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Gardasil’s Strong Launch May Be Suppressing Merck’s M&A Appetite

Executive Summary

The robust growth for Merck's human papillomavirus vaccine Gardasil seen in the first quarter in part reflects initial purchases by state Vaccines for Children programs

The robust growth for Merck's human papillomavirus vaccine Gardasil seen in the first quarter in part reflects initial purchases by state Vaccines for Children programs.

During an April 19 quarterly earnings call, Merck reported worldwide Gardasil sales of $365 million. Sales of the vaccine, which was approved in June 2006, were up 135 percent on a sequential basis.

CFO Judy Lewent noted that the "quarterly figure includes initial purchases by many states" for the Centers for Disease Control and Prevention's VFC program.

Merck announced in November that Gardasil had been added to the program, which gives uninsured and Medicaid-eligible females ages nine to 18 free access to the vaccine (1 (Also see "Gardasil Reimbursement Issues To Be Resolved In Early 2007, Merck Says" - Pink Sheet, 1 Jan, 2007.), p. 10).

CEO Richard Clark noted that not all state VFC programs have adopted Gardasil. "From the state standpoint, it's going to take the time it takes to get through the vaccine committee of the new state and then the ... discussion and debate within the legislature," he noted.

Merck will work to ensure that the stockpiled vaccine is pulled through to patients, Clark said.

"We obviously know that the initial purchases by many states have been effected. Now the pipeline is full and we have to get it to the children," he said. "We feel comfortable where the future pipeline is, but there is obviously some initial stockpiling."

Another key factor in driving the vaccine through the supply chain is ensuring that patients receive the second and third doses of the vaccine, Clark said.

While acknowledging that "it is too early to talk about uptick for the second and third dose," the chief exec said Merck has implemented a program to remind patients to get the booster doses.

"We have worked with payers and physicians to put reminder programs in place and it will trigger, from a compliance standpoint, that we have more success and will be able to monitor that," he explained.

Clark also touted Gardasil's managed care penetration, reporting that 97 percent of privately insured lives have access to the vaccine. By comparison, in January, Merck said 94 percent of lives were covered.

Of potentially greater significance is that "75 percent of plan members have first dollar coverage for Gardasil, which essentially means no copay," Clark said. There had been reports of physicians requiring patients to shoulder a significant portion of the cost of the vaccine at the time of administration due to insufficient reimbursement.

"When you put those combinations together with the fact that there are 118 million girls and women in the U.S. and EU and the highly developed markets that would be an appropriate age, we feel very comfortable with the future forecast," he said.

Gardasil's strong performance - as well as continued strong growth of in-line products such as the respiratory drug Singulair (montelukast), which rose 25 percent year-over-year to $1 billion - was a factor in the firm's decision to raise its full-year 2007 earnings guidance April 12.

Merck reported worldwide sales of $5.8 billion during the quarter, a 7 percent increase over the year-ago period. The year-on-year growth came despite a difficult comparison due to the loss of market exclusivity for Zocor (simvastatin) in June 2006.

The strong performance of Merck's in-line and new products may be having an impact on the firm's mergers and acquisitions strategy. The company had previously said it was looking at acquisitions that could contribute both to its pipeline and top line (2 (Also see "Video Kills The Sales Rep? Merck Rolls Out Large Scale Video Detailing" - Pink Sheet, 18 Dec, 2006.), p. 8).

During the April 19 call, Clark suggested Merck may have less of an appetite for acquisitions as a result of the product successes.

In making M&A decisions, "we really have to strengthen where we are today and in the future and, quite frankly, where we are with our pipeline and where we are with some of our results has to be taken into the equation because the internal growth to organic growth of the company right now is pretty positive," he said.

- Andrew Kasper ([email protected])

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