Merck Anticipates Earnings per Share Growth in 2008; Reaffirms Long-Term, Double-Digit Compound Annual EPS Growth from 2005 to 2010, Excluding Certain Items
WHITEHOUSE STATION, N.J., Dec. 4, 2007 - Merck & Co., Inc. today updated its 2007 financial guidance and, for the first time, provided 2008 guidance. Merck's senior management will host a conference call to discuss the details of the Company's financial guidance at 8:30 a.m. EST.
"Since 2005, we have been changing every aspect of our business in order to position Merck for sustained revenue and earnings growth," said Richard T. Clark, chairman, president and chief executive officer. "These changes – combined with our current and recently launched products, anticipated new product introductions and cost-savings initiatives – will help position Merck to deliver compound annual double-digit earnings growth, excluding certain items, by 2010 from that 2005 base.
"The 2007 and 2008 guidance that we are providing today helps position the Company to meet its long-term performance targets. In 2007, we have made strides to remove a significant amount of uncertainty related to legal concerns through the U.S. VIOXX product liability settlement agreement announced on Nov. 9, 2007, as well as the anticipated resolution of other litigation. In 2008 the Company expects continued growth in newer franchises, including the on-going global launches of GARDASIL, JANUVIA, JANUMET and ISENTRESS as well as other potential new product introductions. Many of the investments that we are making today to grow our pipeline and to re-engineer our business are enabling us to deliver sustained revenue and earnings growth beyond 2010 and we look forward to discussing our progress at our Annual Business Briefing for investors on Dec. 11," Mr. Clark added.
2007 Guidance
The Company reaffirms its full-year 2007 non-GAAP (generally accepted accounting principles) earnings per share (EPS) guidance range of $3.08 to $3.14, excluding certain items and anticipates a 2007 GAAP EPS range of $1.45 to $1.51. The Company has included in its full-year 2007 GAAP guidance:
The previously disclosed pretax charge of $4.85 billion for the U.S. VIOXX product liability litigation settlement. As previously disclosed, the Company has established a reserve solely for future legal defense costs related to the VIOXX litigation which was $720 million as of Sept. 30, 2007. The Company continues to evaluate that reserve.
A previously disclosed pretax charge of approximately $700 million associated with its global restructuring program.
A pretax charge of $670 million in connection with the anticipated resolution of investigations, the first of which was disclosed beginning in 2002, of civil claims by federal and state authorities relating to certain past marketing and selling activities, including nominal pricing programs and samples. The resolution of these matters is still subject to execution of definitive agreements.
An anticipated fourth-quarter, pretax gain of approximately $450 million relating to insurance proceeds which the Company was awarded (or agreed to receive pursuant to negotiated settlements) in the previously disclosed arbitration with the Company's upper level excess product liability insurance carriers relating to coverage for costs incurred in the VIOXX product liability litigation.
A reconciliation of 2007 EPS as reported in accordance with GAAP to non-GAAP EPS, which adjusts for certain items, is provided in the table that follows.
 Full-Year 2007
GAAP EPS $1.45 to $1.51
EPS impact of items* $1.63
Non-GAAP EPS, which adjusts for items listed below1 $3.08 to $3.14
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* Amount calculated as follows (In millions except
per share amount): Full-Year 2007
U.S. VIOXX product liability settlement charge $4,850
Costs related to the global restructuring program 700
Civil governmental investigations charge 670
Insurance arbitration gain (450)
Net reduction before income taxes $5,770
Income tax benefits on above items (2,200)
Reduction in net earnings 3,570
EPS impact of items $1.63
1 Merck is providing information on earnings per share in 2007 and 2008, adjusted for certain items, because of the nature of these items and the impact they have on the analysis of underlying business performance and trends. Management believes that providing this information enhances investors' understanding of the Company's performance. This information should be considered in addition to, but not in lieu of, earnings per share prepared in accordance with GAAP.
2008 Guidance
Merck anticipates a full-year 2008 non-GAAP EPS range of $3.28 to $3.38, excluding certain items and a 2008 GAAP EPS range of $3.96 to $4.06. The 2008 GAAP guidance includes:
A pretax charge of approximately $100 million associated with its global restructuring program.
An estimated minimum gain from distributions associated with the AstraZeneca limited partnership. As previously disclosed, pursuant to the provisions of the Company's agreements with AstraZeneca, the Company expects to receive certain payments from AstraZeneca in the first half of 2008. The resulting estimated pretax minimum gain from those payments is $2.5 billion. The resulting minimum gain does not reflect the potential gain associated with the "non-PPI" asset option that Merck holds. The Company intends to make a decision on the "non-PPI" asset option in the first quarter of 2008.
A reconciliation of 2008 EPS as reported in accordance with GAAP to non-GAAP EPS, which adjusts for certain items, is provided in the table that follows.
 Full-Year 2008
GAAP EPS $3.96 to $4.06
EPS impact of items* $(0.68)
Non-GAAP EPS, which adjusts for items listed below $3.28 to $3.38
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* Amount calculated as follows (In millions except
per share amount): Full-Year 2008
Costs related to the global restructuring program $100
Minimum gain on distributions from AstraZeneca (2,500)
Net increase before income taxes $(2,400)
Income tax expense on above items 915
Increase in net earnings (1,485)
EPS impact of items $(0.68)
Details on the 2007 and 2008 guidance can be found on pages 6-7 and 8-9, respectively, of this release.
Commenting on the Company's financial prospects, Peter N. Kellogg, Merck's executive vice president and chief financial officer, said "Our guidance in 2008 represents the next step in our journey to reach our stated 2010 top- and bottom-line goals. Despite the loss of marketing exclusivity for FOSAMAX in the United States in February 2008, the Company anticipates solid earnings growth in 2008.
"As we disclosed in 2005, Merck's new and in-line pharmaceutical products and vaccines are expected to drive revenue at a compound annual growth rate of 4 percent to 6 percent from 2005 through 2010, including 50 percent of the revenues from the joint ventures from which Merck derives equity income. We also expect that we can fully support our expanding pipeline with mid-single-digit compound annual growth in research funding over the same period. The productivity generated by our ongoing cost management initiatives allows Merck to fully capitalize on the promise of our expanding product portfolio while we expect marketing and administrative expense to return to the 2006 level in 2010," Mr. Kellogg added.
This anticipated performance, together with Merck's ongoing inventory and capital management programs, which contribute to ensuring strong cash flow, supports the Company's commitment to maintaining its dividend at current levels and also is expected to continue to provide opportunities for share repurchases.
Elements of Long-Term Guidance
Merck continues to expect the initial phase of the cost reduction program, announced in 2005, to yield cumulative pretax savings of $4.5 billion to $5.0 billion from 2006 through 2010 and as previously stated, a significant portion of the total restructuring savings through 2010, or approximately $2 billion, will result from the implementation of the manufacturing supply strategy. The Company now anticipates that these savings in manufacturing should enable Merck's gross margin starting in 2008 to return to levels consistent with those seen in the period prior to the loss of U.S. market exclusivity for ZOCOR.
As part of the Company's global restructuring program announced in November 2005, Merck remains on track to eliminate 7,000 positions by the end of 2008. Since the inception of the program through Sept. 30, 2007, approximately 6,000 positions have been eliminated.
The Company expects the pretax costs of the restructuring to be approximately $700 million in 2007 and approximately $100 million in 2008. Through the end of 2008, when the initial phase of the restructuring program will be substantially complete, the cumulative pretax costs of the restructuring activities announced in November 2005 are expected to be approximately $2.2 billion. Approximately 70 percent of the cumulative pretax costs are non-cash relating primarily to accelerated depreciation for those facilities scheduled for closure.
Merck anticipates capital expenditures of approximately $1.1 billion in 2007. Capital expenditures for 2008 are estimated to be $1.6 billion. As Merck continues its initiatives in managing capital, the total reduction over the 2005 to 2008 period is expected to be $1.3 billion versus the Company's expectations for long-range capital spending at the end of 2004.
Conference Call
The Company will host a conference call to discuss the Company's financial guidance. Investors are invited to a live webcast of Merck's conference call today at 8:30 a.m. EST by visiting the Newsroom section of the Merck Web site (www.merck.com/newsroom/webcast/ [1]). Institutional investors and analysts can participate in the call by dialing (706) 758-9927. Journalists are invited to listen by calling (706) 758-9928. A replay of the conference call will be available starting at 10 a.m. EST today through 5 p.m. EST on Dec. 11. To listen to the replay, dial (706) 645-9291 or (800) 642-1687 and enter ID # 21484042.
Merck Financial Guidance for 2007
Worldwide sales will be driven by the Company's major products, including the impact of new studies and indications. Sales forecasts for those products for 2007 are as follows:
PRODUCT WORLDWIDE
2007 SALES
SINGULAIR (Respiratory) $4.1 to $4.3 billion
COZAAR/HYZAAR (Hypertension) $3.2 to $3.4 billion
Vaccines (as recorded by Merck & Co., Inc.) $4.2 to $4.6 billion
FOSAMAX (Osteoporosis) $2.9 to $3.1 billion
ZOCOR (Cholesterol modifying)Â $0.7 to $0.9 billion
Other reported products*Â $5.6 to $5.9 billion
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* Other reported products comprise: AGGRASTAT, ARCOXIA, CANCIDAS, COSOPT, CRIXIVAN, EMEND, INVANZ, ISENTRESS, JANUVIA, JANUMET, MAXALT, PRIMAXIN, PROPECIA, PROSCAR, STOCRIN, TIMOPTIC/TIMOPTIC XE, TRUSOPT, VASOTEC/VASERETIC and ZOLINZA.
Under an agreement with AstraZeneca (AZN), Merck receives revenue at predetermined percentages of the U.S. sales of certain products by AZN, most notably NEXIUM. In 2007, Merck anticipates that these revenues will be approximately $1.6 to $1.8 billion.
Equity income from affiliates includes the results of the Merck and Schering-Plough collaboration and SP-MSD, combined with the results of Merck's other joint venture relationships. Equity income from affiliates is expected to be approximately $2.8 to $3.0 billion for 2007.
Product gross margin (PGM) percentage is estimated to be approximately 76 to 76.5 percent for the full-year 2007. This guidance excludes the portion of the restructuring costs that will be included in product costs and will affect reported PGM in 2007.
Marketing and administrative expense is anticipated to increase between 2.5 and 3.5 percentage points over the full-year 2006 level. The marketing and administrative expense guidance excludes the charges taken in 2006 and 2007 related solely to future legal defense costs of VIOXX and FOSAMAX litigation. In addition, marketing and administrative guidance excludes the financial impact from the U.S. VIOXX product liability settlement agreement, the civil governmental investigations charge, as well as the insurance arbitration gain.
Research and development expense (which excludes joint ventures) is anticipated to increase between 13 and 15 percentage points over the full-year 2006 level. The full-year 2007 guidance includes the third-quarter acquired research charge associated with the NovaCardia acquisition. The full-year 2006 level includes the second-quarter 2006 acquired research expense relating to GlycoFi but excludes the fourth-quarter 2006 acquired research expense relating to the Sirna Therapeutics acquisition. The full-year 2006 level excludes the portion of the restructuring costs that is reported in research and development expense.
As part of the Company's restructuring of its operations, additional costs related to site closings, position eliminations and related costs will be incurred in 2007. The aggregate 2007 pretax expense related to these activities is estimated to be approximately $700 million.
The consolidated 2007 tax rate is estimated to be approximately 24 to 26 percent. This guidance does not reflect the tax rate impact of the U.S. VIOXX product liability settlement charge, restructuring costs, the civil governmental investigations charge and the insurance arbitration gain. The effective tax rate to be applied to these items is at a higher level than the underlying effective tax rate guidance.
Merck plans to continue its stock buyback program in 2007. As of Nov. 30, 2007, $5.7 billion remains under the current buyback authorizations approved by Merck's Board of Directors.
Given these guidance elements, Merck anticipates full-year 2007 non-GAAP EPS of $3.08 to $3.14, excluding certain items, and 2007 GAAP EPS in the range of $1.45 to $1.51.
Merck Financial Guidance for 2008
Worldwide sales will be driven by the Company's major products, including the impact of new studies and indications. Sales forecasts for those products for 2008 are as follows:
PRODUCT WORLDWIDE
2008 SALES
SINGULAIR (Respiratory) $4.6 to $4.8 billion
COZAAR/HYZAAR (Hypertension) $3.2 to $3.4 billion
Vaccines (as recorded by Merck & Co., Inc.) $4.8 to $5.2 billion
FOSAMAX (Osteoporosis) $1.1 to $1.4 billion
Other reported products* $7.5 to $7.9 billionÂ
* Other reported products comprise: AGGRASTAT, ARCOXIA, CANCIDAS, COSOPT, CRIXIVAN, EMEND, INVANZ, ISENTRESS, JANUVIA, JANUMET, MAXALT, PRIMAXIN, PROPECIA, PROSCAR, STOCRIN, TIMOPTIC/TIMOPTIC XE, TRUSOPT, VASOTEC/VASERETIC, ZOCOR and ZOLINZA.
Under an agreement with AstraZeneca (AZN), Merck receives revenue at predetermined percentages of the U.S. sales of certain products by AZN, most notably NEXIUM. In 2008, Merck anticipates that these revenues will be approximately $1.5 to $1.7 billion. A decision on the "non-PPI" asset option that Merck holds has not been made however, it is not anticipated that the decision will have a material impact on this AZN guidance. The Company intends to make a decision in the first quarter of 2008.
Equity income from affiliates includes the results of the Merck and Schering-Plough collaboration and SP-MSD, combined with the results of Merck's other joint venture relationships. Equity income from affiliates is expected to be approximately $3.0 to $3.3 billion for 2008. This equity income guidance range includes the impact of the reduction of the AZLP priority return and the buyout of the Astra USA products which are anticipated to occur in April 2008. There is a summary document previously posted on www.merck.com/finance [2] that provides additional details on the Merck and AstraZeneca relationship.
Product gross margin (PGM) percentage is estimated to be approximately 77 to 78 percent for the full-year 2008. This guidance excludes the portion of the restructuring costs that will be included in product costs and will affect reported PGM in 2008.
Marketing and administrative expense is anticipated to be approximately $7.8 to $8.0 billion.
Research and development expense (which excludes joint ventures) is anticipated to be approximately $4.7 to $4.9 billion.
As part of the Company's restructuring of its operations, additional costs related to site closings, position eliminations and related costs will be incurred in 2008. The aggregate 2008 pretax expense related to these activities is estimated to be approximately $100 million.
The consolidated 2008 tax rate is estimated to be approximately 24 to 26 percent. This guidance does not reflect the tax rate impact of the anticipated gain on distributions from AstraZeneca or restructuring costs. The effective tax rate to be applied to the AstraZeneca gain and the Company's restructuring costs is at a higher level than the underlying effective tax rate guidance.
Merck plans to continue its stock buyback program in 2008. As of Nov. 30, 2007, $5.7 billion remains under the current buyback authorizations approved by Merck's Board of Directors.
Given these guidance elements, Merck anticipates full-year 2008 non-GAAP EPS of $3.28 to $3.38, excluding certain items, and 2008 GAAP EPS in the range of $3.96 to $4.06.
About Merck
Merck & Co., Inc. is a global research-driven pharmaceutical company dedicated to putting patients first. Established in 1891, Merck discovers, develops, manufactures and markets vaccines and medicines to address unmet medical needs. The Company devotes extensive efforts to increase access to medicines through far-reaching programs that not only donate Merck medicines but help deliver them to the people who need them. Merck also publishes unbiased health information as a not-for-profit service. For more information, visit www.merck.com [3].
Forward-Looking Statement
This press release contains "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and involve risks and uncertainties, which may cause results to differ materially from those set forth in the statements. The forward-looking statements may include statements regarding product development, product potential or financial performance. No forward-looking statement can be guaranteed, and actual results may differ materially from those projected. Merck undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise. Forward-looking statements in this press release should be evaluated together with the many uncertainties that affect Merck's business, particularly those mentioned in the risk factors and cautionary statements set forth in Item 1A of Merck's Form 10-K for the year ended Dec. 31, 2006, and in its periodic reports on Form 10-Q and Form 8-K, which the Company incorporates by reference.Â
Links:
[1] http://www.merck.com/newsroom/webcast/
[2] http://www.merck.com/finance
[3] http://www.merck.com/