Merck & Co., Inc. (MRK) Q3 2011 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to Merck's Third Quarter 2011 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Alex Kelly, Senior Vice President of Investor Relations. Please go ahead.

Thanks, Brooke, and good morning, everyone, and welcome to Merck's 2011 third quarter conference call. Before I turn the call over to Ken this morning, I want to mention a few housekeeping items. First, as a reminder, we're hosting our R&D and Business Briefing in less than 2 weeks on November 10. At the briefing, we will discuss our pipeline, and we'll also spend time discussing the company's strategy. As a result, we're going to limit the content of today's call to a discussion of the business in the third quarter, and we'll also limit the call to 45 minutes because we know we'll have ample time on November 10 for further discussion about the business, and we look forward to seeing all of you then. The second thing I'd like to mention is that there are a number of items in the GAAP results such as acquisition-related charges, restructuring costs and a gain resulting from our sale of our interest in our consumer joint venture. We have excluded those items in our non-GAAP reconciliation tables in the press release and also in Table 2, so that will give you a better sense of the underlying performance in the business. Finally, I'd like to remind you that some of the statements we make during today's call may be considered forward-looking statements within the meaning of the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are based upon the current beliefs of management and are subject to significant risks and uncertainties. Our SEC filings, including Item 1A in the 2010 10-K, identify risk factors and cautionary statements that could cause the company's actual results to differ materially from those projected in any forward-looking statements we make today. Merck undertakes no obligation to publicly update any forward-looking statement. Our SEC filings can be found on our website at merck.com. This morning, I'm joined by Ken Frazier, our Chief Executive Officer and President; Adam Schechter, the President of Global Human Health; and Peter Kellogg, our Chief Financial Officer. And now I'd like to introduce Ken Frazier.

Thank you, Alex. Good morning, everyone. Thank you all for joining the call today. As Alex just said, since our business briefing will take place in 2 weeks, I'm going to be fairly brief in my remarks. We look forward to providing you an in-depth view of our pipeline, as well as the progress we are making in executing our growth strategy at that time. For today, I will simply provide a synopsis of the third quarter and our accomplishments year-to-date and then invite Adam Schechter and Peter Kellogg to provide additional context. I'm pleased to report that we had another good quarter. We coupled top line growth with strong expense management to yield an 11% increase in non-GAAP EPS. In addition, this quarter, we were very active in repurchasing our shares. At this point, 3 quarters through 2011, I can report that we are successfully delivering on our stated intent to grow both the top line and the bottom line, maintaining the consistent execution we've seen all year. While we transitioned rights to REMICADE and SIMPONI in certain countries this quarter, we were still able to drive 8% year-over-year growth in our overall business. If one excludes these territories from our history, total company sales on a comparative basis would have grown 10% or 5% x exchange. This quarter's results were, in large part, driven by the strength of our in-line portfolio, with double-digit growth from JANUVIA, JANUMET, ISENTRESS, SINGULAIR, GARDASIL and ZOSTAVAX. This strong underlying growth across our product portfolio is why we continue to make selective investments behind our key in-line products, key launches such as VICTRELIS, geographic growth in Japan and the key emerging markets and life cycle management for our key brands, all while we move towards the SINGULAIR patent expiry in August 2012. Adam…

Thank you, Ken, and good morning, everyone. It's a pleasure to speak with you today and provide you with an overview of the performance of Global Human Health. GHH had another solid quarter with revenue growth of 9%, including the impact of foreign exchange. Our performance was driven by growth in the U.S., Japan and the emerging markets. The solid performance for GHH was achieved despite the loss of REMICADE and SIMPONI sales in certain territories beginning this quarter. If you were to exclude sales from the relinquished territories in 2010, Global Human Health sales grew by 11%, or 6% excluding the impact of foreign exchange. This equates to about $500 million of operational growth this quarter, and it reinforces that our focus on the strategic priorities of growing the core, expanding the core and accelerating new launches is working. So let me share with you how we did on each of the 3 parts of our strategy. First, let me focus on our core business, which includes several of our largest markets. In the United States, sales grew 6% and were driven by double-digit growth from JANUVIA, JANUMET, ISENTRESS and vaccines, which had strong contributions from GARDASIL, ZOSTAVAX and a $25 million CDC stockpile replenishment for RotaTeq. Growth in the United States was partially offset by lower sales of VYTORIN. Overall, our solid performance in the U.S. reflects our continued strong execution and customer focus around our full portfolio of innovative brands. So moving to Europe and Canada. These markets grew 6% due to the impact of foreign exchange. Double-digit growth of JANUVIA, JANUMET, ISENTRESS, REMICADE and SIMPONI in retained territories was offset by over $200 million due to several factors. These factors include the unfavorable impact from EU austerity measures, the loss of REMICADE in Canada and the…

Thank you, Adam, and good morning, everybody. As you heard from Ken, we continue to execute on our strategy. This quarter, we had strong top and bottom line performance, and we achieved this performance while continuing to make strategic investments necessary to fuel future growth. Based on our performance through September, we are once again raising the lower end of our 2011 non-GAAP EPS range, which also increases the midpoint of the range. Now my remarks today will focus on our non-GAAP results, which exclude acquisition-related charges, restructuring charges and a gain resulting from the decision to sell our interest in the J&J-Merck consumer joint venture. Now let's get into the results, starting with revenue. Total revenue for the quarter was $12 billion, 8% above a year ago, which includes a 5% benefit from foreign exchange. Excluding this benefit, revenue grew 3% over the prior year. As you know, we relinquished REMICADE and SIMPONI in certain territories as of July 1. This masked the strength of our underlying performance in the third quarter. As Ken mentioned, if you exclude the relinquished territories from last year's sales, total company sales in the third quarter would have grown 10% on a reported basis or 5% excluding exchange. Now let's talk about expenses, starting with product costs. Our non-GAAP product gross margin was 75.3% in the quarter. The gross margin was sequentially lower than the second quarter due to the J&J settlement, which became effective July 1. As a result of the settlement, the profit split on our sales of REMICADE and SIMPONI moved from 58-42, favoring Merck, to a 50-50 split. This was the biggest driver of the sequential gross margin movement. Moving on to M&A. Marketing and administrative expenses of $3.3 billion were up about $250 million over the third quarter…

Great. Thanks, Peter. Now we're ready to open up the call to answer your questions. [Operator Instructions] So Brooke, we're ready for the Q&A, please.

[Operator Instructions] Your first question comes from Chris Scott with JPMorgan.

Just 2 questions here. First on ZOSTA [ZOSTAVAX]. Could you give an update there, you've had 2 straight quarters of $100 million-plus sales. Are we getting back to normalized production levels? And maybe just looking forward, when can we expect to get back to fully normalized levels here and consistent product shipment? Second is on the tax guidance. I think you've moved your range up about 300 basis points over the course of the year. I guess, you should elaborate a little bit more on specifically what's happening here and how we should think about your tax rate moving forward.

I'll take the question of ZOSTAVAX first. I would say that we continue to work on the manufacturing enhancements necessary to fortify and increase our long-term supply and also say we're encouraged by the progress that we've been making. We still have backorders, but from our perspective, those backorders are getting shorter in duration. So we're optimistic that we are starting to get some good solutions, but time will tell. And I can't say for sure when I -- we'll be able to definitively declare that those issues are completely behind us.

Chris, this is Peter. I'll take the second question. You're right. We have increased our view of the tax rate during 2011, and I would say that the primary driver of that shift over the course of the year has been product mix. We've had some really tremendous performance from some of our products that, particularly JANUVIA, JANUMET that are just going very well. We also, as you may recall, closed out an IRS review earlier in the year with -- and at that time, obviously, you may recall, we had a gain from that but we also slightly revised some of our FIN 48 reserve rates just in recognition of some of the dialogue and items that we observed during that review. So those are the 2 factors. I think the mix is the biggest one. In terms of how you should think about it going forward, obviously, we'll give 2012 guidance on the fourth quarter call, so I can't really give guidance now. But I think, I certainly -- a good place, tax sort of evolves, tax rates evolve, they don't jump around. So I think it's always good to start with kind of what the current year ends up at is a good starting point.

Your next question comes from Catherine Arnold with Credit Suisse.

I wondered if you could give us a little bit more of a peek behind the curtain, Ken, on the R&D expense. It seems like there's been 3 consecutive quarters where you've brought down the level of targeted R&D spend. I'm wondering if there's not an element of initial stages of burning off some of the obligations of the outcome studies, which is obviously something that should be more prominent, I think, next year and 2013. If this is integration-related, where there might be a little bit of uncertainty on timing and if you've got more visibility on that, I'd just like to have a little bit more color on how that process has been playing out for you as you've changed those targets. And then if you could just speak to Animal Health growth, obviously, very strong there. I'm wondering are there commercial or government contracts that are expanding the market or other trends we should be thinking about in modeling that business?

Ken, do you want to start?

Yes, Catherine. First on the outcome studies side of things, obviously, from a vorapaxar standpoint, we're starting to wind down some of the costs associated with vorapaxar. Also that we have the SHARP year-on-year benefit there. I think the other issues that we're facing are some of the savings that we thought -- or efficiencies that we thought we would get in connection with the merger. So we are seeing facilities being closed. And I think across R&D, Peter and his colleagues are really focused on identifying ways to improve the efficiency of all the R&D processes. So that's a major focus of our work right now, is to try to continue to find efficiencies in our processes. But at the same time, I want to be clear. We remain firmly committed to investing in R&D, which has always been the cornerstone of our success, and we're confident that, that R&D investment will lead to another cycle of scientific innovation. So we're very much committed to staying at the forefront of biomedical innovation while at the same time reducing the time and money we spend on developing medical breakthroughs at every stage.

So, Catherine, maybe if you could just -- it's okay, I'll take the Animal Health question. And indeed, you're right. The Animal Health team has done just a great job. They're having a good year. It's very broad-based across the business, their performance. And we often point to different animal segments. But quite frankly, it would be a long list right now because they're doing quite well in all areas. Interesting thing about the Animal Health business is that right now, about 50% of their growth is coming from new products that they're launching into the market. They have a very good pipeline, and those pipeline products are just beginning to come through. There's many more still in late stage that are about to be launched. So we are pretty pleased with the results. Now I think you'll just note that, obviously, they are a very international business so there is some forex benefit. So I believe you'll see in the third quarter we had 20% revenue growth but about 6 points of that, or 6%, was foreign-exchange base. So it's good to know that, but still, you can see underlying that, they're doing a great job. And again, 50% of it's in-line products and 50% is our new product launches.

Your next question comes from David Risinger with Morgan Stanley.

With respect to the operating cost base, obviously, your operating cost exclude acquisition-related costs and restructuring costs. Could you just help us understand where the baseline stands today? Where the number of employees was at the end of the third quarter versus the end of last year? And how much has already been stripped out of the run rate of costs and how we should think about cost coming down, going forward?

Peter, you want to take that?

Sure. So, yes, a really pretty broad-based question, Dave, and I think there's a lot going on. Let me just start with the value capture from the merger. And as we talked about, we've set a pretty strong goal out there of net synergies. And at this point, we're happy to point out that we're in the 2.8, 2.9 kind of rough area of billions of dollars of savings coming through, and you can see it in the P&L. And the other thing I'd say is that clearly, we're in the neighborhood of about 90 to 91 -- 90,000, 91,000 employees at this point as of the end of the third quarter, which obviously is very clear progress. And I think that the one thing to highlight is that really, a lot of the things that we're doing with our operating cost base, I just want to point to some of the comments Ken made in his speech. It really is in all areas of the company. Our R&D organization has, obviously, we've talked about it, has been working to become more efficient and more productive. But the same is true around the world in our commercial organization. They really rapidly combined their commercial organizations and got a lot of benefit from that. But they continue to drive more and more productivity, and Adam could talk to the kind of multi-channel approaches that he's using and so forth. It's also true in manufacturing the network, Willie Deese and his team are looking to have a long-term plan to really refine and reduce the infrastructure and build the efficiency of our entire global supply chain. And also in the G&A areas, all the areas are looking to become a little bit more variable and more virtual and become even more and more of an efficient, productive company, which is, I think, the right thing, obviously, to be doing in this world. I think that what's important to remember, though, as you look at our cost base is that while we are definitely getting these savings, we're also at the same time making sure that we make investments in areas like the emerging markets and product launches and really driving the pipeline forward to make sure that we fuel future growth because we, as Ken has highlighted, we really are taking a long-term view of where we want to be. We want to have the right cost structure, but at the same time, we want to drive investments. And year-to-date, for example, our investments in the emerging markets have been quite significant. I think, Adam, you can comment on that if you'd like.

Yes, and we'll spend some more time on it on November 10. But we've got investments in emerging markets that are greater than $400 million year-to-date above what we spent last year. And we've been able to do that while we're continuing to invest in new product launches around the world. And we'll show you more of how we've transformed our commercial model so that we can really be impactful in the mature markets but grow significantly and reinvest even more in the emerging markets.

Our next question comes from Tim Anderson with Sanford Bernstein.

A question on VYTORIN and ZETIA on pricing and formulary positioning. AstraZeneca yesterday on their Q3 call talked about the downward pricing pressure on CRESTOR that generic Lipitor is going to create. I imagine the same will hold true with VYTORIN, but wondering if it might also apply to ZETIA. This is still a big franchise for Merck at about $4 billion a year, and I'm wondering if you can also just mention formulary positioning heading into 2012? And then second question is on your PNEUMOVAX vaccine, I know it's a smaller product at just under $400 million a year, but hoping you can discuss what you expect will happen assuming approval of Pfizer's Prevnar 13 for adults. How fast do you think the decline could be, for example? And I know you have your own 15-valent version of Prevnar in Phase II, but that seems like it's still quite a few years away.

Adam, you want to start with that?

Yes, so Tim, let me talk first about VYTORIN and ZETIA and then I'll get to PNEUMOVAX. If you looked at -- let me start off with ZETIA. ZETIA currently, about half of the use is in statin-intolerant patients. And obviously, irrespective of Lipitor being on or off patent, that population doesn't get impacted. The other half of the use is add-on to statins, and it's typically added on at about the same market share as you see the market share for the statins in the marketplace. There's no reason to believe that physicians will not add ZETIA to statins as much in the future as they have in the past, irrespective of what's happening with generic Lipitor. In addition, with VYTORIN, we continue to work with formularies, and we've already begun to work on formularies not just for 2011, but we're looking at 2012. And I can tell you our contract discussions to date, we've been able to successfully maintain our status for the vast majority of Medicare D plans, which you know you already had us submit formularies for earlier this year. And I can tell you, recently one of the largest commercial customers maintained a formulary status for 2012. So I believe that there will continue to be pressure. There's been pressure for several years frankly, because there's been generic statins. I think generic Lipitor in the marketplace will have a minimal impact on ZETIA. And so far, we've been fairly successful maintaining our formulary position for VYTORIN. With regard to PNEUMOVAX, PNEUMOVAX 23 has the broadest serotype coverage of any pneumococcal vaccine. And if you look at the CDC information, in 2009, the serotypes in PNEUMOVAX 23 were responsible for about 76% of disease in adults 50 to 64 years old, and 66% of the disease in adults were 65 years of age or older. So I believe that we will continue to have a very good vaccine here that will be successful in the marketplace. I'm not going to comment on the impact of competition right now, but I believe that we are going to be and continue to be successful moving forward.

Okay. Next question, please.

Your next question comes from Marc Goodman with UBS.

I have 2 questions. One, can you talk about GARDASIL specifically in the U.S.? I think you mentioned o U.S. but Japan, obviously, impacted there, but what was the key to the U.S. growth besides just back-to-school, which, obviously, comps take care of that. And then the second question is on VICTRELIS, can you just help us understand and put in context just the Vertex sales number that they put out yesterday that I'm sure you've already seen and the number that you reported in revenues? And then also talk about the EU launches and how your expectations there relative to the U.S. as far as the ramp-up?

Okay. Adam, why don't you take both of this?

So, Marc, let me start off with GARDASIL. So GARDASIL grew 41% in this quarter, and we are very pleased with that. I mentioned that about $50 million of that was GARDASIL launch stocking for Japan. If you look at the U.S. specifically, we are seeing continued uptake of the male indication. And in fact, about 30% of the first doses today are coming from the male indication. We've seen a very strong back-to-school season. We were prepared. We were ready. We were in physicians' offices, and I think we were able to execute very, very well around the back-to-school season. So we remain very pleased with the execution of our team for back-to-school. We are also pleased with the expanded recommendation for the routine vaccination of boys 11 to 12, which happened earlier this week. I think that we will continue to see increases in boys being vaccinated but it's going to come at the same time, with less females that are available to be vaccinated. So the bottom line is we're pleased with the growth of GARDASIL. We think there's continued room for growth in the U.S. as we move forward. But I would be careful not to look at the boys as an incremental opportunity without realizing that there'll be less girls that will be moving into the marketplace. So with regard to VICTRELIS, and let me take some time and walk you through how I think about VICTRELIS. First of all, if you look at the IMS share, it shows about 25% TRx share. We believe it's somewhere between 25% and 30%. If you look at the number of patients treated with VICTRELIS, we believe it's about 5,000 patients. We've seen that our share is growing. It's growing 7 out of 10 weeks, and our TRx…

Let me just say that I think that the GARDASIL case is an example of why it's important to invest in life cycle management. And also I think the VICTRELIS future opportunity is another example of why we think it's important to invest in new product launches so that we can have a durable opportunity with VICTRELIS over time.

Our next question comes from Jami Rubin with Goldman Sachs.

Just a few follow-ups for Mark's question on VICTRELIS. Just so I understand it, what is, Adam, your share of new patient starts today? And based on your description or the difference between in what you've reported and what we're seeing in TRxs, are you suggesting then that the fourth quarter should be more representative of the TRX demand that you're seeing? And is there an opportunity to further grow your share from what you are seeing because we've now been through 2 full quarters of both PIs, and it does appear that Incivek has a substantial lead. I'm just wondering what your thoughts are on how or if that could change? And we're trying to think about a run rate for next year. And then just so I understand the specifics around the VA deal. How long does that -- is that deal good for? And are VA doctors not allowed to give other patients the -- to give patients the other VA -- or the other PI in the VA setting? And I don't know if you want to talk about the sort of discount that you had to give to win that business, but if you can give sort of any color around how we should think about the profitability of that opportunity, that would be great.

Okay, Jami, there's a lot there. So let me start and then if I miss anything, you can jump in. So if you look at VICTRELIS, I think the best way to look at new patient starts is to look at new RXs. The TRxs will give you a sense of continuing patients and new patients. Our new patient starts are also showing at about 25% market share. We believe that IMS is off maybe 3 to 5 share points. So we think that our market share of new patients is probably closer to 28% to 30% based upon our own data. And with regard to how to think about it, I wouldn't think about it from one quarter to the next quarter in any type of catch up that way. It's going to be over time because for every patient that comes into the market, it takes 32 weeks of treatment with VICTRELIS versus -- and that's on average, somewhere between 30 and 32 weeks, versus 12 weeks with the competition. So each patient continues on therapy for a much longer period of time, if they're on VICTRELIS. Now it's important to note that irrespective of which protease inhibitor a patient is on, they have to be on treatment for a long period of time anyway because of PEGINTRON and ribavirin treatment. It's just that their competition is more front-end loaded versus where VICTRELIS is, and it occurs much more gradual. Another way to think about it is if you just take the total number of scripts in the market and you would times that by the amount of dollars per week, and you assume each script is worth 4 weeks, you could get to about the sales that have been reported for the products. So that's another way to start to think about it. With regard to the VA deal, it's a several-year deal. They -- it's a 2-year contract. The physicians typically follow the formulary. We're the only PI on formulary. They can have access to the other products, but it's a way that they have to go about that with a lot of paperwork and it's difficult for them to do. But it can be done and there's some physicians that will do it. The other thing is that the price is not public right now. I can tell you, we continue to negotiate other contracts, so I do not want to give the exact price, I think it would not be a competitive good move. But it is profitable for us, and we have a lot of experience in the VA. We've worked there in many classes. Many of our most important products over time have been part of the formulary, and we're very pleased to be working with them again with VICTRELIS because the patient population is very large here.

Our next question comes from Steve Scala with Cowen.

Two questions. First, Ken, you mentioned a few minutes ago a wind down of costs related to vorapaxar. What does this imply for the TRA 2P trial, which, I believe is still running towards a conclusion? Are you signaling that, that trial will be stopped as well? And secondly, Merck stated in September and, Ken, you reiterated today that it has greater freedom to operate in the Rx-to-OTC switch realm after selling its stake in Merck's J&J OTC to J&J. The question is will Merck now pursue an OTC switch of SINGULAIR for allergic rhinitis? And if you plan not to do that, can you please tell us why you will not do that?

Okay. So let me just say that with respect to both TRA-CER and 2P, we will have an update on November 10, particularly with respect to 2P. TRA-CER, we will have that data being presented at AHA in November. So my comment on vorapaxar shouldn't be read as implying any change in either one of those studies except for the fact that TRA-CER really is winding down in a normal course.

And Steve, with regard to SINGULAIR OTC, we are not presently pursuing that opportunity.

Your next question comes from Greg Gilbert with Bank of America.

For Adam, can you frame the opportunity for GARDASIL in the male market and talk about how much is penetrated already? And then secondly, on the VA contract for VICTRELIS, should we assume that, that's all about price or are there other angles that we should appreciate about your differentiated message?

Yes. So once again, I think that if you look at the recommendation, right, for routine vaccinations of boys 11 to 12, it moves the recommendation from the current "permissive" at the provider's discretion to "universal" on the routine schedule. However, I also mentioned that about 30% of our first doses already were being administered to males. It may improve our managed care coverage, but we already have about 75% of managed care coverage for males already. So we're not providing the penetrations yet because -- the penetration rates yet, because it's still early and it's still relatively low and we want to see how that progresses over time. But I do believe that it would be much slower than what we've seen in the rates that we've seen for penetration into the female segment.

And second question I think it was about the VA in terms of how did we get on their formulary.

So with the VA, I mean, the first thing the VA does is they do a clinical review. So they look at the efficacy of the product, they look at the safety of the product and then after a clinical review, they'll do a pricing review. So it's the totality of the product. It's clinical and pricing that enabled us to be on the formulary.

Your next question comes from Tony Butler with Barclays Capital.

Adam, you call out a number of your established products and the growth that has occurred. One of those, of course, is ISENTRESS, which continues to grow very well both in the U.S. but especially well x U.S. I wanted to simply focus on the U.S. growth though, and ask questions around raltegravir and if, in fact, you think you need to increase overall resources for ISENTRESS in the U.S. in the upcoming year with the assumption that Quad comes to market?

Adam?

So we're pleased with the growth of ISENTRESS. We have 23% growth year-over-year. We had a little bit of a slowdown if you look quarter-over-quarter, but that's because a lot more patients for this quarter moved into the ADAP, which is more discounted, but that's not uncommon to occur. And we've seen that happen in years in the past where one quarter slows down versus other quarters. I like to look at the year-over-year growth, which we're still very pleased with. We look at our resources very carefully. I think we're resourced well. If we believe we need to increase our resources, we have the capability and the ability to do it for sure. When I look at Gilead's Quad, I think there's a couple of things to keep in mind. First is the inclusion of the booster in the Quad, and I think that you have to look at tolerability that, that might bring into play, and I think that it might enable ISENTRESS to have a tolerability advantage because it does not have a booster for ISENTRESS. And now that HIV has become much more of a chronic disease, long-term safety and efficacy data are very important. ISENTRESS has long-term safety and efficacy data. So I believe that we'll continue to be successful with ISENTRESS. Despite the competition next year, I think we have the right level of resources, and if we need to increase those resources, we will.

I think we have time for two more questions, please.

Your next question comes from John Boris with Citi.

First question for Ken. As you take a fresh look, Ken, at the cost structure of Merck, recognizing there's a need for investment but certainly also potentially room for cost-saving initiatives, how are you thinking about at least Merck's cost structure and how a major pharma should look over the longer term? And then second for Adam, on your China sales, can you just break off what percent of those revenues are coming from off-patent medicines versus on-patent medicines? And then just very quickly on DULERA and the COPD filing in the U.S., does it contain data on exacerbations?

Ken, you want to start?

So on the first question around the overall cost structure, I think it's important to remember that we are on track for the synergy goal that we set with respect to the merger in the first place. And last quarter, we announced an additional restructuring around $1.2 billion to $1.5 billion. So I think that shows you that we see opportunity. We also see the need competitively to be a very efficient organization. We talked about R&D a few minutes ago, and I wanted to be very clear. We're very much committed to funding R&D, but Peter Kim and his colleagues are also committed to looking at ways in which they can increase the efficiency of everything that they do in R&D. Adam and his colleagues in commercial area are also looking at the best way to serve customers consistent with that theme of efficiency. And lastly, I think from a network standpoint and a manufacturing standpoint, we have a lot of work to do in front of us to bring together the plant structures that we have and to find efficiencies there. I'd also say that in our headquarters group, people also see the need to behave and to run the company at a way that allows us to be as efficient as possible and reallocate resources where they are going to drive the most growth.

Okay. Adam?

And with regard to China, we reported about 50% increase in sales quarter-over-quarter. And the reason I affirmed that overall, for the full year, we believe that the growth will be 30% is because as I've said many times, in the emerging markets, you have some quarters where there's purchasing patterns that cause increases or decreases versus prior quarters. If you look at last year, we had less sales in July than typical. And therefore, the year-over-year growth of 50% seems higher than it actually was. It was probably closer in the 30%. So that's why I wanted to make sure people understood for the full year, we expect sales to be -- growth in China to be well over 30%. But the other thing that's important is, we do very well with both patented and unpatented products in China. I don't have the sales broken out exactly like that for you. I'm going to spend more time speaking about China specifically on November 10, and I'll be able to provide you with some additional insight into how we see that market and how we see our growth coming from that market. With regard to DULERA, we already have significant improvements in lung functions and also less exacerbations in the label for asthma. And the addition of the COPD claim, I think, will help us continue to grow, but it will also help us to get onto formularies because having both indications is going to be important and helpful. But we already have the exacerbation data available to us in the label.

Okay, next question please.

Your next question comes from Seamus Fernandez with Leerink Swann.

So I actually have just 3 quick questions. First, can you just update us quickly on prospects for Lipitor, ZETIA and the JANUMET XR in terms of just filing capabilities and perhaps an update there. Second, Ken, and for Peter as well, we're seeing very impressive return of cash via the repurchase and the dividend. How should we be thinking about cash returns of the company because as I see it, there's still going to be a fair amount of cash accumulation that's certainly relative to consensus expectations for this model. So can you just help us think about what your thresholds are for utilization of cash and whether the stock is a key threshold there? And then lastly, a question on, maybe more for Adam, the importance of biosimilars as you think about that as part of potential growth strategy, as well as the potential risk long term.

So, Seamus, we'll try to keep track on this. Let me start with the biosimilars. We're not going to talk about biosimilars today. We have the November 10 business briefing coming up in less than 2 weeks. So we'll perhaps have that on the topics there.

Let me -- and so let me answer, so JANUMET XR, we responded to the letter from the FDA, and we expect to hear back from the FDA in the first quarter of 2012. With regard to ez/atorva, we already filed that product. Obviously, you've probably seen that Pfizer has filed a lawsuit. We're not going to comment on the litigation. The lawsuit has the potential for delaying the FDA's ability to approve the product until January of 2014.

Okay. And just generally, I'll just kick off the issue around returning cash to shareholders. As we've said all the time, we intend to be shareholder-friendly. In that regard, I think we've done a good job in the past few years in returning cash to shareholders around 70%. And with that, I'll turn it over to Peter Kellogg.

Sure. And I think as you saw in our share repurchase activity and our year-to-date activity, quite frankly, we are actually this year repeating the performance and having a very strong return of cash to shareholders. We don't give guidance going forward on that though. I'm not able to really comment on it specifically, but I think generally I'm most comfortable highlighting that we stick to the standard that we really need to make sure we invest in the business, whether that be through pipeline or investments geographically. And so we make sure that we have the resources to drive the strategic growth of the business going forward. Then beyond that, I think we've demonstrated over and over again and we really have a goal, Ken and I both with our Board, to make share that we really are shareholder-friendly. We clearly saw the third quarter opportunity to utilize the authorization for share repurchase, and I think we did a nice -- that was a nice volume there. We do have a dividend of $4.7 billion on an annual basis. But I think as we go forward, Ken and I have both said that we're very focused on making sure that we continue the heritage of being very shareholder-friendly in terms of how we return cash to shareholders.

Okay. Let me just close the call by thanking you all for being here with us this morning. I just want to say again, I think this was another good quarter. As a management team at the beginning of this year, we said our intent was to make selective investments that would drive both the top line and the bottom line, and we're pleased that we're able to show that kind of execution. Going forward, we look forward to discussing with you on November 10 our prospectives on Merck's strategy to drive growth and shareholder value over the longer term. Peter Kim and his colleagues will be speaking with you about the many promising projects in our pipeline. And finally, as Adam has said, he will also be able to share with you his views of our product portfolio and the commercial strength that is driving the top line growth that we just discussed today. So thank you very much again for joining us, and I look forward to seeing you on November 10.

Thank you. This concludes Merck's third quarter 2011 earnings conference call. You may now disconnect.