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MRK > SEC Filings for MRK > Form 10-Q on 8-Nov-2011All Recent SEC Filings

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Form 10-Q for MERCK & CO. INC.


8-Nov-2011

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Merger
On November 3, 2009, Merck & Co., Inc. ("Old Merck") and Schering-Plough Corporation ("Schering-Plough") merged (the "Merger"). In the Merger, Schering-Plough acquired all of the shares of Old Merck, which became a wholly owned subsidiary of Schering-Plough and was renamed Merck Sharp & Dohme Corp. Schering-Plough continued as the surviving public company and was renamed Merck & Co., Inc. ("New Merck" or the "Company"). However, for accounting purposes only, the Merger was treated as an acquisition with Old Merck considered the accounting acquirer. References in this report and in the accompanying financial statements to "Merck" for periods prior to the Merger refer to Old Merck and for periods after the completion of the Merger to New Merck. Arbitration Settlement
In April 2011, Merck and Johnson & Johnson ("J&J") reached agreement to amend the distribution rights to Remicade (infliximab) and Simponi (golimumab). This agreement concluded the arbitration proceeding J&J initiated in May 2009, requesting a ruling related to the distribution agreement following the announcement of the proposed merger between Merck and Schering-Plough. Under the terms of the amended distribution agreement, Merck relinquished exclusive marketing rights for Remicade and Simponi to J&J in territories including Canada, Central and South America, the Middle East, Africa and Asia Pacific effective July 1, 2011. Merck retained exclusive marketing rights throughout Europe, Russia and Turkey ("Retained Territories"). The Retained Territories represented approximately 70% of Merck's 2010 revenue of $2.8 billion from Remicade and Simponi. In addition, beginning July 1, 2011, all profits derived from Merck's exclusive distribution of the two products in the Retained Territories are being equally divided between Merck and J&J. Under the prior terms of the distribution agreement, the contribution income (profit) split, which was at 58% to Merck and 42% percent to J&J, would have declined for Merck and increased for J&J each year until 2014, when it would have been equally divided. J&J also received a one-time payment from Merck of $500 million in April 2011.
U.S. Health Care Reform Legislation
In 2010, the United States enacted major health care reform legislation. Various insurance market reforms began last year and will continue through full implementation in 2014. The new law is expected to expand access to health care to more than 32 million Americans by the end of the decade that did not previously have regular access to health care.
With respect to the effect of the law on the pharmaceutical industry, beginning in 2010, the law increased the mandated Medicaid rebate from 15.1% to 23.1%, expanded the rebate to Medicaid managed care utilization, and increased the types of entities eligible for the federal 340B drug discount program. The implementation of these provisions reduced revenues by approximately $44 million and $43 million in the third quarter of 2011 and 2010, respectively, and by $129 million and $120 million for the first nine months of 2011 and 2010, respectively.
Effective in 2011, the law also requires pharmaceutical manufacturers to pay a 50% discount on Medicare Part D utilization by beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-called "donut hole"). Approximately $39 million and $109 million was recorded as a reduction to revenue in the third quarter and first nine months of 2011, respectively, related to the estimated impact of this provision of health care reform.

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Also, beginning in 2011, pharmaceutical manufacturers are required to pay an annual health care reform fee. The total annual industry fee, which will be $2.5 billion in 2011, will be assessed on each company in proportion to its share of sales to certain government programs, such as Medicare and Medicaid. The Company's portion of the annual fee is payable no later than September 30 of the applicable calendar year and is not tax deductible. The liability related to the annual fee for 2011 was initially estimated by the Company to be $167 million and was recorded in full during the first quarter of 2011 with a corresponding offset to a deferred asset. This estimate was refined and revised downward by $5 million in the third quarter of 2011 to $162 million. The deferred asset is being amortized to Marketing and administrative expenses during 2011 on a straight-line basis (net of any revisions), therefore $37 million and $122 million of expense was recognized in the third quarter and first nine months of 2011, respectively. The preliminary invoice for this fee was received and paid by the Company in the third quarter of 2011. Acquisition
In May 2011, Merck completed the acquisition of Inspire Pharmaceuticals, Inc. ("Inspire"), a specialty pharmaceutical company focused on developing and commercializing ophthalmic products. Under the terms of the merger agreement, Merck acquired all outstanding shares of common stock of Inspire at a price of $5.00 per share in cash for a total of approximately $420 million. The transaction was accounted for as an acquisition of a business; accordingly, the assets acquired and liabilities assumed were recorded at their respective fair values as of the acquisition date. The determination of fair value requires management to make significant estimates and assumptions. In connection with the acquisition, substantially all of the purchase price was allocated to Inspire's product and product right intangible assets and related deferred tax liabilities, a deferred tax asset relating to Inspire's net operating loss carryforwards, and goodwill. Certain estimated values are not yet finalized and may be subject to change. The Company expects to finalize these amounts as soon as possible, but no later than one year from the acquisition date. This transaction closed on May 16, 2011, and accordingly, the results of operations of the acquired business have been included in the Company's results of operations beginning after the acquisition date. Pro forma financial information has not been included because Inspire's historical financial results are not significant when compared with the Company's financial results. Management Changes
In August 2011, Merck announced the appointment of Richard R. DeLuca Jr. as executive vice president and president, Merck Animal Health, effective September 15, 2011. In September 2011, Merck announced the appointment of Cuong Viet Do as chief strategy officer, effective October 3, 2011. Both Mr. DeLuca and Mr. Do report to Kenneth C. Frazier, Merck's president and chief executive officer, and serve on the Company's Executive Committee.
In October 2011, Merck announced that Richard T. Clark, chairman, will retire from the Company and the Merck board of directors effective December 1, 2011. The board elected Kenneth C. Frazier, Merck's president and chief executive officer, to serve as chairman following Mr. Clark's retirement. Other
In September 2011, Merck announced that it will launch "Merck for Mothers," a long-term effort with global health partners to create a world where no woman has to die from preventable complications of pregnancy and childbirth. The launch includes a 10-year, $500 million initiative that applies Merck's scientific and business expertise to making proven solutions more widely available, developing new technologies and improving public awareness, policy efforts and private sector engagement for maternal mortality. "Merck for Mothers" will focus on the two leading causes of maternal mortality (excessive and uncontrolled bleeding after childbirth, known as post-partum hemorrhage, and life-threatening high blood pressure during pregnancy, known as preeclampsia) as well as family planning, which is known to play an important role in reducing maternal mortality.

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Operating Results
Segment composition reflects certain managerial changes that have been implemented. Consumer Care product sales outside the United States and Canada, previously included in the Pharmaceutical segment, are now included in the Consumer Care segment. Segment disclosures for prior periods have been recast on a comparable basis with 2011.
Sales
Worldwide sales were $12.0 billion for the third quarter of 2011, an increase of 8% compared with the third quarter of 2010. Foreign exchange favorably affected global sales performance by 5% for the third quarter of 2011. The revenue increase largely reflects higher sales of Januvia(sitagliptin) and Janumet (sitagliptin/metformin HCI), Gardasil[human papillomavirus quadrivalent (types 6, 11, 16 and 18) vaccine, recombinant], Singulair(montelukast sodium), Zostavax (zoster vaccine live), RotaTeq (rotavirus vaccine, live, oral, pentavalent) and Isentress (raltegravir). Also contributing to revenue growth in the quarter were higher sales of Simponi, Zetia (ezetimibe), as well as increased sales of the Company's animal health products. These increases were partially offset by lower sales of Remicade due to the relinquishment of marketing rights in certain territories as a result of the arbitration settlement discussed above. Revenue was also negatively affected by lower sales of Caelyx for which the Company no longer has marketing rights, lower sales of ProQuad (measles, mumps, rubella and varicella virus vaccine live) and lower revenue from the Company's relationship with AstraZeneca LP ("AZLP").
Worldwide sales were $35.8 billion for the first nine months of 2011, an increase of 5% compared with the same period in 2010. Foreign exchange favorably affected global sales performance by 3% for the first nine months of 2011. The revenue increase largely reflects higher sales of Januvia and Janumet, Singulair, Isentress, Gardasil, Remicade, Simponi, Zetia, Zostavaxand RotaTeq, as well as increased sales of the Company's animal health products. These increases were partially offset by lower sales of Cozaar (losartan potassium) and Hyzaar (losartan potassium-hydrochlorothiazide), which lost patent protection in the United States in April 2010 and in a number of major European markets in March 2010, as well as lower sales of Caelyx and Subutex/Suboxone for which the Company no longer has marketing rights, and decreased sales of Varivax (varicella virus vaccine live).
While many of the Company's brands are experiencing positive growth trends in the European Union ("EU") during 2011, the environment in the EU continues to be challenging. Many countries have announced austerity measures, which include the implementation of pricing actions to reduce prices of generic and patented drugs. While the Company is taking steps to mitigate the impact in the EU, the austerity measures have negatively affected the Company's revenue performance in 2011 and the Company anticipates the austerity measures will continue to negatively affect revenue performance into 2012.

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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)                         2011          2010         2011          2010

   Pharmaceutical:
   Cardiovascular
   Zetia                                $      614     $    571     $   1,788     $  1,668
   Vytorin                                     469          485         1,407        1,452
   Integrilin                                   53           63           172          203
   Diabetes and Obesity
   Januvia                                     846          600         2,364        1,710
   Janumet                                     350          247           977          666
   Diversified Brands
   Cozaar/Hyzaar                               404          423         1,236        1,690
   Zocor                                       110          114           345          347
   Propecia                                    112          109           330          322
   Claritin Rx                                  55           53           240          210
   Remeron                                      65           50           181          160
   Vasotec/Vaseretic                            57           69           173          191
   Proscar                                      58           58           171          172
   Infectious Disease
   Isentress                                   343          278           972          777
   PegIntron                                   163          168           482          539
   Cancidas                                    150          135           476          437
   Primaxin                                    124          135           397          452
   Invanz                                      107           91           296          249
   Avelox                                       59           59           227          224
   Noxafil                                      61           52           171          150
   Crixivan/Stocrin                             56           49           151          148
   Rebetol                                      38           55           138          166
   Victrelis                                    31            -            53            -
   Neurosciences and Ophthalmology
   Maxalt                                      156          133           460          401
   Cosopt/Trusopt                              124          114           360          353
   Oncology
   Temodar                                     223          254           704          799
   Emend                                        98           91           305          268
   Intron A                                     47           50           143          155
   Respiratory and Immunology
   Singulair                                 1,336        1,215         4,018        3,638
   Remicade                                    561          661         2,156        2,004
   Nasonex                                     266          259           962          917
   Clarinex                                    128          131           492          486
   Arcoxia                                     108           94           321          284
   Simponi                                      74           27           203           55
   Asmanex                                      42           48           149          155
   Proventil                                    38           43           117          155
   Dulera                                       22            2            59            2
   Vaccines (1)
   Gardasil                                    445          316           935          768
   ProQuad/M-M-R II/Varivax                    391          434           927        1,093
   RotaTeq                                     184          119           457          350
   Pneumovax                                   133          110           276          220
   Zostavax                                    108           23           254          136
   Women's Health and Endocrine
   Fosamax                                     215          220           644          692
   NuvaRing                                    159          134           455          414
   Follistim AQ                                129          119           404          389
   Implanon                                     80           64           220          165
   Cerazette                                    74           56           199          160
   Other pharmaceutical (2)                    888          942         2,567        2,834

   Total Pharmaceutical segment sales       10,354        9,523        30,534       28,826

   Other segment sales (3)                   1,559        1,453         4,833        4,548

   Total segment sales                      11,913       10,976        35,367       33,374

   Other (4)                                   109          149           386          519

                                        $   12,022     $ 11,125     $  35,753     $ 33,893

(1) 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.

(2) Other pharmaceutical primarily includes sales of other human pharmaceutical products, including products within the franchises not listed separately.

(3) Reflects other non-reportable segments, including Animal Health and Consumer Care, and revenue from the Company's relationship with AZLP primarily relating to sales of Nexium, as well as Prilosec. Revenue from AZLP was $299 million and $345 million for the third quarter of 2011 and 2010, respectively, and was $928 million and $950 million for the first nine months of 2011 and 2010, respectively.

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

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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 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 $1.5 billion and $1.2 billion for the three months ended September 30, 2011 and 2010, respectively, and $4.0 billion and $3.5 billion for the nine months ended September 30, 2011 and 2010, respectively. Inventory levels at key U.S. wholesalers for each of the Company's major pharmaceutical products are generally less than one month.
Pharmaceutical Segment Revenues
Cardiovascular
Sales of Zetia (also marketed as Ezetrol outside the United States), a cholesterol-absorption inhibitor, were $614 million in the third quarter of 2011, an increase of 8% compared with the third quarter of 2010, and were $1.8 billion for the first nine months of 2011, an increase of 7% compared with the same period in 2010. These increases reflect favorable pricing in the United States, and higher sales in international markets due in part to the positive impact of foreign exchange, partially offset by volume declines in the United States. Sales of Vytorin(ezetimibe/simvastatin) (marketed outside the United States as Inegy), a combination product containing the active ingredients of both Zetia and Zocor (simvastatin), were $469 million and $1.4 billion for the third quarter and first nine months of 2011, respectively, representing declines of 3% compared with the same periods in 2010. These results reflect volume declines in the United States, partially offset by sales increases in international markets due in large part to the positive impact of foreign exchange.
Supplemental New Drug Applications ("sNDAs") for Vytorin and Zetia have been accepted for standard review by the U.S. Food and Drug Administration (the "FDA"). The sNDAs seek indications for Vytorin, and for Zetia when used in combination with simvastatin, for the prevention of major cardiovascular events in patients with chronic kidney disease. On November 2, 2011, the FDA's Endocrinologic and Metabolic Drugs Advisory Committee unanimously voted to recommend approval of the ezetimibe/simvastatin combination for use in patients with pre-dialysis chronic kidney disease based on the results of the Study of Heart and Renal Protection (SHARP) trial. The Committee's vote was mixed (with the majority not in favor) regarding whether there is sufficient evidence to support approval specifically for patients with end-stage renal disease who are receiving dialysis. The Committee's non-binding recommendation will be considered by the FDA in its assessment of these investigational uses for Vytorin and Zetia. Currently, the Company's sNDAs remain under review, with FDA action expected in the first quarter of 2012.
As previously disclosed, in early September 2011, Merck was advised that the IMPROVE-IT executive committee has decided to schedule the study's second interim analysis in the first quarter of 2012, rather than as previously anticipated in late 2011. As previously disclosed, the Data Safety Monitoring Board for IMPROVE-IT plans to conduct an interim analysis for efficacy when approximately 75% of the pre-specified (5,250) primary clinical endpoints have occurred. The study is fully enrolled and approximately 70% of its pre-specified events had been reported as of early September 2011.
In July 2011, Merck and Astellas US, LLC ("Astellas") entered into an agreement under which Merck acquired exclusive rights in Canada, Mexico and the United States to develop and commercialize the investigational intravenous formulation of vernakalant ("vernakalant i.v.") from Astellas. Under the terms of the agreement, Merck paid Astellas a de minimis upfront fee. In addition, Astellas will be eligible for milestone payments associated with
(i) development, (ii) regulatory approval as well as (iii) sales thresholds associated with vernakalant i.v. in Canada, Mexico and the United States. Astellas had been granted an exclusive license to develop and commercialize vernakalant i.v. in Canada, Mexico and the United States by Cardiome Pharma Corp ("Cardiome"). Under an agreement with Cardiome in 2009, Merck acquired exclusive rights outside of Canada, Mexico and the United States to vernakalant i.v., as well as exclusive worldwide rights to oral formulations of vernakalant. In September 2010, Merck was granted marketing approval in the EU, Iceland and Norway for vernakalant i.v. (marketed as Brinavess) for rapid conversion of recent onset atrial fibrillation to sinus rhythm in adults: for non-surgery patients with atrial fibrillation of seven days or less and for post-cardiac surgery patients with atrial fibrillation of three days or less. Diabetes and Obesity
Global sales of Januvia, Merck's dipeptidyl peptidase-4 ("DPP-4") inhibitor for the treatment of type 2 diabetes, were $846 million in the third quarter of 2011 and $2.4 billion for the first nine months of 2011, representing increases of 41% and 38%, respectively, compared with the same periods of 2010, reflecting growth in the United States, as well as in international markets, particularly in Japan and across Europe. 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.
Worldwide sales of Janumet, Merck's oral antihyperglycemic agent that combines sitagliptin (Januvia) with metformin in a single tablet to target all three key defects of type 2 diabetes, were $350 million for the third

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quarter of 2011, an increase of 42% compared with the third quarter of 2010, and were $977 million for the first nine months of 2011, an increase of 47% compared with the first nine months of 2010, reflecting growth both in the United States and internationally.
In October 2011, the FDA approved Juvisync (sitagliptin and simvastatin), a new treatment for type 2 diabetes that combines the glucose-lowering medication sitagliptin, the active component of Januvia, with the cholesterol-lowering medication Zocor. Juvisync is the first treatment option for health care providers to help patients who need the blood sugar-lowering benefits of a DPP-4 inhibitor and the cholesterol-lowering benefits of simvastatin, with the convenience of a single tablet once daily.
In July 2011, the Company received a Complete Response letter from the FDA for Janumet XR (MK-0431A XR), the Company's investigational extended-release formulation of Janumet, related to the resolution of pre-approval inspection issues. Merck has responded to the questions raised by the FDA and expects a response from the FDA in the first quarter of 2012. Diversified Brands
Merck's diversified brands are human health pharmaceutical products that are approaching the expiration of their marketing exclusivity or are no longer protected by patents in developed markets, but continue to be a core part of the Company's offering in other markets around the world.
Global sales of Cozaar and its companion agent Hyzaar (a combination of Cozaar and hydrochlorothiazide) for the treatment of hypertension declined 4% in the third quarter of 2011 and 27% in the first nine months of 2011 compared with the same periods in 2010. The patents that provided U.S. market exclusivity for Cozaar and Hyzaar expired in April 2010. In addition, Cozaarand Hyzaar lost patent protection in a number of major European markets in March 2010. Accordingly, the Company has experienced significant declines in Cozaar and Hyzaar sales and the Company expects the declines to continue.
Other products contained in the Diversified Brands franchise include among others, Zocor, a statin for modifying cholesterol; Propecia (finasteride), a product for the treatment of male pattern hair loss; prescription Claritin (loratadine) for the treatment of seasonal outdoor allergies and year-round indoor allergies; Remeron (mirtazapine), an antidepressant; Vasotec(enalapril maleate) and Vaseretic (enalapril maleate-hydrochlorothiazide) for hypertension and/or heart failure; and Proscar (finasteride), a urology product for the treatment of symptomatic benign prostate enlargement. Remeron lost market exclusivity in the United States in January 2010 and has also lost market exclusivity in most European markets.
Infectious Disease
Global sales of Isentress, an HIV integrase inhibitor for use in combination with other antiretroviral agents for the treatment of HIV-1 infection in treatment-nave and treatment-experienced adults, were $343 million in the third quarter of 2011, an increase of 23% compared with the third quarter of 2010, and were $972 million in the first nine months of 2011, an increase of 25% compared with the first nine months of 2010, reflecting positive performance in the United States and Europe due in part to the impact of foreign exchange. Isentress works by inhibiting the insertion of HIV DNA into human DNA by the integrase enzyme. Inhibiting integrase from performing this essential function helps to limit the ability of the virus to replicate and infect new cells.
Worldwide sales of PegIntron (peginterferon alpha-2b) for treating chronic hepatitis C were $163 million for the third quarter of 2011, a decline of 3% compared with the third quarter of 2010, and were $482 million for the first nine months of 2011, a decrease of 11% compared with the same period in 2010. The Company believes these declines were attributable in part to patient treatment being delayed by health care providers in anticipation of new therapeutic options becoming available.
In May 2011, the FDA approved Victrelis (boceprevir), the Company's innovative new oral medicine for the treatment of chronic hepatitis C. Victrelis is approved for the treatment of chronic hepatitis C genotype 1 infection, in combination with peginterferon alfa and ribavirin, in adult patients (18 years . . .

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