Good day, everyone, and welcome to Merck's first quarter 2013 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to Alex Kelly, Vice President of Investor Relations. Please go ahead.

Thank you, Jackie, and good morning, everyone and welcome to Merck's first quarter 2013 conference call. Before I turn the call over to Ken, I want to point out just a couple of items. First of all, there are a number of items in the GAAP results, such as acquisition-related charges, restructuring costs and certain other items. You should note that we have excluded those items in our non-GAAP reconciliation tables and you can see them in our press release in table two and that will give you a better sense of the underlying performance. There are three tables in the press release. The first table is the GAAP results. Table number two reconciles our GAAP P&L to the non-GAAP results for the first quarter and table three provides the sales performance for the company's business units and our products, both a recorded basis and excluding exchange. During the call, we will be referring to tables two when we discuss the P&L and table three when we talk about revenue performance. Finally, I would 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 on the current beliefs of Merck's management and are subject to significant risks and uncertainties. If underlying assumptions prove inaccurate or risk or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements. The company's SEC filings including Item 1A in the 2012 10-K identify certain risk factors and cautionary statements that could cause the company's actual results to differ materially from those projected in any forward-looking statements made this morning. Merck undertakes no obligation to publicly update any forward-looking statements. Our SEC filings can be found on the website at merck.com. You can also find our earnings release and all the tables there as well. This morning, I am joined by Ken Frazier, our Chairman and Chief Executive Officer, Roger Perlmutter, our new President of Merck Research Laboratories, Adam Schechter, our President of Global Human Health and Peter Kellogg, our Chief Financial Officer. Now I would like to introduce Ken Frazier.

Thank you, Alex. Good morning, everyone and thank you for joining the call today. Our results for the first quarter underscore the challenges of managing through a major patent expiration and the impact of headwinds which were even tougher than we had anticipated. However, we took the focused actions necessary to drive our business and deliver our first quarter EPS target on an operating basis. Given the trends facing us for the remainder of the year, including substantial non-operational impacts, such as foreign exchange, we have adjusted our 2013 guidance downwards. Peter Kellogg will discuss our guidance in more detail. Despite these short-term challenges, we remain committed to driving shareholder value. One way we demonstrate that commitment is by returning cash to shareholders. In the first quarter, we delivered a 2.5% dividend increase and nearly $600 million share repurchases. This morning, we announced a $15 billion expansion of our share repurchase program. We expect to repurchase approximately half of that or $7.5 billion in the next 12 months. Also, key to creating shareholder value is our four-part strategy, which is focused on executing on our core business, expanding in key markets geographically, extending our complementary businesses and excelling at managing our cost structure. This strategy enables us to take a balanced approach to address the short-term and long-term challenges and opportunities inherent in our business. We knew the first half of 2013 would be challenging for us due to the patent expiries we face and the first quarter results illustrate that challenge. We fell short of our expectations for top line performance and are not satisfied with the overall number for the JANUVIA franchise, which along with the continued decline in sales of SINGULAIR and other products with patent expirations led to a 9% decline in worldwide sales. However, the…

Thanks, Ken, I feel very, very privileged to have the opportunity to lead the Merck Research Laboratories. As many of you know, this is a true homecoming for me since I was responsible for basic research and early clinical development at MRL about 15 years ago. I spent the last two weeks familiarizing myself with the current state of the laboratories and with our most critical projects As Ken mentioned, both SUVOREXANT, our dual orexin receptor antagonist and SUGAMMADEX, our modified cyclodextrin that permits rapid reversal of neuromuscular blockade during surgery are currently under regulatory review. We are looking forward to having more detailed discussions with the FDA on these agents. Last week, we announced that the FDA had granted breakthrough status to LAMBROLIZUMAB, also known as MK-3475, which is our investigational PD1 specific monoclonal antibody for the treatment of advanced malignancy. As you are aware, a 510 patient Phase 2 study of this agent in malignant melanoma is currently underway. We will be presenting more mature data from our Phase 1B study in the same indication as the American study for clinical oncology meetings in early June which will demonstrate why were so enthusiastic about this new approach for treating a variety of otherwise devastating malignancies. I have also had a chance to review the Odanacatib program. Last year, an independent data monitoring committee recommended that our pivotal study be closed for robust efficacy and a favorable benefit risk profile, while noting that safety issues remained in certain selected areas. The DMC recommended continuing the previously defined extension study in a blinded format to collect important safety and efficacy data. That extension study is proceeding at pace. We have a good plan in place and hope to accrue the necessary data and allow for a 2014 filing as previously discussed. Finally just two days ago we announced the worldwide collaboration agreement with Pfizer to develop and commercialize their investigational SGLT2 inhibitor, ERTUGLIFLOZIN, for the treatment of Type 2 diabetes. This partnership builds on our very significant expertise in diabetes and will permit the exploration of a potent and selective SGLT2 inhibitor both as a stand-alone intervention and in combination with other agents, including, of course JANUVIA. There is more work ahead over the next three to six months, if I continue assessing the labs and our pipeline. Though it is too early for me go into details about my views about specific programs or what changes I see ahead for Merck research, suffice it say that when the time is right, I will have more to say on all of these topics. Meanwhile, know that I am excited to be back at Merck and delighted to be working with the gifted scientific team at MRL in addressing the needs of patients around the world.

Thank you, Roger. In terms of R&D, as you can hear, we remain committed to accessing the best opportunities whether they are internal or external. And this year we have already entered into a number of new licensing agreements. In addition to the diabetes partnership with Pfizer that Roger just mentioned, last week we announced the Hepatitis C agreement with Bristol-Myers Squibb to study MK-5172 in an all oral combination with Bristol's NS5A inhibitor in a Phase 2 study. In February, we announced an agreement with Samsung which provides Merck's global commercial presence with the development and manufacturing capabilities of Samsung to increase access to biosimilars. In closing, our top line performance for the quarter reflected both the challenges facing Merck and the benefits of our broad diversity across businesses, products and geographies. While we are not satisfied with our first quarter top line result, they are also not indicative of the future opportunities for our business. Despite the continuing economic pressures and the need to manage through patent expiries we are committed to driving better top line performance with key growth products such as JANUVIA in key geographies, advancing and augmenting our pipeline, and taking out costs through continuous productivity improvements. By doing these things well, we will continue to generate steady cash flow and drive shareholder return over the longer term. I would like to now turn the call over to my colleague, Adam Schechter.

Thank you, Ken and good morning, everyone. This morning, I will focus my remarks in three areas. First, our core products. Second, our core markets. And third, the launches we anticipate later this year and those we are preparing for beyond this year that will provide additional long-term growth opportunities. So, let me begin with our results. Human health sales declined 12% year-over-year. There is a $1.4 billion impact and the loss of exclusivity of SINGULAIR, PROPECIA CLARINEX and MAXALT and there's weakness in the yen. While loss of exclusivity was expected, the rate in the level of erosion has been more rapid. In addition, we had an unexpected decline in U.S. wholesaler inventory levels of about $150 million. Though I am not satisfied with our results this quarter, I am confident in our future outlook. So, let me share with you what I do to get a sense of the underlying business performance. First, I look at sales on a constant currency basis. I also exclude sales from products that lost exclusivity. Then I look to see if there is an impact of business wholesaler purchasing patterns. Putting at a side this quarter, our underlying growth was 4%. I'll now provide more details. Starting with JANUVIA and JANUMET franchise which had sales of $1.3 billion and 1% growth ex-exchange, 7% growth in international markets was offset by a 5% decline in the U.S. this quarter. Let me take a moment to talk about the factors that affected the growth rate this quarter. This is important context that I want to provide. First, in the United States, let us talk about demand, price and inventory. With regard to demand, as you can see from prescription data, growth was about 4% this quarter. This was significantly lower than the demand growth…

Thank you, Adam, and good morning. In the first quarter, we worked hard to offset the top line pressures posed by patent expiration and foreign exchange to deliver the bottom line. We accomplished this by holding our costs flat to achieve our first quarter guidance. Additionally, we had a benefit from our anticipated tax items which drove our earnings up to $0.85 on a non-GAAP basis. Although we achieved our first quarter guidance, the pressures on the business are greater than we had previously anticipated. As a result, we have updated our full year guidance to reflect additional top line pressures, including from foreign exchange as well as new R&D programs and revise tax rates. I'll talk about that in a minute. Separately, we are significantly increasing our share repurchase activity to increase the amount of cash we return to shareholders. Now before discuss our 2013 outlook and the new share repurchase program, I would like to review the operating results in the first quarter. My remarks will focus on our non-GAAP financials. On this basis, we earned $0.85 per share this quarter compared to $0.99 the prior year. The biggest driver of the decreased EPS was loss of sales due to the generic erosion of SINGULAIR, MAXALT, CLARINEX and PROPECIA. Now, these are all relatively high gross margin products and their erosion created a 2.3-point headwind on the gross margin this quarter. As a result, the overall gross margin was lower in the first quarter of 2013 on a year-over-year basis and on sequential basis as we said it would be on our last call. Our non-GAAP gross margin declined on a year-over-year basis to 74.4%. Now, on a full-year basis, our productivity gains will offset part of the patent expiry impact, but we still expect about a one…

Thanks, Peter. Now we are ready to open up the call to answer your questions. In order to help us get through as many questions as possible, please limit yourself to one or two questions and note that we won't take follow-up questions, but if you do have additional questions, you are welcome to rejoin the queue. Jacquie, we are ready for the Q&A?

(Operator Instructions). Your first question comes from the line of Marc Goodman with UBS.

Question on PD1 programs, I was wondering if you could talk about what that means and what the programs you are planning on. And then second, just on odanacatib, can you just give us a sense of how we should be thinking about the hearing from you later this year how you are thinking about letting us know what is going to happen here and just what the update is? Thanks.

The question I think was about PD1 first question.

Maybe you could give me the first question on PD1 again, because unfortunately we can't hear you very well, so go ahead. Marc? Would you mind repeating your question on melanoma, on PD1? We lost him.

I think the question what's the status of the PD1 program, what are we thinking about other indications.

Again, as I indicated, we are going to have the opportunity to review in detail the Phase 1b data at ASCO. And in addition, we have an ongoing Phase II study in malignant melanoma and as everyone knows we do have breakthrough designation from FDA as we recently announced. We have the belief that the drug may have potential and a variety of other indications. We have been conducting a Phase 1 study in which we are looking at a variety of other malignancies. And using those data, we will be able to target the appropriate patients and really ascertain whether or not the drug can make a big difference for patients with malignant disease. Your second question related to the tempo of beta from the odanacatib study. And as I indicated, the Data Monitoring Committee had requested that we continue this blinded study in order to obtain additional data on efficacy and safety. We are doing that. We have a good plan in place. And as these data become available for review, we will as soon as we can, let you know what our plans are but we have to wait and see the data.

Okay. Next question please?

Your next question comes from the line of Jami Rubin with Goldman Sachs.

Peter, my first question to you is if you can walk through the math on your share repurchase program, you said you're going to buy 7.5 million over the next 12 months, that would just based on my calculations reduce your share count by about 340 million or so, which would be highly, highly accretive. So, just related to your new guidance, I guess if you could just walk us through what your expectations are for the accretive impact from the buyback, so we can figure out what the either offsets are. Am I thinking about this correctly? Obviously, you don't get that full benefit in 2013, but I would think you would get a big chunk of that benefit. Then just secondly, Roger, I think that what Marc was trying to ask was what are the tactical implications of breakthrough status or breakthrough designation for your PD1? Thanks very much.

Hi, Jami. It's Peter. Let me take the first part. So, what we did indicate, I think you got this right that we are going to repurchase over the next 12 months $7.5 billion, so our stock is in the 40s. You can do the math. I don't think it's quite 340 million shares. That might be for the full $15 million over a longer period of time. Obviously the other thing I would just advise is obviously going against that you do have to factor in the fact that we do have stock being issued as part of our compensation program. Just as a metric, in 2012 we issued about 50 million shares that kind of the run rate there, but in general we have factored in the benefit of the share repurchase into our EPS guidance for this year. And I think what really important to recognize on our guidance is that we have a very strong international business which has positives and negatives, obviously. But when foreign exchange rates shift as strongly as they have in Japan and in Venezuela, it does impact us. We mentioned earlier this year that Venezuela would be an impact to us on a full year basis, however we kept our guidance range and that pushes down low in that range. Obviously, I think everyone is able to do the math on that. That's about on a full-year basis about $0.07 per share impact to our EPS. The other pressures we are seeing right now, most notably the yen, obviously. But other currencies are well around the world at about 10% of headwind to our performance this year. We have added a little bit of spending on R&D as I mentioned in my comments and we are reducing cost elsewhere throughout the company pretty aggressively. So that gives you a sense of roughly how the EPS has been impacted in the top line. Obviously it has been impacted before. We had indicated that we would be near prior year ex-exchange and that it would be a 1% to 2% impact on foreign exchange. Now we have updated that status to be about 2.5% impact of foreign exchange to the top line. So if you work these factors into a model, I think you will see that obviously offsetting that we have to take a lot of cost out, but still the guidance range is appropriate given the foreign exchange impact. I think that we haven’t given any specific guidance on the pace or specific timings of the share repurchase activity and I am going to hold off on that. we are not going to give guidance on that until we finalize our plans.

Roger, you want to talk about breakthrough?

Yes, Jami, with respect to the implications of breakthrough designation, this is a new program, as you know, from the FDA. The agency is eager to work closely with sponsors when they identify product candidates that potentially could have a large impact in treating grievous illness. We found already that there have been lots of productive interactions with the agency in terms of design of our program. We are moving forward quite aggressively and that we really believe this can have a big impact and we are delighted to be able to work closely with them.

Thanks. Next question please.

Your next question comes from the line of Seamus Fernandez with Leerink.

So, maybe, Ken and Roger, can you folks talk a little bit about what the predetermined mandate is? There is a period within which one can accelerate programs which may be time to increase spending in R&D. So I am just wondering what the mandate is in terms of near-term improving efficiency in R&D, given the higher spend versus some of the peers? Then, longer term, how do you see improving the productivity of the organization, overall? Then second question for Roger on PD1. Can you just clarify what were the reasons offered or how do you position PD1 to gain breakthrough status in melanoma? Was the design of the trial specifically the fact that you tested this in your voice, failures and achieved a 40% response rate? Was that particularly a strong contributor to gaining that status? Thanks.

So why don’t we start with Ken.

So I would say that when Roger came in, and again, I am very pleased that Roger rejoined us. I worked with Roger for a number of years in his prior Merck career. I think the three things I have asked Roger to do. He has agreed to take on. The first one is to look at the organization and to make the kinds of assessments that are necessary to enhance the overall longer-term capability of MRL to continually be successful, if you will, in its endeavors of looking for these transformational drugs that are so important to companies like Merck. The second one is looking at the various programs that are underway and making investments along with his colleagues about those program that are most productive so that we can ensure that the capital that we are spending on R&D is productively spent. I would say the third thing that I have asked him to do and this of course is the critical thing is to continue looking for the best opportunities both inside and outside so that we have a flow of significant products in our pipeline to drive our future success. Roger, you can comment on how you are looking at so many in two weeks?

So, it won't surprise anyone on this call that you are bringing a new guy and a fresh pair of eyes that there are going to be some changes to take place and Ken would not have wanted me to come here and assure that everything is going to be exactly as it was before. I am doing a very detailed review of programs, of process and people and already two weeks in, I can say there is some opportunities for acceleration and for productivity enhancement and you can be confident that I am going to address all of those and we will have a chance to talk about them in much more detail, going forward. With respect to the PD1 breakthrough designation, its all about the data and you have seen the data that was announced early on. There will be more of it at ASCO. Those are the data really that persuaded the agency that this was something important to pursue.

Okay, next question please.

Your next question comes from the line of Chris Schott with JPMorgan.

Thanks for the questions. My first one was on capital deployment priorities and what got you to the $7.5 billion target next 12 months. I guess, specifically as we are thinking about this, what does this mean for potential dividend increases going forward with this announcement? The second question was on JANUVIA, and just a little bit more detail just kind of what happened here? It seems like we've had competitors in this space for some time. Did something changed recently. And without this TZD kind of tailwind, what do you think you need to do a better drug highlighting to physicians to really get the class of JANUVIA, kind of back on track. I was just looking for just a little more color there. Thanks.

Well, before Peter gets into more details. I think our approach to capital deployment is to try to figure out after doing a rigorous analysis, how we can create the more shareholder value. And, I'll turn it over to Peter to give him an opportunity to speak today, but that's what the real key here is, driving the most shareholder value.

Chris, thanks for the question. The dividend has always been our primary means to return cash to shareholders. This announcement data didn't change that that at all. Obviously, we increased our dividend about 2.5% this year and increased it 11% in 2012, so I think our committed dividend remains very strong. What we did here is, we did a rigorous analysis of our capital structure and liquidity. And from that, we concluded that our current strong balance sheet and financial position are more than adequate to achieve our capital structure priorities and to preserve our ability to invest in the business in the ways we want to even in the downside scenario. So, we thought we've definitely got the capacity to fund both, internal and external growth opportunities and we certainly will be doing that, but we also attempt that our focus on shareholder value and returning cash to shareholders. And so, kind of marrying up with the strong dividend program that we plan to continue to support, we felt this share repurchase opportunity was appropriate and certainly reasonable.

So, Chris, let me give you some additional thoughts on JANUVIA. I want to first start off by saying, we remain confident that the growth opportunities for JANUVIA and for the DPPIV class moving forward. The opportunities are that diabetes prevalence is growing, so sulfonylureas still represent a huge amount of patient days of therapy about 35% of patient days of therapy and we have been successful in some markets where in Japan for example, DPIV now represent more patient days of therapy than the sulfonylureas do. We have to continue to talk with physicians and show them the benefits that you can get by adding JANUVIA to metformin. And, I think with the additional dedicated resources that we are putting behind JANUVIA in countries like the United States, where we now have full time dedicated people in discussion with physicians that will give us some additional momentum. I also want to give you a little bit more perspective on what has occurred and what we see as we move forward, and I'll go back to demand and I'll give you a little bit more color on demand. So, if you look at IMS data, you can see about 4% growth, but if you prior to the TZD events, you can see JANUVIA volume growth was in the single digits. It was somewhere between 8%, 9%. When the TZD opportunity occurred, we increased our resources, we focused on the opportunity and we saw a growth between 11% and 16%, so we saw a very big acceleration. There is very difficult to compare now to back then when this acceleration was occurring, so we believe that there is room for us to continue to grow. And as we get through this summer when the acceleration started to go away, we'll start…

Okay, next question please.

Your next question comes for the line of Mark Schoenebaum with ISI Group.

Hi, Roger, I just wanted to say it's nice to hear your voice and its great to have you back again. Sorry, if I accidentally ask you a few Amgen questions every now and again. If I could just go back to JANUVIA, thanks for the color. So I just expand on the $70 inventory reduction you mentioned you think its one time. Could you just elaborate why do you think it is one time? Should we thus expect it to return to more normal wholesale levels next quarter so we could expect a sequential bump up and we should be thinking about an our models? Then, if I might, on the on the anti-PD1 program. There has been several questions but I wanted to ask something a little bit more direct. Is the ongoing melanoma trial, which is technically labeled as a Phase 2 interim trials but is actually rather large. I think it is 500 or 600 patients. Could that or is that a pivotal trial that could spur registration? Have you seen a signal in lung cancer yet? Thank you.

Okay, lets start with Adam.

So thanks Mark for the question and with regard to JANUVIA, we believe there is $70 million inventory reduction in United States. We based it upon days of supply on hand that we received data on. I think what happened was with the very strong acceleration that we saw with the TZD volume, wholesalers are buying in based upon that volume growth. Now that we have seen less of a volume growth, they have taken the inventory down to manageable level. So they are at levels where they can consistently supply to the market but there are days of supply that are lower than they have been before. So we don’t expect them to go lower but I would not necessarily expect a bump up in the future. What we expect is mid single-digit sales growth in the U.S. and that’s reflective of the current RX trends and the current marketplace competition. Outside its low double-digit growth, and that is really what we are seeing with underlying demand and growth for the first quarter.

Okay, Roger, you want to comment on that PD1.

Mark, thanks for your comments. With respect to PD1, again its too early to really be just talking about regulatory strategy. You are right that we have an ongoing Phase 2 study. Its relatively early days for this 510 patients studied in malignant melanoma. Everything will depend on the data. As you know in oncology, there are a variety of mechanisms that permit a relatively early entry. If the data are especially strong, you can be confident that we will pursue all of those possibilities through our discussions with the agency.

Okay. Thanks, Roger. Next question please.

Your next question comes for the line of Andrew Baum with Citi.

Firstly with regard to your PD1, there was a couple of early anecdotal patient reports of drug potentially drug related anorexia/cachexia. Perhaps could you outline if there has been any additional cases reported or whether you believe this was just anecdotal observations that maybe independent to drug or whether there is any type or related phenomenon either drug or class-related? Then second, perhaps, you could comment on animal health business, where you posted 2% growth. Was that just because of a high baseline effects, FX or are there other issues as well in that? Thank you.

So Roger, why don't we start with you on PD-1 question?

So this question on PD-1, again, we will have an opportunity to present in more detail the safety analysis from the Phase 1b study at ASCO and you will be able to see that. Not surprisingly, in these very seriously ill patients, there are variety of signals that one sees, but it's too early to know what to attribute those things or if they will begin to talk about class effects. At the moment, I would just reiterate that we are very encouraged by what we see in terms of the benefit risk profile at a very early stage in the development of this new intervention for cancer.

And Richard, do you want to talk about animal health?

Well, this quarter we continue to see strong growth in the U.S., about 19%, Northern Europe was about 8% but it was sort of offset by weakness in Southern Europe, which was down and Asia Pacific which was down. Also Latin America also grew slower sequentially. So, I would say, we saw some weakness that was impacted in certain areas by economic conditions but, overall, we see excellent prospects for this business going forward.

Okay, next question please.

Your next question comes for the line of Tim Anderson with Sanford Bernstein.

A couple of questions. One on, consumer health. Ken, in the past you've said on several occasions, you have felt you don't have critical mass in this division. Is that still the case? And if so, what options does Merck have in front of it to address that? Then you had another question on PD1. It seems to be a class based side effect, where if you block PD1, you get pneumonitis and obviously with the Bristol compound we saw three pneumonia related deaths or, I should say, lung related deaths. In your program, can you talk about pneumonitis that you've seen?

Tim thank for the questions. I'll start with my thoughts on consumer. My thoughts about the critical mass issue really have not changed. I think that continues to be an issue that we have to look at, and as I've said before, we periodically assess our business strategy based on the fit and the business opportunity that we see. As I've said in my earlier comments, we believe that this quarter our business diversity actually helped us, it was complementary, it contributed to the top and the bottom line. Growth that we need to have, but as always we have to look at all of our portfolio and make assessments about what's the best way to create shareholder value going forward.

Yes. Specifically with respect to the pneumonitis issue, again, I caution everyone that it is too early in these studies to understand what is truly class based but it is the case that there has been pneumonitis reported. We can't compare the frequency of those events across studies, but we would say, the majority of events that we have seen with MK-3475 are grade 1, 2, and we have not had any reported fatalities to-date, so that's what we know at this time but as I say early days.

Your next question comes from the line of David Risinger with Morgan Stanley.

Great. Thanks. So, I just wanted to welcome Dr. Perlmutter and ask, and I'm not sure if it's appropriate for Ken to answer this but could you just talk about your mandate with respect to rebuilding the pipeline, whether you see doing that more internally and thus maintaining the R&D cost structure, or taking the internal cost structure down and going externally for products to accelerate the late-stage pipeline? Then second, another PD1 question. Last year, when Bristol presented its early data on PD1, it presented the data in multiple cancers. Your Phase 1b trial I believe includes multiple cancers but you are only presenting the melanoma cohort at ASCO. Could you just tell us when we should expect data in other cancers from your PD1? Thank you.

So, Dave, let me start by saying, I'm also pleased that Dr. Perlmutter has rejoined us. What's important for us going forward, if we got to be successful in our strategies, we have to have the best medically important products available whether they are internal or external. You saw this quarter that we did some deals showing that we really are very much focused on what's going on in the outside world and so I've not tried to be prescriptive to Dr. Perlmutter. I think it's all about the products. It's all about making sure that we have the right products and sufficient numbers over period of time and make sure that we have the ability to grow this company, and to meet the needs of patients around the world. I'll turn it over to Roger to see if he has any other comment.

Yes. David, thank you. My response to the question about the sufficiency of the pipeline is always the same. In my view, I always want more. It's never good enough. I want more products and I want those products to be the very best possible and I'm actually not so concerned about where they come from. Let's be clear that no matter how good your research organization is and we are very, very good. The majority of great research is being done elsewhere. It has to be true, because of the sheer bulk of research organizations around the world, and I've worked with a lot of those people and they are terrific. So, I'm eager to take advantage of their programs and bring them in-house where that make sense where it complements our expertise and we will do that and we will also accelerate the process of bringing forward products internally. I hope that's helpful. With respect to additional tumor types. Yes, we do have a multi-arm study in our Phase 1 program. We are looking at a variety of potential indications. The opportunity for an anti PD-1 agent, our anti PD-1 agent, we believe is really quite broad. But the data at this point, it's too early to present the data. Our Phase 1b study in non-small cell lung cancer is ongoing. It's a little bit a function of pace and approval and how long it takes. So I don't want to promise you when exactly the data will be presented but, suffice it to say, we are working assiduously to bring this program forward.

Next question, please.

Your next question comes for the line of Steve Scala with Cowen.

Sorry if I missed this, but how much did currency contribute to the reduction in your full year EPS guidance? Then secondly, a question for Dr. Perlmutter. I think FOSAMAX was licensed and developed on your watch. How does its benefit to risk profile compare to odanacatib based on what you now know about odanacatib? Thank you.

Okay, let me just start to try to answer your questions about the factors there and the primary drivers that drove the change in the EPS guidance. I think the factors are the following. So let's just go back. We started at $3.60 to $3.70. I said when we set that target that we were going to try to set an ambitious target. Given that we were going through these patent expiries in last year, it was $3.82. So the original guidance $3.60 to $3.70. Venezuela knocked off $0.07, the additional FX pressures on our top line that we have seen since February we last talked about our guidance are another $0.10. We also had some tax pressures that constitute about $0.05. As we look at the new R&D spend, that's about $0.05 and the product trends that Adam referred to about $0.06. So that all adds up to approximately $0.33 of pressure, of which, I would say, $0.22, I would characterize as non-operational and operational items are about $0.11. We are able to offset over half of those pressures with operational cost reductions versus our prior plans. So, we are able to offset a huge amount of that by cost cutting. Again more than half. By my calculation around $0.18 but we still have with Venezuela and FX, those are still pretty significant drivers. That was what have led, among other things I was saying, at this point, we think it's prudent for us to take down our guidance.

Okay, and with respect to FOSAMAX versus odanacatib, just a few things. You are right, of course, that FOSAMAX was deeper involved in alendronate program here. When I was at Merck previously, I also supervised the Cat-K program which led to odanacatib. So it was nice to be there at the beginning and now I get to be here as we carry it over the finish line too. In addition, of course, I have had experience with other antiresorptive agents and most particularly denosumab at Amgen as well as anabolic agents. So I have some background in the area. You can't compare different classes of antiresorptive agents. The important thing to recognize is that there is great need in the osteoporosis population. There is great need for new agents that reduce fracture risk. What we have heard from our data-monitoring committee is that odanacatib has robust efficacy. That's very important. We have an ongoing Phase 3 blinded study, which the data monitoring committee has looked at. They have said they want us to continue that study on blind to look at additional safety and efficacy data and we are doing that. We know from prior studies that odanacatib compares very favorably in terms of its ability to build bone mineral density and to continue to build bone mineral density over time. Other things will clearly distinguish odanacatib from bisphosphonate antiresorptive agents and the need is very, very large. So I am encouraged by this and I am eager to see what the data looks like when we are finally able to get a complete unblinding of the study.

Okay, next question please.

Your next question comes for the line of Alex Arfaei with BMO Capital Markets.

Good morning, and thank you for taking the questions. First for Adam regarding your recent partnership with Pfizer. In general, where do you see the SGLT2 sitting in diabetes, particularly relative to the DPPIVs? Then on Hep C and your partnership with BMS. My understanding was that you had your own NS5A, which was QD. Was there an issue with that product that led you to partner with BMS or was it simply that daclatasvir was so much further ahead and that this would speed things up a little bit? Thank you.

Okay. Let's start with your first question. So, let me give you some background on the SGLT2, and the first U.S. launch was less than a month ago, so still pretty early. In Europe, it was in late 2012, so it's early but we have some data on that. We've done some market research in Europe. And what we see there is, in most cases the SGLT2 class is being used by specialist after DPPIV class. Diabetes is a progressive disease, most of the patients are on more than one prescription over time. The physicians typically begin treatment with metformin and then they add on therapies until the patient ultimately gets to insulin. So, we believe there is room for another class, however we believe the SGLT2s will be used as an oral option after the DPPIVs. We believe that JANUVIA will continue to be the preferred choice as an add-on to metformin, because of the efficacy profile, the proven tolerability and the five years of experience that physicians have with the product already, but we are very pleased to be collaborating with Pfizer. We think that there is room to commercializing SGLT2 inhibitor and we are excited about the potential combination because after utilizing JANUVIA a nice combination with a high quality SGLT2, we think will be a very attractive option for physicians when they want to continue to use oral therapies prior to insulins.

Roger, you want to comment about the Hep-C?

Yeah. There's no problem with our internal program. We do have a very satisfactory program, but on the other hand the opportunity to collaborate with Bristol is a good one. We clearly wanted to do that. I should just say also with respect to the SGLT2, now I looked to detail at the materials, of course from Pfizer before we went forward with that deal, and their molecule that we are pleased to be collaborating on has varying desirable properties and extremely strong Phase II profile, so there is reason to want to go forward with a leading molecule like that in developing combinations.

Okay. Next question, please?

Your next question comes from the line of Jeff Holford with Jefferies.

So, first off on the revenue guidance, the cut that you have made is greater than incremental FX headwind, so I would assume that you have got some specific products which are lowering your internal expectations for 2013. Could you just breakout what those are? Then just secondly, on the decision around the share repurchase program that you've put in place, would you say that's coincidental in terms of timing with this quarter or potentially reactive to some of the pressure on EPS that might be going for this potential things like JANUVIA estimates on the street, which I think the growth rates are higher than you've talked about on this call might come down? Thank you.

Ken?

Let me start on the share repurchase question. So, no. There is no connection to what happened in this quarter. There are no specific triggers for the program. Our board approved the $15 billion share repurchase program, because after rigorous analysis of our capital structure and liquidity, the interest rate environment, we thought it was a good way to return additional cash to shareholders while maintaining our capital structure objectives, so if anything it just reflects our longer term confidence in our future.

With regard to revenue, there are three pressures that I think are important. The first one is, if you look at the patent expiries, the rate and the magnitude of decline from the products that we mentioned such as SINGULAIR. MAXALT, CLARINEX and PROPECIA, is very strong and it's even stronger than what one would anticipate if you looked at prior patent expiry, so we are seeing a more rapid deeper loss on the patent expiry products and it's in the United States, but you are also seeing significant generic erosion in countries like Japan to a level that is stronger than what we have seen before for patent expires. The second pressure is Hepatitis C, where we are seeing very significant warehousing in countries like the United States, and Germany and France, where physicians are really starting to significant warehousing which is in addition to the fact that there are lot of clinical trials that are underway that are taking up a lot of available patients into the clinical trial, and the third that we remain confident that there is growth opportunities for JANUVIA. There still is pressure on JANUVIA as I've outlined before, so those are the three areas, where we see increased pressure as we look at 2013.

Okay. The next question please?

Your next question comes for the line of Michael Tong with Wells Fargo Securities.

Two questions. One on ertugliflozin. Just wondering, what kind of differentiation do you see in that molecule given the fact that you maybe number four or later to market? Then secondly, with respect to clinical news flow, what Phase 2 or Phase 3 data would you highlight to investors and analysts from now to the end of the year?

Okay, Adam, you want to start that?

So I would start with the SGLT2 class and working with Pfizer and their compound. We are excited about that opportunity. As I mentioned, we see SGLT2 as a potentially important class that will be utilized in oral diabetic agent after DPPIV in particular after JANUVIA. We think having a combination with the market leader JANUVIA will represent a very significant opportunity. So, it's early to see the exact data from the product as a monotherapy. Although as Roger said, we are excited about the initial Phase 2 data, but we think the combination also represents a very significant opportunity because of the success of JANUVIA in the marketplace.

Roger, why you don't you speak to the Phase 2 data?

So just, again, with respect to our collaboration with Pfizer. The importance of combination therapy just can't be overemphasized. Again to have a compound that, based on what we can see plays nicely with others, that's really important. It provides us with big advantage. Going forward, we have a number of programs that we are going to be talking about. Of course, we spend a lot of time on the call talking about 3475, our anti-PD-1 antibody and there will be a lot of data coming out with respect to that. We will also have the opportunity to talk about other biologicals, particularly in the anti-inflammatory space. So there is additional data that will become available from MK-3222, our anti IL-23 antibody. We are going to have the opportunity to do some discussion of our base inhibitor program. As everyone is aware, the impact of Alzheimer's diseases is very profound and we have a leading program for the leading hypothesis with respect to the pathogenesis of Alzheimer's disease. Safety analysis data will become available as part of our very large study in patients with mild-to-moderate cognitive impairment in Alzheimer's disease. We also will have a lot of data in the HCV programs, some of which has been touched upon during our call today. That's just a beginning because, of course, we are very active in a lot of different fields.

Okay, thank you. I think we have time for two more questions, operator.

Your next question comes for the line of Tony Butler with Barclays.

You commented about the construct, particularly in the U.S., of JANUVIA demand. It is very appreciative. But the question really is around the increased level of spend which I think I heard earlier. Why the need for that spend under an environment of SG&A being down year-over-year? Are you actually robbing from one product to actually support another? That maybe wise but I would love some color. Secondly, Roger, beyond anti-PD-1 in the immunoregulatory arena, does Merck have other molecules which they are pursuing or actually have in development. Thanks very much.

Adam, would you like to start?

Yes, absolutely. So our goal is to maximize each and every growth opportunity that we have on our most important growth products and our most important growth markets. We really do invest our SG&A to go after the opportunities that exist before us. JANUVIA obviously is extremely important product for us. We think there is significant opportunity with diabetes prevalence and we are going to invest in order to make sure that as many patients that can benefit from the product have access to the product. So, we are committed to investing behind that product, not at the expense of other growth opportunities but in addition to other growth opportunities. Part of the increased resources is actually an increased level of focus. So, we actually have more dedicated people in order to maximize the opportunities for each of the classes. So in the United States, for example, we have many more people that are fully dedicated to our diabetes franchise where before they might have had part of their time on diabetes and part of their time on cardiovascular, we have now made sure we have more dedicated people to each of the growth opportunities before us. So I think it's an increased level of focus as much as anything else.

With respect to immunoregulatory molecules, the answer is yes. We have a broad effort looking at immunoregulation. I think others have probably heard me speak about this before, but there is no more effective method of killing cancer cells than by harnessing cytotoxic T-cells period. It's just very difficult for tumor cells to escape that kind of attack and that's such a profound observation that it has catalyzed our work, of course the work of others too, but our work in particular, and we will have a lot more to say about that going forward.

Last question please, operator?

Your final question comes from the line of Gregg Gilbert with Bank of America.

These are pressures that keep coming up one last time. I wanted to make sure I am understanding which of these pressures are shorter-term versus perhaps new realities of the business and longer lasting. It seems lime FX is what it is, destocking happens from time-to-time, loss of exclusivity effect should not surprise you frankly, or if they have in certain countries, they will never again. So, I want to make sure that I am not missing anything that's new that you might be factoring into your longer term models that you haven't sort of guided for yet. Then for, Roger, by when will you announce key decisions on the pipeline and your preliminary thoughts on biosimilars? Conceptually, I assume you had something to do with Amgen's thinking there and how that evolved? Thanks.

Yes. So, Gregg, so I think you've outlined what we said the most important issues that we are facing right now and the patent expiries, you learn as you see them come. We haven't seen such rapid loss at the rate of loss that we have seen with the product like SINGULAIR in the U.S. I mentioned it in the fourth quarter, but even in the first quarter of this year, you saw we had $1 million of sales of SINGULAIR in the United Sates. So, we learned from that, we understand that as we model for the future and think about the future obviously. Hepatitis C frankly, it dependent on what the data was going to look like from the all oral therapies, so it was very difficult to predict what that data would look like and therefore what the response would be in terms of the physicians and warehousing. So, that's something we have to watch closely, and as more data becomes available on all oral therapies, we will certainly learn a lot more and then I mentioned as before the JANUVIA impact I have tried to give you guidance for what we see in terms of mid-single-digit growth in the U.S. as we go through this year, and low double-digit growth outside the U.S, so we tried to provide you as much information about what we know as short-term and as we look out into future.

Yes. With respect to key decisions on the pipeline, this is going to be a rolling process of course. MRL is a large and complex organization and we have an awful lot of programs to review, but you can anticipate that I'm not going to take forever here, so within the next three to six months we are going to roll out a number of different, I think, approaches to the variety of very, very important the medical objectives that we are pursuing. Also, with respect to the biosimilar issue that you called out in particular, I'm very pleased with the deal that we have made with Samsung, I know that team well. I had the opportunity to speak with them previously. I know what their capabilities are like and what they have invested behind it. I think it will give us commercial access globally to a large slate of biosimilar products that we will be able to take advantage of.

Okay. Ken, I don't know if you have any closing remarks.

Well, first of all I thank you all for hanging in there for an extended call. Just to wrap up, I will make three points. First of all, we knew that 2013 would be challenging but we are confident about the future and we believe the second half of this year will be a better indicator of the strength of our business. Second, we are managing our cost base and taking actions to strengthen our overall organizational capabilities including as Roger said several times in R&D that will allow Merck to be more successful and what will be the future healthcare environment. Finally, as I always say we are committed to creating shareholder value in the short-term and in the longer-term. So, thank you very much for your attention and staying a little bit longer, we look forward to speaking with you in the future. Thank you.

Thank you. This concludes today's conference call. You may now disconnect.