Good day, everyone and welcome to Merck’s Third Quarter 2014 Earnings Conference Call. Today’s call is being recorded. At this time, I’d like to turn the call over to Joseph Romanelli, Vice President of Investor Relations. Please go ahead..

Okay, thank you, Jackie and good morning, everyone. We’d also like to say good afternoon and good evening to everyone listening outside the United States. Welcome to Merck’s third quarter 2014 conference call. Before I turn the call over to Ken, I want to remind you of a couple of items.

First, there are a number of items in the GAAP results, such as acquisition-related charges, restructuring costs, and certain other items. We've excluded these items at our non-GAAP reconciliation tables and you can see them in our press release in table two. This will give you a better sense of our underlying performance.

There are three tables in the press release. The first table provides the GAAP results, Table No. 2 reconciles our GAAP P&L to the non-GAAP results and Table 3 provides sales performance for the Company’s business units and our products, both on a reported basis and excluding foreign exchange.

During the call, we will be referring to Table 2 when we discuss the P&L and Table 3 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 provision of the U.S.

Private Securities Litigation Reform Act of 1995. Such statements are based upon Merck’s current beliefs and are subject to significant risks and uncertainties. If underlying assumptions prove inaccurate 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 2013 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 statement.

Our SEC filings can be found on the web site at merck.com and you can also find our earnings release and all the tables there as well. Now with that, I'd like to say good morning to Ken Frazier, our Chairman and CEO; Rob Davis, our CFO; Adam Schechter, Head of Global Human Health; and Dr. Roger Perlmutter, Head of Merck Research Labs.

And with that, I'll turn the call over to Ken Frazier.

Ken?.

Thanks, Joe. Good morning, everyone. Thank you all for joining the call today. We again reported solid earnings this morning, but before I discuss our performance, please allow me to remind you of the strategy that consistently guides us.

Merck remains focused on bringing forward medicines and vaccines that make a difference to patients, payers and healthcare systems around the world. In a healthcare marketplace, where resources are increasingly scarce, our strategy continues to be all about meaningful innovation.

To accomplish this, last October, we announced our global initiative to sharpen our commercial and R&D focus, redesign our operating model and reduce our cost base. We launched this multi-year initiative to transform Merck into a more competitive, more innovative company and to build a platform for sustained future growth.

Now one year later, I'm pleased to report that this quarter's results reflect the steady progress we've made in each of these areas. We identified four areas of focus where we will compete to win and our investments are paying off.

In our diabetes business, we reallocated resources and invested significantly in JANUVIA and have now reported our second consecutive quarter of growth in the U.S. and in international market. This marks an important turnaround from where we were last year.

Our acute care business grew by double digits this quarter as we're now seeing the impact of our investments. These brands will continue to be key drivers of growth in emerging markets. Our vaccines business remains a fundamental contributor to Merck, despite a decline this quarter due to the timing of U.S. public sector purchases.

We're also looking forward the regulatory action for V503, our next generation 9-valent vaccine for HPV. And in oncology, our integrated business unit has made strides to file and launch KEYTRUDA. This quarter, we received approval from the FDA for KEYTRUDA, the first anti-PD1 therapy approved in the U.S. for advanced melanoma.

And I'm happy to report that we also recently received breakthrough designation from the FDA for KEYTRUDA as a potential therapy for advanced non-small cell lung cancer.

We continue to study KEYTRUDA in more than 30 different tumor types and are encouraged by recent data presented at the European Society for Medical Oncology in five different cancers. Roger will talk more in a few minutes about the progress we continue to make with the KEYTRUDA program and Adam will discuss the recent U.S. launch in advanced melanoma.

Also during the third quarter, we received U.S. approval from the FDA for BELSOMRA, our novel treatment for insomnia, which we anticipate launching early next year.

In addition to increasing our focus on the key therapeutic areas that represent our best opportunities, we continued to rigorously prioritize our portfolio to ensure that all of our businesses have the potential to be market leaders and create value for shareholders.

This approach led us to divest human health product business areas that amounted to nearly $1 billion annual revenue. That focus also led to the recently completed sale of our $2 billion revenue consumer care business to buyer.

We then employed the proceeds of that sale to complete the acquisition of Idenix and to increase our return of cash to shareholders this year. The same approach let us to a different conclusion with regard to our animal health business, which we believe will continue to generate long-term value for Merck.

Animal health saw strong growth this quarter across all species. We look forward to additional innovation coming out of our animal health pipeline and remain committed to growing this business, which is already a market leader in key segments of the global animal health market.

Let me now turn to the progress we made in sharpening the focus of our R&D organization. Along with the strong progress we’ve made on our KEYTRUDA program, we continue to advance our work to develop a highly effective once daily oral pan-genotypic regimen of the treatment of hepatitis C.

As I mentioned earlier, we also completed the acquisition of Idenix Pharmaceuticals and its promising portfolio of hepatitis C candidates which complement our internal development efforts.

We will continue to focus on our highest potential growth opportunities, while rigorously prioritizing our pipeline, bolstering it with external assets while divesting our out licensing programs and candidates that are better suited to create value elsewhere.

For example this quarter we entered into an agreement to out-license MK-3222 our investigational treatment for chronic fasciolosis to Sun Pharma. All of these actions are keeping with our intention to be the premier research intensive biopharmaceutical company.

Lastly we’ve made significant progress in redesigning our operating model and reducing our cost base. You will recall that last October we targeted a net reduction in annual operating expenses of approximately $2.5 billion off our full year 2012 expense levels by the end of 2015.

As a result of disciplined cost management, I’m pleased that we remain on track to achieve our target for 2014 and our overall savings goal by the end of 2015. These savings have enabled to better target resources to key priorities across the enterprise and to accomplish the goals I’ve mentioned today.

At the same time, this discipline allowed us to return a high level of cash to shareholders through both the dividend and our stock repurchase program. Over the past 12 months we’ve returned nearly $11.5 billion to our shareholders. We are rebuilding Merck for sustainable future growth.

We've sharpened our commercial focus and on launching products with the potential to make a significant difference to patients, while providing value to payers, providers and healthcare systems.

We focused and prioritized our R&D efforts so that we may continue to translate cutting edge science into medicines and vaccines that have meaningful differentiated attributes, and we continue to aggressively manage our costs to ensure that our resources are focused on our most promising opportunities for growth.

Taken together, these actions have created nearly and longer term opportunities that will allow Merck to continue drive value for both shareholders and society. And now I’d like to turn the call over to Adam Schechter..

growth in core areas such as diabetes, immunology and acute care, which were offset by more than $150 million in product divestitures, hepatitis C market dynamics and patent expiries. First I’ll review our core product areas and then I’ll provide an update on our regional performance and I’ll start with primary care.

The JANUVIA franchise reached more than $1.4 billion in sales and grew 5% in the quarter, reflecting growth in the U.S. and international markets. In the U.S. sales grew 6% on continued volume increases. We are encouraged by the growth trends we saw in the third quarter in the month of October.

We are seeing positive results from our efforts to defend our 75% market share and to grow the DPP-4 class. In our international market sales grew 4%, driven by Europe and the emerging markets. Sales declined in Japan due to the 10% re-pricing that occurred in April and the overall competitive environment for DPP-4s.

We are confident that we will deliver global sales growth for JANUVIA franchise in 2014. Next in hospital and specialty care; sales of ISENTRESS were approximately $410 million in the third quarter, a decline of 3%. Internationally our growth in Europe was balanced by the timing of tenders in the emerging markets. In the U.S.

ISENTRESS sales were impacted by customer buying patterns and the competitive dynamics in the HIV market. Several immunology products reached more than $770 million in the third quarter, growing 9%.

We are seeing continued strong uptick with Simponi across multiple indications and Simponi remains the fastest growing anti-TNF in markets where we promote. REMICADE grew 3% reflecting growth in core markets and offset by biosimilar competition in some of the smaller EU markets. In acute care, sales exceeded $600 million and grew by 17% this quarter.

Growth was driven by continued up take of Bridion in Japan, Europe and emerging markets and solid performances across our portfolio of antibiotics and antifungals. While growth rates may vary from quarter to quarter due to timing of tenders, we continue to expect this core area to be an important contributor to future growth.

Now turning to our vaccine business. In the third quarter vaccine sales were approximately $1.7 billion, a decline of 6%, primarily due to roughly $100 million of U.S public sector purchases of GARDASIL and RotaTeq in the third quarter of last year that did not occur in the third quarter of this year.

Sales of ZOSTAVAX were approximately $180 million in the quarter, declining 2% compared to last year. As we enter the flu season in the United States, we have initiated promotional efforts, including a new direct-to-consumer campaign to educate consumers of the importance of talking to their physicians and their pharmacists about shingles.

We have broad access for ZOSTAVAX and we are working with customers to help them understand the reimbursement process.

Now turning to some geographic highlights in the third quarter, in the United States sales declined 8% as growth in the JANUVIA franchise and Dulera was offset by lower vaccine sales, the loss of exclusivity of TEMODAR and declines in our HCV portfolio. In Europe sales are 1%.

We drove continued growth in diabetes, immunology and ISENTRESS, where sales were impacted by the divesture of our ophthalmology products continued declined in HCV portfolio and a generic erosion for NASONEX. Sales in Japan declined 14%, primarily due to biannual price decreases and ophthalmology price divestures. Sales in emerging markets grew 8%.

China grew 33%, in part due to timing of purchases. Demand in China remains strong for a broad portfolio of innovative and also established products. Other important emerging markets such as Turkey and Mexico also delivered solid growth in the quarter. For the full year, we continue to expect that the emerging markets will be good growth drivers.

Now I’ll spend a few more minutes speaking about the early days of the KEYTRUDA launch. First let me say, we are very excited to launch the first and the only anti-PD-1 therapy approved in the United States.

We are still in the early days of launch but we have been moving rapidly to ensure the medicine is available to patients and feedback from our customers is very encouraging. Upon approval, we think KEYTRUDA will be available within a week and we were taking orders and shipping in just a couple of days.

Our colleagues in manufacturing worked tirelessly to ensure that patient would have access to this important medication as soon as possible. On the commercial side we reached the top ipilimumab prescribers in a matter of days from approval. We’ve now expanded our reach into community practitioners.

We have reached more than 75% of the key physicians and we have made multiple call into many of the high volume prescribers. Regarding access, most payers are covering the cost of KEYTRUDA for its current indication without restrictions. Additionally we offer patient assistance for patients requiring reimbursement assistance.

As we said at approval, we believe there are about 1,200 patients in the U.S, who are eligible for KEYTRUDA based upon our current label. Additionally we expect a few hundred new patients to become eligible for treatment with KEYTRUDA each month.

Since approval in early September, we believe that approximately 900 patients are being treated with KEYTRUDA. Many of these patients were previously part of the expanded access program and are now in a process of moving from the EAP to promotional product.

Our global oncology business unit is passionately engaged on maximizing the potential for KEYTRUDA for appropriate patients. We are looking forward to sharing more launch details with you on the fourth quarter earnings call. In summary, Global Human Health is transitioning to through a period of patent expiration divestures.

Since late last year we have consciously re-directed our focus to core product areas, to core markets and to new product launches. We drove growth in many of these core areas and we are successfully introducing KEYTRUDA to the U.S market for patients suffering from advanced melanoma.

We continue to prioritize our investments and we are intent on driving future growth and broadening our impact in Global Health. Now I’d like to turn the call over to my colleague, Rob Davis..

Thanks Adam. Good morning everyone. We've had solid results in the first nine months of the year. Our third quarter results demonstrate that we continue to sharpen our focus as a Company and as Ken mentioned our cost production program is on track. This morning I’ll provide additional color on our P&L and comment on our outlook for the rest of the year.

My remarks will focus on our non-GAAP financials. Total company revenues were $10.6 billion for the quarter a decrease of 4% year over year, with a 1% benefit from Foreign Exchange. This decrease reflects in part the loss of more than $400 million of sales in the prior year from divestitures and the now ended joint venture with AstraZeneca.

As Adam stated, our sales in the pharmaceutical business were driven by solid performance in our key brands, which have benefitted from continued resource allocation to our priority therapeutic areas by diabetes and acute care. Animal health revenues increased $83 million or 10% year-over-year, excluding exchange.

These results were driven by strong performance across the portfolio, including significant growth in our companion animal and poultry businesses. Consumer care revenues decreased 9%, excluding exchange.

As a reminder, this is the last quarter in which we will record sales results from consumer care business since the transaction of Bayer closed on October 1st. Moving now to expenses, gross margin was 74.3% in the quarter, which represents a 30 basis point increase year-over-year.

We continue to expect the 2014 full year gross margin to be slightly lower than 2013's full year ratio of 74.3%. Marketing and administrative expenses were $148 million lower than the prior year, driven by reductions in direction selling and promotion costs.

We continue to focus our resources on key markets and core products, while ensuring we appropriately invest in our product portfolio launches, and in support of these efforts, we expect M&A expenses to be sequentially higher in the fourth quarter.

Research and development expenses were $1.5 billion in the quarter, a $109 million lower than prior year. We expect our R&D expense in the fourth quarter to be higher year-over-year as we invest in our portfolio. Finally, regarding the tax rate, our non-GAAP effective tax rate was 26.5% in the quarter, which was in line with our expectations.

We continue to anticipate the tax rate for the full year to be between 24% and 26%. In terms of our bottom line performance, we earned $0.90 per share in the third quarter as compared to $0.92 per share in the prior year. Now, our outlook for the rest of the year.

On the top line, we are narrowing our revenue guidance to $42.4 billion to $42.8 billion at current exchange rates. This takes into account recent currency movements, as well as a public sector vaccine purchase in the third quarter of last year that did not occur this year, which Adam described earlier.

We are also narrowing our non-GAAP EPS range raising the bottom end of the range to $3.46 and lowering the upper end to $3.50, while maintaining the same midpoint.

Our EPS range reflects our strong performance in the first nine months of the year and includes the absorption of roughly $0.06 to $0.09 of dilution from the consumer care divestiture and the Idenix acquisition. On a GAAP basis, we expect to earn between $4.06 and $4.29 in 2014.

Both M&A and R&D expense in 2014 are expected to be lower than 2013 and as I said earlier, we remain on track to achieve our target of $2.5 billion reduction in expenses off of the 2012 base by the end of 2015.

Now touching briefly on capital allocation, by the end of the year, we will have deployed the balance of the after tax proceeds from the Bayer transaction, net of cash used for the Idenix acquisition for share repurchase. We continue to project our average diluted shares outstanding will be slightly lower than 2.95 billion shares for 2014.

We remain focused on our commitment to return cash to shareholders, and as Ken said, we have returned over $11 billion to shareholders over the past 12 months in the form of dividends and share repurchases.

As we look at capital markets more broadly, we recently took advantage of favorable market conditions and restructured some of our debt through a tender offer and a $2.5 billion debt offering. We are pleased with the results of the transactions which created economic value for the Company and will benefit annual interest expense in 2015 and beyond.

In summary, the third quarter was another solid quarter for Merck. Since our announcement at this time last year, we have refocused our business and divested non-core assets with 2013 full year sales of approximately $3 billion.

In addition, we continue to term our expense base putting a solid way on track to achieve our expense reductions by the end of 2015, while also investing in our promising new product launches and pipeline. Now I will turn the call over to Roger..

Thanks, Rob. The third quarter was an especially busy one for our regulatory affairs group, with multiple product approvals in several important areas. In August, our novel first-in-class orexin receptor antagonist, BELSOMRA was approved by the U.S. FDA. BELSOMRA acts to improve sleep initiation and sleep maintenance in patients suffering from insomnia.

As Ken mentioned, the BELSOMRA launch will begin early next year. In September, we gained approval of BELSOMRA in Japan, where we also gained approval of vaniprevir, a potent highly selective protease inhibitor for the treatment of genotype-1 hepatitis C virus infection.

Also in September, we received approval for KEYTRUDA, our monoclonal antibody directive against PD-1 for the treatment of patients with advanced malignant melanoma refractory to currently available therapies.

As I had previously mentioned, our development program of KEYTRUDA has expanded to include more than two dozen studies around the world, involving more than 6,000 patients and addressing more than 30 different tumor types.

At the European Society for Medical Oncology meetings earlier this month, we presented data documenting the activity of KEYTRUDA in patients with gastric, bladder and head and neck cancers and also presented more comprehensive data describing the activity of KEYTRUDA in patients suffering from ligand melanoma or non-small cell lung cancer.

Today we announced that the U.S. FDA has granted breakthrough designation to KEYTRUDA for the treatment of non-small cell lung cancer in patients who have failed platinum-based therapies and whose tumors do not bear EGF-receptor or alk gene mutations.

We are working closely with the FDA to define an optimal data set that would permit registration of KEYTRUDA for this important indication.

Later in the year we expect to have a chance to describe our studies of KEYTRUDA in patients with so called triple-negative breast cancer at the San Antonio Breast Cancer conference and then some hematologic malignancies at the American Society of Rheumatology meeting.

Combination studies employing KEYTRUDA for the treatment of a variety of devastating malignancies are also underway. These studies employing conventional therapeutic modalities as well as novel targeted agents will benefit enormously from the broad understanding of KEYTRUDA monotherapy that we are developing.

Turning now to infectious diseases, we are looking forward to the upcoming American Association for the Study of Liver Diseases meeting next month. During the meeting we plan to present complete data from Phase 2 studies of our MK-5172 8742 doublet.

I will remind you that the FDA has granted breakthrough designation to these agents for the treatment of Hepatitis C virus infection. Indeed the Phase 3 registration program for MK-5172 8742 is now completely enrolled and we expect to see data from these studies in the first half of 2015.

At AASLD, we will also present early data from the C-Swift study, which pairs the MK-5172 8742 doublet with the nucleoside polymerase inhibitor, Sofosbuvir.

The goal of these studies, which we announced five months ago at our business review to is advance the case given the case for an all oral ribavirin-free genotype independent regimen that can be used in patients irrespective of comorbidities, for example in patients with established cirrhosis, simultaneous infection with Human Immunodeficiency Virus and/or renal insufficiency; and that will achieve sustained virologic responses over a shorter course of therapy.

Because of the difficulties in ensuring patient adherence in the real world, shorter course therapy is clearly desirable. Our triple-therapy regimens have been enabled by our recently completed acquisition of Idenix Pharmaceuticals, through which we gained access to potent nucleoside polymerase inhibitor that we now call MK-3682.

Data describing the effectiveness of MK-3682 monotherapy will also be presented at the AASLD meeting. Beyond HCV, we continue to make very good progress in rolling other Phase 3 infectious disease therapeutics programs, including once daily ISENTRESS and letermovir, a treatment for patients at risk from disseminated cytomegalovirus infection.

During November we also expect to present the results of IMPROVE-IT. Our study testing weather a cholesterol lowering regimen of ezetimibe plus simvastatin versus simvastatin alone improves outcomes in patients at high risk for major cardiovascular events. The first patient was enrolled in this trial exactly nine years ago.

With design and protocol review, it has been a decade since the question that the trial addresses was first posed. In all, IMPROVE-IT enrolled 18,145 patients presenting with stabilized acute coronary syndromes. There been more than 5000 composite events that will soon be reviewed.

The MRO clinical team and I along with the rest of Merck management remain blinded to the data, and our statisticians have only a very short period to conduct analysis before the presentation in mid-November.

My number one consideration regarding the study has been to ensure that we work closely with our academic colleagues to obtain a complete and robust dataset generated during the decade that it has taken to conduct IMPROVE-IT.

Given the size and complexity of this study, I expect that the IMPROVE-IT data will provide important insights into the appropriate care of patients at high risk for major coronary adverse events.

Returning briefly to regulatory affairs, we have now submitted our complete response to FDA questions regarding Sugammadex, our parenteral agent for the reversal of neuromuscular blockade during anesthesia.

Included in this response are new studies designed to examine hyper sensitivity reactions that can occur with Sugammadex administration, as well as an updated review of our Pharmaco-Vigilance experience, with Sugammadex, which is marketed in more than 50 countries as Bridion.

Separately we have had a pre-NDA meeting with the FDA to discuss our Odanacatib results. We have agreed together upon a plan to characterize more completely the adjudicated adverse event reporting in this study, which will mean that our filing will be delayed until 2015.

The data that we presented at the ASPMR meeting in September demonstrate that Odanacatib could provide a meaningful therapeutic option to reduce the frequency of osteoporotic fractures in women at high risk for these events.

Finally as Ken mentioned we continue to work closely with the FDA on the review of the V503 our 9-valent Human-Papillomavirus vaccine for the reduction of cervical malignancy. We expect that the FDA will complete its review before the end of the year.

Joe?.

Great, thank you Roger. And Jackie I think, we're ready to start the Q&A segment of the call. Just as reminder, if you can limit yourself to one or two questions, that way we can get to as many as caller possible. So Jackie, I think we'll turn it over to the first caller..

Our first question comes from the line of Chris Schott with JPMorgan..

Just two questions here.

First, with the breakthrough status in lung for KEYTRUDA, can you just update us on anything about your filing strategy or at least key data points we should be watching for that could support a filing in lung? And then second, just your thoughts on TECOS and risk of heart failure with JANUVIA; there's obviously been a lot of discussion around this point as of late and we want just to get Merck's perspective on the risks associated with that study.

Thanks very much..

Yes, Chris, just with respect to the filing strategy I think -- we certainly are pleased to have gained breakthrough designation for non-small cell lung cancer.

As you know, we have a number of studies underway, large studies and we have the opportunity to look at those studies and we are working closely with the agency to develop and ideal registration strategy as I indicated. So we won’t just have any more to say about that than what I have said to this point.

With respect to TECOS, I think that we do expect that the final patient will be available -- patient data will be available, last patient, last visit by the end of the year. This is of course a study that's been conducted -- led by academic institutions. So we’ll be made aware of those data.

I think it’s important to recognize that the data safety and monitoring board has been following this study extremely carefully. The observations that have been made in other studies, employing regimens to treat diabetes are well known to the data safety and monitoring board.

The last data safety and monitoring board review was in December of last year. Given that, the fact that the DSMB came back and said the study should be continued without change, I think it provides some reassurance with respect to the overall conduct of the study.

It's a large study and would important answers to questions about the meaningfulness of intervention with sitagliptin in patients with type two diabetes..

Okay, great. Thank you, Roger.

Jackie next caller?.

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

So a couple of quick questions for Roger. Roger, can you talk to us a little bit about -- I don’t see PD-L1 status highlighted for the breakthrough designation for KEYTRUDA, but my understanding is that much of the data that was generated in non-small cell lung cancer was in the PD-L1 positive patient population.

Can you just clarify for us if this indication is specific to the PD-L1 patient population or if it isn’t and it is actually for the broader patient population.

And then as we think about the next sort of data points in the KEYNOTE-010 study, can you just update us on whether or not you've officially taken the look at the response rates which is sort of specified on clinical trials.gov relative to the 2 milligram and 10 milligram dose and if that look included a comparison to Taxotere.

The reason I ask is if that can be utilized as supported evidence for a potential filing. Thanks..

Thanks Seamus. First of all, the breakthrough designation is not specific to PD-L1 positive patients and as you know, we have done quite a lot of work.

I’m trying to understand the meaningfulness of PD-L1 positivity, what we’ve shown in a whole variety of settings is that patients whose tumors are judged PD-L1 negative, or more precisely the fall into the PD-L1 staining less than 1% category, nevertheless do demonstrate some responses and we and other groups that studying this are still in the midst of trying to understand exactly how to correlate PD-L1 expression status with outcomes.

We know there is a relationship but exactly what the meaningfulness of that is, I think remains to be elucidated.

With respect to the KEYNOTE-010 study, as I've indicated, we have a variety of different ways that we can look at these data in order to come up with an optimal registration strategy and that something that through the close interaction that we have with the FDA, and we’ll have more particularly because of the breakthrough designation that we’re going to be doing in order to come up with the best possible strategy..

Thank you, Seamus.

And Jackie, next caller?.

Our next question comes from the line of Mark Schoenebaum with ISI..

Maybe just a follow on Seamus. The KEYNOTE-010 Roger, what is the timeline for data readout on that? Can you update us? I believe last time you spoke about it, you had talked about late 2015.

Could you just remind me if that’s correct or incorrect data? And then on hepatitis C if I may Roger, last call you expressed a great -- what I interpreted to be a great period of optimism for the four week regimen. Obviously the bar is very, very high given the Gilead data that is out there.

I was wondering if you could update us on your expectations for the four-week data? And I know this is the third but this is just a yes or no. Just to be clear, the breakthrough designation was for -- if I'm reading the press release -- so that was actually for second line and later lung.

Is that correct?.

Mark, first of all the breakthrough designation doesn’t specify line of therapy.

The breakthrough designation is for patients who have failed platinum based therapies, and that’s understandable of course, because you get breakthrough designation for those circumstances under which there is the anticipation of a meaningful intervention beyond what exists as standard of care. So that's understandable I think.

With respect to the KEYNOTE-010 study, again I think the timing remains as before. We continue to march forward with that study. We as I said have opportunities to examine that data at different times and one of the things that we'll be doing is discussing that with the agency, but we do expect to have data available by the end of next year for sure.

And then with respect to hep C, I think the important thing to remember here is that what we proposed when we described the study back in May was that a triplet regimen would provide the opportunity to test whether it was possible to get sustained virologic responses that is eradication with very short regimens.

We don't know what the nature of those regimens would be. And so we've tried to bookend those for genotype 1 and genotype 3 in the C-SWIFT study.

We have access now of course to 3682, our own nucleoside polymerase inhibitor, and the things that we learn, from our studies was Sofosbuvir can then be applied to our triplet studies with 3682 recognizing of course that no two polymerase inhibitors will behave in exactly the same way, but it basically provides the kind of guidance that we need in order to design effective Phase III study.

So we're looking forward to having the opportunity to review in those data in detail..

Great, thank you Mark. And Jackie, next caller..

Our next question comes from the line of Alex Arfaei with BMO Capital Markets..

Roger, just a follow up on those comments. Could you please remind us what the similarities and differences are from what you can tell from your [indiscernible] Sovaldi? And Adam, could you please give us a little bit more on the Gardasil performance and your outlook.

It seems to have been a little bit lower than expectations?.

Roger?.

So Alex, you will have the opportunity to see Phase Ib data for MK-3682 at AASLD, which will be interesting. But of course it's very difficult to compare two different agents, when they're not studied in the head-to-head context because of differences in patient population. I can't really speculate about that.

We'll have the opportunity to look at those kinds of data sometime later but right now I think the important thing will be to look at the data -- the Phase Ib data which I think you will find intriguing..

And Alex, regarding Gardasil, let me provide some additional context. So sales in total were $590 million for the quarter. The U.S. declined 7%. The U.S. declines were mostly due to higher public sector purchases in 2013. That did not occur in 2014.

If you look at the cumulative 15 to 18 year old penetration rates in the U.S., it's about 65% for females, and about 50% for male. So there's still room to grow there. If you look at males, we continue to have good uptake and if you look at the private sector data, it suggests that about 50% to 55% of first doses are now being administered to males.

If you look outside the U.S., the declines were due to Korea, and also there is the end of the catch up cohorts in several of the smaller markets. But overall we continue to be pleased with our market share greater than 90% on a global basis and 99% in the U.S. and we believe that there is still room for additional growth in the future..

Okay, great. Thank you, Alex. And Jackie, next caller..

Our next question comes from the line of John Boris with SunTrust..

First question just for Ken. I think you traditionally go through your planning process this time of year. I know you can't give, or not ready to prepare -- to give guidance for 2015, but if you can just help us understand what some of the pushes and pulls are? Especially since 2015, you've indicated us return to growth year going into that year.

So that would be very helpful? And then for Roger, if you can just characterize why it's so difficult to potential to get four weeks of therapy in the HCV population at either four or eight weeks going forward that would be real helpful?.

So let me start by saying of course we are not giving 2015 guidance today. We'll do that on our fourth quarter call. But you're correct. We still expect to go off our 2014 base and there are number of factors that are going on outside, right now. For example there has been a change in currency rates which will have an impact on 2015.

But also on an operational standpoint, we are looking forward to several launches, we are looking forward to the continued development of several key programs in our pipeline.

So from an operational standpoint, we're pleased with the progress that is being made and with the upcoming launches and obviously they will have to be looked at in the context of the overall headwinds that I think everyone is experiencing from things like currency.

Roger?.

John, the duration of treatment in infectious disease is always a difficult process to assess. I think first of all there are aspects of molecular cell biology to consider that you have hepatocytes that are infected with HCV.

They differ almost certainly one cell from another in terms of replication rate and those that are replicating more slowly, it can be difficult to inhibit that process and there will be variability in terms of the degradation of the viral nucleic acid. So there is lot of heterogeneity in the liver itself.

And then there is also variation in terms of the exposure to drug in individual liver cells. And beyond those sort of molecular sales are considerations there is also the clinical context.

So we all recognize that despite that fact we’ve more or less understood the nature of -- for example, just to pick one the nature of osteomyelitis, bacterial infection in bone, the length of treatment in the clinical setting is different in different parts of the world and different regions.

We really don’t have an established length of treatment that we can justify with good clinical data. And one can expect that it will be easier in HCV because we can measure viral burden much more readily. But still the clinical context will change depending upon the, for example the degree of liver disease.

So you can imagine where there's a lot of fibrosis and it's difficult to get drug penetration, that that will make things more challenging.

All of which means that it may be hard to get to a single, short course recommendation for all patients, but instead patients will have to be satisfied and may be the satisfaction can be determined before treatment begins. But most likely it will be in response to therapy.

These are the things that we have to learn, now that we have these potent direct acting anti-virals and our C-SWIFT studies I think will provide an important data on this..

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

Just a few questions. Roger, do you expect to receive priority review for your doublet hep C therapy? I know you mentioned you've completed enrollment. Those trials should be completed by the end of I guess middle of next year, Should we anticipate priority review in timing of approval? Second question on KEYTRUDA for lung.

When is the earliest we can expect to see randomized data showing overall survival for KEYTRUDA. And then thirdly a question for you Ken we had read, I guess rumors in the past about Merck considering selling its diversified product line or its legacy business.

Can you give us an update in terms of how you're thinking about that? There have been a couple of trades as you know of those businesses. I’m just wondering how we should think about that for Merck. Thanks very much..

Roger..

Jami thanks. The first question, of course, we do have break through designation for the doublet and that doesn’t by any means stipulate that priority review would occur. I think it will be driven in large part by the strength of the data and the assessment of meaningfulness.

So we’ll get to that point when we have a chance to evaluate all the Phase III data and get it submitted. With respect to the randomized overall survival, again we do have data coming from the KEYNOTE-010 study. There are other possible approaches to this but certainly one would expect towards the end of next year, we'd have an early look at that.

Again, a lot of depends of course of the survival statistics for the population but we’ll have data around that time..

Thanks Jami for the question. And let me start with a broader focus on it. And as I said, we continue to prioritize and focus within our business and as we communicated last October, that required us to look across the entire business to determine which assets might have more value outside Merck versus inside the Company.

As part of that you’ve seen us take action and divest assets with approximately $3 billion of 2013 sales including MCC certain GHH products. We will continue to evaluate opportunities as appropriate.

But specifically with respect to the diversified plans, we will also be considerate of the fact that a lot of these more mature assets also provide strong cash flow, which enables us to continue to invest behind meaningful innovation that's at the heart of our strategy.

So we’ll continue to look at opportunities as we move forward but we’ve got to balance the cash flow concerns as well as what we can do to monetize assets where appropriate..

Okay great. Thanks, Jackie. Next caller..

Our next question comes from the line of Tim Anderson with Sanford C. Bernstein. Tim Anderson - Sanford C. Bernstein Thank you.

I’d love to get your thoughts on the KEYNOTE-006 trial, pretty important in that it compares your PD-1 head to head versus it'd be in first line melanoma and I am wondering if you can update us on timing of read out and just more generally, your views of CTLA-4 antagonist and specifically your views of those products from a risk-benefit standpoint as part of combination therapy with PD-1s in two settings, melanoma and lung? And then just a quick question on TECOS.

Is it possible you would topline those results by late 2014 and more generally how we handle data disclosure when you do have those results?.

Okay Tim, for KEYNOTE-006, yes we do expect the data moving along and then we will have comparative data versus sifalimumab and there is nothing particularly to update with respect to KEYNOTE-0063. What you see on clinicaltrials.gov is a fair reflection of what we have and we are expecting to have data next year.

You asked a more general question of how we view PD-1 antagonism versus CTLA-4 ipilimumab in particular and there is been a lot of discussion of this is as you know very well, there has not been an opportunity for us to compare KEYTRUDA vis-à-vis ipilimumab directly to this point, although ultimately we will have those kinds of data.

I think what we've seen from the registration materials for these drugs is that at the current exposure levels, there is substantial amount of systematic toxicity that has seen with CTLA-4 antagonists. But time will really tell how that plays out, particularly as their dose adjustments and different approaches to combination therapy.

So I don’t think we can say that that’s going to turn out to be an impossibility. I think that the important thing, in order to design combinations correctly, speaking not just for ipilimumab or CTLA-4, but speaking for the totality of combinations, is we have to have firm understanding of how these molecules behave as monotherapy.

And we have a very large monotherapy program for KEYTRUDA which involves more than 6,000 patients as I've noted. In addition we have 17 combination studies currently underway, which explore KEYTRUDA in a variety of other settings used with other drugs.

So we'll have the opportunity with this firm foundation of monotherapy results to understand the meaningfulness of combination therapies, including combinations with CTLA-4 antagonists by ipilimumab. Tim Anderson - Sanford C.

Bernstein And now on TECOS?.

TECOS. So the TECOS data -- as I've indicated but we should have, last patient, last visit, I remind you, this is a study that is coordinated by an academic group. They are managing the study but we should have last patient, last visit by the end of this year we hope and the data will be presented in 2015. That’s all we know about it.

I mentioned before the data safety and monitoring committee that is overseeing the study as well. But we don’t know anything more than that..

Great, okay. Thank you Tim.

And Jackie next caller?.

Our next question comes from the line of Marc Goodman with UBS..

Ken, obviously the restructuring program takes your expenses down pretty significantly by the end of the next year.

I'm just curious from there -- are we now rest and as we start to see this top-line from the new launches kick-in, will we get the operating leverage that we would expect to see, given that Hepatitis C oncology, these businesses that are not primary care kind of drive the top line.

And curious how much investment you need to make in those areas that would offset and that we wouldn’t see that operating leverage. And then Adam if you could just talk about the emerging markets just little bit more; obviously China was really strong.

What type of one-timer was there or was this kind of a catch-up for the year? And maybe you could talk about just some of the key drivers and what’s going on in the emerging markets. Thanks..

Adam, why don’t you start with emerging markets?.

Yes, so if you look at the emerging markets, I've always said that growth can vary from quarter-to-quarter and timing of tenders becomes very significant in the emerging markets. China as you mentioned had strong growth of 33%.

A lot of that was in the acute care products, of which timing played a part in, and also the diversified brands continued to show good growth, which was not related to timing. I also mentioned that in Turkey and Mexico we had very good quarter as well and that was driven by specialty products, but also cardiovascular products..

And on the overall issues with respect to our cost structure and how we're approaching it, we have been pretty aggressive in the first nine months to reduce costs and change our operating model, and we're on track for the overall $2.5 billion in cost savings by 2015. And so we think that actually positions us well as we move into the future.

Beyond that I can’t say much because we're not providing guidance in today’s call..

Okay, thank you Mark.

And Jackie next caller?.

Our next question comes from the line of Andrew Baum with Citi..

Regarding anacetrapib, a question for Roger. Would a positive protocol analysis for IMPROVE-IT at AHA make you any more confident about the anacetrapib trial, given the beta about its proposed LDL mediated mechanism of action? And I know you are aware that two presentations are scheduled.

Second, just following up on the KEYNOTE-010 trial, should I be thinking about an earlier interim analysis for your trial compared to Bristol's equivalent given you are selecting PD-L1 patients and it's obviously much larger and therefore where would that put the interim just on your modeling? And then just an adjunct to that, do you still remain convinced that looking at PD-L1 expression on tumors rather than on the different cohorts of white blood cells is the right way to go to optimally select patients?.

Okay Andrew. Three questions. First of all, for anacetrapib, as I've indicated, we have no idea what the results of IMPROVE-IT are going to be.

IMPROVE-IT tests the question as you know of whether or not one can be aggressively lowering LDL cholesterol levels in patients who already are optimally managed with simvastatin, one can achieve a beneficial effect on cardiovascular events and the magnitude of that effect.

Our studies with anacetrapib are different and because we have an anacetrapib, both the significant LDL cholesterol lowering effect, but also the HDL elevating effect, I’m not sure that I can read out much of anything from IMPROVE-IT to anacetrapib.

I think anacetrapib is testing really quite a different question and we’ll just have to wait for the results of the reveal study. With respect to the KEYNOTE timing, I can’t speculate about how Bristol-Myers is pursuing their analysis versus our own.

I’ve indicated when we expect our data to become available and we’re going to examine those and make decisions based on that.

And with respect to the PD-L1, we've presented really quite a lot of data using our proprietary PD-L1 antibody to look at expression in tumors, and what we've shown is that there is substantial associated between PD-L1 expression and tumors, which is judged at different cut points and responses to KEYTRUDA; and we've shown that in a number of different tumors and most recently we showed it in our presentations at ESMO.

The important thing to recognize as I said, that doesn’t mean that there are no responses in those who PD-L1 negative. It's simply an association.

It is an association that is biologically plausible, but we don’t by any means feel that we are able to inventory all of the PD-L1 that's expressed in an around those cells that might be responsible for tumor killing and so no matter what, we only get a partial picture of it.

My feeling is that PD-L1 assessment in the tumor is much more likely to be revealing than PD-L1 assessment and circulating white blood cells as an example and certainly that’s our experience..

Okay, great, thanks.

Jackie, next caller?.

Our next question comes from the line of Colin Bristow with Bank of America Merrill Lynch..

Sorry if I missed this, but on hep C, how importantly do you view hitting four weeks from commercial standpoint? It feels like physician feedback has not indicated a high level of importance as perhaps we would expect. And then just a second one on the IMPROVE-IT study.

If the trial does not meet the primary endpoint, how do you think about the level of investment in the franchise going forward?.

This is Adam, Colin. With regard to hep C, this is a very large market. In U.S. alone there's about 3.2 million people with chronic HCV, of which only about 50% are diagnosed and only about 150,000, 200,000 are cured. So the market is very large.

I believe that four weeks would be helpful, but as long as in comparative dynamics, there is quality in terms of the regimens, I think that you can be successful commercially under either circumstance. So at this point we’re not commenting specifically on IMPROVE-IT.

We continue to believe in the LDL cholesterol hypothesis and of course we’re prepared for all scenarios but there is nothing specific at this moment..

Great. Thanks Colin.

And Jackie, next caller?.

Our next question comes from the line of Gregg Gilbert with Deutsche Bank..

I have. Adam, you mentioned that roughly 900 patients are being treated with KEYTRUDA.

I was curious if you’re seeing orders and shipments that are pretty consistent with that? Is it a pretty tight relationship between individual patient and managed shipments or is the system kind of gearing up for broader usage, even though you can't talk about broader usage from Merck's standpoint.

And Roger, how confident are you in the scientific community, if you can speak for the community in the reproducibility of a particular patient's PD-L1 status? It sounds like investors want things in neat boxes.

I’m not so sure it’s actually going to play-off that way but curious on your thoughts there on the testing and the status and whether that could flux within patients? Thanks..

It’s Adam. So first of all, as I said before, we're pleased with the uptake in customer feedback that we have early in the launch, but we are still very early in a launch. We're taking orders KEYTRUDA since the first day of availability.

Nearly all the top 50 accounts are purchased since we launched the product and a majority have made repeat purchases and at this point in time we believe we have about 900,000 patients that are being treated with the product..

Roger?.

Yes, and Gregg; you’re absolutely right with respect to PD-L1 status in that the PD-L1 gene itself is responsive to a variety of different stimuli, including cytokine. So the inflammatory [indiscernible] could easily influence how much PD-L1 is expressed and that could be different from one; for example size of metathesis to another.

So there could be quite a bit variability. That variability may underlie the challenges that people have experienced in trying to dissect the relationship between PD-L1 expression and responsiveness to anti-PD-1 therapy. Nevertheless the fact is there is such an association.

So summiting over everything, there still is a general relationship between PD-L1 express and in tumors in responsiveness that's been seen many times..

Okay, great, thanks, Gregg. And Jackie, next caller..

Our next question comes from the line of Tony Butler with Guggenheim Partners..

Two brief questions Roger on, we've talked about 010 and platinum failures.

The question is, what's the difference between 024 and 042 in the Phase III setting at least in first line advanced non-small cell lung? And the second question Adam, the top 50 accounts having ordered KEYTRUDA, can you provide any additional color on the percentage of patients who were already on therapy in the access program and have moved on to if you will as a pain customer and those that are actually new to therapy? Thank you..

So, Adam do you want to take the first question..

So right now as we said we have, we believe there's about 900 patients that are being treated with the product. Many of those we believe are coming from the EAP program. And if you look at the top 50 accounts, it's not easy to tell where the purchases go, to which patients exactly. So you can't comment on that.

But I think the bottom line is we're on track for all in 60 days to move from the EAP program into the commercial area. So we are working hard on that and we're on track for that..

Okay, Roger..

Yes, if you look at the 024 and 042, you will see that there, we're talking about similar kinds of studies but they differ in size and differ on primary outcomes and that's kind of understandable and not atypical for registration strategies in these sorts of settings..

Okay, great. Jackie, and next caller..

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

I have a couple of questions. First, with respect to your hep C program, could you talk about your development vision for Idenix nuke, including the timing for Phase III? And then second, I have a little bit of a lengthy question on KEYTRUDA and this relates to the KEYNOTE-06 trial.

So the approved dose of KEYTRUDA is 2 milligrams per kilogram every three weeks and it costs a $150,000 a year. But in KEYNOTE-06, the KEYTRUDA dosing is 10 milligrams per kilogram every two or three weeks, which would cost $1.15 million or $750,000 a year respectively.

So since KEYNOTE-06 is supposed to read out early next year and assuming that it shows that KEYTRUDA is superior to YERVOY in first line melanoma, it should get Compendia be listed at 10 milligrams per kilogram, but how should we think about actual use in the real world and how should we think about pricings for that compound? Thank you..

Hey Roger..

Yes, so I guess the question is first of all with respect to MK-3682 and the timing; I should note that for MK-3682, and again the data will be -- Phase Ib data will be at AASLD.

We do have an IND now in United States for that molecule and Phase II studies will begin shortly and thereafter based on the results of that, we will begin to decide how best to conduct registration strategy. So that's more or less how we are thinking about it. It's fairly conventional.

And then with respect to KEYNOTE-06; well as you know, we began our studies of pembrolizumab in a variety of different doses, 2 milligrams Q3 and 10 milligrams Q2 and 10 milligrams Q3 and what we've learned in the course of those studies is that the dose response curve is relatively flat and 0.02 milligrams Q3 was selected as the dose to go forward in melanoma.

And we're also working on a fixed dose at 200 milligrams Q3, which will give the equivalent exposure 2 milligrams Q3 for most patients and doesn't require the weight calculation. And my expectation is that because we'll have large amount of data from all of these different settings, we'll be able to make the appropriate analysis.

I can't speak of course to how Compendia will look at this in any other aspect of the commercialization process..

And Dave what I would say is we've been very active to ensure that patients that are in need of KEYTRUDA have access to it and claims are being paid for KEYTRUDA consistent with the indication without restrictions and we've got our clinical presentations, where all of our top 30 target health plans either occurred or are going to occur.

So as we look at the future, of course we continue to work to maintain access as appropriate..

Thank you, Dave. Jackie I think we have time for just two more callers..

Our next question comes from the line of Vamil Diwan with Credit Suisse..

A couple here. One on JANUVIA and JANUMET. From what we understand I think that product starting in 2015 is not going to be available to people with United Healthcare commercial plans.

Can you just confirm if that is indeed the case, if there's been a change there? And while I assume that losing one plan is not likely that material to you guys, are there any other changes to the access of that franchise that we should be aware of as we start thinking about 2015? And then the second question just on the PD-1 side of things; any update you can provide on the status of the lawsuit that you guys filed against Bristol in Europe and also the one that Bristol has filed in the U.S.

against you guys once you get the approval for KEYTRUDA?.

So Adam, do you want to go first?.

JANUVIA continues to have good access in 2014 and based upon preliminary reviews in ‘15, we expect to continue to have good access. JANUVIA is still on preliminary for United Part D plan in 2015 and continues to have preferred assets.

The contract with United was signed recently but since it not had been signed when United filed their 2015 formulary with CMS, the United Part D website and CMS required notice to insurees that that did not list JANUVIA as on formulary, but I would just want to repeat that it still is on formulary for Part D in 2015..

And Vamil, we’re confident with respect to PD-1 and the litigation issue with the patent. We’re confident we'll be able to market KEYTRUDA to any country in which it is approved. Litigation appeals -- they are a multiyear process. So you won’t hear anything much for a while. If there are any updates we’ll provide those in the queue..

Jackie, I think we have time for the last caller..

Our final question comes from the line of Jeff Holford with Jefferies..

I wondered if you can just give us a bit more color on what the biosimilar situation in Europe looks like, what you are really learning from the early stages of this and what you’re going to take forward as access to biosimilars becomes more prevalent in Europe?.

So if you look at Remicade and Simponi, as I said, we had about $775 million of sales about 9% growth. We continue to have growth with Remicade about 3%. That was driven by the core EU markets driven by gastro indications. But there was some offset due to biosimilar competition in the smaller markets.

If you look at the biosimilar specifically, there has been relatively limited uptake of either biosimilar product or acceptance on tenders and formularies and what we’ve seen so far is there has been movement of the biosimilars, it’s been limited to new patients only.

However we have seen increase pricing pressures that are required in order for us to compete with the biosimilars. So we expect the pressure to continue into small markets this year and then we expect there to be some pricing pressure and new patients in the core EU markets after February 2015 loss of exclusivity..

Okay. Thank you Adam.

And Ken?.

So just in closing, we reported another solid quarter Company performance. As I mentioned earlier, we are making great progress on our strategy initiatives we announced last year. We're now seeing the benefit of investing in our core therapeutic areas like we’ve seen in diabetes.

We've made significant advancements in some of our most important research programs, including the launch of KEYTRUDA and receiving breakthrough therapeutic designation in non-small cell lung cancer and as Roger mentioned this morning, we’re making steady progress in in hepatitis C as our registration study for the doublet is now fully enrolled.

We also continue to focus on improving our operating model. Over the past year we've seen our operating expenses decline significantly. We will remain on track to achieve our $2.5 billion cost saving. Our prioritization is also let us to divesting $3 billion in sales through the MCC transaction with Bayer and other divestiture in human health.

We've used those proceeds to fund the Idenix acquisition, and repurchase shares this year. Over the past 12 months we’ve returned more than $11 billion via the dividend and share repurchase program. We remain strongly committed to returning cash to our shareholders.

So again, thank you for joining and hanging in with us for little bit of lengthy call, and we look forward to updating you again on our fourth quarter earnings call..

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