Merck's Management Presents at Sanford C. Bernstein Twenty-Ninth Annual Strategic Decisions Conference (Transcript)

Seeking Alpha

Merck & Co., Inc. (MRK)

Sanford C. Bernstein Twenty-Ninth Annual Strategic Decisions Conference Call

May 31, 2013, 9:00 am ET

Executives

Kenneth Frazier - Chairman of the Board, President, Chief Executive Officer

Frank Clyburn - President of Primary Care and Women's Health

Analysts

Tim Anderson - Sanford C. Bernstein

Presentation

Tim Anderson - Sanford C. Bernstein

Good morning. I am Tim Anderson, the global pharmaceutical analyst with Sanford Bernstein and pleased to have Merck joining us for our conference today. We will be conducting a fireside chat with Ken Frazier, who is the CEO and chairman. Ken has been with Merck for about 20 years now. He has held a variety of operational and legal roles within the company. He is going to start off by making a few prepared remarks.

We are also joined on stage by Frank Clyburn who is the President of Primary Care and Women's Health for Merck. That’s the company's largest business. He joined Merck in 2008 and prior to that, he held a variety of positions at host of other pharma companies. Like these other presentation that you have been to, throughout this conference you will notice that you have question cards on your chair. So go ahead and fill those out now or at any point during the conference. Someone will bring them up and we will try to incorporate that into the discussions as best as we can.

With that, let me turn it over to you, Ken.

Kenneth Frazier

Thanks, Tim. Good morning, everyone. I want to make just a few brief remarks and show a few slides and hopefully we can have a good conversation. Let me start by saying that, from my perspective, for Merck, like many other pharmaceutical companies, the critical success factor is to be sustainably and productively involved in R&D to go after those therapeutic areas and those areas of unmet medical need that will allow us to provide significant benefit not only to customers and patients but also the shareholders over the long term.

For Merck, one of the most recent changes that we made, as you may note, we have a new head of R&D, Roger Perlmutter, who is formerly of Amgen and we selected a new head of research is among one of the most important things that a CEO of a pharmaceutical company will ever do. I am hoping and have a great deal of confidence that under Roger's leadership, Merck will continue to discover and develop important medicines and will be at the forefront of the new wave of innovations that I believe will come for this industry based on (inaudible) science.

Secondly, success requires us to have a diverse strong broad portfolio of products including our complementary businesses. In my presentation, I will show you how our underlying portfolio has been able to deliver 6% to 8% growth over the last two years growing the number of patent expiries. This growth will of course be important as we move forward in weathering the continued impact of the Singulair patent expiration.

Third, obviously, we have to manage our cost structure well. The world in which we operate and in which we compete is a much more price sensitive world. That requires us to be much more cost competitive company. That’s important also to allow us to make the long-term investments that we need to make in R&D and behind our commercial opportunities. Since the merger, we had realized $3.5 billion in annual synergies in driving down our operating expenses as a percentage of sale below that of our peer companies.

Lastly, obviously, we need to have concrete assets in the pipeline that have clinically meaningful differentiation and they also address unmet medical needs. We believe we have that in compounds like odanacatib, anacetrapib, our BACE inhibitor for Alzheimer's as well as the Anti-PD1 molecule for cancer. I believe that if we do all of this well, we will have a kind of strong, sustainable free cash flow that will allow us to drive shareholder value over the long-term.

So with that let me just turn to the forward-looking statements. As a former attorney, I would say that we used to consider this poetry in my department but I won't linger there.

This first slide, really depicts the strategy that I talked. It involves four key elements, executing on our core business, including, and importantly, our R&D pipeline, expanding in to key markets, extending into our complementary business as well as excelling at managing costs. I think this slide really shows what has been the basis of the 6% to 8% underlying growth that I referred to. That is that Merck has the benefit of having a number of long-lived assets that are propelling our growth. It has also helped offset patent expiration since the merger, including specifically Januvia, Isentress, Gardasil and Animal Health.

Amplifying on that portfolio, you can see that we have had tremendous success in the past although in the first quarter, I point out that we had some issues around Januvia and Janumet. We don’t think that performance was indicative of what we will see for the rest of the year. We said that we believe that in the U.S., we will have single digit growth, mid-single digit growth in selling, double digit growth around the world. Frank is here, because that’s in his business line and he is here to talk a little bit more about that in detail. Remicade, Simponi, Isentress, Gardasil, Zostavax going very nicely as well as animal health and consumer care.

I am often asked the question about expenses and how we look compared to our peer group. So what this has shown that post the merger we have been able to take out a significant amount of expenses when you look at both SG&A and R&D below the peer group but I think it is more important to take a look at how those ratios look if you split SG&A and R&D. So as you see here, Merck is significantly below its peer group as it relates to SG&A and that’s by choice. We continue to be in line with our peer group with respect to R&D, which again reflects another strategic choice on the part of the company.

We believe we have a number of opportunities for growth. I will just focus on a couple of them on this slide. I would point out that Suvorexant for insomnia just went through an advisory committee meeting. We are very confident about our ability to bring this product to market. We think it’s a product that will have utility. As you know there is a great deal of dissatisfaction among people with sleep medications. Last night was my first night in a hotel. I can attest to the fact that it will be useful to have a compound like Suvorexant and we are actually looking forward to having that compound on the market.

Bridion for neuromuscular blockade reversal has been very significant for us in markets like Japan, where a lot of people have very deep blockade and it has been viewed as a very useful innovation in that space and then finally been (inaudible) for platinum resistant ovarian cancer, which we intend to launch in the EU.

I talked about our pipeline and here are some of the compounds that we think have potential to address significant needs above and beyond what you just saw in the last slide, the compounds under review. Odanacatib, our Cat-K inhibitor for osteoporosis. Anacetrapib for atherosclerosis, which is also in Phase 3. Our BACE inhibitor for Alzheimer's, which is in phase 2/3 and as you know, Alzheimer's is a disease that is going to have significant impact on our population. If you look in through the Alzheimer's Society, it costs the U.S. population about $200 billion right now. If we don’t have a disease modifying agent that number should go through $1 trillion in the year 2050. So its very important to have important therapeutic in that area. Then lastly, our Anti-PD1, which we will be talking about in much more detail this weekend at ASCO on Sunday where we will be making a presentation where we look forward to sharing the most recent data.

So I talked about free cash flow. One of the aspects of having strong free cash flow is that you are able to return a significant amount of cash to your shareholders, and I think what this is showing is that our value of cash returned to shareholders actually compares favorably With the rest of our peer group.

As you know this year we announced a new $15 billion share repurchase authorization, saying that $7.5 billion will be taken care of in the first 12 months and the other day we announced our $5 billion accelerated program. Again that shows that we are able to fund that through both our cash flows and our debt. We have been able to increase the dividend in 2012, as well as to a lesser extent in 2013

So the bottom line is that with confident in the future. We believe we have robust growth opportunities in our in-line franchises. We dedicated the managing costs not simply for the purpose of managing cost, although we have to be competitive, but frankly a company is a living breathing thing. You can't allow it to become a bureaucracy. So you have to continue to manage cost so that you can continue to redeploy scarce resources behind your desk in the most promising growth opportunities over time which leads me to the importance of our pipeline.

I would say that we have a number of potential catalysts in our pipeline that we are very excited about. Lastly, its important for you, our shareholders, that we are able to return cash in excess of our operating needs and I think again we have shown that we will again be able to do that in a way that actually stacks up favorably to our competition.

So with that, I will just take a seat and I will take your questions, Tim.

Question-and-Answer Session

Tim Anderson - Sanford C. Bernstein

All right. So we have mic up and live. It sounds like we are. So, Ken, you mentioned Januvia slowing down. Its one of the things that led to the guidance being lower for 2013 and when I look at Merck right now, Merck has one of the lowest valuations in the peer group and that’s driven by the guidance that was lowered. It's driven by some pipeline set backs and mixed levels of enthusiasm about some of the late stage assets because there has been delays on products like odanacatib, for example. So you might acknowledge that everything hasn’t gone perfect as big as a company as Merck has but can you go into a bit more detail on what has driven some of the challenges and what the challenges are? Is this a fallout from Schering-Plough merger the closed in 2009. Vs there some ongoing disruption as you are still integrating that? What's going on?

Kenneth Frazier

Okay. Thanks for the question. I would say, first of all, I don’t think there any issues related to the integration. I think the integration of Schering-Plough and Merck was very well know. There is obviously challenges in bringing together two companies like that with disruptive things like the network, manufacturing network, which still needs to be completely finished. I think we have a great opportunity as it relates to taking out cost there. Systems are not always compatible. We have to put the pipelines together.

But we actually don’t think the issues that we are facing really had do with that. I think the most important issues that have caused some real concern around the Merck story has had to do with late stage pipeline efforts. My very first day on the job, we learned about (inaudible) which was a major challenge. (inaudible) late last late last year and then the delay of odanacatib. I would say those are the most important issues.

I think that, first of all, I would say about odanacatib, we are extraordinarily excited by the prospects of that. We still think that’s an important contributor to the future. I would say that with respect to Januvia which Frank can amplify on. I am also very confident and that’s why we said we thought that the first quarter was a bit of an anomaly. A lot of factors came together. I think we pointed out that just on the inventory buying shift, it took us from a minus five to a plus five. If you don’t have that one particular U.S. inventory buying shift.

So I understand that there is some concerns. I am extraordinarily excited about the future. I think at the end of the day, this gain comes down to the assets that you have in your pipeline. As I said a few minutes ago and would repeat what I said, I think we have some important assets in the pipeline. So, I would say, I don’t see the disruption of the merger as being a factor. I think the major factor really has to do with the few pipeline delays and/or failures. We have a new head of research who would be extraordinarily focused on the programs that we have in the pipeline and getting them across the finish line.

I am looking forward to ASCO this weekend, for example, with the data we are going to be able to share on the PD1. So I think that we still have a lot of really good opportunities in front of us grow this company.

Tim Anderson - Sanford C. Bernstein

All right. So its something that you get asked about a lot. I think really, almost every company now that as a bigger pharma company but it falls on the heels of what Pfizer has done and what Abbott has done in carving itself up and splitting off divisions and it always comes up when a drug company runs into highly trouble time. Well, maybe this will be the next company that split up, that it fell off competition. I have asked that question to you in the past what your thoughts are, but maybe you can update us what your perspective is because if you look at the few companies that have done something and it has actually created shareholder value. But what's your perspective on keeping Merck intact as it is or doing something a little more radical like the two companies that I mentioned.

Kenneth Frazier

So let me start by saying something I said when I was doing my presentation which is that, actually our role has been to try to put together the right complement of assets that will allow us to drive long term free cash flow as a company. We said that’s what's going to drive long term shareholder value but I won't comment on anybody else's reasons for splitting or spinning things off.

But let me just say that what we try to do over time is that based upon what's the right composition of the company to drive free cash flow for the long period of time. We also want to look at these two businesses in terms of animal health and consumer and figure out whether or not we have the right fit in contribution to our company going forward. We have said all the time, we continue to assess our current portfolio of products, our current portfolio of businesses and decide how we can configure them to create the long-term shareholder value. That’s what we try to do.

We are not wedded to one business or another. I do like those businesses. I have to say to you that I think that the R&D business that we are in is a challenging business but it’s a good business to be in. These are businesses that are a little bit light sort of more like hardy perennials, if you will. They are very good businesses. They have good cash flow. They have goody growth prospects.

In the case of animal health, it’s the second-largest animal health globally. It is extraordinarily profitable. It Is growing faster than the market. As you look at the underlying dynamics of animal health in terms of the fact that the world population is going to grow to as much as 9 billion by 2050. There is not more land. There is not more water. So the only way that we are going to be able to deal with the world need for protein is to have better science around developing production animals. Of course with the rising middle-class will have more companion animals.

So we have a good business. It has got great tailwinds in terms of the macroeconomic trends behind it. It is growing fastest in that business. It is more profitable business in that business. It has got a good pipeline. So I like that business very much. What I said about consumer in the past is, because I think the consumer business that we have lacked global scale. In the U.S., the parts of the business that we compete, like allergy, foot care, sun care, we actually hold leadership positions in those areas as well as I think in the digestive health area with Miralax. So it’s a really good U.S. business.

What I said is it doesn’t have the global scale that we need. We are going to have to continue to look at that business and say, is that better inside or outside our portfolio? I say that in particular because as you well know when you think about ways of growing that business if you look at the recent deals that have been done, the assets that have been a part of deals have gone through, what I think, a pretty high top in prices. Merck has always been very disciplined about doing deals. I happen to have a philosophy that it is hard to make money if you overpay for assets at the frontend.

So that give us some challenges about how do we think about that business and the fact that it doesn’t have global scale but I want to just leave you with the comment that I have not said that we wouldn’t think about parting with any of the business. I haven’t said that we would. I think it is frankly not a responsible way to be this, if you are going to sell this, its been a business to go out and say to everybody, well that’s business that I am looking to get rid off because it tends not to get the same kind of opportunities there.

Tim Anderson - Sanford C. Bernstein

But your last comment is, you are saying, never say never. That’s specific to consumer care.

Kenneth Frazier

It is specific to all aspects of our portfolio.

Tim Anderson - Sanford C. Bernstein

Okay.

Kenneth Frazier

I said earlier, I think that a company has to be sort of a living, growing organism. By growing, I mean it has to put the nutrients where it has the best growth opportunities. There is limited capital. If you look at your opportunities and you see that you wanted to settle down in one area, it may require you to prune another area. That’s what I am saying in a general sense.

Tim Anderson - Sanford C. Bernstein

So what are the options in consumer health for getting it to scale. Are there partnerships that you can strike?

Kenneth Frazier

Yes.

Tim Anderson - Sanford C. Bernstein

Acquisitions, outright acquisitions, as you do solutions, but maybe not sensitive.

Kenneth Frazier

Right. I think there are a number of things that you can do. So, obviously we have seen people resort to spin off. I think the challenge there, as you don’t have necessary the whole global complement of assets. There is outright sale. There is partnerships and JV. We look at all of those opportunities. We want to have a business that actually is viable and can continue to be a leadership business. It is going to be a global businesses that has to have more assets. A strong platform outside the United States, but I want to again come back to the fact that its number one in this category in that space. A good U.S. business, is what I am trying to say. It is just not a global business.

Tim Anderson - Sanford C. Bernstein

It's also been hypothesized that Merck might have additional restructuring ahead of it. That you could cut even more cost than you have out of the system that are in areas like R&D. If you compare another post merger company like Pfizer/Wyeth, they cut more than what you guys have cut, post the merger. My sense is that you guys are actually pretty far through your cost cutting ability. But I have a path that that seems as likely that you have made your restructuring ahead of you. But can you tell us where you are in that process? How do you see the cost phase now? Maybe you would use a baseball analogy, what inning are you in terms of cost cutting?

Kenneth Frazier

Well, I will try to show some of the data to create some perspective on this. As you see as SG&A, as a percentage of sales, we are doing better than our peer group. In R&D, we are in line with our peer group. So I wouldn’t say that there are not additional opportunities. I try to frame it by saying I think that the world in which we are operating is one which there is going to be much less pricing power for all of these companies.

You look at places like Europe. Its really not as easy to business as it was 10 or 15 years ago. Europe is still a good place to do business but you have to have a business model, an operating model that brings a level of efficiency to allow you to be successful in that market. So I would say that there still are opportunities for us, specifically. I alluded to the fact that we still have opportunities with our network. When we put these two companies together, there were 90 plants. That’s not the right number. We have taken out a significant amount of plants. There is more to be done on the manufacturing side. Between now and 2015, I think it’s a great opportunity in that one space.

In R&D, Roger Perlmutter has come in. People have asked me for the last few years, do you think that you are going to continue to have an R&D budget at $8 billion. I said, my philosophy is, I don’t really have a specific number or percentage of sales in mind. My philosophy is that it doesn’t help to spend more on R&D than you can productively spend. Roger's mandate is to look at the R&D budget, to look at the programs that are composed in the R&D budget and to make really good hard choices about which programs we think actually have a good probability of success technically but also we will have commercial and medical need when we get to the marketplace. I think that over time I would expect to see R&D budget go down as a result of that kind of thoughtful rationalization.

So I think there is still opportunity. I think I wouldn’t say that we are going to be a cost-cutting story. I am much more excited by the opportunities we have in the pipeline and that’s where I am trying to focus.

Tim Anderson - Sanford C. Bernstein

So when you say R&D, over time, likely to go down, are you saying as a percent of sales or in absolute terms?

Kenneth Frazier

I would say, its certainly is absolute terms. That’s what I am really saying.

Tim Anderson - Sanford C. Bernstein

So I want to come back to the pipeline in a bit but I want to maybe move on to an area that you are involved with, which is Januvia and Janumet. So its the company's lead franchise. You mentioned earlier how it would slow down in Q1. Merck has given some growth targets for the rest of the year. It has been a terrific franchise since you guys launched that product, I think it was 2006. But it does seem like it is getting to be an increasingly crowded category. You have got this dynamic of price competition. I think we have got competing companies that have stepped up their sales reps plus a little bit of an arms race it feels like in the DPP-4 category. But maybe you can describe what you see as the challenges are in that area?

Frank Clyburn

Sure, Tim. I think first when you think about diabetes and the franchise and why we are still very bullish on Januvia, Janumet and our future as a prevalence. So around the world, prevalence of diabetes is continuing to grow. So right now, it is estimated at about 300 million patients with diabetes. It is projected to grow another 40% to 50% over the next 10 to 15 years, Tim.

So if we start and just look at the market and the opportunity in diabetes, we think that it’s a great place for us to be. Specifically with Januvia and Janumet, a couple things and Ken highlighted them in the first quarter, we did experience some headwinds in the U.S. Some of that was due to inventory and actually our wholesalers, retailers reducing inventory and it is about $70 million impact on our Q1 results in the U.S.

We also saw volume growth in the U.S. of about 4%, it you look at IMS for that quarter. There are some rate pressures to, what you mentioned as far as competitive activities. The good news for us, Tim, as we have been able to maintain our managed care access very favorably. We have about 85% preferred formulary status even with all of the competitive activities that we have seen in the marketplace.

The real focus for us now is that we are the leader in DPP-4 around the world. We have about 70% share. In the U.S.. it's about 76% share. Our focus now for us to continue to grow is really taking share from sulfonylurea because most patients are treated around the world where they start off with metformin and then often times either a DPP-4, a lot of time Januvia, or a sulfonylurea is added. When you look from a patient day of therapy perspective, sulfonylurea still represents almost 36% of the use in diabetes.

So our focus is around taking business from sulfonylurea. We are investing more. Tim, I think, we shared the fact that we put more dedicated, focused efforts in U.S. and other markets around the world. We are confident in the mid single-digit growth in the U.S. and the double-digit growth outside the U.S. as we move forward.

Tim Anderson - Sanford C. Bernstein

The overall category of DPP-4, has it slowed? Maybe you can talk about what drove growth in the prior years and then some of the dynamics has actually slowed the entire category.

Frank Clyburn

Yes. In some of the comparisons, some of the growth that you see, especially when you look at 2012, Tim, if people recall, there was TVD event. If you look close before that we were growing probably about 8% to 9% in volume. We accelerated our growth significantly in the first half of 2012 because of the TVD event. A lot of that business actually came over to Januvia and Janumet. So now when you are looking at comparison that event is passed. So for us to continue to grow, we have benefited from the leadership in DPP 4s, we have benefited from earlier use of therapy but clearly now the growth has to come from the sulfonylurea because the TVD event is pretty much past us, as we look at future growth opportunities.

Tim Anderson - Sanford C. Bernstein

But you are comparing yourself to the high.

Frank Clyburn

We are comparing our self to high. So if you think about that first half of '12 that’s when you saw an acceleration because of that TVD event. Now, as you look at 2013, those are some of the comparisons you are up against.

Tim Anderson - Sanford C. Bernstein

Maybe you can just clarify for the audience what the TVD event was and what a TVD is?

Frank Clyburn

I am sorry. Those are diabetic products, there was safety concerns with regards to those products. Some of those products were relabeled and many physician decided to switch patients from those agents over to other product and Januvia and Janumet was one of those products that received a lot of that.

Tim Anderson - Sanford C. Bernstein

Price competition in the category?

Kenneth Frazier

What are you saying? In terms of price competition? What you have to pay to continue to have formulary access?

Frank Clyburn

We won't you to share specific rate information, Tim. I can tell you that it is more competitive. To your point, there are a number of DPP-4 companies out in the marketplace. We have looked at price. We continue to take reasonable price and we think our strategy has worked very well because we have been able to maintain access. I would say profitable access as well, Tim, at about 75% to 85% preferred one-way status. So we feel good as far as where we are positioned within the DPP 4 class. Like I said, the future has to be sulfonylurea and other classes to grow.

Tim Anderson - Sanford C. Bernstein

Has then the GLP-1, these injectable products that kind of share similar mechanism to DPP-4s. Can you talk about how that’s interfacing with the oral DPP-4s? The market leading GLP-1 is Victoza. From what I can tell, it is actually gaining some first line usage and I think that they are positioned there right after DPP-4s as well to say that you should use our product first and you have the weight loss with it even though it is an injectable. So how do you see GLP-1s interfacing with the oral DPP-4 category?

Frank Clyburn

So I think GLP-1s is a great advancement to that category of products. Actually we are not seeing, Tim, what you have mentioned as far as earlier use or first line use with GLP-1s. We are seeing it more, in some cases second, but we are seeing it more third and fourth line use. So as I mentioned typically it’s a metformin and then its usually a DPP-4 and then you are seeing physicians add a GLP-1 before they often go to insulin. So we are seeing it more in the third line usage versus earlier in treatment.

Tim Anderson - Sanford C. Bernstein

There is an ongoing safety review of the whole of DPP-4 and GLP-1 category, as many folks know about. When I look at that, my sense is that it's nothing new. There may well be a pancreatic signal of sorts. That highlights the fact that with almost every drug you have side effects. You have to weight risk versus benefit, then most people are going to benefit from these therapies. But there is the small possibility, it seems like, that something can go horribly wrong in FDA safety review in which case that would put tremendous stress on your franchise and on the company. So, can you talk about how you view this ongoing safety review and your comfort level that this won't blossom into something bigger. There was a New York Times article that came out yesterday or this morning talking about the state of affairs and what some of the critics are saying at these academic centers that are saying there is safety issues. So it is getting some press. It hasn’t impacted prescription trends. The stock has shrugged it off. Investors have shrugged it off. But your lead franchises are the first at risk. So what's your comfort level in that?

Frank Clyburn

So first, I want to reiterate, we were very confident in the safety profile of Januvia, Janumet and the franchise. As we have looked at the data, we have looked at the data for a number of our randomized clinical trials, Tim, and we feel very confident in the safety profile. In fact, many of you know, we have an ongoing CV outcomes trial going TECOS which is 14,000 patients. The DSMB just to look at that data earlier this year and actually recommended that the study continue. So from every when which way we looked at the data, we are very confident in the safety profile.

I think many of you know that in June there is going to be a discussion around the safety profile of not only of sitagliptin and DPP-4s but also GLP-1s and we actually will be presenting at that meeting. So I am very confident. We think that our data, that we have looked at, reinforces the safety profile.

Kenneth Frazier

We just published some meta-analysis, didn’t we?

Frank Clyburn

We did. Also just published a meta-analysis as well.

Tim Anderson - Sanford C. Bernstein

And that meeting, from what I can tell, it was on the books already. It wasn’t set up because of the safety issues that FDA raised or not that FDA raised but some of the academic groups have raised. But it does gives a question, when are we going to get resolution on this issue. FDA has taken it up. It has issued a press release. They said they are reviewing safety. So at some point, they will just come out with a near final conclusion. If I had to guess, that is probably 2013 event? But what's your guess?

Frank Clyburn

It is hard to speculate on when the FDA is actually going to make the final review. I would say, I think this meeting coming up in June will be an important meeting and discussion around the overall profile. But I want to make sure, we reiterate that I could set all of the data and all the usage that we have on this product and it looked at, we are very confident of the safety profile.

Tim Anderson - Sanford C. Bernstein

And you think there will be new data that comes out on this topic whether it is from FDA or from Merck or from any of the other participants? Or is just going to be a general discussion of what we already know?

Frank Clyburn

As far as for in the actual meeting?

Tim Anderson - Sanford C. Bernstein

Yes.

Frank Clyburn

Yes, that’s going to be mainly data that’s already been seen in many different forms as well as you will also, I think, have companies probably bringing in some new data as well, preclinical data, et cetera.

Tim Anderson - Sanford C. Bernstein

You guys have a follow-on product which is a weekly formulation of Januvia. That seems like it could be significant. I am not sure where anyone else is on competitive landscape with another weekly but can you tell us how you view that weekly playing out over the long-term? Whether you think this is going to be like Fosamax that ultimately made it to once a month therapy and how that became the regiment of choice. So how important is that product? Where is it in development? When are we going to see data? When could it launch?

Frank Clyburn

So the product, it is one very important product, Tim. We are in the lead with our weekly DPP 4. We see it, I think, as diabetes evolves and I go back to just how many patients around the world have diabetes, we think bringing a weekly DPP-4 will give us an opportunity even for potentially earlier usage. With regards to this agent as well as from an inherent and compliance perspective we think that is also going to be very important, Tim.

So we are excited about our weekly DPP-4. We will be actually seeing, I think, data in 2014, Tim, we will see some additional data. I will have to check on that for you though. But if you think about Januvia, Janumet, you think about our life cycle management programs around met, you think about a weekly DPP-4 in addition to that and then also the recent deal that we have done to expand our diabetes franchise and footprint, we think that, for Merck, it is clearly an area that we believe we can lead and offer patients lot of different solutions as we move forward.

Tim Anderson - Sanford C. Bernstein

Maybe we can shift to some other compounds in the pipeline and the general R&D discussion as well. So you have a new head of R&D that just started. When are we likely to hear his vision of the future. We have already heard him on recent quarterly earnings call. But I believe, at some point you guys might be hosting an R&D day.

Kenneth Frazier

I think we said late this year or early next year. I think that’s what we said. We haven’t set out a specific date. Roger has been with us six weeks. He has rolled up his sleeves and is starting to understand the people, the processes and the program of MRL and we want to get him enough time to make some decisions that he can report to you on some concrete issues.

Tim Anderson - Sanford C. Bernstein

So he can get a light preview whenever you guys are holding out a meeting that you hear his vision for the future or do you think it can (inaudible)?

Kenneth Frazier

I think our IR people will help us think about what the right opportunities are. So you know, obviously there are opportunities before a formal meeting but we think a formal meeting is an important way because you get to show data and you get to look at it as an integrated whole. So we are looking forward to having that.

Tim Anderson - Sanford C. Bernstein

And it is worth pointing out as well that he was with Merck for quite a long time, before he went to another company now. Is that right?

Kenneth Frazier

Absolutely. In fact, I worked closely with him. We worked closely on the launches of two products, Vioxx and Fosamax. It is terrific to have him back. One other thing that Roger (inaudible) with the company really needed to make a transition into biologics and I think bringing him back at this time when the company is making an additional emphasis on biological products is actually a good thing.

Tim Anderson - Sanford C. Bernstein

One of the compound in your pipeline that has got a lot of attention recently is the Anti-PD1 cancer drug and you mentioned you will have data that comes out this week at the upcoming cancer meeting at ASCO. That’s an area where we have three companies now, you are one of the three that it looks like its almost neck and neck. Maybe one company will have a slight lead on timing, but commercially when I think about that category, the two other competitors, Roche/Genetech, they have got a compound, Bristol-Myers has a compound and you guys have a compound. I think you were quite a bit earlier in development of either companies. But Roche and Bristol already have, what I think, is a much stronger toe-hold in oncology. I am just trying to peek through the commercial dynamics. So if we have three products that if they have similar profiles both safety and efficacy, and those other companies have an existing commercial infrastructure in place, I am wondering how you see the competitive dynamics playing out in oncology for Merck. I know oncology has been an area that the company has wanted to wrap it presence out there for years. Right. I think all the way back in the 90s, I think that was a core are but it still not one where you guys have a great toehold at this point. So maybe you can give us review of that compound of how the commercial battle might play out. I know it is going to sound early to start talking about commercial battles but it looks like a classic compounds these products are likely to make it to market. So its probably we are starting to think these things through.

Kenneth Frazier

You are absolutely right. We are very excited by compound. It’s a terrific opportunity. It is a terrific advance. Its, I think, at the forefront of the brand new era of cancer therapy. So different tumor type. So solid and non-solid types. So I think this is a very exciting time to be in this field.

Before I get to the commercial issue, I really want to go back to something you alluded to because I think it is really important to keep focused on this. I can't tell you how many times I have had it observed that because Merck had not been particularly successful in oncology that the research expenditures were not really useful. That we should maybe go somewhere else.

You have got to look at the fact that it takes a long time to develop a drug. I think you know, I always say that there is a fine line between persistence and optimism. I think in this instance, we were rewarded for sticking with this area. We think we have a very good compound. I am not going to talk about the data. It is going to be revealed on Sunday. But you see there is a huge opportunity in this area.

It is a competitive race. There are competitors in terms of Genentech and BMS who have been in this space longer. I am not going to sit here and say that that experiential reference point that they have is not a positive thing for them but also point out that we had nothing in diabetes before we started looking.

At the end of the day it really does not matter what the compound is. It really does not matter what the data. This is an area, frankly, where physicians are used to looking at data and making judgment if the data gets published. Its very positive. They know how use drugs. The vast majority of use of cancer drugs is off label because physicians are very adept at looking at what the comparisons are between the data, making decisions even before you actually have a formal education. You really can't promote it that way.

So I would say that at the end of the day, what matters is that we have a compound. It gets to the market in a timely way with really good data. I think those are the elements of success. I also think it is important that we have been capitalized. We currently filed it in the EU and coming to market soon. So I think that we are in a position now of having a very strong portfolio of novel investigational cancer compound of which PD1 is at the forefront. But we expect to have more behind it. I think that’s the beginning of a new era of targeted cancer therapies. We want to be a part of that.

Tim Anderson - Sanford C. Bernstein

So maybe a couple more questions on that. So as a race among three companies, I am just trying to figure out where some of the companies are exactly.

Kenneth Frazier

Why don’t you come on Sunday.

Tim Anderson - Sanford C. Bernstein

Well, I guess, one of the questions I have and I am not sure you guys are going to address this one, so I will ask you now. When might we see you guys advancing to other tumor types beyond melanoma with next bigger trials to be done, whether they are registration or not. That’s actually I can simplify, is that likely to be a 2013 event or a 2014 event?

Kenneth Frazier

Well, like I said, we are going to move as expeditiously as possible across all the opportunities we have and on Sunday we are going to have more to say about that.

Tim Anderson - Sanford C. Bernstein

Then the other question I have is, so we have seen data of your compound on a few different tumor types, but the science says that if you use classical compounds it probably has efficacy in a whole bunch more tumor types. So when are we going to see data from Merck specifically. I don’t think that its (inaudible). You have one abstract in melanoma. But can you give us a sense of the timeframe by which we see your compound whether has activity in other tumor types, the 5, the 3, which are long renal and melanoma.

Kenneth Frazier

Well, I can't give you a time table for that. I can say that we are having this investor event. We will be presenting more mature data from the Phase 1 study. I just want you to know that we are going to continue to pursue the other tumor types as expeditiously as possible. You go on clinical trials (inaudible) go through stuff that’s published there already. On Sunday, we will have more to say about what our future plans are.

Tim Anderson - Sanford C. Bernstein

Is there anything else? If you were to pick one or two other drugs in your Phase 2 or Phase 3 pipeline that you want to call special attention to that you think we will be generally excited about?

Kenneth Frazier

One that I am really excited about, although it is still very early days, is the BACE inhibitor for Alzheimer's. I think most people think that we are studying the most prominent, useful hypothesis around Alzheimer's development. We have a product that gets 90% receptor occupancy against the target. We are going to be able to test the data hypothesis in a robust way. It is one of these opportunities that really reflects why, at some point in this business, you have to be going for game changing therapies.

There is risk in this business, certainly. Everything can't be a swing for the fences opportunity. But sprinkled into your portfolio has to be some opportunity that can have a profound effect on health and therefore profound effect on Merck. BACE is one of those programs, frankly. So I would point to that as an example of the kind of thing that actually makes me very excited. The early data that we have produce on that really is very encouraging.

Tim Anderson - Sanford C. Bernstein

What was the size of the data?

Kenneth Frazier

Not tough. So far, lets just review. I have talked about odanacatib. I have talked about BACE. I have talked about the Anti-PD1 compound and suvorexant. We have other compounds that are early on in the pipeline. We still have the Anacetrapib program going forward. There are number of other compound but I think those are the ones that are the biggest ones right now. Merck has tended not to get as much focused on hyping early programs as maybe some other people are and I don’t want to start changing that approach.

Tim Anderson - Sanford C. Bernstein

So is the risk of hyping one of those variants? Your BACE inhibitor, when I look at products that I think could be fantastically huge, the BACE inhibitor is probably at the top the list for me. It lines with the science behind Alzheimer's disease that we have all tried to get over the last couple of years. From what little we know about those compounds, they seem like they are perfect set up to treat that disease in a way that they would Can you just talk about your level or the organization's' level of excitement on this? Is it cautiously optimistic? Or is it, wow, this could be the transformation of Merck?

Kenneth Frazier

I think I wouldn’t go so far to say that we are all banking on it being the transformation of Merck. We are very cautiously data driven organization. We know that we are studying a compound and we are also trying to prove a fundamental hypothesis at the same time. So that makes you really try to be reserved a little bit. But I have got to tell you, behind all of those intellectual comments, is a very visceral excitement that this could be the kind of compound that changes the world.

We think we have a great compound. We think it is targeted at the right target. It has great, again, affinity for the target. I think it allows us to test whether or not that hypothesis is really the right basis for understanding what causes the disease progression. We are studying it now in mild to moderate, the intended study in prodromal or the pre-Alzheimer's population. I think this is the opportunity again for the fundamental transformation in the field.

I also want you to know that that’s the first of several programs that are aimed at Alzheimer's. We have earlier stage programs. It is just like the first hypertension drugs led in to an era of additional discovery for hypertension. I think we are on the verge of things. So in other words, we are out of time. That’s what really makes me excited about this business, Tim, is that you can go to a fallow period and then the science lines up to give you real great opportunities and application.

I think we are on the verge of that. I think the paths are hard in terms of things like Alzheimer's. I think that the tools are better and my job as CEO of Merck, is to make sure that Merck is positioned in terms of having access to the right program, the right tools, the right leadership and the right talent to be a company that can continue to succeed over the longer term as it has. If you look at 60 years past, you look at Merck has been a positive outlier when it comes to innovation. My job is to set it up to be that in the future.

Tim Anderson - Sanford C. Bernstein

Maybe just two more quick points. Maybe you can clarify to the audience the timelines on the BACE inhibitor just so people have a sense. Its not a product that’s going to be on path of approval next year. You are still in Phase 2 but maybe just a rough timeline so people can understand that. Then I want to actually finish up with just a very broad question on the sector. Do you think, and that’s a question I would like to ask senior executives periodically, do you think when you look at the big pharma space, you are going to see further consolidation in the sector over, let's say, the next five years? So big pharma to big pharma mergers, we have seen three of those in 2009. Most companies say they are disruptive. Every company I know says, no, we are not going to do it. But what's your view? Do you think there is going to be more consolidation?

Kenneth Frazier

So, on basically on a Phase 2/3 program.

Unidentified Company Representative

(inaudible)

Kenneth Frazier

Okay, (inaudible) is reminding that we have safety analysis due this year for about 200 patients. So we are not talking about a filing next year but we are talking about a filing in the next few years if the data is there. So that’s a good thing.

On consolidation, I think consolidation can work if you have the right combination of company. So us and Schering-Plough, we did at the exact right time. It was at the bottom the market. There was some issues with respect to the compounds that we had in cholesterol. We knew each other. It made sense. It was still disruptive, though.

So whatever the day, you know when you do these kinds of mergers, you are going to have to face a certain amount of disruption. You have got to be able to put two complementary companies together in a way that you can create value. We think we have done that with the synergies as well as the pipeline. When we look at the pipeline now, we just finished talking about anti-PD1 and BACE. Those are both programs that started in Schering's research

So I would say that I would expect to see more consolidation. I think at the end of the day what you need in this industry is to have an R&D organization that’s capable of outperforming. The whole reason that Roger and I are working together is we both share a common passion for ensuring that we build an R&D organization capable of repeated success and that’s our goal.

Tim Anderson - Sanford C. Bernstein

Great. Well, we are out of time. I want to thank you, Ken and Frank as well for joining us today and thanks for everyone at Merck. Thanks.

View Comments (0)