Merck & Co., Inc. (MRK) Q2 2014 Earnings Report, Transcript and Summary

Good day everyone, and welcome to Merck’s Second Quarter 2014 Earnings Conference Call. Today’s call is being recorded. At this time I’d like to turn the call over to Joseph Romanelli, Vice President of Investor Relations. Please go ahead.

Thank you, Jacky and good morning everyone. We’d also like to say good afternoon and good evening to everyone listening outside the United States. Welcome to Merck’s second quarter 2014 conference call. Before I turn the call over to Ken, I want to point out just a couple of items. First of all there are a number of items in the GAAP results, such as acquisition-related charges, restructuring costs, and certain other items. You should note that we have excluded those items in our non-GAAP reconciliation tables and you can see them in our press release in table two. This will give you a better sense of our underlying performance. There are three tables in the press release. The first table provides the GAAP results. Table number two reconciles our GAAP P&L to the non-GAAP results for the first quarter and table three provides the sales performance for the company’s business units and our products both on a reported basis and excluding exchange. During the call we will be referring to table two when we discuss the P&L and table three when we talk about revenue performance. Finally I would like to remind you that some of the statements we make during today’s call may be considered forward-looking statements within the meaning of the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are based upon Merck’s current beliefs and are subject to significant risks and uncertainties. If underlying assumptions prove inaccurate or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements. The company’s SEC filings, including Item 1A in the 2013 10-K, identify 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 made this morning. Merck undertakes no obligation to publicly update any forward-looking statement. Our SEC filings can be found on the website at merck.com and you can also find our earnings release and all the tables there as well. Now this morning, I’m joined by Ken Frazier, our Chairman and CEO; Rob Davis, our CFO; Adam Schechter, Head of Global Human Health; and Dr. Roger Perlmutter, Head of Merck Research Labs. So with that I like to introduce Ken Frazier. Ken?

Thank you, Joe. Good morning everyone, and thank you all for joining the call today. Our performance this quarter reflects our continuing progress towards transforming Merck and building a platform for future growth and innovation. Our underlying portfolio is growing and we are particularly pleased to have reported solid growth in our top five brands. We’ve now delivered a strong first half of the year which we believe positions us well to deliver on our full year non-GAAP EPS guidance. I’m excited that as we move into the second half of the year we’re preparing for a series of promising product launches and data presentation. These represent near and longer term opportunities that will allow Merck to drive value for shareholders and society. They include pembrolizumab our Anti-PD-1 Antibody. New treatment options for hepatitis C; Zontivity for post-MI or PAD patients; Sugammadex for the reversal of neuromuscular blockade; suvorexant for the treatment of insomnia; odanacatib for the treatment of osteoporosis; and V503 or 9-valent HPV vaccine. Importantly each of these candidates underscores Merck’s commitment to translating cutting-edge science into medicines and vaccines that have meaningful differentiated attributes. Additionally, we represent the kind of innovation that while making a potentially significant difference to patients also can provide strong value to payers, providers and healthcare systems. This quarter we further sharpened our commercial and R&D focus by continuing to rigorously prioritize our portfolio to ensure that all of our businesses have the potential to be market leaders and create value for shareholders. This approach led us to enter into an agreement with Bayer for the sale of our consumer care business for $14.2 billion and concomitantly to establish a worldwide collaboration with Bayer to develop and market, Adempas, a novel sGC modulator for the treatment of pulmonary arterial hypertension as well as other novel compounds in development. We also entered into an agreement to acquire Idenix Pharmaceuticals and its promising portfolio of hepatitis C candidates. These candidates will both complement our hepatitis C therapies currently in development and advance our work to develop highly effective once daily oral, pan-genotypic regimen that could benefit millions of patients around the world. We remain on track to complete this acquisition in the third quarter. These transactions are in keeping with our intention to be the premier research intensive bio pharmaceutical company by focusing on our highest potential growth opportunities and augmenting our pipeline with external assets that can create value and continue to provide an industry leading return of capital to our shareholders. In closing, as I said last quarter this is an exciting time at Merck as we prepare to commercialize the next wave of innovation coming out of our labs. This innovation represents a suite of near and longer term opportunities that will make a meaningful difference to patients, healthcare providers and payers while also creating value for our shareholders. And now I would like to turn the call over to Adam Schechter.

Thank you Ken, good morning everyone. This morning I will provide you with an overview of Global Human Health second quarter results. My commentary will be on a constant currency basis. Overall, sales reached $9.1 billion. Immunology, diabetes and vaccines continue to be areas of growth. However, these areas were offset by the continued impact of loss of exclusivity of several brands, product divestitures that we announced previously and the biannual price declines in Japan. As we move through 2014, I look forward to speaking with you about our core business and also multiple launches that we are planning for including pembrolizumab, suvorexant and others. I would now like to discuss results from some of our core product areas and I will start with the Januvia franchise. Januvia franchise had sales that reached $1.6 billion and grew 2% in the quarter. Growth was driven by our international markets which represent about half of our total sales. These markets grew 4% as a result of strong growth in Europe and the emerging markets. In the United States, sales declined 1% but volume growth continues to improve. In fact volume growth was 3% in the latest rolling four week average. We are encouraged by the volume trends that we are seeing. We expect that volume growth will continue in the U.S. over the remainder of 2014 as we defend our market share of nearly of 75% and we work to grow the DPP-4 class. Importantly, we continue to expect global sales growth of the Januvia franchise in 2014. Moving to Isentress, sales grew 10% driven by solid performance in Europe and emerging markets and some benefits from buying patterns in the U.S. Growth outside of the U.S. remains an important driver for the brand that help offset slight volume declines we are…

Thanks, Adam. It’s a pleasure to be here this morning for my first earnings call as CFO. We’ve had a strong first half of 2014 and our second quarter results demonstrated that we continue to sharpen our focus as a company. This morning I’ll provide additional color on our P&L and comment on our outlook for the rest of the year. My remarks will focus on our non-GAAP financials. On this basis, we earned $0.85 per share in the second quarter as compared to $0.84 per share in the prior quarter. Our EPS was driven by growth in key brands and effective cost management, which was partially offset by patent expiries and divestitures. Turning to the top line, total revenue in the quarter decreased 1% year over year. Foreign exchange did not have a material impact on the revenues this quarter. As Adam stated our sales in the pharmaceutical business were driven by solid growth in key brands. Animal health revenues increased $27 million, 3% year over year, excluding exchange or 9% if we also excluded the impact of the Zilmax suspension. Our Animal Health results were driven by the strong performance of bravecto, our newly launched oral flea and tick treatment for dogs in the US and Europe and the strong growth from our poultry business. Consumer care revenues increased $100 million or 20% excluding exchange. Sales in the quarter were driven by sales of Claritin and Coppertone. As you may recall, we had a onetime unfavorable adjustment to sales in the second quarter of 2013, which represents a single significant percentage of the positive year over year comparison this quarter. Excluding those actions, Consumer Care global sales grew 4% including 1 percentage point of negative impact due to foreign exchange. As a reminder, we expect the divestiture of…

During the second quarter, our R&D organization made substantial progress in advancing important new therapies. In April, our regulatory affairs group obtained FDA approval for Zontivity, the first thrombin receptor antagonist ever introduced into clinical practice. Zontivity has been shown to reduce the risk of cardiovascular death, heart attack stroke and the need for procedures to restore blood flow to the heart in patients with a history of heart attack or a peripheral arterial disease who are already receiving optimal therapy. Because of the increased bleeding risk associated with this anti-platelet therapy, Zontivity should not be used in patients with a history of stroke or transient ischemic attacks. We are excited about the potential for Zontivity to improve outcomes in patients at high risk for heart attacks and are working assiduously to make certain that heart specialists are aware of the clinical data supporting the use of Zontivity. In Europe, we’re engaged with the Committee on Medicinal Products for Human Use of the European Medicines Agency, who are evaluating our file for this product. Meanwhile, during the second quarter, we advanced a regulatory review of Suvorexant, our orexin antagonist for improving sleep in patients with insomnia. You will recall that we submitted our response to the FDA’s complete response later in February. We’ve worked closely with the agency and are now discussing features of product labeling. The PDUFA date for action by the FDA with respect to Suvorexant is August 14. We’re also making progress in supporting the regulatory review of V503 our 9 valent human papillomavirus vaccine designed to extend protection from the risk of cervical cancer across approximately 90% of vaccine genotypes associated with this disease. We are eager to bring this important new vaccine to world markets. During the second quarter, the FDA accepted our filing for…

Thank you Roger, and thank you Jackie. Before we open up the line to Q&A just a quick reminder to get to as many callers as possible please limit your questions to one or two that way we can try to make sure we cover everyone. Jackie, why don’t we go ahead and take the first caller.

Your first question comes from the line of John Boris from SunTrust Robinson Humphrey.

First question, Roger. Just possible to maybe articulate -- obviously there is an upcoming oncology meeting, ESMO, and then AASLD -- what we might be looking to see coming out of those conferences in terms of additional data that you could be presenting? Then a question for Ken and Rob. Certainly been some speculation in the press about divestiture of additional non-core late-lifecycle pharma-type assets. Can you walk us through where you might be within that process and, upon a sale of such assets, what you might be using the proceeds for?

John, with respect to ASMO we have submitted a substantial number of abstracts but so far we don’t know exactly which ones of those will be accepted, suffice it to say that we will have the opportunity to present a substantial amount of new data with respect to pembrolizumab and similarly for AASLD where as you know our C-SWIFT regimen that I mentioned which is a triplet regimen that will give us a sense of where we stand with respect to short duration, active therapy we won’t have all the data by then but we should have some available data and we will hope to have the opportunity to describe that to you at that time.

John, thanks for the question, so with respect to what’s been reported in the press we obviously can’t comment on those rumors but what I can say that as a broader question about focus and prioritization, we communicated last October that we’re going to look across the entire business to determine if assets might have more value outside the Company or as part of our business. So for example with these diversified brands as they are known inside Merck, those products can be very important to our business in the emerging market. We have to look at whether or not selling all or part of those brands is going to make sense to our business over the longer term. You have already seen us take action with respect to MCC, Saphris, ophthalmology, and some select diversified brands as part of our Aspen deal. And all I can say is that we’ll continue to evaluate opportunities as appropriate going forward.

Your next question comes from the line of Colin Bristow from Bank of America Merrill Lynch.

Morning. Thanks for taking the questions. On hep C, can you outline the development plan for the Idenix nuc and when we should next see data on this asset? Then perhaps, while we are on the nuc, can you remind us of what gave you comfort to acquire this, in light of the turbulent history with that class? Then on M&A, can you just talk about your appetite for large-scale M&A, particularly in the context of a tax inversion? Thank you.

With respect to hep C, as you mentioned there is a turbulent history that you described for nucleoside polymerase inhibitors in hep C. What we’ve learned over time is that the structural features of those get one more comfort with respect to the safety characteristics and the Idenix nucleoside inhibitor has those characteristics as we learned. And in addition we had exposure to nearly 100 subjects and some of it for a reasonable period of time without evidence of significant hepato-toxicity so that gives us some confidence going forward; we of course also know as they presented the data that there is a very substantial reduction in viral burden across numerous genotypes using their nucleoside polymerase inhibitor. So in many respect to sort of the ideal nucleoside polymerase inhibitor we will be studying that in combination with ours just as soon as we can gain access to the molecule, but of course we don’t have access to it until the time that the deal actually closes. So that’s the general plan and we’ll hope of course to be able present quite a bit of data at AASLD as I mentioned.

And relating the other question on M&A I would say that Merck is not interested in pursuing a business development deal either solely or primarily for the specific purpose of tax inversion. Obviously every company takes a very different path to drive long term shareholder value. As we’ve said before, our goal is to be the premier research driven biopharmaceutical company; our strategy is built on innovation in the pipeline and so from our perspective that’s what we’re focusing on, delivering novel programs like our Anti-PD-1 program and our HCV program. We believe this is the best path for Merck to drive sustainable growth in shareholder value over the long term. So we are not focusing on a major consolidation of the industry type transaction as a preferred strategy. We continue to look for value added bolt on opportunity to augment our pipeline like Idenix.

Your next question comes from the line of Vamil Divan from Credit Suisse.

Thanks for taking the question. First, just on the DPP-4 side, it's interesting you mentioned you expect, I think you said, global growth in 2014 for the franchise, which, compared to where we were a few months or a year or so ago, would not really be news but interesting. Just thinking about how you would forecast that going forward, is that something again where we might see just flat or lowish single-digit growth like we saw this quarter? Or do you see any of the investments you and some of your competitors are making in regenerating the growth of that franchise to make more of an impact as we go forward here? Then the second question I just have, related to one of the other questions, in terms of future data later this year. Just curious about ASH and also the San Antonio breast convention, do you think you guys will have anything on immuno-oncology assets in those, either on the hematology side or on breast cancer, later in the year? Thanks.

This is Adam thanks for your question on the DPP-4 class. Let me give you some additional context on the Januvia franchise and where we’re standing. As I said before our second quarter sales were $1.6 billion which was 2% growth and that was from 4% growth outside the U.S. and minus 1% growth in the U.S. So let me focus on the U.S. first. We have always said that what’s most important is to watch TRx volume, there is going to be wholesale or buying pattern changes that occur over year and if you look at the second quarter this year we had a tough comparison to the second quarter last year which as you may recall we grew 9% over the prior year. So that’s what I always focus on, the underlying volume. The good news is that the TRx trends right now are more positive than they have been. We have 3% growth over the rolling four weeks and if you look at the past two weeks we actually had 4% growth versus the same week prior year. So we expect the growth in TRX to continue as we go to the second half of the year and that’s why we’re cautiously optimistic on the volume increases that we’re seeing in the United States. In the international markets we had good volume growth in Europe, Canada and emerging markets and we maintain our strong market leadership position. Those were partially offset a bit by the April 1st price reductions that occurred in Japan. When you look at the strength of our franchise we have maintained about 65% share globally and about a 75% share of the class in the U.S. So really is about getting patients to be considered for DPP-4s prior to sulfonylureas and that’s what we think we’re beginning to see some progress in the U.S. and remain cautiously optimistic as we expect growth for the second half of the year.

And with respect to presentations at ASH on the San Antonio breast cancer conference, we have studies in both hematologic malignancies and in breast cancer and we do expect that we’ll have an opportunity to present some of those results again the pembrolizumab program is far ranging. So we’re looking forward to those as well, of course they occur somewhat later in the year or be in the next year.

And Jackie could we turn it over to the next caller please.

Your next question comes from the line David Risinger from Morgan Stanley. David Risinger - Morgan Stanley Yes, thanks very much. My question is, could you just update us, please, on the expected readout timing, so when investors should expect to see a press release on the results of three cardiovascular trials, IMPROVE-IT, TECOS, and the anacetrapib Phase III? Thank you.

Dave it’s roger. With respect to improve we are expecting that the last patient visit will occur sometime in September, of course this is a very large study, more than 18,000 patients study conducted nearly a decade so it will take a long time to pull together all the data, clean the files have all the queries go out to the sites et cetera. But over a period of some weeks thereafter that will get done, the database log will take place and then we will analyze it and then of course top line data will be shared with you. The situation with TECOS is similar, except that their last patient visit is in December. So again we are not going to be able to share data from that and of course that it’s under supervision of an academic group that will do it until after that database has been cleaned up and all that’s done so that you will see next year. And then with respect to anacetrapib, there of course we are conducting interim analysis and the first interim analysis is not going to be available to us until the early part of next year, or sometime during the first half of next year is the expectation and we will share all of these things with you just as soon as we have them available.

Your next question comes from line of Jami Rubin from Goldman Sachs.

Adam, on pembrolizumab. Roger, just curious to know if, with the European filing, were you granted accelerated assessment? Can you give us a sense for timing of that approval? Adam, for you, can you just help to frame the market opportunity for pembro in the US? Patients resistant to Yervoy, what is the market opportunity size for that? What would you expect the launch to look like? And would you anticipate that there would be some off-label use? Thanks.

Yes, Jami for pembrolizumab in the EU, we are working with our repertoires there in order to get a closer assessment of what the timing will be for the filing. In Europe, there is a different strategy as you know in terms of the timing of assessment. So I can’t really speak to that, I think the best thing to plan for is a traditional standard review and we will let you know as we hear more from our repertoires, they’ve just accepted the file.

Hi, Jami this is Adam. So as we said before, we expect regulatory action by October 28 this year in U.S. and we are preparing for the launch obviously. We realize that with the label that we get from the FDA, we will have to be very clear on the appropriate utilization and where physicians need to use the product based upon the label that we get from the FDA which will be in ipi-refractory patients. So we are going to be very clear on the appropriate utilization of the product. Now if you look at physicians that prescribe Yervoy which is primarily for melanoma, you can see it’s a very small fraction of the total number of oncologists across the United States. And in fact if you look at the total number of oncologists, the ones that are really prescribing Yervoy are less than 15% to 20% of the total. So we are going to really focus in on the physicians that are prescribing Yervoy to really know who the ipi-refractory patients, where that will be seen and where we will be best able to reach them. We believe we will be able to get to each of those physicians within 7 to 10 days after the launch of the product. With regard to off label utilization, we will not promote nor will we do anything to encourage off-label utilization, however we realize in certain situations with cancer patients that that does occur. Our manufacturing facilities will be able to supply if need be the utilization and we have enough supply but we don’t look to try to encourage that, nor do we try to forecast what that can be. We just want to make sure if it happens that there is supply for it.

Your next question comes from the line of Mark Schoenebaum from ISI Group.

Maybe a couple for Roger, if I may. Also, welcome, Rob, to the call; it's nice to hear your voice. Roger, on hepatitis C, a lot of us on Wall Street, I think are waiting for the data that you might have at AASLD, which is looking at the doublet-plus-Sovaldi in a 4-week regimen. I would just love to get your thoughts -- I think everybody would love to get your thoughts on whether or not you think that generating high SVR rates at 4 weeks is a high-probability event. Just scientifically, what your thoughts around 4 weeks are? Then number two, I and at least some other Merck observers always felt like you guys have felt like it is at least a possibility you might be able to accelerate the pembro lung filing. I just, Roger, would love to get your updated comments on that, since I haven't heard you speak about it since the analyst meeting. Thanks so much.

Okay, Mark. First of all, with respect to the hep C data, we do expect that we will have a chance to share at least some of the data from C-SWIFT at the AASLD meeting. And my view is that there is a high likelihood actually that there will be good responses at four weeks in a triplet combination, based on the potency of the drugs that are being used and the information that we already have available from combination regimens that have a six-week end point. As you know, the determination of what optimal duration of therapy is for infectious diseases is often empirical, and we struggle with that, and we still look at those kinds of things, for example, for the question of how long one treats bacterial osteomyelitis is an example. And so, we don’t know what the ideal treatment regimen is, but my guess is that we can get to a four-week regimen, and that’s of course why we are doing the study and we are eager to see what the results look like. And with respect to pembrolizumab in lung, we have lot of opportunities to evaluate potential filing strategies, we have quite a number of ongoing studies in non-small cell lung cancer, we are not going to go through what that filing strategy could be, but as we see the data we are certainly working very closely with FDA to understand how we could get this drug to market sooner in fact the data supported it.

Thanks Mark. And Jackie, we would open up the line to next caller please.

Your next question comes from the line of Tim Anderson from Sanford Bernstein.

If I could just go back and clarify the answer to the question about M&A and potential targets, Ken, is it safe to assume that you are looking primarily at bolt-ons? That's the term you used in answering that other question. Second question is on Animal Health. Earlier in the year, you talked about having potentially very different outcomes with Consumer Health versus Animal Health. Should we assume that you are keeping the Animal Health business? Is that the safest assumption? Then last question is just Merck's opinion in general on the CTLA-4 antagonists and whether you view those as promising in terms of combining them with the PD-1s. You have at least one trial where you are looking at a combination regimen, I believe.

Thanks for the questions Tim. As we tried to say before, we are not interested in pursuing a major consolidation of the industry-type transaction as our preferred approach. We are much more focused on value added bolt-on opportunities and business developments that augments our pipeline, and I would say Idenix is an exemplar of that. I also think you should look in the future to see us continue to demonstrate that kind of value creating business development deal is really a priority for us as a company to augment on pipeline. Turning to Animal Health, when we made the consumer announcement, we also said that we plan to augment our Animal Health business with additional business development. We continue to look at this business as a key growth driver that has industry leadership, healthy margins, and a strong market outlook. So, we will look for opportunities to supplement our diverse portfolio in that business again in ways that create long-term shareholder value.

Yeah, with respect Tim to CTLA-4, as you know we have embarked upon a number of different combination studies using a variety of different sorts of molecules with pembrolizumab of standard chemotherapeutic regimens, oncolytic vaccines, as well as immunomodulatory agents, our owned and others, and CTLA-4 is in the mix. I think another question really will be how much additional efficacy do you get, and is the toxicity of the regimen tolerable, and I think there are concerns with respect to both of those, but there may be opportunities. We are just sort of eager to see the results, and no one should expect that the results are predictable with the new regimen until you’ve actually done the studies, that’s what we are going to do.

Great.

Thank you for the questions Tim, and Jackie, next caller.

Your next question comes from the line of Seamus Fernandez from Leerink.

Thanks very much for the questions. I actually have three for Roger. With regard to KEYNOTE-006 in melanoma, can you just update us on the timing? If there is an interim analysis, the timing of that? And how important, can you tell us, is comparative data of pembro versus ipi in the treatment-naive melanoma setting, and why this wouldn't happen very soon considering the pace at which your competitor is filing in melanoma? Second is pembro in lung cancer. Has the interim evaluation of response rates in KEYNOTE-010 yet occurred or are we waiting for that? I believe it says that there is a response rate evaluation. And can you just update us on whether or not those data could be provided to FDA for a potential early lung filing? Then lastly on C-SWIFT, when would you start or hope to start a triple combination with the Idenix nuc? And would you consider going head-to-head if C-SWIFT is meaningfully positive with the Idenix nuc? Thanks a lot.

Okay Seamus, great questions. First of all with respect KEYNOTE-006, we are expecting to have the data in February of next year, that’s what we have described, and we are moving along very well on that. With respect to the KEYNOTE-010 interim analysis, we will have an interim analysis for KEYNOTE-010. We do not have the data in front of us right now, and those data like all of our data particularly since we have a file under regulatory review, all of our data will be shared with the agency. That’s one of a number of options that we have looking at the potential for demonstrating to regulatory authorities that there is an opportunity to introduce pembrolizumab in non-small cell lung cancer. We’ll look carefully at all of those, and for C-SWIFT, again we will be presenting some of those data at AASLD. We will have the opportunity to study the Idenix compound once we gain access to it, and of course that depends upon the completion of the acquisition of Idenix. We will move just as quickly as we can, and yes of course, my expectation is that when we have access to the compound, if we are encouraged by those results, we will prepare to go head to head against any regimen because our belief is it’s going to be superior. That’s why we are doing the study.

And Jacky, next caller please.

Your next question comes from the line of Marc Goodman from UBS.

Good Morning, Roger. If you could talk about the progress you are making for the internal development of some of these non-PD-1 checkpoint inhibitors. Second, Adam, can you talk about emerging markets a little bit? China just seems to be a little weaker than we'd think it would be, and you mentioned some of the other countries, Eastern Europe. What is going on there and Mexico? Obviously, we know what is going on in Egypt. Then, for 2015, the formulary changes should be announced pretty soon. I was curious if you can maybe preview that a little bit. Are there any major changes that we should be expecting for 2015? And specifically, we're definitely focused on Januvia. Have you been as aggressive this year as last year to make sure you're maintaining that on formulary and not getting kicked off on the exclusionary formularies? Thanks.

So, Mark yes, with respect to other checkpoint approaches beyond pembrolizumab, we’ve mentioned the anti-GITR approach. Again, that’s a stimulatory agent and that program is just beginning. So, we are starting that program now, and we have numerous others that are moving along and heading towards clinical trials. So a lot of good progress have been made in characterizing those agents. And in particular, in identifying those that we think are most promising based on a set of clinical samples and pre-clinical studies that we can do, so we are doing quite well on those and looking forward to seeing the data as we go forward.

And Mark, this is Adam. With regard to emerging markets, we had 2% growth ex-Forex. And as I said in the past, there are certain things that happen in terms of timing of tenders and lumpiness in the emerging market business. But in addition to that, we are seeing some pressure in Egypt but also in Eastern Europe, in the Ukraine for example. At the same time, we are seeing strength in certain markets like Turkey and Brazil. We continue to believe that emerging markets will be growth drivers for us. We continue to invest significantly across the emerging markets. And if you look at China, the 6% growth actually is a bit better than the growth we’ve had in the past couple of quarters, and we expect that China will continue to be a good growth driver for us in the second half of the year. In addition, Mexico, we believe will be an accelerator for us in the second half of the year. So although, this quarter was a little bit lumpy versus other quarters, we expect that we will have good growth in the emerging markets. With regard to formulary changes in the U.S., those are still in progress as we speak. We have had very good access capabilities across managed care for the portfolio of products that we have in United States, and we continue to work very closely with our managed care customers, and we expect that in 2015 we will have good formulary access for Januvia and other products as well. It’s too early to have exact numbers on access, but overall, we feel that things are moving forward in a good way.

Your next question comes from the line of Alex Arfaei from BMO Capital Markets.

Good morning. Thank you for taking the questions and congrats on a good quarter. Adam, could you provide us a little bit more color on Remicade and Simponi? Both were very strong. Just wondering if you could just talk about the key drivers in the major markets and also what kind of penetration you are seeing from the biosimilar. I apologize if you mentioned this already, but on Gardasil in Japan, I believe there were some safety concerns. I am just wondering if there has been any update on that. Thank you.

So let me start with Remicade and Simponi. So we had combined growth of the franchise of 15% excluding Forex. If you look more specifically, Simponi grew 37% and Remicade grew 9%. We continue to see strength as we are launching Simponi around the world, and if you look at our growth for Simponi, it’s faster than any of the other anti-TNFs in the marketplace. As we continue to launch, we are seeing increased market share, patient days of therapy, and penetration rates with the UC indication that we have for Simponi as well. As you look at Remicade, we continue to have good growth, but it’s driven by the gastro indications. And if you look in about 20% of the smaller European markets, biosimilars are available. Up until now, we’ve been very aggressive and we’ve been able to maintain a good bit of our share despite the entry of the biosimilars. It will continue to be tough. We continue to expect increase in competition from the biosimilars, but we have been very successful to date, and we will continue to be successful we believe as we move forward. But the real growth driver as we move forward is going to be SIMPONI particularly in markets where biosimilars of Remicade are available. If you look at Gardasil, there was last year suspended promotion in Japan and that occurred in 2013, and it was due to a government decision that they made. We continue to believe in the large amount of safety data we have for Gardasil, and we continue to work with the government in order to see how they can move forward to have the proactive recommendation moving forward, and we are excited about both HPV vaccines and also the launch of V503 as we move forward. The second thing I’d say is that we will be lapping the Japan issue in the second half of this year. So we expect in the second half we won’t have that as a reduction in the ability to grow Gardasil because we are lapping in June.

Your next question comes from the line of Jeff Holford from Jefferies.

Give this maybe to Roger. Your latest thoughts on your combination strategy in immunotherapy, and whether you think you will need to acquire or make more exclusive in-licensing deals to support that strategy. Then just secondly, on [CART-I] (ph) immunotherapy, just give us a sense of your level of enthusiasm for this approach. Thank you.

Jeff, we’ve adopted the approach of looking as closely as possible at pembrolizumab monotherapy, because my view is that we need to understand how well pembrolizumab works as monotherapy before we can put into context how combinations might work. And to be clear, there is also a mechanistic issue to the extent that we understand how pembrolizumab actually works. We’ll do a better job of picking combinations. I don’t doubt the combinations will be used, that’s what happens in cancer therapy, the question is which ones, and one can argue that radiotherapy or conventional cytotoxics might be good or vaccines might be good or other checkpoint inhibitors, and to really sort that out, we need to understand what’s the base of monotherapy and then to understand what mechanistic improvements can we engineer to actually drive higher response rates and more durability beyond what we already have. So we’re looking at all of those things. We are doing strategic combinations in the clinic based on what we see pre-clinically. I don’t see right now a need for us to acquire other molecules for combinations, but I do not have any hesitation about acquiring them either through licensing or through acquisition if that turns out to be the right thing to do. So, we’re definitely going to move forward with those kinds of programs, and with respect to the CAR approach, I think in the setting of hematologic malignancy for a certain number of individuals, there is no doubt that engineering of T-cells, introducing them into patients can have a dramatic effect. I think we don’t know yet from the limited studies that have been published of what the balance of efficacy and safety might be and whether that approach will have a greater breadth in, for example, solid tumors. Time will tell, that work is being pursued in other organizations and of course largely in academic centers, and we’re certainly interested in following them.

Okay, great, thanks Jeff. Jacky I think we have time for two more callers.

Your next question comes from the line of Steve Scala from Cowen. Steve Scala - Cowen Thank you. I have two questions. First for Dr. Perlmutter, should Merck look at and file the Phase II subset of KEYNOTE-010? Would that in any way inhibit the ability to file the full Phase III data when the study concludes in September 2015? Then the second thing, the second question is: Is Merck prohibited in any way from purchasing the Novartis flu vaccines business and selling flu vaccines on a global basis, given the vaccines JV with Sanofi, since they are a major flu provider? Or is Merck not interested in flu? Thank you.

Okay. So first with respect to KEYNOTE-010, and more generally regulatory agencies are always interested in more data, so are we, so as we have more data available, we make those data available to FDA and other regulatory agencies, and there is prohibition based on -- for example, an early filing if that were to be performed on coming back with subsequent filings. So, in general, without getting into details, there is nothing about early strategic approach that limits what you can do later if that’s the gist of your question.

And with regard to flu vaccine, outside of the EU where we have the JV, we have freedom to operate within the JV area, we have to work with the JV to see if it is a possibility. Flu is of interest in certain areas, but it’s not something that we have aggressively pursued in the past.

Great, thanks Steve. And Jackie, I think we have time for one last call.

Your final question comes from the line of Chris Schott from JPMorgan. Chris Schott - JPMorgan Just two here. First I just would love to get your updated thoughts on the HCV market and the durability of that opportunity. I guess, based on the rapid adoption of Sovaldi this year, does that change your view at all in terms of the HCV adoption curve over time? The second question, it is a follow-up on the established products unit, and I don't know if it's the one you will answer, but what are the factors that weigh into a decision here? I guess my question is how much of this is based on the performance and health of Merck's core business and pipeline, so continued pipeline success would suggest a greater likelihood of further divestitures versus a decision on that unit that is solely based on the value you believe you could achieve for those assets in the market. Thanks so much.

Let me start with the HCV market, and the HCV market is a very large market in the United States, but also globally, and although there has been success from competition there recently, we still believe there will be a significant amount of potential for additional agents moving into the future, particularly shorter-acting agents. There is 3 million patients if you look at the number of patients in the U.S. alone, and in fact only a certain number of patients can get through the physicians that treat hepatitis C in any point of time. Also, if you look, we believe that you can only get about 90,000 patients through the system in a given year. So when you have 2 million patients and you’ve got 90,000 to 100,000 go through the year, it tells you you’re going to have a market for quite some time. In addition to that, there will be a cirrhosis wave that we believe will occur over the years to patients that have HCV and then develop into cirrhotic patients, so there will be a rational reason to treat these patients as they go through the system overtime. So, we believe in the long term growth for this market. With regard to diversified brands, we look at the diversified brands in a global basis, and we look at brands that fit into our therapeutic categories, so for example, we have a primary care business and we have diversified brands in primary care and we are in the physicians’ offices any way. There is reason for us to continue to maintain those brands. On the other hand, when we look at ophthalmology for example, we had brands that we weren’t in the office for any other reason, but for a few products for ophthalmology, we didn’t have any new products coming in the future in ophthalmology. We didn’t have a pipeline in ophthalmology. Therefore, it made sense for us to divest those products. Same thing with Saphris. We didn’t have a reason to call many of those physicians in the future based upon our pipeline. So we look at them as whether they fit into our core today or in the future, whether we have pipeline in the future for calling on those physicians that we’re calling on with those brands today, and of course we look at the potential growth of those particularly in the emerging markets.

Thanks Adam and Chris, thank you for your questions. And with that I’ll turn it over to Ken.

We had a strong first half, we are very reassured by the outlook for the full year. We have been able to reconfirm our top line guidance despite divestitures that we’ve been able to narrow our EPS guidance while covering the $0.69 dilution from the two deals we’ve talked about. What’s more important, what’s more critical, what’s more exciting for us is the innovative momentum in our pipeline, and we look forward to regulatory updates in the second half of the year with respect to pembro, suvorexant, and also filing odanacatib, Bridion, and another things in the second half of the year. This business is ultimately about innovation and we’re pleased that we’re seeing innovation momentum at Merck. Thank you very much.

This does conclude today’s conference call. You may now disconnect.