Teri Loxam - IR Ken Frazier - Chairman and CEO Rob Davis - Chief Financial Officer Adam Schechter - President, Global Human Health Dr. Roger Perlmutter - President, Merck Research Labs.

Geoff Meacham - Barclays Tim Anderson - Bernstein Jami Rubin - Goldman Sachs Chris Schott - JP Morgan Gregg Gilbert - Deutsche Bank Seamus Fernandez - Leerink Andrew Baum - Citi Tony Butler - Guggenheim Securities Alex Arfaei - BMO Capital Markets David Risinger - Morgan Stanley Mark Schoenebaum - Evercore ISI.

Good morning. My name is Darla and I will be your conference operator today. At this time I’d like to welcome everyone to the Q4 and Full Year 2015 Sales and Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

[Operator Instructions] Thank you. I would now like to turn the conference over to Teri Loxam. Please go ahead..

Thank you Darla and good morning everyone. Welcome to Merck’s fourth quarter 2015 conference call. Today I’m joined by Ken Frazier, our Chairman and Chief Executive Officer; Rob Davis, our Chief Financial Officer; Adam Schechter, President of Global Human Health; and Dr. Roger Perlmutter, President of Merck Research Labs.

Before I turn the call over to Ken, I want to point out a couple of items. First, you will see that we have items in our GAAP results such as acquisition-related charges, restructuring costs, and certain other items.

You should note that we’ve excluded these from our non-GAAP results and provided a reconciliation of these items in Table 2 of our press release. We’ve also provided a table to help you understand the sales results in the quarter for the business units and products, which can be found in Table 3 of our press release.

Second, 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 made based on the current belief of Merck’s management and are subject to significant risks and uncertainties. If our underlying assumptions prove inaccurate or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements.

Our SEC filings, including Item 1A in the 2014 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 of our forward-looking statements made this morning.

Merck undertakes no obligation to publicly update any forward-looking statements and you can see our SEC filings as well as today’s earnings release on merck.com. With that, I’d like to turn the call over to Ken..

First, we must innovate across all aspects of our business that we can pursue and deliver the most products in medical breakthroughs; second, we must execute in our labs and in markets around the world to deliver results by prioritizing resources for the highest growth areas, key markets and customers; and finally, we must adapt our culture and business model to evolve as the world changes around us.

Specifically this includes driving the success of our key in line brands including JANUVIA, launching new indicators for KEYTRUDA in more tumor types, and launching ZEPATIER which received approval from the FDA just last week. We also anticipate several important pipeline catalysts this year, which Roger will discuss in more detail shortly.

Augmenting our pipeline with the best scientific and medical innovations also remains a key priority for us. And we are eager to continue to aggressively seek attractive external opportunities that can further bolster our scientific leadership, while complementing the current assets in our pipeline.

In closing, in 2016, we will build upon the strong foundation we established last year.

We will continue to invest resources to launch and grow our strongest brands; support the most promising internal assets; enhance our pipeline with the best available external science; and maintain our balanced and differentiated portfolio, all with the goal of delivering long-term growth and shareholder value.

And now, I’d like to turn the call over to my colleague Rob Davis..

Thanks Ken and good morning everyone. As Ken referenced, 2015 reflected another solid year of operational performance at Merck. We delivered full year revenues of $39.5 billion, which was in the upper part of our original guidance range, despite a slightly higher than expected foreign exchange impact for the year.

In addition, as a result of our continued focus on transforming our business model, we were able to deliver full-year non-GAAP EPS of $3.59, $0.12 higher than the upper end of our original 2015 guidance range. We also returned over $9 billion to shareholders through dividends and share repurchases.

This strong performance was driven by our continued focus on prioritizing resources to our highest growth areas, and reducing net cost by more than $2.5 billion versus 2012, while investing in key in line brands, including JANUVIA, maximizing launches such as KEYTRUDA, and strategically investing in R&D and business development to drive a pipeline that would deliver long-term results.

Now, let me turn to some specifics for the fourth quarter, and my remarks will focus on our non-GAAP financials. In the fourth quarter, we delivered a leveraged P&L with growth excluding exchange on both the top and bottom line.

Total Company revenues were $10.2 billion in the quarter, a decrease of 3% year-over-year, including 7 percentage points of negative impact from foreign exchange. Excluding the impact of exchange, fourth quarter revenues grew 4%.

It’s worth mentioning that approximately $110 million of our foreign exchange impact on revenues in the quarter was due to a devaluation of our operations in Venezuela where we began using the Simadi rate in the fourth quarter. Given the current and expected conditions in that market, we anticipate continuing to use the Simadi rate for P&L in 2016.

In addition, the solid results for Global Human Health in the quarter, which Adam will discuss in a few minutes, the animal health business also had a good quarter with sales growing 8%, excluding exchange. Sales of companion animal products led by BRAVECTO as well as swine products accounted for the majority of the growth.

Turning to the other parts of the P&L, non-GAAP gross margin was 74.8% in the quarter, an increase of 20 basis points year-over-year. Full year gross margin increased 150 basis points to 75.4%. Lower discards and foreign exchange drove the overall improvement in margin percent.

We continued to manage expenses in Q4 with decreases in both marketing and administrative cost as well as R&D as operational efficiencies more than offset our investments supporting key products and new launches.

On a full year basis, we delivered operating expenses in line with our guidance with meaningful savings in marketing and administrative expenses more than offsetting modest increases in R&D. Our non-GAAP effective tax rate for the quarter was 16.4%, resulting in a full year tax rate of 21.7%.

The quarterly and full year rates reflect the benefit from the renewal of the R&D tax credit. Taken together, we earned $0.93 per share on a non-GAAP basis in the fourth quarter, delivering 13% growth excluding exchange on the bottom line and significant P&L leverage. Now, let’s turn to guidance and our outlook for 2016.

Given the continued strength of the U.S. dollars against virtually all other currencies, we anticipate foreign exchange will have a meaningful impact again in 2016. We expect revenues to be $38.7 billion to $40.2 billion using mid-January exchange rates, which reflects an approximately 3 percentage-point negative impact from foreign exchange.

Excluding the impact of exchange, we expect low to mid single-digit revenue growth in 2016 as new product launches more than offset the impact from generic and biosimilar competition. Our guidance range also assumes negligible revenues from Venezuela compared to $625 million in the full year 2015.

We expect non-GAAP EPS to be $3.60 to $3.75, which also reflects an approximately 4 percentage-point negative impact from foreign currency at mid-January rates. 2016 EPS growth would be in the mid to high single-digits excluding the impact of exchange. On a GAAP basis, we expect to earn between $1.96 and $2.23.

Our non-GAAP EPS guidance assumes 2016 product gross margin will be roughly flat compared to 2015. In addition, we expect operating expenses to be generally in line with prior year.

We will continue to invest in direct selling and promotion to support new product launches while reducing administrative expenses, as we continue to focus our operating model. We remain committed to delivering a leveraged P&L and we will monitor our new launches and key products throughout the year in flex resources as appropriate.

Regarding tax, we expect the full year non-GAAP tax rate to be in the range 21.5% to 22.5%, which includes the benefit from the recently renewed R&D tax credit. Finally, we project average diluted shares outstanding of 2.78 billion for 2016, reflecting a decrease versus the prior year as we continue our share repurchase program.

The fourth quarter was a strong finish to a solid year of execution. We expect this momentum to continue into 2016 as we further innovate in our labs, invest behind our launches and continue our focus on disciplined resource allocation and continuous productivity to deliver a leveraged P&L and shareholder returns.

Now, I’ll turn the call over to Adam..

Thank you Rob and good morning everyone. This morning I’ll provide highlights on Global Human Health performance for the fourth quarter and for the full year of 2015. My comments will be on constant currency basis. Total sales reached $34.8 billion in 2015, reflecting growth of 4%. In the fourth quarter, sales reached $9 billion and also grew 4%.

Excluding Cubis and divestitures, Human Health sales grew was 2% in 2015. Moving now to product and franchise updates, I’ll start with the JANUVIA franchise. The JANUVIA franchise grew 7% in 2015 driven primarily by volume increases. However, in the fourth quarter, U.S.

revenue was impacted by a significant reduction in channel inventory, following buy-in that we saw in the third quarter. It’s important to note that underlying volume maintained growth of about 3% in U.S. in the fourth quarter. Despite increased pricing pressure, we expect to grow the JANUVIA franchise in 2016 ex-exchange.

We have maintained a high market share of about 75% in the U.S. and 65% globally. Volume increases in the U.S. and internationally, physician and patient experience with our medicine and macro trends that support a growing market, all reinforced our confidence in JANUVIA. Moving to hospital and specialty care.

Our hospital acute care business grew 11% in 2015 excluding Cubis. Sales in the fourth quarter reached more than $600 million and grew 7%. Performance was driven by our antibiotic and antifungal treatments as well as by BRIDION in the international markets. In addition, we are currently launching BRIDION in the U.S.

While it’s still early, customer feedback is very positive on this new product that uniquely reverses the neuromuscular block following surgery. We are also excited to be launching ZEPATIER for the treatment of chronic hepatitis C infection in the U.S. and Canada.

ZEPATIER offers a competitive profile and high cure rates with 12 weeks of therapy for the vast majority of patients in a one pill once today treatment. ZEPATIER is differentiated versus other options including consistent dosing regardless of cirrhosis status, renal impairment or use of PPIs and other acid-reducing agents.

We believe our payor and pricing strategy will maximize ZEPATIER revenue and market share, as well as broaden and accelerate patient access. We’re enthusiastic to be backing this important market and our teams are rapidly deploying to capitalize on this opportunity. Moving to vaccines, the vaccines portfolio grew 3% with sales of $5.7 billion in 2015.

In the fourth quarter, sales reached approximately $1.7 billion and grew 5% on strong performance for GARDASIL. GARDASIL growth was aided by timing of public sector purchases in the U.S. of about $50 million and timing of government purchases in Brazil in the fourth quarter. GARDASIL 9 now represents approximately 90% of sales in the U.S.

as our teams have executed well on converting customers to 9-valent vaccine. ZOSTAVAX sales declined 11% in the fourth quarter, resulting from a very weak flu season in the U.S. We continued to work to educate customers on the reimbursement for ZOSTAVAX and to invest in direct to consumer advertising for this important ramp.

Finally, I’d like to spend a few moments commenting on the continued launch of KEYTRUDA. In the fourth quarter, sales were approximately $215 million, driving strong full year sales of more than $560 million.

Our performance was driven largely by the refractory melanoma indication in the U.S., as well as ongoing launches in more than 40 markets ex-U.S. In late 2015, we received approval in United States for first line treatment of advanced melanoma regardless of BRAF status. The sales force is launching this indication as we speak.

Looking into 2016 and beyond, we remain enthusiastic about the portfolio for KEYTRUDA across markets and across cancer types. We are building a critical foundation for PD-L1 testing in lung cancer as we launch in second line. We believe this will help to set the stage for when our first line indication is achieved.

We have now demonstrated overall survival benefits [ph] for KEYTRUDA versus standard of care in both lung cancer and melanoma, which strengthens our belief that KEYTRUDA has a potential to become foundational in the treatment of cancer over time.

With more than 200 clinical trials and more than 100 combinations in over 32 tumor types, we see the potential to drive significant growth for KEYTRUDA over the long term. In summary, Global Human Health delivered a solid performance in 2015.

In 2016, we’ll continue to prioritize resources focusing on JANUVIA, hospital acute care, vaccines and important product launches including ZEPATIER and KEYTRUDA. The strength of our underlying business, the continued execution of our strategy, and the launch opportunities before us position us well for the year ahead.

Now, I’ll turn the call over to Roger..

Thanks Adam. I’ll provide a brief update on our progress in key programs during the fourth quarter and will note opportunities for further advancement in 2016. The fourth quarter was an important one for KEYTRUDA. Our U.S.

label was updated to include data from our 006 study in melanoma, demonstrating that KEYTRUDA treatment is superior to ipilimumab, the prior standard of care in the first line treatment of advanced melanoma and is judged by improvements in overall survival and progression-free survival.

Data from the 002 study in which KEYTRUDA treatment proved superior as judged by progression-free survival to traditional cytotoxic chemotherapy was also added to our label. Hence in United States as in Europe, our KEYTRUDA label documents the superior effect of this treatment for advanced melanoma as compared with other interventions.

Also in the fourth quarter, we presented data from our KEYNOTE-010 study demonstrating that KEYTRUDA provides superior overall survival as compared with docetaxel treatment in non-small cell lung cancer in patients with PD-L1 expression of 1% or more.

This study was presented at the ESMO Asia meeting, simultaneously published in the Lancet and it’s already been included in NCCN guidelines for lung cancer treatment. These data have also been submitted for review in United States and in Europe. Looking ahead for KEYTRUDA, 2016 promises to be a very exciting year.

We’ll see data from our KEYNOTE-024 first line non-small cell lung cancer trial comparing treatment with the range of cytotoxic chemotherapy regimens to KEYTRUDA monotherapy by mid-year. Primary endpoint is progression-free survival.

Our KEYNOTE-055 study, which evaluates response rates in head and neck cancer following KEYTRUDA monotherapy in patients who have failed both platinum agents cetuximab, will also provide important new data.

Looking still further ahead, there are multiple opportunities for filings in other tumor types including bladder cancer and classical Hodgkin lymphoma depending upon the results that we observe. As we have noted, the KEYTRUDA development program is exceptionally broad with registration-enabling studies underway in more than a dozen tumor types.

We do view KEYTRUDA as providing a foundation for the next generation treatment of malignant disease. Along these lines, we’re also setting combinations with cytotoxic agents, targeted therapies, vaccines and other immunomodulatory agents.

In 2015, we gained access to a Phase1 CEACAM directed anti-body program, which complements our internal clinical programs that target GITR, IL-10 and many other access. In all we have more than 100 combination studies underway as Adam mentioned.

A few weeks ago, we announced the acquisition of IOmet, through which we will gain access to a set of IDO1 and TDO1 small molecule antagonists. We previously presented data in collaboration with our colleagues at Incyte suggesting that KEYTRUDA may be fruitfully combined with their IDO1 inhibitor.

And a Phase 3 study using this agent will soon begin enrolling patients with melanoma. Our acquisition of IOmet will permit us to explore the utility of IDO1 inhibition much more broadly. Last week, we announced the approval of ZEPATIER in the United States.

ZEPATIER was the subject of two breakthrough designations and was evaluated promptly by a priority review. A key strength of ZEPATIER is the fact that it can be used without dose adjustment in patients with chronic renal failure, a group that suffers from increased rates of HCV infection.

Going forward in 2016, we expect to complete Phase 2b and initiate Phase 3 studies for new regimens that include MK-3682 uridinal nucleoside polymerase inhibitor and MK-8408, a next generation highly active NS5A inhibitor.

These programs emphasize our commitment to complete a care of patients HCV infection where the goal should certainly be to cure as many patients as possible using appropriate and effective regimens. Our 2016 plan includes numerous several approvals and filings.

As we have announced previously, bezlotoxumab, our therapy designed to reduce recurrences of Clostridium difficile associated enterocolitis received priority review designation from the FDA with PDUFA date in July. In 2016, we expect to complete our Phase 3 program and our filing for ertugliflozin as both agent and in combination JANUVIA.

And we will obtain adjudicated data supporting the filing of odanacatib. We’ll have the opportunity to review Phase 3 data from our inactivated varicella-zoster vaccine in immunocompromised populations and from our Phase 3 program studying letermovir as prophylaxis for Cytomegalovirus activation in patients receiving bone marrow transplant.

In collaboration with our colleagues at Bayer, we will begin a Phase 3 heart failure program for vericiguat based on Phase 2 data that we presented last year. And we also have a chance to see important early clinical data from our collaborations with NGM Pharmaceuticals in metabolic disease and from Moderna in the vaccine space.

It will be a busy year. Now, I’ll turn the call over to Teri..

Thanks, Roger. We’re going to be moving on to Q&A. We would like to try to get as many questions as possible this morning. So, I’d ask that you try to hold your questions to one or two each. Thanks. Darla, we can go to Q&A..

[Operator Instructions] Your first question comes from the line of Geoff Meacham from Barclays..

Good morning, guys. Thanks for taking the question. I have a couple for Roger on KEYTRUDA and lung. So, the first question is for the first line data this year.

How much do you think the OS data will be and will that matter to regulators sort of competitive landscape? And then, on the 010 study, how much do you think it will play a role when it comes to -- the overall survival data will play a role when it comes to looking at the PD-L1 minimal expressers when you think about kind of that sort testing as a lever going forward, vis-à-vis competition with Bristol? Thanks a lot..

Geoff, first of all, with respect to first line, the primary endpoint of the study is progression-free survival. In these studies, we do permit crossover. It’s really necessary to do that in these studies. And so, you’re really comparing the early versus late access to KEYTRUDA. That’s understood, progression-free survival is an accepted endpoint.

So, I think that’s where we’ll be with respect to first line. And with respect to the 010 study, not sure exactly what you mean by PD-L1 minimal expressers, and what we showed in the 010 study of course was that there was a treatment effect in the 1% expressers as well as in the high expressers.

We have noted that in PD-L1 negative populations with non-squamous non-small cell lung cancer, it’s not at all clear that there is a benefit that inures to patients who receive PD-1 directed therapy. And that’s true for every agent that’s been studied, not just our own agent.

So I think it is important to be looking at PD-L1 expression in order to decide who in fact should be treated with these agents. Adam may have some other thoughts about the PD-L1 expression in the second line..

The only thing I’d add Geoff is that if you look at reimbursement broadly in the U.S. right now we’re being reimbursed for PD-L1 positive. So, it’s irrespective of its’ 1% or above 50% for the vast majority of the plan, so we’re seeing reimbursement already for anybody that shows up as PD-L1 positive..

Next question please, Darla?.

It’s from Tim Anderson with Bernstein..

A question on ZEPATIER, payers and your competitors in the space talk about long-term contracting.

Knowing where your net pricing is coming in or at least I think know where it’s coming in and knowing the positioning of the product which has some reasonable attributes, can you just talk about what we should expect in 2016 -- consensus has around 600 million. I know you don’t guide on individual products normally.

But give us some guidance here if you can, especially in the context of trying to bump what could be of high prevalence of long-term contracts? Second question on 4-1BB, Pfizer made some positive comments yesterday. One of the products they’ve been setting with is your drug KEYTRUDA.

But I am wondering about the longevity of that deal and whether they could kick you to the curb, potentially now that they have their own PD-L1? And then just a very quick question; does KEYNOTE-24 have an interim analysis? Bristol’s first line trial does not..

Adam, why don’t we start with you on ZEPATIER and then we can move to Roger for the other two?.

Sure, Teri. And let me give you some context, and then I’ll try to answer the question specifically on how we’re thinking about the pricing reimbursement contracting strategy. But first of all, I agree with your comment that we do have a competitive product. And we have high cure rates.

And if you look at our clinical trials in GT1 patients, it was 94% to 97%. If you look at GT4 patients, it’s 97% to 100%. So, we start off by showing we have very good efficacy with the product. I also believe we have some important differentiation with the product, right? Our dosing is not affected by the presence of compensated cirrhosis.

If you look at the competition, they have to change their dose there. You can use us with any degree of renal impairment. If you look at the competition, particularly in certain patients with renal impairment, they can’t be used there. And also, you don’t have to adjust our dose for acid-reducing agents such as PPI.

So, I think those are some things we feel good about in terms of differentiating our product versus the competition in the marketplace. I think what we did was develop a real deliberate and I believe innovative pricing strategy to try to maximize the product and increase the number of appropriate patients treated.

But the first thing I want to say is we want to be competitive across all segments, and we want to look at public, private, we want to work with managed care organizations and government agencies et cetera, et cetera. So we plan to be competitive across all segments.

And I believe that the strategy that we implemented could accelerate access to patients in certain segments where access frankly has not been as broad to-date, including those patients with medical needs in stage 4 and 5 CKD. So, I’d just say, we don’t give guidance for individual products, but we will provide updates as we go through the year.

We’re just launching right now the products not available in the marketplace yet but it will be in a matter of days. And then, I’ll provide updates as we go through the year to give you a sense of where we are..

Great.

And Roger, do you want to address the 4-1BB and KEYNOTE-024 interim?.

Right. Tim, so on 4-1BB, just first in context, as you know this is just a huge number of combinations that potentially can be studied. We’re studying 100 and 4-1BB is one of those. The expectation is that we’re going to see a lot of opportunities to combine KEYTRUDA with other drugs; we’re already seeing those and have talked about them.

For example, in combination with chemotherapy, radiotherapy, with immunization with TVEC, the oncolytic virus, and of course we’re doing our own studies with other checkpoint inhibitors and other immunogens. We’re very pleased with other collaboration with Pfizer on 4-1BB.

I believe that plan is assuming that it’s accepted to be able to present some of those data at ASCO. And our expectation is that if it turns out that there is a good opportunity there that we’ll continue to collaborate. So, I’m not really terribly concerned about not being able to take advantage of an important opportunity to help patients.

With respect to KEYNOTE-024, the study is of course being continuously monitored by data monitoring committee. But importantly, I mean here we are in February, clinicaltrials.gov I think has the end of June. So, we’re getting close to the end of the study anyway.

And my expectation is that we’ll have the opportunity to see the data in too long time and can use that as a basis -- potentially assuming the data come up correctly, as a basis for filing..

Thanks Roger.

Next question please?.

It’s from Jami Rubin with Goldman Sachs..

Thank you very much. Ken, the first question is for you.

At our CEO conference, probably the last month, you talked about your increasing desire to be more aggressive with M&A, now that you have a strong scientific team on-board, thanks to Roger? Given the fairly significant de-rating of the biotech space since that conference, I would think you are absolutely licking your chops.

Can you talk about the M&A landscape? And most importantly, when you think the buyers and sellers start to come together? And then a question for you, Roger -- I think to Roger. It’s again on KEYTRUDA and the first-line study.

Can you say the opportunity? How large is the highest PD-L1 expressers in the front-line lung market? And when we will see the study that targets the entire PD-L1 patient population in front-line lung? Thanks very much..

Thanks Jami. Let me start by just reiterating what I said before.

The business development remains a critical part of our strategy because we need to pay both our internal growth with the best external innovation opportunities and we’re looking to augment our Phase 2 as well as our early stage pipeline with these kinds of partnerships and collaborations and bolt-on acquisition.

As it relates to re-rating of the biotech industry, of course we’re very focused on value creating opportunities. Our team has looked at this very carefully and we are very active in looking for opportunities in oncology and other therapeutic areas where we can build our pipeline.

So, I can just assure you that we paid attention to what’s happened in the marketplace and we are looking very actively to reach the right kinds of deals whether they’re M&A or partnership with collaborations to advance on pipeline..

Great. Roger, do you want to….

Jami, on the first-line opportunity size, just to remind you and everyone that our approach has been to ask the question of whether or not we can identify populations that would benefit especially from the treatment of KEYTRUDA. And we chose to use the PD-L1 expression as a marker for that. It’s turned out that that is a marker.

And the reason of course is not because specifically the PD-L1 is the counter ligand for PD-1, but rather because PD-L1 is a marker for the presence of an immune response and that PD-L1, as a result is telling us that there already is the pre-existing immune response that can be enhanced by the addition of KEYTRUDA.

The 024 study looks at those that are PD-L1 high. And what we’ve done in all of our studies is that we have looked at the PD-L1 high, those with the proportion scores above 50% and then looked at those that are expressing PD-L1 above 1% and also looked at that those that appeared not to be expressing PD-L1 as we move across the line.

So for example and we published in the New England Journal that there was in general, in general terms in the 001 study in melanoma, in general that those patients who are expressing more PD-L1 had better responses.

We similarly published data in 010-study recently, showing that responses were better in the highest in the PD-L1 expressers, again reflecting immune status. The 024 study looks at those that have the highest PD-L1 expression with about 25% of the first-line patient population. The 042 study will go on and look at patients who have the 1% cut point.

And we’ll begin to see the data across the entire first-line. So, we’ll have an opportunity to look at that.

Frankly, from a biological perspective, I really can’t understand why would be any difference in the first-line population from what we’ve previously shown in other tumor populations because again PD-L1 is a expression reflection of immune activity..

Thanks Roger. Next question please, Darla..

Your next question is from Chris Schott with JP Morgan..

Great. Thanks very much for the questions.

Just two here, first, can you elaborate on JANUVIA sales in the quarter? I guess how much the destocking impact results? And maybe more broadly, just latest thoughts on the SGLT2 impact on DPP-4 classes, as you talk about growing JANUVIA in 2016? And then a follow-up on HCV, can you just comment specifically on how much you see price driving share and broader adoption of these agents in the space? I think just a lot of focus on how the price dynamics play out here, no specific comments but just generally speaking, do you see price as a lever that is relevant [ph] to the space going forward for you guys? Thanks..

Hi Chris, this is Adam. Let me start with the JANUVIA franchise. So, I think it’s important to give some additional context. So, I want to start by saying we’re really pleased that JANUVIA grew 7% in 2015. And if you look at our underlying performance in fourth quarter, it was similar to the other quarters in the year.

What you saw on fourth quarter was volume growth in the U.S. of about 3%, which was about the same as what you saw the quarter before and so forth. What happened was there was significant channel reductions that followed the third quarter buy-in which I noted on the last call was more than $100 million. And as you may recall, last quarter the U.S.

grew 22% for JANUVIA and that’s why I noted that there was buy-in and we would expect to see buy out. So when you look at fourth quarter, I would look at the underlying performance, which remains similar to the other quarters. And I think we have a good year with JANUVIA, showing 7% growth versus prior.

When you look at 2016, despite increasing pricing pressure that we’ll see in the United States and the biannual price declines that you see in Japan, we expect to grow the franchise globally when you exclude exchange. And what that means with regard to EMPA-REG, we don’t see a significant impact in 2016.

In fact, if you look at the earliest data that you can look at, we’re seeing market share shifts within the SGLT2 class but we’re not seeing shifts between classes, between DPP-4s and SGLT2s. We’ll continue to monitor that closely. We’ll see when there is label changes or if there is potential guideline changes.

But at this point in time, we feel confident that there should not be a significant impact in 2016 from the SGLT2 class. So, let me answer your question on ZEPATIER. And I already stated that we think that we have a competitive product profile and that’s where it all starts.

You have to have a competitive product profile to be successful in the marketplace. Our efficacy is good. We think we have strong differentiation versus the competitors.

So, price is always a lever that you can choose to utilize, but you don’t necessarily have to utilize it nearly as much when you have a differentiated product that you think you can bring to market. So, we’ll continue to keep you updated on ZEPATIER, as we move forward. But we’re going to do everything we can to optimize or maximize that brand..

Thanks Adam. Darla, let’s go to the next question please..

It’s from Gregg Gilbert with Deutsche Bank..

First for Rob. It looks like you’re guiding to a currency effect on the bottom line that’s more extreme than the top line ‘16.

So, can you just help us understand that relationship for ‘16 and for Merck in general, and comment on what share count you’re factoring in to guidance for the year? And then for Ken, going back to the aggressive deal strategy described.

What are your latest thoughts on, on deals like the Cubis deal and whether those are the kinds of deals you’re looking as sprinkle in [ph] as well? It sounds like you have a scientific and pipeline focus, but what about deals that sort of leverage or build out certain commercial verticals you have and whether you do those deals again? Thanks..

This is Rob. Good morning, Gregg. So, on your question, we are seeing a little bit more pressure to earnings when we earn sales from foreign currency. The biggest single driver of that is really how our hedging is flowing through on a year-on-year basis.

Recall that in 2015, we flagged in prior quarters that we have received a meaningful benefit from hedge gains, as a result of the positions we took. And that benefit declined as you look from ‘15 into ‘16, assuming constant rates basically because of the fact that why those hedges are in place and the gains on them are smaller.

So that impact does cause a little bit more of the leveraging effect you’re seeing between the top and the bottom line. Other than that, we generally see a proportional move between sales and earnings, but that’s the biggest single driver.

And then to your question of what we’re looking out from a share count, as I mentioned in my prepared remarks, we’re assuming 2.78 billion shares as an average for 2016, which is a reduction from where we were in ‘15..

And Gregg, thanks for the question on M&A. Let me start by saying that the Cubis deal actually has been a good deal for us, as you can see from this year’s results. It also positions us well in the antibiotic space, a space that’s a priority space for us going forward from that standpoint.

But I also want to reiterate what I’ve said, which is our main focus going forward will be to augment our Phase 2 in early stage pipeline. So, our focus is on getting the best external science because we believe that’s how we could drive the greatest long term value.

So, I would say going forward, our main focus will be more on those kinds of scientific acquisition deals than on things that augment necessarily our commercial table..

Thanks Ken. Let’s go to next question please Darla..

It’s from Seamus Fernandez with Leerink..

So, just a couple of quick questions.

Ken, as I just listened to your comments, one of the things that I am trying to better understand is, can you give us a little bit of the history of stage 2 and earlier stage deals where Merck has successfully brought forward a product like that into development? When I look at the deal history, Schering-Plough is really one of the acquisitions that was quite successful with regard to gaining access to KEYTRUDA, having your base inhibitor advance forward.

Can you just help me understand why the smaller acquisitions are really a way to go? Obviously you guys -- and identified those assets, but it actually came from a larger deal and was clearly value generating. And then separately for Roger.

Roger, where I’m a little perplexed on the timing, if I look at the development of the front-line lung situation, it seems like studies that finished faster in immuno-oncology consistently show a less robust results.

So, can you help me understand how the KEYNOTE-024 study has an opportunity to successfully complete earlier than expected and before some of the other competitor studies that are out there? And then my final question just for Adam.

When you look at -- I think you guys have been really respectful, basically not saying that you’re going to win, but that you will have a foundational product in KEYTRUDA.

When other competitors claim and they’re going to win particularly from a third or fourth or fifth position, how likely is it given what you’ve seen historically that that is a realistic possibility, particularly in a space were new standards-of-care are being created? Thanks..

Let me first start with your first question Seamus, which is sort of a perspective on how early stage deals have created value for Merck.

And I will start by saying that at Merck we’ve always been focused on being a company that tries to develop really strong insight to human biology, and that has helped us to find things earlier on that have actually become important. So, some examples are FOSAMAX, which was licensed in or COZAAR.

In my own experience when I was on the legal side, the work that we did to get access to the DPP-4 technology through a German company called Probiodrug, when those deals were done, people don’t necessarily sit up and take notice of that, but JANUVIA was the result of that deal, which was done a number of years ago.

And so what we have found in the past is the best way for us to create value is do those insights early on that allow us to acquire the kinds of things that you heard Roger talk about NGM and Moderna.

Our goal is to find those kinds of things before there is a bidding war to apply our scientific knowhow, our development knowhow, our molecular -- I’m sorry our medicinal chemistry knowhow and to bring forward the kinds of molecules like sitagliptin that can actually be pretty important contributions to human health..

So with regard to KEYTRUDA, I’ll answer your question next. I’ve always said that I believe that this market is going to be a very large market and that there is room for multiple competitors. I also believe that there will be certain competitors that do really well in one tumor type and another competitor might get it in a different tumor type first.

And therefore you’ll see differences based upon tumor type. It’s not too different if you look at the anti-TNF field where you have multiple products, one might be better in GI, the other might do better in rheumatoid arthritis but they all tend to do very well and grow very fast. At the same time, I believe building a wall of data is important.

And when you look at the size and the magnitude of our clinical trials and when you look at the number of tumor types that we’re studying, I think we’re going to be in a very good position over the long-term. And it’s hard to think about late entrants coming in and having a strong position, once you have that wall of data built.

So, I think the strategy that we put in place is the right strategy over time. And I think over time, you’ll see us in a leadership position..

Seamus, I’m not sure exactly what you mean by faster studies giving less robust results.

Just to outline again what our strategy with respect to -- broadly with respect to these tumor types, as I mentioned in response to Jami Rubin’s question is that we’ve gone in said let’s look at the patient populations in which we expect to see the best results and those are the PD-L1 highs in the current formulations.

It’s not the only biomarker that we have; in fact we’ve evolved other better biomarkers we believe, but it’s one that’s useful. In those patient populations because higher percentage of the treated patients in principal should respond, the result will be faster, but it shouldn’t be less robust.

In fact, in many cases, it would be more robust simply in terms of the efficacy window. So that’s the basis for why the 024 study which is reading out in mid-year has a good chance of succeeding. We don’t know what the data are, but we’re eager to see the data and PFS.

And thereafter, the populations will broaden through 042 and through a whole variety of other studies that we’re doing. That’s the general strategy. And I think it’s a good one, because it focuses on those patients who need these therapies most..

Thanks Roger. Next question please Darla..

It’s from Andrew Baum with Citi..

Thank you. Couple of questions, please. First Roger, some of your competitors are beginning to make investments in cancer antigen vaccine platforms to address the nonimmunogenic tumor subsets which are obviously sizable. I am unaware that Merck has such a collaboration right now.

Obviously it involves logistical complexities [indiscernible] off the shelf solution might share a point. I’m interested in your appetite moving to that strategy? And then second question for Ken, obviously pharma has been positioned as a rogue [ph] industry in light of the pricing issues within the U.S.

To what extent do you think some of the negative attention on reimbursements spill over into other areas? I noticed an uptick in investigations from the DoJ, the SEC the HHS. Do you see any additional risk there for the industry as a functional scrutiny, almost certainly driven by political focus? Thank you..

Andrew with respect to neoantigen vaccine strategies, again this is -- conceptually the idea is okay, we’ve introduced checkpoint inhibitors now and we can get good responses in a significant percentage of patients, but in a large number of patients, on more than half, we actually don’t see a response.

So, why don’t we see a response in those patients? And one possibility certainly is that there isn’t enough pre-existing immune response. And if we could stimulate that through as you say in neoantigen vaccine, things might go better. We’re interested in those kinds of strategies. We of course have used other vaccination strategies.

I point out again the oncolytic virus strategy which appears to have some traction. And we are looking at the question of whether or not it’s possible to use neoantigens.

And one of the issues is as I am sure you realized that introducing bespoke therapy where each patient receives neoantigen cocktail will be very challenging from an industry perspective.

So, we’re looking for those situations where there might be groups of neoantigen s that could be used and would but able to improve responses in a large set of patients..

With respect to the political and regulatory and legal issues around pricing pressures, obviously the whole issue of pricing and affordability for patients is a significant one; it’s the challenge that we have in the society.

I think it’s unfortunate that that debate is being amplified and in some ways distorted by some of the political rhetoric, especially having to do with the presidential election cycle.

So from a pharma standpoint, as Chairman of pharma, we continue to work, educate constituents in Washington DC and around the country on how pharmaceuticals actually help reduce cost in the overall healthcare system as well as the impact that they have on individuals as well.

Now, reality of the world is as we’ve seen when there are these headlines, you tend to get congressional hearing and you tend to have state attorneys generals writing letters and things of that nature.

And I take those things very seriously but I also think that the most important thing that we can do as an industry is to continue to price our products consistent with the value that they provide to our customers and to continue to try to educate again people about the long-term positive impact that appropriate use of pharmaceuticals has on overall healthcare costs..

Thanks Ken. Next question please..

It’s from Tony Butler with Guggenheim Securities..

A couple of brief questions for Roger, one is, interesting BD solution with IOmet, given some early data that you presented at CTSI on melanoma.

But the real question is do you actually have data in house that an IDO and/or keto inhibitor in combination with KEYTRUDA would have utility in tumors outside of melanoma? Second question is around GITR, what we see KEYTRUDA, GITR combos this calendar year at clinical meeting. Ad forgive me Teri.

But Adam quickly on REMICADE non-U.S., do you actually have countries which are actively switching patients onto the biosimilar today, or is that simply a new patients who go on an anti-TNF inhibitor?.

Tony, so with respect to the question of whether IDO1 inhibitor data exists outside of melanoma, we have a lot of data that we generated in combination with Incyte. In order to really know whether you have evidence for combined efficacy, you’d have to have detailed really comparisons between monotherapy versus combination therapy.

And those kinds of data don’t exist really anywhere. Those really have to be done in robust Phase 2 or certainly Phase 3 studies. And we’re moving forward with that. But we’re interested in pursuing the field in more detail. And in order to do that, we really need to have access to a whole range of different compounds.

And that’s really what drove the IOmet deal. We’re pleased with our interaction with Incyte but we need to be able to look at a broader range of starting materials. And for the GITR data, we are doing combination studies right now, GITR in combination with KEYTRUDA.

Depending on who enrolment goes and how much data we have, we hope to be able to present some of that data this year..

With regard to the question on REMICADE, if you look at share by volume, we had about 85% share in the fourth quarter. That came down from about 90% share that we had the quarter before. So, we’re definitely seeing biosimilar business wins for new patients. And the percent of new patient is going to only grow over time.

So right now about 10% to 20% of the business per year is new patients. We are seeing substitution of existing patients in some smaller markets, such as the Nordics. At this point in time, we’re not seeing it in the larger markets.

But we continue to anticipate that the impacts of biosimilars is going to accelerate as we go into 2016, as there is more and more new patients coming into the market and they become a larger percent of the sales..

Next question please Darla..

It’s from Alex Arfaei with BMO Capital Markets..

Roger, on the KEYTRUDA 024 first line study and forgive my ignorance on this. But can you provide the rational why PFS was selected as a primary endpoint given that it has not been a reliable endpoint with anti-PD1s in general? Basically I’m trying to assess the risk for this trial.

Could we see a situation where PFS is not significant, but overall survival is eventually significant, which would actually be similar to what we’ve seen in more advanced setting? And the follow-up for Rob.

What’s driving the 14% FX headwind in animal health? Obviously it’s more significant than what you’re experiencing overall and that’s solid [ph] operational growth. Is this mostly Venezuela and when can we expect this to moderate? Thank you..

Alex, it’s Roger. On the PFS endpoint, if you look at the 010 study, I think that’s a good model for you to look at, because you look at overall survival and you look at PFS. The PFS hazard ratio is really excellent. And you can see the progression free survival for both doses and for PD-L1 high as well as PD-L1 1% populations.

So again, I don’t really see why first-line should look any different from second-line in that kind of setting and we should therefore be able to see a PFS signal. And you can do the power calculations based on the hazard ratio of less than 0.6 that we saw in that study. So that looks pretty good.

And if you can’t know until you do the study but that’s really what it all look like, I think..

Next question please. Sorry..

Alex, the other part of your question on the animal health. The reason you see a higher FX impact in animal health is predominantly due to the fact that the sales of animal health relative to our human health business are even more weighted outside of United States, pretty significantly outside of United States.

So, it’s really just a proportion of the sales coming from markets exposed to currency more than anything else. Venezuela did have a nominal impact on animal health, but it’s not the driver, it’s just general trends across all currencies..

Thanks.

Next question?.

It’s from David Risinger with Morgan Stanley..

So, with respect to hepatitis C, could you please talk a little bit more about your list pricing decision relative to the competition and how the market should think about discounting? Obviously there is a lot of speculation, so it would be good for you to help frame these topics, so that people understand your perspective on the list pricing and discounting? And then second, with respect to odanacatib, investor expectations are very low for this drug.

Roger, I was just hoping that you could share your level of enthusiasm for this drug to be approved and have a successful launch? Thank you..

Hi Dave, this is Adam. So, let me start with ZEPATIER. I always think it’s important to remind everyone that we have a competitive product profile and it all starts with having a competitive product profile. And I think we potentially even have some areas of differentiation that could be important.

In addition to that, I think we’ve developed a great pricing strategy that’s going to help ZEPATIER be successful in the marketplace. What we did was we priced our list price to be competitive where the market’s current net prices are. And our list price makes us competitive across all segments.

And I think it could potentially help I think some currently underserved segments. I think also lower list prices could potentially have a positive impact on out-of-pocket medication costs for some patients. There is some patients in part D, where the list price does matter in terms of the out-of-pocket cost.

And I think it could be beneficial for us there. I wouldn’t read into our discounting strategy based upon our initial pricing strategy. What we intend to do is to compete in all segments of the market and to have an appropriate discounting strategy that allows us to have access..

And Dave, it’s Roger on odanacatib. Back in May of 2014, I talked about odanacatib because we had the early results memo available for the Phase 3 study and noted that odanacatib had hit the three critical endpoints in osteoporosis process, namely reduced vertebral fractures, non-vertebral fractures and it reduced factures at hip.

And I said at the time that the benefit risk profile for odanacatib appeared favorable. And so, it’s a novel oral therapy that does what it’s supposed to do in terms of reducing fractures. Actually quite dramatically, quite impressively in terms of clinical vertebral fractures, it’s really the best that I’ve seen and I’ve been doing this for a while.

So it looks really quite good. One of the things that we pointed out when we presented these data at the end of 2014 was that there was a larger than usual discrepancy in adverse experience reporting for investigators versus central review. And in order to resolve that problem, we undertook an adjudication process.

And adjudication process has taken much longer than we imagined. We worked with FDA to find that process and we’ve worked with an external organization to go through it; it took all of last year. We are nearly done. We want to get these data in and have the opportunity to file it.

But I don’t think there is any question that odanacatib does what it’s supposed to do, we just want to see those data pull together..

Thanks Roger. Darla, we’re going to try to get in two really quick ones, if we can..

Your next question come is from Mark Schoenebaum, Evercore ISI..

I wanted to talk a little bit about your BELSOMRA launch. Scripts are doing fine; we are curious about the performance though above and below your expectations at this point.

And really quick, is there anything in the pipeline that investors are ignoring?.

With regard to BELSOMRA, I think we started off with a really good launch and we had nice growth. It has flattened a little bit. We ran direct to consumer advertising and we saw an increase again in TRx volume. We’ve since seen it flatten a bit and we’re working right now on augmenting our digital capabilities and our online capabilities.

At the same time, we’re working with physicians to understand that 10 milligrams which is the start dose isn’t effective that they should titrate the patient to 20 milligrams. So, I would say that we were off to a good start. I am not pleased it’s currently flat at this point in time, but we’re working on that..

And Mark with respect to the pipeline, your colleagues are always telling me that based on our current share price, it appears that the pipeline is being completely ignored because there is almost no value that is ascribed to it.

And it surprises them that here we have a really major effort in Alzheimer’s for example and don’t get an enormous amount of credit for that.

When you check through all of those Phase 3 opportunities, some of which I mentioned that are coming forward as well as the large number of Phase 2 programs in the early space, and I could go through them one after another. I think we’ve got an enormous opportunity here and would love to have the opportunity to talk about in more detail..

Thanks Roger. I think unfortunately we’re out of time. So, I am going to just turn it over to Ken for some final comments..

Okay. Well, again thank you for joining us this morning. We’re pleased with the growth that we saw through continued execution in our key areas including, diabetes. We’re looking forward to additional growth. I think if you look at our 2016 guidance ex-FX, you see we expect to grow low to mid single digits. I think it’s important to look at our EPS also.

We continue to be very vigorous in our cost reductions and we are able to provide guidance here that again will allow us ex-FX to grow mid to high single digits. So we’re pleased that we’re back in a growth mode. And we’re very excited to have opportunities to launch important products like ZEPATIER and KEYTRUDA.

So, thank you for your attention this morning. We look forward to talking to you in the future. Bye-bye..

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect..