SECURITIES
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This
filing consists of a transcript of a conference call between Richard Clark,
Chairman, President and Chief Executive Officer of Merck & Co., Inc. (“Merck”), Fred Hassan,
Chairman and Chief Executive Officer of Schering-Plough Corporation (“Schering-Plough”),
members of the Executive Committee of Merck, Eva Boratto, Vice President of
Investor Relations at Merck, Robert Bertolini, Chief Financial Officer of
Schering-Plough and analysts, to discuss the proposed merger of Merck and
Schering-Plough. The conference call consisted of a presentation and
webcast, followed by a Question and Answer session, and was held on March 9,
2009.
CORPORATE
PARTICIPANTS
Eva
Boratto
Merck
- VP, IR
Richard
Clark
Merck
- Chairman & CEO
Fred
Hassan
Schering-Plough
- CEO
Peter
Kim
Merck
- EVP & President, Merck Research Laboratories
Peter
Kellogg
Merck
- EVP & CFO
Bruce
Kuhlik
Merck
- EVP & General Counsel
Ken
Frazier
Merck
- EVP & President, Global Human Health
CONFERENCE
CALL PARTICIPANTS
Roopesh
Patel
UBS
- Analyst
Jami
Rubin
Goldman
Sachs - Analyst
Chris
Schott
JPMorgan
- Analyst
Barbara
Ryan
Deutsche
Bank - Analyst
Tim
Anderson
Sanford
Bernstein - Analyst
John
Boris
Citi
Investment - Analyst
Catherine
Arnold
Credit
Suisse - Analyst
Steve
Scala
Cowen
and Company - Analyst
Seamus
Fernandez
Leerink
Swann - Analyst
Bert
Hazlett
BMO
Capital Markets - Analyst
PRESENTATION
Operator
Welcome
to today's conference call and webcast to discuss the combination of Merck and
Schering-Plough. All participants are in a listen-only mode. Following the
presentation the lines will be open for questions and answers. (Operator
Instructions)
I would
now like to turn the call over to Eva Boratto, Vice President of Investor
Relations at Merck. Please go ahead.
Eva
Boratto - Merck - VP,
IR
Thank
you, Taylor. Good morning, everyone, and welcome to our conference call to
discuss the combination of Merck and Schering-Plough which was announced earlier
today. We will be using a slide presentation during the call today. The
presentation is available on both Merck and Schering-Plough's websites and on
the joint venture website that we launched this morning at www.anewMerck.com. At
the conclusion of our prepared remarks we will open the call for Q&A
regarding this transaction.
On slides
two and three of the presentation you have the forward-looking statement and
other important information. I am not going to read these slides, but it's
important and is included in the presentation and posted on our
website.
Moving to
slide four you can see your hosts for today's call are Richard Clark, Chairman,
President and Chief Executive Officer of Merck, and Fred Hassan, Chairman and
Chief Executive Officer of Schering-Plough. Also making brief remarks today are
Peter Kim, Executive Vice President and President, Merck Research Lab, and Peter
Kellogg, Executive Vice President and Chief Financial Officer.
Moving to
slide five you see the brief agenda for today's call. With that I will turn the
call over to Dick Clark.
Richard
Clark - Merck - Chairman &
CEO
Thank
you, Eva. Good morning, everyone, and thank you for joining us for this
transformational event. As Eva mentioned, I am here with several members of
Merck's senior management and we are pleased to be joined by Fred Hassan and
Schering-Plough's CFO, Bob Bertolini. Let's move on to the transaction overview
on slide seven.
Based on
the closing price of Merck's stock on March 6, 2009, the consideration is equal
to $23.61 per share or $41.1 billion in the aggregate. This price represents a
premium to Schering-Plough's shareholders of approximately 34% based on the
closing price of Schering-Plough's stock on March 6, 2009.
Upon
closing of this transaction, Merck's shareholders are expected to own
approximately 68% of the combined company and Schering-Plough's shareholders
approximately 32%. Peter Kellogg will provide further details on the terms of
the transaction, which we expect to close in the fourth quarter of this
year.
The
combination of Merck and Schering-Plough makes great strategic sense and holds
exceptional promise. Together we will create a global healthcare leader
distinguished by research and development excellence. This will ensure that we
will continue to be at the forefront of drug discovery and development for years
to come.
We will
have the comprehensive capabilities and efficient operating structure necessary
to meet the needs of patients in today's evolving healthcare environment. The
combined strengths of Merck and Schering-Plough will create a company that can
deliver consistent, sustainable growth and meaningful value for
shareholders.
Here are
a few highlights -- a more diverse portfolio across important therapeutic areas,
including the addition of Schering's capability in biologics; double the number
of potential medicines that Merck has in Phase III development bringing the
total to an impressive 18 candidates; a dramatic acceleration of Merck's
international growth efforts, specifically in targeted emerging markets and a
more global diversified revenue base; a strong financial profile including
robust free cash flow.
Merck is
committed to maintaining the dividend at the current level following the closing
of this transaction. We will maintain the strong balance sheet and we believe we
will retain our current credit rating.
Incremental
cost savings, approximately $3.5 billion annually beyond 2011 which are expected
to be generated through efficiencies realized across the Company. The $3.5
billion in annual cost savings are in addition to the previously announced
ongoing cost reduction initiatives at both companies.
I would
now like to ask Fred Hassan to provide some additional thoughts and comments on
our industry and why this is a compelling combination for his company.
Fred?
Fred
Hassan - Schering-Plough -
CEO
Thank
you, Dick. As all of you have observed over the past six years, the
Schering-Plough action agenda has driven a dramatic transformation. Together our
people around the world have created a high-performance competitor. Just one
indicator, from '04 through '08 we grew adjusted top-line sales from $8 billion
to $21 billion. We achieved this growth through good strategies and above all
through excellent execution on many fronts.
We are
especially proud of the transformation we drove in R&D and in our pipeline.
We transformed one of the weaker R&D engines into one of the strongest. As a
result, today we have an industry-leading late stage pipeline with 12 promising
late-stage compounds.
An
important step on our transformation journey was the acquisition of Organon
BioSciences. The successful integration of OBS has brought further strength and
diversity to Schering-Plough. However, the stunning and accelerating changes in
the global macro environment are driving stunning and accelerating changes in
our own industry's environment.
Merck
came to us at the very time these changes were unfolding. Our Board carried out
a very careful assessment of the attractive offer of 44% premium based on the
30-day average. It concluded that the accelerating challenges of our environment
and the attractiveness of the Merck offer meant that this was the right
transaction at the right time.
It's a
transaction that delivers value to our shareholders. It creates a company with
the critical mass to absorb the bigger and bigger shocks being driven in our
environment. Most especially, this merger brings together two science-centered
companies with the combined R&D and pipeline strength to have many, many
shots at the goal.
In
summary, this combination will create a leading company in our industry with the
strength and diversity needed to succeed during a time of unprecedented change.
And it will reward our shareholders with a premium for their shares today, while
also greeting the opportunity for them to participate in the significant growth
potential of the combined company for the longer term. That includes the more
than threefold increase that our shareowners will realize in the dividends. We
believe this combination is a very good strategic logic for our company and we
look forward to participating in the strength of the combined company going
forward.
Richard
Clark - Merck - Chairman &
CEO
Thank
you, Fred. The combined company will benefit from a broader portfolio of
products including many leading marketed brands. Slide 12 demonstrates the scope
of our combined commercial portfolio. This transaction brings together both
companies' strong portfolio of medicines and scientific
capabilities.
By
leveraging the complementary offerings and development efforts of both
companies, we will be well-positioned to expand our franchises and continue to
develop and deliver innovative treatments. The combined company's
customer-centric selling model along with our broader product portfolio will
enable the salesforce to be more effective, increasing the ability to help
physicians in healthcare systems improve patient outcomes.
Slide 13
shows another benefit of the transaction -- the consolidation of our cholesterol
joint venture with Schering-Plough.
Turning
now to renegade REMICADE and Gmab, Schering-Plough has marketing rights to these
products outside the United States through a joint venture. We believe the
transaction is structured so that Schering-Plough's rights are not affected by
the merger and we will retain distribution rights to the products.
The
combination will also have one of the world's leading animal health businesses
as well as many attractive consumer health brands through Schering-Plough's
Consumer Health unit. As you can see from the chart on slide 16, the combined
company will have a strength across our key therapeutic areas with no product
representing more than 10% of our sales. This chart shows the increased
diversity in our product portfolio created by this combination.
As many
of you know, Schering-Plough generates about 70% of its revenue outside the
United States including more than $2 billion in annual revenue from high-growth
emerging markets. Merck has been working to build our presence overseas and last
year established a goal of achieving a top-five market share position in
targeted emerging markets. This transaction will dramatically accelerate those
efforts.
The
combined company will have an industry-leading team of marketing and sales
professionals throughout the world. More than 50% of the combined revenue will
be generated outside of the United States. You will see on slide 18
Schering-Plough's portfolio has long-remaining marketing exclusivity. We expect
this broader portfolio of products will fuel the growth of the combined company
beyond the expiration of Merck's current patents.
As many
of you are aware, one of our key strategic objectives has been to have more
stable, consistent top-line growth. Over the last five years, even as patents
for major Merck products such as Zocor and Fosamax have expired, we have
continued to drive growth. This transaction gives us a broader set of products
with significant marketing exclusivity. That is why we are confident we will
achieve high single-digit compound annual earnings growth over the next five
years.
With
that, I would like to introduce to Peter Kim, Executive Vice President and
President of MRL.
Peter
Kim - Merck - EVP &
President, Merck Research Laboratories
Thank
you, Dick. From an R&D perspective there were several facts that made this
transaction uniquely compelling to me. First, I am passionate about scientific
excellence and it is an important component of Merck's R&D
culture.
When I
reviewed the compounds in Schering-Plough's pipeline, including some of those in
early clinical development, the company's commitment to scientific excellence
and the talent of its researchers was readily apparent. Not only are the
pipelines and capabilities of the two companies extraordinarily complimentary,
but the scientists within each organization clearly share the same mission -- to
leverage scientific innovation to meet major unmet medical needs and make a
difference to human health.
In
addition, Schering-Plough has established presence with marketed products in two
of the therapeutic areas in which we are making a conscious effort to build our
capabilities -- oncology and neuroscience. This transaction not only adds new
products and late-stage compounds to these two newer franchises within Merck,
but it also allows us to strengthen our relationships with physicians and
scientists in these important disease areas.
Third,
Merck is committed to establishing a presence in biologics. Through Merck
BioVentures for follow-on biologics we are gearing up in a significant way to
discover and develop novel biologics. Schering-Plough has considerable
experience in biologics discovery, development, and manufacturing and an
attractive early-stage biologics pipeline which was strengthened by the
acquisition of Organon.
This
transaction will create a powerful biologics combination with both extends our
reach and our capabilities and complements Merck's novel proprietary GlycoFi
[pychia] platform and bioprocess and analytical expertise.
And
lastly and very importantly, the therapeutic areas of focus within
Schering-Plough's pipeline are well aligned with Merck's. And despite this
alignment, there are remarkably few overlaps with respect to compounds with the
same mechanism of action. The Schering-Plough transaction enables us to
significantly expand not only the number of development candidates in our
pipeline, but also its diversity. I will illustrate this on the combined
pipeline shown on the next two slides.
Merck's
R&D strategy is built upon a franchise and functional matrix organization,
which ensures the appropriate subject matter expertise is leveraged optimally
throughout the drug discovery and development process. This matrix
organizational structure, which was intentionally designed to be scalable, is
well-suited for the combination of the two pipelines. And the remarkable
alignment of the therapeutic areas of the two companies will provide for a
smooth transition.
Now I
would like to explain why I am so excited about this transaction. Slide 20
illustrates just how complementary the pipelines of Schering-Plough and Merck
actually are.
As you
know, Merck has a long-standing commitment in cardiovascular disease which is
the leading cause of death worldwide. In addition to our marketed products,
which include the Merck Schering-Plough joint-venture products, ZETIA and
Vytorin, we have several exciting late-stage compounds in our pipelines for
atherosclerosis and heart failure.
With the
combined cardiovascular pipeline our reach extends from atherosclerosis into
atherothrombosis and into a new patient population with a first-in-class Phase
III compound, TRA, or thrombin receptor antagonist. This compound has the
potential to change medical practice in patients with acute coronary syndrome
and established cardiovascular disease as an add-on to current standard of
care.
Merck
also has a long-standing history in infectious disease with several marketed
antibiotics and anti-fungal and HIV antivirals, including ISENTRESS. HIV and HCV
are the key areas of focus in Merck's infectious disease franchise and there is
a high degree of overlap in the two patient populations.
Schering-Plough
has been a pioneer in HCV research and its HCV protease inhibitor, Boceprevir,
which is currently being evaluated in Phase III studies in both treatment
experience and treatment naive patients, has demonstrated striking antiviral
efficacy. Thus the combined pipeline provides the opportunity to establish an
earlier presence in HCV.
In
respiratory and immunology the merger with Schering-Plough is particularly
exciting. As discussed last December, we are developing a combination of
montelukast, the active ingredient in Singulair, and Schering-Plough's inhaled
corticosteroid, mometasone. In addition to the respiratory disease compounds in
their pipeline, Schering-Plough's experience in developing inhaled therapies
will accelerate the development of MK-476C and our new research efforts in
inhalation therapies.
And as I
mentioned earlier, we are in the process of building our neuroscience and
oncology franchises. In neuroscience this combination will increase the
diversity of our joint pipeline across all phases of development. Asenapine for
schizophrenia and bipolar disorder is currently under review at the FDA.
Sugammadex, a novel agents that rapidly reverses neuromuscular blockade using
anesthesia, has been approved in Europe and Australia and is in Phase III
development in the US.
In
addition, there are several earlier clinical development candidates with
potential to address important unmet medical needs in Parkinson's disease and
Alzheimer's disease.
In
oncology, Merck has a robust early clinical pipeline with two molecules in mid-
to late-stage clinical development. The merger of Schering-Plough and Merck will
greatly augment our efforts to establish a presence in oncology through
Schering's marketed product, TEMODAR, an oral agent for the treatment of brain
tumors. A new IV formulation of TEMODAR was recently approved in both the US and
the EU.
You will
note that both pipelines include an IGF-1R monoclonal antibody for colorectal
cancer, one of the few examples of where the two companies have a compound with
the same mechanism of action in clinical development. In this case this will
allow us to select the compound with the best characteristics.
In
conclusion, I have discussed only a few examples that demonstrate the
outstanding alignment between these two pipelines and why I am so enthusiastic
about this merger. These two combined pipelines are remarkably complementary and
will greatly advance our ability to deliver important new medications to
patients. Indeed, I think the combined pipeline will be the best in the industry
by far.
With
that, I will now turn the call over to Peter Kellogg, our CFO at Merck.
Peter?
Peter
Kellogg - Merck - EVP &
CFO
Thanks,
Peter, and good morning. I want to take a few minutes to review the compelling
financial benefits of the combination of Merck and Schering-Plough. I will also
discuss the financing details related to this transaction and provide you with
our outlook for the combined company.
As we
have said, we would only pursue a transaction that would drive shareholder value
and indeed we believe this transaction is very compelling for shareholders. On a
discounted cash flow basis or on other metrics, we believe this deal will create
significant fundamental value. I would like to begin on slide 24.
We
anticipate this transaction to be modestly accretive to non-GAAP EPS in the
first full year following completion and significantly accretive thereafter. We
realize that many investors are interested in Merck's P&L outlook beyond
2010, with particular focus on the years 2012 and 2013. I am pleased to share
with you that we are targeting a high single-digit compound annual growth rate
for non-GAAP EPS from 2009 to 2013.
One of
our goals in designing this merger was to maintain the strong financial profile
at Merck. We believe we have achieved this. We expect that the near-term
effective tax rate of the combined company will be consistent with our
anticipated 2009 non-GAAP Merck tax rate. We believe the combined company will
generate $15 billion in free cash flow in 2013.
We are
committed to maintaining the current Merck dividend following the close of the
transaction. Our annual dividend is $1.52 per share. For Merck shareholders this
represents a threefold increase on an as converted basis compared to the current
Schering-Plough dividend payout.
We will
maintain a strong balance sheet and the financing for this transaction is
conservative. We have discussed this with the rating agencies and we believe we
will maintain our current strong credit rating.
We have a
history of driving efficiencies through improvements to our operating models.
Given the improvements we have made and the complimentary nature of our
therapeutic focus, together we are uniquely positioned to improve the margins of
the combined company. In 2013 our non-GAAP pretax margin target is nearly 40%,
which implies improving the combined company's performance up to and beyond
Merck's 2008 stand-alone pretax margins.
Now
moving to slide 26. As Dick said, we expect to generate significant efficiencies
with approximately $3.5 billion of savings annually beyond 2011. Approximately
60% of the savings are to come from marketing and administrative with the
remaining 40% from R&D and manufacturing. We expect to achieve approximately
half of the annual savings in the first full year and approximately 75% in the
second year.
I want to
stress that the savings are incremental to the current cost programs already
underway at both companies. At Merck we announced last fall our 2008
restructuring program expected to deliver $3.8 billion to $4.2 billion in
cumulative savings from 2008 to 2013. As shown on the slide, the annual savings
we expect beyond 2011 is $950 million.
Likewise,
Schering-Plough announced its PTP transformation program and expects to save
$1.5 billion. Please note that Schering-Plough has already achieved more than
$600 million in savings in 2008. Based on our experience and the natural overlap
that the two companies have in many areas, we are confident in our ability to
complete these announced programs and to achieve the additional $3.5 billion in
synergies.
Now I
would like to talk about the transaction financing on slide 27. The aggregate
consideration will be comprised of a combination of $10.50 per share of cash and
the remaining consideration in stock. This equates to 44% cash and debt and 56%
of stock as of today.
The cash
portion will be financed with a combination of $9.8 billion from existing cash
balances and $8.5 billion from committed financing to be provided by JPMorgan.
We intend to access the cash on hand at both companies. This will be facilitated
through the repayments of existing Schering-Plough intercompany
loans.
With
respect to the $8.5 billion of committed financing, it is structured as an
underwritten acquisition financing with a $3 billion, 364-day bridge term loan
and a $5.5 billion of new and amended revolving credit facilities. These will be
syndicated to other banks promptly and we anticipate terming out the bridge
facility and reducing the revolving credit facility through our commitments
through a multi-tranche bond offering and asset sale proceeds.
Now I
want to turn for a moment to the structure of the transaction. For a variety of
reasons it will be structured as a reverse merger in which Schering-Plough,
renamed Merck, will continue as the surviving public corporation. Effective upon
the merger each Merck to share will automatically become a share of the combined
company. Schering-Plough's shareholders will receive 0.5767 of a share of the
combined company and $10.50 in cash for each share of
Schering-Plough.
Now
before I comment on the longer-term prospects of the business I want to
reinforce that 2009 remains on track. Today we reaffirmed our 2009 revenue and
EPS guidance. Of course, this guidance is before the various impacts from this
transaction.
As a
reminder, we expect this transaction to close in the fourth quarter. Accordingly
we are targeting a high single-digit compound annual growth rate in non-GAAP EPS
from 2009 to 2013. It is important to note that we are using Merck's stand-alone
guidance of $3.15 to $3.30 non-GAAP earnings per share as our 2009
base.
As Dick
mentioned, we believe that the Schering-Plough rights to REMICADE and Gmab are
not affected by the merger. With that said, I just want to be clear that
regardless of assumptions that you make for the REMICADE business this high
single-digit, non-GAAP EPS, CAGR guidance holds. We are targeting pretax margins
of nearly 40% in 2013 and our expanded product portfolio is expected to generate
combined free cash flow of approximately $15 billion in 2013.
Thank
you. With that, I would now like to turn the call over to Dick.
Richard
Clark - Merck - Chairman &
CEO
Thanks,
Peter. I would like to take a moment to acknowledge the hard work and commitment
of the people of both Merck and Schering-Plough. Fred and I are able to make
this move to position the combined companies for an exciting future thanks to
the day in and day out contribution of our great employees. Combining the
Schering-Plough will enable us to build on our strong foundation and meet the
needs of patients worldwide.
Turning
to slide 30, I am confident that we can integrate our two organizations quickly
and seamlessly. Our cultures are compatible and our collective talents and
expertise will create a strong combined enterprise.
We
recognize that integrating our companies will be a significant undertaking, but
we are confident that this process will be made easier by our familiarity with
one another and our past successes. My Merck colleagues and I look forward to
working with the talented men and women of Schering-Plough.
Merck's
integration team will be led by Adam Schechter, President of Global
Pharmaceuticals, and will report to me. Adams has a deep knowledge of both
companies run from his time leading the cholesterol joint venture during the
launch of Vytorin. Schering-Plough's integration team will be led by Brent
Saunders, Senior Vice President and President of Consumer Health Care, and will
report to Fred.
A key
priority is keeping the best talent from both companies. The combination will
result in a much larger organization and we expect that the substantial majority
of Schering-Plough employees will remain with the combined company. In addition,
both Merck and Schering-Plough will institute hiring freezes
immediately.
Let me
walk you through where we go from here to complete the transaction. We will be
filing an S4 with the SEC in the near future. We will also file the appropriate
regulatory notices. In the coming months we will schedule special shareholder
meeting so that Merck and Schering-Plough's shareholders have the opportunity to
approve the transaction. We expect to complete the transaction in the fourth
quarter of 2009.
Before we
open the call for your questions, let me underscore that the combination of
Merck and Schering-Plough will create a stronger global company well-positioned
for sustainable growth. With our combined R&D expertise and scientific
leadership we will continue to be on the forefront of drug discovery and
development. Together we can more quickly and effectively advance our
long-standing missions of addressing the significant unmet medical needs of
patients worldwide.
Now I
will turn the call over to Eva so that we can take your questions.
Eva
Boratto - Merck - VP,
IR
Thank
you, Dick. We will now open the call to take your questions. Joining us for the
Q&A session is Ken Frazier, Merck Executive Vice President and President,
Global Human Health; Bruce Kuhlik, Merck Executive Vice President and General
Counsel; as well as Bob Bertolini, Schering-Plough's Chief Financial
Officer.
At this
point I will turn the call back over to Taylor, who will communicate
instructions for the Q&A format and then introduce the first question.
Taylor?
QUESTION AND
ANSWER
Operator
(Operator
Instructions) Roopesh Patel, UBS.
Thanks.
Just a couple of questions. Firstly, I was wondering if you could kindly
elaborate on why you believe this transaction doesn't trigger the change of
control provisions of Schering's agreement with J&J on REMICADE and
Golimumab. My understanding is that if Schering shareholders end up owning less
than 50% of the shares of the new company that would have triggered the change
of control.
Just to
follow up on that, I am also curious if there has been any discussion in this
regard with J&J and if they agree upon the same interpretation that Merck
does? And, lastly, if you were to exclude the earnings contribution from the RA
drugs, what would be the Company's earnings guidance? Just wanted to clarify
that. Thank you.
Bruce
Kuhlik - Merck - EVP &
General Counsel
It's
Bruce Kuhlik and I will start with the change of control question. As Peter
explained and Dick, this is structured as a reverse merger in which the
surviving parent company is the existing Schering-Plough corporate entity which
will be renamed Merck. And under the expressed terms of the distribution
agreement, this change of control provision focuses on whether there has been a
change in the surviving public company, it doesn't refer to stock ownership or
anything of the sort.
As you
know, that does appear in other change of control provisions. It's not in this
one and that is why we are confident in our belief that we will not trigger a
loss of rights.
Fred
Hassan - Schering-Plough -
CEO
And I
think that there is a very good respect among the three companies in New Jersey
and good relationships and good dialogue. In fact, I had a cordial conversation
with Bill Weldon this morning.
So the
last question, I think, had to do with what is our earnings guidance under
different scenarios. I highlighted that the guidance we have provided is for EPS
growth, non-GAAP EPS growth, from 2009 to 2013 in the high single-digit compound
annual growth rate range. And I also made it clear that regardless of the
assumptions you make for the REMICADE business this high single-digit, non-GAAP
EPS, CAGR guidance holds. So that will be in place.
Operator
Jami
Rubin, Goldman Sachs.
Jami
Rubin - Goldman Sachs -
Analyst
Thank
you. Just a follow-up question on that. If J&J does decide to challenge the
change of control is there a carve out provisions such that the REMICADE and
Golimumab distribution rights revert back to J&J and how would that -- I am
just wondering if you could elaborate that? Secondly, Peter, you provided EPS
guidance over the next five years. Was wondering if you could provide revenue
guidance over that same period of time with the combined company?
Thanks.
Bruce
Kuhlik - Merck - EVP &
General Counsel
Jami,
it's Bruce. In response to your question, the agreement provides for a mandatory
binding arbitration in the event of a dispute. Obviously, at this point I can't
speculate on how that is going to go forward. We will vigorously defend our
rights if necessary. At this point we are really looking forward to working with
our colleagues at Johnson & Johnson.
Peter
Kellogg - Merck - EVP &
CFO
Jami,
this is Peter regarding the guidance. So we have provided the guidance on
non-GAAP EPS and we think that is going to be very meaningful for all the
investors. At this point we haven't given guidance on revenue, but I think it's
pretty clear and to our comments, we have emphasized that this is going to be a
growth company going forward. So we are excited about where we are
going.
In the
future, when we feel appropriate we may come back and update guidance, but at
the moment our guidance will focus on EPS.
Chris
Schott, JPMorgan.
Great,
thank you. As it relates to animal health, with the 2013 guidance how much of
Schering's animal health business do you envision keeping and rolling into the
JV versus divesting? Just elaborate a little bit on the mechanisms of how that
is going to work with Merial.
And then
a second question, Peter, I think you mentioned asset sale proceeds. Is that
relating, again, primarily to animal health? And in that same vein, consumer
health is not a business you have historically had a large presence in. Can you
maybe just talk about your plans for the consumer health business at
Schering?
Sure,
Chris, I would be glad to take those. So first I think on the animal health
side, as you know, we do have a relationship with the Merial joint venture and
so there is a lot of different ways this could play out and there is a lot of
different scenarios. We haven't really finalized that yet at this
point.
But as
you build your models and you think about how to build those models in, what we
would recommend you put in at the moment is that we get the economic benefit for
half of the animal health business from Schering-Plough. But that doesn't really
signal one way or the other where it's going, but clearly -- or how we work with
it, but that would be a reasonable modeling expectation.
For the
other half, obviously, for your modeling purposes would be an asset sale. So in
those we get value in cash for the other half of the business that we don't have
in our ongoing P&L and that is, in fact, the proceeds from asset sale that I
was referring to.
Now on
the OTC side, I would just highlight that first of all the OTC business at
Schering-Plough has some really tremendous brands and tremendous business, and
we are very excited to be participating with that in the future. For your
modeling purposes, again, I would recommend that you include the OTC business in
our financials going forward and not assume it's being sold.
Now we
do, obviously, have a relationship on an OTC collaboration as well. But that has
some specific elements and so we will work that out. But for your modeling
purposes what we would recommend is maintaining half of the animal health
business and 100% of the OTC business. And we will update you as we go
forward.
Barbara
Ryan, Deutsche Bank.
Thank you
for taking my question. Just a quick one. You mentioned that the tax rate would
be expected to be the same as Merck's current guidance for the tax rate. And I
am just wondering because of the NOLs at Schering-Plough is that being offset by
the fact that a lot of the synergies would come in the US and therefore you will
quickly run through those?
Okay,
great. So you are correct, so the Schering-Plough business does have some NOLs
and they have been working through those. And I think the Schering-Plough team
in prior calls has been very clear in terms of where they are and how they are
being used. So we have taken that into account as we have thought about our tax
rate going forward.
And there
are obviously numerous factors that roll into a tax rate. In fact, it's one of
the more complicated things we do. But net-net when you take it all together, it
all adds up to being a go-forward tax rate for the combined company that is
similar to the guidance range that we provided for our 2009
guidance.
Tim
Anderson, Sanford Bernstein.
Thanks.
Going back to REMICADE, I know that it sounds like you feel there will be no
change in control, but the fact that you are giving guidance with and without
those products seems to suggest that there may in fact be a challenge. And I am
wondering if you can say that you would still be interested in acquiring
Schering if REMICADE and Golimumab were not part of the picture.
And does
losing those products potentially trigger a material adverse change clause and
what would be the breakup fee in the event there is a breakup? I am just
wondering if J&J might actually come in and bid for Schering out right and
trying to figure out how Merck might be protected.
A lot of
different questions there but let me begin with kind of a firm statement and
maybe it was misinterpreted so just want to be clear. We believe that this
transaction does not trigger the change of control arrangement and so we believe
that we will be having the REMICADE Gmab business going forward in our
financials.
I just
made a point that said under any outcome or any scenario we are very positive on
what this transaction would mean for our shareholders in terms of value. And
likewise we have built in our guidance at EPS levels that we are comparable with
delivering that guidance under different ranges of outcomes.
On some
of the other points of the question I will turn it over to Bruce.
The
agreement will be filed shortly, no later than Thursday, and you will see the
answers there to some of your questions about the specific agreement
terms.
Just one
other point -- this is Dick Clark -- the strength of the combination of Merck
and Schering-Plough's pipeline, the complementary product portfolio with long
periods of exclusivity, the strong commercial models, the expanded global
presence, the sustainable cost savings for long-term growth go far beyond just
one or two products that may or not be part of the equation. This is a strategic
fit for the future and it's not based on one or two products. We have looked at
this many different ways and the combination of these two companies is a
uniquely complementary activity that will show growth regardless of the products
you are talking about.
John
Boris, Citi Investment.
Thanks
for taking the questions. I just wanted to pick up on one that Tim had asked,
just some clarity and what the breakup fee would be if you opted not to go
through with the merger? Back to the question on top-line synergies, I know you
are not giving specific guidance on growth on the top line for the two
companies, but can you maybe in general talk about opportunities for top-line
synergies?
One for
Peter on the portfolio, I know you have indicated there is limited overlap. Have
you made a decision? It seems as though there is two protease inhibitors, two
IGF-1R type compounds within the portfolio. Would anything have to happen there
or divest there?
Then on
the Merial agreement, I think you indicated that you would be able to retain
about half of the economic benefit. Is there a formula for valuing the other
half that is built into that agreement already? Thanks.
First,
with respect to the breakup fee, again, the terms of the agreement will become
available when we publicly file it later this week.
In terms
of top-line synergies, Ken, do you want to take that?
Sure.
While we haven't modeled in any synergies into the financial model here, I want
to be very clear for the reasons that Dick just stated that we think that these
are complementary product portfolios. They have much longer periods of
exclusivity; they substantially broaden what products are in our
representatives' bags. And we think, based on this expanded product offering,
our sales forces will be much more effective in the developed markets as well as
the emerging markets around the world.
So my
point would be while we haven't modeled in synergies as such, we see huge
opportunities and we are very excited about these franchises and how they fit
well together.
With
regard to the pipeline, as I said, these pipelines are remarkably complementary
and there really is very little overlap. The two specific cases that you cited,
John, the protease inhibitor I actually think is a tremendous advantage that
will allow us to get into the HCV market faster with a molecule that
Schering-Plough has in the Phase III which has shown really excellent responses
and a very high rate of SPR.
It will
also allow us then to take the other programs, both the program ongoing at Merck
as well as the second molecule that is ongoing at Schering, and develop them
with the goal of really making sure that we come out with the absolute
best-in-class molecules. This I see as a real positive for the hepatitis C
franchise.
With
regard to IGF-1R, that is actually -- it's remarkable but it's probably the only
case where we have pipeline overlap which will lead to a decision probably as to
what we are going to do in terms of prioritization. And given the size of these
two pipelines and the degree of complementarity, it's really quite remarkable
that there is only really that one case where I think we are going to have to
make a decision. And we will do that by comparing the molecules and deciding
which is the best one to proceed forward with.
I just
want to emphasize the really tremendous complementarity that goes here. I mean
with cardiovascular I think with our CTP inhibitor, with MK-524 series, and now
adding to that the atherothrombosis product and the thrombin receptor antagonist
I think we stand to be the very best company in terms of the pipeline for
cardiovascular.
I will
just emphasize again that respiratory is aligned completely with our desire to
go into inhalation therapies. The overlap and complementarity in terms of
infectious disease with HIV and HCV and really the ability to now go into
neuroscience and oncology in a substantial way, which is what we have been
gearing up to do all along, are really just huge positives.
So the
last part of the question I think, John, that you asked -- this is Peter -- was
about the animal health business and the 50%. I just want to be crystal clear on
that. What I mentioned was that for modeling purposes -- obviously, there is a
lot of different scenarios in how this could play out, but for modeling purposes
what we have said is to keep 50% of the business in our P&L going forward.
So you keep 50% of the value through our regular P&L performance and then
the other 50% assumes an asset sale under the scenario that it did get rolled
into Merial.
But,
obviously, that that has to be sorted out in terms of exactly what actions we
take. But I wanted to make sure it wasn't misunderstood. We will in value
standpoint keep 100% of this business for sure. It's just a question of actually
how we organize it in the combination. Thanks, John.
Catherine
Arnold, Credit Suisse.
Thanks
for taking my question. I wanted to just ask you a quick item on a change of
control and then I had another one. On the change of control, it was my
understanding that one of the items that would trigger a change was that
Schering directors are less than 50% of the new company's Board and I wonder if
that is correct. And if so, you will reconcile that by obviously having the
right distribution on the Board. I didn't get the impression that that was the
case.
And then,
secondly, I wanted to ask you about the price that you paid. If you have a
bullish view on the Schering pipeline, you might argue that the price that you
paid is actually what the intrinsic value is without synergies. And I wondered
if you could just address those that might see the price being modest versus the
company's stand-alone outcome.
With
respect to the change of control, there is a reference in the agreement to the
Board participation and membership but it doesn't apply where the existing Board
elects or appoints new members. And that is what is happening here. So the new
Board of the combined entity will include the existing Merck Board and three
representatives from the existing Schering Board, but because they are being
appointed by the existing Schering Board that will not trigger the change of
control.
And just
a comment on whether the right price, I just want to assure you that we are very
pleased with what this is going to do for our shareholders. $10.50 in cash
earnings per share stream going forward from the combined company that is
comparable to the Schering-Plough earnings per share and then a dividend that
goes up more than 300%. The 44% premium on a 30-day average is a very good
premium. In fact, Dick and I had agreed on another number which was $26.25 based
on a 30-day average, but as you know even the Dow Jones Index is down right now.
There is a secular decline in capital markets and therefore one should not get
locked in on any single date in terms of a price. Dick, any comments to
that?
No, I
agree with you, Fred. This is an outstanding combination of two companies and I
support what Fred has said. A company of the caliber of Schering-Plough at 44%
premium during that period is extremely reasonable.
Steve
Scala, Cowen.
Thank
you, I have three questions. First, I believe three-times on the call it was
said that regardless of assumptions for REMICADE, the REMICADE business, the
guidance holds. Was Golimumab not in this statement deliberately or should we
assume that this statement includes Golimumab?
Secondly,
has the single efficacy look at the IMPROVE-IT trial been conducted yet? We
believe it is scheduled for sometime in 2009. And should that look occur before
closing would that either positively or negatively affect the guidance or your
desire to move forward?
Then,
lastly, is a fact that the reverse merger would allow no trigger of the J&J
deal in the public documents or is that in confidential documents? Thank
you.
This is
Peter, Steve, let me take the first question. When we referred to that we are
referring to the entire relationship, so its' obviously REMICADE and Gmab. Maybe
we were just taking a short cut. Peter, maybe you can talk to the IMPROVE-IT
status?
Sure.
With regard to the IMPROVE-IT trial, which as you know is the trial in which we
are looking at outcomes with Vytorin versus simvastatin. In 2009 and not yet
occurred, our academic collaborators, TIMI and DCRI, will review the event rates
and the lipid changes, but they will not be unblinded to the results. They will
just look at the event rates and the lipid LDL cholesterol changes.
And that
is being done to determine whether or not a sample size adjustment would be
needed. And if that is the case, then we will promptly communicate that. But
just to emphasize that there is going to be no look at the efficacy, it's just
going to be a look at the event raise in lipid levels. Just also add that we
have, of course, very high confidence in LDL as a surrogate for
atherosclerosis.
With
respect to the availability of documents, the REMICADE distribution agreement is
publicly available and you can review that now. And the technical description of
how the reverse merger works will be in our merger agreement, which will be
publicly available later this week.
Seamus
Fernandez, Leerink Swann.
Thanks
very much. So just wanted to follow up on Steve's question, but maybe expand on
it a little bit. With regard to the three mega trials that you would have
ongoing -- HPS2-THRIVE, the TRA2P -- in fact, four studies -- TRA2P and TRACER
study and the IMPROVE-IT study -- can you just give us your thoughts in terms of
the risk profile that that represents for the overall company?
Is it the
fact that the combined company offers on a lot more upside opportunity, but that
capturing the synergies now starts to defray the risk of those types of
programs? Because again I would perceive those as both high risk and high
reward. But just wanted to get your thoughts on the risk profile of the company
on a combined basis and how the mega trials worked under that thought process.
Thank you.
It's
Peter Kim, I will take that one. With regard to the IMPROVE-IT trial, as I have
said, we have a very high degree of confidence in the use of LDL cholesterol as
a surrogate for atherosclerosis. This is a study which is being done to really
take a look at actually demonstrating within an outcome study that it is
working.
The TRA
trial is very well involved now with over 18,000 patients that are enrolled.
Very recently the DSMB met and said to continue the trial with no
changes.
And
HPS2-THRIVE is an outcome study that we are very confident about. Niacin has
proven benefits, proven outcome benefits and the HPS2-THRIVE trial is being done
to confirm that benefit in the setting of MK-524. So in terms of cardiovascular,
I just want to emphasize that I think that with these products as well as with
our CTP inhibitor we are positioned to be the leader -- the leader -- in
cardiovascular disease by far.
Bert
Hazlett, BMO Capital Markets.
Thanks
for taking the question. Just to round out the REMICADE Golimumab comments,
might an adverse outcome there have any affect on your dividend stability or
dividend policy? Then, secondly, does the Novartis agreement with the
respiratory products have any similar types of examinations? Again, is there any
ability to spit back that transaction in any way, shape, or form?
Thanks.
To your
first question, we are committed to the dividend. That has no impact on
it.
And we
don't believe there is any complexity around our other agreements with
Novartis.
Okay, we
will take one more question, please.
(Operator
Instructions) There are no further questions at this time.
Thank
you. That concludes our call. I will turn it back to Dick Clark for some
concluding remarks.
Thank
you, everyone, for your questions and for being on the call. Certainly you can
tell from the discussions we have had what a compelling combination this is and
it's important for us to move forward on this tremendous
transformation.
From the
two companies' standpoint it's about science, it's about growth of in-line
products, it's about diversity from a global standpoint. And there is no doubt
that we will be a leading growth in expanded science from a pharmaceutical
leadership standpoint moving forward. So thank you again.
Thank
you. This concludes today's conference call. You may now
disconnect.
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This
communication 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 communication 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 December 31, 2008, and in its periodic
reports on Form 10-Q and Form 8-K, which the Company incorporates by reference.
These reports are available on our website at www.merck.com and
www.schering-plough.com.
In
connection with the proposed transaction, Schering-Plough will file a
registration statement, including a joint proxy statement of Merck and
Schering-Plough, with the Securities and Exchange Commission (the “SEC”). Investors are
urged to read the registration statement and joint proxy statement (including
all amendments and supplements to it) because they will contain important
information. Investors may obtain free copies of the registration statement and
joint proxy statement when they become available, as well as other filings
containing information about Merck and Schering-Plough, without charge, at the
SEC’s Internet web site (www.sec.gov). These documents may also be obtained for
free from Schering-Plough’s Investor Relations web site
(www.schering-plough.com) or by directing a request to Schering-Plough’s
Investor Relations at (908) 298-7436. Copies of Merck’s filings may be obtained
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Merck and
Schering-Plough and their respective directors and executive officers and other
members of management and employees are potential participants in the
solicitation of proxies from Merck and Schering-Plough shareholders in respect
of the proposed transaction.
Information
regarding Schering-Plough’s directors and executive officers is available in
Schering-Plough’s proxy statement for its 2008 annual meeting of shareholders,
filed with the SEC on April 23, 2008, and information regarding Merck’s
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