we've also provided tables to help you understand the revenue trends.
There are three tables in the press release. Table 1 is the GAAP results.
Table 2 is a reconciliation of our GAAP P&L to our non-GAAP P&L for the fourth quarter and year-to-date period. Table 3 is a supplemental non-GAAP table, which provides the sales performance for the company, the business units and the products.
During the call, we will refer mostly to Tables 2 and 3 so you might want to have those available. Finally, I'd like to remind you that some of the statements we make during today's call might be considered forward-looking statements within the meaning of the Safe Harbor provisions of the U.S.
Private Securities Litigation Act of 1995. Such statements are based upon the current beliefs of management and are subject to significant risks and uncertainties.
You can see in our SEC filings, including Item 1A in the 2009 10-K, certain risk factors and cautionary statements that could cause the company's actual results to differ materially from those projected in any forward-looking statements we make today. Merck undertakes no obligation to publicly update any forward-looking statement.
And as always, you can see our website for the SEC filings. This morning, I'm joined by Ken Frazier, our President and Chief Executive Officer; by Adam Schechter, our President of Global Human Health; and Peter Kellogg, our Chief Financial Officer.
Now I would like to introduce Ken Frazier.
Kenneth Frazier
Thank you, Alex, and good morning, everyone. I'm pleased that the hard work and consistent focus of my colleagues at Merck produced such strong results for the fourth quarter.
These results were achieved in the midst of a tough external environment, coupled with ongoing merger integration activities around the world. Merck's resilient performance was a great finish for our first year of combined operations following the merger and provides us with good business momentum going forward.
Before moving on to the results, I want to take this opportunity to thank Dick Clark for his practical and principled leadership as CEO during the past five years. Dick steadily steered this company through a very challenging period, and his legacy is a stronger and better Merck.
Under Dick's leadership, Merck brought forth great medical innovations such as JANUVIA, ISENTRESS, GARDASIL, RotaTeq and ZOSTAVAX, broadened its innovative platform by merging with Schering-Plough and produced a strong track record of value creation for Merck's shareholders. I am honored to succeed Dick as CEO and to have the opportunity, along with Merck's senior management team, to lead the company into the future.
Now let me turn to our fourth quarter earnings. This morning, we reported a high-quality quarter characterized by strong revenue performance of $12 billion, significant cost reductions and double-digit earnings growth.
Driving our revenue performance, SINGULAIR, JANUVIA, JANUMET, REMICADE and ISENTRESS grew a combined 15% on a year-over-year basis. In addition, our Animal Health portfolio grew 7% and our Consumer Care business grew 8%.
Our results clearly demonstrate the benefits of the post-merger Merck. We believe Merck is uniquely positioned to drive customer innovation, to grow our business globally and to create shareholder value over the long term.
Looking back on 2010, I hope you will agree that we accomplished a great deal in bringing together two exceptional companies. As you know, many mergers struggle because they lose sales momentum after the transaction is complete.
We did not. We integrated our commercial operations quickly and maintained sales momentum, despite significant resource reductions in the more developed market and the loss of marketing exclusivity for COZAAR/HYZAAR.
We remain focused on delivering our late-stage pipeline and, over the course of 2010, we completed the prioritization of our combined R&D portfolio to give Merck one of the industry's best pipelines with more than 20 candidates in late-stage development. As part of that process, we removed 13 projects in Phases II or III.
Additionally, we are more sharply focusing our R&D spending on a narrower group of therapeutic areas where we have the greatest likelihood to differentiate Merck, to also those areas where we can beat the competition and capitalize on significant future commercial opportunities. We generated four new drug approvals in a year where drug approvals were hard to come by, including DULERA in the U.S.
and BRINAVESS, ELONVA and SYCREST in the EU, and we launched DAXAS in the EU. In addition, we filed important New Drug Applications in the fourth quarter, including boceprevir for hepatitis C and once-daily JANUMET XR.
While the recent news regarding the clinical studies of vorapaxar raises questions about the compound and has reduced expectations, we need to wait for the data and see what they tell us. As you know, despite all the advances that have been made, cardiovascular disease remains the world's leading killer.
Addressing serious unmet medical needs is what Merck is all about. Boceprevir is a great example of a novel drug candidate from our lab that could meet a significant unmet need in the treatment of hepatitis C, with millions of patients worldwide waiting for new therapies.
And that is why we remain committed to pursuing innovative R&D programs. Finally, we exceeded our 2010 cost synergy goals through streamlining operations, building more efficient and scalable company-wide systems and outsourcing non-core work.
But we are by no means done, and we will continue our sharp focus on reducing costs. Last May, we told you about our strategy to drive growth in the emerging markets.
Throughout 2010, we've been launching new products in key markets and expanding important relationships in existing and new markets around the world. Last year, we dramatically increased our investment in China and other key emerging markets, and we will be making additional investments in these markets in 2011 and beyond to drive growth.
And as Adam will describe in a few moments, these investments are already beginning to pay off. So as we close the book on 2010 and emerge from a year of maximum disruption due to integration, we stand ready to face the challenges of 2011 from a stronger position, and we believe that we can sustain and build on the top line momentum that we achieved in the fourth quarter.
But make no mistake. The macroeconomic challenges of 2010 are continuing into 2011, and some will get even more difficult, including increased European austerity measures and higher-than-anticipated U.S.
health care reform costs. On the other hand, across our expanded product base, our launch opportunities and expanded geographic reach, there are some key areas where we believe additional investment can drive even more revenue growth.
These include further investments in life cycle management in the emerging markets in Japan, fully supporting launch activities globally, appropriately investing in the growth of brands beyond our top brands and investing in Consumer Care and Merck BioVentures. We will also be pursuing partnerships through business development and licensing activities and new joint ventures to gain access to innovations, to strengthen our geographic footprint, particularly in the emerging markets, and to expand our ability to meet the needs of our customers.
Another key investment is our Phase III pipeline. For many of our late-stage candidates, we are conducting large outcome studies.
The fact is that these outcomes data will demonstrate the value of our new medicines to governments and private payers and ultimately help fuel long-term growth for Merck. So as you can see, although we are in a dynamic environment, we also have many growth opportunities at hand.
In 2010, our objective was to maintain portfolio momentum as we merged and cut significant costs. In 2011, we intend to grow the top line, exceeding current expectations, which are essentially flat.
In fact, our plan is to accelerate revenue growth and EPS growth with anticipated top line growth in the low to mid-single digit range and bottom line growth in the high single digits. To drive the top line, we will invest wisely in the best growth opportunities within our portfolio.
These investments are important to our future and offer potential value for our shareholders and our customers. At the same time, we will continue to accelerate our efforts to drive out inefficiencies in operations and optimize cash flow.
This brings us to the strategic question of how much profitable growth we can expect to achieve over time, and how we will make the right investment decisions to get there. Given the realities of the external environment, including European austerity and pricing pressures around the world, U.S.
health care reform and our recent vorapaxar news, it is clear that the only way to achieve our 2013 EPS target would be through deeper, short-term-oriented cost cutting. That would result in significant under investment in our longer-term growth prospects and could limit our ability to pursue external opportunities.
Instead, I have decided that investing in our growth is the best long-term strategy for the business and our shareholders. As a result, we are withdrawing our 2013 EPS target.
I want to emphasize to you that I did not take this decision lightly, and I hope I have been clear in explaining the strategic rationale behind this decision. Our goal and my responsibility is to position Merck for the strongest possible long-term growth profile, and I firmly believe the approach we are taking is the best way to get there.
However, I also want to underscore that we will continue our relentless focus on reducing costs while not jeopardizing our long-term growth. So what is our thinking about the longer term?
Looking beyond 2011, we will be focused on driving top line growth, appropriately sizing our cost structure and delivering strong bottom line growth. Our ambition is to drive growth and increase cash flow.
As you know, Merck has a strong record of returning cash to shareholders. In fact, since 2005, we've returned about 90% of free cash flow to shareholders in the form of dividends and share repurchases.
During 2010, we repurchased $1.6 billion worth of our stock. We believe that positions us very strongly in comparison with the repurchases made by our U.S.
pharma peers. Our remaining repurchase authorization is one potential vehicle for returning cash to shareholders.
Going forward, we will continue to evaluate regularly our opportunities to return cash to shareholders. While the challenges we face are real, so are the opportunities.
And I'm confident that Merck can and will navigate this dynamic period and remain a leader in health care. Looking back on Merck in 2010, I see a company that delivered strong results while completing challenging merger plans, increasing its pace and momentum throughout the year and ending it well positioned for success.
Looking ahead, I see a Merck focused on delivering sustainable profitable growth. Our employees and markets all over the world are energized and excited about capitalizing on the many new and ongoing opportunities we have to bring value to patients, customers and shareholders.
Thank you for your attention, and now I will turn the call over to Adam.
Adam Schechter
Thank you, Ken, and good morning, everyone. It's a pleasure to speak with you about our performance in the fourth quarter and the first full year following the merger.
It was a transformational year for the company and we're pleased that we were able to accomplish many of our goals, including the integration of our commercial teams in over 90% of our markets, the implementation of the new commercial model across the combined organization and the execution of our portfolio strategy. As I assumed my current role, my priorities included finalizing the integration, ensuring we kept the momentum of our business and pulling through the strategy that we developed following the merger.
I am pleased to say that we were able to continue the momentum in our Global Human Health business and recorded sales of $10.6 billion. This represents growth of 3% on a supplemental combined non-GAAP basis, excluding the impact of generic COZAAR and HYZAAR.
Our commercial performance this quarter was characterized by the following: strong growth in the emerging markets and Japan, strong performance of our top-selling brands and solid contributions from new product launches. The performance in our top line is just part of the evidence that our merger is working.
With a much broader global footprint, we've been able to allocate our resources and find opportunities to accelerate our business in key markets. We've been able to do that despite some of the economic challenges in the developed markets.
With our broader portfolio, we've been able to become even more relevant to our customers. A key example is emerging markets.
We have already heard from Ken that we will continue to make significant but disciplined long-term investments in the business. Emerging markets sales in the fourth quarter increased 19%, with strong performance in key markets like China, Turkey and Korea.
There are a lot of significant opportunities for Merck as we see that our business fits well with the needs of the emerging markets. These countries are important growth drivers now and will continue to be in the future.
We're working directly with our teams in the local markets to ensure they have the right level of resources to meet our long-term goals, and we are confident that we have the right people and we have the right products to meet our growth targets. Another market we continue to experience strong growth in is Japan.
In Japan, sales increased 14%, largely driven by the strength of our new product launches, most notably JANUVIA, the continued success of in-line brands such as SINGULAIR and ZETIA and the favorable impact of foreign exchange. In addition to JANUVIA, we're also seeing solid growth from our other brands that are launching such as BRIDION and COSOPT.
We're laying down a foundation of strong launches in Japan, which will support us as we prepare to market and launch other brands like GARDASIL and RotaTeq in 2011. Turning to the EU.
Sales were lower this quarter due to loss of exclusivity for COZAAR and HYZAAR. While the environment in the EU remains challenging, we are seeing strong volume growth from our key brands, and we are working to ensure that we allocate the right amount of resources for the opportunities that remain in these markets.
In the United States, sales were flat in the fourth quarter, if you exclude the impact of generic COZAAR and HYZAAR. While we are not satisfied, there are certainly things that give us confidence in how our team performed in the U.S.
First, we continue to drive strong growth in several key brands such as ISENTRESS, JANUVIA and JANUMET. Second, we're getting solid contributions from brands in our respiratory, women's health and oncology products.
And lastly, we were able to maintain the top line while significantly reducing resources, including the sales force. In 2011, we will continue our launch efforts to support DULERA and SAPHRIS in the United States.
We see opportunities to grow these brands in the market, and we will continue to allocate appropriate resources to drive growth. Now turning to our portfolio performance.
As you review Table 3, which provides the supplemental combined non-GAAP results, you will see that product sales were once again driven by the robust growth of our key brands: SINGULAIR, JANUVIA, JANUMET, REMICADE and ISENTRESS. These brands grew a combined 15% year-over-year and are great examples of how differentiated products that provide a strong value proposition in the market can continue to be successful.
In 2010, we were very focused on sustaining the momentum of these brands and we will do the same in 2011. But our focus in 2011 will expand beyond these key products to other brands; other brands that we believe can grow over the long term.
The brands will vary by market, and we believe they will benefit from greater focus and greater resources. Now starting with our respiratory portfolio, which grew 5% compared to the previous year.
As the second-largest respiratory company in the world, we are seeing the benefits of our portfolio strategy. In the U.S., representatives are gaining better access to customers and they're capturing a greater share of voice in the market.
This is a critical factor for the success as we continue to launch DULERA. Improved access gives our representatives an opportunity to differentiate DULERA against more established brands.
As of January 1, DULERA has greater than 70% unrestricted managed care access. Outside the United States, our respiratory portfolio strategy is helping us exceed market growth rates in countries like Japan, France and Mexico.
Turning to the JANUVIA and JANUMET franchise, which continued its strong performance in the fourth quarter. Overall, global revenue grew 27% for the franchise.
In the U.S., we continue to gain market share in the oral diabetic market as we benefit from the recent regulatory actions for Avandia and also focus on high prescribers of sulfonylureas. Our growth in the EU is primarily driven by the launch of new indications and the ongoing launches of JANUMET.
In December, the two-week prescription limitation for JANUVIA was lifted in Japan. And we are seeing continued strong demand for sitagliptin, which now has a combined market share of about 17%.
We now have a market leadership position in Japan in addition to the rest of Asia-Pacific region. Globally, we know it's important to extend the value of the JANUVIA brand.
That's why we have a strong life cycle management program in place. Our once-daily version of JANUMET was recently accepted by the FDA, and we have other fixed-dose combinations in the pipeline.
Moving to our immunology portfolio, which had another strong quarter. REMICADE sales grew 12% and SIMPONI sales increased to $42 million, as we continued to roll out SIMPONI to additional markets.
We have worked hard to establish the complementary positioning of REMICADE and SIMPONI. And so far, we've been able to greatly limit the cannibalization of REMICADE.
We continue to be focused on improving access for SIMPONI and are preparing for the upcoming launches in France and the U.K. in 2011.
For VYTORIN and ZETIA, franchise sales were flat this quarter as we continued to see signs of stabilization in the U.S. and strong volume growth outside the U.S., especially in Japan where sales of ZETIA grew 30% in the fourth quarter.
We were pleased to see the results of the SHARP study, which showed that VYTORIN reduced the risk of major cardiovascular events in patients with chronic kidney disease. We plan to submit this data to regulatory authorities in the first half of 2011.
Shifting to the Vaccine business, which grew slightly in the fourth quarter but remains challenged by supply issues. First, GARDASIL sales were $221 million, which was a decline from the prior year, primarily due to government stockpile purchases in the fourth quarter of 2009.
GARDASIL continues to maintain greater than a 95% market share in the U.S. and approximately 75% market share globally.
Sales of RotaTeq increased 25%, driven mostly by the replenishment of government stockpiles in the fourth quarter. Sales of ZOSTAVAX were $107 million this quarter, which was driven by the availability of supply as we were able to clear a significant number of back orders.
Sales in the first quarter of 2011 will be lower as we remain in a back order situation. Moving to ISENTRESS, which had another solid quarter performance, worldwide sales grew 34%, driven by volume growth as physicians are utilizing ISENTRESS earlier in the treatment regimen.
We remain confident that ISENTRESS will maintain its strong position and continue to grow in 2011. We also look forward to expanding our infectious disease franchise this year as we plan for the launch of boceprevir, our protease inhibitor for the treatment of hepatitis C.
Following the presentation of the Phase III data in November, we filed boceprevir with regulatory agencies in the U.S. and EU and announced the acceptance of these files for expedited review in January.
Considering that many external stakeholders view boceprevir as being behind in development, it was great to see that we are first to file and gain acceptance with key regulatory agencies. We are currently in the process of preparing for the launch, and I am confident that we will be ready to execute our plans upon approval.
We look forward to talking more about boceprevir and our commitment to hepatitis C as we move through 2011. In closing, we had a solid fourth quarter performance which ended a successful year in 2010.
We are in a great position with strong in-line brands, new launch opportunities and an integrated commercial organization that is focused on growth in 2011. We see 2011 as a year for us to invest in our business to maximize these unique opportunities and grow the top line.
We look forward to updating you on our progress during the year as we report on our performance. Now I'd like to turn it over to my colleague, Peter Kellogg.
Peter Kellogg
Thank you, Adam, and good morning. As you've heard from Ken and Adam, we've had a strong performance during the fourth quarter and the first full year of combined operations.
You can see that the merger is working, and we are on track as we enter 2011. In the fourth quarter, strong revenue performance was the main driver of our results, which exceeded expectations.
In addition to the strong sales performance, we exceeded our initial goals for ongoing cost management and merger synergy targets and are now operating on a significantly lower cost base. So overall, it was a high-quality quarter.
As we look ahead, we see some challenges in the macro environment. Worsening EU austerity measures and the health care reform costs will represent headwinds.
However, despite these, we are optimistic that we can sustain and build on the top line performance that we drove in the fourth quarter. In fact, in 2011, we are targeting to drive low to mid-single digit revenue growth despite these challenges, the continuing generic impact from COZAAR/HYZAAR and the return of CAELYX and SUBOXONE to their originators.
Now let's get into our results. To make it easier to follow my remarks today, I will speak to the non-GAAP results in Table 2a, which exclude purchase accounting adjustments, which reflect the charge for vorapaxar, merger-related costs, restructuring charges and other items.
On this basis, we reported strong fourth quarter non-GAAP earnings per share of $0.88, which is double-digit growth year-over-year. Total revenue for the quarter was $12.1 billion, slightly lower on a year-over-year supplemental combined non-GAAP basis.
Excluding the impact of generic COZAAR/HYZAAR, total company sales were up about 4%. We're very proud to have delivered such a strong top line performance in the face of the various headwinds we've discussed, and each of the businesses had a strong quarter.
Since Adam discussed our Global Human Health performance, I'll just comment on our Animal Health and Consumer businesses. Animal Health grew 7% to $815 million.
This is our highest sales quarter of the year, and it was driven by strong growth of in-line and new products and strong growth in cattle and swine. We also had strong performances in Europe and Latin America.
Consumer Care sales increased 8% to $251 million, with strong contributions from foot care, skin care and CLARITIN. Now moving on to the P&L.
I'd like to begin by noting that our 2010 operating expense performance far exceeded the value capture goals we'd envisioned. In 2010, we achieved synergies of over $2 billion, and I believe that you can see these savings reflected in our P&L.
So indeed, we've delivered net synergies and exceeded our 2010 merger synergies goal. And we did this while launching new products, making progress with the R&D pipeline and overcoming some unexpected operating items.
That's took a lot of focused effort from our team, and we're proud of their excellent execution against our plan. As expected, we made significant growth driving investments in the fourth quarter and as you know, the fourth quarter is typically a period of higher expenses.
Accordingly, our operating expenses were sequentially higher than they were in the third quarter of 2010. Let's begin with a materials introduction.
The non-GAAP gross margin in the fourth quarter was 74.1%, which was lower than the third quarter of 2010 mostly due to product mix. On a non-GAAP basis, marketing and administrative expenses in the fourth quarter were $3.4 billion, reflecting the investments we made to drive the top line performance and charges for certain legal fees.
Moving on to R&D. As expected, research and development expense of $2.2 billion for the fourth quarter was higher due to the continued work we are doing to advance our R&D pipeline.
Now let me spend a few minutes on the other expense line since it was bigger than anticipated this quarter. On a non-GAAP basis, other expense of $309 million was significantly higher than the third quarter of 2010, primarily due to the unfavorable impact from the currency devaluation in Venezuela.
Now we do have a very large business in Venezuela, so this devaluation has two unfavorable impacts on our business. The first impact is the exchange loss due to the translation of our monetary assets and liabilities on the Venezuela balance sheet.
The impact was $120 million in the fourth quarter. The second impact is the ongoing foreign exchange impact on sales in future periods.
There was no consequence from this in the fourth quarter, but it will unfavorably affect our reported sales in Venezuela in each quarter of 2011. Moving to tax.
Our non-GAAP tax rate was 14.1% for the fourth quarter, which was lower than the previous quarters partly due to the enactment of the tax extenders legislation, including the R&D tax credit. This resulted in a favorable impact of approximately $80 million on the tax line.
Separately, we also had a benefit due to the foreign dividends from our subsidiaries. The EPS impact of these benefits was entirely offset by the combined impact of Venezuela, legal and other charges in the quarter, which totaled over $300 million.
So in summary, we finished 2010 strongly and we are well positioned for growth in 2011. Now let's spend our remaining time reviewing our outlook.
As I said at the beginning, we see some season challenges in the macro environment, but we are also optimistic that we can sustain and build on the top line performance that we drove in the fourth quarter. In fact, in 2011, as I mentioned, we anticipate that we will drive low to mid-single digit revenue growth from the 2010 base of $46 billion.
In 2011, we will face top line pressures due to the European austerity measures, the U.S. health care reform and the residual impact of generics and the return of two products.
We are targeting to overcome more than $1 billion of these challenges in 2011 and still grow the top line in the low to mid-single digit range. That top line growth is the result of a strategic decision to invest more in growth, so some of our 2011 synergies will be reinvested to drive the top line.
Accordingly though, in 2011, we expect to drive faster top line and bottom line growth than we did in 2010. Specifically, on a non-GAAP basis, Merck is targeting a full year 2011 EPS range of $3.64 to $3.76, which is high single-digit growth.
On a GAAP basis, Merck is targeting full year EPS of $2.05 to $2.33. Our EPS ranges include an unfavorable impact of about $0.06 due to the Venezuela currency devaluation in 2011 that I discussed earlier.
Our range also includes an unfavorable impact from some supply issues in vaccines and women's health products. In addition, the EPS ranges also include our revised estimates of the impact of U.S.
health care reform in 2011 due to changes in our assumptions about the cost of filling the donut hole, and slightly higher assumptions on the impact of managed Medicaid and the excise tax. We now expect the cost of U.S.
health care reform to be between $400 million and $450 million in 2011. As you think about our targets for 2011, you may also want to keep a couple of points in mind: First, our 2011 sales and EPS targets assume that Merck retains the full rights to REMICADE and SIMPONI in our markets.
Second, we have included a full year of Animal Health sales and expenses in our targets. But please note that upon consummation of the JV, it is expected to have a dilutive impact in the first 12 months since the divestitures of overlapping products will occur before synergies can be implemented.
Finally, we expect the first quarter to be the weakest quarter of 2011 due to the full impact of COZAAR/HYZAAR sales erosion, the return of CAELYX and SUBOXONE rights and some supply challenges in vaccines and women's health. As a result, we expect sales and EPS in the first quarter of 2011 to be pretty similar to the first quarter of 2010.
Beyond that though, we expect to see much better top line and bottom line growth in the remaining quarters of 2011. Ken discussed why we are withdrawing our long-term EPS targets and very importantly noted that our ambition is to drive long-term profitable top line growth.
Let me add that we will also be rigorous about continuing to streamline our cost structure to realize our $3.5 billion merger synergy target. In closing, we are pleased with the fourth quarter results we reported today with top line performance, new product launches, tight expense management each contributing to these results.
This caps off a successful first year of combined operations, and we remain excited about our future and are focused on driving sustainable growth. Thank you, and now I'll turn the call back over to Alex.
Alex Kelly
Thanks, Peter. Now we'd like to open up the call to answer your questions.
[Operator Instructions] So operator, we're ready for the Q&A.
Operator
[Operator Instructions] Your first question comes from Chris Schott with JP Morgan.
Christopher Schott
I just had two questions, maybe the first for Ken. I think you made some comments on this, but the company reiterated its 2013 guidance last quarter when some of the impact of health care reform and the EU austerity measures were pretty well understood.
And while you've had a setback with TRA, it doesn't seem like that would have been a huge driver to earnings in, really, its first full year in the market. So the withdrawal of 2013 guidance, is that driven more by your view of the level of investment needed to maximize Merck's long-term opportunities as you moved into the CEO role?
Or was it really that TRA finally kind of tipped the balance away from that guidance being achievable? The second question, which I think kind of falls onto that, since you're withdrawing long-term guidance here and are talking about making some targeted ongoing investments in your franchises, can you just talk a little bit more about the SG&A trend we should expect over the next couple years?
I guess how should we be thinking about 2011 relative to 2010? And then directionally, should we expect a drop off in SG&A as you approach the SINGULAIR patent expiration?
Or is that not a realistic kind of expectation from here?
Kenneth Frazier
So the first part of your question, I would say it's both. We're, first of all, very confident in our future prospects, but we face a certain number of headwinds in the external environment, most notably as we said European austerity measures and U.S.
health care reform. And coupled with the recent news around vorapaxar, it actually made us face up to what we felt was an important strategic choice to either engage in immediate and, in my view, potentially indiscriminate short-term cost cutting to stay on the track to meet the 2013 EPS guidance or to fund the many growth initiatives that we believe will create long-term shareholder value.
So given that trade-off, we, after much thought, decided that it was imperative to continue to make the necessary investments in our late-stage pipeline, recent launches, our key in-line products and we're very pleased that some of our products, our most important products, are growing at 15%, and geographic expansion. We believe that those will drive growth over the longer period, and so we decided to fund them even at the expense of the long-term guidance.
And as I said before, I take seriously, as do all of my colleagues, the withdrawal of those guidance. As we go forward, I want to assure you that we recognize the need to continue to ruthlessly prioritize resource allocation through strict ROI hurdles and to have a relentless focus on reducing our underlying cost structure, which I think is exemplified by the fact that we exceeded our 2010 synergy targets.
So our ambition as a company over the longer term is to drive growth on the top line while continuing to gain significant efficiencies in our cost structure, which we think ultimately will lead to a strong top and bottom line growth. So on the second issue around what specific product, I think Adam alluded to a number of them.
Our top growth drivers are continuing. We have launches underway with DULERA and SAPHRIS.
Around the world in Japan, we have a number of launches underway. Even in the emerging markets, we have a number of products that are actually going very strong.
So from our perspective, we need to make sure that we continue with the products that are in-line, the products that are launched, and then this year, we're launching boceprevir. So we really look forward to that launch and from our standpoint, this was a time for us to pause and to ensure that we invested in our portfolio, and I want to assure everyone on the phone that the issue isn't that I don't want to perform at the level of the long-term guidance.
It's that with all of the things happened at the beginning of the year, I either had to go off without a documented approach to do that and cut more costs at the expense of the top line and the long-term growth or to invest in the long-term growth. Peter, do you have anything to add?
Peter Kellogg
That's well said. I would reiterate, again, that it's really a blend of different things.
We have reiterated again and again that we will definitely capture the value capture goals and merger synergies that we had intended. Incrementally, we may make the right kinds of investments to sort of drive the top line and that, that's the decision we're making right now.
And I think the key thing is we just don't want to pin the performance of any one particular year, and that we will be having a growth story going forward. And it's a series of different investments over time, but because it's nice to have a pipeline and the investment opportunities that we do have, we want to take full advantage of them.
Operator
Your next question comes from Marc Goodman with UBS.
Marc Goodman
I was hoping you could give us an update on some of the key filings that are going to go in this year.
Kenneth Frazier
I think first of all, the most important thing for us is in terms of 2011 is what I mentioned before, which is the filing that's been accepted for boceprevir, and we want to move forward as well as JANUMET XR. So those are really major focuses.
As we look forward to the rest of the year, we have a number of filings. I would just point out that we have, for example, SAFLUTAN in the U.S., telcagepant in the U.S.
And at the end of the year while it's not a filing, we're looking forward as we move into later 2011 and perhaps a little beyond, we have to really still wait for the readout of the data for vorapaxar in 2P. I recognize that what the news so far has caused many people to be discouraged, but I also want to remind you that the DSMB recommended that we continue the trial with respect to patients with peripheral artery disease and coronary artery disease, specifically myocardial infarction.
So that could still be an important contributor. So ultimately, what I've been saying this morning is we believe in the innovation approach.
We think we have a good innovation story. We think boceprevir is an upcoming opportunity to demonstrate that.
Operator
Your next question comes from Catherine Arnold with Credit Suisse.
Catherine Arnold
First, in the sense that I think -- so I want to probe on 2013 guidance a little bit more, and where I'd like to start is on vorapaxar because I think it would have been very surprising if vorapaxar would have been a positive contributor to 2013 given an expected launch in 2012. Seems like it would have been actually a drag on earnings, not a positive, so I'm trying to put that comment in context.
I'm also wondering what you're assuming about European pricing in your forecast today versus what you were forecasting. And then just lastly, if you could just qualitatively reflect on the fact, I think most investors and myself, I would say I appreciate the importance of investing for the long term, but I think there's also the notion that there needs to be more sharing of pain in terms of that investments for the company with the shareholders.
And I'm just wondering I know you don't want to cut costs and I understand that, but there's a balance here and where are you as far as looking for ways to do this so that you might have more upside for the future?
Kenneth Frazier
First, starting with boceprevir. I think it's important to recognize that we were already in those physicians' offices.
We have a primary care -- vorapaxar, I'm sorry. We're already in the physicians' offices, so the fixed costs are already there with respect to most of what we do with respect to our direct selling.
I think that as we think about this decision that we've made, I want to make a couple of points First of all, I want to stress with respect to your sharing of pain, we actually agree 100% that the tough external environment that we're facing next year is not going to abate going forward. We have to get our cost structure in line.
I point out again that in 2010, we exceeded the synergy targets. Over the last few years since 2008 in the U.S., we have 50% fewer sales reps.
We have been trying to drive costs out of the system, but in a thoughtful way that doesn't jeopardize our business. With the things that have happened since we've created our guidance and the stuff that I've mentioned at the end of the year including stronger pricing pressures around the world and the vorapaxar removal, we faced a short-term question of whether or not we wanted to cut deeper in the short term without having, in my view, a thoughtful approach that would not jeopardize the business.
Cutting 50% of the reps made sense because we went about it the right way. So Catherine, what I would say to you is I am not signaling any less concern about the importance of getting our cost base in line.
What we face today given the situation we have on the opportunities is whether or not we're going to do that in the short run, adhere to the point target that we had for 2013 or whether we were going to reinvest some of the synergies that we are cutting this year into the business.
Operator
Our next question comes from Jami Rubin with Goldman Sachs.
Jami Rubin
More of a strategic question. Just given the setback that you've faced with vorapaxar, I'm just wondering if you can provide us with your view of the research model going forward.
I mean, might it make sense for some of these very large, very expensive, very risky outcomes trial such as vorapaxar, how do you buffer these trials? I mean, might it have made sense to isolate some of the subgroups before pursuing a large trial, and I know that obviously what's happening with anacetrapib.
Maybe if you could talk just in terms of how you see the R&D spend going forward. Also, it's interesting that yesterday or the day before Pfizer announced a significant cut to its R&D.
And I'm just wondering if you can talk about your R&D spend going forward, and if you see opportunities to really rethink that budget and to improve the R&D output. And just a question for you, Peter.
On the AZN put option, I understand that, that will be put to AstraZeneca next year in 2012, and if you can just remind us what is the earnings cost to Merck? Based on my calculations, I'm coming up with about $0.20.
But if maybe you could refresh us and help us to think about our models for next year.
Kenneth Frazier
You asked some very typical questions in that set of questions. Let me start with vorapaxar.
So I assume that what you're essentially asking is in hindsight, could we have done two separate trials, one in the ACS population, one with essentially the prevention population. I can't comment on the trial design.
It was so long ago, but what I can say is that as we, as a committee with Peter and Adam and Peter Kellogg and myself, what we do regularly in the company is try to assess all the programs that we're relying on. We try to look at them from a science and technical and medical standpoint.
We also try to look at them from a commercial standpoint. So we try to engage each program one by one, in addition to having the kinds of tough metrics we have in place around ROI and value creation in the pipeline.
What I would also say is that we recognize that our strategy comes with it a certain amount of complexity, lengthiness and unpredictability because we are seeking innovative medically important therapies. And with vorapaxar, we know the risk of trying new mechanisms and approaches.
I still continue to have optimism because the DSMB continued in 2P. We will see what the data shows.
If the data shows a benefit to that population, this could still be a very important drug going forward. On the Pfizer question, obviously, I can't comment on anyone else's view of their particular pipeline or the investment requirements that they face at this time.
But I will tell you that we are mindful of the need to drive productivity, greater productivity in our R&D program. Peter Kim and his colleagues understand that we are focused on it.
We are trying to take cost out. We're trying to increase the probability of success as we go forward.
But as a company, I think we are saying that we are committed to innovation as a strategy, and we believe that over the long term, it will pay off. And if you'll indulge me one minute, last week I attended the funeral of John Horan, who was the CEO of Merck a number of years ago before Roy Vagelos.
One of the things he was proudest of was that he kept the focus on research during a fallow period for Merck Research in the '70s, and that's exactly what led to a spate of innovation that has made the modern-day Merck. So I am not blind to what investors want us to do.
They want us to invest in prudent ways and ways that actually drive ROI and productivity. But we, as a company, believe that the only sustainable strategy in the health care environment that we're in is real innovation that makes a difference to patients and payers.
And that's why we have outcome studies surrounding these drugs because we come to market, we want regulators and payers to see the value of Merck drugs.
Alex Kelly
Peter, you want to answer the AstraZeneca LP question?
Peter Kellogg
Sure. And Jami, the essence of your question is right and that is, obviously, as you recall, the AZLP relationship is a long-term relationship that we've had for quite a long time.
When it was originally designed, it was structured such that there would be put and call options over time, and that there would be options for AZLP to buy out different parts of the relationship at a fair value each couple years. You may recall that in 2010 we covered the fact that, that exercise for non-PPI products had been -- the option rather for non-PPI products had been exercised.
As a result, we don't rebook supply sales for non-PPI products anymore and obviously, that come out of the relationship. And as we had commented then two years later, which would be in 2012, another option would exist where they'd be able to buy out the PPI products, and that is an option that is really AstraZeneca's choice.
We've already assumed in all of our modeling and the way we've always talked about our outlook in the future that AstraZeneca would exercise those options, but obviously there's no decision yet. And that something that's completely up to them and they can sort that out.
From an economic standpoint, actually it was a well-designed contract and it was one where there is a true up obviously, so we know that we're getting fair value in any kind of option exercise, that we're comfortable from a shareholder value standpoint that, that'll work very well. But at this point obviously, we don't know what AstraZeneca's decision would be on that transaction.
Operator
Our next question comes from Tim Anderson with Bernstein.
Tim Anderson
I want to go back to that long-term guidance because the U.S. health care reform issues have been known for about a year and European price cuts about just as long, and vorapaxar couldn't have been a big contributor.
So it really says to me that there were other things that have changed along the way that may have been miscalculations on Merck's part, and I'm wondering if you can clarify what those miscalculations may have been. We've had some setbacks like ISENTRESS QD.
Maybe that plays into it. Or are there things like emerging markets where you feel you need to step up your investment more?
And equally importantly, when can we expect you to give us new guidance? Your peer companies, in some cases, have lowered their guidance but no one's withdrawn it outright, and I'm wondering when we can see updated guidance from you.
Second question is on share buybacks. I thought that maybe Merck might do this as the story de-risks as you get through the REMICADE dispute, assuming that is positive.
But now with Merck withdrawing long-term guidance, it makes me wonder if Merck is not ready to do something like this and it might just be the status quo instead, so hoping you can comment there as well.
Kenneth Frazier
So I want to make it clear that we will regularly look at ways of returning cash to customers. With respect to REMICADE, we have no updates on it.
And nothing we've said today reflects anything having to do with any new perspective on REMICADE. On the first question, Tim, I want to make sure that I try to do this as well as I can.
With respect to European price austerity measures and health care reform, it is certainly the case that we knew about the general subject matter. We've seen increases in the pricing pressure.
But it's also important to recognize that in addition to vorapaxar, and you're right, all along we've had some setbacks with respect to our pipeline, which incrementally changed the way our revenue line looked and incrementally made us increase our cost reduction goal. You can see again, in 2010 we exceeded our cost reduction goal.
Our goal was to stay online with this EPS guidance. But we are now at a point where if we stay on that track, we are going to have to choose not to make important strategic investments.
I'll come back to the pipeline. A key factor in the size of our R&D investment this year or any year is the quality, quantity and size of clinical trials.
We're in a period right now where we have 20 late-stage programs with a number of very large outcome studies. In a year with fewer larger outcome studies, maybe we could take some costs out there.
In emerging markets, we are seeing strong growth. As you know, we've said that we wouldn't go out necessarily and buy many assets to get revenue.
We're trying to build our business in the right way that creates long-term value. That requires internal investment.
With respect to the launch products, including boceprevir, we see those as real opportunities. And so I want to be clear, it isn't that we couldn't cut costs enough to make the long-term guidance.
Our choice was to do that. But we couldn't do that in our estimation fast enough without sacrificing the growth opportunities, and that was the choice that we made.
It wasn't that we couldn't do it. It's that we couldn't do it anyway that would create long-term shareholder value, given the opportunities that we have in front of us.
And I would just cite again, we did say that we're withdrawing the guidance. We have not put new guidance in because there are some important events coming up.
I thought it was prudent to say that we would not restore guidance at this point in time. But I've also said very clearly, our aspiration is to drive profitable and sustainable top line growth, and we are saying now and I think if you look at the models that were out there before, people didn't see us growing and we have an opportunity to grow.
We've done it in the fourth quarter. We're exiting 2010 with very strong momentum.
We'll go into 2011, and we're excited about the ability to drive sustainable growth on the top line.
Operator
Our next question comes from John Boris with Citi.
John Boris
First question, just having your release, you do indicate that your financial for '11 assume that you will retain full rights of REMICADE, SIMPONI in the applicable markets. With this being an overhang in your stock, can you confirm whether you're currently in negotiations with J&J?
What your next steps are? And then timing for resolution?
Kenneth Frazier
So we have no further updates on the arbitration beyond what's been said, and I think there's nothing more to add. What was your second question?
John Boris
One for Adam in emerging markets. Can you just discuss your supply chain in emerging markets for distribution of product?
Is it an optimal distribution for your supply chain in emerging markets?
Adam Schechter
Yes. So obviously, the supply chain in emerging markets is critical.
And when we think about the emerging markets and the opportunities that exist, they're extremely large. But getting the products widely available means that we're going to have to have a supply chain at a cost structure level that enables us to have a pricing strategy that makes those products widely available.
So we are going to continue to make improvements on our supply chain, continue to make improvements on low-cost manufacturing. We're not where we need to be yet, but we are continuing to make improvements.
Operator
Our next question comes from David Maris with Credit Agricole. David Maris - Credit Agricole Securities (USA) Inc.
First, I know Merck doesn't have a crystal ball. But how does the company anticipate the challenges to the health care plan from a funding and constitutionality standpoint?
How do you think that's going to play out? And then on the emerging markets side, they did perform exceptionally well.
How big is your China business at this point? And on a dollar sales standpoint, how many sales people do you have?
And when you talk about emerging market expansion, where do you think you need a bigger footprint than you have now?
Kenneth Frazier
I'll take those questions, and I'll turn the second one over to Adam. So we don't have a crystal ball on the health care reform cases.
We know that the federal courts are split. I would assume that at one point or another, given the importance of this constitutional question to the U.S.
and patients around the U.S., et cetera, I would believe that it would eventually make its way to the United States Supreme Court because of the split in the cases among the districts that have decided it are pretty important ones for the country going forward. On the emerging markets, without getting into the particulars, which I'll turn over to Adam, I would say that we have strong growth in China.
We have strong growth in Brazil, in Eastern Europe. Dick Clark had said that we're late to the game and I think he's right.
We focused there but we're very encouraged by the growth that we see there. And we're going to continue to build out our commercial infrastructure in a prudent, disciplined way in those markets in a way that we think will create strong top line growth and attractive margins.
Adam Schechter
So if you look at the emerging markets first. In the fourth quarter, it was 19% of our business and it represented about 19% growth versus the same time last year.
So we're seeing strong growth, and it's becoming a larger part of our business. Specific to China, we see very significant opportunities in China.
I've actually visited China three times in my first six months in this role, and it's in our top 10 markets. It's greater than $500 million in sales, and we have about 5,000 people currently working for Merck in that market.
China now reports directly to me, which is the same where Japan and the United States report directly to me. So we have a very significant presence there.
It is part of our emerging markets strategy that I'd pay significant attention to, and we're very excited about the future prospects in that market but all of the emerging markets, frankly.
Operator
Our next question comes from David Risinger with Morgan Stanley.
David Risinger
With respect to your guidance for 2011, you've guided to revenue that is above the Street consensus and EPS that's below. And so it seems like your costs are higher than sell-side analysts expected for 2011.
Is that effectively because you are reinvesting the synergies? Is that what we should conclude?
And then second, with respect to driving top line growth beyond 2011, you've made that statement a number of times. So is what you're saying that you expect the top line to grow consistently beyond 2011 even in the face of the patent expiration of SINGULAIR and the buyback of the AstraZeneca partnership in 2012?
Kenneth Frazier
So on the first question around the year's EPS range. I think first of all, just to remind you, Peter Kellogg pointed out that there's a $0.06 hit right there because of Venezuela devaluation.
Overall, I would say though you're correct. We are reinvesting some of the synergies in 2011.
We have I think very good plans about taking costs out of the company where we think it creates less value, but we think there's value in investing across our portfolio, both our product portfolio and our geographic portfolio. As it relates to our aspiration for top line growth, that's an aspiration across a number of years.
We're not making a specific comment about the year in which SINGULAIR goes off patent. But what's in the portfolio, the underlying portfolio is growing strongly now.
It's growing strongly despite the fact that we've gone through a period of disruption and taking out a huge amount of resources out of the commercial part of the business. We think it's the right time to invest in our pipeline and our product portfolio.
Peter Kellogg
I think the other question you asked was relationship -- we're really not issuing guidance beyond 2011, so I just want to be careful and be clear about that. But beyond that, we have highlighted that over time, we believe we can grow the top line as Ken said.
We also believe we'll definitely get the value capture element that we've always targeted and probably more. We really have gotten off to a very great start in the first year.
We will make some reinvestments. But we did also comment that one of our goals is to have good P&L leverage over time, and so to have the bottom line growing faster than the top line, and that's a good formula.
Now we aren't trying to pin down any one year because, obviously, it's a somewhat volatile environment, but over time, that is clearly what we're driving for. And I would think 2011 is a first start proxy to see low to mid-single digit top line growth and high single digit EPS growth really indicates -- and it's a year we're investing -- indicates that we're trying to read this together.
Adam Schechter
And David, the way I also think about is if you look at our key growth drivers, JANUVIA, JANUMET, ISENTRESS, REMICADE, we're growing very significantly in those products and we're going to continue to support those products, and we expect to continue to be able to grow those products. But as I mentioned before, we're also focusing on the next 10 products or next 15 products.
And every market that visit, I don't only focus now on the key growth drivers in those markets as they exist today. We take a look at products that you wouldn't normally necessarily be tracking because in every market, the next 10 products might be different than the first five or six.
So we believe that there is opportunity for growth in our expanded portfolio across the products that we have in markets today. So we're really not only spending time on the growth drivers that you would look at routinely, but we're spending time in each market on other potential growth drivers.
And then the third lever, obviously, is the launches. And we feel that with DULERA, with boceprevir coming, with BRIDION, with some of the launches we have in Japan, that we have real opportunities.
In fact, if you look at 2010, our new product launches were over $650 million. If you look at just the fourth quarter, the new product launches were very significant as well.
So we're going to continue to invest in those.
Operator
Our next question comes from Steve Scala with Cowen.
Steve Scala
First, the release states that you're pulling 2009 to '13 EPS guidance, but to the best of my recollection, Merck has 2013 pretax margin guidance of up to 40%. The release doesn't speak to that one way or the other, so I'm wondering if you could shed light on that.
And then secondly, on TRACER, I don't know if you said Peter Kim was on the line. But the trial was designed assuming an 18% projected placebo response rate, and I'm just wondering if Merck believes the selection of that 18% placebo response rate was a good choice.
Or do you think the actual rate is likely higher such as 20% or lower such as 15%?
Kenneth Frazier
So Peter Kim is not here today, and I can't get into the math that you just described. So I'll turn it over to Peter Kellogg with respect to your other question.
Peter Kellogg
So at the time of the merger, we announced kind of the guidance elements that we were shooting for. Some of them were financial, some of them were profiling how we thought the P&L might evolve.
Obviously, a lot's happened since that time. We continue to focus on our pretax margin.
However, we have not been updating that particular element of guidance since the original merger. And at this point, that is not within the element of guidance that we've been reiterating.
That said, I don't want to leave the wrong impression. Clearly, we are as we've said, continuing to focus on driving the top line and driving the bottom line faster.
And we will get P&L leverage that would naturally drive our pretax margin up. The other piece I would just take into consideration is that we will have some elements in our P&L that move around if we complete the M1L [ph] joint venture and then have equity income on the P&L, and that will drive some changes in our pretax margin as well.
So there's a lot of moving parts. But nonetheless, I wouldn't take away that we're not focused on value capture in any way that's different than we were originally.
We were trying to initially give some sense that we were trying to drive the margins up significantly from where we were, and we're still trying to do that. But we haven't been reiterating that particular element of guidance since then just because of the number of changes occurring in the external environment, in the pipeline and also conversely, just sort of depends on how a few other factors play out in the future.
Operator
Our next question comes from Seamus Fernandez with Leerink Swann.
Seamus Fernandez
So just in terms of the thoughts around, again, wanting to know a little bit more about the long-term guidance. There were two elements that we haven't really discussed.
One aspect of the long-term guidance, which was not apparently included in the top line or the bottom line expectations of a CAGR in the high single digits from 2009 to 2013 was REMICADE and SIMPONI. When I incorporate, that's clearly incorporated into my model and I'm still seeing challenges there.
What are your statements with regard to at least how we should be thinking about that? Has that not really changed in terms of REMICADE, SIMPONI?
And then the other element of the guidance that I just wanted to, at least the original guidance that would be helpful to have clarification on, was the expectation for roughly $15 billion of operating cash flow to my recollection. How should we be thinking about the operating cash flow metrics in that regard?
Peter Kellogg
A couple pieces. One, in our 2011 guidance, I did indicate that obviously our guidance right now is to the next year and we did indicate that, that would include -- that's based on the assumption of retaining REMICADE and SIMPONI.
We have not given guidance what that would look like in the short term without. In terms of focus on cash flow generation, we are really not reiterating long-term guidance at this point so I won't get into that.
But I would say that there's no question that in this company, we are focused on generating cash. We do a good job today, and we're focused on returning that cash to shareholders.
And in fact, I think you would look even -- if you took a look at the first three quarters or the full year of 2010, we'd be a top-tier U.S. pharma company in terms of the amount of cash flow generated that was returned to shareholders, so I think we're very proud.
Even this past year where we repurchased $1.6 billion of shares and maintained a dividend, that we've been a very high returner of the cash generated by the operating business and we intend to continue that. But we aren't maintaining long-term guidance.
I just don't want to give another long-term guidance comment.
Operator
Our last question comes from Tony Butler with Barclays Capital.
Charles Butler
Ken, I'm trying to balance two statements you made. One is about the right investment decisions and the second is Merck's focus on real innovation.
Given the context of 2011 R&D guidance of $8.1 billion to $8.5 billion, why keep betrixaban given the commitments already for outcomes trials that our ongoing? And I'm sorry, Peter, you may want to be pithy this time or more so.
Isn't there increasing pressure on gross margin for 2011 much like in this quarter just based on that mix?
Kenneth Frazier
So again, Peter Kim is not here to articulate his thinking about the particular program you referred to, betrixaban. I will say that the guidance that you see around our R&D spending is driven by the aggregate quality of what we have, the quantity of what we have, the size of the clinical trials.
And we are pleased to be in a period where we have 20 late-stage programs with a number of products that could yield innovative, medically important therapies.
Peter Kellogg
I will be pithy on the PGM. You're right; there are pressures that over time will help our PGM and there's pressures in the short-term that will have more pressure on our PGM.
We aren't giving guidance on it but yes, you're right. There are pressures that would push our PGM down in the short term.
Kenneth Frazier
Yes, in closing, let me just say to everyone, first of all, thank you for being on the call and for staying a little bit past the prescribed time. I just want to reassure you that as we go forward, it is our ambition to create value for shareholders.
We believe the way to do that over the longer term is to drive sustainable growth on the top line, continuing to gain important significant efficiencies in our cost structure, which will ultimately lead to strong bottom line growth. So I want to assure you that that's what my team is committed to, and we look forward to engaging you in future calls.
So thank you very much.
Alex Kelly
Thank you.
Operator
Thank you. This concludes the conference.
You may now disconnect.