Merck & Co Earnings Call Insights: Animal Health and Consumer, Januvia

Merck & Co. (NYSE:MRK) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Animal Health and Consumer

Marc Goodman – UBS: Couple of things. First, can you comment a little more about Animal Health and Consumer? Both areas seem to be a little weak, even Consumer excluding that one-time change you made. You talked about additional products for immunotherapy. Can you talk about how quickly you can get those into man? Then R&D, can you talk about some of the changes that allowed you to take spending down for the quarter?

Kenneth C. Frazier – Chairman, President and CEO: Let me start with the Animal Health and Consumer questions. So I would say that overall, reflecting on this quarter, it was an okay quarter for those businesses, but if you step back, you will see that they grew low-single digits and as we look back beyond this quarter, we think both are performing well. So I would not let one quarter be the answer for those two businesses. As I said, we continue to think of them as being complementary businesses that will help us over the longer-term contributing to our top and bottom-line growth.

Peter N. Kellogg – EVP and CFO: Yeah, thank you, Ken. I would add. I think in the Animal Health business, they’re in the middle of rolling out the Activyl product line, which we’re very excited about, as well as (Zuprevo), (Zuprevo) rather. I think I’d remind you that last year in the second quarter we actually had some very strong performance as we picked up some business where there were out of stock some of our competitors. So last – we probably are in the Animal Health business lapping a pretty strong prior year. For the rest – for your other questions, maybe I’ll pass it over to Roger…

Roger M. Perlmutter – EVP and President of Merck Research Laboratories: Yeah. So just, Marc, just a couple of things. With respect to the immunomodulatory agents, there is a whole set of different cell surface molecules that are involved as checkpoint regulators, if you will, that control the response of T lymphocytes to a stimulus. We’ve had the opportunity to inventory these to develop antibodies directed against a whole set of them and to look at them in preclinical studies. We hope to be advancing those into the clinic relatively soon. You’ll see them come up on, and I have more to say on them in subsequent quarters. With respect to expense, there is no single category of expense control that we can point to, but there are whole variety of things that I’ve been able to do in terms of reassigning resources and in that process have pulled back on some of the spending levers, which enabled us to reduce our expense now and will going forward as well.



Chris Schott – JPMorgan: Just had two questions. The first is on Januvia, obviously, we saw a rebound in reported 2Q growth, but it looks like prescription volume growth at least in the U.S. is still fairly low. I guess, my question is, do you believe you are seeing a benefit from the additional resources you put on the franchise earlier this year? Maybe more broadly talk about the overall DPP-4 market at this point? I guess as we start to annualize the (TCD) benefit, do you believe you can reaccelerate growth for this category? My second question is just going back to some of the comments that Roger had made about the licensing of assets. I guess to dig into that a little bit more, should we think of this as a greater focus on M&A for Merck that we have seen in the past and is that focused more on early-stage assets or those that have achieved proof of concept?

Kenneth C. Frazier – Chairman, President and CEO: Let me start with the second one first. I just would say, Chris, that for us, when we think about capital allocation strategy. One of the most important things as Roger said is to augment the pipeline and that means looking for the best technology that we can find, the best opportunities we can find that are value creating opportunities and that will remain a major priority and I know for Roger, it’s even a greater priority, so why don’t I turn it over to Roger…

Roger M. Perlmutter – EVP and President of Merck Research Laboratories: Chris, just let me emphasize, I think I did at the first quarter earnings call that I’m really interested and really focused on products. So, it is to me less important that we consider the stage and more important that we consider what is the potential value of this new therapeutic entry? Does it have unambiguous meaningful clinical impact that can change the practice of medicine and bring important benefits to patients suffering from grievous illness, that’s the critical point and I’m prepared to go after those wherever those exist and I know Ken and Adam and Peter are completely (onboard) with that.

Kenneth C. Frazier – Chairman, President and CEO: With respect to your Januvia question, I’ll turn it over to Adam, but again, we are pleased that we saw the product perform better this quarter versus the first quarter. We think it’s rebounding and we’re continuing to provide tremendous support behind it. With that, I’ll turn it over to Adam.

Adam H. Schechter – EVP and President, Global Human Health: Let me give you some additional context in the U.S. and also give you a little bit of more color outside the U.S. and what we’re thinking about outside the U.S. As I discussed in the U.S., we had 9% growth and I tried to give you some context to that by breaking it down where we had 1% that was volume, 4% was inventory and rest was price. The real key is changing the TRx trend and that’s what we’re frankly focused on. The real issue, Chris, is that, we have a 75% market share in the U.S. despite a very significant number of competitors. It’s not about trying to gain more market share. It’s really about getting sulfonylureas used over into DPP-4 which were the lion share. Typically, with multiple new entrants in a market, you see a lot of class growth. We don’t see a lot of class growth despite all the new competitors that have come into the marketplace. So, the way for us to change the trend is really to focus on switch from sulfonylureas and sulfonylureas still represent about 35% of the patient days of therapy. So, there is still big opportunity there for us to go after. What we’ve done is we’ve increased our focus. We now have dedicated sales force and thereafter they are promoting they are engaged. In addition to that, we have increased our promotion spending and out print direct to consumer advertising. All of our focus now is on the sulfonylureas utilization. Up until the first quarter of this year, most of our focus is on the TVD opportunity, that’s no longer there. So it really is about sulfonylureas. The good news is that we’ve maintained our strong managed-care access in the U.S. So we have access to our product in over 80% of the patients we have preferred access. That really is about executing on the sulfonylureas strategy in the United States. Outside the United States, we still have a very significant opportunity and every region outside the U.S. had strong volume growth. The one thing I think is important is that, although we had 11% growth ex-FX, the big difference between ex-FX and FX was the yen. We have a very significant amount of our sales in Japan for Januvia. In Japan, you may recall, the DPP-4 class is the number one class of oral diabetics in Japan. It is ahead of metformin, it is ahead of sulfonylureas and we have by far the leading market share. At the same time, on every other quarter we get supply sales from our co-marketing partner, which happened this quarter. So when you look at our success in Japan, plus the supply sales coming in lumpy, you can see how the yen would have a very significant impact on our sales when you don’t adjust for exchange. That’s the difference primarily for the underlying business performance being very strong, but what you see including foreign exchange. Outside the U.S., we continue to anticipate low-double-digit growth and we see that we’re getting that in volume. I think the opportunity remains very strong there for us.

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