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MRK > SEC Filings for MRK > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for MERCK & CO. INC.

Form 10-Q for MERCK & CO. INC.


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Singulair Patent Expiries

The patent that provided U.S. market exclusivity for Singulair (montelukast sodium) expired in August 2012 and the Company is experiencing a significant and rapid decline in U.S. Singulair sales and the Company expects the decline to continue. In addition, the patent that provides market exclusivity for Singulair will expire in a number of major European markets in February 2013. The Company expects a significant and rapid reduction in sales thereafter in those markets. The patent that provides market exclusivity for Singulair in Japan will expire in 2016. For the full year of 2011, sales of Singulair were $3.5 billion in the United States, $724 million in Europe and $641 million in Japan.

U.S. Health Care Reform Legislation

In 2010, the United States enacted major health care reform legislation. Various market reforms advanced in 2011 and will continue through full implementation in 2014.

Effective in 2011, the law requires pharmaceutical manufacturers to pay a 50% discount to Medicare Part D beneficiaries when they are in the Medicare Part D coverage gap (i.e., the so-called "donut hole"). Approximately $37 million and $39 million was recorded as a reduction to revenue in the third quarter of 2012 and 2011, respectively, and $113 million and $109 million for the first nine months of 2012 and 2011, respectively, related to the estimated impact of this provision of health care reform.

Also, beginning in 2011, pharmaceutical manufacturers are required to pay an annual health care reform fee. The total annual industry fee, which was $2.5 billion in 2011 and will be $2.8 billion in 2012, is 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. Each year, the liability related to the annual fee is estimated by the Company and recorded in full during the first quarter with a corresponding offset to a deferred asset. The deferred asset is amortized to Marketing and administrative expenses on a straight-line basis (net of any revisions) during the year. The liability related to the annual fee recognized in 2012 was $190 million and for 2011 was $162 million. The Company recognized expenses of $48 million and $37 million for the third quarter of 2012 and 2011, respectively, and $143 million and $122 million for the first nine months of 2012 and 2011, respectively, related to this fee.

Arbitration Settlement

In April 2011, Merck and Johnson & Johnson ("J&J") reached an agreement to amend the agreement governing the distribution rights to Remicade (infliximab) and Simponi (golimumab). This agreement concluded the arbitration proceeding J&J initiated in May 2009. Under the terms of the amended distribution agreement, Merck relinquished 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 (the "Retained Territories"). 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. J&J also received a one-time payment from Merck of $500 million in April 2011.

Operating Results

Sales

Worldwide sales were $11.5 billion for the third quarter of 2012, a decline of 4% compared with the third quarter of 2011. The revenue decline in the third quarter was driven primarily by lower sales of Singulair. As noted above, the patent that provided U.S. market exclusivity for Singulair expired in August 2012 and the Company is experiencing a significant and rapid decline in U.S. Singulair sales. Foreign exchange unfavorably affected global sales performance by 4% for the third quarter of 2012. The revenue decline in the third quarter also reflects lower sales of Cozaar (losartan potassium), Hyzaar (losartan potassium hydrochlorothiazide), Remicade, Clarinex (desloratadine), Fosamax (alendronate sodium) and Vytorin (ezetimibe/simvastatin). These declines were partially offset by growth in Gardasil [human papillomavirus quadrivalent (types 6, 11, 16 and 18) vaccine, recombinant], Januvia (sitagliptin), Victrelis (boceprevir), Zostavax [Zoster Vaccine Live], Isentress (raltegravir) and Janumet (sitagliptin/metformin HCI).

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Global sales for the first nine months of 2012 were $35.5 billion, a decrease of 1% compared with the same period in 2011. Foreign exchange unfavorably affected global sales performance by 3% for the first nine months of 2012. The sales decline in the year-to-date period was driven primarily by lower sales of Singulair, Remicade, Cozaar, Hyzaar, Clarinex, Fosamax, Primaxin (imipenem and cilastatin sodium), and Vytorin, as well as by lower revenue from the Company's relationship with AstraZeneca LP ("AZLP"). These declines were largely offset by higher sales of Januvia, Victrelis, Gardasil, Janumet, Zostavax, Isentress, Zetia (ezetimibe), Pneumovax [pneumococcal vaccine polyvalent], and higher sales of the Company's animal health products.

While several of the Company's brands experienced positive volume growth trends in the European Union (the "EU") in the first nine months of 2012, 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 and mandatory switches to generic drugs. While the Company is taking steps to mitigate the impact in the EU, the austerity measures continued to negatively affect the Company's revenue performance in the first nine months of 2012 and the Company anticipates mid-single digit pricing pressures for the full year of 2012 across Europe as well as from the biennial price reductions in Japan.

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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)                            2012                   2011                  2012                   2011

Primary Care and Women's Health
Cardiovascular
Zetia                                 $            645      $            614       $          1,891      $          1,788
Vytorin                                            423                   469                  1,312                 1,407
Diabetes and Obesity
Januvia                                            975                   846                  2,952                 2,364
Janumet                                            405                   350                  1,207                   977
Respiratory
Singulair                                          602                 1,336                  3,373                 4,018
Nasonex                                            292                   266                    960                   962
Clarinex                                            64                   128                    337                   492
Asmanex                                             42                    42                    141                   149
Dulera                                              52                    22                    140                    59
Women's Health and Endocrine
Fosamax                                            152                   215                    522                   644
NuvaRing                                           156                   159                    459                   455
Follistim AQ                                       111                   129                    352                   404
Implanon                                            93                    80                    254                   220
Cerazette                                           64                    74                    202                   199
Other
Maxalt                                             166                   156                    476                   460
Arcoxia                                            109                   108                    338                   321
Avelox                                              30                    59                    146                   227
Hospital and Specialty
Immunology
Remicade                                           490                   561                  1,527                 2,156
Simponi                                             86                    74                    236                   203
Infectious Disease
Isentress                                          399                   343                  1,133                   972
PegIntron                                          165                   163                    510                   482
Cancidas                                           163                   150                    474                   476
Victrelis                                          149                    31                    387                    53
Invanz                                             118                   107                    329                   296
Primaxin                                           109                   124                    301                   397
Noxafil                                             66                    61                    191                   171
Oncology
Temodar                                            227                   223                    688                   704
Emend                                              111                    98                    358                   305
Other
Cosopt/Trusopt                                     102                   124                    331                   360
Bridion                                             68                    52                    186                   141
Integrilin                                          48                    53                    160                   172
Diversified Brands
Cozaar/Hyzaar                                      295                   404                    969                 1,236
Propecia                                           104                   112                    312                   330
Zocor                                               86                   110                    285                   345
Claritin Rx                                         47                    55                    181                   240
Remeron                                             52                    65                    175                   181
Proscar                                             55                    58                    160                   171
Vasotec/Vaseretic                                   42                    57                    144                   173
Vaccines (1)
Gardasil                                           581                   445                  1,189                   935
ProQuad/M-M-R II/Varivax                           396                   391                    967                   927
RotaTeq                                            150                   184                    433                   457
Zostavax                                           202                   108                    426                   254
Pneumovax                                          160                   133                    372                   276
Other pharmaceutical (2)                         1,023                 1,015                  3,031                 2,975

Total Pharmaceutical segment sales               9,875                10,354                 30,517                30,534

Other segment sales (3)                          1,556                 1,586                  4,830                 4,908

Total segment sales                             11,431                11,940                 35,347                35,442

Other (4)                                           57                    82                    183                   311

                                      $         11,488      $         12,022       $         35,530      $         35,753

(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 health pharmaceutical products 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. Revenue from AZLP was $255 million and $299 million for the third quarter of 2012 and 2011, respectively, and $664 million and $928 million for the first nine months of 2012 and 2011, respectively.

(4) Other revenues are primarily comprised of miscellaneous corporate revenues, third-party manufacturing sales, sales related to divested products or businesses and supply sales not included in segment results. The declines in other revenues in the third quarter and first nine months of 2012 as compared with the same periods of 2011 reflect lower third-party manufacturing sales, which for the year-to-date period were attributable in part to the divestiture of certain manufacturing facilities in the first quarter of 2011.

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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 $1.3 billion and $1.5 billion for the three months ended September 30, 2012 and 2011, respectively, and $4.3 billion and $4.0 billion for the nine months ended September 30, 2012 and 2011, 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

Primary Care and Women's Health

Cardiovascular

Sales of Zetia (also marketed as Ezetrol outside the United States), a cholesterol-absorption inhibitor, were $645 million in the third quarter of 2012, an increase of 5% compared with the third quarter of 2011, and were $1.9 billion for the first nine months of 2012, an increase of 6% compared with the same period in 2011. Foreign exchange unfavorably affected global sales performance by 4% and 2% in the third quarter and first nine months of 2012, respectively. The sales increases reflect positive performance in the United States due to pricing, as well as volume growth in Japan, partially offset by volume declines in the United States and Europe. Sales of Vytorin (marketed outside the United States as Inegy), a combination product containing the active ingredients of both Zetia and Zocor (simvastatin), were $423 million and $1.3 billion in the third quarter and first nine months of 2012, respectively, representing declines of 10% and 7%, respectively, compared with the same periods in 2011. Foreign exchange unfavorably affected global sales performance by 6% and 4% in the third quarter and first nine months of 2012, respectively. The sales declines reflect volume declines in the United States, partially offset by pricing in the United States and volume growth in certain international markets.

In March 2012, the Data Safety Monitoring Board (the "DSMB") of the IMPROVE-IT trial, a large cardiovascular outcomes study evaluating ezetimibe/simvastatin against simvastatin alone in patients presenting with acute coronary syndrome, completed the second pre-specified interim efficacy analysis of the study. The DSMB conducted the planned interim efficacy analysis after the trial had reached approximately 75% of the targeted 5,250 clinical endpoints called for in the study design. The DSMB recommended that the study continue without change in design and stated it planned to review the data again in approximately nine months. That review has been scheduled for March 2013, at which point nine months of additional data will have been adjudicated. Merck remains blinded to IMPROVE-IT safety and efficacy data. IMPROVE-IT is an 18,000 patient event-driven trial and, based on the current rate at which events are being reported, the Company now anticipates the targeted 5,250 clinical endpoints for study completion will be reached in 2014.

Diabetes and Obesity

Global sales of Januvia, Merck's dipeptidyl peptidase-4 ("DPP-4") inhibitor for the treatment of type 2 diabetes, were $975 million in the third quarter of 2012, an increase of 15% compared with the third quarter of 2011, due primarily to volume growth in the United States and Japan. Worldwide sales of Januvia were $3.0 billion for the first nine months of 2012, representing an increase of 25% compared with the same period of 2011, reflecting volume growth both in international markets, as well as in the United States.

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 $405 million for the third quarter of 2012 and $1.2 billion for the first nine months of 2012, representing increases of 16% and 24%, respectively, compared with the same periods of 2011, reflecting volume growth in the United States, the emerging markets and Europe.

In February 2012, the U.S. Food and Drug Administration (the "FDA") approved Janumet XR, a treatment for type 2 diabetes that combines sitagliptin with extended-release metformin. Janumet XR provides a convenient once-daily treatment option for health care providers and patients who need help to control their blood sugar.

As previously disclosed, on February 17, 2012, the FDA sent a Warning Letter to the Company relating to Januvia and Janumet stating that the Company did not fulfill a post-marketing requirement for a 3-month pancreatic safety study in a diabetic rodent model treated with sitagliptin. Merck has been in communication with the FDA

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regarding this study and Merck's efforts to complete it in a timely and satisfactory manner. Under the terms of the Warning Letter, within 30 days from the date of the letter, the Company must submit to the FDA a final study protocol for a new 3-month rodent study that will satisfy the FDA's requirements and a proposed revised timetable for completion of the study. Within 6 months from the date of the letter, the FDA expects that the Company will have obtained agreement with the FDA on an adequate study protocol and will have initiated the study. The letter states that failure to correct the violation may result in regulatory actions by the FDA, including, but not limited to, civil money penalties. The Company has reached an agreement with the FDA on a study protocol and is proceeding with the study. Merck remains fully committed to fulfilling the FDA's requirements.

Respiratory

Worldwide sales for Singulair, a once-a-day oral medicine for the chronic treatment of asthma and for the relief of symptoms of allergic rhinitis, were $602 million for the third quarter of 2012 and $3.4 billion for the first nine months of 2012, declines of 55% and 16%, respectively, compared with the same periods of 2011, driven primarily by lower sales in United States. Revenue declines in Europe, Canada and the emerging markets also contributed to Singulair sales declines during the quarter and year-to-date period. The patent that provided U.S. market exclusivity for Singulair expired on August 3, 2012. Accordingly, the Company is experiencing a significant and rapid decline in U.S. Singulair sales and the Company expects the decline to continue. U.S. sales of Singulair declined 72% to $249 million in the third quarter of 2012 compared with the third quarter of 2011. In addition, the patent that provides market exclusivity for Singulair will expire in a number of major European markets in February 2013. The Company expects a significant and rapid reduction in sales thereafter in those markets. The patent that provides market exclusivity for Singulair in Japan will expire in 2016. For the full year of 2011, sales of Singulair were $3.5 billion in the United States, $724 million in Europe and $641 million in Japan.

Global sales of Nasonex (mometasone furoate monohydrate), an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms, were $292 million for the third quarter of 2012, an increase of 10% compared with the third quarter of 2011, reflecting increases in the United States and volume growth in Japan. Worldwide sales of Nasonex were $960 million for the first nine months of 2012, comparable to the same period of 2011, driven largely by price in the United States, offset by price declines in Europe and lower volumes in Japan. Foreign exchange unfavorably affected global sales performance by 4% and 2% for the third quarter and first nine months of 2012, respectively. In June 2012, the U.S. District Court for the District of New Jersey ruled against the Company in a patent infringement suit against Apotex Inc. and Apotex Corp. (collectively "Apotex") holding that Apotex's generic version of Nasonex does not infringe on the Company's patent (see Note 10 to the interim consolidated financial statements). Apotex is seeking FDA approval to sell its generic version of Nasonex. If generic versions become available, significant losses of Nasonex sales in the U.S. market are anticipated and could result in a material non-cash impairment charge related to the Nasonex intangible asset. U.S. sales of Nasonex were $604 million for the full year of 2011. As a result of the unfavorable U.S. District Court decision, the Company evaluated the Nasonex intangible asset for impairment and concluded that it was not impaired. The Company has appealed the U.S. District Court decision.

Global sales of Clarinex (marketed as Aerius in many countries outside the United States), a non-sedating antihistamine, were $64 million for the third quarter of 2012 and $337 million for the first nine months of 2012, declines of 50% and 32%, respectively, compared with the same periods of 2011, reflecting lower volumes in Europe and the United States as a result of generic competition. As previously disclosed, by virtue of litigation settlements, certain generic manufacturers were given the right to enter the U.S. market in 2012. The U.S. patent and exclusivity periods otherwise expire in 2020. In July 2012, a generic manufacturer launched a generic version of Clarinex in the United States. The Company anticipates that U.S. sales of Clarinex will continue to be negatively impacted in the fourth quarter of 2012 and beyond. U.S. sales of Clarinex were $197 million for the full year of 2011.

Women's Health and Endocrine

Worldwide sales for Fosamax and Fosamax Plus D (alendronate sodium/cholecalciferol) (marketed as Fosavance throughout the EU and as Fosamac in Japan) for the treatment and, in the case of Fosamax, prevention of osteoporosis were $152 million for the third quarter of 2012 and $522 million for the first nine months of 2012, representing declines of 29% and 19%, respectively, over the comparable periods of 2011. These medicines have lost market exclusivity in the United States and have also lost market exclusivity in most major European markets. Accordingly, the Company is experiencing sales declines within the Fosamax product franchise and the Company expects the declines to continue.

Worldwide sales of NuvaRing (etonogestrel/ethinyl estradiol vaginal ring), a vaginal contraceptive product, were $156 million for the third quarter of 2012, a decline of 2% compared with the third quarter of 2011, and $459 million for the first nine months of 2012, an increase of 1% compared with the same period of 2011. Foreign

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exchange negatively affected sales performance by 6% and 4% for the third quarter and first nine months of 2012, respectively. Sales performance in both periods reflects volume growth in the emerging markets.

Global sales of Follistim AQ (follitropin beta injection) (marketed in most countries outside the United States as Puregon), a biological fertility treatment, were $111 million for the third quarter of 2012 and $352 million for the first nine months of 2012, declines of 14% and 13%, respectively, compared with the same periods of 2011, driven largely by volume declines in Europe. Puregon lost market exclusivity in the EU in August 2009. Foreign exchange unfavorably affected global sales performance by 6% and 3% for the third quarter and first nine months of 2012, respectively.

The Company is currently experiencing difficulty manufacturing certain women's health products. The Company is working to resolve these issues.

In August 2011, Zoely(nomegestrol acetate 2.5 mg/17-estradiol 1.5 mg), an oral contraceptive, was granted marketing authorization by the European Commission (the "EC") for use by women to prevent pregnancy. Zoely is a combined oral contraceptive tablet containing a unique monophasic combination of two hormones:
nomegestrol acetate, a highly selective progesterone-derived progestin, and 17-beta estradiol, an estrogen that is similar to the one naturally present in a woman's body. In November 2011, Merck received a Complete Response Letter from the FDA for NOMAC/E2 (MK-8175A), which is being marketed as Zoely in the EU. The Company is conducting an additional clinical study requested by the FDA and plans to update the application in the future.

Other

Global sales of Maxalt (rizatriptan benzoate), a product for the acute treatment of migraine, were $166 million for the third quarter of 2012, an increase of 7% compared with the third quarter of 2011, and were $476 million for the first nine months of 2012, an increase of 3% compared with the first nine months of 2011, reflecting favorable pricing in the United States, partially offset by volume declines in the United States and declines in Europe and Canada. The patent that provides U.S. market exclusivity for Maxalt will expire in December 2012. U.S. sales of Maxalt were $451 million for the full year of 2011. In addition, the patent that provides market exclusivity for Maxalt is scheduled to expire in a number of major European markets in February 2013. However, the Company has applied for a six-month pediatric extension in the EU, which has been granted by most major countries and the Company expects to obtain the extension in the remaining countries by February 2013. The Company anticipates that sales in the United States and in these European markets will decline significantly after these patent expiries.

Other products included in the Primary Care and Women's Health customer business line include among others, Asmanex (mometasone furoate inhalation powder), an inhaled corticosteroid for asthma; Dulera (mometasone furoate/formoterol fumarate dihydrate) Inhalation Aerosol, a fixed-dose combination asthma treatment; Implanon(etonogestrel implant), a single-rod subdermal contraceptive . . .

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