Over the course of my years at Merck, this Company has discovered, developed and brought to patients medicines and vaccines that have made an enormous difference in the health and lives of millions. All of us at Merck are proud of what we have accomplished together. Each of us is eager to build on that legacy of achievement and reach new heights of success.
Yet each of us is also keenly aware that we have a lot of work to do to return Merck to the leadership position it held for so long. We are driven, not by some sense of nostalgia for the past, but by a vision of what Merck can be in the years ahead. We are determined to succeed by producing results that earn the confidence of patients, physicians, payers and shareholders in equal measure.
From the moment I assumed my new position, my management team and I began working to identify what we need to do to reclaim Merck's leadership. We concluded that we must take a completely different approach to every aspect of our business. By the time 2005 came to a close, we had developed and started implementing a strategy to make Merck, once again, a true leader in the pharmaceutical industry.
We call our strategy Merck's Plan to Win. We entered 2006 actively working to execute that plan to deliver greater value for shareholders, patients and the health care providers and payers who serve them, and results that all of us at Merck can take
pride in.
Throughout my tenure at Merck, I have been impressed by the dedication and talent of our employees. It is because of these qualities that I have such confidence in our ability to deliver on our plan. I am also appreciative of the guidance and support of our Board of Directors. This Company is fortunate to be served by people of such extraordinary passion and commitment, and I am fortunate to be working with them.
In this report, we will share with you the framework of our plan. I am confident that you will agree that it is a plan that fully and boldly addresses the challenges we face. I pledge that you will see during the course of 2006 and beyond that we are committed to flawlessly executing our plan.
As we undertake this effort, we do so with considerable strength and momentum. Throughout the course of 2005 and early in 2006, we continued to make important advances in improving patient care and preventing disease:
- Fosamax Plus D, a single once-weekly tablet that provides osteoporosis patients with the benefits of Fosamax and vitamin D in one convenient dose, was approved by the United States Food and Drug Administration (FDA);
- Singulair received approval for a new indication for year-round allergies in patients as young as six months;
- Vaqta, our hepatitis A vaccine, was approved by the FDA for children as young as one year, and was recommended for use at this age by the Advisory Committee on Immunization Practices;
- ProQuad, our combination vaccine for measles, mumps, rubella and chickenpox, became the first and only vaccine approved for use in the United States that helps protect against these four diseases in one shot;
- Gardasil, our investigational vaccine for cervical cancer — the second leading cause of cancer deaths in women worldwide — was granted priority review by the FDA. A true breakthrough, Gardasil has the potential to reduce the estimated 500,000 diagnosed cases of cervical cancer and 300,000 deaths annually worldwide;
- RotaTeq, our vaccine to prevent rotavirus gastroenteritis, which is responsible for approximately half a million deaths among children worldwide each year, was approved by the FDA for use in the United States;
- Zostavax, our investigational vaccine to help prevent shingles in patients over 60, received a positive review by an FDA Advisory Committee, a critical step toward expected FDA approval in 2006. In February 2006, the FDA extended its review by three months until late May;
- Januvia, which is the proposed name for our investigational medicine to treat type 2 diabetes, has been accepted for standard review by the FDA. If approved, Januvia will be Merck's first marketed drug for this disease, which afflicts nearly 21 million Americans.
As one of just five major pharmaceutical research companies in the world that is actively pursuing the development of new vaccines, we are making significant inroads in the cause of disease prevention. We expect our vaccine business to continue to provide significant strength to our long-term growth.
In addition, promising drugs in late-stage development for diabetes, insomnia, heart disease, high cholesterol and HIV/AIDS continue to advance through our pipeline and are expected to drive our growth between now and the end of the decade.
Our momentum is further fueled by significant growth in the number of new candidates entering Merck's pipeline. In 2005, the number of compounds entering our pipeline was nearly four times greater than it was in 2001. Our commitment to the research and development which drives our success is as strong today as it has ever been. And because we are taking full advantage of the exciting advances emerging from the revolution in the biosciences, that commitment should yield real results faster than ever before for patients and for Merck.
We continue to reinforce the strength of our core pharmaceutical business by entering into partnerships and licensing agreements. In the years ahead, we also will pursue certain alliances or acquisitions in diagnostics and devices — not to build a stand-alone business in that area — but rather to enhance our core business. Furthermore, we will look for opportunities to participate in authorized generics.
Merck's strong financial status provides a sound platform for the future. We continue to be focused on cash flow to enhance total shareholder returns. In 2005, free operating cash flow, after capital expenditures, was more than $5 billion, and we anticipate it will be approximately $5 billion in 2006. That strong cash flow reinforces our commitment to maintaining our dividend at the current level and provides opportunity for share repurchases.
We also initiated in 2005 a new series of steps to reduce our cost structure to make Merck better able to respond to the challenges we face, provide value for customers and enhance shareholder value. In November, we announced a global restructuring plan to produce significant cost savings through our manufacturing process redesign. Combined with substantial cost savings we expect to achieve in our marketing and administrative expenses, we anticipate cumulative savings in these areas of $4.5 to $5 billion through 2010.
These savings will enable us to fund new product launches, which will contribute to earnings per share (EPS) growth over the next five years. Excluding net tax charges in 2005, charges related to our restructuring plan, any one-time gains associated with the AstraZeneca partnership and the establishment of reserves for any potential liability related to the Vioxx litigation, we expect to achieve double-digit compound annual EPS growth through 2010, relative to our 2005 base, with annual EPS growth resuming in 2007.
As you know, the past year brought some challenges as well as successes. The litigation around Vioxx continues to unfold and will go on for years. This situation has not, however, distracted our attention from our mission of bringing novel and critically needed medicines and vaccines to patients who need them. Neither has it disrupted our business operations nor diverted us from our efforts to restore Merck to a position of industry leadership.
In 2005, Merck continued and expanded its historic commitment to ensuring that the people who need our medicines have access to them. From our progress in addressing HIV/AIDS in Botswana and elsewhere, to our continuing commitment to combating the scourge of river blindness through the Merck Mectizan Donation Program, we are extending a helping hand to those most in need in the developing world.
In the United States, our efforts to provide medicines to those who cannot afford them have continued to expand through our Patient Assistance Program and our new Merck Prescription Discount Program. As Rebecca Ray, a 46-year-old woman in Virginia who has been helped through our Patient Assistance Program, said, "It's made a huge difference in my life. It's a great program."
Our help also extended to those whose lives were affected by a series of natural disasters in the United States and elsewhere around the world. Our combined contributions following the 2004 tsunami in Southeast Asia, the recent earthquake in Pakistan and hurricanes Katrina and Rita exceeded $26 million. These efforts demonstrate that we continue to honor the values that have long distinguished Merck.
As I said on my first day on the job, I am committed to leading the change that is necessary to ensure Merck's success into the future. Merck's Plan to Win is changing the way we approach every aspect of our business. It is positioning us to take full advantage of the opportunities these challenging times present. By executing our plan flawlessly, Merck can again be the Company to which patients, physicians and payers alike look for unmatched excellence and to which shareholders look for value and performance.
We have behind us a proud and distinguished legacy. We have before us an exciting and successful future. We are eager to make it happen.
Sincerely,
Dick Clark
Chief Executive Officer and President
February 22, 2006
