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MRK > SEC Filings for MRK > Form 10-Q on 2-Nov-2009All Recent SEC Filings

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Form 10-Q for MERCK & CO INC


2-Nov-2009

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Merger Agreement with Schering-Plough Corporation In March 2009, Merck and Schering-Plough Corporation ("Schering-Plough") announced that their Boards of Directors unanimously approved a definitive merger agreement under which Merck and Schering-Plough will combine in a stock and cash transaction. The transaction is structured as a "reverse merger" in which Schering-Plough, renamed Merck, will continue as the surviving public corporation ("New Merck"). Under the terms of the agreement, each issued and outstanding share of Schering-Plough common stock will be converted into the right to receive a combination of $10.50 in cash and 0.5767 of a share of the common stock of New Merck. Each issued and outstanding share of Merck common stock will automatically be converted into a share of the common stock of New Merck. Based on the closing price of Merck stock on September 30, 2009, the value of the cash and stock consideration to be received by Schering-Plough shareholders is estimated to be $50 billion in the aggregate. The cash portion of the consideration, which is estimated to be approximately $18 billion, will be funded with a combination of existing cash, the sale or redemption of short-term investments and the issuance of debt. Upon completion of the merger, each issued and outstanding share of Schering-Plough 6% Mandatory Convertible Preferred Stock not converted in accordance with the preferred stock designations shall remain outstanding as one share of 6% Mandatory Convertible Preferred Stock of the newly combined company having the rights set forth in the New Merck certificate of incorporation. The transaction, which was approved by Merck and Schering-Plough shareholders, remains subject to the satisfaction of customary closing conditions and regulatory approvals. The transaction is expected to close in the fourth quarter of 2009. Operating Results
Sales
Worldwide sales were $6.05 billion for the third quarter of 2009, an increase of 2% compared with the third quarter of 2008, primarily attributable to a 2% favorable effect from volume and a 2% favorable effect from price changes, partially offset by a 3% unfavorable effect from foreign exchange. Sales growth was driven primarily by higher sales of Januvia and Janumet for the treatment of type 2 diabetes, Isentress, an antiretroviral therapy for the treatment of HIV infection, Zostavax, a vaccine to help prevent shingles (herpes zoster), Pneumovax, a vaccine to help prevent pneumococcal disease, and Singulair, a medicine indicated for the chronic treatment of asthma and the relief of symptoms of allergic rhinitis. These increases were partially offset by lower sales of Gardasil, a vaccine to help prevent cervical, vulvar and vaginal cancers, precancerous or dysplastic lesions, and genital warts caused by HPV types 6, 11, 16 and 18, Cosoptand Trusopt, ophthalmic products which lost U.S. market exclusivity in October 2008, and Fosamaxfor the treatment and prevention of osteoporosis. Fosamax and Fosamax Plus D lost market exclusivity for substantially all formulations in the United States in February 2008 and April 2008, respectively. Revenue during the third quarter of 2009 was also negatively impacted by lower revenue from the Company's relationship with AstraZeneca LP ("AZLP") and decreased sales of Cozaar/Hyzaar* for the treatment of hypertension.
Worldwide sales were $17.33 billion for the first nine months of 2009, a decline of 3% compared with the same period of 2008, primarily attributable to a 4% unfavorable effect from foreign exchange and a 1% unfavorable effect from volume, partially offset by a 2% favorable effect from price changes. The revenue decline largely reflects lower sales of Fosamax, Gardasil, Cosopt and Trusopt, and lower revenue from the Company's relationship with AZLP. Revenue was also negatively impacted by lower sales of RotaTeq, a vaccine to help protect against rotavirus gastroenteritis in infants and children, Primaxin for the treatment of bacterial infections and Zocor, the Company's statin for modifying cholesterol. These declines were partially offset by higher sales of Januviaand Janumet, Isentress, Singulair and Pneumovax.

* Cozaar and Hyzaar are registered trademarks of E.I. duPont de Nemours & Company, Wilmington, Delaware.

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Sales of the Company's products were as follows:

                                                      Three Months Ended                     Nine Months Ended
                                                        September 30,                          September 30,
($ in millions)                                    2009               2008                2009                2008

Pharmaceutical:
Singulair                                       $ 1,085.0          $ 1,029.3          $  3,399.7          $  3,214.6
Cozaar/Hyzaar                                       860.9              888.3             2,605.7             2,676.3
Januvia                                             491.1              378.5             1,364.3               984.4
Fosamax                                             276.1              353.9               814.9             1,234.8
Janumet                                             173.0              100.7               456.1               231.5
Zocor                                               141.2              157.2               419.3               513.1
Maxalt                                              144.3              136.4               418.3               388.3
Cosopt/Trusopt                                      123.4              208.6               369.5               627.4
Propecia                                            109.0              107.9               317.8               320.6
Arcoxia                                              90.5               96.8               259.7               294.1
Emend                                                82.0               68.2               228.0               193.3
Vasotec/Vaseretic                                    72.5               82.1               225.8               271.5
Proscar                                              67.2               80.9               218.5               251.9
Other pharmaceutical (1)                            476.5              519.1             1,446.5             1,734.2
Vaccine and infectious disease product
sales included in the Pharmaceutical
segment (2)                                         600.7              596.7             1,664.9             1,686.1

Pharmaceutical segment revenues                   4,793.4            4,804.6            14,209.0            14,622.1

Vaccines(3) and Infectious Diseases:
ProQuad/M-M-R II/Varivax                            461.5              430.4             1,035.9               973.8
Gardasil                                            311.3              401.0               841.5             1,117.1
RotaTeq                                             126.8              134.5               386.7               502.4
Zostavax                                             84.2               11.2               201.7               150.8
Hepatitis vaccines                                   45.7               36.2               109.0               107.9
Other vaccines                                      138.0               80.6               246.3               222.8
Primaxin                                            168.3              187.6               492.8               591.5
Isentress                                           197.2              107.3               517.6               231.1
Cancidas                                            154.7              147.9               442.2               457.4
Invanz                                               72.9               71.1               205.2               197.0
Crixivan/Stocrin                                     49.4               68.5               154.0               222.8
Other infectious disease                              7.0                6.3                22.9                 9.6
Vaccine and infectious disease product
sales included in the Pharmaceutical
segment (2)                                        (600.7 )           (596.7 )          (1,664.9 )          (1,686.1 )

Vaccines and Infectious Diseases segment
revenues                                          1,216.3            1,085.9             2,990.9             3,098.1

Other segment revenues(4)                            21.6               21.2                47.2                65.3

Total segment revenues                            6,031.3            5,911.7            17,247.1            17,785.5

Other (5)                                            18.4               32.2                87.7                32.4

                                                $ 6,049.7          $ 5,943.9          $ 17,334.8          $ 17,817.9

(1) Other pharmaceutical primarily includes sales of other human pharmaceutical products and revenue from the Company's relationship with AZLP primarily relating to sales of Nexium, as well as Prilosec. Revenue from AZLP was $339.8 million and $375.2 million for the third quarter of 2009 and 2008, respectively, and was $1,081.9 million and $1,235.7 million for the first nine months of 2009 and 2008, respectively.

(2) Sales of vaccine and infectious disease products by non-U.S. subsidiaries are included in the Pharmaceutical segment.

(3) These amounts do not reflect sales of vaccines sold in most major European markets through the Company's joint venture, Sanofi Pasteur MSD, the results of which are reflected in Equity income from affiliates. These amounts do, however, reflect supply sales to Sanofi Pasteur MSD.

(4) Includes other non-reportable human and animal health segments.

(5) Other revenues are primarily comprised of miscellaneous corporate revenues, sales related to divested products or businesses and other supply sales not included in segment results.

Sales are presented net of discounts and returns. The provision for discounts includes indirect customer discounts that occur when a contracted customer purchases directly through an intermediary wholesale purchaser, known as chargebacks, as well as indirectly in

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the form of rebates owed based upon definitive contractual agreements or legal requirements with private sector and public sector (Medicaid and Medicare Part D) benefit providers, after the final dispensing of the product by a pharmacy to a benefit plan participant. These discounts, in the aggregate, reduced revenues by $600.4 million and $529.7 million for the three months ended September 30, 2009 and 2008, respectively, and by $1,679.0 million and $1,581.7 million for the nine months ended September 30, 2009 and 2008, respectively. Inventory levels at key wholesalers for each of the Company's major pharmaceutical products are generally two weeks. Pharmaceutical Segment Revenues
Sales of the Pharmaceutical segment for the third quarter of 2009 were $4.79 billion, comparable to the third quarter of 2008. Sales of the Pharmaceutical segment declined 3% for the first nine months of 2009 to $14.21 billion compared with the corresponding period of 2008. These results reflect declines in Fosamax, Cosopt/Trusopt, lower supply sales to AZLP, and lower sales of Zocor,partially offset by growth in Januvia, Janumet and Singulair. In addition, foreign exchange negatively impacted sales in 2009 as compared with 2008.
Worldwide sales for Singulair were $1.09 billion for the third quarter of 2009, representing an increase of 5% over the third quarter of 2008. Sales for the first nine months of 2009 were $3.40 billion, an increase of 6% compared with the first nine months of 2008. Sales growth in both periods was driven by price increases and strong performance in Japan. Singulair continues to be the number one prescribed branded product in the U.S. respiratory market.
Global sales of Cozaar and Hyzaar were $860.9 million for the third quarter of 2009, a decrease of 3% compared with the third quarter of 2008. Sales for the first nine months of 2009 were $2.61 billion, a decline of 3% compared with the first nine months of 2008. The decline in both periods was driven in part by the unfavorable effect of foreign exchange, partially offset by the strong performance of Hyzaar in Japan (marketed as Preminent). Cozaar and Hyzaar are among the leading medicines in the angiotensin receptor blocker class. Global sales of Januvia, Merck's dipeptidyl peptidase-4 ("DPP-4") inhibitor for the treatment of type 2 diabetes, were $491.1 million in the third quarter of 2009, an increase of 30% compared with the third quarter of 2008. Sales for the first nine months of 2009 were $1.36 billion, an increase of 39% compared with the first nine months of 2008. DPP-4 inhibitors represent a class of prescription medications that improve blood sugar control in patients with type 2 diabetes by enhancing a natural body system called the incretin system, which helps to regulate glucose by affecting the beta cells and alpha cells in the pancreas. In the vast majority of markets where more than one DPP-4 inhibitor exists, sitagliptin is the market leader. Januvia recently received regulatory approval in Japan and China.
In June 2009, Merck received a positive opinion from the European Medicines Agency's Committee for Medicinal Products for Human Use ("CHMP") recommending restricted first line use of Januvia for the treatment of type 2 diabetes. With this positive opinion, the CHMP recommends that sitagliptin be indicated to improve glycemic control when diet and exercise alone do not provide adequate glycemic control and when metformin is inappropriate due to contraindications or intolerance. If this opinion is accepted by the European Commission ("EC"), sitagliptin will be the only diabetes treatment in the DPP-4 inhibitor class to have a restricted first line indication.
Worldwide sales of Janumet, Merck's oral antihyperglycemic agent that combines sitagliptin (Merck's DPP-4 inhibitor, Januvia) with metformin in a single tablet to target all three key defects of type 2 diabetes, were $173.0 million for the third quarter of 2009 compared with $100.7 million for the third quarter of 2008. Sales for the first nine months of 2009 were $456.1 million compared with $231.5 million for the same period of 2008. Janumet was initially approved as an adjunct to diet and exercise, to improve blood sugar control in adult patients with type 2 diabetes who are not adequately controlled on metformin or sitagliptin alone, or in patients already being treated with the combination of sitagliptin and metformin. In February 2008, Merck received U.S. Food and Drug Administration ("FDA") approval to market Janumet as an initial treatment for type 2 diabetes. In July 2008, Janumet was approved for marketing in the European Union ("EU"), Iceland and Norway.
In September 2009, Merck announced it received a positive opinion from the CHMP for Januvia tablets and Janumet tablets recommending their use as add-on to insulin for the treatment of type 2 diabetes. If adopted by the EC, sitagliptin will be the only diabetes treatment in the DPP-4 inhibitor class to have an indication for use as add-on to insulin in the EU. The labeling for both Januvia and Janumet state that they have not been studied in combination with insulin. In the United States, a supplemental New Drug Application that is similar to the European proposal concerning the use of Januvia and Janumet in combination with insulin has been accepted by the FDA and is currently under review. The use of Januvia and Janumet in combination with insulin is investigational in the United States.
Global sales for Fosamax and Fosamax Plus D (marketed as Fosavance throughout the EU and as Fosamacin Japan) were $276.1 million for the third quarter of 2009 and were $814.9 million for the first nine months of 2009, representing declines of 22% and 34%, respectively, over the comparable periods of 2008. Since substantially all formulations of these medicines have lost U.S. market exclusivity, the Company is experiencing a significant decline in sales in the United States within the Fosamax franchise and the

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Company expects such declines to continue. The Company has also lost market exclusivity for certain formulations in several major European markets. Sales of Cosopt and Trusopt declined 41% in both the third quarter and first nine months of 2009 compared with the corresponding periods of 2008. The patent that provided U.S. market exclusivity for Cosopt and Trusopt expired in October 2008. Cosopt has also lost market exclusivity in a number of major European markets. Trusopt will lose market exclusivity in a number of major European markets in April 2012.
Worldwide sales of Zocor declined 10% and 18% in the third quarter and first nine months of 2009, respectively, compared with the corresponding periods of 2008. Zocor lost U.S. market exclusivity in June 2006 and has also lost market exclusivity in all major international markets.
The patents that provide U.S. marketing exclusivity for Cozaar and Hyzaar expire in April 2010 and the patent that provides U.S. marketing exclusivity for Singulair expires in August 2012. The Company expects that within the two years following each product's respective patent expiration, it will lose substantially all U.S. sales of that product, with most of those declines coming in the first full year following patent expiration. Full year 2008 U.S. sales of Cozaar/Hyzaar were $1.2 billion and full year 2008 U.S. sales of Singulair were $2.8 billion. In addition, the Company anticipates that the patents for Cozaar, Hyzaar and Singulair will expire in a number of major European markets in March 2010, February 2010, and August 2012, respectively, and the Company expects sales of these products in those markets will decline significantly thereafter.
During the first quarter of 2009, Merck divested its U.S. marketing rights to the Timopticfranchise to Aton Pharma, Inc. The Timoptic franchise includes ophthalmic products to treat elevated intraocular pressure in patients with ocular hypertension or open-angle glaucoma.
In September 2009, Merck launched Saflutan (tafluprost) in the United Kingdom and Spain, and additional launches in other countries are expected over the next several months, pending regulatory approvals. Saflutan is a preservative free, synthetic analogue of the prostaglandin F2†for the reduction of elevated intraocular pressure in appropriate patients with primary open-angle glaucoma and ocular hypertension. Tafluprost is in Phase III development in the United States. In April 2009, Merck and Santen Pharmaceutical Co., Ltd. ("Santen") announced a worldwide licensing agreement for tafluprost (see "Research and Development Update" below).
In June 2009, Merck began launching Tredaptive (extended-release niacin/laropiprant) in international markets and as of the third quarter the Company has launched in 13 countries including Mexico, the United Kingdom, Spain and Germany. Tredaptive is a lipid-modifying therapy for patients with mixed dyslipidemia and primary hypercholesterolemia. Tredaptive, also known by the trademark of Cordaptive in some places, is now approved in 44 countries outside the United States. In the United States, it remains investigational. Vaccines and Infectious Diseases Segment Revenues Sales of the Vaccines and Infectious Diseases segment grew 12% to $1.22 billion in the third quarter of 2009 primarily driven by higher sales of Zostavax, Pneumovax, Isentress and the pediatric formulation of Vaqta, partially offset by lower sales of Gardasil. Sales of the Vaccines and Infectious Diseases segment declined 3% to $2.99 billion in the first nine months of 2009 compared with the same periods of 2008 primarily due to lower sales of Gardasil and RotaTeq, partially offset by higher sales of Isentress, Pneumovax, Varivax, and the pediatric formulation of Vaqta.
The following discussion of vaccine and infectious disease product sales includes total vaccine and infectious disease product sales, the majority of which are included in the Vaccines and Infectious Diseases segment and the remainder, representing sales of these products by non-U.S. subsidiaries, are included in the Pharmaceutical segment. These amounts do not reflect sales of vaccines sold in most major European markets through Sanofi Pasteur MSD ("SPMSD"), the Company's joint venture with Sanofi Pasteur, the results of which are reflected in Equity income from affiliates (see "Selected Joint Venture and Affiliate Information" below). Supply sales to SPMSD, however, are reflected in Vaccines and Infectious Diseases segment revenues.
Worldwide sales of Gardasil, as recorded by Merck, were $311.3 million for the third quarter of 2009, a decline of 22% compared with the third quarter of 2008 and were $841.5 million for the first nine months of 2009, a decline of 25% over the comparable period of 2008. Gardasil, the world's top-selling human papillomavirus ("HPV") vaccine is indicated for girls and women nine through 26 years of age for the prevention of cervical, vulvar and vaginal cancers, precancerous or dysplastic lesions, and genital warts caused by HPV types 6, 11, 16 and 18. Sales performance was driven largely by declines in the United States which continues to be affected by the saturation of the 13 to 18 year-old female cohort due to rapid early uptake, and ongoing challenges to vaccinating the 19 to 26 female age group.
In October 2009, Merck announced that the FDA approved Gardasil for use in boys and men 9 through 26 years of age for the prevention of genital warts caused by HPV types 6 and 11, making Gardasilthe only HPV vaccine approved for use in males. Later

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in October 2009, the Company announced that the U.S. Centers for Disease Control and Prevention's ("CDC's") Advisory Committee on Immunization Practices ("ACIP") supports the permissive use of Gardasil for boys and young men ages 9 to 26, which means that Gardasil may be given to males ages 9 to 26 to reduce the likelihood of acquiring genital warts at the discretion of the patient's health care provider. The ACIP also voted to recommend that funding be provided for the use of Gardasil in males through the Vaccines for Children ("VFC") program. For females, the ACIP also voted to recommend vaccination with either the bivalent or the quadrivalent HPV vaccine for the prevention of HPV 16 and 18 related cervical cancers, precancers and dysplastic lesions, and recommended vaccination with the quadrivalent HPV vaccine, Gardasil, for the prevention of cervical, vulvar and vaginal cancers, precancers and dysplastic lesions due to HPV types 16 or 18, and for prevention of genital warts due to HPV types 6 or 11.
In January 2009, the FDA issued a second complete response letter regarding the sBLA for the use of Gardasil in women ages 27 though 45. The agency completed its review of the response that Merck provided in July 2008 to the FDA's first complete response letter issued in June 2008 and has recommended that Merck submit additional data when the 48 month study has been completed. The initial sBLA included data collected through an average of 24 months from enrollment into the study, which is when the number of pre-specified endpoints had been met. Following a review of the final results of the study, Merck anticipates providing a response to the FDA in the fourth quarter of 2009. The complete response letter does not affect current indications for Gardasil in females ages 9 through 26.
In May 2009, the Company announced Gardasil had been awarded World Health Organization ("WHO") pre-qualification. Gardasil is the first cervical cancer vaccine to receive WHO pre-qualification. WHO pre-qualification means that Gardasil is now eligible for procurement by the United Nations Children's Fund and other United Nations agencies, including the Pan American Health Organization, for use in national immunization programs.
The Company has received regulatory approvals in the United States and certain other markets to increase its manufacturing capacity for varicella zoster virus ("VZV")-containing vaccines. The Company is manufacturing bulk varicella and is producing doses of Varivax and Zostavax consistent with product demand. ProQuad, the Company's combination vaccine that helps protect against measles, mumps, rubella and chickenpox, one of the VZV-containing vaccines, is currently not available for ordering; however, orders have been transitioned, as appropriate, to M-M-R II and Varivax. Total sales as recorded by Merck for ProQuad were $9.5 million for the first nine months of 2008.
Merck's sales of Varivax, the Company's vaccine for the prevention of chickenpox (varicella), were $356.3 million for the third quarter of 2009 compared with $336.7 million for the third quarter of 2008 and were $777.3 million for the first nine months of 2009 compared with $710.6 million for the first nine months of 2008. Varivax is currently the only vaccine available in the United States to help protect against chickenpox due to the unavailability of ProQuad. Merck's sales of M-M-R II, a vaccine to help protect against measles, mumps, and rubella, were $105.5 million for the third quarter of 2009 compared with $93.9 million for the third quarter of 2008 and were $260.8 million for the first nine months of 2009 compared with $253.7 million for the first nine months of 2008. Combined sales of ProQuad, M-M-R II and Varivax increased 7% in the third quarter of 2009 and increased 6% for the first nine months of 2009 compared with the same periods of 2008.
RotaTeq achieved worldwide sales as recorded by Merck of $126.8 million for the third quarter of 2009, a decline of 6% compared with the third quarter of 2008 and were $386.7 million for the first nine months of 2009, a decrease of 23% compared with the same period in 2008. During the nine months ended September 30, 2008, the Company recorded $54 million in revenue as a result of government purchases for the CDC's Strategic National Stockpile. RotaTeq is experiencing moderate impact from competition in the United States, with a greater impact in the public sector.
Sales of Zostavax, as recorded by Merck, were $84.2 million for the third quarter of 2009 as compared with $11.2 million in the third quarter of 2008. Sales for the first nine months of 2009 were $201.7 million compared with $150.8 million for the comparable period of 2008. Sales performance in 2009 and 2008 was affected by supply issues. In early June 2009, the Company returned to normal shipping schedules for Zostavax.
Sales of Pneumovax, included in Other vaccines, were $129.7 million for the third quarter of 2009 compared with $57.6 million for the third quarter of 2008 and were $217.7 million for the first nine months of 2009 compared with $137.0 million for the same period of 2008 due to increased demand.
Sales of Primaxin were $168.3 million in the third quarter of 2009, a decline of 10% compared with the third quarter of 2008 and were $492.8 million for the first nine months of 2009, a decline of 17% compared with the same period of 2008. These results reflect competitive pressures, and for the nine month period also reflect limited supply constraints. Patents on Primaxin have expired worldwide. Accordingly, the Company is experiencing a significant decline in sales of this product and the Company expects the decline to continue. Worldwide sales for Isentress were $197.2 million in the third quarter of 2009 compared with $107.3 million for the third quarter of 2008 and were $517.6 million for the first nine months of 2009 compared with $231.1 million for the first nine months of 2008.

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