e10vk
As filed with the Securities and Exchange Commission on March
1, 2010
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
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(MARK ONE)
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þ
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Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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For the Fiscal Year Ended December
31, 2009
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or
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o
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Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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For the transition period
from
to
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Commission File
No. 1-6571
Merck & Co., Inc.
One Merck Drive
Whitehouse Station, N. J.
08889-0100
(908) 423-1000
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Incorporated in New Jersey
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I.R.S. Employer
Identification No. 22-1918501
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Securities Registered pursuant to Section 12(b) of the
Act:
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Name of Each Exchange
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Title of Each Class
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on which Registered
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Common Stock ($0.50 par value)
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New York Stock Exchange
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Mandatory Convertible Preferred Stock
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New York Stock Exchange
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Number of shares of Common Stock ($0.50 par value)
outstanding as of January 29, 2010: 3,115,317,260.
Aggregate market value of Common Stock ($0.50 par value)
held by non-affiliates on June 30, 2009 based on closing
price on June 30, 2009: $41,003,000,000.
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405) is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check One):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Documents
Incorporated by Reference:
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Document
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Part of Form 10-K
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Proxy Statement for the Annual Meeting of
Shareholders to be held May 25, 2010, to be filed with the
Securities and Exchange Commission within 120 days after
the close of the fiscal year covered by this report
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Part III
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PART I
On November 3, 2009, Merck & Co., Inc. (Old
Merck) and Schering-Plough Corporation
(Schering-Plough) completed their
previously-announced merger (the Merger). In the
Merger, Schering-Plough acquired all of the shares of Old Merck,
which became a wholly-owned subsidiary of Schering-Plough and
was renamed Merck Sharp & Dohme Corp. Schering-Plough
continued as the surviving public company and was renamed
Merck & Co., Inc. (New Merck or the
Company). However, for accounting purposes only, the
Merger was treated as an acquisition with Old Merck considered
the accounting acquirer. Accordingly, the accompanying financial
statements reflect Old Mercks stand-alone operations as
they existed prior to the completion of the Merger. The results
of Schering-Ploughs business have been included in New
Mercks financial statements only for periods subsequent to
the completion of the Merger. Therefore, New Mercks
financial results for 2009 do not reflect a full year of legacy
Schering-Plough operations. References in this report and in the
accompanying financial statements to Merck for
periods prior to the Merger refer to Old Merck and for periods
after the completion of the Merger to New Merck.
The Company is a global health care company that delivers
innovative health solutions through its medicines, vaccines,
biologic therapies, and consumer and animal products, which it
markets directly and through its joint ventures. The
Companys operations are principally managed on a products
basis and are comprised of one reportable segment, which is the
Pharmaceutical segment. The Pharmaceutical segment includes
human health pharmaceutical and vaccine products marketed either
directly by the Company or through joint ventures. Human health
pharmaceutical products consist of therapeutic and preventive
agents, sold by prescription, for the treatment of human
disorders. The Company sells these human health pharmaceutical
products primarily to drug wholesalers and retailers, hospitals,
government agencies and managed health care providers such as
health maintenance organizations, pharmacy benefit managers and
other institutions. Vaccine products consist of preventative
pediatric, adolescent and adult vaccines, primarily administered
at physician offices. The Company sells these human health
vaccines primarily to physicians, wholesalers, physician
distributors and government entities. The Companys
professional representatives communicate the effectiveness,
safety and value of its pharmaceutical and vaccine products to
health care professionals in private practice, group practices
and managed care organizations. The Company also has animal
health operations that discover, develop, manufacture and market
animal health products, including vaccines. The Companys
professional representatives communicate the safety and value of
the Companys animal health products to veterinarians,
distributors and animal producers. Additionally, the Company has
consumer health care operations that develop, manufacture and
market
Over-the-Counter
(OTC), foot care and sun care products, which are
sold through wholesale and retail drug, food chain and mass
merchandiser outlets in the United States and Canada.
For financial information and other information about the
Pharmaceutical segment, see Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Item 8. Financial Statements and
Supplementary Data below.
All product or service marks appearing in type form different
from that of the surrounding text are trademarks or service
marks owned, licensed to, promoted or distributed by Merck, its
subsidiaries or affiliates, except as noted. Cozaar and
Hyzaar are registered trademarks of E.I. du Pont de
Nemours and Company, Wilmington, DE. All other trademarks or
services marks are those of their respective owners.
Overview
As discussed above, the Merger was completed on November 3,
2009. In the Merger, Old Merck shareholders received one share
of common stock of New Merck for each share of Old Merck stock
that they owned, and Schering-Plough shareholders received
0.5767 of a share of common stock of New Merck and $10.50 in
cash for each share of Schering-Plough stock that they owned.
The consideration in the Merger was valued at $49.6 billion in
the aggregate. Schering-Plough was Old Mercks long-term
partner in the Merck/Schering-Plough cholesterol partnership
(the MSP Partnership). The cash portion of the
consideration was funded with a
2
combination of existing cash, including proceeds from the sale
of Old Mercks interest in Merial Limited, the sale or
redemption of investments and the issuance of debt.
The combined company has a research and development pipeline
with greater depth and breadth and many promising drug
candidates, a significantly broader portfolio of medicines and
an expanded presence in key international markets, particularly
in high-growth emerging markets. The Company anticipates that
the efficiencies gained from the Merger will allow it to invest
in promising pipeline candidates, as well as strategic external
research and development opportunities.
The combination increased the Companys pipeline of early,
mid- and late stage product candidates, including a significant
increase in the number of potential medicines the Company has in
Phase III development to 19 candidates. Additionally, a
number of candidates are currently under review in the United
States and internationally.
The Merger also is expected to accelerate the expansion into
therapeutic areas that Old Merck has focused on in recent years
with the addition of Schering-Ploughs established presence
and expertise in oncology, neuroscience and novel biologics.
Further, the Merger is expected to broaden the Companys
commercial portfolio with leading franchises in key therapeutic
areas, including cardiovascular, respiratory, oncology,
neuroscience, infectious diseases, immunology and womens
health. Additionally, the combined company is expected to
realize potential benefits from its animal health business and
portfolio of consumer health brands, including Claritin,
Coppertone and Dr. Scholls. Many of the
legacy Schering-Ploughs products are expected to have long
periods of marketing exclusivity and, by leveraging the combined
companys expanded product offerings, the Company expects
to benefit from additional revenue growth opportunities. For
example, the combined company is expected to have expanded
opportunities for life-cycle management through the introduction
of potential new combinations and formulations of existing
products of the two legacy companies. Also, the Company will
have an expanded global presence and a more geographically
diverse revenue base. Schering-Ploughs significant
international presence will accelerate Old Mercks own
international growth efforts.
During 2009, revenue increased 15% driven largely by the
incremental sales resulting from the inclusion of the
post-Merger results of legacy Schering-Plough products, such as
Remicade (infliximab), a treatment for
inflammatory diseases, Temodar (temozolomide), a
treatment for certain types of brain tumors, Nasonex
(mometasone furoate monohydrate) nasal spray, an inhaled
nasal corticosteroid for the treatment of nasal allergy
symptoms, and PegIntron (peginterferon
alpha-2b)
for treating chronic hepatitis C, as well as the
recognition of revenue from sales of Zetia (ezetimibe)
and Vytorin (ezetimibe/simvastatin), cholesterol
modifying medicines. Prior to the Merger, sales of Zetia
and Vytorin were recognized by the MSP Partnership
and the results of Old Mercks interest in the MSP
Partnership were recorded in Equity income from
affiliates. As a result of the Merger, the MSP Partnership
is now wholly-owned by the Company and therefore revenues from
these products for the post-Merger period are reflected in
Sales. Additionally, the Company recognized sales in the
post-Merger period from legacy Schering-Plough animal health and
consumer health care products. Also contributing to the sales
increase was growth in Januvia (sitagliptin phosphate)
and Janumet (sitagliptin phosphate and metformin
hydrochloride) for the treatment of type 2 diabetes,
Isentress (raltegravir), an antiretroviral therapy for
the treatment of HIV infection, Singulair (montelukast
sodium), a medicine indicated for the chronic treatment of
asthma and the relief of symptoms of allergic rhinitis,
Varivax (Varicella Virus Vaccine Live), a vaccine to help
prevent chickenpox (varicella), and Pneumovax
(pneumococcal vaccine polyvalent), a vaccine to help prevent
pneumococcal disease. These increases were partially offset by
lower sales of Fosamax (alendronate sodium) for the
treatment and prevention of osteoporosis. Fosamax and
Fosamax Plus D (alendronate sodium/cholecalciferol) lost
market exclusivity for substantially all formulations in the
United States in February 2008 and April 2008, respectively.
Revenue was also negatively affected by lower sales of
Gardasil [Human Papillomavirus Quadrivalent (Types 6, 11,
16, and 18) Vaccine, Recombinant], a vaccine to help
prevent cervical, vulvar and vaginal cancers, precancerous or
dysplastic lesions, and genital warts caused by human
papillomavirus (HPV) types 6, 11, 16 and 18,
Cosopt (dorzolamide hydrochloride and timolol maleate
ophthalmic solution)/Trusopt (dorzolamide hydrochloride
ophthalmic solution), ophthalmic products which lost
U.S. market exclusivity in October 2008, and lower revenue
from the Companys relationship with AstraZeneca LP
(AZLP). Other products experiencing declines include
RotaTeq (Rotavirus Vaccine, Live, Oral, Pentavalent), a
vaccine to help protect against rotavirus gastroenteritis in
infants and
3
children, Zocor (simvastatin), the Companys
statin for modifying cholesterol, and Primaxin (imipenem
and cilastatin sodium) for the treatment of bacterial infections.
As a result of the Merger, the Company expects to achieve
substantial cost savings across all areas, including from
consolidation in both sales and marketing and research and
development, the application of the Companys lean
manufacturing and sourcing strategies to the expanded
operations, and the full integration of the MSP Partnership.
In February 2010, the Company announced the first phase of a new
global restructuring program (the Merger Restructuring
Program) in conjunction with the integration of the legacy
Merck and legacy Schering-Plough businesses. This Merger
Restructuring Program is intended to optimize the cost structure
of the combined Company. As part of the first phase of the
Merger Restructuring Program, by the end of 2012, the Company
expects to reduce its total workforce by approximately 15%
across all areas of the Company worldwide. The Company also
plans to eliminate 2,500 vacant positions as part of the first
phase of the program. These workforce reductions will primarily
come from the elimination of duplicative positions in sales,
administrative and headquarters organizations, as well as from
the consolidation of certain manufacturing facilities and
research and development operations. The Company will continue
to hire new employees in strategic growth areas of the business
during this period. Certain actions, such as the ongoing
reevaluation of manufacturing and research and development
facilities worldwide, have not yet been completed, but will be
included later in 2010 in other phases of the Merger
Restructuring Program. In connection with the first phase of the
Merger Restructuring Program, separation costs under the
Companys existing severance programs worldwide were
recorded in the fourth quarter of 2009 to the extent such costs
were probable and reasonably estimable. The Company recorded
pretax restructuring costs of $1.5 billion, primarily
employee separation costs, related to the Merger Restructuring
Program in the fourth quarter of 2009. This first phase of the
Merger Restructuring Program is expected to be completed by the
end of 2012 with the total pretax costs estimated to be
$2.6 billion to $3.3 billion. The Company estimates
that approximately 85% of the cumulative pretax costs relate to
cash outlays, primarily related to employee separation expense.
Approximately 15% of the cumulative pretax costs are non-cash,
relating primarily to the accelerated depreciation of facilities
to be closed or divested.
The Company expects this first phase of the Merger Restructuring
Program to yield annual savings in 2012 of approximately
$2.6 billion to $3.0 billion. These anticipated
savings relate only to the first phase of the Merger
Restructuring Program and therefore are only a portion of the
estimated $3.5 billion of incremental annual savings
originally disclosed when the Merger was announced. The Company
expects that additional savings will be generated by subsequent
phases of the Merger Restructuring Program that will be
announced later this year, as well as by non-restructuring
related activities, such as procurement savings initiatives.
These cost savings, which are expected to come from all areas of
the Companys pharmaceutical business, are in addition to
the previously announced ongoing cost reduction initiatives at
both legacy companies.
As a result of the Merger, the Company obtained a controlling
interest in the MSP Partnership and it is now owned 100% by the
Company. Accordingly, the Company was required to remeasure
Mercks previously held equity interest in the MSP
Partnership at its merger-date fair value and recognize the
resulting gain in earnings. As a result, the Company recorded a
gain of $7.5 billion recognized in Other (income)
expense, net in 2009. Also during 2009, Old Merck sold its
50% interest in Merial Limited (Merial) to
sanofi-aventis for $4 billion in cash. The sale resulted in
the recognition of a $3.2 billion gain reflected in
Other (income) expense, net in 2009. See Note 10 to
the consolidated financial statements in Item 8.
Financial Statements and Supplementary Data below
for further information.
Earnings per common share (EPS) assuming dilution
for 2009 were $5.65, which reflect a net impact of $2.40
resulting from gains related to the MSP Partnership and the sale
of Merial, partially offset by increased expenses from the
amortization of purchase accounting adjustments, restructuring
and merger-related costs. EPS in 2009 were also affected by the
dilutive impact of shares issued in the Merger.
4
Product
Sales
Sales(1) of
the Companys products were as follows:
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($ in millions)
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2009
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2008
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2007
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Pharmaceutical:
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Bone, Respiratory, Immunology and Dermatology
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Singulair
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$
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4,659.7
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$
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4,336.9
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$
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4,266.3
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Fosamax
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1,099.8
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1,552.7
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3,049.0
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Propecia
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440.3
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429.1
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405.4
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Remicade
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430.7
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Arcoxia
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357.5
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377.3
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329.1
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Nasonex
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164.9
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Clarinex
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100.6
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Asmanex
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37.0
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Cardiovascular
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Vytorin
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440.8
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84.2
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84.3
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Zetia
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402.9
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6.4
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6.5
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Integrilin
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45.9
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Diabetes and Obesity
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Januvia
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1,922.1
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1,397.1
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667.5
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Janumet
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658.4
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351.1
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86.4
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Infectious Disease
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Isentress
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751.8
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361.1
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41.3
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Primaxin
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688.9
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760.4
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763.5
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Cancidas
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616.7
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596.4
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536.9
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Invanz
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292.9
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265.0
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190.2
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Crixivan/Stocrin
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206.1
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275.1
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310.2
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PegIntron
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148.7
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Avelox
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66.2
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Rebetol
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36.1
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Mature Brands
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Cozaar/Hyzaar
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3,560.7
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3,557.7
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3,350.1
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Zocor
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558.4
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660.1
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876.5
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Vasotec/Vaseretic
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310.8
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356.7
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494.6
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Proscar
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290.9
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323.5
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411.0
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Claritin Rx
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71.1
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Proventil
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26.2
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Neurosciences and Ophthalmology
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Maxalt
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574.5
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529.2
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467.3
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Cosopt/Trusopt
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503.5
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781.2
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786.8
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Remeron
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38.5
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Subutex/Suboxone
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36.3
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Oncology
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Emend
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313.1
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259.7
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201.7
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Temodar
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188.1
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Caelyx
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46.5
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Intron A
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38.4
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Vaccines(2)
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ProQuad/M-M-R II/Varivax
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1,368.5
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1,268.5
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1,347.1
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Gardasil
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1,118.4
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1,402.8
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1,480.6
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RotaTeq
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521.9
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664.5
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524.7
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Pneumovax
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345.6
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249.3
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233.2
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Zostavax
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277.4
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312.4
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236.0
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Womens Health and Endocrine
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Follistim/Puregon
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96.5
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NuvaRing
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88.3
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Other
Pharmaceutical(3)
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1,294.9
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922.9
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1,136.6
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25,236.5
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22,081.3
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22,282.8
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Other segment
revenues(4)
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2,114.0
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1,694.1
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1,848.1
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Total segment revenues
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27,350.5
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23,775.4
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24,130.9
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Other(5)
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77.8
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74.9
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66.8
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$
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27,428.3
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$
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23,850.3
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$
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24,197.7
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(1)
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Sales of legacy Schering-Plough products only reflect results
for the post-Merger period through December 31, 2009. Sales
of MSP Partnership products Zetia and Vytorin
represent sales for the post-Merger period through
December 31, 2009. Prior to the Merger, sales of Zetia
and Vytorin were primarily recognized by the MSP
Partnership and the results of Old Mercks interest in the
MSP Partnership were recorded in Equity income from
affiliates. Sales of Zetia and Vytorin in 2008
and 2007 reflect Old Mercks sales of these products in
Latin America which was not part of the MSP Partnership.
|
|
(2)
|
These amounts do not reflect sales of vaccines sold in most
major European markets through the Companys joint venture,
Sanofi Pasteur MSD, the results of which are reflected in
Equity income from affiliates. These amounts do, however,
reflect supply sales to Sanofi Pasteur MSD.
|
|
(3)
|
Other pharmaceutical primarily includes sales of other human
pharmaceutical products, including products within the
franchises not listed separately.
|
|
(4)
|
Reflects other non-reportable segments, including animal
health and consumer health care, and revenue from the
Companys relationship with AZLP primarily relating to
sales of Nexium, as well as Prilosec. Revenue from
AZLP was $1.4 billion, $1.6 billion and
$1.7 billion in 2009, 2008 and 2007, respectively.
|
|
(5)
|
Other revenues are primarily comprised of miscellaneous
corporate revenues, third party manufacturing sales, sales
related to divested products or businesses and other supply
sales not included in segment results.
|
5
Pharmaceutical
The Companys pharmaceutical products include therapeutic
and preventive agents, generally sold by prescription, for the
treatment of human disorders. Among these are:
Bone, Respiratory, Immunology and Dermatology: Singulair;
Remicade; Fosamax; Nasonex; Propecia
(finasteride), a product for the treatment of male pattern
hair loss; Clarinex (desloratadine), a non-sedating
antihistamine for the treatment of allergic rhinitis;
Arcoxia (etoricoxib) for the treatment of arthritis and
pain; and Asmanex Twisthaler (mometasone furoate
inhalation powder), an oral dry-powder corticosteroid inhaler
for first-line maintenance treatment of asthma.
Cardiovascular Disease: Zetia (marketed as
Ezetrol outside the United States); Vytorin
(marketed as Inegy outside the United States) and
Integrilin (eptifibatide) Injection, a platelet receptor
GP IIb/IIIa inhibitor for the treatment of patients with acute
coronary syndrome and those undergoing percutaneous coronary
intervention in the United States, as well as for the prevention
of early myocardial infarction in patients with acute coronary
syndrome in most countries.
Diabetes and Obesity: Januvia and
Janumet.
Infectious Disease: Isentress; Primaxin;
Cancidas (caspofungin acetate), an anti-fungal product;
PegIntron; Invanz (ertapenem sodium) for the
treatment of certain infections; Avelox (moxifloxacin),
which the Company only markets in the United States, a
broad-spectrum fluoroquinolone antibiotic for certain
respiratory and skin infections; Crixivan (indinavir
sulfate) and Stocrin (efavirenz), antiretroviral
therapies for the treatment of HIV infection; and Rebetol
(ribavirin, USP) Capsules and Oral Solution for use in
combination with PegIntron or Intron A (interferon
alpha-2b,
recombinant) for treating chronic hepatitis C.
Mature Brands: Cozaar (losartan potassium);
Hyzaar (losartan potassium and hydrochlorothiazide;,
Vasotec (enalapril maleate) and Vaseretic
(enalapril maleate-hydrochlorothiazide), the
Companys most significant hypertension
and/or heart
failure products; Zocor; Proscar (finasteride), a urology
product for the treatment of symptomatic benign prostate
enlargement; Claritin Rx; and Proventil HFA
(albuterol) inhalation aerosol for the relief of
bronchospasm in patients 12 years or older.
Neurosciences and Ophthalmology: Maxalt
(rizatriptan benzoate), an acute migraine product;
Cosopt and Trusopt, Mercks largest-selling
ophthalmological products; Remeron (mirtazapine), an
antidepressant; Subutex, a sublingual tablet formulation
of buprenorphine; and Suboxone, a sublingual tablet
combination of buprenorphine and naloxone, marketed by the
Company in certain countries outside the United States for the
treatment of opiate addiction.
Oncology: Temodar/Temodal; Emend
(aprepitant) for the prevention of chemotherapy-induced and
post-operative nausea and vomiting; Caelyx (pegylated
liposomal doxorubicin hydrochloride), a long-circulating
formulation of the cancer drug doxorubicin marketed by the
Company outside the United States for the treatment of certain
ovarian cancers, Kaposis sarcoma and metastatic breast
cancer; and Intron A for Injection, marketed for chronic
hepatitis B and C and numerous anticancer indications worldwide,
including as adjuvant therapy for malignant melanoma.
Vaccines: M-M-R II (Measles, Mumps and Rubella
Virus Vaccine Live), a vaccine against measles, mumps and
rubella; ProQuad (Measles, Mumps, Rubella and Varicella
Virus Vaccine Live), a pediatric combination vaccine against
measles, mumps, rubella and varicella; Varivax;
Gardasil; RotaTeq; Pneumovax; and Zostavax (Zoster
Vaccine Live).
Womens Health: Follistim/Puregon
(follitropin beta injection), a fertility treatment; and
NuvaRing (etonogestrel/ethinyl estradiol), a vaginal
contraceptive ring.
Animal
Health
The Animal Health segment discovers, develops, manufactures and
markets animal health products, including vaccines. Principal
marketed products in this segment include:
Livestock Products: Nuflor antibiotic range for use in
cattle and swine; Bovilis/Vista vaccine lines for
infectious diseases in cattle; Banamine bovine and swine
anti-inflammatory; Estrumate for treatment of fertility
6
disorders in cattle; Regumate/Matrix fertility
management for swine and horses; Resflor combination
broad-spectrum antibiotic and non-steroidal anti-inflammatory
drug for bovine respiratory disease; Zilmax and
Revalor to improve production efficiencies in beef
cattle; M+Pac swine pneumonia vaccine; and Porcilis
vaccine line for infectious diseases in swine.
Poultry Products: Nobilis/Innovax vaccine lines
for poultry; and Paracox and Coccivac coccidiosis
vaccines.
Companion Animal Products: Nobivac/Continuum
vaccine lines for flexible dog and cat vaccination;
Otomax/Mometamax/Posatex ear ointments for
acute and chronic otitis; Caninsulin/Vetsulin
diabetes mellitus treatment for dogs and cats;
Panacur/Safeguard broad-spectrum anthelmintic
(de-wormer) for use in many animals; and
Scalibor/Exspot for protecting against bites from
fleas, ticks, mosquitoes and sandflies.
Aquaculture Products: Slice parasiticide for sea lice in
salmon; Aquavac/Norvax vaccines against bacterial
and viral disease in fish; Compact PD vaccine for salmon;
and Aquaflor antibiotic for farm-raised fish.
Consumer
Health Care
The Consumer Health Care segment develops, manufactures and
markets OTC, foot care and sun care products. Principal products
in this segment include:
OTC Products: Claritin non-drowsy antihistamines;
MiraLAX treatment for occasional constipation;
Coricidin HBP decongestant-free cold/flu medicine for
people with high blood pressure; Afrin nasal decongestant
spray; and Correctol laxative tablets.
Foot Care: Dr. Scholls foot care products;
Lotrimin topical antifungal products; and Tinactin
topical antifungal products and foot and sneaker
odor/wetness products.
Sun Care: Coppertone sun care lotions, sprays, dry oils
and lip-protection products and sunless tanning products; and
Solarcaine sunburn relief products.
For a further discussion of sales of the Companys
products, see Item 7. Managements Discussion
and Analysis of Financial Condition and Results of
Operations below.
Product
Approvals
In July 2009, the U.S. Food and Drug Administration
(FDA) approved an expanded indication for
Isentress. The broadened indication now includes use in
the treatment of adult patients starting HIV-1 therapy for the
first time (treatment-naïve), as well as in
treatment-experienced adult patients.
In August 2009, the FDA approved Saphris (asenapine)
sublingual tablets for acute treatment of schizophrenia in
adults and acute treatment of manic or mixed episodes associated
with bipolar I disorder with or without psychotic features in
adults. Saphris can be used as a first-line treatment and
is the first psychotropic drug to receive initial approval for
both of these indications simultaneously.
In October 2009, the FDA approved Gardasil for use in
boys and men 9 through 26 years of age for the prevention
of genital warts caused by HPV types 6 and 11, making
Gardasil the only HPV vaccine approved for use in males.
Gardasil is also the only HPV vaccine that protects
against HPV types 6 and 11 which cause approximately
90 percent of all genital warts cases. In addition, on
October 21, 2009, Old Merck announced that the
U.S. Centers for Disease Control and Preventions
Advisory Committee on Immunization Practices (ACIP)
supports the permissive use of Gardasil for boys and
young men ages 9 to 26, which means that Gardasil
may be given to males ages 9 to 26 to reduce the
likelihood of acquiring genital warts at the discretion of the
patients health care provider. The ACIP also voted to
recommend that funding be provided for the use of Gardasil
in males through the Vaccines for Children program.
In October 2009, the European Commission (EC)
approved Simponi (golimumab), a once-monthly,
subcutaneous treatment for certain inflammatory diseases.
In December 2009, the FDA approved Zegerid OTC
(omeprazole 20 mg/sodium bicarbonate 1100 mg
capsules) for OTC treatment of frequent heartburn.
7
In January 2010, Merck received EC approval of Elonva
(corifollitropin alpha injection), a new fertility
treatment. Elonva is indicated for controlled ovarian
stimulation in combination with a GnRH antagonist for the
development of multiple follicles in women participating in an
assisted reproductive technology program.
Joint
Ventures
Merck/Schering-Plough
Partnership
In 2000, Old Merck and Schering-Plough (collectively, the
legacy companies) entered into an agreement to
create an equally-owned partnership to develop and market in the
United States new prescription medicines for cholesterol
management. In December 2001, the cholesterol-management
partnership was expanded to include all the countries of the
world, excluding Japan. In October 2002, Zetia, the first
in a new class of cholesterol-lowering agents, was launched in
the United States. In July 2004, Vytorin, a combination
product containing the active ingredients of both Zetia
and Zocor, was approved in the United States.
As previously disclosed, in January 2008, the legacy companies
announced the results of the Effect of Combination Ezetimibe and
High-Dose Simvastatin vs. Simvastatin Alone on the
Atherosclerotic Process in Patients with Heterozygous Familial
Hypercholesterolemia (ENHANCE) clinical trial, an
imaging trial in 720 patients with heterozygous familial
hypercholesterolemia, a rare genetic condition that causes very
high levels of LDL bad cholesterol and greatly
increases the risk for premature coronary artery disease. As
previously reported, despite the fact that ezetimibe/simvastatin
10/80 mg (Vytorin) significantly lowered LDL
bad cholesterol more than simvastatin 80 mg
alone, there was no significant difference between treatment
with ezetimibe/simvastatin and simvastatin alone on the
pre-specified primary endpoint, a change in the thickness of
carotid artery walls over two years as measured by ultrasound.
The Improved Reduction in High-Risk Subjects Presenting with
Acute Coronary Syndrome (IMPROVE-IT) trial is
underway and is designed to provide cardiovascular outcomes data
for ezetimibe/simvastatin in patients with acute coronary
syndrome. No incremental benefit of ezetimibe/simvastatin on
cardiovascular morbidity and mortality over and above that
demonstrated for simvastatin has been established. In January
2009, the FDA announced that it had completed its review of the
final clinical study report of ENHANCE. The FDA stated that the
results from ENHANCE did not change its position that elevated
LDL cholesterol is a risk factor for cardiovascular disease and
that lowering LDL cholesterol reduces the risk for
cardiovascular disease. For a discussion concerning litigation
arising out of the ENHANCE study, see Item 1A. Risk
Factors and Item 3. Legal Proceedings
below.
On July 21, 2008, efficacy and safety results from the
Simvastatin and Ezetimibe in Aortic Stenosis (SEAS)
study were announced. SEAS was designed to evaluate whether
intensive lipid lowering with Vytorin
10/40 mg
would reduce the need for aortic valve replacement and the risk
of cardiovascular morbidity and mortality versus placebo in
patients with asymptomatic mild to moderate aortic stenosis who
had no indication for statin therapy. Vytorin failed to
meet its primary endpoint for the reduction of major
cardiovascular events. In the study, patients in the group who
took Vytorin 10/40 mg had a higher incidence of
cancer than the group who took placebo. There was also a
nonsignificant increase in deaths from cancer in patients in the
group who took Vytorin versus those who took placebo.
Cancer and cancer deaths were distributed across all major organ
systems. The Company believes the cancer finding in SEAS is
likely to be an anomaly that, taken in light of all the
available data, does not support an association with
Vytorin. In August 2008, the FDA announced that it was
investigating the results from the SEAS trial. In December 2009,
the FDA announced that it had completed its review of the data
from the SEAS trial as well as a review of interim data from the
Study of Heart and Renal Protection (SHARP) and
IMPROVE-IT trials. Based on currently available information, the
FDA indicated it believed it is unlikely that Vytorin or
Zetia increase the risk of cancer-related death. The
SHARP trial is expected to be completed in 2010. The IMPROVE-IT
trial is scheduled for completion in 2013. In the IMPROVE-IT
trial, a blinded interim efficacy analysis will be conducted by
the Data Safety Monitoring Board for the trial when
approximately 50% of the endpoints have been accrued. That
interim analysis is expected to be conducted in 2010.
The Company is committed to working with regulatory agencies to
further evaluate the available data and interpretations of those
data; however, the Company does not believe that changes in the
clinical use of Vytorin are warranted.
8
AstraZeneca
LP
In 1982, Old Merck entered into an agreement with Astra AB
(Astra) to develop and market Astra products in the
United States. In 1994, Old Merck and Astra formed an equally
owned joint venture that developed and marketed most of
Astras new prescription medicines in the United States
including Prilosec (omeprazole), the first in a class of
medications known as proton pump inhibitors, which slows the
production of acid from the cells of the stomach lining.
In 1998, Old Merck and Astra restructured the joint venture
whereby Old Merck acquired Astras interest in the joint
venture, renamed KBI Inc. (KBI), and contributed
KBIs operating assets to a new U.S. limited
partnership named Astra Pharmaceuticals, L.P. (the
Partnership), in exchange for a 1% limited partner
interest. Astra contributed the net assets of its wholly owned
subsidiary, Astra USA, Inc., to the Partnership in exchange for
a 99% general partner interest. The Partnership, renamed
AstraZeneca LP (AZLP) upon Astras 1999 merger
with Zeneca Group Plc (the AstraZeneca merger),
became the exclusive distributor of the products for which KBI
retained rights.
The Company earns certain Partnership returns as well as ongoing
revenue based on sales of current and future KBI products. The
Partnership returns include a priority return provided for in
the Partnership Agreement, variable returns based, in part, upon
sales of certain former Astra USA, Inc. products, and a
preferential return representing the Companys share of
undistributed Partnership AZLP generally accepted accounting
principles (GAAP) earnings. The AstraZeneca merger
triggered a partial redemption in March 2008 of Old Mercks
interest in certain AZLP product rights. Upon this redemption,
Old Merck received $4.3 billion from AZLP. This amount was
based primarily on a multiple of Old Mercks average annual
variable returns derived from sales of the former Astra USA,
Inc. products for the three years prior to the redemption (the
Limited Partner Share of Agreed Value). Old Merck
recorded a $1.5 billion pretax gain on the partial
redemption in 2008. The partial redemption of Old Mercks
interest in the product rights did not result in a change in Old
Mercks 1% limited partnership interest. As described in
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations below, after
certain adjustments, Old Merck recorded an aggregate pretax gain
of $2.2 billion in 2008.
In conjunction with the 1998 restructuring, Astra purchased an
option (the Asset Option) for a payment of
$443.0 million, which was recorded as deferred income, to
buy Old Mercks interest in the KBI products, excluding the
gastrointestinal medicines Nexium (esomeprazole) and
Prilosec (the Non-PPI Products). AstraZeneca
can exercise the Asset Option in the first half of 2010 at an
exercise price of $647 million which represents the net
present value as of March 31, 2008 of projected future
pretax revenue to be received by the Company from the Non-PPI
Products (the Appraised Value). On February 26,
2010, AstraZeneca notified the Company that it was exercising
the Asset Option. Old Merck also had the right to require Astra
to purchase such interest in 2008 at the Appraised Value. In
February 2008, Old Merck advised AstraZeneca that it would not
exercise the Asset Option, thus the $443.0 million remains
deferred but will be recognized when the Asset Option is
consummated. In addition, in 1998, Old Merck granted Astra an
option (the Shares Option) to buy Old
Mercks common stock interest in KBI and, therefore, Old
Mercks interest in Nexium and Prilosec,
exercisable two years after Astras exercise of the Asset
Option. Astra can also exercise the Shares Option in 2017
or if combined annual sales of the two products fall below a
minimum amount provided, in each case, only so long as
AstraZenecas Asset Option has been exercised in 2010. The
exercise price for the Shares Option is based on the net
present value of estimated future net sales of Nexium and
Prilosec as determined at the time of exercise, subject
to certain
true-up
mechanisms.
Sanofi
Pasteur MSD
In 1994, Old Merck and Pasteur Mérieux Connaught (now
Sanofi Pasteur S.A.) formed a joint venture to market human
vaccines in Europe and to collaborate in the development of
combination vaccines for distribution in the then existing EU
and the European Free Trade Association. Old Merck and Sanofi
Pasteur contributed, among other things, their European vaccine
businesses for equal shares in the joint venture, known as
Pasteur Mérieux MSD, S.N.C. (now Sanofi Pasteur MSD,
S.N.C.). The joint venture maintains a presence, directly or
through affiliates or branches, in Belgium, Italy, Germany,
Spain, France, Austria, Ireland, Sweden, Portugal, the
Netherlands, Switzerland and the United Kingdom and through
distributors in the rest of its territory.
9
Johnson &
JohnsonoMerck
Consumer Pharmaceuticals Company
In 1989, Old Merck formed a joint venture with
Johnson & Johnson to develop and market a broad range
of nonprescription medicines for U.S. consumers. This 50%
owned joint venture also includes Canada. Significant joint
venture products are Pepcid AC (famotidine), an OTC form
of Old Mercks ulcer medication Pepcid (famotidine),
as well as Pepcid Complete, an OTC product that combines
the Companys ulcer medication with antacids (calcium
carbonate and magnesium hydroxide).
Merial
Limited
In 1997, Old Merck and Rhône-Poulenc S.A. (now
sanofi-aventis) combined their respective animal health
businesses to form Merial Limited (Merial), a
fully integrated animal health company, which was a stand-alone
joint venture, 50% owned by each party. Merial provides a
comprehensive range of pharmaceuticals and vaccines to enhance
the health, well-being and performance of a wide range of animal
species.
On September 17, 2009, Old Merck sold its 50% interest in
Merial to sanofi-aventis for $4 billion in cash. The sale
resulted in the recognition of a $3.2 billion gain
reflected in Other income (expense), net in 2009. Also,
in connection with the sale of Merial, Old Merck, sanofi-aventis
and Schering-Plough signed a call option agreement. Under the
terms of the call option agreement, following the closing of the
Merger, sanofi-aventis has an option to require the Company to
combine its Intervet/Schering-Plough Animal Health business with
Merial to form an animal health joint venture that would be
owned equally by the Company and sanofi-aventis. As part of the
call option agreement, the value of Merial has been fixed at
$8 billion. The minimum total value received by the Company
and its affiliates for contributing Intervet/Schering-Plough to
the combined entity would be $9.25 billion (subject to
customary transaction adjustments), consisting of a floor
valuation of Intervet/Schering-Plough which is fixed at a
minimum of $8.5 billion (subject to potential upward
revision based on a valuation exercise by the two parties) and
an additional payment by sanofi-aventis of $750 million.
Based on the valuation exercise of Intervet/Schering-Plough and
the customary transaction adjustments, if Merial and
Intervet/Schering-Plough are combined, a payment may be required
to be paid by either party to make the joint venture equally
owned by the Company and sanofi-aventis. This payment would
true-up the
value of the contributions so that they are equal. Any formation
of a new animal health joint venture with sanofi-aventis is
subject to customary closing conditions including antitrust
review in the United States and Europe. Prior to the closing of
the Merger, the agreements provided Old Merck with certain
rights to terminate the call option for a fee of
$400 million. The recognition of the termination fee was
deferred until the fourth quarter of 2009 when the conditions
that could have triggered its payment lapsed.
Licenses
In 1998, a subsidiary of Schering-Plough entered into a
licensing agreement with Centocor, Inc., now a
Johnson & Johnson company, to market Remicade,
which is prescribed for the treatment of inflammatory
diseases. In 2005, Schering-Ploughs subsidiary exercised
an option under its contract with Centocor for license rights to
develop and commercialize Simponi, a fully human
monoclonal antibody. The Company has exclusive marketing rights
to both products outside the United States, Japan and certain
Asian markets. In December 2007, Schering-Plough and Centocor
revised their distribution agreement regarding the development,
commercialization and distribution of both Remicade and
Simponi, extending the Companys rights to
exclusively market Remicade to match the duration of the
Companys exclusive marketing rights for Simponi. In
addition, Schering-Plough and Centocor agreed to share certain
development costs relating to Simponis
auto-injector delivery system. On October 6, 2009, the EC
approved Simponi as a treatment for rheumatoid arthritis
and other immune system disorders in two
presentations a novel auto-injector and a prefilled
syringe. As a result, the Companys marketing rights for
both products extend for 15 years from the first commercial
sale of Simponi within the EU following the receipt of
pricing and reimbursement approval within the EU. After
operating expenses and subject to certain adjustments, the
Company is entitled to receive an approximate 60% share of
profits on the Companys distribution in the Companys
marketing territory. Beginning in 2010, the share of profits
will change over time to a 50% share of profits by 2014 for both
products and the share of profits will remain fixed thereafter
for the remainder of the term. The Company may independently
develop and market Simponi for a Crohns disease
indication in its territories, with an option for Centocor to
participate. Centocor has instituted an arbitration proceeding
to terminate this agreement and the Companys rights to
distribute these products. See Item 1A. Risk
Factors and Item 3. Legal Proceedings
below.
10
Competition
The markets in which the Company conducts its business and the
pharmaceutical industry are highly competitive and highly
regulated. The Companys operations may be affected by
technological advances of competitors, industry consolidation,
patents granted to competitors, competitive combination
products, new products of competitors, new information from
clinical trials of marketed products or post-marketing
surveillance and generic competition as the Companys
products mature. In addition, patent positions are increasingly
being challenged by competitors, and the outcome can be highly
uncertain. An adverse result in a patent dispute can preclude
commercialization of products or negatively affect sales of
existing products and could result in the recognition of an
impairment charge with respect to certain products. Competitive
pressures have intensified as pressures in the industry have
grown. The effect on operations of competitive factors and
patent disputes cannot be predicted.
Pharmaceutical competition involves a rigorous search for
technological innovations and the ability to market these
innovations effectively. With its long-standing emphasis on
research and development, the Company is well positioned to
compete in the search for technological innovations. Additional
resources to meet market challenges include quality control,
flexibility to meet customer specifications, an efficient
distribution system and a strong technical information service.
The Company is active in acquiring and marketing products
through external alliances, such as joint ventures, and licenses
and has been refining its sales and marketing efforts to further
address changing industry conditions. However, the introduction
of new products and processes by competitors may result in price
reductions and product displacements, even for products
protected by patents. For example, the number of compounds
available to treat a particular disease typically increases over
time and can result in slowed sales growth for the
Companys products in that therapeutic category.
Global efforts toward healthcare cost containment continue to
exert pressure on product pricing and access. In addressing cost
containment pressure, the Company makes a continuing effort to
demonstrate that its medicines provide value to patients and to
those who pay for health care. In addition, pricing flexibility
across the Companys product portfolio has encouraged
growing use of its medicines and mitigated the effects of
increasing cost pressures on individual medicines.
Outside the United States, in difficult government budgetary
environments, the Company has worked with payers to encourage
allocation of scarce resources to optimize healthcare outcomes,
limiting the potentially detrimental effects of government
policies on sales growth and access to innovative medicines and
vaccines, and to support the discovery and development of
innovative products to benefit patients. The Company also is
working with governments in many emerging markets in Eastern
Europe, Latin America and Asia to encourage them to increase
their investments in health and thereby improve their
citizens access to medicines. In addition, certain
countries within the EU, recognizing the economic importance of
the research-based pharmaceutical industry and the value of
innovative medicines to society, are working with industry
representatives to improve the competitive climate through a
variety of means including market deregulation.
The Company anticipates that the worldwide trend toward cost
containment will continue, resulting in ongoing pressures on
healthcare budgets. In the United States, major healthcare
reform has been introduced and passed in both houses of
Congress. A final revised bill which unifies both versions may
be considered and adopted into law. The impact of such actions,
as well as budget pressures on governments in the United States
and other nations, cannot be predicted at this time. As the
Company continues to successfully launch new products,
contribute to health care debates and monitor reforms, its new
products, policies and strategies should enable it to maintain a
strong position in the changing economic environment.
Although no one can predict the outcome of these and other
legislative, regulatory and advocacy initiatives, the Company
believes that it is well positioned to respond to the evolving
health care environment and market forces.
Access to
Medicines
The Company is also committed to improving access to medicines
and enhancing the quality of life for people around the world.
To cite just one example, The African Comprehensive HIV/AIDS
Partnerships in
11
Botswana, a partnership between the government of Botswana, the
Bill & Melinda Gates Foundation and The Merck Company
Foundation/Merck & Co., Inc., is supporting
Botswanas response to HIV/AIDS through a comprehensive and
sustainable approach to HIV prevention, care, treatment, and
support.
To further catalyze access to HIV medicines in developing
countries, the Company makes no profit on the sale of its
current HIV/AIDS medicines in the worlds poorest countries
and those hardest hit by the pandemic, and offers its HIV/AIDS
medicines at significantly reduced prices to medium-income
countries. In February 2007, Old Merck announced that it had
again reduced the price of Stocrin in the least developed
countries of the world and those hardest hit by the pandemic.
Through these and other actions, the Company is working
independently and with partners in both the public and private
sectors to address the most critical barriers to access to
medicines in the developing world. Addressing these barriers
requires investments in education, training and health
infrastructure and to improve capacity achieved through
increased international assistance and sustainable financing.
In addition, Old Merck has committed to providing RotaTeq
to the Global Alliance for Vaccines and
Immunization-eligible countries at prices at which it does not
profit. Also, in 2009, Old Merck and The Wellcome Trust
established the MSD Wellcome Trust Hilleman Laboratories, a
joint venture in India to develop vaccines for millions of
people in some of the poorest areas of the world.
Government
Regulation
The pharmaceutical industry is subject to regulation by
regional, country, state and local agencies around the world. Of
particular importance is the FDA in the United States, which
administers requirements covering the testing, approval, safety,
effectiveness, manufacturing, labeling, and marketing of
prescription pharmaceuticals. In many cases, the FDA
requirements have increased the amount of time and resources
necessary to develop new products and bring them to market in
the United States. In 1997, the Food and Drug Administration
Modernization Act (the FDA Modernization Act) was
passed and was the culmination of a comprehensive legislative
reform effort designed to streamline regulatory procedures
within the FDA and to improve the regulation of drugs, medical
devices, and food. The legislation was principally designed to
ensure the timely availability of safe and effective drugs and
biologics by expediting the premarket review process for new
products. A key provision of the legislation is the
re-authorization of the Prescription Drug User Fee Act of 1992,
which permits the continued collection of user fees from
prescription drug manufacturers to augment FDA resources
earmarked for the review of human drug applications. This helps
provide the resources necessary to ensure the prompt approval of
safe and effective new drugs.
In the United States, the government expanded access for senior
citizens to prescription drug coverage by enacting the Medicare
Prescription Drug Improvement and Modernization Act of 2003,
which was signed into law in December 2003. Prescription drug
coverage began on January 1, 2006. This legislation
supports the Companys goal of improving access to
medicines by expanding insurance coverage, while preserving
market-based incentives for pharmaceutical innovation. At the
same time, the legislation has helped control the cost of
prescription drug costs through competitive pressures and by
encouraging the appropriate use of medicines. As mentioned
above, in the United States major healthcare reform has been
introduced and passed in both houses of Congress. A final
revised bill which unifies both versions may be considered and
adopted into law. The U.S. Congress has also considered,
and may consider again, proposals to increase the
governments role in pharmaceutical pricing in the Medicare
program. These proposals may include removing the current legal
prohibition against the Secretary of the Health and Human
Services intervening in price negotiations between Medicare drug
benefit program plans and pharmaceutical companies. They may
also include mandating the payment of rebates for some or all of
the pharmaceutical utilization in Medicare drug benefit plans.
In addition, Congress may again consider proposals to allow,
under certain conditions, the importation of medicines from
other countries.
For many years, the pharmaceutical industry has been under
federal and state oversight with the approval process for new
drugs, drug safety, advertising and promotion, drug purchasing
and reimbursement programs, and formularies. The Company
believes that it will continue to be able to conduct its
operations, including the introduction of new drugs to the
market, in this regulatory environment.
The Company continues to work with private and public payors to
slow increases in healthcare spending. Also, U.S. federal
and state governments have pursued methods to directly reduce
the cost of drugs and vaccines for
12
which they pay. For example, federal laws require the Company to
pay specified rebates for medicines reimbursed by Medicaid, to
provide discounts for outpatient medicines purchased by certain
Public Health Service entities and disproportionate
share hospitals (hospitals meeting certain criteria), and
to provide minimum discounts of 24% off of a defined
non-federal average manufacturer price for purchases
by certain components of the federal government such as the
Department of Veterans Affairs and the Department of Defense.
Initiatives in some states seek rebates beyond the minimum
required by Medicaid legislation, in some cases for patients
beyond those who are eligible for Medicaid. Under the Federal
Vaccines for Children entitlement program, the U.S. Centers
for Disease Control and Prevention (CDC) funds and
purchases recommended pediatric vaccines at a public sector
price for the immunization of Medicaid-eligible, uninsured,
Native American and certain underinsured children. Old Merck was
awarded a CDC contract in 2009 for the supply of pediatric
vaccines for the Vaccines for Children program.
Outside the United States, the Company encounters similar
regulatory and legislative issues in most of the countries where
it does business. There, too, the primary thrust of governmental
inquiry and action is toward determining drug safety and
effectiveness, often with mechanisms for controlling the prices
of or reimbursement for prescription drugs and the profits of
prescription drug companies. The EU has adopted directives
concerning the classification, labeling, advertising, wholesale
distribution and approval for marketing of medicinal products
for human use. The Companys policies and procedures are
already consistent with the substance of these directives;
consequently, it is believed that they will not have any
material effect on the Companys business.
In January 2008, the EC launched a sector inquiry in the
pharmaceutical industry under the rules of EU competition law.
As part of this inquiry, Old Mercks offices in Germany
were inspected by the authorities beginning in January 2008. The
preliminary report of the EC was issued on November 28,
2008, and following the public consultation period, the final
report was issued in July 2009. The final report confirmed that
there has been a decline in the number of novel medicines
reaching the market and instances of delayed market entry of
generic medicines and discussed industry practices that may have
contributed to these phenomena. While the EC has issued further
inquiries with respect to the subject of the investigation, the
EC has not alleged that the Company or any of its subsidiaries
have engaged in any unlawful practices.
The Company is subject to the jurisdiction of various regulatory
agencies and is, therefore, subject to potential administrative
actions. Such actions may include seizures of products and other
civil and criminal sanctions. Under certain circumstances, the
Company on its own may deem it advisable to initiate product
recalls. The Company believes that it should be able to compete
effectively within this environment.
Privacy
and Data Protection
The Company is subject to a number of privacy and data
protection laws and regulations globally. The legislative and
regulatory landscape for privacy and data protection continues
to evolve, and there has been an increasing attention to privacy
and data protection issues with the potential to affect directly
the Companys business, including recently enacted laws and
regulations in the United States and internationally requiring
notification to individuals and government authorities of
security breaches involving certain categories of personal
information.
Distribution
The Company sells its human health pharmaceutical products
primarily to drug wholesalers and retailers, hospitals,
government agencies and managed health care providers such as
health maintenance organizations, pharmacy benefit managers and
other institutions. Human health vaccines are sold primarily to
physicians, wholesalers, physician distributors and government
entities. The Companys professional representatives
communicate the effectiveness, safety and value of the
Companys pharmaceutical and vaccine products to health
care professionals in private practice, group practices and
managed care organizations. The Companys professional
representatives communicate the safety and value of the
Companys animal health products to veterinarians,
distributors and animal producers. The Companys OTC, foot
care and sun care products are sold through wholesale and retail
drug, food chain and mass merchandiser outlets.
13
Raw
Materials
Raw materials and supplies, which are generally available from
multiple sources, are purchased worldwide and are normally
available in quantities adequate to meet the needs of the
Companys business.
Patents,
Trademarks and Licenses
Patent protection is considered, in the aggregate, to be of
material importance in the Companys marketing of human
health products in the United States and in most major foreign
markets. Patents may cover products per se,
pharmaceutical formulations, processes for or intermediates
useful in the manufacture of products or the uses of products.
Protection for individual products extends for varying periods
in accordance with the legal life of patents in the various
countries. The protection afforded, which may also vary from
country to country, depends upon the type of patent and its
scope of coverage.
The FDA Modernization Act includes a Pediatric Exclusivity
Provision that may provide an additional six months of market
exclusivity in the United States for indications of new or
currently marketed drugs if certain agreed upon pediatric
studies are completed by the applicant. These exclusivity
provisions were re-authorized by the Prescription Drug User Fee
Act passed in September 2007. Current U.S. patent law
provides additional patent term under Patent Term Restoration
for periods when the patented product was under regulatory
review before the FDA.
14
Patent portfolios developed for products introduced by the
Company normally provide market exclusivity. The Company has the
following key U.S. patent protection (including Patent Term
Restoration and Pediatric Exclusivity) for major marketed
products:
|
|
|
Product(1)
|
|
Year of Expiration (in
U.S.)
|
|
Cozaar
|
|
2010
|
Hyzaar
|
|
2010
|
Crixivan
|
|
2012 (compound)/2018 (formulation)
|
Maxalt
|
|
2012 (compound)/2014 (other)
|
Singulair
|
|
2012
|
Cancidas
|
|
2013 (compound)/2015 (composition)
|
Propecia(2)
|
|
2013 (formulation/use)
|
Asmanex
|
|
2014 (use)/2018 (formulation)
|
Avelox
|
|
2014
|
Integrilin
|
|
2014 (compound)/2015 (use/formulation)
|
Nasonex
|
|
2014 (use/formulation)/2018(formulation)
|
Temodar(3)
|
|
2014
|
Emend
|
|
2015
|
Follistim/Puregon
|
|
2015
|
PegIntron
|
|
2015 (conjugates)/2020 (Mature IFN-alpha)
|
Zolinza
|
|
2015
|
Invanz
|
|
2016 (compound)/2017 (composition)
|
Zostavax
|
|
2016
|
Zetia/Vytorin
|
|
2017
|
NuvaRing
|
|
2018 (delivery system)
|
Noxafil
|
|
2019
|
RotaTeq
|
|
2019
|
Clarinex(4)
|
|
2020 (formulation)
|
Comvax
|
|
2020 (method of making/vectors)
|
Intron A
|
|
2020
|
Recombivax
|
|
2020 (method of making/vectors)
|
Saphris/Sycrest
|
|
2020 (use/formulation) (subject to pending Patent Term
Restoration application)
|
Januvia/Janumet
|
|
2022 (compound)/2026 (salt)
|
Isentress
|
|
2023
|
Gardasil
|
|
2026 (method of making/use/product by process)
|
|
|
(1)
|
Compound patent unless otherwise noted.
|
(2)
|
By agreement, Dr. Reddys Laboratories may launch a
generic on January 1, 2013.
|
(3)
|
In January 2010, a court held the patent for Temodar
to be unenforceable. That decision is being appealed. See
Item 3. Legal Proceedings Patent
Litigation below.
|
(4)
|
By virtue of litigation settlement, generics have been given
the right to enter the market as of 2012.
|
While the expiration of a product patent normally results in a
loss of market exclusivity for the covered pharmaceutical
product, commercial benefits may continue to be derived from:
(i) later-granted patents on processes and intermediates
related to the most economical method of manufacture of the
active ingredient of such product; (ii) patents relating to
the use of such product; (iii) patents relating to novel
compositions and formulations; and (iv) in the United
States and certain other countries, market exclusivity that may
be available under relevant law. The effect of product patent
expiration on pharmaceutical products also depends upon many
other factors such as the nature of the market and the position
of the product in it, the growth of the market, the complexities
and economics of the process for manufacture of the active
ingredient of the product and the requirements of new drug
provisions of the Federal Food, Drug and Cosmetic Act or similar
laws and regulations in other countries.
15
The patents that provide U.S. market exclusivity for
Cozaar and Hyzaar expire in April 2010. In
addition, the patent for Cozaar will expire in a number
of major European markets in March 2010. Hyzaar lost
patent protection in major European markets in
February 2010. The Company expects that sales of these
products will decline rapidly after expiration of these patents,
particularly in the United States since there are expected to be
multiple sources of generic products at the time of patent
expiry. In addition, the patent that provides U.S. market
exclusivity for Singulair expires in August 2012. The
Company expects that within the two years following patent
expiration, it will lose substantially all U.S. sales of
Singulair, with most of those declines coming in the
first full year following patent expiration. Also, the patent
for Singulair will expire in a number of major European
markets in August 2012 and the Company expects sales of
Singulair in those markets will decline significantly
thereafter.
Additions to market exclusivity are sought in the United States
and other countries through all relevant laws, including laws
increasing patent life. Some of the benefits of increases in
patent life have been partially offset by a general increase in
the number of incentives for and use of generic products.
Additionally, improvements in intellectual property laws are
sought in the United States and other countries through reform
of patent and other relevant laws and implementation of
international treaties.
For further information with respect to the Companys
patents, see Item 1A. Risk Factors and
Item 3. Legal Proceedings Patent
Litigation below.
Worldwide, all of the Companys important products are sold
under trademarks that are considered in the aggregate to be of
material importance. Trademark protection continues in some
countries as long as used; in other countries, as long as
registered. Registration is for fixed terms and can be renewed
indefinitely.
Royalties received during 2009 on patent and know-how licenses
and other rights amounted to $218.9 million. Merck also
paid royalties amounting to $1.27 billion in 2009 under
patent and know-how licenses it holds.
Research
and Development
The Companys business is characterized by the introduction
of new products or new uses for existing products through a
strong research and development program. Approximately
17,200 people are employed in the Companys research
activities. Research and development expenses (which included
restructuring costs) were $5.8 billion in 2009,
$4.8 billion in 2008 and $4.9 billion in 2007. The
Company maintains its ongoing commitment to research over a
broad range of therapeutic areas and clinical development in
support of new products.
The Company maintains a number of long-term exploratory and
fundamental research programs in biology and chemistry as well
as research programs directed toward product development. The
Companys research and development model is designed to
increase productivity and improve the probability of success by
prioritizing the Companys research and development
resources on disease areas of unmet medical needs, scientific
opportunity and commercial opportunity. Merck is managing its
research and development portfolio across diverse approaches to
discovery and development by balancing investments appropriately
on novel, innovative targets with the potential to have a major
impact on human health, on developing
best-in-class
approaches, and on delivering maximum value of its new medicines
and vaccines through new indications and new formulations.
Another important component of the Companys science-based
diversification is based on expanding the Companys
portfolio of modalities to include not only small molecules and
vaccines, but also biologics, peptides and RNAi. Further, Merck
moved to diversify its portfolio by creating a new division,
Merck BioVentures, which has the potential to harness the market
opportunity presented by biological medicine patent expiries by
delivering high quality follow-on biologic products to enhance
access for patients worldwide. The Company will continue to
pursue appropriate external licensing opportunities.
The integration plans for research and development are focused
on integrating the research operations of the legacy companies,
including providing an effective transition for employees,
realizing projected merger synergies in the form of cost savings
and revenue growth opportunities, and maintaining momentum in
the Companys late-stage pipeline. During 2009, Merck
continued implementing a new model for its basic research global
operating strategy at legacy Merck Research Laboratories sites.
The new model will align franchise and function as well as align
resources with disease area priorities and balance capacity
across discovery phases and allow the Company to act upon those
programs with the highest probability of success. Additionally,
across all
16
disease area priorities, the Companys strategy is designed
to expand access to worldwide external science and incorporate
external research as a key component of the Companys early
discovery pipeline in order to translate basic research
productivity into late-stage clinical success.
The Companys clinical pipeline includes candidates in
multiple disease areas, including anemia, atherosclerosis,
cancer, diabetes, heart disease, hypertension, infectious
diseases, inflammatory/autoimmune diseases, migraine,
neurodegenerative diseases, ophthalmics, osteoporosis,
psychiatric diseases, respiratory disease and womens
health. The Company supplements its internal research with an
aggressive licensing and external alliance strategy focused on
the entire spectrum of collaborations from early research to
late-stage compounds, as well as new technologies.
In the development of human health products, industry practice
and government regulations in the United States and most
foreign countries provide for the determination of effectiveness
and safety of new chemical compounds through preclinical tests
and controlled clinical evaluation. Before a new drug or vaccine
may be marketed in the United States, recorded data on
preclinical and clinical experience are included in the New Drug
Application (NDA) for a drug or the Biologics
License Application (BLA) for a vaccine or biologic
submitted to the FDA for the required approval.
Once the Companys scientists discover a new small molecule
compound that they believe has promise to treat a medical
condition, the Company commences preclinical testing with that
compound. Preclinical testing includes laboratory testing and
animal safety studies to gather data on chemistry, pharmacology
and toxicology. Pending acceptable preclinical data, the Company
will initiate clinical testing in accordance with established
regulatory requirements. The clinical testing begins with Phase
I studies, which are designed to assess safety, tolerability,
pharmacokinetics, and preliminary pharmacodynamic activity of
the compound in humans. If favorable, additional, larger
Phase II studies are initiated to determine the efficacy of
the compound in the affected population, define appropriate
dosing for the compound, as well as identify any adverse effects
that could limit the compounds usefulness. If data from
the Phase II trials are satisfactory, the Company commences
large-scale Phase III trials to confirm the compounds
efficacy and safety. Upon completion of those trials, if
satisfactory, the Company submits regulatory filings with the
appropriate regulatory agencies around the world to have the
product candidate approved for marketing. There can be no
assurance that a compound that is the result of any particular
program will obtain the regulatory approvals necessary for it to
be marketed.
Vaccine development follows the same general pathway as for
drugs. Preclinical testing focuses on the vaccines safety
and ability to elicit a protective immune response
(immunogenicity). Pre-marketing vaccine clinical trials are
typically done in three phases. Initial Phase I clinical studies
are conducted in normal subjects to evaluate the safety,
tolerability and immunogenicity of the vaccine candidate.
Phase II studies are dose-ranging studies. Finally,
Phase III trials provide the necessary data on
effectiveness and safety. If successful, the Company submits
regulatory filings with the appropriate regulatory agencies.
Also during this stage, the proposed manufacturing facility
undergoes a pre-approval inspection during which production of
the vaccine as it is in progress is examined in detail.
In the United States, the FDA review process begins once a
complete NDA is submitted and received by the FDA. Pursuant to
the Prescription Drug User Fee Act, the FDA review period
targets for NDAs or supplemental NDAs is either six months, for
priority review, or ten months, for a standard review. Within
60 days after receipt of an NDA, the FDA determines if the
application is sufficiently complete to permit a substantive
review. The FDA also assesses, at that time, whether the
application will be granted a priority review or standard
review. Once the review timelines are defined, the FDA will
generally act upon the application within those timelines,
unless a major amendment has been submitted (either at the
Companys own initiative or the FDAs request) to the
pending application. If this occurs, the FDA may extend the
review period to allow for review of the new information, but by
no more than 180 days. Extensions to the review period are
communicated to the Company. The FDA can act on an application
by issuing an approval letter or a complete response letter.
Research
and Development Update
In connection with the Merger, the Company is assessing its
pipeline to identify the most promising, high-potential
compounds for development. The Company has completed the
prioritization of its clinical development
17
programs. The Company is continuing to work on the
prioritization of its value adding programs related to currently
marketed products and to its preclinical/discovery programs. The
Company anticipates that the full prioritization process will be
completed by the first half of 2010. In connection with this
process, the Company may recognize non-cash impairment charges
for the cancellation of certain legacy Schering-Plough pipeline
programs that were measured at fair value and capitalized in
connection with the Merger. These non-cash impairment charges,
which are anticipated to be excluded from the Companys
non-GAAP earnings, could be material to the Companys
future GAAP earnings.
The Company currently has a number of candidates under
regulatory review in the United States and internationally.
Additionally, the Company has 19 drug candidates in
Phase III development.
MK-6621, vernakalant (IV), is an investigational candidate for
the treatment of atrial fibrillation currently undergoing
regulatory review in the EU. In April 2009, Old Merck and
Cardiome Pharma Corp. (Cardiome) announced a
collaboration and license agreement for the development and
commercialization of vernakalant which provides Merck exclusive
rights outside of the United States, Canada and Mexico to the
intravenous formulation of vernakalant. Vernakalent (oral) is
currently in Phase II development. Merck has exclusive
global rights to the oral formulation of vernakalent for the
maintenance of normal heart rhythm in patients with atrial
fibrillation.
SCH 418131, MFF, is a combination of two previously approved
drugs for the treatment of asthma: mometasone (Asmanex)
and formoterol (Foradil). The Company is aiming to create
a new option for patients by bringing these two key treatments
together. In July 2009,
Schering-Plough
announced that it had filed an NDA with the FDA for MFF. MFF is
also currently under regulatory review in the EU.
SCH 900121, NOMAC/E2, is an oral contraceptive that combines a
selective progestin with estradiol, the estrogen that women
produce naturally. The drug is currently under regulatory review
in the EU. It is in Phase III development for the
U.S. market.
SCH 900274, Saphris, asenapine, a central nervous system
compound for bipolar I disorder and schizophrenia, is currently
undergoing regulatory review in the EU. The FDA approved
Saphris in August 2009.
SCH 900616, Bridion, sugammadex, is a medication designed
to rapidly reverse the effects of certain muscle relaxants used
as part of general anesthesia to ensure patients remain immobile
during surgical procedures. It differs from other reversal
agents that can only be administered once the muscle relaxant
begins to wear off. Bridion has received regulatory
approval in the EU, Australia, New Zealand and Japan, and is
under regulatory review in other markets, including the United
States. Prior to the Merger, Schering-Plough received a complete
response letter from the FDA for Bridion. Following
further communication from the FDA, the Company is assessing the
agencys feedback in order to determine a new timetable for
response.
SCH 503034, boceprevir, is a hepatitis C protease inhibitor
currently under development. Boceprevir is fully enrolled in its
Phase III program, which the Company expects to conclude in
mid-2010. The Company expects to submit an NDA to the FDA for
boceprevir by the end of 2010 for both treatment-experienced and
treatment-naïve patients with hepatitis C.
MK-8669, ridaforolimus, is a novel mTOR (mammalian target of
rapamycin) inhibitor being evaluated for the treatment of
cancer. The drug candidate is being jointly developed and
commercialized with ARIAD Pharmaceuticals, Inc., under an
agreement entered into in 2007. A Phase III study (SUCCEED)
in patients with metastatic soft-tissue or bone sarcomas is
underway. The Company continues to anticipate filing an NDA for
ridaforolimus with the FDA in 2010, subject to a review of the
results from the planned interim analysis of SUCCEED.
SCH 697243, an allergy immunotherapy sublingual tablet
(AIT) for grass pollen allergy, is being developed
by the Company. In November 2009, SCH 697243 met the primary
endpoint in a Phase III study of adult subjects in the
United States with a history of grass pollen induced
rhinoconjunctivitis with or without asthma. The investigational
grass AIT treatment is designed to work by inducing a protective
immune response against grass pollen allergy and providing
sustained prevention of allergy symptoms, treating both the
symptoms and the underlying cause of the disease.
SCH 039641, an AIT for ragweed allergy, is also in
Phase III development for the U.S. market.
18
SCH 530348, vorapaxar, is a thrombin receptor antagonist or
antiplatelet protease activated receptor-1 inhibitor being
studied for the prevention and treatment of thrombosis. In
November 2009, Merck announced completion of patient enrollment
of more than 26,000 patients in the TRA 2°P-TIMI 50
clinical trial, a Phase III, randomized, double-blind,
placebo-controlled, multinational study. The trial will assess
the ability of SCH 530348 to prevent major cardiovascular events
when added to current antiplatelet regimens (aspirin or aspirin
plus an ADP inhibitor) in patients who have previously
experienced a heart attack or stroke or who have peripheral
arterial disease. SCH 530348 is also being studied in the
treatment of patients with acute coronary syndrome in the
ongoing Phase III Thrombin Receptor Antagonist for Clinical
Event Reduction in Acute Coronary Syndrome trial, led by the
Duke Clinical Research Institute. The Company anticipates filing
an NDA for vorapaxar with the FDA in 2011.
MK-2452, tafluprost, is a preservative free, synthetic analogue
of the prostaglandin F2α for the reduction of elevated
intraocular pressure in appropriate patients with primary
open-angle glaucoma and ocular hypertension. In April 2009, Old
Merck and Santen announced a worldwide licensing agreement for
tafluprost.
As previously disclosed, Old Merck submitted for filing an NDA
with the FDA for MK-0653C, ezetimibe combined with atorvastatin,
which is an investigational medication for the treatment of
dyslipidemia, and the FDA refused to file the application. The
FDA has identified additional manufacturing and stability data
that are needed and the Company is assessing the FDAs
response and anticipates filing in 2011.
MK-0431C, a candidate currently in Phase III clinical
development, combines Januvia with pioglitazone, another
type 2 diabetes therapy. The Company continues to anticipate
filing an NDA for MK-0431C with the FDA in 2011.
MK-0822, odanacatib, is an oral, once-weekly investigational
treatment for osteoporosis. Osteoporosis is a disease which
reduces bone density and strength and results in an increased
risk of bone fractures. Odanacatib is a cathepsin K inhibitor
that selectively inhibits the cathepsin K enzyme. Cathepsin K is
known to play a central role in the function of osteoclasts,
which are cells that break down existing bone tissue,
particularly the protein components of bone. Inhibition of
cathepsin K is a novel approach to the treatment of
osteoporosis. In September 2009, data from a Phase IIB clinical
study of odanacatib were presented at the 31st Annual
Meeting of the American Society for Bone and Mineral Research
which showed that when stopping treatment after two years the
increases in lower back (lumbar spine) bone mineral density
(BMD) were reversed over the next year, while BMD at
the hip (femoral neck) remained above levels observed at the
start of the study. Additionally, three years of treatment with
odanacatib 50 mg demonstrated increases in BMD at key
fracture sites and minimal impact on the formation of new bone
as measured by biochemical markers of bone turnover. Odanacatib
is currently in Phase III clinical trials and is being
evaluated in a large-scale, global outcomes study to determine
its effects on vertebral, hip and non-vertebral fractures. The
Company continues to anticipate filing an NDA with the FDA in
2012.
V503 is a nine-valent HPV vaccine in development to expand
protection against cancer-causing HPV types. The Phase III
clinical program is underway and Merck anticipates filing a BLA
with the FDA in 2012.
MK-0524A is a drug candidate that combines extended-release
(ER) niacin and a novel flushing inhibitor,
laropiprant. MK-0524A has demonstrated the ability to lower
LDL-cholesterol (LDL-C or bad
cholesterol), raise HDL-cholesterol (HDL-C or
good cholesterol) and lower triglycerides with
significantly less flushing than traditional extended release
niacin alone. High LDL-C, low HDL-C and elevated triglycerides
are risk factors associated with heart attacks and strokes. In
April 2008, Old Merck received a non-approvable action letter
from the FDA in response to its NDA for MK-0524A. At a meeting
to discuss the letter, the FDA stated that additional efficacy
and safety data were required and suggested that Old Merck wait
for the results of the Treatment of HDL to Reduce the Incidence
of Vascular Events (HPS2-THRIVE) cardiovascular
outcomes study, which is expected to be completed in 2012. The
Company anticipates filing an NDA with the FDA for MK-0524A in
2012. MK-0524A has been approved in more than 45 countries
outside the United States for the treatment of dyslipidemia,
particularly in patients with combined mixed dyslipidemia
(characterized by elevated levels of LDL-C and triglycerides and
low HDL-C) and in patients with primary hypercholesterolemia
(heterozygous familial and non-familial) and is marketed as
Tredaptive (or as Cordaptive in certain
countries). Tredaptive should be used in patients in
combination with statins, when the cholesterol lowering effects
of statin monotherapy is inadequate. Tredaptive can be
used as monotherapy only in patients in whom statins are
considered inappropriate or not tolerated.
19
MK-0524B is a drug candidate that combines the novel approach to
raising HDL-C and lowering triglycerides from ER niacin combined
with laropiprant with the proven benefits of simvastatin in one
combination product. Merck will not seek approval for MK-0524B
in the United States until it files its complete response
relating to MK-0524A.
MK-0859, anacetrapib, is an inhibitor of the cholesteryl ester
transfer protein that has shown promise in lipid management by
raising HDL-C and reducing LDL-C without raising blood pressure.
In November 2009, Merck announced that in a Phase IIb study in
589 patients with primary hypercholesterolemia or mixed
hyperlipidemia treated with anacetrapib as monotherapy or
co-administered with atorvastatin, there were persistent lipid
effects in the higher dose arms in both the monotherapy and
co-administration treatment groups eight weeks after stopping
active therapy with anacetrapib. The effect of CETP inhibition
on cardiovascular risk has yet to be established. A
Phase III trial, titled DEFINE, is ongoing to further
evaluate the safety and efficacy of anacetrapib in patients with
coronary heart disease. The Company anticipates filing an NDA
with the FDA beyond 2015.
As previously disclosed, in 2009, Old Merck announced it was
delaying the filing of the U.S. application for telcagepant
(MK-0974), the Companys investigational calcitonin
gene-related peptide (CGRP)-receptor antagonist for
the intermittent treatment of acute migraine. The decision was
based on findings from a Phase IIa exploratory study in which a
small number of patients taking telcagepant twice daily for
three months for the prevention of migraine were found to have
marked elevations in liver transaminases. The daily dosing
regimen in the prevention study was different than the dosing
regimen used in Phase III studies in which telcagepant was
intermittently administered in one or two doses to treat
individual migraine attacks as they occurred. Other studies with
telcagepant for the acute, intermittent treatment of migraine
continue. Following meetings with regulatory agencies at the end
of 2009, Merck is planning to conduct an additional safety study
as part of the overall Phase III program for telcagepant.
The results of this study will inform planned filings for
approval.
SCH 900395, acadesine, is a potential
first-in
class adenosine regulating agent for ischemia reperfusion-injury
in patients undergoing heart bypass surgery. Patient enrollment
in the RED CABG Phase III clinical trial was initiated in
2009.
SCH 417690, vicriviroc, for the treatment of HIV infection
(treatment experienced) was evaluated in two Phase III
studies in this patient population, and it was announced in
January 2010 that the primary efficacy endpoint was not met.
Merck will not submit an NDA to the FDA for vicriviroc in
treatment-experienced HIV-infected patients at this time but
will continue to evaluate vicriviroc as first-line therapy for
treatment-naive patients.
As previously disclosed, in 2007, Cubist Pharmaceuticals, Inc.
(Cubist) entered into a license agreement with Old
Merck for the development and commercialization of Cubicin
(daptomycin for injection, MK-3009) in Japan. Merck will develop
and commercialize Cubicin through its wholly-owned subsidiary,
Banyu Pharmaceutical Co., Ltd. Cubist commercializes Cubicin in
the United States. MK-3009 is currently in Phase III
development.
MK-4305 is an orexin receptor antagonist, a potential new
approach to the treatment of chronic insomnia, currently in
Phase III development.
SCH 900962, Elonva, corifollitropin alpha injection,
which has been approved in the EC for controlled ovarian
stimulation in combination with a GnRH antagonist for the
development of multiple follicles in women participating in an
assisted reproductive technology program, is currently in
Phase III development in the United States.
Merck has terminated the internal clinical development program
for esmirtazapine (SCH 900265) for hot flashes and insomnia
for strategic reasons.
As previously disclosed, in 2009, Old Merck announced that
preliminary results for the pivotal Phase III study of
rolofylline (MK-7418), its investigational medicine for the
treatment of acute heart failure, showed that rolofylline did
not meet the primary or secondary efficacy endpoints. Old Merck
terminated the clinical development program for rolofylline.
The chart below reflects the Companys current research
pipeline as of February 12, 2010. Candidates shown in
Phase III include specific products. Candidates shown in
Phase II include the most advanced compound with a specific
mechanism or, if listed compounds have the same mechanism, they
are each currently intended for
20
commercialization in a given therapeutic area. Small molecules
and biologics are given MK-number or SCH-number designations and
vaccine candidates are given V-number designations. Candidates
in Phase I, additional indications in the same therapeutic area
and additional claims, line extensions or formulations for
in-line products are not shown.
Phase II
Allergy
SCH
900237(2)
Anemia
MK-2578
Asthma
MK-0476C
Atrial Fibrillation
MK-6621 (vernakalant [oral])
Cancer
MK-0646 (dalotuzumab)
SCH 727965 (dinaciclib)
SCH 900776
Clostridium difficile
Infection
MK-3415A
COPD
SCH 527123
Diabetes
MK-0941
MK-3577
Hepatitis C
MK-7009 (vaniprevir)
HIV
SCH 417690 (vicriviroc)
Hot Flashes
MK-6913
Hypertension
MK-0736
Insomnia
MK-6096
Osteoporosis
MK-5442
Parkinsons
Disease
SCH 420814 (preladenant)
Pediatric Vaccine
V419
Progeria
SCH 066336, Sarasar
(lonafarnib)
Schizophrenia
MK-8998
SCH 900435
Staph Infection
V710
Thrombosis
MK-4448 (betrixaban)
Phase III(6)
Allergy
SCH 697243, Grass
pollen(2)
SCH 039641,
Ragweed(2)
Anesthesia Reversal
SCH 900616 (sugammadex)
(U.S.)(4)
Atherosclerosis
MK-0524A (extended-release
niacin/ laropiprant)
(U.S.)(3)
MK-0524B (extended-release
niacin/ laropiprant/simvastin)
MK-0859 (anacetrapib)
Cervical Cancer
V503
Contraception
SCH 900121 (NOMAC/E2) (U.S.)
Diabetes
MK-0431C
(Januvia/pioglitazone)
Fertility
SCH 900962 (corifollitropin alfa
injection)
(U.S.)(3)
Glaucoma
MK-2452 (tafluprost)
(U.S.)(4)
Hepatitis C
SCH 503034 (boceprevir)
Insomnia
MK-4305
Ischemia-Reperfusion
Injury
SCH 900395 (acadesine)
Migraine
MK-0974 (telcagepant)
Osteoporosis
MK-0822 (odanacatib)
Sarcoma
MK-8669 (ridaforolimus)
Staph Infection
MK-3009 (daptomycin for
injection)(5)
Thrombosis
SCH 530348 (vorapaxar) (TRA)
Under Review
Asthma
SCH 418131 (momestasone/ formoterol
combination) (U.S./EU)
Atrial Fibrillation
MK-6621 (vernakalant [IV])
(EU)(1)
Contraception
SCH 900121 (NOMAC/E2) (EU)
Schizophrenia/Bipolar I
Disorder
SCH 900274 (asenapine) (EU)
Footnotes:
|
|
(1)
|
Exclusive rights outside of the
United States, Canada and Mexico to vernakalant (IV)
|
(2)
|
North American rights only
|
(3)
|
Approved in certain countries in
Europe
|
(4)
|
Approved in certain countries in
Europe and Japan
|
(5)
|
Japanese rights only
|
(6)
|
MK-0653C fixed dose combination of
ezetimibe and atorvastatin is anticipated to be submitted to the
U.S. FDA in 2011 and commercialized when regulatory and legal
requirements have been satisfied
|
Employees
As of December 31, 2009, the Company had approximately
100,000 employees worldwide, with approximately 42,000
employed in the United States, including Puerto Rico.
Approximately 28% of worldwide employees of the Company are
represented by various collective bargaining groups.
In October 2008, Old Merck announced a global restructuring
program (the 2008 Restructuring Program) to reduce
its cost structure, increase efficiency, and enhance
competitiveness. As part of the 2008 Restructuring Program, the
Company expects to eliminate approximately 7,200 positions
6,800 active employees and 400 vacancies
across all areas of the Company worldwide by the end of 2011.
About 40% of the total
21
reductions will occur in the United States. As part of the 2008
Restructuring Program, Old Merck is streamlining management
layers by reducing its total number of senior and mid-level
executives globally.
Prior to the Merger, Schering-Plough commenced a Productivity
Transformation Program, which was designed to reduce and avoid
costs and increase productivity.
In February 2010, the Company announced the first phase of a new
global restructuring program (the Merger Restructuring
Program) in conjunction with the integration of the legacy
Merck and legacy Schering-Plough businesses. This Merger
Restructuring Program is intended to optimize the cost structure
of the combined Company. As part of the first phase of the
Merger Restructuring Program, by the end of 2012, the Company
expects to reduce its total workforce by approximately 15%
across all areas of the Company worldwide. The Company also
plans to eliminate 2,500 vacant positions as part of the first
phase of the program. These workforce reductions will primarily
come from the elimination of duplicative positions in sales,
administrative and headquarters organizations, as well as from
the consolidation of certain manufacturing facilities and
research and development operations.
Environmental
Matters
The Company believes that there are no compliance issues
associated with applicable environmental laws and regulations
that would have a material adverse effect on the Company. In
2009, Merck incurred capital expenditures of approximately
$33.6 million for environmental protection facilities. The
Company is also remediating environmental contamination
resulting from past industrial activity at certain of its sites.
Expenditures for remediation and environmental liabilities were
$16.6 million in 2009, $34.5 million in 2008,
$19.5 million in 2007, and are estimated at
$55 million for the years 2010 through 2013. These amounts
do not consider potential recoveries from other parties. The
Company has taken an active role in identifying and providing
for these costs and, in managements opinion, the
liabilities for all environmental matters, which are probable
and reasonably estimable, have been accrued and totaled
$161.8 million at December 31, 2009. Although it is
not possible to predict with certainty the outcome of these
environmental matters, or the ultimate costs of remediation,
management does not believe that any reasonably possible
expenditures that may be incurred in excess of the liabilities
accrued should exceed $170.0 million in the aggregate.
Management also does not believe that these expenditures should
have a material adverse effect on the Companys financial
position, results of operations, liquidity or capital resources
for any year.
Geographic
Area Information
The Companys operations outside the United States are
conducted primarily through subsidiaries. Sales worldwide by
subsidiaries outside the United States were 47% of sales in
2009, 44% of sales in 2008 and 39% of sales in 2007. The
increase in proportion of sales outside the United States in
2009 is primarily due to the inclusion of results of
Schering-Plough following the close of the Merger.
The Companys worldwide business is subject to risks of
currency fluctuations, governmental actions and other
governmental proceedings abroad. The Company does not regard
these risks as a deterrent to further expansion of its
operations abroad. However, the Company closely reviews its
methods of operations and adopts strategies responsive to
changing economic and political conditions.
As a result of the Merger, Merck has expanded its operations in
countries located in Latin America, the Middle East, Africa,
Eastern Europe and Asia Pacific. Business in these developing
areas, while sometimes less stable, offers important
opportunities for growth over time.
Financial information about geographic areas of the
Companys business is discussed in Item 8.
Financial Statements and Supplementary Data below.
Available
Information
The Companys Internet website address is
www.merck.com. The Company will make available,
free of charge at the Investor Information portion
of its website, its Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
and all amendments to those reports filed or furnished pursuant
to
22
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after such
reports are electronically filed with, or furnished to, the
Securities and Exchange Commission (SEC).
The Companys corporate governance guidelines and the
charters of the Board of Directors six standing committees
are available on the Companys website at
www.merck.com/about/leadership and all such
information is available in print to any stockholder who
requests it from the Company.
Investors should carefully consider all of the information set
forth in this
Form 10-K,
including the following risk factors, before deciding to invest
in any of the Companys securities. The risks below are not
the only ones the Company faces. Additional risks not currently
known to the Company or that the Company presently deems
immaterial may also impair its business operations. The
Companys business, financial condition, results of
operations or prospects could be materially adversely affected
by any of these risks. This
Form 10-K
also contains forward-looking statements that involve risks and
uncertainties. The Companys results could materially
differ from those anticipated in these forward-looking
statements as a result of certain factors, including the risks
it faces as described below and elsewhere. See Cautionary
Factors that May Affect Future Results below.
Certain of the Companys major products are going to
lose patent protection in the near future and, when that occurs,
the Company expects a significant decline in sales of those
products.
The Company depends upon patents to provide it with exclusive
marketing rights for its products for some period of time. As
product patents for several of the Companys products have
recently expired, or are about to expire, in the United States
and in other countries, the Company faces strong competition
from lower priced generic drugs. Loss of patent protection for
one of the Companys products typically leads to a rapid
loss of sales for that product, as lower priced generic versions
of that drug become available. In the case of products that
contribute significantly to the Companys sales, the loss
of patent protection can have a material adverse effect on the
Companys business, cash flow, results of operations,
financial position and prospects. The patents that provide U.S.
market exclusivity for Cozaar and Hyzaar expire in
April 2010. In addition, the patent for Cozaar will
expire in a number of major European markets in March 2010.
Hyzaar lost patent protection in major European markets
in February 2010. The Company expects significant declines
in sales of these products after such times. In addition, the
patent that provides U.S. market exclusivity for
Singulair expires in August 2012. The Company expects
that within the two years following patent expiration, it will
lose substantially all U.S. sales of Singulair, with
most of those declines coming in the first full year following
patent expiration. Also, the patent for Singulair will
expire in a number of major European markets in August 2012 and
the Company expects sales of Singulair in those markets
will decline significantly thereafter.
A chart listing the U.S. patent protection for the
Companys major marketed products is set forth above in
Item 1. Business Patents, Trademarks and
Licenses.
Key Company products generate a significant amount of the
Companys profits and cash flows, and any events that
adversely affect the markets for its leading products could have
a material and negative impact on results of operations and cash
flows.
The Companys ability to generate profits and operating
cash flow depends largely upon the continued profitability of
the Companys key products, such as Singulair,
Remicade, Vytorin, Zetia, Januvia, Nasonex and
Gardasil. As a result of the Companys dependence on
key products, any event that adversely affects any of these
products or the markets for any of these products could have a
significant impact on results of operations and cash flows.
These events could include loss of patent protection (as in the
recent case of Temodar), increased costs associated with
manufacturing, generic or OTC availability of the Companys
product or a competitive product, the discovery of previously
unknown side effects, increased competition from the
introduction of new, more effective treatments and
discontinuation or removal from the market of the product for
any reason.
The Companys research and development efforts may not
succeed in developing commercially successful products and the
Company may not be able to acquire commercially successful
products in other ways; in consequence, the Company may not be
able to replace sales of successful products that have lost
patent protection.
23
Like other major pharmaceutical companies, in order to remain
competitive, the Company must continue to launch new products
each year. Declines in sales of products, such as Fosamax,
Cozaar and Hyzaar, after the loss of market
exclusivity mean that the Companys future success is
dependent on its pipeline of new products, including new
products which it may develop through joint ventures and
products which it is able to obtain through license or
acquisition. To accomplish this, the Company commits substantial
effort, funds and other resources to research and development,
both through its own dedicated resources and through various
collaborations with third parties. There is a high rate of
failure inherent in the research to develop new drugs to treat
diseases. As a result, there is a high risk that funds invested
by the Company in research programs will not generate financial
returns. This risk profile is compounded by the fact that this
research has a long investment cycle. To bring a pharmaceutical
compound from the discovery phase to market may take a decade or
more and failure can occur at any point in the process,
including later in the process after significant funds have been
invested.
For a description of the research and development process, see
Research and Development above. Each phase of
testing is highly regulated, and during each phase there is a
substantial risk that the Company will encounter serious
obstacles or will not achieve its goals, and accordingly the
Company may abandon a product in which it has invested
substantial amounts of time and resources. Some of the risks
encountered in the research and development process include the
following: pre-clinical testing of a new compound may yield
disappointing results; clinical trials of a new drug may not be
successful; a new drug may not be effective or may have harmful
side effects; a new drug may not be approved by the FDA for its
intended use; it may not be possible to obtain a patent for a
new drug; or sales of a new product may be disappointing.
The Company cannot state with certainty when or whether any of
its products now under development will be approved or launched;
whether it will be able to develop, license or otherwise acquire
compounds, product candidates or products; or whether any
products, once launched, will be commercially successful. The
Company must maintain a continuous flow of successful new
products and successful new indications or brand extensions for
existing products sufficient both to cover its substantial
research and development costs and to replace sales that are
lost as profitable products, such as Fosamax, Cozaar and
Hyzaar, lose patent protection or are displaced by
competing products or therapies. Failure to do so in the short
term or long term would have a material adverse effect on the
Companys business, results of operations, cash flow,
financial position and prospects.
The Companys success is dependent on the successful
development and marketing of new products, which are subject to
substantial risks.
Products that appear promising in development may fail to reach
market for numerous reasons, including the following:
|
|
|
findings of ineffectiveness, superior safety or efficacy of
competing products, or harmful side effects in clinical or
pre-clinical testing;
|
|
|
failure to receive the necessary regulatory approvals, including
delays in the approval of new products and new indications, and
increasing uncertainties about the time required to obtain
regulatory approvals and the benefit/risk standards applied by
regulatory agencies in determining whether to grant approvals;
|
|
|
lack of economic feasibility due to manufacturing costs or other
factors; and
|
|
|
preclusion from commercialization by the proprietary rights of
others.
|
In connection with the Merger, the Company is assessing its
pipeline to identify the most promising,
high-potential
compounds for development. The Company has completed the
prioritization of its clinical development programs. The Company
is continuing to work on the prioritization of its value adding
programs related to currently marketed products and to its
preclinical/discovery programs. The Company anticipates that the
full prioritization process will be completed by the first half
of 2010. In connection with this process, the Company may
recognize non-cash impairment charges for the cancellation of
certain legacy Schering-Plough pipeline programs that were
measured at fair value and capitalized in connection with the
Merger. These
non-cash
impairment charges, which are anticipated to be excluded from
the Companys non-GAAP earnings, could be material to the
Companys future GAAP earnings.
24
The Companys products, including products in
development, can not be marketed unless the Company obtains and
maintains regulatory approval.
The Companys activities, including research, preclinical
testing, clinical trials and manufacturing and marketing its
products, are subject to extensive regulation by numerous
federal, state and local governmental authorities in the United
States, including the FDA, and by foreign regulatory
authorities, including the EC. In the United States, the FDA is
of particular importance to the Company, as it administers
requirements covering the testing, approval, safety,
effectiveness, manufacturing, labeling and marketing of
prescription pharmaceuticals. In many cases, the FDA
requirements have increased the amount of time and money
necessary to develop new products and bring them to market in
the United States. Regulation outside the United States also is
primarily focused on drug safety and effectiveness and, in many
cases, cost reduction. The FDA and foreign regulatory
authorities have substantial discretion to require additional
testing, to delay or withhold registration and marketing
approval and to mandate product withdrawals.
Even if the Company is successful in developing new products, it
will not be able to market any of those products unless and
until it has obtained all required regulatory approvals in each
jurisdiction where it proposes to market the new products. Once
obtained, the Company must maintain approval as long as it plans
to market its new products in each jurisdiction where approval
is required. The Companys failure to obtain approval,
significant delays in the approval process, or its failure to
maintain approval in any jurisdiction will prevent it from
selling the new products in that jurisdiction until approval is
obtained, if ever. The Company would not be able to realize
revenues for those new products in any jurisdiction where it
does not have approval.
The Company is dependent on its patent rights, and if its
patent rights are invalidated or circumvented, its business
would be adversely affected.
Patent protection is considered, in the aggregate, to be of
material importance in the Companys marketing of human
health products in the United States and in most major foreign
markets. Patents covering products that it has introduced
normally provide market exclusivity, which is important for the
successful marketing and sale of its products. The Company seeks
patents covering each of its products in each of the markets
where it intends to sell the products and where meaningful
patent protection is available.
Even if the Company succeeds in obtaining patents covering its
products, third parties or government authorities may challenge
or seek to invalidate or circumvent its patents and patent
applications. It is important for the Companys business to
defend successfully the patent rights that provide market
exclusivity for its products. The Company is often involved in
patent disputes relating to challenges to its patents or
infringement and similar claims against the Company. The Company
aggressively defends its important patents both within and
outside the United States, including by filing claims of
infringement against other parties. See Item 3. Legal
Proceedings Patent Litigation below. In
particular, manufacturers of generic pharmaceutical products
from time to time file Abbreviated New Drug Applications
(ANDA) with the FDA seeking to market generic forms
of the Companys products prior to the expiration of
relevant patents owned by the Company. The Company normally
responds by vigorously defending its patent, including by filing
lawsuits alleging patent infringement. Patent litigation and
other challenges to the Companys patents are costly and
unpredictable and may deprive the Company of market exclusivity
for a patented product or, in some cases, third party patents
may prevent the Company from marketing and selling a product in
a particular geographic area.
Additionally, certain foreign governments have indicated that
compulsory licenses to patents may be granted in the case of
national emergencies, which could diminish or eliminate sales
and profits from those regions and negatively affect the
Companys results of operations. Further, recent court
decisions relating to other companies U.S. patents,
potential U.S. legislation relating to patent reform, as
well as regulatory initiatives may result in further erosion of
intellectual property protection.
If one or more important products lose patent protection in
profitable markets, sales of those products are likely to
decline significantly as a result of generic versions of those
products becoming available and, in the case of certain
products, such a loss could result in an impairment charge. The
Companys results of operations may be adversely affected
by the lost sales unless and until the Company has successfully
launched commercially successful replacement products.
25
The Companys hypertension products Cozaar and
Hyzaar will each lose patent protection in the
United States in April 2010. In addition, the patent for
Cozaar will expire in a number of major European markets
in March 2010. Hyzaar lost patent protection in
major European markets in February 2010. The Company
expects significant declines in the sales of these products
after such times. In addition, the patent that provides
U.S. market exclusivity for Singulair expires in
August 2012. The Company expects that within the two years
following patent expiration, it will lose substantially all
U.S. sales of Singulair, with most of those declines
coming in the first full year following patent expiration. Also,
the patent for Singulair will expire in a number of major
European markets in August 2012 and the Company expects sales of
Singulair in those markets will decline significantly
thereafter.
The Company faces intense competition from lower-cost generic
products.
In general, the Company faces increasing competition from
lower-cost generic products. The patent rights that protect its
products are of varying strengths and durations. In addition, in
some countries, patent protection is significantly weaker than
in the United States or the EU. In the United States, political
pressure to reduce spending on prescription drugs has led to
legislation which encourages the use of generic products.
Although it is the Companys policy to actively protect its
patent rights, generic challenges to the Companys products
can arise at any time, and it may not be able to prevent the
emergence of generic competition for its products.
Loss of patent protection for a product typically is followed
promptly by generic substitutes, reducing the Companys
sales of that product. Availability of generic substitutes for
the Companys drugs may adversely affect its results of
operations and cash flow. In addition, proposals emerge from
time to time in the United States and other countries for
legislation to further encourage the early and rapid approval of
generic drugs. Any such proposal that is enacted into law could
worsen this substantial negative effect on the Companys
sales and, potentially, its business, cash flow, results of
operations, financial position and prospects.
The Company faces intense competition from new products.
The Companys products face intense competition from
competitors products. This competition may increase as new
products enter the market. In such an event, the
competitors products may be safer or more effective or
more effectively marketed and sold than the Companys
products. Alternatively, in the case of generic competition,
they may be equally safe and effective products that are sold at
a substantially lower price than the Companys products. As
a result, if the Company fails to maintain its competitive
position, this could have a material adverse effect on its
business, cash flow, results of operations, financial position
and prospects.
The Company faces pricing pressure with respect to its
products.
The Company faces increasing pricing pressure globally from
managed care organizations, institutions and government agencies
and programs that could negatively affect the Companys
sales and profit margins. In the United States, these include
(i) practices of managed care groups and institutional and
governmental purchasers and (ii) U.S. federal laws and
regulations related to Medicare and Medicaid, including the
Medicare Prescription Drug Improvement and Modernization Act of
2003 (the 2003 Act). The 2003 Act included a
prescription drug benefit for individuals that first went into
effect on January 1, 2006. The increased purchasing power
of entities that negotiate on behalf of Medicare beneficiaries
could result in further pricing pressures.
Outside the United States, numerous major markets have pervasive
government involvement in funding healthcare and, in that
regard, fix the pricing and reimbursement of pharmaceutical and
vaccine products. Consequently, in those markets, the Company is
subject to government decision making and budgetary actions with
respect to its products.
The Company expects pricing pressures to increase in the future.
The healthcare industry will continue to be subject to
increasing regulation and political action.
The Company believes that the healthcare industry will continue
to be subject to increasing regulation as well as political and
legal action, as future proposals to reform the healthcare
system are considered by Congress and state legislatures.
Recently, major health care reform has been introduced and
passed in both houses of Congress. A final revised bill which
unifies both versions may be considered and adopted into law.
Congress may
26
also choose not to take action on comprehensive reform and
instead move to consider more incremental health care proposals
that may or may not involve pharmaceutical-related issues.
Some of the proposals included in the House and Senate versions
of health reform could adversely affect the Companys sales
and profit margins. If enacted, these proposals could call for
government intervention in pharmaceutical pricing, changes in
government reimbursement, or increased rebates and discounts on
sales related to state and federal government programs among
other changes. Other proposals that might be enacted that would
adversely affect our business include legalization of commercial
drug importation into the United States, and involuntary
approval of medicines for OTC use. In addition, individual
states have enacted or proposed regulations that restrict
certain sales and marketing activities
and/or
require tracking and disclosure of payments and other financial
support to healthcare professionals. Similar regulations may be
proposed at the federal level. Such regulations could adversely
affect the Companys sales and profit margins.
Any of these new legislative initiatives, if enacted, may
further increase government regulation of or other government
involvement in healthcare, lower reimbursement rates and
otherwise change the operating environment for healthcare
companies. Government regulations applicable to the
Companys current or future products, or the interpretation
of existing regulations, might change and thereby prevent the
Company from marketing some or all of its products and services
for a period of time or indefinitely.
The Company cannot predict the likelihood of all future changes
in the healthcare industry in general, or the pharmaceutical
industry in particular, or what impact they may have on the
Companys results of operations, financial condition or
business.
The Company is experiencing difficulties and delays in the
manufacturing of certain of its products.
As previously disclosed, Old Merck has, in the past, experienced
difficulties in manufacturing certain of its vaccines and other
products. These issues are continuing, in particular, with
respect to the manufacture of bulk varicella which is required
for production of the Companys varicella zoster
virus-containing vaccines, such as Varivax, ProQuad and
Zostavax. Similarly,
Schering-Plough
has, in the past, experienced difficulties manufacturing certain
of its animal health products. The Company is working on these
issues, but there can be no assurance of when or if these issues
will be finally resolved.
In addition to the difficulties that the Company is experiencing
currently, the Company may experience difficulties and delays
inherent in manufacturing its products, such as (i) failure
of the Company or any of its vendors or suppliers to comply with
Current Good Manufacturing Practices and other applicable
regulations and quality assurance guidelines that could lead to
manufacturing shutdowns, product shortages and delays in product
manufacturing; (ii) construction delays related to the
construction of new facilities or the expansion of existing
facilities, including those intended to support future demand
for the Companys products; and (iii) other
manufacturing or distribution problems including changes in
manufacturing production sites and limits to manufacturing
capacity due to regulatory requirements, changes in types of
products produced, or physical limitations that could impact
continuous supply. Manufacturing difficulties can result in
product shortages, leading to lost sales.
The Company faces significant litigation related to
Vioxx.
On September 30, 2004, Old Merck voluntarily withdrew
Vioxx, its arthritis and acute pain medication, from the
market worldwide. Although Old Merck has settled the major
portion of the U.S. Product Liability litigation, the
Company still faces material litigation arising from the
voluntary withdrawal of Vioxx.
In addition to the Vioxx Product Liability Lawsuits,
various purported class actions and individual lawsuits have
been brought against Old Merck and several current and former
officers and directors of the Company alleging that Old Merck
made false and misleading statements regarding Vioxx in
violation of the federal and state securities laws (all of these
suits are referred to as the Vioxx Securities
Lawsuits). On April 12, 2007, Judge Chesler granted
defendants motion to dismiss the complaint with prejudice.
Plaintiffs appealed Judge Cheslers decision to the United
States Court of Appeals for the Third Circuit. On
September 9, 2008, the Third Circuit issued an opinion
reversing Judge Cheslers order and remanding the case to
the District Court. Old Merck filed a petition for a writ of
certiorari with the United States Supreme Court, which was
granted. Oral argument was held in the Supreme Court on
November 30, 2009 and a decision is expected in the first
half of 2010. While Old Mercks
27
petition for certiorari was pending, plaintiffs filed their
Consolidated and Fifth Amended Class Action Complaint in
the District Court. On May 1, 2009, defendants moved to
dismiss the Fiffth Amended Class Action Complaint; that
motion has been withdrawn without prejudice to refile it pending
the outcome in the Supreme Court. In addition, various putative
class actions have been brought against Old Merck and several
current and former employees, officers, and directors of the
Company alleging violations of ERISA. (All of these suits are
referred to as the Vioxx ERISA Lawsuits and,
together with the Vioxx Securities Lawsuits the
Vioxx Shareholder Lawsuits. The Vioxx
Shareholder Lawsuits are discussed more fully in Item 3.
Legal Proceedings below.) Old Merck has also been
named as a defendant in actions in various countries outside the
United States. (All of these suits are referred to as the
Vioxx Foreign Lawsuits.) Old Merck has also
been sued by ten states, five counties and New York City with
respect to the marketing of Vioxx.
The U.S. Department of Justice (DOJ) has issued
subpoenas requesting information relating to Old Mercks
research, marketing and selling activities with respect to
Vioxx in a federal health care investigation under
criminal statutes. This investigation includes subpoenas for
witnesses to appear before a grand jury. There are also ongoing
investigations by local authorities in Europe. The Company is
cooperating with authorities in all of these investigations.
(All of these investigations are referred to as the
Vioxx Investigations.) The Company cannot
predict the outcome of any of these investigations; however,
they could result in potential civil
and/or
criminal remedies.
The Vioxx product liability litigation is discussed more
fully in Item 3. Legal Proceedings below. A
trial in a representative action in Australia concluded on
June 25, 2009, in the Federal Court of Australia. The named
plaintiff, who alleges he suffered an MI, seeks to represent
others in Australia who ingested Vioxx and suffered an
MI, thrombotic stroke, unstable angina, transient ischemic
attack or peripheral vascular disease. The trial judge has
reserved decision in this matter.
The Company currently anticipates that two U.S. Vioxx
Product Liability Lawsuits will be tried in 2010. The
Company cannot predict the timing of any other trials related to
the Vioxx Litigation. The Company believes that it has
meritorious defenses to the Vioxx Product Liability
Lawsuits, Vioxx Shareholder Lawsuits and Vioxx
Foreign Lawsuits (collectively, the Vioxx
Lawsuits) and will vigorously defend against them. The
Companys insurance coverage with respect to the Vioxx
Lawsuits will not be adequate to cover its defense costs and
any losses.
During 2009, Merck spent approximately $244 million in the
aggregate in legal defense costs worldwide related to
(i) the Vioxx Lawsuits, and (ii) the Vioxx
Investigations (collectively, the Vioxx
Litigation). In 2009, Merck recorded charges of
$75 million, including $35 million in the fourth
quarter, to add to the reserve solely for its future legal
defense costs related to the Vioxx Litigation which was
$279 million at December 31, 2008 and
$110 million (the Vioxx Reserve) at
December 31, 2009. The amount of the Vioxx Reserve
is based on certain assumptions, described below under
Item 3. Legal Proceedings, and is the best
estimate of the minimum amount that the Company believes will be
incurred in connection with the remaining aspects of the
Vioxx Litigation, however, events such as additional
trials in the Vioxx Litigation and other events that
could arise in the course of the Vioxx Litigation could
affect the ultimate amount of defense costs to be incurred by
the Company.
The Company is not currently able to estimate any additional
amounts that it may be required to pay in connection with the
Vioxx Lawsuits or Vioxx Investigations. These
proceedings are still expected to continue for years and the
Company cannot predict the course the proceedings will take. In
view of the inherent difficulty of predicting the outcome of
litigation, particularly where there are many claimants and the
claimants seek unspecified damages, the Company is unable to
predict the outcome of these matters, and at this time cannot
reasonably estimate the possible loss or range of loss with
respect to the Vioxx Lawsuits not included in the
Settlement Program. Other than a reserve established in
connection with the settlement of the shareholder derivative
actions discussed below under Item 3. Legal
Proceedings, the Company has not established any reserves
for any potential liability relating to the Vioxx
Lawsuits not included in the Settlement Program or the
Vioxx Investigations.
A series of unfavorable outcomes in the Vioxx Lawsuits or
the Vioxx Investigations, resulting in the payment of
substantial damages or fines or resulting in criminal penalties,
could have a material adverse effect on the Companys
business, cash flow, results of operations, financial position
and prospects.
28
Issues concerning Vytorin and the ENHANCE and SEAS
clinical trials have had an adverse effect on sales of
Vytorin and Zetia in the United States and results
from ongoing trials could have an adverse effect on such
sales.
The Company sells Vytorin and Zetia. As previously
disclosed, in January 2008, the legacy companies announced
the results of the ENHANCE clinical trial, an imaging trial in
720 patients with heterozygous familial
hypercholesterolemia, a rare genetic condition that causes very
high levels of LDL bad cholesterol and greatly
increases the risk for premature coronary artery disease. As
previously reported, despite the fact that ezetimibe/simvastatin
10/80 mg (Vytorin) significantly lowered LDL
bad cholesterol more than simvastatin 80 mg
alone, there was no significant difference between treatment
with ezetimibe/simvastatin and simvastatin alone on the
pre-specified primary endpoint, a change in the thickness of
carotid artery walls over two years as measured by ultrasound.
The IMPROVE-IT trial is underway and is designed to provide
cardiovascular outcomes data for ezetimibe/simvastatin in
patients with acute coronary syndrome. No incremental benefit of
ezetimibe/simvastatin on cardiovascular morbidity and mortality
over and above that demonstrated for simvastatin has been
established. In January 2009, the FDA announced that it had
completed its review of the final clinical study report of
ENHANCE. The FDA stated that the results from ENHANCE did not
change its position that elevated LDL cholesterol is a risk
factor for cardiovascular disease and that lowering LDL
cholesterol reduces the risk for cardiovascular disease. For a
discussion concerning litigation arising out of the ENHANCE
study, see Item 3. Legal Proceedings below.
As previously disclosed, the legacy companies have received
several letters addressed to both companies from the House
Committee on Energy and Commerce, its Subcommittee on Oversight
and Investigations (O&I), and the Ranking
Minority Member of the Senate Finance Committee, collectively
seeking a combination of witness interviews, documents and
information on a variety of issues related to the ENHANCE
clinical trial, the sale and promotion of Vytorin, as
well as sales of stock by corporate officers. In addition, the
legacy companies received three additional letters from
O&I, seeking certain information and documents related to
the SEAS clinical trial, which is described in more detail
below. The legacy companies also each received subpoenas from
the New York and New Jersey State Attorneys General Offices and
a letter from the Connecticut Attorney General seeking similar
information and documents. Finally, in September 2008, the
legacy companies received a letter from the Civil Division of
the DOJ informing it that the DOJ is investigating whether the
companies conduct relating to the promotion of Vytorin
caused false claims to be submitted to federal health care
programs. The Company is cooperating with these investigations.
As previously disclosed, a number of shareholder lawsuits
arising out of the ENHANCE study have been brought against Old
Merck and Schering-Plough.
In July 2008, efficacy and safety results from the SEAS study
were announced. SEAS was designed to evaluate whether intensive
lipid lowering with Vytorin 10/40 mg would reduce
the need for aortic valve replacement and the risk of
cardiovascular morbidity and mortality versus placebo in
patients with asymptomatic mild to moderate aortic stenosis who
had no indication for statin therapy. Vytorin failed to
meet its primary endpoint for the reduction of major
cardiovascular events. In the study, patients in the group who
took Vytorin 10/40 mg had a higher incidence of
cancer than the group who took placebo. There was also a
nonsignificant increase in deaths from cancer in patients in the
group who took Vytorin versus those who took placebo.
Cancer and cancer deaths were distributed across all major organ
systems. The Company believes the cancer finding in SEAS is
likely to be an anomaly that, taken in light of all the
available data, does not support an association with
Vytorin. In August 2008, the FDA announced that it was
investigating the results from the SEAS trial. In December 2009,
the FDA announced that it had completed its review of the data
from the SEAS trial as well as a review of interim data from the
SHARP and IMPROVE-IT trials. Based on currently available
information, the FDA indicated it believed it is unlikely that
Vytorin or Zetia increase the risk of
cancer-related death. The SHARP trial is expected to be
completed in 2010. The IMPROVE-IT trial is scheduled for
completion in 2013. In the IMPROVE-IT trial, a blinded interim
efficacy analysis will be conducted by the Data Safety
Monitoring Board for the trial when approximately 50% of the
endpoints have been accrued. That interim analysis is expected
to be conducted in 2010. If, based on the results of the interim
analysis, the trial were to be halted because of concerns
related to Vytorin, that could have a material adverse
effect on sales of Vytorin and Zetia. Similarly,
as noted above, the SHARP trial is expected to be completed in
2010. Negative results from the SHARP trial could also have an
adverse affect on the sales of Vytorin and Zetia.
29
Following the announcements of the ENHANCE and SEAS clinical
trial results, sales of Vytorin and Zetia declined
in 2008 and 2009 in the United States. These issues concerning
the ENHANCE and SEAS clinical trials have had an adverse effect
on sales of Vytorin and Zetia and could continue
to have an adverse effect on such sales. If sales of such
products are materially adversely affected, the Companys
business, cash flow, results of operations, financial position
and prospects could also be materially adversely affected. In
addition, unfavorable outcomes resulting from the litigation
concerning the sale and promotion of these products could have a
material adverse effect on the Companys business, cash
flow, results of operations, financial position and prospects.
An arbitration proceeding commenced by Centocor against
Schering-Plough may result in the Companys loss of the
rights to market Remicade and Simponi.
A subsidiary of the Company is a party to a Distribution
Agreement with Centocor, now a wholly owned subsidiary of
Johnson & Johnson, under which the Schering-Plough
subsidiary has rights to distribute and commercialize the
rheumatoid arthritis treatment Remicade and
Simponi, a next-generation treatment, in certain
territories.
Under Section 8.2(c) of the Distribution Agreement,
If either party is acquired by a third party or otherwise
comes under Control (as defined in Section 1.4 [of the
Distribution Agreement]) of a third party, it will promptly
notify the other party not subject to such change of control.
The party not subject to such change of control will have the
right, however not later than thirty (30) days from such
notification, to notify in writing the party subject to the
change of Control of the termination of the Agreement taking
effect immediately. As used herein Change of Control
shall mean (i) any merger, reorganization, consolidation or
combination in which a party to this Agreement is not the
surviving corporation; or (ii) any person
(within the meaning of Section 13(d) and
Section 14(d)(2) of the Securities Exchange Act of 1934),
excluding a partys Affiliates, is or becomes the
beneficial owner, directly or indirectly, of securities of the
party representing more than fifty percent (50%) of either
(A) the then-outstanding shares of common stock of the
party or (B) the combined voting power of the partys
then-outstanding voting securities; or (iii) if individuals
who as of the Effective Date [April 3, 1998] constitute the
Board of Directors of the party (the Incumbent
Board) cease for any reason to constitute at least a
majority of the Board of Directors of the party; provided,
however, that any individual becoming a director subsequent to
the Effective Date whose election, or nomination for election by
the partys shareholders, was approved by a vote of at
least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose,
any such individual whose initial assumption of office occurs as
a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual
or threatened solicitation of proxies or consents by or on
behalf of a person other than the Board; or (iv) approval
by the shareholders of a party of a complete liquidation or the
complete dissolution of such party.
Section 1.4 of the Distribution Agreement defines
Control to mean the ability of any entity (the
Controlling entity), directly or indirectly, through
ownership of securities, by agreement or by any other method, to
direct the manner in which more than fifty percent (50%) of the
outstanding voting rights of any other entity (the
Controlled entity), whether or not represented by
securities, shall be cast, or the right to receive over fifty
percent (50%) of the profits or earnings of, or to otherwise
control the management decisions of, such other entity (also a
Controlled entity).
On May 27, 2009, Centocor delivered to Schering-Plough a
notice initiating an arbitration proceeding to resolve whether,
as a result of the proposed Merger, Centocor is permitted to
terminate the Distribution Agreement and related agreements. As
part of the arbitration process, Centocor will take the position
that it has the right to terminate the Distribution Agreement on
the grounds that, in the Merger, Schering-Plough and the
Schering-Plough subsidiary party to the Distribution Agreement
were (i) acquired by a third party or otherwise
come[ing] under Control (as defined in
Section 1.4) of a third party
and/or
(ii) undergoing a Change of Control (as defined
in Section 8.2(c)). A hearing in the arbitration is
scheduled to commence in late September 2010. Sales of
Remicade and Simponi included in the
Companys results for the post-Merger period were
$430.7 million and $3.9 million, respectively. Sales
of Remicade recognized by Schering-Plough in 2009 prior
to the Merger were $1.9 billion.
The Company is vigorously contesting Centocors attempt to
terminate the Distribution Agreement as a result of the Merger.
However, if the arbitrator were to conclude that Centocor is
permitted to terminate the Distribution Agreement as a result of
the Merger and Centocor in fact terminates the Distribution
Agreement, the
30
Companys subsidiary would not be able to distribute
Remicade or Simponi. In addition, in the
arbitration, Centocor is claiming damages, in an amount to
be determined, that result from Mercks alleged
non-termination of the Distribution Agreement. If Centocor were
to prevail in the arbitration, Merck could be liable for the net
damages, including any offsets or mitigation, that the
arbitration panel finds Centocor incurred as a result of
non-termination and the Company would suffer an impairment
charge. An unfavorable outcome in the arbitration would have a
material adverse effect on the Companys financial
position, liquidity and results of operations.
Finally, due to the uncertainty surrounding the outcome of the
arbitration, the parties may choose to settle the dispute under
mutually agreeable terms but any agreement reached with Centocor
to resolve the dispute under the Distribution Agreement may
result in the terms of the Distribution Agreement being modified
in a manner that may reduce the benefits of the Distribution
Agreement to the Company.
Pharmaceutical products can develop unexpected safety or
efficacy concerns.
Unexpected safety or efficacy concerns can arise with respect to
marketed products, whether or not scientifically justified,
leading to product recalls, withdrawals, or declining sales, as
well as product liability, consumer fraud
and/or other
claims.
Changes in laws and regulations could adversely affect the
Companys business.
All aspects of the Companys business, including research
and development, manufacturing, marketing, pricing, sales,
litigation and intellectual property rights, are subject to
extensive legislation and regulation. Changes in applicable
federal and state laws and agency regulations could have a
material adverse effect on the Companys business.
Reliance on third party relationships and outsourcing
arrangements could adversely affect the Companys
business.
The Company depends on third parties, including suppliers,
alliances with other pharmaceutical and biotechnology companies,
and third party service providers, for key aspects of its
business including development, manufacture and
commercialization of its products and support for its
information technology systems. Failure of these third parties
to meet their contractual, regulatory and other obligations to
the Company or the development of factors that materially
disrupt the relationships between the Company and these third
parties could have a material adverse effect on the
Companys business.
The Company is increasingly dependent on sophisticated
information technology and infrastructure.
The Company is increasingly dependent on sophisticated
information technology and infrastructure. Any significant
breakdown, intrusion, interruption or corruption of these
systems or data breaches could have a material adverse effect on
our business. In addition, the Company currently is proceeding
with a multi-year implementation of an enterprise wide resource
planning system, which includes modification to the design,
operation and documentation of its internal controls over
financial reporting, and intends to implement the resource
planning system in the United States in 2010. Any material
problems in the implementation could have a material adverse
effect on the Companys business.
Developments following regulatory approval may adversely
affect sales of the Companys products.
Even after a product reaches market, certain developments
following regulatory approval, including results in
post-marketing Phase IV trials, may decrease demand for the
Companys products, including the following:
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the re-review of products that are already marketed;
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new scientific information and evolution of scientific theories;
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the recall or loss of marketing approval of products that are
already marketed;
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changing government standards or public expectations regarding
safety, efficacy or labeling changes; and
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greater scrutiny in advertising and promotion.
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In the past several years, clinical trials and post-marketing
surveillance of certain marketed drugs of the Company and of
competitors within the industry have raised safety concerns that
have led to recalls, withdrawals or adverse labeling of marketed
products. Clinical trials and post-marketing surveillance of
certain marketed drugs also have raised concerns among some
prescribers and patients relating to the safety or efficacy of
pharmaceutical products in general that have negatively affected
the sales of such products. In addition, increased scrutiny of
the outcomes of clinical trials have led to increased volatility
in market reaction. Further, these matters often attract
litigation and, even where the basis for the litigation is
groundless, considerable resources may be needed to respond.
In addition, following the wake of product withdrawals and other
significant safety issues, health authorities such as the FDA,
the European Medicines Agency (EMEA) and the
Pharmaceutical and Medical Device Agency have increased their
focus on safety when assessing the benefit/risk balance of
drugs. Some health authorities appear to have become more
cautious when making decisions about approvability of new
products or indications and are re-reviewing select products
that are already marketed, adding further to the uncertainties
in the regulatory processes. There is also greater regulatory
scrutiny, especially in the United States, on advertising and
promotion and, in particular,
direct-to-consumer
advertising.
If previously unknown side effects are discovered or if there is
an increase in negative publicity regarding known side effects
of any of the Companys products, it could significantly
reduce demand for the product or require the Company to take
actions that could negatively affect sales, including removing
the product from the market, restricting its distribution or
applying for labeling changes. Further, in the current
environment in which all pharmaceutical companies operate, the
Company is at risk for product liability claims for its products.
Negative events in the animal health industry could have a
negative impact on future results of operations.
Future sales of key animal health products could be adversely
impacted by a number of risk factors including certain risks
that are specific to the animal health business. For example,
the outbreak of disease carried by animals, such as Bovine
Spongiform Encephalopathy (BSE) or mad cow disease,
could lead to their widespread death and precautionary
destruction as well as the reduced consumption and demand for
animals, which could adversely impact the Companys results
of operations. Also, the outbreak of any highly contagious
diseases near the Companys main production sites could
require the Company to immediately halt production of vaccines
at such sites or force the Company to incur substantial expenses
in procuring raw materials or vaccines elsewhere. Other risks
specific to animal health include epidemics and pandemics,
government procurement and pricing practices, weather and global
agribusiness economic events. As the Animal Health segment of
the Companys business becomes more significant, the impact
of any such events on future results of operations would also
become more significant.
Biologics carry unique risks and uncertainties, which could
have a negative impact on future results of operations.
The successful development, testing, manufacturing and
commercialization of biologics, particularly human and animal
health vaccines, is a long, expensive and uncertain process.
There are unique risks and uncertainties with biologics,
including:
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There may be limited access to and supply of normal and diseased
tissue samples, cell lines, pathogens, bacteria, viral strains
and other biological materials. In addition, government
regulations in multiple jurisdictions, such as the United States
and European states within the EU, could result in restricted
access to, or transport or use of, such materials. If the
Company loses access to sufficient sources of such materials, or
if tighter restrictions are imposed on the use of such
materials, the Company may not be able to conduct research
activities as planned and may incur additional development costs.
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The development, manufacturing and marketing of biologics are
subject to regulation by the FDA, the EMEA and other regulatory
bodies. These regulations are often more complex and extensive
than the regulations applicable to other pharmaceutical
products. For example, in the United States, a BLA, including
both preclinical and clinical trial data and extensive data
regarding the manufacturing
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procedures, is required for human vaccine candidates and FDA
approval is required for the release of each manufactured lot.
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Manufacturing biologics, especially in large quantities, is
often complex and may require the use of innovative technologies
to handle living micro-organisms. Each lot of an approved
biologic must undergo thorough testing for identity, strength,
quality, purity and potency. Manufacturing biologics requires
facilities specifically designed for and validated for this
purpose, and sophisticated quality assurance and quality control
procedures are necessary. Slight deviations anywhere in the
manufacturing process, including filling, labeling, packaging,
storage and shipping and quality control and testing, may result
in lot failures, product recalls or spoilage. When changes are
made to the manufacturing process, the Company may be required
to provide pre-clinical and clinical data showing the comparable
identity, strength, quality, purity or potency of the products
before and after such changes.
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Biologics are frequently costly to manufacture because
production ingredients are derived from living animal or plant
material, and most biologics cannot be made synthetically. In
particular, keeping up with the demand for vaccines may be
difficult due to the complexity of producing vaccines.
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The use of biologically derived ingredients can lead to
allegations of harm, including infections or allergic reactions,
or closure of product facilities due to possible contamination.
Any of these events could result in substantial costs.
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There currently is no process in the United States for the
submission or approval of generic biologics based upon
abbreviated data packages or a showing of sameness to another
approved biologic, but there is public dialogue at the FDA and
in Congress regarding the scientific and statutory basis upon
which such products, known as biosimilars or follow-on
biologics, could be approved and marketed in the United States.
The Company cannot be certain when Congress will create a
statutory pathway for the approval of biosimilars, and the
Company cannot predict what impact, if any, the approval of
biosimilars would have on the sales of Company products in the
United States. In Europe, however, the EMEA has issued
guidelines for approving biological products through an
abbreviated pathway, and biosimilars have been approved in
Europe. If a biosimilar version of one of the Companys
products were approved in Europe, it could have a negative
effect on sales of the product.
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The Company is exposed to market risk from fluctuations in
currency exchange rates and interest rates.
The Company operates in multiple jurisdictions and, as such,
virtually all sales are denominated in currencies of the local
jurisdiction. Additionally, the Company has entered and will
enter into acquisition, licensing, borrowings or other financial
transactions that may give rise to currency and interest rate
exposure.
Since the Company cannot, with certainty, foresee and mitigate
against such adverse fluctuations, fluctuations in currency
exchange rates and interest rates could negatively affect the
Companys results of operations, financial position and
cash flows.
In order to mitigate against the adverse impact of these market
fluctuations, the Company will from time to time enter into
hedging agreements. While hedging agreements, such as currency
options and interest rate swaps, may limit some of the exposure
to exchange rate and interest rate fluctuations, such attempts
to mitigate these risks may be costly and not always successful.
The Company is subject to evolving and complex tax laws,
which may result in additional liabilities that may affect
results of operations.
The Company is subject to evolving and complex tax laws in the
jurisdictions in which it operates. Significant judgment is
required for determining the Companys tax liabilities, and
the Companys tax returns are periodically examined by
various tax authorities. The Company believes that its accrual
for tax contingencies is adequate for all open years based on
past experience, interpretations of tax law, and judgments about
potential actions by tax authorities; however, due to the
complexity of tax contingencies, the ultimate resolution of any
tax matters may result in payments greater or less than amounts
accrued.
In February 2010, President Obamas administration proposed
significant changes to the U.S. international tax laws,
including changes that would limit U.S. tax deductions for
expenses related to un-repatriated
33
foreign-source income and modify the U.S. foreign tax
credit rules. We cannot determine whether these proposals will
be enacted into law or what, if any, changes may be made to such
proposals prior to their being enacted into law. If these or
other changes to the U.S. international tax laws are
enacted, they could have a significant impact on the financial
results of the Company.
In addition, the Company may be impacted by changes in tax laws,
including tax rate changes, changes to the laws related to the
remittance of foreign earnings (deferral), or other limitations
impacting the U.S. tax treatment of foreign earnings, new
tax laws, and revised tax law interpretations in domestic and
foreign jurisdictions.
The Company may fail to realize the anticipated cost savings,
revenue enhancements and other benefits expected from the
Merger, which could adversely affect the value of the
Companys common stock.
The success of the Merger will depend, in part, on the
Companys ability to successfully combine the businesses of
Old Merck and Schering-Plough and realize the anticipated
benefits and cost savings from the combination of the two
companies. If the combined company is not able to achieve these
objectives within the anticipated time frame, or at all, the
value of the Companys common stock may be adversely
affected.
It is possible that the integration process could result in the
loss of key employees, result in the disruption of each legacy
companys ongoing businesses or identify inconsistencies in
standards, controls, procedures and policies that adversely
affect our ability to maintain relationships with customers,
suppliers, distributors, creditors, lessors, clinical trial
investigators or managers or to achieve the anticipated benefits
of the Merger.
Specifically, issues that must be addressed in integrating the
operations of the two legacy companies in order to realize the
anticipated benefits of the Merger include, among other things:
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integrating the research and development, manufacturing,
distribution, marketing and promotion activities and information
technology systems of Old Merck and Schering-Plough;
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conforming standards, controls, procedures and accounting and
other policies, business cultures and compensation structures
between the companies;
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identifying and eliminating redundant and underperforming
operations and assets; and
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managing tax costs or inefficiencies associated with integrating
the operations of the combined company.
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Integration efforts between the two companies will also divert
management attention and resources. An inability to realize the
full extent of, or any of, the anticipated benefits of the
Merger, as well as any delays encountered in the integration
process, could have an adverse effect on the Companys
business and results of operations, which may affect the value
of the shares of Company common stock.
In addition, the actual integration may result in additional and
unforeseen expenses, and the anticipated benefits of the
integration plan may not be realized. Actual cost and sales
synergies, if achieved at all, may be lower than the Company
expects and may take longer to achieve than anticipated. If the
Company is not able to adequately address these challenges, it
may be unable to successfully integrate the operations of the
two legacy companies, or to realize the anticipated benefits of
the integration of the two legacy companies.
Delays encountered in the integration process could have a
material adverse effect on the revenues, expenses, operating
results and financial condition of the Company. Although the
Company expects significant benefits, such as increased cost
savings, to result from the Merger, there can be no assurance
that the Company will realize any of these anticipated benefits.
The Company will incur significant transaction and
merger-related transition costs in connection with the
Merger.
The Company will incur significant costs in connection with
consummating the Merger and integrating the operations of the
two companies, with a significant portion of such costs being
incurred through the first year after completion of the Merger.
The Company continues to assess the magnitude of these costs,
and additional unanticipated costs may be incurred in the
integration of the businesses of the two legacy companies.
Although the Company believes that the elimination of
duplicative costs, as well as the realization of other
efficiencies related to the integration of the businesses, will
offset incremental transaction and Merger-related costs over
time, no assurance can be given that this net benefit will be
achieved in the near term, or at all.
34
The Companys debt obligations incurred to finance the
Merger could adversely affect its business.
While the Companys financing strategy for the Merger was
focused on preserving financial strength and flexibility to
continue to invest in the Companys business and key growth
drivers post-merger, debt obligations incurred to finance the
Merger could affect the Companys flexibility in planning
for, or reacting to, changes in its business and the industry in
which it operates, thereby placing it at a competitive
disadvantage compared to competitors that have less
indebtedness. Further, if the Company decides to retire or pay
down indebtedness early it may be required to dedicate a
substantial portion of its cash flow from operations to do so,
thereby reducing the availability of its cash flow for other
purposes, including business development efforts and mergers and
acquisitions.
Product liability insurance for products may be limited, cost
prohibitive or unavailable.
As a result of a number of factors, product liability insurance
has become less available while the cost has increased
significantly. With respect to product liability, the Company
self-insures substantially all of its risk, as the availability
of commercial insurance has become more restrictive. The Company
has evaluated its risks and has determined that the cost of
obtaining product liability insurance outweighs the likely
benefits of the coverage that is available and, as such, has no
insurance for certain product liabilities effective
August 1, 2004, including liability for legacy Merck
products first sold after that date. The Company will
continually assess the most efficient means to address its risk;
however, there can be no guarantee that insurance coverage will
be obtained or, if obtained, will be sufficient to fully cover
product liabilities that may arise.
The Company has significant global operations, which expose
it to additional risks, and any adverse event could have a
material negative impact on the Companys results of
operations.
The extent of the Companys operations outside the United
States will be significant due to the fact that the majority of
Schering-Ploughs legacy operations are outside the United
States. Risks inherent in conducting a global business include:
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changes in medical reimbursement policies and programs and
pricing restrictions in key markets;
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multiple regulatory requirements that could restrict the
Companys ability to manufacture and sell its products in
key markets;
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trade protection measures and import or export licensing
requirements;
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foreign exchange fluctuations;
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diminished protection of intellectual property in some
countries; and
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possible nationalization and expropriation.
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As discussed below, the Venezuelan economy was recently
determined to be hyperinflationary which requires the Company to
remeasure its local currency operations there to U.S. dollars
which remeasurement will be recorded in the first quarter of
2010. In addition, the Venezuelan government recently devalued
its currency. These actions will have an adverse effect on the
Companys results of operations, financial position and
cash flows.
In addition, there may be changes to the Companys business
and political position if there is instability, disruption or
destruction in a significant geographic region, regardless of
cause, including war, terrorism, riot, civil insurrection or
social unrest; and natural or man-made disasters, including
famine, flood, fire, earthquake, storm or disease.
Cautionary
Factors that May Affect Future Results
(Cautionary Statements Under the Private Securities Litigation
Reform Act of 1995)
This report, including the Annual Report, and other written
reports and oral statements made from time to time by the
Company may contain so-called forward-looking
statements, all of which are based on managements
current expectations and are subject to risks and uncertainties
which may cause results to differ materially from those set
forth in the statements. One can identify these forward-looking
statements by their use of words such as expects,
plans, will, estimates,
forecasts, projects and other words of
similar meaning. One can also identify them by the fact that
they do not relate strictly to historical or current facts.
These statements are likely to address the Companys growth
strategy, financial results, product development, product
approvals, product
35
potential, and development programs. One must carefully consider
any such statement and should understand that many factors could
cause actual results to differ materially from the
Companys forward-looking statements. These factors include
inaccurate assumptions and a broad variety of other risks and
uncertainties, including some that are known and some that are
not. No forward-looking statement can be guaranteed and actual
future results may vary materially. The Company does not assume
the obligation to update any forward-looking statement. The
Company cautions you not to place undue reliance on these
forward-looking statements. Although it is not possible to
predict or identify all such factors, they may include the
following:
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Competition from generic products as the Companys products
lose patent protection.
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Increased brand competition in therapeutic areas
important to the Companys long-term business performance.
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The difficulties and uncertainties inherent in new product
development. The outcome of the lengthy and complex process of
new product development is inherently uncertain. A drug
candidate can fail at any stage of the process and one or more
late-stage product candidates could fail to receive regulatory
approval. New product candidates may appear promising in
development but fail to reach the market because of efficacy or
safety concerns, the inability to obtain necessary regulatory
approvals, the difficulty or excessive cost to manufacture
and/or the
infringement of patents or intellectual property rights of
others. Furthermore, the sales of new products may prove to be
disappointing and fail to reach anticipated levels.
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Pricing pressures, both in the United States and abroad,
including rules and practices of managed care groups, judicial
decisions and governmental laws and regulations related to
Medicare, Medicaid and health care reform, pharmaceutical
reimbursement and pricing in general.
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Changes in government laws and regulations and the enforcement
thereof affecting the Companys business.
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Efficacy or safety concerns with respect to marketed products,
whether or not scientifically justified, leading to product
recalls, withdrawals or declining sales.
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Significant litigation related to Vioxx, and Vytorin
and Zetia.
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The arbitration proceeding involving the Companys right to
distribute Remicade and Simponi.
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Legal factors, including product liability claims, antitrust
litigation and governmental investigations, including tax
disputes, environmental concerns and patent disputes with
branded and generic competitors, any of which could preclude
commercialization of products or negatively affect the
profitability of existing products.
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Lost market opportunity resulting from delays and uncertainties
in the approval process of the FDA and foreign regulatory
authorities.
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Increased focus on privacy issues in countries around the world,
including the United States and the EU. The legislative and
regulatory landscape for privacy and data protection continues
to evolve, and there has been an increasing amount of focus on
privacy and data protection issues with the potential to affect
directly the Companys business, including recently enacted
laws in a majority of states in the United States requiring
security breach notification.
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Changes in tax laws including changes related to the taxation of
foreign earnings.
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Changes in accounting pronouncements promulgated by
standard-setting or regulatory bodies, including the Financial
Accounting Standards Board and the SEC, that are adverse to the
Company.
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Economic factors over which the Company has no control,
including changes in inflation, interest rates and foreign
currency exchange rates.
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This list should not be considered an exhaustive statement of
all potential risks and uncertainties. See Risk
Factors above.
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Item 1B.
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Unresolved
Staff Comments.
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None
36
The Companys corporate headquarters is located in
Whitehouse Station, New Jersey. The Companys
U.S. commercial operations are headquartered in Upper
Gwynedd, Pennsylvania. The Companys
U.S. pharmaceutical business is conducted through
divisional headquarters located in Upper Gwynedd and Whitehouse
Station, New Jersey. The Companys vaccines business is
conducted through divisional headquarters located in West Point,
Pennsylvania. Mercks Animal Health global headquarters is
located in Boxmeer, the Netherlands. Principal
U.S. research facilities are located in Rahway, Kenilworth,
Summit and Union, New Jersey, West Point, Palo Alto, California,
and Nebraska (Animal Health). Principal research facilities
outside the U.S. are located in the Netherlands and
Scotland. The Company also has production facilities for human
health products at 14 locations in the United States and Puerto
Rico. Outside the United States, through subsidiaries, the
Company owns or has an interest in manufacturing plants or other
properties in Australia, Canada, Japan, Singapore, South Africa,
and other countries in Western Europe, Central and South
America, and Asia.
Capital expenditures for 2009 were $1.5 billion compared
with $1.3 billion for 2008. In the United States, these
amounted to $981.6 million for 2009 and $946.6 million
for 2008. Abroad, such expenditures amounted to
$479.0 million for 2009 and $351.7 million for 2008.
The Company and its subsidiaries own their principal facilities
and manufacturing plants under titles that they consider to be
satisfactory. The Company considers that its properties are in
good operating condition and that its machinery and equipment
have been well maintained. Plants for the manufacture of
products are suitable for their intended purposes and have
capacities and projected capacities adequate for current and
projected needs for existing Company products. Some capacity of
the plants is being converted, with any needed modification, to
the requirements of newly introduced and future products.
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Item 3.
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Legal
Proceedings.
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The Company is involved in various claims and legal proceedings
of a nature considered normal to its business, including product
liability, intellectual property, and commercial litigation, as
well as additional matters such as antitrust actions.
Vioxx
Litigation
Product
Liability Lawsuits
As previously disclosed, individual and putative class actions
have been filed against Old Merck in state and federal courts
alleging personal injury
and/or
economic loss with respect to the purchase or use of
Vioxx. All such actions filed in federal court are
coordinated in a multidistrict litigation in the
U.S. District Court for the Eastern District of Louisiana
(the MDL) before District Judge Eldon E. Fallon. A
number of such actions filed in state court are coordinated in
separate coordinated proceedings in state courts in New Jersey,
California and Texas, and the counties of Philadelphia,
Pennsylvania and Washoe and Clark Counties, Nevada. As of
December 31, 2009, the Company had been served or was aware
that it had been named as a defendant in approximately 9,100
pending lawsuits, which include approximately 19,400 plaintiff
groups, alleging personal injuries resulting from the use of
Vioxx, and in approximately 44 putative class actions
alleging personal injuries
and/or
economic loss. (All of the actions discussed in this paragraph
and in Other Lawsuits below are collectively
referred to as the Vioxx Product Liability
Lawsuits.) Of these lawsuits, approximately 7,350 lawsuits
representing approximately 15,525 plaintiff groups are or are
slated to be in the federal MDL and approximately 10 lawsuits
representing approximately 10 plaintiff groups are included in a
coordinated proceeding in New Jersey Superior Court before Judge
Carol E. Higbee.
Of the plaintiff groups described above, most are currently in
the Vioxx Settlement Program, described below. As of
December 31, 2009, 80 plaintiff groups who were otherwise
eligible for the Settlement Program have not participated and
their claims remain pending against Old Merck. In addition, the
claims of approximately 275 plaintiff groups who are not
eligible for the Settlement Program remain pending against Old
Merck. A number of these 275 plaintiff groups are subject to
various motions to dismiss for failure to comply with
court-ordered deadlines. Since December 31, 2009, certain
of these plaintiff groups have since been dismissed. In
addition, the
37
claims of over 35,600 plaintiffs had been dismissed as of
December 31, 2009, the vast majority of which were
dismissed as a result of the settlement process discussed below.
On November 9, 2007, Old Merck announced that it had
entered into an agreement (the Settlement Agreement)
with the law firms that comprise the executive committee of the
Plaintiffs Steering Committee (PSC) of the
federal Vioxx MDL, as well as representatives of
plaintiffs counsel in the Texas, New Jersey and California
state coordinated proceedings, to resolve state and federal
myocardial infarction (MI) and ischemic stroke
(IS) claims filed as of that date in the United
States. The Settlement Agreement applies only to U.S. legal
residents and those who allege that their MI or IS occurred in
the United States. The Settlement Agreement provided for Old
Merck to pay a fixed aggregate amount of $4.85 billion into
two funds ($4.0 billion for MI claims and $850 million
for IS claims).
Interim and final payments have been made to certain qualifying
claimants. It is expected that the remainder of the full
$4.85 billion will be distributed in the first half of
2010. The Company has completed making payments into the
settlement funds.
There are two U.S. Vioxx Product Liability Lawsuits
currently scheduled for trial in 2010. Old Merck has previously
disclosed the outcomes of several Vioxx Product Liability
Lawsuits that were tried prior to 2010.
Of the cases that went to trial, the McDarby matter was
resolved in the fourth quarter of 2009, leaving only two
unresolved post-trial appeals: Ernst v. Merck and
Garza v. Merck.
As previously reported, in September 2006, Old Merck filed a
notice of appeal of the August 2005 jury verdict in favor of the
plaintiff in the Texas state court case, Ernst v.
Merck. On May 29, 2008, the Texas Court of Appeals
reversed the trial courts judgment and issued a judgment
in favor of Old Merck. The Court of Appeals found the evidence
to be legally insufficient on the issue of causation. Plaintiff
filed a motion for rehearing en banc in the Court of
Appeals. On June 4, 2009, in response to plaintiffs
motion for rehearing, the Court of Appeals issued a new opinion
reversing the jurys verdict and rendered judgment for Old
Merck. On September 8, 2009, plaintiff filed a second
motion for rehearing en banc, which the Court of Appeals
denied on November 19, 2009. On December 7, 2009,
plaintiff filed another motion for rehearing, which the Court of
Appeals again denied. Plaintiff filed a petition for review with
the Supreme Court of Texas on February 3, 2010.
As previously reported, in April 2006, in Garza v. Merck,
a jury in state court in Rio Grande City, Texas returned a
verdict in favor of the family of decedent Leonel Garza. The
jury awarded a total of $7 million in compensatory damages
to Mr. Garzas widow and three sons. The jury also
purported to award $25 million in punitive damages even
though under Texas law, in this case, potential punitive damages
were capped at $750,000. In May 2008, the San Antonio Court
of Appeals reversed the judgment and rendered a judgment in
favor of Old Merck. In December 2008, the Court of Appeals, on
rehearing, vacated its prior ruling and issued a replacement. In
the new ruling, the court ordered a take-nothing judgment for
Old Merck on the design defect claim, but reversed and remanded
for a new trial as to the strict liability claim because of
juror misconduct. In January 2009, Old Merck filed a petition
for review with the Texas Supreme Court. The Texas Supreme Court
granted Old Mercks petition for review and oral argument
was held on January 20, 2010.
Other
Lawsuits
Approximately 190 claims by individual private third-party
payors were filed in the New Jersey court and in federal court
in the MDL. On September 15, 2009, Old Merck announced it
had finalized a settlement agreement, which it had previously
disclosed, to resolve all pending lawsuits in which
U.S.-based
private third-party payors (TPPs) sought
reimbursement for covering Vioxx purchased by their plan
members. Certain other claimants participated in the resolution
as well. The agreement provided that Old Merck did not admit
wrongdoing or fault. Under the settlement agreement, Old Merck
paid a fixed total of $80 million. This amount includes a
settlement fund that will be divided among the TPPs (insurers,
employee benefit plans and union welfare funds) participating in
the resolution in accordance with a formula that is based on
product volume and a provision for potential payment of
attorneys fees. In return, the settling TPPs will dismiss
their lawsuits and release their claims against Old Merck.
Stipulated dismissals of the settled TTP actions were filed in
New Jersey and the MDL in December 2009. Old Merck recorded a
charge of $80 million in the second quarter of 2009 related
to the settlement and paid the
38
$80 million in the fourth quarter of 2009. Since the
settlement, one additional TPP case has been filed which is
pending in the MDL proceeding.
Separately, there are also still pending in various
U.S. courts putative class actions purportedly brought on
behalf of individual purchasers or users of Vioxx and
seeking reimbursement of alleged economic loss. In the MDL
proceeding, 33 such class actions remain. In 2005, Old Merck
moved to dismiss a master complaint that includes these cases,
but the MDL court has not yet ruled on that motion.
On March 17, 2009, the New Jersey Superior Court denied
plaintiffs motion for class certification in
Martin-Kleinman v. Merck, a putative consumer class
action. Plaintiffs moved for leave to appeal the decision to the
New Jersey Supreme Court on November 6, 2009. On
January 12, 2010, the New Jersey Supreme Court denied
plaintiffs request for appellate review of the denial of
class certification.
On June 12, 2008, a Missouri state court certified a class
of Missouri plaintiffs seeking reimbursement for
out-of-pocket
costs relating to Vioxx. The plaintiffs do not allege any
personal injuries from taking Vioxx. The Missouri Court
of Appeals affirmed the trial courts certification of a
class on May 12, 2009, and the Missouri Supreme Court
denied Old Mercks application for review of that decision
on September 1, 2009. Trial has been set for April 11,
2011. In addition, in Indiana, plaintiffs have filed a motion to
certify a class of Indiana Vioxx purchasers in a case
pending before the Circuit Court of Marion County, Indiana;
discovery in that case is ongoing. Briefing is complete on
plaintiffs motion to certify a class of Kentucky Vioxx
purchasers before the Circuit Court of Pike County,
Kentucky. A hearing on this matter was held on February 26,
2010. A judge in Cook County, Illinois has consolidated three
putative class actions brought by Vioxx purchasers. The
plaintiffs in those actions recently voluntarily dismissed their
lawsuits.
Plaintiffs also filed a class action in California state court
seeking certification of a class of California third-party
payors and end-users. The trial court denied the motion for
class certification on April 30, 2009, and the Court of
Appeal affirmed that ruling on December 15, 2009. On
January 25, 2010, plaintiffs filed a petition for review
with the California Supreme Court.
Old Merck has also been named as a defendant in twenty-one
separate lawsuits brought by government entities, including the
Attorneys General of thirteen states, five counties, the City of
New York, and private citizens (who have brought qui tam
and taxpayer derivative suits). These actions allege that
Old Merck misrepresented the safety of Vioxx and seek:
(i) recovery of the cost of Vioxx purchased or
reimbursed by the government entity and its agencies;
(ii) reimbursement of all sums paid by the government
entity and its agencies for medical services for the treatment
of persons injured by Vioxx; (iii) damages under
various common law theories;
and/or
(iv) remedies under various state statutory theories,
including state consumer fraud
and/or fair
business practices or Medicaid fraud statutes, including civil
penalties. Nine of the thirteen cases are pending in the MDL
proceeding, two are subject to conditional orders transferring
them to the MDL proceeding, and two were remanded to state
court. One of the lawsuits brought by the counties is a class
action filed by Santa Clara County, California on behalf of
all similarly situated California counties.
Old Mercks motion for summary judgment was granted in
November 2009 in a case brought by the Attorney General of Texas
that was scheduled to go to trial in early 2010. The Texas
Attorney General did not appeal. In the Michigan Attorney
General case, Old Merck is currently seeking appellate review of
the trial courts order denying Old Mercks motion to
dismiss. The trial court has entered a stay of proceedings
(including discovery) pending the result of that appeal.
Finally, the Attorney General actions in the MDL described in
the previous paragraph are in the discovery phase. The Louisiana
Attorney General case is currently scheduled for trial in the
MDL court on April 12, 2010.
Shareholder
Lawsuits
As previously disclosed, in addition to the Vioxx Product
Liability Lawsuits, Old Merck and various current and former
officers and directors are defendants in various putative class
actions and individual lawsuits under the federal securities
laws and state securities laws (the Vioxx
Securities Lawsuits). All of the Vioxx Securities
Lawsuits pending in federal court have been transferred by the
Judicial Panel on Multidistrict Litigation (the
JPML) to the U.S. District Court for the
District of New Jersey before District Judge Stanley R. Chesler
for inclusion in a nationwide MDL (the Shareholder
MDL). Judge Chesler has consolidated the Vioxx
Securities
39
Lawsuits for all purposes. The putative class action, which
requested damages on behalf of purchasers of Old Merck stock
between May 21, 1999 and October 29, 2004, alleged
that the defendants made false and misleading statements
regarding Vioxx in violation of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, and sought
unspecified compensatory damages and the costs of suit,
including attorneys fees. The complaint also asserted
claims under Section 20A of the Securities and Exchange Act
against certain defendants relating to their sales of Old Merck
stock and under Sections 11, 12 and 15 of the Securities
Act of 1933 against certain defendants based on statements in a
registration statement and certain prospectuses filed in
connection with the Old Merck Stock Investment Plan, a dividend
reinvestment plan. On April 12, 2007, Judge Chesler granted
defendants motion to dismiss the complaint with prejudice.
Plaintiffs appealed Judge Cheslers decision to the
U.S. Court of Appeals for the Third Circuit. On
September 9, 2008, the Third Circuit issued an opinion
reversing Judge Cheslers order and remanding the case to
the District Court. Old Merck filed a petition for a writ of
certiorari with the United States Supreme Court on
January 15, 2009, which the Supreme Court granted on
May 26, 2009. Oral argument was held on November 30,
2009 and a decision is expected in the first half of 2010. While
the petition for certiorari was pending, plaintiffs filed their
Consolidated and Fifth Amended Class Action Complaint in
the District Court. Old Merck filed a motion to dismiss that
complaint on May 1, 2009, following which the District
Court proceedings were stayed pending the outcome of the Supreme
Court appeal. The motion to dismiss in the District Court has
been withdrawn without prejudice to Old Mercks right to
re-file such a motion pending the outcome of the Supreme Court
appeal.
In October 2005, a Dutch pension fund filed a complaint in the
District of New Jersey alleging violations of federal securities
laws as well as violations of state law against Old Merck and
certain officers. Pursuant to the Case Management Order
governing the Shareholder MDL, the case, which is based on the
same allegations as the Vioxx Securities Lawsuits, was
consolidated with the Vioxx Securities Lawsuits.
Defendants motion to dismiss the pension funds
complaint was filed on August 3, 2007. In September 2007,
the Dutch pension fund filed an amended complaint rather than
responding to defendants motion to dismiss. In addition,
in 2007, six new complaints were filed in the District of New
Jersey on behalf of various foreign institutional investors also
alleging violations of federal securities laws as well as
violations of state law against Old Merck and certain officers.
By stipulation, defendants are not required to respond to these
complaints until the resolution of any motion to dismiss in the
consolidated securities action.
In addition, as previously disclosed, various putative class
actions filed in federal court under the Employee Retirement
Income Security Act (ERISA) against Old Merck and
certain current and former officers and directors (the
Vioxx ERISA Lawsuits and, together with the
Vioxx Securities Lawsuits and the Vioxx Derivative
Lawsuits described below, the Vioxx Shareholder
Lawsuits) have been transferred to the Shareholder MDL and
consolidated for all purposes. The consolidated complaint
asserts claims for breach of fiduciary duty on behalf of certain
of Old Mercks current and former employees who are
participants in certain of Old Mercks retirement plans.
The complaint makes similar allegations with respect to Vioxx
to the allegations contained in the Vioxx Securities
Lawsuits. On July 11, 2006, Judge Chesler granted in part
and denied in part defendants motion to dismiss the ERISA
complaint. On October 19, 2007, plaintiffs moved for
certification of a class of individuals who were participants in
and beneficiaries of Old Mercks retirement savings plans
at any time between October 1, 1998 and September 30,
2004 and whose plan accounts included investments in the Old
Merck Common Stock Fund
and/or Old
Merck common stock. On February 9, 2009, the court denied
the motion for certification of a class as to one count and
granted the motion as to the remaining counts. The court also
excluded from the class definition those individuals who
(i) were not injured in connection with their investments
in Old Merck stock and (ii) executed post-separation
settlement agreements that released their claims under ERISA. On
March 23, 2009, Judge Chesler denied defendants
motion for judgment on the pleadings. On May 11, 2009,
Judge Chesler entered an order denying plaintiffs motion
for partial summary judgment against certain individual
defendants, which had been filed on December 24, 2008.
As previously disclosed, on October 29, 2004, two
individual shareholders made a demand on Old Mercks Board
to take legal action against Mr. Raymond Gilmartin, former
Chairman, President and Chief Executive Officer, and other
individuals for allegedly causing damage to Old Merck with
respect to the allegedly improper marketing of Vioxx. In
December 2004, the Special Committee of the Board of Directors
retained the Honorable John S. Martin, Jr. of
Debevoise & Plimpton LLP to conduct an independent
investigation of, among other things, the allegations set forth
in the demand. Judge Martins report was made public in
September 2006.
40
Based on the Special Committees recommendation made after
careful consideration of the Martin report and the impact that
derivative litigation would have on Old Merck, the Board
rejected the demand. On October 11, 2007, two shareholders
filed a shareholder derivative lawsuit purportedly on Old
Mercks behalf in state court in Atlantic County, New
Jersey against current and former officers and directors of Old
Merck. Plaintiffs alleged that the Boards rejection of
their demand was unreasonable and improper, and that the
defendants breached various duties to Old Merck in allowing
Vioxx to be marketed. The parties reached a proposed
settlement and, on February 8, 2010, the court issued an
order preliminarily approving the settlement, requiring that
notice of the proposed settlement be made to Mercks
shareholders, and setting a hearing to consider final approval
of the settlement on March 22, 2010. On February 9,
2010, Merck notified shareholders of the proposed settlement and
its terms. Under the proposed settlement, Merck has agreed to
make certain corporate governance changes and supplement
policies and procedures previously established by the Company,
and has agreed to pay an award of fees and expenses to
plaintiffs attorneys in an amount to be determined by the
court, not to exceed $12.15 million. In addition, Merck,
the plaintiffs and the individual defendants will exchange full,
mutual releases of all claims that were, or could have been,
asserted in the derivative actions. The proposed settlement does
not constitute an admission of liability or wrongful conduct by
Merck or by any of the defendants named in the actions. If
approved by the court, this proposed settlement will also
resolve the federal consolidated shareholder derivative action
described below.
As previously disclosed, various shareholder derivative actions
filed in federal court were transferred to the Shareholder MDL
and consolidated for all purposes by Judge Chesler (the
Vioxx Derivative Lawsuits). On May 5,
2006, Judge Chesler granted defendants motion to dismiss
on the grounds that plaintiffs had failed to demonstrate that
demand should be excused and denied plaintiffs request for
leave to amend their complaint. Plaintiffs appealed, arguing
that Judge Chesler erred in denying plaintiffs leave to
amend their complaint with documents acquired by stipulation of
the parties. On July 18, 2007, the United States Court of
Appeals for the Third Circuit reversed the District Courts
decision on the grounds that Judge Chesler should have allowed
plaintiffs to seek leave to amend their complaint using the
documents acquired by stipulation, and remanded the case for the
District Courts consideration of whether, even with the
additional materials, plaintiffs proposed amendment would
be futile. Plaintiffs filed their brief in support of their
request for leave to amend their complaint, along with their
proposed amended complaint, on November 9, 2007. The Court
denied the motion on June 17, 2008, and again dismissed the
case. One of the plaintiffs appealed Judge Cheslers
decision to the United States Court of Appeals for the Third
Circuit. Oral argument on the appeal was held on July 15,
2009. On November 10, 2009, before any decision was issued,
the appeal was stayed pending approval of a settlement reached
in the derivative action pending in the New Jersey Superior
Court that would resolve all state and federal shareholder
derivative claims relating to Vioxx.
International
Lawsuits
As previously disclosed, in addition to the lawsuits discussed
above, Old Merck has been named as a defendant in litigation
relating to Vioxx in various countries (collectively, the
Vioxx Foreign Lawsuits) in Europe, as well as
Canada, Brazil, Argentina, Australia, Turkey, Israel, The
Philippines and Singapore.
In November 2006, the Superior Court in Quebec authorized the
institution of a class action on behalf of all individuals who,
in Quebec, consumed Vioxx and suffered damages arising
out of its ingestion. On May 7, 2009, the plaintiffs served
an introductory motion for a class action based upon that
authorization, and the case remains in preliminary stages of
litigation. On May 30, 2008, the provincial court of
Queens Bench in Saskatchewan, Canada entered an order
certifying a class of Vioxx users in Canada, except those
in Quebec. Old Merck appealed the certification order and, on
March 30, 2009, the Court of Appeal granted Old
Mercks appeal and quashed the certification order. On
October 22, 2009, the Supreme Court of Canada dismissed
plaintiffs appeal application and decided not to review
the judgment of the Saskatchewan Court of Appeal. On
July 28, 2008, the Superior Court in Ontario denied Old
Mercks motion to stay class proceedings in Ontario and
decided to certify an overlapping class of Vioxx users in
Canada, except those in Quebec and Saskatchewan, who allege
negligence and an entitlement to elect to waive the tort. On
February 13, 2009, the Ontario Divisional Court dismissed
the appeal from the order denying the stay and, on May 15,
2009, the Ontario Court of Appeal denied leave to appeal. On
October 22, 2009, the Supreme Court of Canada dismissed Old
Mercks application and decided not to review the judgment
of the Ontario Court of Appeal. After the Court of Appeal for
Saskatchewan quashed the multi-jurisdictional certification
order entered in that province, Old Merck applied to the Ontario
Court of Appeal for leave to appeal from the
41
Ontario certification order. Leave to appeal was granted, the
appeal was filed on May 20, 2009 and, in accordance with
the courts decision, Old Merck sought leave to appeal to
the Divisional Court, which was denied on December 7, 2009.
These procedural decisions in the Canadian litigation do not
address the merits of the plaintiffs claims and litigation
in Canada remains in an early stage.
A trial in a representative action in Australia commenced on
March 30, 2009, in the Federal Court of Australia. The
named plaintiff, who alleges he suffered an MI, seeks to
represent others in Australia who ingested Vioxx and
suffered an MI, thrombotic stroke, unstable angina, transient
ischemic attack or peripheral vascular disease. On
March 30, 2009, the trial judge entered an order directing
that, in advance of all other issues in the proceeding, the
issues to be determined during the trial are those issues of
fact and law in the named plaintiffs individual case, and
those issues of fact and law that the trial judge finds, after
hearing the evidence, are common to the claims of the group
members that the named plaintiff has alleged that he represents.
The trial in this representative action concluded on
June 25, 2009, and the trial judge reserved decision.
Insurance
As previously disclosed, the Company has Directors and Officers
insurance coverage applicable to the Vioxx Securities
Lawsuits and Vioxx Derivative Lawsuits with stated upper
limits of approximately $190 million. The Company has
Fiduciary and other insurance for the Vioxx ERISA
Lawsuits with stated upper limits of approximately
$275 million. As a result of the previously disclosed
arbitration, additional insurance coverage for these claims
should also be available, if needed, under upper-level excess
policies that provide coverage for a variety of risks. There are
disputes with the insurers about the availability of some or all
of the Companys insurance coverage for these claims and
there are likely to be additional disputes. The amounts actually
recovered under the policies discussed in this paragraph may be
less than the stated upper limits.
Investigations
As previously disclosed, Old Merck has received subpoenas from
the DOJ requesting information related to Old Mercks
research, marketing and selling activities with respect to
Vioxx in a federal health care investigation under
criminal statutes. This investigation includes subpoenas for
witnesses to appear before a grand jury. As previously
disclosed, in March 2009, Old Merck received a letter from the
U.S. Attorneys Office for the District of
Massachusetts identifying it as a target of the grand jury
investigation regarding Vioxx. Further, as previously
disclosed, investigations are being conducted by local
authorities in certain cities in Europe in order to determine
whether any criminal charges should be brought concerning
Vioxx. The Company is cooperating with these governmental
entities in their respective investigations (the
Vioxx Investigations). The Company cannot
predict the outcome of these inquiries; however, they could
result in potential civil
and/or
criminal remedies.
In addition, Old Merck received a subpoena in September 2006
from the State of California Attorney General seeking documents
and information related to the placement of Vioxx on
Californias Medi-Cal formulary. The Company is cooperating
with the Attorney General in responding to the subpoena.
Reserves
As discussed above, on November 9, 2007, Old Merck entered
into the Settlement Agreement with the law firms that comprise
the executive committee of the PSC of the federal Vioxx
MDL as well as representatives of plaintiffs counsel
in the Texas, New Jersey and California state coordinated
proceedings to resolve state and federal MI and IS claims filed
as of that date in the United States. In 2007, as a result of
entering into the Settlement Agreement, Old Merck recorded a
pretax charge of $4.85 billion which represents the fixed
aggregate amount to be paid to plaintiffs qualifying for payment
under the Settlement Program.
There are two U.S. Vioxx Product Liability Lawsuit
trials scheduled for trial in 2010. The Company cannot predict
the timing of any other trials related to the Vioxx
Litigation. The Company believes that it has meritorious
defenses to the Vioxx Product Liability Lawsuits,
Vioxx Shareholder Lawsuits and Vioxx Foreign
Lawsuits (collectively the Vioxx Lawsuits)
and will vigorously defend against them. In view of the inherent
difficulty of predicting the outcome of litigation, particularly
where there are many claimants and the claimants seek
indeterminate damages, the Company is unable to predict the
outcome of these matters, and at this time cannot reasonably
estimate the possible loss or range of loss with respect to the
Vioxx Lawsuits not included in the
42
Settlement Program. The Company has not established any reserves
for any potential liability relating to the Vioxx
Lawsuits not included in the Settlement Program, other than
a reserve established in connection with the resolution of the
shareholder derivative lawsuits discussed above, or the Vioxx
Investigations. Unfavorable outcomes in the Vioxx
Litigation could have a material adverse effect on the
Companys financial position, liquidity and results of
operations.
Legal defense costs expected to be incurred in connection with a
loss contingency are accrued when probable and reasonably
estimable. As of December 31, 2008, Old Merck had an
aggregate reserve of approximately $4.379 billion (the
Vioxx Reserve) for the Settlement Program and
future legal defense costs related to the Vioxx
Litigation.
During 2009, Merck spent approximately $244 million in the
aggregate in legal defense costs worldwide, including
approximately $54 million in the fourth quarter of 2009,
related to (i) the Vioxx Product Liability Lawsuits,
(ii) the Vioxx Shareholder Lawsuits, (iii) the
Vioxx Foreign Lawsuits, and (iv) the Vioxx
Investigations (collectively, the Vioxx
Litigation). In addition, during 2009, Old Merck paid
an additional $4.1 billion into the settlement funds in
connection with the Settlement Program. Also, during 2009, Merck
recorded $75 million of charges, including $35 million
in the fourth quarter, solely for its future legal defense costs
for the Vioxx Litigation. Consequently, as of
December 31, 2009, the aggregate amount of the Vioxx
Reserve was approximately $110 million, which is solely
for future legal defense costs for the Vioxx Litigation.
Some of the significant factors considered in the review of the
Vioxx Reserve were as follows: the actual costs incurred
by the Company; the development of the Companys legal
defense strategy and structure in light of the scope of the
Vioxx Litigation, including the Settlement Agreement and
the expectation that certain lawsuits will continue to be
pending; the number of cases being brought against the Company;
the costs and outcomes of completed trials and the most current
information regarding anticipated timing, progression, and
related costs of pre-trial activities and trials in the
Vioxx Litigation. The amount of the Vioxx Reserve
as of December 31, 2009 represents the Companys best
estimate of the minimum amount of defense costs to be incurred
in connection with the remaining aspects of the Vioxx
Litigation; however, events such as additional trials in the
Vioxx Litigation and other events that could arise in the
course of the Vioxx Litigation could affect the ultimate
amount of defense costs to be incurred by the Company.
The Company will continue to monitor its legal defense costs and
review the adequacy of the associated reserves and may determine
to increase the Vioxx Reserve at any time in the future
if, based upon the factors set forth, it believes it would be
appropriate to do so.
Other
Product Liability Litigation
Fosamax
As previously disclosed, Old Merck is a defendant in product
liability lawsuits in the United States involving Fosamax
(the Fosamax Litigation). As of
December 31, 2009, approximately 978 cases, which include
approximately 1,356 plaintiff groups, had been filed and were
pending against Old Merck in either federal or state court,
including one case which seeks class action certification, as
well as damages
and/or
medical monitoring. In these actions, plaintiffs allege, among
other things, that they have suffered osteonecrosis of the jaw,
generally subsequent to invasive dental procedures, such as
tooth extraction or dental implants
and/or
delayed healing, in association with the use of Fosamax.
In addition, plaintiffs in approximately five percent of these
actions allege that they sustained stress
and/or low
energy femoral fractures in association with the use of
Fosamax. On August 16, 2006, the JPML ordered that
the Fosamax product liability cases pending in federal
courts nationwide should be transferred and consolidated into
one multidistrict litigation (the Fosamax
MDL) for coordinated pre-trial proceedings. The
Fosamax MDL has been transferred to Judge John Keenan in
the U.S. District Court for the Southern District of New
York. As a result of the JPML order, approximately 771 of the
cases are before Judge Keenan. Judge Keenan issued a Case
Management Order (and various amendments thereto) setting forth
a schedule governing the proceedings which focused primarily
upon resolving the class action certification motions in 2007
and completing fact discovery in an initial group of 25 cases by
October 1, 2008. Briefing and argument on plaintiffs
motions for certification of medical monitoring classes were
completed in 2007 and Judge Keenan issued an order denying the
motions on January 3, 2008. On January 28, 2008, Judge
Keenan issued a further order dismissing with prejudice all
class claims asserted in the first four class action lawsuits
filed against Old Merck that sought personal injury damages
and/or
medical monitoring relief on a class wide basis. Daubert
motions were filed
43
in May 2009 and Judge Keenan conducted a Daubert hearing
in July 2009. On July 27, 2009, Judge Keenan issued his
ruling on the parties respective Daubert motions.
The ruling denied the Plaintiff Steering Committees motion
and granted in part and denied in part Old Mercks
motion. The first MDL trial Boles v. Merck
began on August 11, 2009, and ended on
September 2, 2009. On September 11, 2009, the MDL
court declared a mistrial in Boles because the eight
person jury could not reach a unanimous verdict and,
consequently, the Boles case is set to be retried on
June 2, 2010. The second MDL case set for trial
Flemings v. Merck was scheduled to start
on January 12, 2010, but Judge Keenan granted Old
Mercks motion for summary judgment and dismissed the case
on November 23, 2009. The next MDL case set for
trial Maley v. Merck is
currently scheduled to start on April 19, 2010. Old Merck
filed a motion for summary judgment in Maley, which the
MDL court granted in part and denied in part on January 27,
2010 and, as a result, the Company expects that the trial will
commence as currently scheduled on April 19. On
February 1, 2010, Judge Keenan selected a new bellwether
case Judith Graves v. Merck
to replace the Flemings bellwether case,
which the MDL court dismissed when it granted summary judgment
in favor of Old Merck. The MDL court has set the Graves
trial to begin on September 13, 2010. A trial in
Alabama is currently scheduled to begin on May 3, 2010 and
a trial in Florida is currently scheduled to begin on
June 21, 2010.
In addition, in July 2008, an application was made by the
Atlantic County Superior Court of New Jersey requesting that all
of the Fosamax cases pending in New Jersey be considered
for mass tort designation and centralized management before one
judge in New Jersey. On October 6, 2008, the New Jersey
Supreme Court ordered that all pending and future actions filed
in New Jersey arising out of the use of Fosamax and
seeking damages for existing dental and jaw-related injuries,
including osteonecrosis of the jaw, but not solely seeking
medical monitoring, be designated as a mass tort for centralized
management purposes before Judge Higbee in Atlantic County
Superior Court. As of December 31, 2009, approximately 189
cases were pending against Old Merck in the New Jersey
coordinated proceeding. On July 20, 2009, Judge Higbee
entered a Case Management Order (and various amendments thereto)
setting forth a schedule that contemplates completing fact
discovery in an initial group of 10 cases by February 28,
2010, followed by expert discovery in five of those cases, and a
projected trial date of July 12, 2010 for the first case to
be tried in the New Jersey coordinated proceeding.
Discovery is ongoing in the Fosamax MDL litigation, the
New Jersey coordinated proceeding, and the remaining
jurisdictions where Fosamax cases are pending. The
Company intends to defend against these lawsuits.
As of December 31, 2008, the Company had a remaining
reserve of approximately $33 million solely for its future
legal defense costs for the Fosamax Litigation. During
2009, the Company spent approximately $35 million and added
$40 million to its reserve. Consequently, as of
December 31, 2009, the Company had a reserve of
approximately $38 million solely for its future legal
defense costs for the Fosamax Litigation. Some of the
significant factors considered in the establishment of the
reserve for the Fosamax Litigation legal defense costs
were as follows: the actual defense costs incurred thus far; the
development of the Companys legal defense strategy and
structure in light of the creation of the Fosamax MDL;
the number of cases being brought against the Company; and the
anticipated timing, progression, and related costs of pre-trial
activities in the Fosamax Litigation. The Company will
continue to monitor its legal defense costs and review the
adequacy of the associated reserves. Due to the uncertain nature
of litigation, the Company is unable to reasonably estimate its
costs beyond the third quarter of 2010. The Company has not
established any reserves for any potential liability relating to
the Fosamax Litigation. Unfavorable outcomes in the
Fosamax Litigation could have a material adverse effect
on the Companys financial position, liquidity and results
of operations.
NuvaRing
Beginning in May 2007, a number of complaints were filed in
various jurisdictions asserting claims against the
Companys subsidiaries Organon USA, Inc., Organon
Pharmaceuticals USA, Inc., Organon International (collectively,
Organon), and Schering-Plough arising from
Organons marketing and sale of NuvaRing, a combined
hormonal contraceptive vaginal ring. The plaintiffs contend that
Organon and Schering-Plough failed to adequately warn of the
alleged increased risk of venous thromboembolism
(VTE) posed by NuvaRing,
and/or
downplayed the risk of VTE. The plaintiffs seek damages for
injuries allegedly sustained from their product use, including
some alleged deaths, heart attacks and strokes. The majority of
the cases are currently pending in a federal Multidistrict
litigation venued in Missouri and in New Jersey state court.
Other cases are pending in other states.
44
Vetsulin
On December 28, 2009, Schering-Plough Animal Health was
named as a defendant in a putative class action lawsuit filed in
the U.S. District Court for the Northern District of Ohio.
In that lawsuit, entitled Friedman v. Schering-Plough
Animal Health, the individual plaintiff seeks to represent a
class of people who purchased Vetsulin for their
household pets and the suit alleges the Vetsulin was
contaminated or improperly manufactured. Vetsulin is an
insulin product administered to diabetic dogs and cats.
Plaintiff seeks compensatory and punitive damages based on
theories of negligence, violation of consumer sales practices
acts, breach of warranty, and product liability due to allegedly
defective manufacturing. Merck intends to defend this lawsuit
vigorously.
Commercial
Litigation
AWP
Litigation and Investigations
As previously disclosed, Old Merck was joined in ongoing
litigation alleging manipulation by pharmaceutical manufacturers
of Average Wholesale Prices (AWP), which are
sometimes used in calculations that determine public and private
sector reimbursement levels. The complaints allege violations of
federal and state law, including fraud, Medicaid fraud and
consumer protection violations, among other claims. The outcome
of these litigations and investigations could include
substantial damages, the imposition of substantial fines,
penalties and injunctive or administrative remedies. In 2002,
the JPML ordered the transfer and consolidation of all pending
federal AWP cases to federal court in Boston, Massachusetts.
Plaintiffs filed one consolidated class action complaint, which
aggregated the claims previously filed in various federal
district court actions and also expanded the number of
manufacturers to include some which, like Old Merck, had not
been defendants in any prior pending case. In May 2003, the
court granted Old Mercks motion to dismiss the
consolidated class action and dismissed Old Merck from the class
action case. Old Merck and many other pharmaceutical
manufacturers are defendants in similar complaints pending in
federal and state court including cases brought individually by
a number of counties in the State of New York. Fifty of the
county cases have been consolidated in New York state court. Old
Merck was dismissed from the Suffolk County case, which was the
first of the New York county cases to be filed. In addition to
the New York county cases, as of December 31, 2008, Old
Merck was a defendant in state cases brought by the Attorneys
General of eleven states, all of which are being defended. In
February 2009, the Kansas Attorney General filed suit against
Old Merck and several other manufacturers. AWP claims brought by
the Attorney General of Arizona against Old Merck were dropped
in 2009. The court in the AWP cases pending in Hawaii listed Old
Merck and others to be set for trial in mid-2010.
In 2009, Schering-Plough reached settlements of claims relating
to AWP. In August 2009, Schering-Plough and five other
pharmaceutical companies settled all claims brought on behalf of
the Alabama Medicaid program for a combined total of
$89 million. In addition, in July 2009, Schering-Plough
reached a settlement with the Relator, acting on behalf of the
United States in a non-intervened AWP qui tam action
pending in the U.S. Federal District Court of Massachusetts
and with the States of California and Florida for a combined
total of $69 million. That settlement resolved all claims
brought on behalf of the Medicaid programs for the States of
California and Florida and has been approved by the
U.S. District Court for the District of Massachusetts and
held to be preclusive of all claims for the federal share of any
alleged Medicaid overpayment in all remaining states consistent
with applicable precedent. In January 2010, the
U.S. District Court for the District of Massachusetts held
that a unit of Schering-Plough and eight other drugmakers
overcharged New York City and 42 New York counties for certain
generic drugs. The court has reserved the issue of damages and
any penalties for future proceedings.
The Company continues to respond to litigation brought by
certain states and private payors and to investigations
initiated by the Department of Health and Human Services, the
Department of Justice and several states regarding AWP. The
Company is cooperating with these investigations.
Centocor
Distribution Agreement
On May 27, 2009, Centocor, now a wholly owned subsidiary of
Johnson & Johnson, delivered to Schering-Plough a
notice initiating an arbitration proceeding to resolve whether,
as a result of the Merger, Centocor is permitted to terminate
the Companys rights to distribute and commercialize
Remicade and Simponi. Sales of Remicade and
Simponi included in the Companys results for the
post-Merger period were $430.7 million and
$3.9 million, respectively. Sales of Remicade
recognized by Schering-Plough in 2009 prior to the Merger
were
45
$1.9 billion. The arbitration process involves a number of
steps, including the selection of independent arbitrators,
information exchanges and hearings, before a final decision will
be reached. A hearing in the arbitration is scheduled to
commence in late September 2010. An unfavorable outcome in the
arbitration would have a material adverse effect on the
Companys financial position, liquidity and results of
operations. For more information about this matter, see
Item 1A. Risk Factors above.
Governmental
Proceedings
As previously disclosed, in February 2008, Old Merck entered
into a Corporate Integrity Agreement (CIA) with the
U.S. Department of Health and Human Services Office of
Inspector General (HHS-OIG) for a five-year term.
The CIA requires, among other things, that Old Merck maintain
its ethics training program and policies and procedures
governing promotional practices and Medicaid price reporting.
Further, as required by the CIA, Old Merck has retained an
Independent Review Organization (IRO) to conduct a
systems review of its promotional policies and procedures and to
conduct, on a sample basis, transactional reviews of Old
Mercks promotional programs and certain Medicaid pricing
calculations. Old Merck is also required to provide regular
reports and certifications to the HHS-OIG regarding its
compliance with the CIA.
Similarly, as previously disclosed by Schering-Plough, in 2004
Schering-Plough entered into a CIA with HHS-OIG for a five-year
term, and in August 2006, it entered into an addendum to the CIA
also effective for five years. The requirements of Old Merck and
Schering-Plough CIAs are similar, although not identical.
Failure to comply with the CIAs requirements can result in
financial penalties or exclusion from participation in federal
health care programs. The Company believes that its promotional
practices and Medicaid price reports meet the requirements of
each of the CIAs.
Vytorin/Zetia
Litigation
As previously disclosed, the legacy companies have received
several letters from the House Committee on Energy and Commerce,
its Subcommittee on Oversight and Investigations
(O&I), and the Ranking Minority Member of the
Senate Finance Committee, collectively seeking a combination of
witness interviews, documents and information on a variety of
issues related to the ENHANCE clinical trial, the sale and
promotion of Vytorin, as well as sales of stock by
corporate officers. In addition, as previously disclosed, since
August 2008, Old Merck and Schering-Plough received three
additional letters each from O&I, including identical
letters dated February 19, 2009, seeking certain
information and documents related to the SEAS clinical trial. As
previously disclosed, the legacy companies received subpoenas
from the New York State Attorney Generals Office and a
letter from the Connecticut Attorney General seeking similar
information and documents, and on July 15, 2009, the legacy
companies announced that they reached a civil settlement with
the Attorneys General representing 35 states and the
District of Columbia to resolve a previously disclosed
investigation by that group into whether the legacy companies
violated state consumer protection laws when marketing
Vytorin and Zetia. As part of the settlement, the
legacy companies agreed to reimburse the investigative costs of
the 35 states and the District of Columbia which totaled
$5.4 million, and to make voluntary assurances of
compliance related to the promotion of Vytorin and
Zetia, including agreeing to continue to comply with the
Food, Drug and Cosmetic Act, the U.S. Food and Drug
Administration Amendments Act, and other laws requiring the
truthful and non-misleading marketing of pharmaceutical
products. The settlement did not include any admission of
misconduct or liability by the legacy companies. Furthermore, as
previously disclosed, in September 2008, the legacy companies
received letters from the Civil Division of the DOJ informing
them that the DOJ is investigating whether their conduct
relating to the promotion of Vytorin caused false claims
to be submitted to federal health care programs. The Company is
cooperating with these investigations and responding to the
inquiries.
As previously disclosed, the legacy companies have become aware
of or been served with approximately 145 civil class action
lawsuits alleging common law and state consumer fraud claims in
connection with the MSP Partnerships sale and promotion of
Vytorin and Zetia. Certain of those lawsuits
alleged personal injuries
and/or
sought medical monitoring. The lawsuits against Old Merck and
Schering-Plough were consolidated in a single multi-district
litigation docket before Judge Cavanaugh of the District of New
Jersey, In re Vytorin/Zetia Marketing Sales Practices and
Products Liability Litigation. On August 5, 2009, Old
Merck and Schering-Plough jointly announced that their
cholesterol joint venture, entered into agreements to resolve,
for a total fixed amount of $41.5 million, these civil
class
46
action lawsuits. The MSP Partnership recorded these charges in
the second quarter of 2009. On February 9, 2010, Judge
Cavanaugh granted final approval of the settlements.
Also, as previously disclosed, on April 3, 2008, an Old
Merck shareholder filed a putative class action lawsuit in
federal court in the Eastern District of Pennsylvania alleging
that Old Merck and its Chairman, President and Chief Executive
Officer, Richard T. Clark, violated the federal securities laws.
This suit has since been withdrawn and re-filed in the District
of New Jersey and has been consolidated with another federal
securities lawsuit under the caption In re Merck &
Co., Inc. Vytorin Securities Litigation. An amended
consolidated complaint was filed on October 6, 2008, and
names as defendants Old Merck; Merck/Schering-Plough
Pharmaceuticals, LLC; and certain of the Companys current
and former officers and directors. Specifically, the complaint
alleges that Old Merck delayed releasing unfavorable results of
the ENHANCE clinical trial regarding the efficacy of Vytorin
and that Old Merck made false and misleading statements
about expected earnings, knowing that once the results of the
Vytorin study were released, sales of Vytorin
would decline and Old Mercks earnings would suffer. On
December 12, 2008, Old Merck and the other defendants moved
to dismiss this lawsuit on the grounds that the plaintiffs
failed to state a claim for which relief can be granted. On
September 2, 2009, the court issued an opinion and order
denying the defendants motion to dismiss this lawsuit, and
on October 19, 2009, Old Merck and the other defendants
filed an answer to the amended consolidated complaint. There is
a similar consolidated, putative class action securities lawsuit
pending in the District of New Jersey, filed by a
Schering-Plough shareholder against Schering-Plough and its
former Chairman, President and Chief Executive Officer, Fred
Hassan, under the caption In re Schering-Plough
Corporation/ENHANCE Securities Litigation. The amended
consolidated complaint was filed on September 15, 2008 and
names as defendants Schering-Plough, Merck/Schering-Plough
Pharmaceuticals, LLC; certain of the Companys current and
former officers and directors; and underwriters who participated
in an August 2007 public offering of Schering-Ploughs
common and preferred stock. On December 10, 2008,
Schering-Plough and the other defendants filed motions to
dismiss this lawsuit on the grounds that the plaintiffs failed
to state a claim for which relief can be granted. On
September 2, 2009, the court issued an opinion and order
denying the defendants motion to dismiss this lawsuit, and
on September 17, 2009, the defendants filed a motion for
reconsideration of the courts September 2, 2009
opinion and order denying the motion to dismiss. The motion for
reconsideration was fully briefed on October 13, 2009 and a
decision remains pending. The defendants filed an answer to the
consolidated amended complaint on November 18, 2009.
As previously disclosed, on April 22, 2008, a member of an
Old Merck ERISA plan filed a putative class action lawsuit
against Old Merck and certain of the Companys current and
former officers and directors alleging they breached their
fiduciary duties under ERISA. Since that time, there have been
other similar ERISA lawsuits filed against Old Merck in the
District of New Jersey, and all of those lawsuits have been
consolidated under the caption In re Merck & Co.,
Inc. Vytorin ERISA Litigation. A consolidated amended
complaint was filed on February 5, 2009, and names as
defendants Old Merck and various current and former members of
the Companys Board of Directors. The plaintiffs allege
that the ERISA plans investment in Old Merck stock was
imprudent because Old Mercks earnings are dependent on the
commercial success of its cholesterol drug Vytorin and
that defendants knew or should have known that the results of a
scientific study would cause the medical community to turn to
less expensive drugs for cholesterol management. On
April 23, 2009, Old Merck and the other defendants moved to
dismiss this lawsuit on the grounds that the plaintiffs failed
to state a claim for which relief can be granted. On
September 1, 2009, the court issued an opinion and order
denying the defendants motion to dismiss this lawsuit. On
November 9, the plaintiffs moved to strike certain of the
defendants affirmative defenses. That motion was fully
briefed on December 4, 2009 and is pending before the court.
There is a similar consolidated, putative class action ERISA
lawsuit currently pending in the District of New Jersey, filed
by a member of a Schering-Plough ERISA plan against
Schering-Plough and certain of its current and former officers
and directors, alleging they breached their fiduciary duties
under ERISA, and under the caption In re Schering-Plough
Corp. ENHANCE ERISA Litigation. The consolidated amended
complaint was filed on October 1, 2009 and names as
defendants Schering-Plough, various current and former members
of Schering-Ploughs Board of Directors and current and
former members of committees of Schering-Ploughs Board of
Directors. On November 6, 2009, the Company and the other
defendants filed a motion to dismiss this lawsuit on the grounds
that the plaintiffs failed to state a claim for which relief can
be granted. The plaintiffs opposition to the
47
motion to dismiss was filed on December 16, 2009, and the
motion was fully briefed on January 15, 2010. A decision
remains pending.
On November 5, 2009, a stockholder of the Company filed a
shareholder derivative lawsuit, In re Local No, 38
International Brotherhood of Electrical Workers Pension Fund
v. Clark (Local No. 38), in
the District of New Jersey, on behalf of the nominal defendant,
the Company, and all shareholders of the Company, against the
Company; certain of the Companys officers, directors and
alleged insiders; and certain of the predecessor companies
former officers, directors and alleged insiders for alleged
breaches of fiduciary duties, waste, unjust enrichment and gross
mismanagement. A similar shareholder derivative lawsuit, Cain
v. Hassan, was filed by a Schering-Plough stockholder
and is currently pending in the District of New Jersey. An
amended complaint was filed on May 13, 2008, by the
Schering-Plough stockholder on behalf of the nominal defendant,
Schering-Plough, and all Schering-Plough shareholders. The
lawsuit is against Schering-Plough, Schering-Ploughs
then-current Board of Directors, and certain of
Schering-Ploughs current and former officer, directors and
alleged insiders. The plaintiffs in both Local No. 38
and Cain v. Hassan allege that the defendants
withheld the ENHANCE study results and made false and misleading
statements, thereby deceiving and causing harm to the Company
and Schering-Plough, respectively, and to the investing public,
unjustly enriching insiders and wasting corporate assets. The
defendants in Local No. 38 intend to move to dismiss
the plaintiffs complaint. The defendants in Cain v.
Hassan moved to dismiss the amended complaint on
July 14, 2008, and that motion was fully briefed on
October 15, 2008. A decision remains pending.
The Company intends to defend the lawsuits referred to in this
section. Unfavorable outcomes resulting from the government
investigations or the civil litigations could have a material
adverse effect on the Companys financial position,
liquidity and results of operations.
In November 2008, the individual shareholder who had previously
delivered a letter to Old Mercks Board of Directors
demanding that the Board take legal action against the
responsible individuals to recover the amounts paid by Old Merck
in 2007 to resolve certain governmental investigations delivered
another letter to the Board demanding that the Board or a
subcommittee thereof commence an investigation into the matters
raised by various civil suits and governmental investigations
relating to Vytorin.
Securities
and Class Action Litigation
Federal
Securities Litigation
Following Schering-Ploughs announcement on
February 15, 2001 that the FDA had been conducting
inspections of its manufacturing facilities in New Jersey and
Puerto Rico and had issued reports citing deficiencies
concerning compliance with current Good Manufacturing Practices,
and had delayed approval of Clarinex, several lawsuits
were filed against Schering-Plough and certain named officers.
These lawsuits allege that the defendants violated the federal
securities law by allegedly failing to disclose material
information and making material misstatements. Specifically,
they allege that Schering-Plough failed to disclose an alleged
serious risk that a new drug application for Clarinex
would be delayed as a result of these manufacturing issues,
and they allege that the Company failed to disclose the alleged
depth and severity of its manufacturing issues. These complaints
were consolidated into one action in the U.S. District
Court for the District of New Jersey, and a consolidated amended
complaint was filed on October 11, 2001, purporting to
represent a class of shareholders who purchased shares of
Schering-Plough stock from May 9, 2000 through
February 15, 2001. The complaint sought compensatory
damages on behalf of the class. On February 18, 2009, the
court signed an order preliminarily approving a settlement
agreement under which Schering-Plough would provide for a
settlement fund in the amount of $165 million to resolve
all claims by the class, which funds were placed in escrow at
that time. The vast majority of the settlement was covered by
insurance. On December 31, 2009, the District Court granted
final approval of the settlement. The settlement is due to be
consummated after the expiration of the appeal period from that
final approval decision.
ERISA
Litigation
On March 31, 2003, Schering-Plough was served with a
putative class action complaint filed in the U.S. District
Court in New Jersey alleging that Schering-Plough, its Employee
Savings Plan (the Plan) administrator, several
current and former directors, and certain former corporate
officers breached their fiduciary obligations to certain
participants in the Plan. The complaint seeks damages in the
amount of losses allegedly
48
suffered by the Plan. The complaint was dismissed on
June 29, 2004. The plaintiffs appealed. On August 19,
2005 the U.S. Court of Appeals for the Third Circuit
reversed the dismissal by the District Court and the matter has
been remanded back to the District Court for further
proceedings. On September 30, 2008, the District Court
entered an order granting in part, and denying in part, the
named putative class representatives motion for class
certification. Schering-Plough thereafter petitioned the
U.S. District Court of Appeals for the Third Circuit for
leave to appeal the class certification decision.
Schering-Ploughs petition was granted on December 10,
2008. On December 21, 2009, the Third Circuit vacated the
District Courts order and remanded the case for further
proceedings consistent with the courts ruling.
K-DUR
Antitrust Litigation
In June 1997 and January 1998, Schering-Plough settled patent
litigation with Upsher-Smith, Inc. (Upsher-Smith)
and ESI Lederle, Inc. (Lederle), respectively,
relating to generic versions of K-DUR, Schering-Ploughs
long-acting potassium chloride product supplement used by
cardiac patients, for which Lederle and Upsher-Smith had filed
Abbreviated New Drug Applications. Following the commencement of
an administrative proceeding by the United States Federal Trade
Commission (the FTC) alleging anti-competitive
effects from those settlements (which has been resolved in
Schering-Ploughs favor), alleged class action suits were
filed in federal and state courts on behalf of direct and
indirect purchasers of K-DUR against Schering-Plough,
Upsher-Smith and Lederle. These suits claim violations of
federal and state antitrust laws, as well as other state
statutory and common law causes of action. These suits seek
unspecified damages. In February 2009, a special master
recommended that the U.S. District Court for the District
of New Jersey dismiss the class action lawsuits on summary
judgment. The U.S. District Court judge has not yet ruled
on the recommendation.
Third-party
Payor Actions
As discussed above, in July 2004, in connection with the
settlement of an investigation with the DOJ and the
U.S. Attorneys Office for the Eastern District of
Pennsylvania, Schering-Plough entered into a five-year CIA. The
CIA was amended in August 2006 in connection with the
$435 million settlement of an investigation by the State of
Massachusetts involving certain of Schering-Ploughs sales,
marketing and clinical trial practices and programs
(Massachusetts Investigation). Several purported
class action litigations have been filed following the
announcement of the settlement of the Massachusetts
Investigation. Plaintiffs in these actions seek damages on
behalf of third-party payors resulting from the allegations of
off-label promotion and improper payments to physicians that
were at issue in the Massachusetts Investigation. The actions
have been consolidated in a multidistrict litigation in federal
District Court for the District of New Jersey. In July 2009, the
District Court dismissed the consolidated class action complaint
but granted plaintiffs leave to refile. In September 2009,
plaintiffs filed amended complaints, and the Companys
motion to dismiss those complaints is pending.
Vaccine
Litigation
As previously disclosed, Old Merck is a party to individual and
class action product liability lawsuits and claims in the United
States involving pediatric vaccines (e.g., hepatitis B vaccine)
that contained thimerosal, a preservative used in vaccines. As
of December 31, 2009, there were approximately 200
thimerosal related lawsuits pending in which Old Merck is a
defendant, although the vast majority of those lawsuits are not
currently active. Other defendants include other vaccine
manufacturers who produced pediatric vaccines containing
thimerosal as well as manufacturers of thimerosal. In these
actions, the plaintiffs allege, among other things, that they
have suffered neurological injuries as a result of exposure to
thimerosal from pediatric vaccines. There are no cases currently
scheduled for trial. The Company will defend against these
lawsuits; however, it is possible that unfavorable outcomes
could have a material adverse effect on the Companys
financial position, liquidity and results of operations.
Old Merck has been successful in having cases of this type
either dismissed or stayed on the ground that the action is
prohibited under the National Childhood Vaccine Injury Act (the
Vaccine Act). The Vaccine Act prohibits any person
from filing or maintaining a civil action (in state or federal
court) seeking damages against a vaccine manufacturer for
vaccine-related injuries unless a petition is first filed in the
United States Court of Federal Claims (hereinafter the
Vaccine Court). Under the Vaccine Act, before filing
a civil action against a vaccine manufacturer, the petitioner
must either (a) pursue his or her petition to conclusion in
Vaccine Court and then timely
49
file an election to proceed with a civil action in lieu of
accepting the Vaccine Courts adjudication of the petition
or (b) timely exercise a right to withdraw the petition
prior to Vaccine Court adjudication in accordance with certain
statutorily prescribed time periods. Old Merck is not a party to
Vaccine Court proceedings because the petitions are brought
against the United States Department of Health and Human
Services.
The Company is aware that there are approximately 5,000 cases
pending in the Vaccine Court involving allegations that
thimerosal-containing vaccines
and/or the
M-M-R II vaccine cause autism spectrum disorders. Not all
of the thimerosal-containing vaccines involved in the Vaccine
Court proceeding are Company vaccines. The Company is the sole
source of the M-M-R II vaccine domestically. The Special
Masters presiding over the Vaccine Court proceedings held
hearings in three test cases involving the theory that the
combination of M-M-R II vaccine and thimerosal in
vaccines causes autism spectrum disorders. On February 12,
2009, the Special Masters issued decisions in each of those
cases, finding that the theory was unsupported by valid
scientific evidence and that the petitioners in the three cases
were therefore not entitled to compensation. Two of those three
cases are currently on appeal. The Special Masters have held
similar hearings in three different test cases involving the
theory that thimerosal in vaccines alone causes autism spectrum
disorders. Decisions have not been issued in this second set of
test cases. The Special Masters had previously indicated that
they would hold similar hearings involving the theory that
M-M-R II alone causes autism spectrum disorders, but they
have stated that they no longer intend to do so. The Vaccine
Court has indicated that it intends to use the evidence
presented at these test case hearings to guide the adjudication
of the remaining autism spectrum disorder cases.
Patent
Litigation
From time to time, generic manufacturers of pharmaceutical
products file ANDAs with the FDA seeking to market generic
forms of the Companys products prior to the expiration of
relevant patents owned by the Company. Generic pharmaceutical
manufacturers have submitted ANDAs to the FDA seeking to
market in the United States generic forms of Fosamax, Nexium,
Singulair, Emend and Cancidas,
respectively, prior to the expiration of Old
Mercks (and AstraZenecas in the case of
Nexium) patents concerning these products. In addition,
an ANDA has been submitted to the FDA seeking to market in the
United States a generic form of Zetia and an ANDA has
been submitted to the FDA seeking to market in the United States
a generic form of Vytorin, both prior to the expiration
of Schering-Ploughs patent concerning that product. The
generic companies ANDAs generally include
allegations of non-infringement, invalidity and unenforceability
of the patents. The Company has filed patent infringement suits
in federal court against companies filing ANDAs for
generic alendronate (Fosamax) and montelukast
(Singulair) and AstraZeneca and the Company have filed
patent infringement suits in federal court against companies
filing ANDAs for generic esomeprazole (Nexium).
Also, the Company and Schering-Plough have filed patent
infringement suits in federal court against companies filing
ANDAs for generic versions of ezetimibe (Zetia) and
ezetimibe/simvastatin (Vytorin). Also, Schering Corp.
(Schering), a subsidiary of the Company, has filed
patent infringement suits in federal court against generic
companies filing ANDAs for generic versions of
Temodar, Integrilin, Levitra and
Nasonex. Similar patent challenges exist in certain
foreign jurisdictions. The Company intends to vigorously defend
its patents, which it believes are valid, against infringement
by generic companies attempting to market products prior to the
expiration dates of such patents. As with any litigation, there
can be no assurance of the outcomes, which, if adverse, could
result in significantly shortened periods of exclusivity for
these products.
In February 2007, Schering-Plough received a notice from a
generic company indicating that it had filed an ANDA for
Zetia and that it is challenging the U.S. patents
that are listed for Zetia. Prior to the Merger, the
Company marketed Zetia through a joint venture, MSP
Singapore Company LLC. On March 22, 2007, Schering-Plough
and MSP Singapore Company LLC filed a patent infringement suit
against Glenmark Pharmaceuticals Inc., USA and its parent
corporation (Glenmark). The lawsuit automatically
stays FDA approval of Glenmarks ANDA until October 2010 or
until an adverse court decision, if any, whichever may occur
earlier. The trial in this matter is scheduled to commence on
May 3, 2010.
As previously disclosed, in February 2007, Old Merck received a
notice from Teva Pharmaceuticals, Inc. (Teva), a
generic company, indicating that it had filed an ANDA for
montelukast and that it is challenging the U.S. patent that
is listed for Singulair. On April 2, 2007, Old Merck
filed a patent infringement action against Teva. A trial in this
matter was held in February 2009. On August 19, 2009, the
court issued a decision upholding the
50
validity of Old Mercks Singulair patent and ordered
that Tevas ANDA could not be approved prior to expiry of
Old Mercks exclusivity rights in August 2012. Teva had
appealed the decision, however, in January 2010, Teva withdrew
its appeal of the trial courts decision upholding the
validity of Old Mercks Singulair patent. In
addition, in May 2009, the United States Patent and Trademark
Office granted a petition by Article One Partners LLC to
reexamine Old Mercks Singulair patent. On
December 15, 2009, the United States Patent and Trademark
Office issued a notice indicating that it will allow the claims
of the Companys Singulair patent. Product
exclusivity is accordingly expected to be maintained until
August 2012.
In May 2005, the Federal Court of Canada Trial Division issued a
decision refusing to bar the approval of generic alendronate on
the grounds that Old Mercks patent for weekly alendronate
was likely invalid. This decision cannot be appealed and generic
alendronate was launched in Canada in June 2005. In July 2005,
Old Merck was sued in the Federal Court of Canada by Apotex
Corp. (Apotex) seeking damages for lost sales of
generic weekly alendronate due to the patent proceeding. In
October 2008, the Federal Court of Canada issued a decision
awarding Apotex its lost profits for its generic alendronate
product for the period of time that it was held off the market
due to Old Mercks lawsuit. In June 2009, the trial court
decision was upheld in part and both companies sought leave to
appeal to the Supreme Court of Canada. In January 2010, the
Supreme Court of Canada declined to hear the appeal, leaving
intact the decision that Apotex is entitled to damages for the
discrete period of time that its market entry was postponed due
to the litigation launched by Old Merck.
As previously disclosed, in September 2004, Old Merck appealed a
decision of the Opposition Division of the European Patent
Office (EPO) that revoked the Companys patent
in Europe that covers the once-weekly administration of
alendronate. On March 14, 2006, the Board of Appeal of the
EPO upheld the decision of the Opposition Division revoking the
patent. On March 28, 2007, the EPO issued another patent in
Europe to Old Merck that covers the once-weekly administration
of alendronate. Under its terms, this new patent is effective
until July 2018. Old Merck has sued multiple parties in European
countries asserting its European patent covering once-weekly
dosing of Fosamax. Decisions have been rendered in the
Netherlands and Belgium invalidating the patent in those
countries. Old Merck has appealed these decisions. Oppositions
have been filed in the EPO against this patent. In a hearing
held March
17-19, 2009,
the Opposition Division of the EPO issued an appealable decision
revoking this patent. Old Merck has appealed the decision.
In addition, as previously disclosed, in Japan after a
proceeding was filed challenging the validity of Old
Mercks Japanese patent for the once-weekly administration
of alendronate, the patent office invalidated the patent. The
decision is under appeal.
In October 2008, the U.S. patent for dorzolamide, covering
both Trusopt and Cosopt, expired, after which Old
Merck experienced a significant decline in U.S. sales of
these products. The Company is involved in litigation
proceedings of the corresponding patents in Canada and Great
Britain and Germany. In November 2009, the trial court in Great
Britain issued a decision finding Old Mercks Cosopt
patent invalid. In Canada a trial was held in December 2009
regarding the Companys Canadian Trusopt and
Cosopt patents. The Company is awaiting a decision.
Old Merck and AstraZeneca received notice in October 2005 that
Ranbaxy had filed an ANDA for esomeprazole magnesium. The ANDA
contains Paragraph IV challenges to patents on
Nexium. In November 2005, Old Merck and AstraZeneca
sued Ranbaxy in the U.S. District Court in New Jersey. As
previously disclosed, AstraZeneca, Old Merck and Ranbaxy have
entered into a settlement agreement which provides that Ranbaxy
will not bring its generic esomeprazole product to market in the
United States until May 27, 2014. The Company and
AstraZeneca each received a CID from the FTC in July 2008
regarding the settlement agreement with Ranbaxy. The Company is
cooperating with the FTC in responding to this CID.
Old Merck and AstraZeneca received notice in January 2006 that
IVAX Pharmaceuticals, Inc. (IVAX), subsequently
acquired by Teva, had filed an ANDA for esomeprazole magnesium.
The ANDA contains Paragraph IV challenges to patents on
Nexium. In March 2006, Old Merck and AstraZeneca sued
Teva in the U.S. District Court in New Jersey. On
January 7, 2010, AstraZeneca, Old Merck and Teva/IVAX
entered into a settlement agreement which provides that
Teva/IVAX will not bring its generic esomeprazole product to
market in the United States until May 27, 2014. In
addition, in January 2008, Old Merck and AstraZeneca sued
Dr. Reddys Laboratories
(Dr. Reddys) in the District Court in New
Jersey based on Dr. Reddys filing of an ANDA for
51
esomeprazole magnesium. The trial, which had been scheduled for
January 2010 with respect to both IVAXs and
Dr. Reddys ANDAs, has been postponed and no new trial
date has been set. Also, Old Merck and AstraZeneca received
notice in December 2008 that Sandoz Inc. (Sandoz)
had filed an ANDA for esomeprazole magnesium. The ANDA contains
Paragraph IV challenges to patents on Nexium. In
January 2009, Old Merck and AstraZeneca sued Sandoz in the
District Court in New Jersey based on Sandozs filing of an
ANDA for esomeprazole magnesium. In addition, Old Merck and
AstraZeneca received notice in September 2009 that Lupin Ltd.
(Lupin) had filed an ANDA for esomeprazole
magnesium. The ANDA contains Paragraph IV challenges to
patents on Nexium. In October 2009, Old Merck and
AstraZeneca sued Lupin in the District Court in New Jersey based
on Lupins filing of an ANDA for esomeprazole magnesium.
In January 2009, Old Merck received notice from Sandoz that it
had filed an ANDA and that it was challenging five Old Merck
patents listed in the FDA Orange Book for Emend. In
February 2009, Old Merck filed a patent infringement suit
against Sandoz. The lawsuit automatically stays FDA approval of
Sandozs ANDA until July 2011 or until an adverse court
decision, if any, whichever may occur earlier. The case is
scheduled to go to trial in December 2010.
In Europe, Old Merck is aware of various companies seeking
registration for generic losartan (the active ingredient for
Cozaar and Hyzaar). Old Merck has patent rights to
losartan via license from E.I. du Pont de Nemours and Company
(du Pont). Old Merck and du Pont have filed patent
infringement proceedings against various companies in Portugal,
Spain, Norway, Finland, Belgium, the Netherlands and Austria.
In October 2009, Old Merck received notice from Teva Parenteral
Medicines (TPM) that it filed an ANDA for
caspofungin acetate and that it was challenging five patents
listed in the FDA Orange Book for Cancidas. On
November 25, 2009, the Company filed a patent infringement
suit against TPM. The lawsuit automatically stays FDA approval
of TPMs ANDA until April 2012 or until an adverse court
decision, if any, whichever may occur earlier.
In November 2009, Schering received notice from Apotex that it
filed an ANDA for mometasone furoate nasal spray and that it was
challenging two patents listed in the FDA Orange Book for
Nasonex. On December 18, 2009, Schering filed a
patent infringement suit against Apotex. The lawsuit
automatically stays FDA approval of Apotexs ANDA until May
2012 or until an adverse court decision, if any, whichever may
occur earlier.
In November 2009, Schering-Plough received notice from Mylan
that it filed an ANDA for ezetimibe/simvastatin and that it was
challenging two patents listed in the FDA Orange Book for
Vytorin. On December 16, 2009, Schering-Plough filed
a patent infringement suit against Mylan. The lawsuit
automatically stays FDA approval of Mylans ANDA until May
2012 or until an adverse court decision, if any, whichever may
occur earlier.
In July 2007, Schering and its licensor, Cancer Research
Technologies, Limited (CRT), received notice from
Barr Laboratories (Barr) (now a subsidiary of Teva)
that Barr had filed an ANDA for Temodar and that it was
challenging CRTs patent for temozolomide. In July 2007,
Schering and CRT filed a patent infringement action against
Barr. In January 2010, the court issued a decision finding the
CRT patent unenforceable on grounds of prosecution laches and
inequitable conduct. Schering and CRT are in the process of
appealing the decision.
In January 2009, Schering and its licensor, Millennium, received
notice from Teva that it filed an ANDA for eptifibatide and that
it was challenging three Millennium patents listed in the FDA
Orange Book for Integrilin. On February 18, 2009,
Schering and Millennium filed patent infringement actions
against Teva. The lawsuit automatically stays FDA approval of
Tevas ANDA until August 2011 or until an adverse court
decision, if any, whichever may occur earlier.
In May 2009, Schering, Bayer Schering Pharma AG, and Bayer
Healthcare Pharmaceuticals received notice from Teva that it
filed an ANDA for vardenofil and that it was challenging
Bayers patent listed in the FDA Orange Book for Levitra
(vardenifil). On June 30, 2009, Schering and Bayer
filed a patent infringement action against Teva. The lawsuit
automatically stays FDA approval of Tevas ANDA until
November 2011 or until an adverse court decision, if any,
whichever may occur earlier.
52
Legal
Proceedings Related to the Merger
In connection with the Merger, separate class action lawsuits
were brought against Old Merck and Schering-Plough challenging
the Merger and seeking other forms of relief. As previously
disclosed, both lawsuits have been settled pending court
approval.
These settlements, if approved by the court, will resolve and
release all claims that were or could have been brought by any
shareholder of Old Merck or Schering-Plough challenging any
aspect of the proposed merger, including any merger disclosure
claims.
Other
Litigation
French
Matter
Based on a complaint to the French competition authority from a
competitor in France and pursuant to a court order, the French
competition authority has obtained documents from a French
subsidiary of the Company relating to Subutex, one of the
products that the subsidiary markets and sells. Any resolution
of this matter adverse to the French subsidiary could result in
the imposition of civil fines and injunctive or administrative
remedies. On July 17, 2007, the Juge des Libertés et
de la Détention ordered the annulment of the search and
seizure on procedural grounds. On July 19, 2007, the French
authority appealed the order to the French Supreme Court. On
May 20, 2009, the French Supreme Court overturned that
annulment and remanded the case to the Paris Court of Appeal on
the basis that the Juge des Libertés et de la
Détention had not examined each document to assess whether
it should have been seized and whether it had been lawfully
seized. The case is now pending before the Paris Court of Appeal.
In April 2007, the competitor also requested interim relief, a
portion of which was granted by the French competition authority
in December 2007. The interim relief required the Companys
French subsidiary to publish in two specialized newspapers
information including that the generic has the same quantitative
and qualitative composition and the same pharmaceutical form as,
and is substitutable for, Subutex. In February 2008, the
Paris Court of Appeal confirmed the decision of the French
competition authority. In January 2009, the French Supreme Court
confirmed the decision of the French competition authority.
Other
There are various other legal proceedings, principally product
liability and intellectual property suits involving the Company,
that are pending. While it is not feasible to predict the
outcome of such proceedings or the proceedings discussed in this
Item, in the opinion of the Company, all such proceedings are
either adequately covered by insurance or, if not so covered,
should not ultimately result in any liability that would have a
material adverse effect on the financial position, liquidity or
results of operations of the Company, other than proceedings for
which a separate assessment is provided in this Item.
Environmental
Matters
The Company and its subsidiaries are parties to a number of
proceedings brought under the Comprehensive Environmental
Response, Compensation and Liability Act, commonly known as
Superfund, and other federal and state equivalents. These
proceedings seek to require the operators of hazardous waste
disposal facilities, transporters of waste to the sites and
generators of hazardous waste disposed of at the sites to clean
up the sites or to reimburse the government for cleanup costs.
The Company has been made a party to these proceedings as an
alleged generator of waste disposed of at the sites. In each
case, the government alleges that the defendants are jointly and
severally liable for the cleanup costs. Although joint and
several liability is alleged, these proceedings are frequently
resolved so that the allocation of cleanup costs among the
parties more nearly reflects the relative contributions of the
parties to the site situation. The Companys potential
liability varies greatly from site to site. For some sites the
potential liability is de minimis and for others the
final costs of cleanup have not yet been determined. While it is
not feasible to predict the outcome of many of these proceedings
brought by federal or state agencies or private litigants, in
the opinion of the Company, such proceedings should not
ultimately result in any liability which would have a material
adverse effect on the financial position, results of operations,
liquidity or capital resources of the Company. The Company has
taken an active role in identifying and providing for these
costs and such amounts do not include
53
any reduction for anticipated recoveries of cleanup costs from
former site owners or operators or other recalcitrant
potentially responsible parties.
As previously disclosed, approximately 2,200 plaintiffs have
filed an amended complaint against Old Merck and 12 other
defendants in U.S. District Court, Eastern District of
California asserting claims under the Clean Water Act, the
Resource Conservation and Recovery Act, as well as negligence
and nuisance. The suit seeks damages for personal injury,
diminution of property value, medical monitoring and other
alleged real and personal property damage associated with
groundwater and soil contamination found at the site of a former
Old Merck subsidiary in Merced, California. Old Merck intends to
defend itself against these claims.
In managements opinion, the liabilities for all
environmental matters that are probable and reasonably estimable
have been accrued and totaled $161.8 million and
$89.5 million at December 31, 2009 and 2008,
respectively. These liabilities are undiscounted, do not
consider potential recoveries from other parties and will be
paid out over the periods of remediation for the applicable
sites, which are expected to occur primarily over the next
15 years. Although it is not possible to predict with
certainty the outcome of these matters, or the ultimate costs of
remediation, management does not believe that any reasonably
possible expenditures that may be incurred in excess of the
liabilities accrued should exceed $170.0 million in the
aggregate. Management also does not believe that these
expenditures should result in a material adverse effect on the
Companys financial position, results of operations,
liquidity or capital resources for any year.
Executive
Officers of the Registrant (ages as of February 1,
2010)
RICHARD T. CLARK Age 63
November 2009 Chairman, President and Chief
Executive Officer, Merck & Co., Inc. (formerly
Schering-Plough Corporation)
April 2007 Chairman, President and Chief Executive
Officer, Old Merck
May 2005 Chief Executive Officer and President, Old
Merck
June 2003 President, Merck Manufacturing Division,
Old Merck responsible for the Companys
manufacturing, information services and operational excellence
organizations worldwide
ADELE D. AMBROSE Age 53
November 2009 Senior Vice President and Chief
Communications Officer, Merck & Co., Inc. (formerly
Schering-Plough Corporation) responsible for the
Global Communications organization
December 2007 Vice President and Chief
Communications Officer, Old Merck responsible for
the Global Communications organization
April, 2005 On sabbatical
Prior to April 2005, Ms. Ambrose was Executive Vice
President, Public Relations & Investor Communications
at AT&T Wireless (wireless services provider) from
September 2001 to April 2005
STANLEY F. BARSHAY Age 70
November 2009 Executive Vice President and
President, Consumer Health Care, Merck & Co., Inc.
(formerly Schering-Plough Corporation) responsible
for the Consumer Health Care organization. Mr. Barshay will
retire effective April 1, 2010.
Prior to November 2009, Mr. Barshay was Chairman, Consumer
Health Care, Schering-Plough Corporation since June 2003
54
RICHARD S. BOWLES III Age 58
November 2009 Executive Vice President and Chief
Compliance Officer, Merck & Co., Inc. (formerly
Schering-Plough Corporation) responsible for the
Companys compliance function, including Global
Safety & Environment, Systems Assurance, Ethics and
Privacy
Prior to November 2009, Dr. Bowles was Senior Vice
President, Global Quality Operations, Schering-Plough
Corporation since March 2001
JOHN CANAN Age 53
November 2009 Senior Vice President and Global
Controller, Merck & Co., Inc. (formerly
Schering-Plough Corporation) responsible for the
Companys global control organization including all
accounting, controls, external reporting and financial standards
and policies
January 2008 Senior Vice President and Controller,
Old Merck responsible for the Corporate
Controllers Group
September 2006 Vice President, Controller, Old
Merck responsible for the Corporate
Controllers Group
WILLIE A. DEESE Age 54
November 2009 Executive Vice President and
President, Merck Manufacturing Division (MMD),
Merck & Co., Inc. (formerly Schering-Plough
Corporation) responsible for the Companys
global manufacturing, procurement, and distribution and
logistics functions
January 2008 Executive Vice President and President,
MMD, Old Merck responsible for the Companys
global manufacturing, procurement, and distribution and
logistics functions
May 2005 President, MMD, Old Merck
responsible for the Companys global manufacturing,
procurement, and operational excellence functions
January 2004 Senior Vice President, Global
Procurement
KENNETH C. FRAZIER Age 55
November 2009 Executive Vice President and
President, Global Human Health, Merck & Co., Inc.
(formerly Schering-Plough Corporation) responsible
for the Companys marketing and sales organizations
worldwide, including the global pharmaceutical and vaccine
franchises
August 2007 Executive Vice President and President,
Global Human Health, Old Merck responsible for the
Companys marketing and sales organizations worldwide,
including the global pharmaceutical and vaccine franchises
November 2006 Executive Vice President and General
Counsel, Old Merck responsible for legal and public
affairs functions and The Merck Company Foundation (a
not-for-profit
charitable organization affiliated with the Company)
December 1999 Senior Vice President and General
Counsel, Old Merck responsible for legal and public
affairs functions and The Merck Company Foundation (a
not-for-profit
charitable organization affiliated with the Company)
MIRIAN M. GRADDICK-WEIR Age 55
November 2009 Executive Vice President, Human
Resources, Merck & Co., Inc. (formerly Schering-Plough
Corporation) responsible for the Global Human
Resources organization
January 2008 Executive Vice President, Human
Resources, Old Merck responsible for the Global
Human Resources organization
September 2006 Senior Vice President, Human
Resources, Old Merck
55
Prior to September 2006, Dr. Graddick-Weir was Executive
Vice President of Human Resources and Employee Communications at
AT&T (communications services provider), and held several
other senior Human Resources leadership positions at AT&T
for more than 20 years.
BRIDGETTE HELLER Age 48
Effective March 1, 2010 Executive Vice
President and President, Consumer Health Care, Merck &
Co., Inc. (formerly Schering-Plough Corporation)
responsible for the Consumer Health Care organization
Prior to March 1, 2010, Ms. Heller was President,
Johnson & Johnsons Baby Global Business Unit
(2007 2010) and Global President for Baby, Kids
and Wound Care (2005 2007).
Prior to joining Johnson & Johnson, Ms. Heller
was founder and managing partner at Heller Associates from 2004
to 2005.
PETER N. KELLOGG Age 53
November 2009 Executive Vice President and Chief
Financial Officer, Merck & Co., Inc. (formerly
Schering-Plough Corporation) responsible for the
Companys worldwide financial organization, investor
relations, corporate development and licensing, and the
Companys joint venture relationships
August 2007 Executive Vice President and Chief
Financial Officer, Old Merck responsible for the
Companys worldwide financial organization, investor
relations, corporate development and licensing, and the
Companys joint venture relationships
Prior to August 2007, Mr. Kellogg was Executive Vice
President, Finance and Chief Financial Officer of Biogen Idec
(biotechnology company) since November 2003, from the merger of
Biogen, Inc. and IDEC Pharmaceuticals Corporation.
PETER S. KIM Age 51
November 2009 Executive Vice President and
President, Merck Research Laboratories, Merck & Co.,
Inc. (formerly Schering-Plough Corporation) (since January
2003) responsible for the Companys research
and development efforts worldwide
January 2008 Executive Vice President and President,
Merck Research Laboratories, Old Merck responsible
for the Companys research and development efforts worldwide
January 2003 President, Merck Research Laboratories,
Old Merck responsible for the Companys
research and development efforts worldwide
RAUL E. KOHAN Age 57
November 2009 Executive Vice President and
President, Animal Health, Merck & Co., Inc. (formerly
Schering-Plough Corporation) responsible for the
Companys Animal Health organization
October 2008 Senior Vice President and President,
Intervet/Schering-Plough Animal Health,
Schering-Plough
Corporation
October 2007 Deputy Head, Animal Health and Senior
Vice President, Corporate Excellence and Administrative
Services, Schering-Plough Corporation.
February 2007 Senior Vice President and President,
Animal Health, Schering-Plough Corporation
Prior to February 2007, Mr. Kohan was Group Head of Global
Specialty Operations and President, Animal Health,
Schering-Plough Corporation (since 2003).
56
BRUCE N. KUHLIK Age 53
November 2009 Executive Vice President and General
Counsel, Merck & Co., Inc. (formerly Schering-Plough
Corporation) responsible for legal, communications,
and public policy functions and The Merck Company Foundation (a
not-for-profit
charitable organization affiliated with the Company)
January 2008 Executive Vice President and General
Counsel, Old Merck responsible for legal,
communications, and public policy functions and The Merck
Company Foundation (a
not-for-profit
charitable organization affiliated with the Company)
August 2007 Senior Vice President and General
Counsel, Old Merck responsible for legal,
communications, and public policy functions and The Merck
Company Foundation (a
not-for-profit
charitable organization affiliated with the Company)
May 2005 Vice President and Associate General
Counsel, Old Merck primary responsibility for the
Companys Vioxx litigation defense
Prior to May 2005, Mr. Kuhlik was Senior Vice President and
General Counsel for the Pharmaceutical Research and
Manufacturers of America since October, 2002
MICHAEL ROSENBLATT Age 62
December 2009 Executive Vice President and Chief
Medical Officer, Merck & Co., Inc. (formerly
Schering-Plough Corporation) the Companys
primary voice to the global medical community on critical issues
such as patient safety and will oversee the Companys
Global Center for Scientific Affairs
Prior to December 2009, Dr. Rosenblatt was the Dean of
Tufts University School of Medicine since 2003
J. CHRIS SCALET Age 51
November 2009 Executive Vice President, Global
Services, and Chief Information Officer (CIO),
Merck & Co., Inc. (formerly Schering-Plough
Corporation) responsible for Global Shared Services
across the human resources, finance, site services and
information services function; and the enterprise business
process redesign initiative
January 2008 Executive Vice President, Global
Services, and CIO, Old Merck responsible for Global
Shared Services across the human resources, finance, site
services and information services function; and the enterprise
business process redesign initiative
January 2006 Senior Vice President, Global Services,
and CIO, Old Merck responsible for Global Shared
Services across the human resources, finance, site services and
information services function; and the enterprise business
process redesign initiative
March 2003 Senior Vice President, Information
Services, and CIO, Old Merck responsible for all
areas of information technology and services including
application development, technical support, voice and data
communications, and computer operations worldwide
MERVYN TURNER Age 63
November 2009 Chief Strategy Officer and Senior Vice
President, Emerging Markets Research & Development,
Merck Research Laboratories, Merck & Co., Inc.
(formerly Schering-Plough Corporation) responsible
for leading the formulation and execution of the Companys
long term strategic plan and additional responsibilities in
Licensing & External Research within Merck Research
Laboratories
November 2008 Chief Strategy Officer and Senior Vice
President, Worldwide Licensing and External Research, Merck
Research Laboratories, Old Merck
October 2002 Senior Vice President, Worldwide
Licensing and External Research, Old Merck
All officers listed above serve at the pleasure of the Board of
Directors. None of these officers was elected pursuant to any
arrangement or understanding between the officer and the Board.
57
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
The principal market for trading of the Companys Common
Stock is the New York Stock Exchange (NYSE) under
the symbol SGP prior to the Merger, and then MRK after the
Merger. The Common Stock market price information set forth in
the table below is based on historical NYSE market prices.
The following table also sets forth, for the calendar periods
indicated, the dividend per share information.
Cash
Dividends Paid per Common
Share(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
4th Q
|
|
|
3rd Q
|
|
|
2nd Q
|
|
|
1st Q
|
|
|
|
|
2009
|
|
$
|
0.26
|
|
|
$
|
0.065
|
|
|
$
|
0.065
|
|
|
$
|
0.065
|
|
|
$
|
0.065
|
|
2008
|
|
$
|
0.26
|
|
|
$
|
0.065
|
|
|
$
|
0.065
|
|
|
$
|
0.065
|
|
|
$
|
0.065
|
|
|
|
Common
Stock Market Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
4th Q
|
|
|
3rd Q
|
|
|
2nd Q
|
|
|
1st Q
|
|
|
|
|
High
|
|
$
|
38.42
|
|
|
$
|
28.68
|
|
|
$
|
25.12
|
|
|
$
|
24.42
|
|
Low
|
|
$
|
27.97
|
|
|
$
|
24.34
|
|
|
$
|
21.67
|
|
|
$
|
16.32
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
18.48
|
|
|
$
|
22.32
|
|
|
$
|
20.72
|
|
|
$
|
27.73
|
|
Low
|
|
$
|
12.76
|
|
|
$
|
17.51
|
|
|
$
|
13.86
|
|
|
$
|
14.41
|
|
|
|
|
|
|
(1) |
|
In each of 2009 and 2008, Old
Merck paid quarterly cash dividends per common share of $0.38
for an annual amount of $1.52. |
As of January 31, 2010, there were approximately
176,000 shareholders of record.
Equity
Compensation Plan Information
The following table summarizes information about the options,
warrants and rights and other equity compensation under the
Companys legacy Merck and legacy Schering-Plough equity
plans as of the close of business on December 31, 2009. The
table does not include information about tax qualified plans
such as the MSD Employee Savings and Security Plan and the
Schering-Plough Employees Savings Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
|
Number of
|
|
|
|
|
|
remaining available
|
|
|
|
securities to be
|
|
|
|
|
|
for future issuance
|
|
|
|
issued upon
|
|
|
Weighted-average
|
|
|
under equity
|
|
|
|
exercise of
|
|
|
exercise price of
|
|
|
compensation plans
|
|
|
|
outstanding
|
|
|
outstanding
|
|
|
(excluding
|
|
|
|
options, warrants
|
|
|
options, warrants
|
|
|
securities
|
|
|
|
and rights
|
|
|
and rights
|
|
|
reflected in column (a))
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security
holders(1)
|
|
|
313,784,854
|
(2)
|
|
$
|
43.01
|
|
|
|
134,004,583
|
|
Equity compensation plans not approved by security
holders(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
313,784,854
|
|
|
$
|
43.01
|
|
|
|
134,004,583
|
|
|
|
|
(1) |
|
Includes options to purchase
shares of Company Common Stock and other rights under the
following shareholder-approved plans: the Merck Sharp &
Dohme 1996, 2001, 2004 and 2007 Incentive Stock Plans, the Merck
& Co., Inc. 1996, 2001 and 2006 Non-Employee Directors
Stock Option Plans, and the Schering-Plough Corporation 1997,
2002 and 2006 Stock Incentive Plans. |
58
|
|
|
(2) |
|
Excludes approximately
7,453,426 shares of restricted stock units and 3,695,024
performance share units (assuming maximum payouts) under the
Merck Sharp & Dohme 2004 and 2007 Incentive Stock Plans and
7,665,296 shares of restricted stock units and 475,077
performance share units (excluding accrued dividends) under the
Schering-Plough Corporation 2006 Stock Incentive Plan. Also
excludes 350,473 shares of phantom stock deferred under the
Merck & Co., Inc. Deferral Program. |
|
(3) |
|
The table does not include
information for equity compensation plans and options and other
warrants and rights assumed by the Company in connection with
mergers and acquisitions and pursuant to which there remain
outstanding options or other warrants or rights (collectively,
Assumed Plans), which include the Rosetta
Inpharmatics, Inc. 1997 and 2000 Employee Stock Option Plans. A
total of 69,934 shares of Merck Common Stock may be
purchased under the Assumed Plans, at a weighted average
exercise price of $37.90. No further grants may be made under
any Assumed Plans. |
59
Performance
Graph
The following graph assumes a $100 investment on
December 31, 2004, and reinvestment of all dividends, in
each of the Companys Common Shares, the S&P 500
Index, and a composite peer group of the major
U.S.-based
pharmaceutical companies, which are: Abbott Laboratories,
Bristol-Myers Squibb Company, Johnson & Johnson, Eli
Lilly and Company, and Pfizer Inc.
Comparison
of Five-Year Cumulative Total Return*
Merck &
Co., Inc., Composite Peer Group and S&P 500 Index
|
|
|
|
|
|
|
|
|
|
|
End of
|
|
2009/2004
|
|
|
Period Value
|
|
CAGR**
|
|
MERCK
|
|
$
|
170
|
|
|
|
11
|
%
|
PEER GRP.***
|
|
|
104
|
|
|
|
1
|
|
S&P 500
|
|
|
102
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
MERCK
|
|
|
|
100.00
|
|
|
|
|
100.91
|
|
|
|
|
115.48
|
|
|
|
|
131.36
|
|
|
|
|
85.26
|
|
|
|
|
169.87
|
|
PEER GRP.
|
|
|
|
100.00
|
|
|
|
|
93.24
|
|
|
|
|
105.85
|
|
|
|
|
107.91
|
|
|
|
|
96.21
|
|
|
|
|
103.80
|
|
S&P 500
|
|
|
|
100.00
|
|
|
|
|
104.91
|
|
|
|
|
121.46
|
|
|
|
|
128.13
|
|
|
|
|
80.73
|
|
|
|
|
102.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The Performance Graph reflects
Schering-Ploughs stock performance from December 31,
2004 through the close of the Merger and New Mercks stock
performance from November 3, 2009 through December 31,
2009. Assumes the cash component of the merger consideration was
reinvested in New Merck stock at the closing price on
November 3, 2009. |
|
|
|
** |
|
Compound Annual Growth
Rate |
|
*** |
|
On October 15, 2009, Wyeth
and Pfizer Inc. completed its previously announced merger (the
Pfizer/Wyeth Merger) where Wyeth became a
wholly-owned subsidiary of Pfizer Inc. As discussed, on
November 3, 2009, Old Merck and Schering-Plough completed
the Merger (together with the Pfizer/Wyeth Merger, the
Transactions) where Old Merck (subsequently renamed
Merck Sharp & Dohme Corp.) became a wholly-owned subsidiary
of Schering-Plough (subsequently renamed Merck & Co.,
Inc.). As a result of the Transactions, Wyeth and Old Merck no
longer exist as publicly traded entities and ceased all trading
of their common stock as of the close of business on their
respective merger dates. Wyeth and Old Merck have been
permanently removed from the peer group index. |
60
Recent
Sale of Unregistered Securities
Between November 3, 2009 and January 22, 2010, the
Company inadvertently issued a total of approximately 834,000
unregistered shares of common stock to certain former directors
and former employees of Old Merck upon the exercise of stock
options they held. The aggregate of the exercise prices paid in
connection with the stock option exercises was approximately
$26.6 million.
In addition, on January 8, 2010, the Company inadvertently
issued a total of approximately 66,000 unregistered shares of
common stock to certain former senior employees of Old Merck
upon the vesting of performance share units they held.
61
|
|
Item 6.
|
Selected
Financial Data.
|
The following selected financial data should be read in
conjunction with Item 7. Managements Discussion
and Analysis of Financial Condition and Results of
Operations and consolidated financial statements and notes
thereto contained in Item 8. Financial Statements and
Supplementary Data of this report.
Merck &
Co., Inc. and Subsidiaries
($ in millions except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009(1)
|
|
|
2008(2)
|
|
|
2007(3)
|
|
|
2006(4)
|
|
|
2005(5)
|
|
|
|
|
Results for Year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
$27,428.3
|
|
|
|
$23,850.3
|
|
|
|
$24,197.7
|
|
|
|
$22,636.0
|
|
|
|
$22,011.9
|
|
Materials and production costs
|
|
|
9,018.9
|
|
|
|
5,582.5
|
|
|
|
6,140.7
|
|
|
|
6,001.1
|
|
|
|
5,149.6
|
|
Marketing and administrative expenses
|
|
|
8,543.2
|
|
|
|
7,377.0
|
|
|
|
7,556.7
|
|
|
|
8,165.4
|
|
|
|
7,155.5
|
|
Research and development expenses
|
|
|
5,845.0
|
|
|
|
4,805.3
|
|
|
|
4,882.8
|
|
|
|
4,782.9
|
|
|
|
3,848.0
|
|
Restructuring costs
|
|
|
1,633.9
|
|
|
|
1,032.5
|
|
|
|
327.1
|
|
|
|
142.3
|
|
|
|
322.2
|
|
Equity income from affiliates
|
|
|
(2,235.0
|
)
|
|
|
(2,560.6
|
)
|
|
|
(2,976.5
|
)
|
|
|
(2,294.4
|
)
|
|
|
(1,717.1
|
)
|
U.S. Vioxx Settlement Agreement charge
|
|
|
|
|
|
|
|
|
|
|
4,850.0
|
|
|
|
|
|
|
|
|
|
Other (income) expense, net
|
|
|
(10,669.5
|
)
|
|
|
(2,318.1
|
)
|
|
|
(75.2
|
)
|
|
|
(503.2
|
)
|
|
|
(232.0
|
)
|
Income before taxes
|
|
|
15,291.8
|
|
|
|
9,931.7
|
|
|
|
3,492.1
|
|
|
|
6,341.9
|
|
|
|
7,485.7
|
|
Taxes on income
|
|
|
2,267.6
|
|
|
|
1,999.4
|
|
|
|
95.3
|
|
|
|
1,787.6
|
|
|
|
2,732.6
|
|
Net income
|
|
|
13,024.2
|
|
|
|
7,932.3
|
|
|
|
3,396.8
|
|
|
|
4,554.3
|
|
|
|
4,753.1
|
|
Net income attributable to noncontrolling interests
|
|
|
122.9
|
|
|
|
123.9
|
|
|
|
121.4
|
|
|
|
120.5
|
|
|
|
121.8
|
|
Net income attributable to Merck & Co., Inc.
|
|
|
12,901.3
|
|
|
|
7,808.4
|
|
|
|
3,275.4
|
|
|
|
4,433.8
|
|
|
|
4,631.3
|
|
Preferred stock dividends
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
|
12,899.2
|
|
|
|
7,808.4
|
|
|
|
3,275.4
|
|
|
|
4,433.8
|
|
|
|
4,631.3
|
|
Basic earnings per common share available to common shareholders
|
|
|
$5.67
|
|
|
|
$3.65
|
|
|
|
$1.51
|
|
|
|
$2.03
|
|
|
|
$2.10
|
|
Earnings per common share assuming dilution available to common
shareholders
|
|
|
$5.65
|
|
|
|
$3.63
|
|
|
|
$1.49
|
|
|
|
$2.02
|
|
|
|
$2.10
|
|
Cash dividends declared
|
|
|
3,599.8
|
|
|
|
3,250.4
|
|
|
|
3,310.7
|
|
|
|
3,318.7
|
|
|
|
3,338.7
|
|
Cash dividends paid per common share
|
|
|
$1.52
|
(6)
|
|
|
$1.52
|
|
|
|
$1.52
|
|
|
|
$1.52
|
|
|
|
$1.52
|
|
Capital expenditures
|
|
|
1,460.6
|
|
|
|
1,298.3
|
|
|
|
1,011.0
|
|
|
|
980.2
|
|
|
|
1,402.7
|
|
Depreciation
|
|
|
1,654.3
|
|
|
|
1,445.1
|
|
|
|
1,752.4
|
|
|
|
2,098.1
|
|
|
|
1,544.2
|
|
Average common shares outstanding (millions)
|
|
|
2,268.2
|
|
|
|
2,135.8
|
|
|
|
2,170.5
|
|
|
|
2,177.6
|
|
|
|
2,197.0
|
|
Average common shares outstanding assuming dilution (millions)
|
|
|
2,273.2
|
|
|
|
2,142.5
|
|
|
|
2,189.8
|
|
|
|
2,184.1
|
|
|
|
2,199.2
|
|
|
|
Year-End Position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
|
12,677.9
|
|
|
|
$4,793.9
|
|
|
|
$2,787.2
|
|
|
|
$2,507.5
|
|
|
|
$7,806.9
|
|
Property, plant and equipment, net
|
|
|
18,273.5
|
|
|
|
11,999.6
|
|
|
|
12,346.0
|
|
|
|
13,194.1
|
|
|
|
14,398.2
|
|
Total assets
|
|
|
112,089.7
|
|
|
|
47,195.7
|
|
|
|
48,350.7
|
|
|
|
44,569.8
|
|
|
|
44,845.8
|
|
Long-term debt
|
|
|
16,074.9
|
|
|
|
3,943.3
|
|
|
|
3,915.8
|
|
|
|
5,551.0
|
|
|
|
5,125.6
|
|
Total equity
|
|
|
61,492.6
|
|
|
|
21,167.1
|
|
|
|
20,591.4
|
|
|
|
19,965.8
|
|
|
|
20,384.9
|
|
|
|
Year-End Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stockholders of record
|
|
|
175,600
|
|
|
|
165,700
|
|
|
|
173,000
|
|
|
|
184,200
|
|
|
|
198,200
|
|
Number of employees
|
|
|
100,000
|
|
|
|
55,200
|
|
|
|
59,800
|
|
|
|
60,000
|
|
|
|
61,500
|
|
|
|
|
(1)
|
Amounts for 2009 include the
impact of the merger with Schering-Plough Corporation on
November 3, 2009, including the recognition of a gain
representing the fair value
step-up of
Mercks previously held interest in the
Merck/Schering-Plough partnership as a result of obtaining a
controlling interest and increased materials and production
costs as a result of the amortization of intangible assets and
inventory step-up. Also included in 2009, is a gain on the sale
of Mercks interest in Merial Limited, the favorable impact
of certain tax items, the impact of restructuring actions and
additional legal defense costs.
|
(2)
|
Amounts for 2008 include a gain
on distribution from AstraZeneca LP, a gain related to the sale
of the remaining worldwide rights to
Aggrastat, the
favorable impact of certain tax items, the impact of
restructuring actions, additional legal defense costs and an
expense for a contribution to the Merck Company Foundation.
|
(3)
|
Amounts for 2007 include the
impact of the U.S. Vioxx
Settlement Agreement charge, restructuring actions, a civil
governmental investigations charge, an insurance arbitration
settlement gain, in-process research and development expense
resulting from an acquisition, additional Vioxx legal
defense costs, gains on sales of assets and product
divestitures, as well as a net gain on the settlements of
certain patent disputes.
|
(4)
|
Amounts for 2006 include the
impact of restructuring actions, in-process research and
development expenses resulting from acquisitions, additional
Vioxx legal defense
costs and the adoption of a new accounting standard requiring
the expensing of stock options.
|
(5)
|
Amounts for 2005 include the
impact of the net tax charge primarily associated with the
American Jobs Creation Act repatriation, restructuring actions
and additional Vioxx
legal defense costs.
|
(6)
|
Amount reflects dividends paid
to common shareholders of Old Merck. In addition, approximately
$144 million of dividends were paid subsequent to the
merger with Schering-Plough, and $431 million were paid prior to
the merger, relating to common stock and preferred stock
dividends declared by Schering-Plough in 2009.
|
62
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Description
of Mercks Business
On November 3, 2009, Merck & Co., Inc. (Old
Merck) and Schering-Plough Corporation
(Schering-Plough) completed their
previously-announced merger (the Merger). In the
Merger, Schering-Plough acquired all of the shares of Old Merck,
which became a wholly-owned subsidiary of Schering-Plough and
was renamed Merck Sharp & Dohme Corp. Schering-Plough
continued as the surviving public company and was renamed
Merck & Co., Inc. (New Merck or the
Company). However, for accounting purposes only, the
Merger was treated as an acquisition with Old Merck considered
the accounting acquirer. Accordingly, the accompanying financial
statements reflect Old Mercks stand-alone operations as
they existed prior to the completion of the Merger. The results
of Schering-Ploughs business have been included in New
Mercks financial statements only for periods subsequent to
the completion of the Merger. Therefore, New Mercks
financial results for 2009 do not reflect a full year of legacy
Schering-Plough operations. References in this report and in the
accompanying financial statements to Merck for
periods prior to the Merger refer to Old Merck and for periods
after the completion of the Merger to New Merck.
The Company is a global health care company that delivers
innovative health solutions through its medicines, vaccines,
biologic therapies, and consumer and animal products, which it
markets directly and through its joint ventures. The
Companys operations are principally managed on a products
basis and are comprised of one reportable segment, which is the
Pharmaceutical segment. The Pharmaceutical segment includes
human health pharmaceutical and vaccine products marketed either
directly by the Company or through joint ventures. Human health
pharmaceutical products consist of therapeutic and preventive
agents, sold by prescription, for the treatment of human
disorders. The Company sells these human health pharmaceutical
products primarily to drug wholesalers and retailers, hospitals,
government agencies and managed health care providers such as
health maintenance organizations, pharmacy benefit managers and
other institutions. Vaccine products consist of preventative
pediatric, adolescent and adult vaccines, primarily administered
at physician offices. The Company sells these human health
vaccines primarily to physicians, wholesalers, physician
distributors and government entities. The Companys
professional representatives communicate the effectiveness,
safety and value of its pharmaceutical and vaccine products to
health care professionals in private practice, group practices
and managed care organizations. The Company also has animal
health operations that discover, develop, manufacture and market
animal health products, including vaccines. The Companys
professional representatives communicate the safety and value of
the Companys animal health products to veterinarians,
distributors and animal producers. Additionally, the Company has
consumer health care operations that develop, manufacture and
market
Over-the-Counter
(OTC), foot care and sun care products, which are
sold through wholesale and retail drug, food chain and mass
merchandiser outlets in the United States and Canada.
Overview
As discussed above, the Merger was completed on November 3,
2009. In the Merger, Old Merck shareholders received one share
of common stock of New Merck for each share of Old Merck stock
that they owned, and Schering-Plough shareholders received
0.5767 of a share of common stock of New Merck and $10.50 in
cash for each share of Schering-Plough stock that they owned.
The consideration in the Merger was valued at $49.6 billion
in the aggregate. Schering-Plough was Old Mercks long-term
partner in the Merck/Schering-Plough cholesterol partnership
(the MSP Partnership). The cash portion of the
consideration was funded with a combination of existing cash,
including proceeds from the sale of Old Mercks interest in
Merial Limited, the sale or redemption of investments and the
issuance of debt.
The combined company has a research and development pipeline
with greater depth and breadth and many promising drug
candidates, a significantly broader portfolio of medicines and
an expanded presence in key international markets, particularly
in high-growth emerging markets. The Company anticipates that
the efficiencies gained from the Merger will allow it to invest
in promising pipeline candidates, as well as strategic external
research and development opportunities.
The combination increased the Companys pipeline of early,
mid- and late stage product candidates, including a significant
increase in the number of potential medicines the Company has in
Phase III development to
63
19 candidates. Additionally, a number of candidates are
currently under review in the United States and internationally.
The Merger also is expected to accelerate the expansion into
therapeutic areas that Old Merck has focused on in recent years
with the addition of Schering-Ploughs established presence
and expertise in oncology, neuroscience and novel biologics.
Further, the Merger is expected to broaden the Companys
commercial portfolio with leading franchises in key therapeutic
areas, including cardiovascular, respiratory, oncology,
neuroscience, infectious diseases, immunology and womens
health. Additionally, the combined company is expected to
realize potential benefits from its animal health business and
portfolio of consumer health brands, including Claritin,
Coppertone and Dr. Scholls. Many of the
legacy Schering-Ploughs products are expected to have long
periods of marketing exclusivity and, by leveraging the combined
companys expanded product offerings, the Company expects
to benefit from additional revenue growth opportunities. For
example, the combined company is expected to have expanded
opportunities for life-cycle management through the introduction
of potential new combinations and formulations of existing
products of the two legacy companies. Also, the Company will
have an expanded global presence and a more geographically
diverse revenue base. Schering-Ploughs significant
international presence will accelerate Old Mercks own
international growth efforts.
During 2009, revenue increased 15% driven largely by the
incremental sales resulting from the inclusion of the
post-Merger results of legacy Schering-Plough products, such as
Remicade, a treatment for inflammatory diseases,
Temodar, a treatment for certain types of brain tumors,
Nasonex nasal spray, an inhaled nasal corticosteroid for
the treatment of nasal allergy symptoms, and PegIntron
for treating chronic hepatitis C, as well as the
recognition of revenue from sales of Zetia and
Vytorin, cholesterol modifying medicines. Prior to the
Merger, sales of Zetia and Vytorin were recognized
by the MSP Partnership and the results of Old Mercks
interest in the MSP Partnership were recorded in Equity
income from affiliates. As a result of the Merger, the MSP
Partnership is now wholly-owned by the Company and therefore
revenues from these products for the post-Merger period are
reflected in Sales. Additionally, the Company recognized
sales in the post-Merger period from legacy Schering-Plough
animal health and consumer health care products. Also
contributing to the sales increase was growth in Januvia
and Janumet for the treatment of type 2 diabetes,
Isentress, an antiretroviral therapy for the treatment of
HIV infection, Singulair, a medicine indicated for the
chronic treatment of asthma and the relief of symptoms of
allergic rhinitis, Varivax, a vaccine to help prevent
chickenpox (varicella), and Pneumovax, a vaccine to help
prevent pneumococcal disease. These increases were partially
offset by lower sales of Fosamax for the treatment and
prevention of osteoporosis. Fosamax and Fosamax Plus D
lost market exclusivity for substantially all formulations
in the United States in February 2008 and April 2008,
respectively. Revenue was also negatively affected by lower
sales of Gardasil, a vaccine to help prevent cervical,
vulvar and vaginal cancers, precancerous or dysplastic lesions,
and genital warts caused by human papillomavirus
(HPV) types 6, 11, 16 and 18, Cosopt/Trusopt,
ophthalmic products which lost U.S. market exclusivity in
October 2008, and lower revenue from the Companys
relationship with AstraZeneca LP (AZLP). Other
products experiencing declines include RotaTeq, a vaccine
to help protect against rotavirus gastroenteritis in infants and
children, Zocor, the Companys statin for modifying
cholesterol and Primaxin for the treatment of bacterial
infections.
As a result of the Merger, the Company expects to achieve
substantial cost savings across all areas, including from
consolidation in both sales and marketing and research and
development, the application of the Companys lean
manufacturing and sourcing strategies to the expanded
operations, and the full integration of the MSP Partnership.
In February 2010, the Company announced the first phase of
a new global restructuring program (the Merger
Restructuring Program) in conjunction with the integration
of the legacy Merck and legacy Schering-Plough businesses. This
Merger Restructuring Program is intended to optimize the cost
structure of the combined Company. As part of the first phase of
the Merger Restructuring Program, by the end of 2012, the
Company expects to reduce its total workforce by approximately
15% across all areas of the Company worldwide. The Company also
plans to eliminate 2,500 vacant positions as part of the first
phase of the program. These workforce reductions will primarily
come from the elimination of duplicative positions in sales,
administrative and headquarters organizations, as well as from
the consolidation of certain manufacturing facilities and
research and development operations. The Company will continue
to hire new employees in strategic growth areas of the business
during this period. Certain actions, such as the ongoing
reevaluation of manufacturing and research and development
facilities
64
worldwide have not yet been completed, but will be included
later in 2010 in other phases of the Merger Restructuring
Program. In connection with the first phase of the Merger
Restructuring Program, separation costs under the Companys
existing severance programs worldwide were recorded in the
fourth quarter of 2009 to the extent such costs were probable
and reasonably estimable. The Company recorded pretax
restructuring costs of $1.5 billion, primarily employee
separation costs, related to the Merger Restructuring Program in
the fourth quarter of 2009. This first phase of the Merger
Restructuring Program is expected to be completed by the end of
2012 with the total pretax costs estimated to be
$2.6 billion to $3.3 billion. The Company estimates
that approximately 85% of the cumulative pretax costs relate to
cash outlays, primarily related to employee separation expense.
Approximately 15% of the cumulative pretax costs are non-cash,
relating primarily to the accelerated depreciation of facilities
to be closed or divested.
The Company expects this first phase of the Merger Restructuring
Program to yield annual savings in 2012 of approximately
$2.6 billion to $3.0 billion. These anticipated
savings relate only to the first phase of the Merger
Restructuring Program and therefore are only a portion of the
estimated $3.5 billion of incremental annual savings
originally disclosed when the Merger was announced. The Company
expects that additional savings will be generated by subsequent
phases of the Merger Restructuring Program that will be
announced later this year, as well as by non-restructuring
related activities, such as procurement savings initiatives.
These cost savings, which are expected to come from all areas of
the Companys pharmaceutical business, are in addition to
the previously announced ongoing cost reduction initiatives at
both legacy companies.
As a result of the Merger, the Company obtained a controlling
interest in the MSP Partnership and it is now owned 100% by the
Company. Accordingly, the Company was required to remeasure
Mercks previously held equity interest in the MSP
Partnership at its merger-date fair value and recognize the
resulting gain in earnings. As a result, the Company recorded a
gain of $7.5 billion recognized in Other (income)
expense, net in 2009. Also during 2009, Old Merck sold its
50% interest in Merial Limited (Merial) to
sanofi-aventis for $4 billion in cash. The sale resulted in
the recognition of a $3.2 billion gain reflected in
Other (income) expense, net in 2009. See Note 10 to
the consolidated financial statements.
Earnings per common share (EPS) assuming dilution
for 2009 were $5.65, which reflect a net impact of $2.40
resulting from gains related to the MSP Partnership and the sale
of Merial, partially offset by increased expenses from the
amortization of purchase accounting adjustments, restructuring
and merger-related costs. EPS in 2009 were also affected by the
dilutive impact of shares issued in the Merger.
Competition
and the Health Care Environment
Competition
The markets in which the Company conducts its business and the
pharmaceutical industry are highly competitive and highly
regulated. The Companys operations may be affected by
technological advances of competitors, industry consolidation,
patents granted to competitors, competitive combination
products, new products of competitors, new information from
clinical trials of marketed products or post-marketing
surveillance and generic competition as the Companys
products mature. In addition, patent positions are increasingly
being challenged by competitors, and the outcome can be highly
uncertain. An adverse result in a patent dispute can preclude
commercialization of products or negatively affect sales of
existing products and could result in the recognition of an
impairment charge with respect to certain products. Competitive
pressures have intensified as pressures in the industry have
grown. The effect on operations of competitive factors and
patent disputes cannot be predicted.
Pharmaceutical competition involves a rigorous search for
technological innovations and the ability to market these
innovations effectively. With its long-standing emphasis on
research and development, the Company is well positioned to
compete in the search for technological innovations. Additional
resources to meet market challenges include quality control,
flexibility to meet customer specifications, an efficient
distribution system and a strong technical information service.
The Company is active in acquiring and marketing products
through external alliances such as joint ventures and licenses
and has been refining its sales and marketing efforts to further
address changing industry conditions. However, the introduction
of new products and processes by competitors may result in price
reductions and product displacement, even for products protected
by patents. For example, the number of
65
compounds available to treat a particular disease typically
increases over time and can result in slowed sales growth for
the Companys products in that therapeutic category.
Global efforts toward healthcare cost containment continue to
exert pressure on product pricing and access. In addressing cost
containment pressure, the Company makes a continuing effort to
demonstrate that its medicines provide value to patients and to
those who pay for healthcare. In addition, pricing flexibility
across the Companys product portfolio has encouraged
growing use of its medicines and mitigated the effects of
increasing cost pressures on individual medicines.
Outside the United States, in difficult government budgetary
environments, the Company has worked with payers to encourage
allocation of scarce resources to optimize healthcare outcomes,
limiting the potentially detrimental effects of government
policies on sales growth and access to innovative medicines and
vaccines, and to support the discovery and development of
innovative products to benefit patients. The Company also is
working with governments in many emerging markets in Eastern
Europe, Latin America and Asia to encourage them to increase
their investments in health and thereby improve their
citizens access to medicines. In addition, certain
countries within the European Union (EU),
recognizing the economic importance of the research-based
pharmaceutical industry and the value of innovative medicines to
society, are working with industry representatives to improve
the competitive climate through a variety of means including
market deregulation.
The Company anticipates that the worldwide trend toward cost
containment will continue, resulting in ongoing pressures on
healthcare budgets. In the United States, major healthcare
reform has been introduced and passed in both houses of
Congress. A final revised bill which unifies both versions may
be considered and adopted into law. The impact of such actions,
as well as budget pressures on governments in the United States
and other nations, cannot be predicted at this time. As the
Company continues to successfully launch new products,
contribute to healthcare debates and monitor reforms, its new
products, policies and strategies should enable it to maintain a
strong position in the changing economic environment.
Although no one can predict the outcome of these and other
legislative, regulatory and advocacy initiatives, the Company
believes that it is well positioned to respond to the evolving
healthcare environment and market forces.
Access to
Medicines
The Company is also committed to improving access to medicines
and enhancing the quality of life for people around the world.
To cite just one example, The African Comprehensive HIV/AIDS
Partnerships in Botswana, a partnership between the government
of Botswana, the Bill & Melinda Gates Foundation and
The Merck Company Foundation/Merck & Co., Inc., is
supporting Botswanas response to HIV/AIDS through a
comprehensive and sustainable approach to HIV prevention, care,
treatment, and support.
To further catalyze access to HIV medicines in developing
countries, the Company makes no profit on the sale of its
current HIV/AIDS medicines in the worlds poorest countries
and those hardest hit by the pandemic, and offers its HIV/AIDS
medicines at significantly reduced prices to medium-income
countries. In February 2007, Old Merck announced that it had
again reduced the price of Stocrin in the least developed
countries of the world and those hardest hit by the pandemic.
Through these and other actions, the Company is working
independently and with partners in both the public and private
sectors to address the most critical barriers to access to
medicines in the developing world. Addressing these barriers
requires investments in education, training and health
infrastructure and to improve capacity in developing countries
achieved through increased international assistance and
sustainable financing.
In addition, Old Merck has committed to providing
RotaTeq, its vaccine to help protect against rotavirus
gastroenteritis in infants and children, to the Global Alliance
for Vaccines and Immunization-eligible countries at prices at
which it does not profit. Also, in 2009, Old Merck and The
Wellcome Trust established the MSD Wellcome Trust Hilleman
Laboratories, a joint venture in India to develop vaccines for
millions of people in some of the poorest areas of the world.
Government
Regulation
The pharmaceutical industry is subject to regulation by
regional, country, state and local agencies around the world. Of
particular importance is the U.S. Food and Drug
Administration (FDA) in the United States, which
administers requirements covering the testing, approval, safety,
effectiveness, manufacturing, labeling, and marketing of
prescription pharmaceuticals. In many cases, the FDA
requirements have increased the amount of
66
time and resources necessary to develop new products and bring
them to market in the United States. In 1997, the Food and Drug
Administration Modernization Act (the FDA Modernization
Act) was passed and was the culmination of a comprehensive
legislative reform effort designed to streamline regulatory
procedures within the FDA and to improve the regulation of
drugs, medical devices, and food. The legislation was
principally designed to ensure the timely availability of safe
and effective drugs and biologics by expediting the premarket
review process for new products. A key provision of the
legislation is the re-authorization of the Prescription Drug
User Fee Act of 1992, which permits the continued collection of
user fees from prescription drug manufacturers to augment FDA
resources earmarked for the review of human drug applications.
This helps provide the resources necessary to ensure the prompt
approval of safe and effective new drugs.
In the United States, the government expanded access for senior
citizens to prescription drug coverage by enacting the Medicare
Prescription Drug Improvement and Modernization Act of 2003,
which was signed into law in December 2003. Prescription drug
coverage began on January 1, 2006. This legislation
supports the Companys goal of improving access to
medicines by expanding insurance coverage, while preserving
market-based incentives for pharmaceutical innovation. At the
same time, the legislation has helped control the cost of
prescription drug costs through competitive pressures and by
encouraging the appropriate use of medicines. As mentioned
above, in the United States major healthcare reform has been
introduced and passed in both houses of Congress. A final
revised bill which unifies both versions may be considered and
adopted into law. The U.S. Congress also considered, and
may consider again, proposals to increase the governments
role in pharmaceutical pricing in the Medicare program. These
proposals may include removing the current legal prohibition
against the Secretary of the Health and Human Services
intervening in price negotiations between Medicare drug benefit
program plans and pharmaceutical companies. They may also
include mandating the payment of rebates for some or all of the
pharmaceutical utilization in Medicare drug benefit plans. In
addition, Congress may again consider proposals to allow, under
certain conditions, the importation of medicines from other
countries.
For many years, the pharmaceutical industry has been under
federal and state oversight with the approval process for new
drugs, drug safety, advertising and promotion, drug purchasing
and reimbursement programs, and formularies. The Company
believes that it will continue to be able to conduct its
operations, including the introduction of new drugs to the
market, in this regulatory environment.
The Company continues to work with private and public payors to
slow increases in healthcare spending. Also, U.S. federal
and state governments have pursued methods to directly reduce
the cost of drugs and vaccines for which they pay. For example,
federal laws require the Company to pay specified rebates for
medicines reimbursed by Medicaid, to provide discounts for
outpatient medicines purchased by certain Public Health Service
entities and disproportionate share hospitals
(hospitals meeting certain criteria), and to provide minimum
discounts of 24% off of a defined non-federal average
manufacturer price for purchases by certain components of
the federal government such as the Department of Veterans
Affairs and the Department of Defense.
Initiatives in some states seek rebates beyond the minimum
required by Medicaid legislation, in some cases for patients
beyond those who are eligible for Medicaid. Under the Federal
Vaccines for Children entitlement program, the U.S. Centers
for Disease Control and Prevention (CDC) funds and
purchases recommended pediatric vaccines at a public sector
price for the immunization of Medicaid-eligible, uninsured,
Native American and certain underinsured children. Old Merck was
awarded a CDC contract in 2009 for the supply of pediatric
vaccines for the Vaccines for Children program.
Outside the United States, the Company encounters similar
regulatory and legislative issues in most of the countries where
it does business. There, too, the primary thrust of governmental
inquiry and action is toward determining drug safety and
effectiveness, often with mechanisms for controlling the prices
of or reimbursement for prescription drugs and the profits of
prescription drug companies. The EU has adopted directives
concerning the classification, labeling, advertising, wholesale
distribution and approval for marketing of medicinal products
for human use. The Companys policies and procedures are
already consistent with the substance of these directives;
consequently, it is believed that they will not have any
material effect on the Companys business.
In January 2008, the European Commission (EC)
launched a sector inquiry in the pharmaceutical industry under
the rules of EU competition law. As part of this inquiry, Old
Mercks offices in Germany were inspected by the
authorities beginning in January 2008. The preliminary report of
the EC was issued on November 28, 2008, and following the
public consultation period, the final report was issued in July
2009. The final report confirmed that there has been a decline
in the number of novel medicines reaching the market and
instances of delayed market entry of generic medicines and
discussed industry practices that may have contributed
67
to these phenomena. While the EC has issued further inquiries
with respect to the subject of the investigation, the EC has not
alleged that the Company or any of its subsidiaries have engaged
in any unlawful practices.
The Company is subject to the jurisdiction of various regulatory
agencies and is, therefore, subject to potential administrative
actions. Such actions may include seizures of products and other
civil and criminal sanctions. Under certain circumstances, the
Company on its own may deem it advisable to initiate product
recalls. The Company believes that it should be able to compete
effectively within this environment.
Privacy
and Data Protection
The Company is subject to a number of privacy and data
protection laws and regulations globally. The legislative and
regulatory landscape for privacy and data protection continues
to evolve, and there has been an increasing attention to privacy
and data protection issues with the potential to affect directly
the Companys business, including recently enacted laws and
regulations in the United States and internationally requiring
notification to individuals and government authorities of
security breaches involving certain categories of personal
information.
Operating
Results
Sales
Worldwide sales totaled $27.4 billion for 2009, an increase
of 15% compared with 2008. Foreign exchange unfavorably affected
global sales performance by 2%. The revenue increase over 2008
largely reflects incremental sales resulting from the inclusion
of the post-Merger results of legacy Schering-Plough products
such as Remicade, Temodar, Nasonex nasal spray, and
PegIntron, as well as the recognition of revenue from
sales of Zetia and Vytorin. Prior to the Merger,
sales of Zetia and Vytorin were recognized by the
MSP Partnership and the results of Old Mercks interest in
the MSP Partnership were recorded in Equity income from
affiliates. As a result of the Merger, the MSP Partnership
is now wholly-owned by the Company and therefore revenues from
these products for the post-Merger period are reflected in
Sales. Additionally, the Company recognized sales in the
post-Merger period from legacy Schering-Plough animal health and
consumer healthcare products. Also contributing to the sales
increase was growth in Januvia and Janumet,
Isentress, Singulair, Varivax and
Pneumovax. These increases were partially offset by lower
sales of Fosamax and Fosamax Plus D, which lost
market exclusivity for substantially all formulations in the
United States in February 2008 and April 2008, respectively.
Revenue was also negatively affected by lower sales of
Gardasil, Cosopt/Trusopt, which lost
U.S. market exclusivity in October 2008, and lower revenue
from the Companys relationship with AZLP. Other products
experiencing declines include RotaTeq, Zocor and
Primaxin.
Domestic sales increased 8% compared with 2008, while foreign
sales rose 24%, driven primarily by incremental sales resulting
from the inclusion of the post-Merger results of legacy
Schering-Plough products. The domestic sales increase was also
driven by higher sales of Januvia, Janumet, Isentress and
Singulair. These increases were partially offset by lower
sales of Fosamax and Fosamax Plus D,
Cosopt/Trusopt, Gardasil and RotaTeq.
Foreign sales growth reflects the strong performance of
Januvia, Janumet and Isentress, partially offset
by lower sales of Fosamax and Fosamax Plus D, and
vaccines. Foreign sales represented 47% of total sales in 2009.
Worldwide sales totaled $23.9 billion for 2008, a decline
of 1% compared with 2007. Foreign exchange favorably affected
global sales performance by 3%. The revenue decline over 2007
largely reflects lower sales of Fosamax and Fosamax
Plus D. Also contributing to the decline were lower sales of
Zocor, Vasotec/Vaseretic and sales of certain vaccines,
including hepatitis and Haemophilus influenzae type b
(HIB) vaccines. Partially offsetting these declines
were higher sales of Januvia, Janumet, Isentress,
Cozaar/Hyzaar, RotaTeq and Singulair. Foreign sales
represented 44% of total sales for 2008.
68
Sales(1) of
the Companys products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Pharmaceutical:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bone, Respiratory, Immunology and Dermatology
|
|
|
|
|
|
|
|
|
|
|
|
|
Singulair
|
|
$
|
4,659.7
|
|
|
$
|
4,336.9
|
|
|
$
|
4,266.3
|
|
Fosamax
|
|
|
1,099.8
|
|
|
|
1,552.7
|
|
|
|
3,049.0
|
|
Propecia
|
|
|
440.3
|
|
|
|
429.1
|
|
|
|
405.4
|
|
Remicade
|
|
|
430.7
|
|
|
|
|
|
|
|
|
|
Arcoxia
|
|
|
357.5
|
|
|
|
377.3
|
|
|
|
329.1
|
|
Nasonex
|
|
|
164.9
|
|
|
|
|
|
|
|
|
|
Clarinex
|
|
|
100.6
|
|
|
|
|
|
|
|
|
|
Asmanex
|
|
|
37.0
|
|
|
|
|
|
|
|
|
|
Cardiovascular
|
|
|
|
|
|
|
|
|
|
|
|
|
Vytorin
|
|
|
440.8
|
|
|
|
84.2
|
|
|
|
84.3
|
|
Zetia
|
|
|
402.9
|
|
|
|
6.4
|
|
|
|
6.5
|
|
Integrilin
|
|
|
45.9
|
|
|
|
|
|
|
|
|
|
Diabetes and Obesity
|
|
|
|
|
|
|
|
|
|
|
|
|
Januvia
|
|
|
1,922.1
|
|
|
|
1,397.1
|
|
|
|
667.5
|
|
Janumet
|
|
|
658.4
|
|
|
|
351.1
|
|
|
|
86.4
|
|
Infectious Disease
|
|
|
|
|
|
|
|
|
|
|
|
|
Isentress
|
|
|
751.8
|
|
|
|
361.1
|
|
|
|
41.3
|
|
Primaxin
|
|
|
688.9
|
|
|
|
760.4
|
|
|
|
763.5
|
|
Cancidas
|
|
|
616.7
|
|
|
|
596.4
|
|
|
|
536.9
|
|
Invanz
|
|
|
292.9
|
|
|
|
265.0
|
|
|
|
190.2
|
|
Crixivan/Stocrin
|
|
|
206.1
|
|
|
|
275.1
|
|
|
|
310.2
|
|
PegIntron
|
|
|
148.7
|
|
|
|
|
|
|
|
|
|
Avelox
|
|
|
66.2
|
|
|
|
|
|
|
|
|
|
Rebetol
|
|
|
36.1
|
|
|
|
|
|
|
|
|
|
Mature Brands
|
|
|
|
|
|
|
|
|
|
|
|
|
Cozaar/Hyzaar
|
|
|
3,560.7
|
|
|
|
3,557.7
|
|
|
|
3,350.1
|
|
Zocor
|
|
|
558.4
|
|
|
|
660.1
|
|
|
|
876.5
|
|
Vasotec/Vaseretic
|
|
|
310.8
|
|
|
|
356.7
|
|
|
|
494.6
|
|
Proscar
|
|
|
290.9
|
|
|
|
323.5
|
|
|
|
411.0
|
|
Claritin Rx
|
|
|
71.1
|
|
|
|
|
|
|
|
|
|
Proventil
|
|
|
26.2
|
|
|
|
|
|
|
|
|
|
Neurosciences and Ophthalmology
|
|
|
|
|
|
|
|
|
|
|
|
|
Maxalt
|
|
|
574.5
|
|
|
|
529.2
|
|
|
|
467.3
|
|
Cosopt/Trusopt
|
|
|
503.5
|
|
|
|
781.2
|
|
|
|
786.8
|
|
Remeron
|
|
|
38.5
|
|
|
|
|
|
|
|
|
|
Subutex/Suboxone
|
|
|
36.3
|
|
|
|
|
|
|
|
|
|
Oncology
|
|
|
|
|
|
|
|
|
|
|
|
|
Emend
|
|
|
313.1
|
|
|
|
259.7
|
|
|
|
201.7
|
|
Temodar
|
|
|
188.1
|
|
|
|
|
|
|
|
|
|
Caelyx
|
|
|
46.5
|
|
|
|
|
|
|
|
|
|
Intron A
|
|
|
38.4
|
|
|
|
|
|
|
|
|
|
Vaccines(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
ProQuad/M-M-R II/Varivax
|
|
|
1,368.5
|
|
|
|
1,268.5
|
|
|
|
1,347.1
|
|
Gardasil
|
|
|
1,118.4
|
|
|
|
1,402.8
|
|
|
|
1,480.6
|
|
RotaTeq
|
|
|
521.9
|
|
|
|
664.5
|
|
|
|
524.7
|
|
Pneumovax
|
|
|
345.6
|
|
|
|
249.3
|
|
|
|
233.2
|
|
Zostavax
|
|
|
277.4
|
|
|
|
312.4
|
|
|
|
236.0
|
|
Womens Health and Endocrine
|
|
|
|
|
|
|
|
|
|
|
|
|
Follistim/Puregon
|
|
|
96.5
|
|
|
|
|
|
|
|
|
|
NuvaRing
|
|
|
88.3
|
|
|
|
|
|
|
|
|
|
Other
Pharmaceutical(3)
|
|
|
1,294.9
|
|
|
|
922.9
|
|
|
|
1,136.6
|
|
|
|
|
|
|
25,236.5
|
|
|
|
22,081.3
|
|
|
|
22,282.8
|
|
|
|
Other segment revenues
(4)
|
|
|
2,114.0
|
|
|
|
1,694.1
|
|
|
|
1,848.1
|
|
|
|
Total segment revenues
|
|
|
27,350.5
|
|
|
|
23,775.4
|
|
|
|
24,130.9
|
|
|
|
Other (5)
|
|
|
77.8
|
|
|
|
74.9
|
|
|
|
66.8
|
|
|
|
|
|
$
|
27,428.3
|
|
|
$
|
23,850.3
|
|
|
$
|
24,197.7
|
|
|
|
|
(1)
|
Sales of legacy Schering-Plough
products only reflect results for the post-Merger period through
December 31, 2009. Sales of MSP Partnership products
Zetia and Vytorin
represent sales for the post-Merger period through
December 31, 2009. Prior to the Merger, sales of Zetia
and Vytorin were primarily recognized by the MSP
Partnership and the results of Old Mercks interest in the
MSP Partnership were recorded in Equity income from
affiliates. Sales of Zetia and Vytorin in 2008
and 2007 reflect Old Mercks sales of these products in
Latin America which was not part of the MSP Partnership.
|
|
(2)
|
These amounts do not reflect
sales of vaccines sold in most major European markets through
the Companys joint venture, Sanofi Pasteur MSD, the
results of which are reflected in
Equity income from
affiliates. These amounts do, however, reflect supply sales to
Sanofi Pasteur MSD.
|
|
(3)
|
Other pharmaceutical primarily
includes sales of other human pharmaceutical products, including
products within the franchises not listed separately.
|
|
(4)
|
Reflects other non-reportable
segments, including animal health and consumer health care, and
revenue from the Companys relationship with AZLP primarily
relating to sales of
Nexium, as well as
Prilosec. Revenue from AZLP was $1.4 billion,
$1.6 billion and $1.7 billion in 2009, 2008 and 2007,
respectively.
|
|
(5)
|
Other revenues are primarily
comprised of miscellaneous corporate revenues, third-party
manufacturing sales, sales related to divested products or
businesses and other supply sales not included in segment
results.
|
69
Pharmaceutical
Segment Revenues
Bone,
Respiratory, Immunology and Dermatology
Worldwide sales of Singulair, a leukotriene receptor
antagonist for the chronic treatment of asthma and for the
relief of symptoms of allergic rhinitis, grew 7% reaching
$4.7 billion in 2009 primarily driven by favorable pricing
and strong performance in Japan and Asia Pacific. Global sales
of Singulair rose 2% to $4.3 billion in 2008,
reflecting higher sales outside the United States, including
volume growth in Europe and Japan and the positive effect of
foreign exchange, partially offset by lower sales domestically.
Singulair continues to be the number one prescribed
product in the U.S. respiratory market. U.S. sales of
Singulair were $3.0 billion in 2009. The patent that
provides U.S. marketing exclusivity for Singulair
expires in August 2012. The Company expects that within the
two years following patent expiration, it will lose
substantially all U.S. sales of Singulair, with most
of those declines coming in the first full year following patent
expiration. In addition, the patent for Singulair will
expire in a number of major European markets in August 2012 and
the Company expects sales of Singulair in those markets
will decline significantly thereafter.
Worldwide sales of Fosamax and Fosamax Plus D
(marketed as Fosavance throughout the EU and as
Fosamac in Japan), for the treatment and, in the case of
Fosamax, prevention of osteoporosis, decreased 29% in
2009 to $1.1 billion and declined 49% in 2008 to
$1.6 billion. Since substantially all formulations of these
medicines have lost U.S. market exclusivity, the Company is
experiencing significant declines in sales in the United States
within the Fosamax product franchise and the Company
expects such declines to continue.
International sales of Remicade, a treatment for
inflammatory diseases, were $430.7 million for the
post-Merger period through December 31, 2009. Remicade
is marketed by the Company outside of the United States
(except in Japan and certain Asian markets). Products that
compete with Remicade have been launched over the past
several years. In October 2009, the EC approved Simponi
(golimumab), a once-monthly subcutaneous treatment for certain
inflammatory diseases. The Company has launched Simponi
in Canada, Germany and Denmark; launches in other
international markets are ongoing or planned. See Note 12
to the consolidated financial statements for a discussion of
arbitration proceedings involving Remicade/Simponi.
Global sales of Nasonex nasal spray, an inhaled nasal
corticosteroid for the treatment of nasal allergy symptoms, were
$164.9 million for the post-Merger period through
December 31, 2009.
Global sales of Clarinex (marketed as Aerius in
many countries outside the United States), a non-drowsy
antihistamine, were $100.6 million for the post-Merger
period through December 31, 2009.
Other products included in the Bone, Respiratory, Immunology and
Dermatology franchise include among others, Propecia, a
product for the treatment of male pattern hair loss; Arcoxia,
for the treatment of arthritis and pain; and Asmanex,
an orally inhaled steroid for asthma.
Cardiovascular
Sales of Zetia, a cholesterol absorption inhibitor, and
Vytorin, a combination product containing the active
ingredients of both Zetia and Zocor were
$402.9 million and $440.8 million respectively, for
the post-Merger period through December 31, 2009. Prior to
the Merger, sales of these products were recognized by the MSP
Partnership and the results of Old Mercks interest in the
MSP Partnership were recorded in Equity income from
affiliates. As a result of the Merger, the MSP Partnership
is now wholly-owned by the Company and therefore revenues from
these products are now reflected in Sales. For a
discussion of the performance of Zetia and Vytorin
prior to the closing of the Merger (see Selected Joint
Venture and Affiliate Information below).
Global sales of Integrilin Injection, a legacy
Schering-Plough product for the treatment of patients with acute
coronary syndrome, which is sold by the Company in the United
States and Canada, were $45.9 million for the post-Merger
period through December 31, 2009.
In June 2009, launches of Tredaptive began in
international markets and as of December 31, 2009, Merck
had launched Tredaptive in 20 countries including most
major European markets. Tredaptive is a lipid-modifying
therapy for patients with mixed dyslipidemia and primary
hypercholesterolemia. Tredaptive, also known by the
trademark of Cordaptive in certain countries, is now
approved in 45 countries outside the United States. In the
United States, it remains investigational.
70
Diabetes
and Obesity
Global sales of Januvia, Mercks dipeptidyl
peptidase-4 (DPP-4) inhibitor for the treatment of
type 2 diabetes, were $1.9 billion in 2009,
$1.4 billion in 2008 and $667.5 million in 2007.
Januvia was approved by the FDA in October 2006 and by
the EC in March 2007. DPP-4 inhibitors represent a class of
prescription medications that improve blood sugar control in
patients with type 2 diabetes by enhancing a natural body system
called the incretin system, which helps to regulate glucose by
affecting the beta cells and alpha cells in the pancreas. During
2009, Januvia received regulatory approval in Japan and
China.
In 2009, the EC approved the restricted first line use of
Januvia for the treatment of type 2 diabetes. With this
approval, sitagliptin is indicated to improve glycemic control
when diet and exercise alone do not provide adequate glycemic
control and when metformin is inappropriate due to
contraindications or intolerance. Sitagliptin is now the only
diabetes treatment in the DPP-4 inhibitor class to have a
restricted first line indication in the EU.
Worldwide sales of Janumet, Mercks oral
antihyperglycemic agent that combines sitagliptin (Mercks
DPP-4 inhibitor, Januvia) with metformin in a single
tablet to target all three key defects of type 2 diabetes, were
$658.4 million in 2009 compared with $351.1 million in
2008 and $86.4 million in 2007. Janumet was
initially approved as an adjunct to diet and exercise to improve
blood sugar control in adult patients with type 2 diabetes who
are not adequately controlled on metformin or sitagliptin alone,
or in patients already being treated with the combination of
sitagliptin and metformin. In February 2008, FDA approval to
market Janumet as an initial treatment for type 2
diabetes was received. In July 2008, Janumet was approved
for marketing in the EU, Iceland and Norway.
In 2009, the EC approved the use of Januvia tablets and
Janumet tablets as add-on to insulin for the treatment of
type 2 diabetes. Sitagliptin is now the only diabetes treatment
in the DPP-4 inhibitor class to have an indication for use as
add-on to insulin in the EU. In the United States, a
supplemental New Drug Application concerning the use of
Januvia and Janumet in combination with insulin
has been accepted by the FDA and is currently under review.
Infectious
Disease
Worldwide sales of Isentress, an antiretroviral therapy
for the treatment of HIV infection, were $751.8 million in
2009, $361.1 million in 2008 and $41.3 million in
2007. Sales growth in 2009 reflects positive performance in the
United States, as well as internationally due in part to strong
2008 launches in certain countries, including France, Spain and
Italy. Isentress is now available in all major
international markets. In October 2007, the FDA granted
Isentress accelerated approval for use in combination
with other antiretroviral agents for the treatment of HIV-1
infection in treatment-experienced adult patients who have
evidence of viral replication and HIV-1 strains resistant to
multiple antiretroviral agents. Isentress was the first
medicine to be approved in the class of antiretroviral drugs
called integrase inhibitors. Isentress works by
inhibiting the insertion of HIV DNA into human DNA by the
integrase enzyme. Inhibiting integrase from performing this
essential function limits the ability of the virus to replicate
and infect new cells. In January 2009, the FDA granted
traditional approval to Isentress following review of the
48 week data from the BENCHMRK 1 & 2 clinical trials.
In July 2009, the FDA approved an expanded indication for
Isentress to include use in the treatment of adult
patients starting HIV-1 therapy for the first time (treatment
naïve), as well as in treatment-experienced adult patients.
In September 2009, Isentress was granted an expanded
license from the EC for use in combination with other
antiretroviral medicinal products for the treatment of HIV-1
infection in adult patients, including treatment-naïve
adult patients, as well as treatment-experienced adult patients.
The Commissions decision is applicable to the 27 countries
that are members of the EU, as well as Iceland and Norway.
Additionally, in October 2009, Merck announced that Isentress
is now indicated for use in treatment-naïve adults in
Canada.
Sales of Primaxin, an anti-bacterial product, declined 9%
in 2009 to $688.9 million as compared with 2008. These
results reflect competitive pressures and also reflect supply
constraints. Patents on Primaxin have expired worldwide
and multiple generics have been approved in Europe. Accordingly,
the Company is experiencing a decline in sales of this product
and the Company expects the decline to continue. Sales of
Primaxin were essentially flat in 2008 as compared with
2007.
71
Worldwide sales of PegIntron for treating chronic
hepatitis C were $148.7 million for the post-Merger
period through December 31, 2009.
Other products contained in the Infectious Diseases franchise
include among others, Cancidas, an anti-fungal product;
Crixivan and Stocrin, antiretroviral therapies for
the treatment of HIV infection; Avelox, a fluoroquinolone
antibiotic for the treatment of certain respiratory and skin
infections; and Invanz for the treatment of certain
infections.
Mature
Brands
Mercks mature brands are human health pharmaceutical
products that are approaching the expiration of their marketing
exclusivity or are no longer protected by patents in developed
markets, but continue to be a core part of the Companys
offering in other markets around the world.
Global sales of Cozaar, and its companion agent Hyzaar
(a combination of Cozaar and hydrochlorothiazide),
for the treatment of hypertension, were $3.6 billion in
2009 which are comparable to sales in 2008 reflecting the
unfavorable effect of foreign exchange, offset by strong
performance of both products in the United States and of
Hyzaar in Japan (marketed as Preminent). Global
sales of Cozaar and Hyzaar grew 6% to
$3.6 billion in 2008 driven by strong performance of
Hyzaar in Japan, as well as by the positive effect of
foreign exchange. Cozaar and Hyzaar are among the
leading medicines in the angiotensin receptor blocker class. The
patents that provide U.S. market exclusivity for Cozaar
and Hyzaar expire in April 2010. In addition, the
patent for Cozaar will expire in a number of major
European markets in March 2010. Hyzaar lost patent
protection in a number of major European markets in February
2010. The Company anticipates a significant decline in future
Cozaar/Hyzaar sales since there are multiple sources of
generics expected for these medicines at the time of patent
expiry.
Worldwide sales of Zocor, a statin for modifying
cholesterol, declined 15% in 2009 and 25% in 2008. Zocor
lost U.S. market exclusivity in June 2006 and has also
lost market exclusivity in all major international markets.
Other products contained in the Mature Brands franchise include
among others, prescription Claritin for the treatment of
seasonal outdoor allergies and year-round indoor allergies;
Vasotec/Vaseretic for hypertension
and/or heart
failure; and Proscar, a urology product for the treatment
of symptomatic benign prostate enlargement.
Neurosciences
and Ophthalmology
Sales of Cosopt and Trusopt, Mercks
largest-selling ophthalmic products, declined 36% to
$503.5 million in 2009 as compared with 2008. The patent
that provided U.S. market exclusivity for Cosopt and
Trusopt expired in October 2008. Cosopt has also
lost market exclusivity in a number of major European markets.
Trusopt will lose market exclusivity in a number of major
European markets in April 2012 and the Company expects sales in
those markets to decline significantly thereafter. Sales of
Cosopt and Trusopt declined 1% in 2008 as compared
with 2007.
Saphris (asenapine), Mercks sublingual tablet for
acute treatment of schizophrenia in adults and acute treatment
of manic or mixed episodes associated with bipolar I disorder,
was approved by the FDA in August 2009 and a full launch is
underway. The Company has filed two supplemental New Drug
Applications with the FDA for Saphris as an adjunct to
therapy in patients with mania and for maintenance therapy in
patients with schizophrenia. The application for asenapine is
also under review in the EU.
The Companys muscle relaxant reversal drug, Bridion,
is currently approved in 44 countries, including Japan, and
has been launched in 28 countries around the world.
During 2009, Saflutan (tafluprost) was launched in a
number of countries including the United Kingdom and Spain, and
additional launches in other countries are expected over the
next year, pending regulatory approvals. Saflutan is a
preservative free, synthetic analogue of the prostaglandin
F2α for the reduction of elevated intraocular pressure in
appropriate patients with primary open-angle glaucoma and ocular
hypertension. Tafluprost is in Phase III development in the
United States. In April 2009, Old Merck and Santen
Pharmaceutical Co., Ltd. (Santen) announced a
worldwide licensing agreement for tafluprost (see Research
and Development Update below).
72
Also, during 2009, Old Merck divested its U.S. marketing
rights to the Timoptic product franchise to Aton Pharma,
Inc. The Timoptic product franchise includes ophthalmic
products to treat elevated intraocular pressure in patients with
ocular hypertension or open-angle glaucoma.
Oncology
Sales of Temodar, a treatment for certain types of brain
tumors, were $188.1 million for the post-Merger period
through December 31, 2009. Temodar lost patent
exclusivity in the EU in 2009. In January 2010, the Company
announced that the U.S. District Court for the District of
Delaware ruled against the Company in a patent infringement suit
against Teva Pharmaceuticals USA Inc. (see Note 12 to the
consolidated financial statements). The decision is being
appealed. The effects of the ruling are uncertain while this
matter is under appeal.
Other products in the Oncology franchise include Emend
for the treatment of chemotherapy induced nausea and
vomiting; and Caelyx for the treatment of ovarian cancer,
metastatic breast cancer and Kaposis sarcoma. Marketing
rights for Caelyx return to Johnson & Johnson
as of December 31, 2010.
Vaccines
The following discussion of vaccines does not include sales of
vaccines sold in most major European markets through Sanofi
Pasteur MSD (SPMSD), the Companys joint
venture with Sanofi Pasteur, the results of which are included
in Equity income from affiliates (see Selected
Joint Venture and Affiliate Information below). Supply
sales to SPMSD, however, are included.
Worldwide sales of Gardasil, recorded by Merck, declined
20% to $1.1 billion in 2009 and declined 5% to
$1.4 billion in 2008. Gardasil, the worlds
top-selling HPV vaccine, is indicated for girls and women 9
through 26 years of age for the prevention of cervical,
vulvar and vaginal cancers, precancerous or dysplastic lesions,
and genital warts caused by HPV types 6, 11, 16 and 18.
Gardasil is also approved in the United States for use in
boys and men ages 9 through 26 years of age for the
prevention of genital warts caused by HPV types 6 and 11. Sales
performance in 2009 was driven largely by declines in the United
States which continue to be affected by the saturation of the 13
to 18 year-old female cohort due to rapid early uptake, and
ongoing challenges to vaccinating the 19 to 26 year-old
female age group. Sales in 2009 include $51 million of
revenue as a result of government purchases for the
U.S. Centers for Disease Control and Preventions
(CDC) Strategic National Stockpile. In 2008, sales
performance reflects lower sales domestically, partially offset
by growth outside the United States. Sales in 2007 include
initial purchases by many states through the CDC Vaccines for
Children program. The Company is a party to certain third party
license agreements with respect to Gardasil (including a
cross-license and settlement agreement with GlaxoSmithKline). As
a result of these agreements, the Company pays royalties on
worldwide Gardasil sales of 21% to 27% which vary by
country and are included in Materials and production
costs.
In October 2009, the FDA approved Gardasil for use in
boys and men, making Gardasil the only HPV vaccine
approved for use in males. Later in October 2009, Merck
announced that the CDCs Advisory Committee on Immunization
Practices (ACIP) supports the permissive use of
Gardasil for boys and men ages 9 to 26, which means
that Gardasil may be given to males ages 9 to 26 to
reduce the likelihood of acquiring genital warts. The ACIP also
voted to recommend that funding be provided for the use of
Gardasil in males through the Vaccines for Children
program.
In January 2009, the FDA issued a second complete response
letter regarding the supplemental Biologics License Application
(sBLA) for the use of Gardasil in women
ages 27 through 45. The FDA completed its review of the
response that Old Merck provided in July 2008 to the FDAs
first complete response letter issued in June 2008 and
recommended that Old Merck submit additional data when the
48 month study has been completed. The initial sBLA
included data collected through an average of 24 months
from enrollment into the study, which is when the number of
pre-specified endpoints had been met. Merck provided a response
to the FDA in the fourth quarter of 2009. This was a
Class 2 Response which generally carries a
6-month
review time from the point that the FDA has accepted the file.
The complete response letter does not affect current indications
for Gardasil in females ages 9 through 26.
Global sales of RotaTeq, a vaccine to help protect
against rotavirus gastroenteritis in infants and children,
recorded by Merck declined 21% in 2009 to $521.9 million
reflecting moderate impact from competition in the
73
United States, with a greater impact in the public sector.
Worldwide sales of RotaTeq grew 27% in 2008 to
$664.5 million primarily driven by the continued uptake in
the United States and successful launches around the world.
Sales in 2008 included purchases of $54 million to support
the CDC Strategic National Stockpile.
Old Merck has received regulatory approvals in the United States
and certain other markets to increase its manufacturing capacity
for the Companys varicella zoster virus
(VZV)-containing vaccines. The Company is
manufacturing bulk varicella and is producing doses of
Varivax and Zostavax. ProQuad, a pediatric
combination vaccine to help protect against measles, mumps,
rubella and varicella, one of the VZV-containing vaccines, is
currently not available for ordering; however, orders have been
transitioned, as appropriate, to M-M-R II and
Varivax. Total sales as recorded by Merck for ProQuad
were $9.5 million in 2008 and $264.4 million in
2007. Merck anticipates that some ProQuad will be
available in the U.S. market in 2010.
Mercks sales of Varivax, a vaccine to help prevent
chickenpox (varicella), were $1.0 billion in 2009,
$924.6 million in 2008 and $854.9 million in 2007.
Varivax is the only vaccine available in the United
States to help protect against chickenpox due to the
unavailability of ProQuad. Sales for 2009 reflect
$64 million in revenue as a result of government purchases
for the CDCs Strategic National Stockpile. In 2007,
Varivax benefited from the ACIPs June 2006 second
dose recommendation. Mercks sales of M-M-R II, a
vaccine to help protect against measles, mumps and rubella, were
$331.4 million in 2009, $334.4 million in 2008 and
$227.8 million in 2007. Sales of Varivax and
M-M-R II were affected by the unavailability of
ProQuad. Combined sales of ProQuad, M-M-R II and
Varivax increased 8% in 2009 and declined 6% in 2008.
Sales of Zostavax, a vaccine to help prevent shingles
(herpes zoster), recorded by Merck were $277.4 million in
2009, $312.4 million in 2008 and $236.0 million in
2007. Sales in all of these years were affected by supply
issues. While normal shipping schedules for Zostavax in
the United States were resumed in June 2009 and the Company
anticipates that Zostavax will be available in 2010 in
the United States, customers will likely experience back orders
of Zostavax throughout the year. International launches
of Zostavax will be delayed until 2011. The vaccine is
the first and only medical option for the prevention of shingles.
Sales of Pneumovax, a vaccine to help prevent
pneumococcal disease, were $345.6 million for 2009 compared
with $249.3 million for 2008 and $233.2 million for
2007. The increase in 2009 is due to favorable pricing in the
United States and higher demand associated with the flu pandemic.
In September 2009, Old Merck announced that it had entered into
an exclusive agreement with CSL Biotherapies (CSL),
a subsidiary of CSL Limited, to market and distribute
Afluria, CSLs seasonal influenza (flu) vaccine, in
the United States, for the 2010/2011-2015/2016 flu seasons.
Under the terms of the agreement, the Company will assume
responsibility for all aspects of commercialization of
Afluria in the United States. CSL will supply Afluria
to Merck and will retain responsibility for marketing the
vaccine outside the United States. Afluria is indicated
for the active immunization of persons age 6 months
and older against influenza disease caused by influenza virus
subtypes A and type B present in the vaccine.
Efforts to resolve manufacturing issues related to
HIB-containing vaccines, PedvaxHIB and Comvax have
been ongoing since December 2007. In January 2010, PedvaxHIB
became fully available in the United States for routine
vaccination as well as for booster dose
catch-up
vaccination. The timing of availability outside the United
States is dependent upon local regulatory requirements. The
market return of Comvax will be dependent upon the supply
situation for both the Companys HIB-containing vaccine and
hepatitis B vaccine.
The pediatric/adolescent formulation of Vaqta, a vaccine
against hepatitis A, is currently available. Because the Company
is continuing to prioritize the pediatric/adolescent
formulation, Merck anticipates the adult formulation will not be
available in 2010. Outside of the United States, the supply of
Vaqta is limited and availability will vary by region.
The pediatric/adolescent formulation of Recombivax HB, a
vaccine against hepatitis B, became available in December 2009.
The Company does not anticipate availability of the adult
formulation in the first half of 2010. The Company anticipates
the dialysis formulation will become available before the end of
2010.
74
Womens
Health & Endocrine
Global sales of Follistim/Puregon, a fertility treatment,
were $96.5 million for the post-Merger period through
December 31, 2009. Follistim/Puregon lost market
exclusivity in the EU in August 2009. Worldwide sales of
NuvaRing, a contraceptive product, were
$88.3 million for the post-Merger period through
December 31, 2009.
In January 2010, Merck received EC approval of Elonva. Elonva
is indicated for controlled ovarian stimulation in
combination with a GnRH antagonist for the development of
multiple follicles in women participating in an assisted
reproductive technology program. With the EC approval, Merck
receives marketing authorization for Elonva with unified
labeling valid in all European Union Member States. Elonva
is the first in the class of sustained follicle stimulant.
Due to its ability to initiate and sustain multiple follicular
growth for an entire week, a single subcutaneous injection of
the recommended dose of Elonva may replace the first
seven injections of any daily recombinant follicle stimulating
hormone (rFSH) preparation in a controlled ovarian stimulation
treatment cycle.
Other
In January 2010, the Company, AZLP and Teva Pharmaceuticals,
Inc. (which acquired IVAX Pharmaceuticals, Inc.) entered into a
settlement agreement to resolve patent litigation with respect
to esomeprazole (Nexium) which provides that Teva/IVAX
will not bring its generic esomeprazole product to market in the
United States until May 27, 2014. During 2008, Old Merck
and AZLP entered into a similar agreement with Ranbaxy
Laboratories Ltd. (Ranbaxy) which provides that
Ranbaxy will not bring its generic esomeprazole product to
market in the United States until May 27, 2014. The Company
faces other challenges with respect to outstanding patent
infringement matters for esomeprazole (see Note 12 to the
consolidated financial statements).
Animal
Health
Global sales of Animal Health products, which include livestock,
poultry, companion animal and aquaculture products that prevent
and treat animal diseases, totaled $494.2 million for the
post-Merger period through December 31, 2009. Animal Health
sales are affected by intense competition and the frequent
introduction of generic products.
Consumer
Health Care
Global sales of Consumer Health Care products, which include
OTC, foot care and sun care products, were $149.2 million
for the post-Merger period through December 31, 2009.
Consumer Health Care product sales are affected by competition,
frequent competitive product introductions and consumer spending
patterns. Consumer Health Care products include
Dr. Scholls foot care products, Claritin
non-drowsy antihistamines; MiraLAX, a treatment for
occasional constipation; and Coppertone sun care products.
In December 2009, Merck announced that the FDA approved
Zegerid OTC for
over-the-counter
treatment of frequent heartburn. Under an agreement with
Santarus, Inc. a specialty pharmaceutical company that developed
and currently markets prescription Zegerid,
Schering-Plough Healthcare Products, the consumer healthcare
division of Merck, is responsible for the development,
manufacturing and commercialization of Zegerid OTC
products for heartburn-related indications in the United States
and Canada.
75
Costs
Expenses and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2009
|
|
|
Change
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
|
|
|
Materials and production
|
|
$
|
9,018.9
|
|
|
|
62
|
%
|
|
$
|
5,582.5
|
|
|
|
-9
|
%
|
|
$
|
6,140.7
|
|
Marketing and administrative
|
|
|
8,543.2
|
|
|
|
16
|
%
|
|
|
7,377.0
|
|
|
|
-2
|
%
|
|
|
7,556.7
|
|
Research and development
|
|
|
5,845.0
|
|
|
|
22
|
%
|
|
|
4,805.3
|
|
|
|
-2
|
%
|
|
|
4,882.8
|
|
Restructuring costs
|
|
|
1,633.9
|
|
|
|
58
|
%
|
|
|
1,032.5
|
|
|
|
*
|
|
|
|
327.1
|
|
Equity income from affiliates
|
|
|
(2,235.0
|
)
|
|
|
−13
|
%
|
|
|
(2,560.6
|
)
|
|
|
-14
|
%
|
|
|
(2,976.5
|
)
|
U.S. Vioxx Settlement Agreement charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
4,850.0
|
|
Other (income) expense, net
|
|
|
(10,669.5
|
)
|
|
|
*
|
|
|
|
(2,318.1
|
)
|
|
|
*
|
|
|
|
(75.2
|
)
|
|
|
|
|
$
|
12,136.5
|
|
|
|
−13
|
%
|
|
$
|
13,918.6
|
|
|
|
-33
|
%
|
|
$
|
20,705.6
|
|
|
Materials
and Production
In 2009, materials and production costs were $9.0 billion
compared with $5.6 billion in 2008. Materials and
production costs include expenses related to the sale of legacy
Schering-Plough products in the post-Merger period.
Additionally, these costs were unfavorably affected by
$1.5 billion of amortization of purchase accounting
adjustments to Schering-Ploughs inventories and
$0.8 billion of expense for the amortization of intangible
assets recognized in the Merger. Also included in materials and
production costs in 2009 were $115.2 million of costs
associated with restructuring activities, substantially all of
which represents accelerated depreciation associated with the
planned sale or closure of manufacturing facilities. (See
Note 4 to the consolidated financial statements.)
In 2008, materials and production costs declined 9% compared
with a 1% decline in sales primarily reflecting lower
restructuring costs. Included in materials and production costs
in 2008 were $123.2 million of restructuring costs
comprised of $88.7 million of accelerated depreciation and
$34.5 million of other costs, primarily asset write-offs.
This compares with restructuring costs of $483.1 million in
2007 representing $460.6 million of accelerated
depreciation and $22.5 million of asset impairments.
Gross margin was 67.1% in 2009 compared with 76.6% in 2008 and
74.6% in 2007. The additional amortization expense as a result
of the Merger in 2009 and restructuring charges reflected in all
periods as noted above had an unfavorable impact of
8.8 percentage points in 2009, 0.5 percentage points
in 2008 and 2.0 percentage points in 2007. Gross margin in
2008 reflects changes in product mix, including the decline in
Fosamax and Fosamax Plus D sales as a result of
the loss of U.S. market exclusivity in 2008, and
manufacturing efficiencies. Gross margin in 2007 reflects a
slight unfavorable impact from changes in product mix and the
positive impact of manufacturing efficiencies.
Marketing
and Administrative
Marketing and administrative expenses increased 16% in 2009
driven largely by the inclusion of expenses related to
Schering-Plough activities in the post-Merger period.
Additionally, $370.7 million of merger-related costs were
recognized in 2009 consisting of transaction costs directly
related to the Merger (including advisory and legal fees) and
integration costs. These increases were partially offset by
initiatives to reduce the cost base, which were in place prior
to the consummation of the Merger. Separation costs associated
with sales force reductions have been incurred and are reflected
in Restructuring costs as discussed below. In addition,
marketing and administrative expenses benefited from foreign
exchange. Marketing and administrative expenses in 2009 and 2008
included $75 million and $62 million, respectively, of
additional reserves solely for future Vioxx legal defense
costs. Expenses in both 2009 and 2008 also reflect
$40 million of additional reserves solely for future legal
defense costs for Fosamax litigation. (See Note 12
to the consolidated financial statements for more information on
Vioxx and Fosamax litigation related matters).
Marketing and administrative expenses declined 2% in 2008 as
compared with 2007. Included in marketing and administrative
expenses in 2008 and 2007 were $62 million and
$280 million, respectively, of additional reserves solely
for future Vioxx legal defense costs. Also included in
these costs in 2008 was $40 million of additional reserves
solely for future legal defense costs for Fosamax
litigation. In addition, marketing and
76
administrative expenses for 2007 included a $455 million
gain from an insurance arbitration award related to Vioxx
product liability litigation coverage. In addition to lower
expenses for future legal defense costs, the decline in
marketing and administrative expenses in 2008 as compared with
2007 also reflects efforts to reduce the cost base.
Research
and Development
Research and development expenses increased 22% in 2009 as
compared with 2008, due in part to the incremental expenditures
associated with the inclusion of Schering-Ploughs results
in the post-Merger period. Additionally, expenses in 2009
reflect $231.6 million of costs associated with
restructuring activities, including the closure or sale of
research facilities in connection with the 2008 Restructuring
Program, substantially all of which represent accelerated
depreciation. (See Note 4 to the consolidated financial
statements.) In addition, research and development expenses in
2009 as compared with 2008 reflect an increase in development
spending in support of the continued advancement of the research
pipeline, including investments in late-stage clinical trials.
Research and development expenses declined 2% in 2008 compared
with 2007. Expenses in 2008 reflect $128.4 million of costs
related to restructuring activities. Expenses in 2007 reflect
$325.1 million of in-process research and development
expense related to the NovaCardia acquisition. Research and
development expenses in 2008 compared with 2007 reflect an
increase in development spending in support of the continued
advancement of the research pipeline.
Share-Based
Compensation
Total pretax share-based compensation expense was
$415.5 million in 2009, $348.0 million in 2008 and
$330.2 million in 2007. At December 31, 2009, there
was $521.8 million of total pretax unrecognized
compensation expense related to nonvested stock option,
restricted stock unit and performance share unit awards which
will be recognized over a weighted average period of
1.5 years. For segment reporting, share-based compensation
costs are unallocated expenses.
Restructuring
Costs
Restructuring costs were $1.6 billion, $1.0 billion
and $327.1 million for 2009, 2008 and 2007, respectively.
Of the restructuring costs recorded in 2009, $1.4 billion
related to the Merger Restructuring Program, $178.2 million
related to the 2008 Restructuring Program and $38.7 million
related to the legacy Schering-Plough Productivity
Transformation Program. Of the restructuring costs recorded in
2008, $735.5 million related to the 2008 Restructuring
Program and the remainder were associated with the 2005
Restructuring Program. In 2009, 2008 and 2007, separation costs
of $1.4 billion, $957.3 million and
$251.4 million, respectively, were incurred associated with
actual headcount reductions, as well as estimated expenses under
existing severance programs for headcount reductions that were
probable and could be reasonably estimated. Merck eliminated
3,525 positions in 2009 (most of which related to the 2008
Restructuring Program), 5,800 positions in 2008 (of which
approximately 1,750 related to the 2008 Restructuring Program
and 4,050 related to the 2005 Restructuring Program) and 2,400
positions in 2007. These position eliminations are comprised of
actual headcount reductions, and the elimination of contractors
and vacant positions. Also included in restructuring costs are
curtailment, settlement and termination charges on pension and
other postretirement benefit plans and shutdown costs. For
segment reporting, restructuring costs are unallocated expenses.
Additional costs associated with the Companys
restructuring activities are included in Materials and
production costs and Research and development
expenses.
Equity
Income from Affiliates
Equity income from affiliates reflects the performance of the
Companys joint ventures and partnerships. The decline in
2009 was primarily driven by lower equity income from the MSP
Partnership, which is now wholly-owned by the Company as a
result of the Merger and therefore its results are reflected in
the consolidated results of the Company beginning on the date of
the Merger, and decreased equity income from Merial due to the
sale of Old Mercks interest in September 2009, partially
offset by higher partnership returns from AZLP. In 2008, the
decline in equity income from affiliates reflects decreased
equity income from the MSP Partnership and lower partnership
returns from AZLP, partially offset by higher equity income from
Merial and SPMSD. The decrease in equity income from the MSP
Partnership in 2008 was primarily the result of lower revenues
of Vytorin and Zetia following the announcements
of the ENHANCE and SEAS clinical trial results. The lower
partnership returns from AZLP in
77
2008 were primarily attributable to the first quarter 2008
partial redemption of Old Mercks interest in certain AZLP
product rights, which resulted in a reduction of the priority
return and the variable returns which were based, in part, upon
sales of certain former Astra USA, Inc. products. The higher
equity income from Merial in 2008 primarily reflects higher
sales of biological products. The increase in equity income from
SPMSD in 2008 was largely attributable to higher sales of
Gardasil in joint venture territories outside of the
United States. (See Selected Joint Venture and Affiliate
Information below.)
U.S.
Vioxx
Settlement Agreement Charge
On November 9, 2007, Old Merck entered into an agreement
(the Settlement Agreement) with the law firms that
comprise the executive committee of the Plaintiffs
Steering Committee of the federal multidistrict Vioxx
litigation as well as representatives of plaintiffs
counsel in state coordinated proceedings to resolve state and
federal myocardial infarction (MI) and ischemic
stroke (IS) claims filed as of that date against Old
Merck in the United States. Under the Settlement Agreement, Old
Merck paid an aggregate fixed amount of $4.85 billion into
two funds for qualifying claims consisting of $4.0 billion
for qualifying MI claims and $850 million for qualifying IS
claims that entered into the resolution process
(Settlement Program), of which $750 million was
paid into such funds in 2008 and the remainder in 2009. As a
consequence of the Settlement Agreement, a pretax charge of
$4.85 billion was recorded in 2007. (See Note 12 to
the consolidated financial statements).
Other
(Income) Expense, Net
Included in other (income) expense, net in 2009 was a
$7.5 billion gain related to Mercks previously held
interest in the MSP Partnership. As a result of the Merger, the
Company obtained a controlling interest in the MSP Partnership
and it is now owned 100% by the Company. Previously, the Company
had a noncontrolling interest. A business combination in which
an acquirer holds a noncontrolling equity investment in the
acquiree immediately before obtaining control of that acquiree
is referred to as a step acquisition. The acquirer
is required to remeasure its previously held equity interest in
the acquiree at its acquisition-date fair value and recognize
the resulting gain or loss in earnings. Additionally during
2009, a $3.2 billion gain was recognized on the sale of Old
Mercks interest in Merial (see Note 10 to the
consolidated financial statements). Also included in other
(income) expense, net in 2009 was $231 million of
investment portfolio recognized net gains, and an
$80 million charge related to the settlement of the
Vioxx third-party payor litigation in the United States
(see Note 12 to the consolidated financial statements).
Included in other (income) expense, net in 2008 was an aggregate
gain on distribution from AZLP of $2.2 billion (see
Note 10 to the consolidated financial statements), a gain
of $249 million related to the sale of the remaining
worldwide rights to Aggrastat, a $300 million
expense for a contribution to the Merck Company Foundation,
$117 million of investment portfolio recognized net losses
and a $58 million charge related to the resolution of an
investigation into whether Old Merck violated state consumer
protection laws with respect to the sales and marketing of
Vioxx. Merck experienced a decline in interest income in
2009 as compared with 2008 primarily as a result of lower
interest rates and a change in the investment portfolio mix
toward cash and shorter-dated securities in anticipation of the
Merger. Merck recognized higher interest expense in 2009 largely
due to $174 million of commitment fees and incremental
interest expense related to the financing of the Merger.
The change in other (income) expense, net during 2008 as
compared with 2007 was primarily due to an aggregate gain in
2008 from AZLP of $2.2 billion, the impact of a
$671 million charge in 2007 related to the resolution of
certain civil governmental investigations, and a 2008 gain of
$249 million related to the sale of the remaining worldwide
rights to Aggrastat, partially offset by a
$300 million expense in 2008 for a contribution to the
Merck Company Foundation, an increase in exchange losses of
$202 million, higher recognized losses of
$153 million, net, in the investment portfolio and a
$58 million charge related to the resolution of an
investigation into whether Old Merck violated consumer
protection laws with respect to the sales and marketing of
Vioxx. The fluctuation in exchange losses (gains) in 2008
from 2007 was primarily due to the higher cost of foreign
currency contracts due to lower U.S. interest rates and
unfavorable impacts of
period-to-period
changes in foreign currency exchange rates on net long or net
short foreign currency positions, considering both net monetary
assets and related foreign currency contracts.
78
Segment
Profits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Pharmaceutical segment profits
|
|
$
|
15,714.6
|
|
|
$
|
14,110.3
|
|
|
$
|
14,558.7
|
|
Other non-reportable segment profits
|
|
|
1,735.1
|
|
|
|
1,691.0
|
|
|
|
2,027.6
|
|
Other
|
|
|
(2,157.9
|
)
|
|
|
(5,869.6
|
)
|
|
|
(13,094.2
|
)
|
|
|
Income before income taxes
|
|
$
|
15,291.8
|
|
|
$
|
9,931.7
|
|
|
$
|
3,492.1
|
|
|
Segment profits are comprised of segment revenues less certain
elements of materials and production costs and operating
expenses, including components of equity income (loss) from
affiliates and depreciation and amortization expenses. For
internal management reporting presented to the chief operating
decision maker, Merck does not allocate production costs, other
than standard costs, research and development expenses and
general and administrative expenses, as well as the cost of
financing these activities. Separate divisions maintain
responsibility for monitoring and managing these costs,
including depreciation related to fixed assets utilized by these
divisions and, therefore, they are not included in segment
profits. Also excluded from the determination of segment profits
are the gain related to the MSP Partnership, the amortization of
purchase accounting adjustments, the gain on the disposition of
Merial, the gain on distribution from AZLP, restructuring costs
the U.S. Vioxx Settlement Agreement charge, taxes
paid at the joint venture level and a portion of equity income.
Additionally, segment profits do not reflect other expenses from
corporate and manufacturing cost centers and other miscellaneous
income (expense). These unallocated items are reflected in
Other in the above table. Also included in other are
miscellaneous corporate profits, operating profits related to
divested products or businesses, other supply sales and
adjustments to eliminate the effect of double counting certain
items of income and expense.
Pharmaceutical segment profits rose 11% in 2009 largely driven
by the inclusion of legacy Schering-Plough results in the
post-Merger period. Pharmaceutical segment profits decreased 3%
in 2008 largely driven by lower sales of Fosamax and
Fosamax Plus D, Zocor and decreased equity income from
the MSP Partnership.
Taxes on
Income
The effective income tax rate was 14.8% in 2009, 20.1% in 2008
and 2.7% in 2007. The 2009 effective tax rate reflects the
favorable impacts of increased income in lower tax
jurisdictions, which includes the favorable impact of the MSP
Partnership gain, and higher expenses in certain jurisdictions
including the amortization of purchase accounting adjustments
and restructuring costs. The effective income tax rate in 2009
also benefited from 2009 tax settlements, including the
previously announced settlement with the Canada Revenue Agency
(CRA.) These favorable impacts were partially offset
by the unfavorable effect of the gain on the sale of Old
Mercks interest in Merial being taxable in the United
States at a combined federal and state tax rate of approximately
38.0%. The net favorable impact of the above items on the 2009
effective tax rate was approximately 7 percentage points. The
2008 effective tax rate reflects a net favorable impact as
compared with the statutory rate of approximately
3 percentage points, which includes favorable impacts
relating to tax settlements that resulted in a reduction of the
liability for unrecognized tax benefits of approximately
$200 million, the realization of foreign tax credits and
the favorable tax impact of foreign exchange rate changes during
the fourth quarter, particularly the strengthening of the
Japanese yen against the US dollar, partially offset by an
unfavorable impact resulting from the AZLP gain being fully
taxable in the United States at a combined federal and state tax
rate of approximately 36.3%. In the first quarter of 2008, Old
Merck decided to distribute certain prior years foreign
earnings to the United States which will result in a utilization
of foreign tax credits. These foreign tax credits arose as a
result of tax payments made outside of the United States in
prior years that became realizable in the first quarter based on
a change in Old Mercks decision to distribute these
foreign earnings. The 2007 effective tax rate reflects the
reduction of domestic pretax income primarily resulting from the
U.S. Vioxx Settlement Agreement charge and the
related change in mix of domestic and foreign pretax income.
Net
Income and Earnings per Common Share
Net income available to common shareholders was
$12.9 billion in 2009 compared with $7.8 billion in
2008 and $3.3 billion in 2007. Earnings per common share
assuming dilution available to common shareholders
(EPS) were $5.65 in 2009 compared with $3.63 in 2008
and $1.49 in 2007. The increases in net income and earnings per
share in 2009 were largely driven by the gain associated with
the MSP Partnership recognized in conjunction with the Merger,
as well as the gain recorded on the sale of Old Mercks
interest in Merial, partially offset by incremental charges
associated with the Merger, including the amortization of
intangible assets and
79
inventory step-up and the recognition of merger-related costs.
EPS in 2009 was also affected by the dilutive impact of shares
issued in the Merger. The increases in net income and earnings
per share in 2008 as compared with 2007 are primarily
attributable to the gain on distribution from AZLP in 2008 and
the impacts in 2007 of the U.S. Vioxx Settlement
Agreement and civil governmental investigations charges. In
addition, the increases reflect the positive impact of certain
tax items, lower in-process research and development costs and
lower expenses for legal defense costs, partially offset by
higher restructuring costs and lower equity earnings in 2008, as
well as the recognition in 2007 of an insurance arbitration gain.
Non-GAAP Income
and Non-GAAP EPS
Non-GAAP income and non-GAAP EPS are alternative views of
the Companys performance used by management that Merck is
providing because management believes this information enhances
investors understanding of the Companys results.
Non-GAAP income and non-GAAP earnings per share exclude certain
items because of the nature of these items and the impact that
they have on the analysis of underlying business performance and
trends. The excluded items are certain purchase accounting items
related to the Merger, restructuring activities, merger-related
costs, and certain other items. These excluded items are
significant components in understanding and assessing financial
performance. Therefore, the information on non-GAAP income and
non-GAAP EPS should be considered in addition to, but not
in lieu of, net income and earnings per share prepared in
accordance with generally accepted accounting principles in the
United States (GAAP). Additionally, since non-GAAP
income and non-GAAP EPS are not measures determined in
accordance with GAAP, they have no standardized meaning
prescribed by GAAP and, therefore, may not be comparable to the
calculation of similar measures of other companies.
Non-GAAP income and non-GAAP EPS are important internal
measures for the Company. Senior management receives a monthly
analysis of operating results that includes non-GAAP income and
non-GAAP EPS and the performance of the Company is measured
on this basis along with other performance metrics. Senior
managements annual compensation is derived in part using
non-GAAP income and non-GAAP EPS.
80
A reconciliation between GAAP financial measures and non-GAAP
financial measures is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Pretax income as reported under GAAP
|
|
$
|
15,292
|
|
|
$
|
9,932
|
|
|
$
|
3,492
|
|
Increase (decrease) for excluded items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase accounting
|
|
|
2,286
|
|
|
|
|
|
|
|
|
|
Restructuring activities
|
|
|
1,981
|
|
|
|
1,284
|
|
|
|
810
|
|
Merger-related costs
|
|
|
544
|
|
|
|
|
|
|
|
|
|
Other items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain related to the MSP Partnership
|
|
|
(7,530
|
)
|
|
|
|
|
|
|
|
|
Gain on Merial
|
|
|
(3,163
|
)
|
|
|
|
|
|
|
|
|
Gain on distribution from AZLP
|
|
|
|
|
|
|
(2,223
|
)
|
|
|
|
|
U.S. Vioxx settlement agreement charge
|
|
|
|
|
|
|
|
|
|
|
4,850
|
|
Civil governmental investigations charge
|
|
|
|
|
|
|
|
|
|
|
671
|
|
Insurance arbitration gain
|
|
|
|
|
|
|
|
|
|
|
(455
|
)
|
|
|
|
|
|
9,410
|
|
|
|
8,993
|
|
|
|
9,368
|
|
|
|
Taxes on income as reported under GAAP
|
|
|
2,268
|
|
|
|
1,999
|
|
|
|
95
|
|
Tax (benefit) expense on excluded items
|
|
|
(390
|
)
|
|
|
(472
|
)
|
|
|
2,134
|
|
|
|
Non-GAAP taxes on income
|
|
|
1,878
|
|
|
|
1,527
|
|
|
|
2,229
|
|
|
|
Non-GAAP net income
|
|
$
|
7,532
|
|
|
$
|
7,466
|
|
|
$
|
7,139
|
|
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
EPS assuming dilution as reported under GAAP
|
|
$
|
5.65
|
|
|
$
|
3.63
|
|
|
$
|
1.49
|
|
EPS impact of excluded items
|
|
|
(2.40
|
)
|
|
|
(0.21
|
)
|
|
|
1.71
|
|
|
|
Non-GAAP EPS assuming dilution
|
|
$
|
3.25
|
|
|
$
|
3.42
|
|
|
$
|
3.20
|
|
|
Purchase
Accounting Adjustments
Non-GAAP income and non-GAAP EPS exclude certain amounts
recorded in connection with the Merger (see Note 3 to the
consolidated financial statements). These amounts include the
amortization of intangible assets and inventory step-up.
Restructuring
Activities
Non-GAAP income and non-GAAP EPS exclude restructuring
activities, including restructuring activities related to the
Merger (see Note 4 to the consolidated financial
statements). These amounts include employee separation costs and
accelerated depreciation associated with facilities to be sold
or closed. The Company has undertaken restructurings of
different types during the covered periods and therefore these
charges should not to be considered non-recurring; however,
management excludes these amounts from non-GAAP income and
non-GAAP EPS because it believes it is helpful for
understanding the performance of the continuing business.
Merger-Related Costs
Non-GAAP income and non-GAAP EPS exclude transaction costs
associated directly with the Merger, as well as integration
costs. These costs are excluded because management believes that
these costs are unique to the Merger transaction and are not
representative of ongoing normal business activities.
Integration costs associated with the Merger will occur over
several years, however, the impacts within each year will vary
as the integration progresses.
Certain Other Items
Non-GAAP income and non-GAAP EPS exclude certain other
items. These items represent substantive, unusual items that are
evaluated on an individual basis. Such evaluation considers both
the quantitative and the
81
qualitative aspect of their unusual nature and generally
represent items that, either as a result of their nature or
magnitude, management would not anticipate that they would occur
as part of the Companys normal business on a regular
basis. Certain other items include, among other items, the gain
on the fair value adjustment of Mercks existing interest
in the MSP Partnership as a result of the Merger, the gain on
the divestiture of the interest in Merial, the gain on a
distribution from AZLP and certain legal settlements.
Research
and Development
A chart reflecting the Companys current research pipeline
as of February 12, 2010 is set forth in Item 1.
Business Research and Development
above.
Research
and Development Update
In connection with the Merger, the Company is assessing its
pipeline to identify the most promising, high-potential
compounds for development. The Company has completed the
prioritization of its clinical development programs. The Company
is continuing to work on the prioritization of its value adding
programs related to currently marketed products and to its
preclinical/discovery programs. The Company anticipates that the
full prioritization process will be completed by the first half
of 2010. In connection with this process, the Company may
recognize non-cash impairment charges for the cancellation of
certain legacy Schering-Plough pipeline programs that were
measured at fair value and capitalized in connection with the
Merger. These non-cash impairment charges, which are anticipated
to be excluded from the Companys non-GAAP earnings, could
be material to the Companys future GAAP earnings.
The Company currently has a number of candidates under
regulatory review in the United States and internationally.
Additionally, the Company has 19 drug candidates in
Phase III development.
MK-6621, vernakalant (IV), is an investigational candidate for
the treatment of atrial fibrillation currently undergoing
regulatory review in the EU. In April 2009, Old Merck and
Cardiome Pharma Corp. (Cardiome) announced a
collaboration and license agreement for the development and
commercialization of vernakalant which provides Merck exclusive
rights outside of the United States, Canada and Mexico to the
intravenous formulation of vernakalant (see below). Vernakalent
(oral) is currently in Phase II development. Merck has
exclusive global rights to the oral formulation of vernakalent
for the maintenance of normal heart rhythm in patients with
atrial fibrillation.
SCH 418131, MFF, is a combination of two previously approved
drugs for the treatment of asthma: mometasone (Asmanex)
and formoterol (Foradil). The Company is aiming to create
a new option for patients by bringing these two key treatments
together. In July 2009, Schering-Plough announced that it had
filed a New Drug Application (NDA) with the FDA for
MFF. MFF is also currently under regulatory review in the EU.
SCH 900121, NOMAC/E2, is an oral contraceptive that combines a
selective progestin with estradiol, the estrogen that women
produce naturally. The drug is currently under regulatory review
in the EU. It is in Phase III development for the
U.S. market.
SCH 900274, Saphris, asenapine, a central nervous system
compound for bipolar I disorder and schizophrenia, is currently
undergoing regulatory review in the EU. The FDA approved
Saphris in August 2009.
SCH 900616, Bridion, sugammadex, is a medication designed
to rapidly reverse the effects of certain muscle relaxants used
as part of general anesthesia to ensure patients remain immobile
during surgical procedures. It differs from other reversal
agents that can only be administered once the muscle relaxant
begins to wear off. Bridion has received regulatory
approval in the EU, Australia, New Zealand and Japan, and is
under regulatory review in other markets, including the United
States. Prior to the Merger, Schering-Plough received a complete
response letter from the FDA for Bridion. Following
further communication from the FDA, the Company is assessing the
agencys feedback in order to determine a new timetable for
response.
SCH 503034, boceprevir, is a hepatitis C protease inhibitor
currently under development. Boceprevir is fully enrolled in its
Phase III program, which the Company expects to conclude in
mid-2010. The Company expects to submit an NDA to the FDA for
boceprevir by the end of 2010 for both treatment-experienced and
treatment-naïve patients with hepatitis C.
82
MK-8669, ridaforolimus, is a novel mTOR (mammalian target of
rapamycin) inhibitor being evaluated for the treatment of
cancer. The drug candidate is being jointly developed and
commercialized with ARIAD Pharmaceuticals, Inc., under an
agreement entered into in 2007. A Phase III study (SUCCEED)
in patients with metastatic soft-tissue or bone sarcomas is
underway. The Company continues to anticipate filing an NDA for
ridaforolimus with the FDA in 2010, subject to a review of the
results from the planned interim analysis of SUCCEED.
SCH 697243, an allergy immunotherapy sublingual tablet
(AIT) for grass pollen allergy, is being developed
by the Company. In November 2009, SCH 697243 met the primary
endpoint in a Phase III study of adult subjects in the
United States with a history of grass pollen induced
rhinoconjunctivitis with or without asthma. The investigational
grass AIT treatment is designed to work by inducing a protective
immune response against grass pollen allergy and providing
sustained prevention of allergy symptoms, treating both the
symptoms and the underlying cause of the disease.
SCH 039641, an AIT for ragweed allergy, is also in
Phase III development for the U.S. market.
SCH 530348, vorapaxar, is a thrombin receptor antagonist or
antiplatelet protease activated receptor-1 inhibitor being
studied for the prevention and treatment of thrombosis. In
November 2009, Merck announced completion of patient enrollment
of more than 26,000 patients in the TRA 2°P-TIMI 50
clinical trial, a Phase III, randomized, double-blind,
placebo-controlled, multinational study. The trial will assess
the ability of SCH 530348 to prevent major cardiovascular events
when added to current antiplatelet regimens (aspirin or aspirin
plus an ADP inhibitor) in patients who have previously
experienced a heart attack or stroke or who have peripheral
arterial disease. SCH 530348 is also being studied in the
treatment of patients with acute coronary syndrome in the
ongoing Phase III Thrombin Receptor Antagonist for Clinical
Event Reduction in Acute Coronary Syndrome trial, led by the
Duke Clinical Research Institute. The Company anticipates filing
an NDA for vorapaxar with the FDA in 2011.
MK-2452, tafluprost, is a preservative free, synthetic analogue
of the prostaglandin F2α for the reduction of elevated
intraocular pressure in appropriate patients with primary
open-angle glaucoma and ocular hypertension. In April 2009, Old
Merck and Santen announced a worldwide licensing agreement for
tafluprost (see below).
As previously disclosed, Old Merck submitted for filing an NDA
with the FDA for MK-0653C, ezetimibe combined with atorvastatin,
which is an investigational medication for the treatment of
dyslipidemia, and the FDA refused to file the application. The
FDA has identified additional manufacturing and stability data
that are needed and the Company is assessing the FDAs
response and anticipates filing in 2011.
MK-0431C, a candidate currently in Phase III clinical
development, combines Januvia with pioglitazone, another
type 2 diabetes therapy. The Company continues to anticipate
filing an NDA for MK-0431C with the FDA in 2011.
MK-0822, odanacatib, is an oral, once-weekly investigational
treatment for osteoporosis. Osteoporosis is a disease which
reduces bone density and strength and results in an increased
risk of bone fractures. Odanacatib is a cathepsin K inhibitor
that selectively inhibits the cathepsin K enzyme. Cathepsin K is
known to play a central role in the function of osteoclasts,
which are cells that break down existing bone tissue,
particularly the protein components of bone. Inhibition of
cathepsin K is a novel approach to the treatment of
osteoporosis. In September 2009, data from a Phase IIB clinical
study of odanacatib were presented at the 31st Annual
Meeting of the American Society for Bone and Mineral Research
which showed that when stopping treatment after two years the
increases in lower back (lumbar spine) bone mineral density
(BMD) were reversed over the next year, while BMD at
the hip (femoral neck) remained above levels observed at the
start of the study. Additionally, three years of treatment with
odanacatib 50 mg demonstrated increases in BMD at key
fracture sites and minimal impact on the formation of new bone
as measured by biochemical markers of bone turnover. Odanacatib
is currently in Phase III clinical trials and is being
evaluated in a large-scale, global outcomes study to determine
its effects on vertebral, hip and non-vertebral fractures. The
Company continues to anticipate filing an NDA with the FDA in
2012.
V503 is a nine-valent HPV vaccine in development to expand
protection against cancer-causing HPV types. The Phase III
clinical program is underway and Merck anticipates filing a
Biologics License Application (BLA) with the FDA in
2012.
83
MK-0524A is a drug candidate that combines extended-release
(ER) niacin and a novel flushing inhibitor,
laropiprant. MK-0524A has demonstrated the ability to lower
LDL-cholesterol (LDL-C or bad
cholesterol), raise HDL-cholesterol (HDL-C or
good cholesterol) and lower triglycerides with
significantly less flushing than traditional extended release
niacin alone. High LDL-C, low HDL-C and elevated triglycerides
are risk factors associated with heart attacks and strokes. In
April 2008, Old Merck received a non-approvable action letter
from the FDA in response to its NDA for MK-0524A. At a meeting
to discuss the letter, the FDA stated that additional efficacy
and safety data were required and suggested that Old Merck wait
for the results of the Treatment of HDL to Reduce the Incidence
of Vascular Events (HPS2-THRIVE) cardiovascular
outcomes study, which is expected to be completed in 2012. The
Company anticipates filing an NDA with the FDA for MK-0524A in
2012. MK-0524A has been approved in more than 45 countries
outside the United States for the treatment of dyslipidemia,
particularly in patients with combined mixed dyslipidemia
(characterized by elevated levels of LDL-C and triglycerides and
low HDL-C) and in patients with primary hypercholesterolemia
(heterozygous familial and non-familial) and is marketed as
Tredaptive (or as Cordaptive in certain
countries). Tredaptive should be used in patients in
combination with statins, when the cholesterol lowering effects
of statin monotherapy is inadequate. Tredaptive can be
used as monotherapy only in patients in whom statins are
considered inappropriate or not tolerated.
MK-0524B is a drug candidate that combines the novel approach to
raising HDL-C and lowering triglycerides from ER niacin combined
with laropiprant with the proven benefits of simvastatin in one
combination product. Merck will not seek approval for MK-0524B
in the United States until it files its complete response
relating to MK-0524A.
MK-0859, anacetrapib, is an inhibitor of the cholesteryl ester
transfer protein that has shown promise in lipid management by
raising HDL-C and reducing LDL-C without raising blood pressure.
In November 2009, Merck announced that in a Phase IIb study in
589 patients with primary hypercholesterolemia or mixed
hyperlipidemia treated with anacetrapib as monotherapy or
co-administered with atorvastatin, there were persistent lipid
effects in the higher dose arms in both the monotherapy and
co-administration treatment groups eight weeks after stopping
active therapy with anacetrapib. The effect of CETP inhibition
on cardiovascular risk has yet to be established. A
Phase III trial, titled DEFINE, is ongoing to further
evaluate the safety and efficacy of anacetrapib in patients with
coronary heart disease. The Company anticipates filing an NDA
with the FDA beyond 2015.
As previously disclosed, in 2009, Old Merck announced it was
delaying the filing of the U.S. application for telcagepant
(MK-0974), the Companys investigational calcitonin
gene-related peptide (CGRP)-receptor antagonist for
the intermittent treatment of acute migraine. The decision was
based on findings from a Phase IIa exploratory study in which a
small number of patients taking telcagepant twice daily for
three months for the prevention of migraine were found to have
marked elevations in liver transaminases. The daily dosing
regimen in the prevention study was different than the dosing
regimen used in Phase III studies in which telcagepant was
intermittently administered in one or two doses to treat
individual migraine attacks as they occurred. Other studies with
telcagepant for the acute, intermittent treatment of migraine
continue. Following meetings with regulatory agencies at the end
of 2009, Merck is planning to conduct an additional safety study
as part of the overall Phase III program for telcagepant.
The results of this study will inform planned filings for
approval.
SCH 900395, acadesine, is a potential
first-in
class adenosine regulating agent for ischemia reperfusion-injury
in patients undergoing heart bypass surgery. Patient enrollment
in the RED CABG Phase III clinical trial was initiated in
2009.
SCH 417690, vicriviroc, for the treatment of HIV infection
(treatment experienced) was evaluated in two Phase III
studies in this patient population, and it was announced in
January 2010 that the primary efficacy endpoint was not met.
Merck will not submit an NDA to the FDA for vicriviroc in
treatment-experienced HIV-infected patients at this time but
will continue to evaluate vicriviroc as first-line therapy for
treatment-naive patients.
As previously disclosed, in 2007, Cubist Pharmaceuticals, Inc.
(Cubist) entered into a license agreement with Old
Merck for the development and commercialization of Cubicin
(daptomycin for injection, MK3009) in Japan. Merck will develop
and commercialize Cubicin through its wholly-owned subsidiary,
Banyu Pharmaceutical Co., Ltd. Cubist commercializes Cubicin in
the United States. MK-3009 is currently in Phase III
development.
84
MK-4305 is an orexin receptor antagonist, a potential new
approach to the treatment of chronic insomnia, currently in
Phase III development.
SCH 900962, Elonva, corifollitropin alpha injection,
which has been approved in the EC for controlled ovarian
stimulation in combination with a GnRH antagonist for the
development of multiple follicles in women participating in an
assisted reproductive technology program, is currently in
Phase III development in the United States.
Merck has terminated the internal clinical development program
for esmirtazapine (SCH 900265) for hot flashes and insomnia
for strategic reasons.
As previously disclosed, in 2009, Old Merck announced that
preliminary results for the pivotal Phase III study of
rolofylline (MK-7418), its investigational medicine for the
treatment of acute heart failure, showed that rolofylline did
not meet the primary or secondary efficacy endpoints. Old Merck
terminated the clinical development program for rolofylline.
In-Process
Research and Development
In connection with the Merger, the Company recorded the fair
value of human and animal health research projects underway at
Schering-Plough. Approximately $5.0 billion of the
consideration transferred in the Merger was allocated to
Pharmaceutical segment IPR&D projects and $1.3 billion
was allocated to Animal Health operating segment IPR&D
projects.
Some of the more significant projects include Bridion,
vorapaxar and boceprevir, all of which are in Phase III
clinical development, as well as an ezetimibe/atorvastatin
combination product. These projects are discussed in further
detail above. Also, as noted above, the Company expects to file
NDAs with the FDA in 2010 for boceprevir and in 2011 for
vorapaxar and the ezetimibe/atorvastatin combination product.
The fair values of identifiable intangible assets related to
IPR&D were determined by using an income approach, through
which fair value is estimated based on each assets
probability adjusted future net cash flows, which reflect the
different stages of development of each product and the
associated probability of successful completion. The net cash
flows are then discounted to present value using discount rates
which range from 12% to 15%. Actual cash flows are likely to be
different than those assumed.
Additional research and development will be required before any
of the programs reach technological feasibility. The costs to
complete the research projects will depend on whether the
projects are brought to their final stages of development and
are ultimately submitted to the FDA or other regulatory agencies
for approval. As of December 31, 2009, the estimated costs
to complete projects in Phase III development for human
health and the analogous stage of development for animal health
were approximately $1.6 billion. All of the IPR&D
projects are subject to the inherent risks and uncertainties in
drug development and it is possible that the Company will not be
able to successfully develop and complete the IPR&D
programs and profitably commercialize the underlying product
candidates. The time periods to receive approvals from the FDA
and other regulatory agencies are subject to uncertainty.
Significant delays in the approval process, or the
Companys failure to obtain approval at all, will delay or
prevent the Company from realizing revenues from these products.
Additionally, if certain of the IPR&D programs fail or are
abandoned during development as a result of the Companys
portfolio prioritization process or otherwise, then the Company
will not realize the future cash flows it has estimated and
recorded as IPR&D on the Merger date, and the Company may
also not recover the research and development expenditures made
since the Merger to further develop that program. If such
circumstances were to occur, the Companys future operating
results could be adversely affected.
Acquisitions,
Research Collaborations and License Agreements
Merck continues to remain focused on augmenting its internal
efforts by capitalizing on growth opportunities that will drive
both near- and long-term growth. During 2009, transactions
across a broad range of therapeutic categories, as well as
early stage technology transactions were completed.
Merck is actively
85
monitoring the landscape for growth opportunities that meet the
Companys strategic criteria. Highlights from these
activities include:
In December 2009, Merck and Avecia Investments Limited announced
a definitive agreement under which Merck would acquire the
biologics business of the Avecia group for a total purchase
price of $180 million. Avecia Biologics is a contract
manufacturing organization with specific expertise in
microbial-derived biologics. Under the terms of the agreement,
Merck would acquire Avecia Biologics Limited
(Avecia) and all of its assets, including all
Avecias process development and
scale-up,
manufacturing, quality and business support operations located
in Billingham, United Kingdom. This transaction closed on
February 1, 2010, and accordingly, the results of
operations of the acquired business will be included in
Mercks results of operations beginning as of the
acquisition date.
In July 2009, Old Merck and Portola Pharmaceuticals, Inc.
(Portola) signed an exclusive global collaboration
and license agreement for the development and commercialization
of betrixaban (MK-4448), an investigational oral Factor Xa
inhibitor anticoagulant currently in Phase II clinical
development for the prevention of stroke in patients with atrial
fibrillation. In return for an exclusive worldwide license to
betrixaban, Old Merck paid Portola an initial fee of
$50 million at closing, which was recorded as research and
development expense. Portola is eligible to receive additional
cash payments totaling up to $420 million upon achievement
of certain development, regulatory and commercialization
milestones, as well as double-digit royalties on worldwide sales
of betrixaban, if approved. The Company will assume all
development and commercialization costs, including the costs of
Phase III clinical trials. Portola retained an option
(a) to co-fund Phase III clinical trials in
return for additional royalties and (b) to co-promote
betrixaban with Merck in the United States. The term of the
agreement commenced in August 2009 and, unless terminated
earlier, will continue until there are no remaining royalty
payment obligations in a country, at which time the agreement
will expire in its entirety in such country. The agreement may
be terminated by either party in the event of a material uncured
breach or bankruptcy of a party. The agreement may be terminated
by Merck in the event that the parties or Merck decide to cease
development of betrixaban for safety or efficacy. In addition,
Merck may terminate the agreement at any time upon 180 days
prior written notice. Portola may terminate the agreement in the
event that Merck challenges any Portola patent covering
betrixaban. Upon termination of the agreement, depending upon
the circumstances, the parties have varying rights and
obligations with respect to the continued development and
commercialization of betrixaban and, in the case of termination
for cause by Merck, certain royalty obligations.
In April 2009, Old Merck, Medarex, Inc. (Medarex)
and Massachusetts Biologic Laboratories (MBL) of the
University of Massachusetts Medical School announced an
exclusive worldwide license agreement for CDA-1 and CDB-1
(MK-3415A) (also known as MDX-066/MDX-1388 and
MBL-CDA1/MBL-CDB1), an investigational fully human monoclonal
antibody combination developed to target and neutralize
Clostridium difficile toxins A and B, for the treatment
of C. difficile infection. CDA-1 and CDB-1 were
co-developed by Medarex and MBL. Under the terms of the
agreement, Merck gained worldwide rights to develop and
commercialize CDA-1 and CDB-1. Medarex and MBL received an
aggregate upfront payment of $60 million upon closing,
which was recorded as research and development expense, and are
potentially eligible to receive additional cash payments up to
$165 million in the aggregate upon achievement of certain
milestones associated with the development and approval of a
drug candidate covered by this agreement. Upon
commercialization, Medarex and MBL will also be eligible to
receive double-digit royalties on product sales and milestones
if certain sales targets are met. The term of the agreement
commenced on the closing date and, unless terminated earlier,
will continue until there are no remaining royalty payment
obligations in a country, at which time the agreement will
expire in its entirety in such country. Either party may
terminate this agreement for uncured material breach by the
other party, or bankruptcy or insolvency of the other party.
Merck may terminate this agreement at any time upon providing
180 days prior written notice to Medarex and MBL.
Also, in April 2009, Old Merck and Santen Pharmaceutical Co.,
Ltd. (Santen) announced a worldwide licensing
agreement for tafluprost (MK-2452), a prostaglandin analogue
under investigation in the United States. Tafluprost, preserved
and preservative-free formulations, has received marketing
approval for the reduction of elevated intraocular pressure in
open-angle glaucoma and ocular hypertension in several European
and Nordic countries as well as Japan and has been filed for
approval in additional European and Asia Pacific markets. Under
the terms of the agreement, Old Merck paid a fee, which was
capitalized and will be amortized to Materials and
86
production costs over the life of the underlying patent,
and will pay milestones and royalty payments based on future
sales of tafluprost (both preserved and preservative-free
formulations) in exchange for exclusive commercial rights to
tafluprost in Western Europe (excluding Germany), North America,
South America and Africa. Santen will retain commercial rights
to tafluprost in most countries in Eastern Europe, Northern
Europe and Asia Pacific, including Japan. Merck will provide
promotion support to Santen in Germany and Poland. If tafluprost
is approved in the United States, Santen has an option to
co-promote it there. The agreement between Old Merck and Santen
expires on a
country-by-country
basis on the last to occur of (a) the expiry of the last to
expire valid patent claim; or (b) the expiration of the
last to expire royalty. Merck may terminate the agreement at any
time upon 90 days prior written notice and also at any time
upon 60 days prior written notice if Merck determines that
the product presents issues of safety or tolerability. In
addition, Merck may terminate the agreement in the event that
any of the enumerated agreements between Santen and the
co-owner/licensor of certain intellectual property terminate or
expire and this materially adversely affects Merck. If either
Merck or Santen materially breaches the agreement and fails to
cure after receiving notice, then the non-breaching party may
terminate the agreement. The agreement provides for termination
by the non-insolvent party due to bankruptcy by the other party.
Finally, the agreement will terminate if, during the term, Merck
develops or commercializes a competitive product (as that term
is defined in the agreement).
In addition, in April 2009, Old Merck and Cardiome Pharma Corp.
(Cardiome) announced a collaboration and license
agreement for the development and commercialization of
vernakalant (MK-6621), an investigational candidate for the
treatment of atrial fibrillation. The agreement provides Merck
with exclusive global rights to the oral formulation of
vernakalant (vernakalant (oral)) for the maintenance
of normal heart rhythm in patients with atrial fibrillation, and
provides a Merck affiliate, Merck Sharp & Dohme
(Switzerland) GmbH, with exclusive rights outside of the United
States, Canada and Mexico to the intravenous (IV)
formulation of vernakalant (vernakalant (IV)) for
rapid conversion of acute atrial fibrillation to normal heart
rhythm. Under the terms of the agreement, Old Merck paid
Cardiome an initial fee of $60 million upon closing, which
was recorded as research and development expense. In addition,
Cardiome is eligible to receive up to $200 million in
payments based on achievement of certain milestones associated
with the development and approval of vernakalant products
(including $15 million for submission for regulatory
approval in Europe of vernakalant (IV), which Old Merck paid in
2009 as a result of that submission, and $20 million for
initiation of a planned Phase III program for vernakalant
(oral)) and up to $100 million for milestones associated
with approvals in other subsequent indications of both the
intravenous and oral formulations. Also, Cardiome will receive
tiered royalty payments on sales of any approved products and
has the potential to receive up to $340 million in
milestone payments based on achievement of significant sales
thresholds. Cardiome has retained an option to co-promote
vernakalant (oral) with Merck through a hospital-based sales
force in the United States. Merck will be responsible for all
future costs associated with the development, manufacturing and
commercialization of these candidates. Merck has granted
Cardiome a secured, interest-bearing credit facility of up to
$100 million that Cardiome may access in tranches over
several years commencing in 2010. Cardiomes co-development
partner in North America, Astellas Pharma U.S., Inc., submitted
an NDA with the FDA for Kynapid (vernakalant hydrochloride)
Injection in December 2006 that included results from two
pivotal Phase III clinical trials. In December 2007, the
Cardiovascular and Renal Drugs Advisory Committee recommended
that the FDA approve vernakalant (IV) for rapid conversion
of atrial fibrillation. In August 2008, the FDA issued an
Approvable action letter requesting additional information. A
Phase IIb double-blind, placebo-controlled, randomized,
dose-ranging clinical trial in patients at risk of recurrent
atrial fibrillation showed that, at the 500 mg dose,
vernakalant (oral) significantly reduced the rate of atrial
fibrillation relapse as compared to placebo. This agreement
continues in effect until the expiration of Cardiomes
co-promotion rights and all royalty and milestone payment
obligations. This agreement may be terminated in the event of
insolvency or a material uncured breach by either party.
Additionally, the collaboration may be terminated by Merck in
the event that Merck determines (in good faith) that it is not
advisable to continue the development or commercialization of a
vernakalant product as a result of a serious safety issue. In
addition, Merck may terminate the agreement at any time upon
12 months prior written notice. Cardiome may terminate the
agreement in the event that Merck challenges any Cardiome patent
covering vernakalant. Upon termination of the agreement,
depending upon the circumstances, the parties have varying
rights and obligations with respect to the continued development
and commercialization of vernakalant and in some cases
continuing royalty obligations.
87
In March 2009, Old Merck acquired Insmed Inc.s
(Insmed) portfolio of follow-on biologic therapeutic
candidates and its commercial manufacturing facilities located
in Boulder, Colorado. Under the terms of the agreement, Old
Merck paid Insmed an aggregate of $130 million in cash to
acquire all rights to the Boulder facilities and Insmeds
pipeline of follow-on biologic candidates. Insmeds
follow-on biologics portfolio includes two clinical candidates:
MK-4214, an investigational recombinant granulocyte-colony
stimulating factor (G-CSF) that will be evaluated
for its ability to prevent infections in patients with cancer
receiving chemotherapy, and MK-6302, a pegylated recombinant
G-CSF designed to allow for less frequent dosing. The
transaction was accounted for as a business combination;
accordingly, the assets acquired and liabilities assumed were
recorded at their respective fair values as of the acquisition
date. The determination of fair value requires management to
make significant estimates and assumptions. In connection with
the acquisition, substantially all of the purchase price was
allocated to Insmeds follow-on biologics portfolio
(MK-4214 and MK-6302) and an indefinite-lived intangible asset
was recorded. The fair value was determined based upon the
present value of expected future cash flows of new product
candidates resulting from Insmeds follow-on biologics
portfolio adjusted for the probability of their estimated
technical and marketing success utilizing an income approach
reflecting appropriate risk-adjusted discount rates. The ongoing
activity related to MK-4214 and MK-6302 is not expected to be
material to the Companys research and development expense.
The remaining net assets acquired were not material and there
were no other milestone or royalty obligations associated with
the acquisition. This transaction closed on March 31, 2009,
and accordingly, the results of operations of the acquired
business have been included in Mercks results of
operations beginning April 1, 2009.
The Company maintains a number of long-term exploratory and
fundamental research programs in biology and chemistry as well
as research programs directed toward product development. The
Companys research and development model is designed to
increase productivity and improve the probability of success by
prioritizing the Companys research and development
resources on disease areas of unmet medical needs, scientific
opportunity and commercial opportunity. Merck is managing its
research and development portfolio across diverse approaches to
discovery and development by balancing investments appropriately
on novel, innovative targets with the potential to have a major
impact on human health, on developing
best-in-class
approaches, and on delivering maximum value of its new medicines
and vaccines through new indications and new formulations.
Another important component of the Companys science-based
diversification is based on expanding the Companys
portfolio of modalities to include not only small molecules and
vaccines, but also biologics, peptides and RNAi. Further, Merck
moved to diversify its portfolio by creating a new division,
Merck BioVentures, which has the potential to harness the market
opportunity presented by biological medicine patent expiries by
delivering high quality follow-on biologic products to enhance
access for patients worldwide. The Company will continue to
pursue appropriate external licensing opportunities.
The integration plans for research and development are focused
on integrating the research operations of the legacy companies,
including providing an effective transition for employees,
realizing projected merger synergies in the form of cost savings
and revenue growth opportunities, and maintaining momentum in
the Companys late-state pipeline. During 2009, Merck
continued implementing a new model for its basic research global
operating strategy at legacy Merck Research Laboratories sites.
The new model will align franchise and function as well as align
resources with disease area priorities and balance capacity
across discovery phases and allow the Company to act upon those
programs with the highest probability of success. Additionally,
across all disease area priorities, the Companys strategy
is designed to expand access to worldwide external science and
incorporate external research as a key component of the
Companys early discovery pipeline in order to translate
basic research productivity into late-stage clinical success.
The Companys clinical pipeline includes candidates in
multiple disease areas, including anemia, atherosclerosis,
cancer, diabetes, heart disease, hypertension, infectious
diseases, inflammatory/autoimmune diseases, migraine,
neurodegenerative diseases, ophthalmics, osteoporosis,
psychiatric diseases, respiratory disease and womens
health. The Company supplements its internal research with an
aggressive licensing and external alliance strategy focused on
the entire spectrum of collaborations from early research to
late-stage compounds, as well as new technologies.
88
Selected
Joint Venture and Affiliate Information
To expand its research base and realize synergies from combining
capabilities, opportunities and assets, in previous years Old
Merck formed a number of joint ventures. (See Note 10 to
the consolidated financial statements.)
Merck/Schering-Plough
Partnership
In 2000, Old Merck and Schering-Plough (collectively, the
Partners) entered into an agreement to create an
equally-owned partnership to develop and market in the United
States new prescription medicines for cholesterol management.
This agreement generally provided for equal sharing of
development costs and for co-promotion of approved products by
each company. In 2001, the cholesterol-management partnership
was expanded to include all the countries of the world,
excluding Japan. In 2002, ezetimibe, the first in a new class of
cholesterol-lowering agents, was launched in the United States
as Zetia (marketed as Ezetrol outside the United
States). In 2004, a combination product containing the active
ingredients of both Zetia and Zocor was approved
in the United States as Vytorin (marketed as Inegy
outside the United States). Vytorin is the only
combination tablet cholesterol treatment to provide LDL
cholesterol lowering through the dual inhibition of cholesterol
production and absorption.
The cholesterol agreements provided for the sharing of operating
income generated by the MSP Partnership based upon percentages
that vary by product, sales level and country. In the
U.S. market, the Partners shared profits on Zetia
and Vytorin sales equally, with the exception of the
first $300 million of annual Zetia sales, on which
Schering-Plough received a greater share of profits. Operating
income included expenses that the Partners contractually agreed
to share, such as a portion of manufacturing costs, specifically
identified promotion costs (including
direct-to-consumer
advertising and direct and identifiable
out-of-pocket
promotion) and other agreed upon costs for specific services
such as on-going clinical research, market support, market
research, market expansion, as well as a specialty sales force
and physician education programs. Expenses incurred in support
of the MSP Partnership but not shared between the Partners, such
as marketing and administrative expenses (including certain
sales force costs), as well as certain manufacturing costs, were
not included in Equity income from affiliates. However,
these costs were reflected in the overall results of each legacy
company. Certain research and development expenses were
generally shared equally by the Partners, after adjusting for
earned milestones.
As a result of the Merger, the MSP Partnership is now owned 100%
by the Company. The results of the MSP Partnership through the
date of the Merger are reflected in Equity income from
affiliates. The results from sales of MSP Partnership
products after the Merger have been consolidated with
Mercks results.
Sales of joint venture products were as
follows(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
($ in millions)
|
|
Pre-Merger
|
|
|
Post-Merger
|
|
|
Total
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Vytorin
|
|
$
|
1,689.5
|
|
|
$
|
370.6
|
|
|
$
|
2,060.1
|
|
|
$
|
2,360.0
|
|
|
$
|
2,779.1
|
|
Zetia
|
|
|
1,697.7
|
|
|
|
370.3
|
|
|
|
2,068.0
|
|
|
|
2,201.1
|
|
|
|
2,407.1
|
|
|
|
|
|
$
|
3,387.2
|
|
|
$
|
740.9
|
|
|
$
|
4,128.1
|
|
|
$
|
4,561.1
|
|
|
$
|
5,186.2
|
|
|
|
|
(1) |
Amounts exclude sales of these products by the Partners
outside of the MSP Partnership.
|
Following the previously announced ENHANCE and SEAS clinical
trial results (discussed below), sales of Vytorin and
Zetia declined in 2009 and 2008.
As previously disclosed, in January 2008, the legacy companies
announced the results of the Effect of Combination Ezetimibe and
High-Dose Simvastatin vs. Simvastatin Alone on the
Atherosclerotic Process in Patients with Heterozygous Familial
Hypercholesterolemia (ENHANCE) clinical trial, an
imaging trial in 720 patients with heterozygous familial
hypercholesterolemia, a rare genetic condition that causes very
high levels of LDL bad cholesterol and greatly
increases the risk for premature coronary artery disease. As
previously reported, despite the fact that ezetimibe/simvastatin
10/80 mg (Vytorin) significantly lowered LDL
bad cholesterol more than simvastatin 80 mg
alone, there was no significant difference between treatment
with ezetimibe/simvastatin and simvastatin alone on the
pre-specified primary endpoint, a change in the thickness of
carotid artery walls over two years as measured by ultrasound.
The Improved Reduction in High-Risk Subjects Presenting with
Acute Coronary Syndrome (IMPROVE-IT) trial is
underway and is designed to provide cardiovascular outcomes data
for ezetimibe/simvastatin in patients with acute coronary
syndrome. No incremental benefit of ezetimibe/
89
simvastatin on cardiovascular morbidity and mortality over and
above that demonstrated for simvastatin has been established. In
January 2009, the FDA announced that it had completed its review
of the final clinical study report of ENHANCE. The FDA stated
that the results from ENHANCE did not change its position that
elevated LDL cholesterol is a risk factor for cardiovascular
disease and that lowering LDL cholesterol reduces the risk for
cardiovascular disease.
On July 21, 2008, efficacy and safety results from the
Simvastatin and Ezetimibe in Aortic Stenosis (SEAS)
study were announced. SEAS was designed to evaluate whether
intensive lipid lowering with Vytorin 10/40 mg would
reduce the need for aortic valve replacement and the risk of
cardiovascular morbidity and mortality versus placebo in
patients with asymptomatic mild to moderate aortic stenosis who
had no indication for statin therapy. Vytorin failed to
meet its primary end point for the reduction of major
cardiovascular events. In the study, patients in the group who
took Vytorin 10/40 mg had a higher incidence of
cancer than the group who took placebo. There was also a
nonsignificant increase in deaths from cancer in patients in the
group who took Vytorin versus those who took placebo.
Cancer and cancer deaths were distributed across all major organ
systems. The Company believes the cancer finding in SEAS is
likely to be an anomaly that, taken in light of all the
available data, does not support an association with
Vytorin. In August 2008, the FDA announced that it was
investigating the results from the SEAS trial. In December 2009,
the FDA announced that it had completed its review of the data
from the SEAS trial as well as a review of interim data from the
Study of Heart and Renal Protection (SHARP) and
IMPROVE-IT trials. Based on currently available information, the
FDA indicated it believed it is unlikely that Vytorin or
Zetia increase the risk of cancer-related death. The
SHARP trial is expected to be completed in 2010. The IMPROVE-IT
trial is scheduled for completion in 2013. In the IMPROVE-IT
trial, a blinded interim efficacy analysis will be conducted by
the Data Safety Monitoring Board for the trial when
approximately 50% of the endpoints have been accrued. That
interim analysis is expected to be conducted in 2010.
The Company is committed to working with regulatory agencies to
further evaluate the available data and interpretations of those
data; however, the Company does not believe that changes in the
clinical use of Vytorin are warranted.
See Note 12 to the consolidated financial statements for
information with respect to litigation involving the Partners
and the MSP Partnership related to the sale and promotion of
Zetia and Vytorin.
The results from Old Mercks interest in the MSP
Partnership through the completion of the Merger are recorded in
Equity income from affiliates. Equity income was
$1.2 billion in 2009, $1.5 billion in 2008 and
$1.8 billion in 2007.
The financial statements of the MSP Partnership for 2008 are
included in Item 15. (a) (2) Financial Statement
Schedules below.
AstraZeneca
LP
In 1982, Old Merck entered into an agreement with Astra AB
(Astra) to develop and market Astras products
under a royalty-bearing license. In 1993, Old Mercks total
sales of Astra products reached a level that triggered the first
step in the establishment of a joint venture business carried on
by Astra Merck Inc. (AMI), in which Old Merck and
Astra each owned a 50% share. This joint venture, formed in
1994, developed and marketed most of Astras new
prescription medicines in the United States including
Prilosec, the first of a class of medications known as
proton pump inhibitors, which slows the production of acid from
the cells of the stomach lining.
In 1998, Old Merck and Astra completed the restructuring of the
ownership and operations of the joint venture whereby Old Merck
acquired Astras interest in AMI, renamed KBI Inc.
(KBI), and contributed KBIs operating assets
to a new U.S. limited partnership, Astra Pharmaceuticals
L.P. (the Partnership), in exchange for a 1% limited
partner interest. Astra contributed the net assets of its wholly
owned subsidiary, Astra USA, Inc., to the Partnership in
exchange for a 99% general partner interest. The Partnership,
renamed AstraZeneca LP (AZLP) upon Astras 1999
merger with Zeneca Group Plc (the AstraZeneca
merger), became the exclusive distributor of the products
for which KBI retained rights.
90
While maintaining a 1% limited partner interest in AZLP, Merck
has consent and protective rights intended to preserve its
business and economic interests, including restrictions on the
power of the general partner to make certain distributions or
dispositions. Furthermore, in limited events of default,
additional rights will be granted to the Company, including
powers to direct the actions of, or remove and replace, the
Partnerships chief executive officer and chief financial
officer. Merck earns ongoing revenue based on sales of current
and future KBI products and such revenue was $1.4 billion,
$1.6 billion and $1.7 billion in 2009, 2008 and 2007,
respectively, primarily relating to sales of Nexium, as
well as Prilosec. In addition, Merck earns certain
Partnership returns, which are recorded in Equity income from
affiliates. Such returns include a priority return provided
for in the Partnership Agreement, variable returns based, in
part, upon sales of certain former Astra USA, Inc. products, and
a preferential return representing Mercks share of
undistributed AZLP GAAP earnings. These returns aggregated
$674.3 million, $598.4 million and $820.1 million
in 2009, 2008 and 2007, respectively. The AstraZeneca merger
triggered a partial redemption in March 2008 of Old Mercks
interest in certain AZLP product rights. Upon this redemption,
Old Merck received $4.3 billion from AZLP. This amount was
based primarily on a multiple of Old Mercks average annual
variable returns derived from sales of the former Astra USA,
Inc. products for the three years prior to the redemption (the
Limited Partner Share of Agreed Value). A pretax
gain of $1.5 billion on the partial redemption was recorded
in 2008. The partial redemption of Old Mercks interest in
the product rights did not result in a change in Old
Mercks 1% limited partnership interest.
In conjunction with the 1998 restructuring, Astra purchased an
option (the Asset Option) for a payment of
$443.0 million, which was recorded as deferred income, to
buy Old Mercks interest in the KBI products, excluding the
gastrointestinal medicines Nexium and Prilosec
(the Non-PPI Products). AstraZeneca can exercise
the Asset Option in the first half of 2010 at an exercise price
of $647 million which represents the net present value as
of March 31, 2008 of projected future pretax revenue to be
received by Old Merck from the Non-PPI Products (the
Appraised Value). On February 26, 2010,
AstraZeneca notified the Company that it was exercising the
Asset Option. Old Merck also had the right to require Astra to
purchase such interest in 2008 at the Appraised Value. In
February 2008, Old Merck advised AstraZeneca that it would not
exercise the Asset Option, thus the $443.0 million remains
deferred but will be recognized when the Asset Option is
consummated. In addition, in 1998, Old Merck granted Astra an
option (the Shares Option) to buy Old
Mercks common stock interest in KBI and, therefore, Old
Mercks interest in Nexium and Prilosec,
exercisable two years after Astras exercise of the Asset
Option. Astra can also exercise the Shares Option in 2017
or if combined annual sales of the two products fall below a
minimum amount provided, in each case, only so long as
AstraZenecas Asset Option has been exercised in 2010. The
exercise price for the Shares Option is based on the net
present value of estimated future net sales of Nexium and
Prilosec as determined at the time of exercise, subject
to certain
true-up
mechanisms.
The AstraZeneca merger constituted a Trigger Event under the KBI
restructuring agreements. As a result of the merger, in exchange
for Old Mercks relinquishment of rights to future Astra
products with no existing or pending U.S. patents at the
time of the merger, Astra paid $967.4 million (the
Advance Payment). The Advance Payment was deferred
as it remained subject to a
true-up
calculation (the
True-Up
Amount) that was directly dependent on the fair market
value in March 2008 of the Astra product rights retained by Old
Merck. The calculated
True-Up
Amount of $243.7 million was returned to AZLP in March 2008
and a pretax gain of $723.7 million was recognized related
to the residual Advance Payment balance.
Under the provisions of the KBI restructuring agreements,
because a Trigger Event has occurred, the sum of the Limited
Partner Share of Agreed Value, the Appraised Value and the
True-Up
Amount was guaranteed to be a minimum of $4.7 billion.
Distribution of the Limited Partner Share of Agreed Value less
payment of the
True-Up
Amount resulted in cash receipts to Old Merck of
$4.0 billion and an aggregate pretax gain of
$2.2 billion which is included in Other (income)
expense, net in 2008. AstraZenecas purchase of Old
Mercks interest in the Non-PPI Products is contingent upon
the exercise of the Asset Option by AstraZeneca in 2010 and,
therefore, payment of the Appraised Value may or may not occur.
Also, in March 2008, the $1.38 billion outstanding loan
from Astra plus interest through the redemption date was
settled. As a result of these transactions, Old Merck received
net proceeds from AZLP of $2.6 billion in 2008.
91
Merial
Limited
In 1997, Old Merck and Rhône-Poulenc S.A. (now
sanofi-aventis) combined their animal health businesses to
form Merial Limited (Merial), a fully
integrated animal health company, which was a stand-alone joint
venture, 50% owned by each party. Merial provides a
comprehensive range of pharmaceuticals and vaccines to enhance
the health, well-being and performance of a wide range of animal
species.
On September 17, 2009, Old Merck sold its 50% interest in
Merial to sanofi-aventis for $4 billion in cash. The sale
resulted in the recognition of a $3.2 billion gain
reflected in Other income (expense), net in 2009.
Also, in connection with the sale of Merial, Old Merck,
sanofi-aventis and Schering-Plough signed a call option
agreement. Under the terms of the call option agreement,
following the closing of the Merger, sanofi-aventis has an
option to require the Company to combine its
Intervet/Schering-Plough Animal Health business with Merial to
form an animal health joint venture that would be owned equally
by the Company and sanofi-aventis. As part of the call option
agreement, the value of Merial has been fixed at
$8 billion. The minimum total value received by the Company
and its affiliates for contributing Intervet/Schering-Plough to
the combined entity would be $9.25 billion (subject to
customary transaction adjustments), consisting of a floor
valuation of Intervet/Schering-Plough which is fixed at a
minimum of $8.5 billion (subject to potential upward
revision based on a valuation exercise by the two parties) and
an additional payment by sanofi-aventis of $750 million.
Based on the valuation exercise of Intervet/Schering-Plough and
the customary transaction adjustments, if Merial and
Intervet/Schering-Plough are combined, a payment may be required
to be paid by either party to make the joint venture equally
owned by the Company and sanofi-aventis. This payment would
true-up the
value of the contributions so that they are equal. Any formation
of a new animal health joint venture with sanofi-aventis is
subject to customary closing conditions including antitrust
review in the United States and Europe. Prior to the closing of
the Merger, the agreements provided Old Merck with certain
rights to terminate the call option for a fee of
$400 million. The recognition of the termination fee was
deferred until the fourth quarter of 2009 when the conditions
that could have triggered its payment lapsed.
Sales of joint venture products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2009(1)
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Fipronil products
|
|
$
|
783.9
|
|
|
$
|
1,053.0
|
|
|
$
|
1,033.3
|
|
Biological products
|
|
|
524.5
|
|
|
|
789.7
|
|
|
|
674.9
|
|
Avermectin products
|
|
|
341.4
|
|
|
|
511.8
|
|
|
|
478.4
|
|
Other products
|
|
|
199.7
|
|
|
|
288.2
|
|
|
|
262.2
|
|
|
|
|
|
$
|
1,849.5
|
|
|
$
|
2,642.7
|
|
|
$
|
2,448.8
|
|
|
(1)Amounts
for 2009 include sales until the September 17, 2009
divestiture date.
Sanofi
Pasteur MSD
In 1994, Old Merck and Pasteur Merieux Connaught (now Sanofi
Pasteur S.A.) established a 50% owned joint venture to market
vaccines in Europe and to collaborate in the development of
combination vaccines for distribution in Europe.
Sales of joint venture products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Gardasil
|
|
$
|
549.2
|
|
|
$
|
865.3
|
|
|
$
|
476.0
|
|
Influenza vaccines
|
|
|
249.4
|
|
|
|
229.9
|
|
|
|
232.5
|
|
Other viral vaccines
|
|
|
112.1
|
|
|
|
105.1
|
|
|
|
86.8
|
|
Hepatitis vaccines
|
|
|
44.2
|
|
|
|
72.6
|
|
|
|
72.9
|
|
RotaTeq
|
|
|
42.2
|
|
|
|
28.4
|
|
|
|
15.7
|
|
Other vaccines
|
|
|
591.5
|
|
|
|
583.5
|
|
|
|
554.1
|
|
|
|
|
|
$
|
1,588.6
|
|
|
$
|
1,884.8
|
|
|
$
|
1,438.0
|
|
|
92
Johnson &
Johnson°Merck Consumer Pharmaceuticals Company
In 1989, Old Merck formed a joint venture with
Johnson & Johnson to develop and market a broad range
of nonprescription medicines for U.S. consumers. This 50%
owned joint venture was subsequently expanded into Canada.
Significant joint venture products are Pepcid AC, an
over-the-counter
form of the Companys ulcer medication Pepcid, as
well as Pepcid Complete, an
over-the-counter
product which combines the Companys ulcer medication with
antacids.
Sales of joint venture products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Gastrointestinal products
|
|
$
|
202.0
|
|
|
$
|
210.7
|
|
|
$
|
218.5
|
|
Other products
|
|
|
1.2
|
|
|
|
1.4
|
|
|
|
1.2
|
|
|
|
|
|
$
|
203.2
|
|
|
$
|
212.1
|
|
|
$
|
219.7
|
|
|
Capital
Expenditures
Capital expenditures were $1.5 billion in 2009,
$1.3 billion in 2008 and $1.0 billion in 2007.
Expenditures in the United States were $981.6 million in
2009, $946.6 million in 2008 and $788.0 million in
2007. Expenditures during 2009 included $801.5 million for
production facilities, $161.2 million for research and
development facilities, $33.6 million for environmental
projects, and $464.3 million for administrative, safety and
general site projects, of which approximately 25% represents
capital investments related to a multi-year initiative to
standardize the Companys information systems.
Depreciation expense was $1.7 billion in 2009,
$1.4 billion in 2008 and $1.8 billion in 2007 of which
$1.0 billion, $1.0 billion and $1.4 billion,
respectively, applied to locations in the United States. Total
depreciation expense in 2009, 2008 and 2007 included accelerated
depreciation of $348.6 million, $216.7 million and
$460.6 million, respectively, associated with restructuring
activities (see Note 4 to the consolidated financial
statements).
Analysis
of Liquidity and Capital Resources
Mercks strong financial profile enables it to fully fund
research and development, focus on external alliances, support
in-line products and maximize upcoming launches while providing
significant cash returns to shareholders.
Selected
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Working capital
|
|
$
|
12,677.9
|
|
|
$
|
4,793.9
|
|
|
$
|
2,787.2
|
|
Total debt to total liabilities and equity
|
|
|
15.6
|
%
|
|
|
13.2
|
%
|
|
|
11.9
|
%
|
Cash provided by operations to total debt
|
|
|
0.2:1
|
|
|
|
1.1:1
|
|
|
|
1.2:1
|
|
|
The $18 billion cash portion of the consideration for the
Merger was funded with a combination of existing cash, including
the proceeds from the sale of Old Mercks interest in
Merial discussed above, the sale or redemption of short-term
investments and the issuance of debt. In preparation for the
Merger, during 2009, Old Merck closed an underwritten public
offering of $4.25 billion senior unsecured notes as
discussed below. Additionally, a significant portion of the
long-term investments as of December 31, 2008 were
liquidated in anticipation of the Merger.
Cash provided by operating activities, which was
$3.4 billion in 2009, $6.6 billion in 2008 and
$7.0 billion in 2007, continues to be the Companys
primary source of funds to finance operating needs, capital
expenditures, treasury stock purchases and dividends paid to
shareholders. Cash provided by operating activities in 2009
reflects $4.1 billion of payments into the Vioxx
settlement funds and a $660 million payment made in
connection with the previously disclosed settlement with the
CRA. Cash provided by operating activities in 2008 reflects
$2.1 billion received in connection with a partial
redemption of Old Mercks partnership interest in AZLP,
representing a
93
distribution of Old Mercks accumulated earnings on its
investment in AZLP since inception. Cash provided by operating
activities in 2008 was also affected by a $675 million
payment made in connection with the previously disclosed
resolution of investigations of civil claims by federal and
state authorities relating to certain past marketing and selling
activities and $750 million of payments into the Vioxx
settlement funds. Cash provided by operating activities for
2007 reflects the payment made under a previously disclosed
settlement with the Internal Revenue Service (IRS).
Cash provided by investing activities was $3.2 billion in
2009 compared with cash used by investing activities of
$1.8 billion in 2008. The change was primarily driven by
the release of restricted cash primarily due to the release of
pledged collateral for certain Vioxx-related matters,
lower purchases of securities and other investments and proceeds
from the 2009 disposition of Old Mercks interest in
Merial. These increases in cash used by investing activities
were partially offset by the use of cash to fund the Merger, as
well as by a 2008 distribution from AZLP representing a return
of Old Mercks investment in AZLP. Cash used by investing
activities in 2008 was $1.8 billion compared with
$2.8 billion in 2007. The lower use of cash by investing
activities primarily reflects a distribution from AZLP in 2008
and a $1.1 billion payment in 2007 in connection with the
December 2006 acquisition of Sirna Therapeutics, Inc., partially
offset by higher net purchases of securities and other
investments, higher capital expenditures and an increase in
restricted assets.
Cash used by financing activities was $1.6 billion in 2009
compared with $5.5 billion in 2008 reflecting the 2009
issuance of $4.25 billion senior unsecured notes, no
purchases of treasury stock and lower payments on debt,
partially offset by a net decrease in short-term borrowings.
Cash used in financing activities was $5.5 billion in 2008
compared with $4.9 billion in 2007 reflecting higher
purchases of treasury stock, lower proceeds from the exercise
stock options and higher payments on debt in connection with the
settlement of a note due to Astra, partially offset by a net
increase in short-term borrowings. Dividends paid to
stockholders were $3.2 billion in 2009 and
$3.3 billion in 2008 and 2007.
At December 31, 2009, the total of worldwide cash and
investments was $10.0 billion, including $9.6 billion
of cash, cash equivalents and short-term investments, and
$432.3 million of long-term investments. In addition, the
Company has $290 million of cash and investments restricted
under certain collateral arrangements as discussed below.
Working capital levels are more than adequate to meet the
operating requirements of the Company.
In August 2008, Old Merck executed a $4.1 billion letter of
credit agreement with a financial institution, which satisfied
certain conditions set forth in the U.S. Vioxx
Settlement Agreement (see Note 12 to the consolidated
financial statements). Old Merck pledged collateral to the
financial institution of approximately $5.1 billion
pursuant to the terms of the letter of credit agreement.
Although the amount of assets pledged as collateral was set by
the letter of credit agreement and such assets are held in
custody by a third party, the assets were managed by Old Merck.
Old Merck considered the assets pledged under the letter of
credit agreement to be restricted. The letter of credit amount
and required collateral balances declined as payments (after the
first $750 million) under the Settlement Agreement were
made. As of December 31, 2008, $3.8 billion was
recorded within Deferred income taxes and other current
assets and $1.3 billion was classified as Other
assets. During 2009, all remaining payments into the
Vioxx settlement funds were made pursuant to the
U.S. Vioxx Settlement Agreement. Accordingly, the
letter of credit agreement was terminated and the collateral was
released.
As previously disclosed, the IRS has completed its examination
of Old Mercks tax returns for the years 1993 to 2001. As a
result of the examination, Old Merck made an aggregate payment
of $2.79 billion in February 2007. This payment was offset
by (i) a tax refund of $165 million received in 2007
for amounts previously paid for these matters and (ii) a
federal tax benefit of approximately $360 million related
to interest included in the payment, resulting in a net cash
cost to Old Merck of approximately $2.3 billion in 2007.
The impact for years subsequent to 2001 for items reviewed as
part of the examination was included in the payment although
those years remain open in all other respects. The closing of
the IRS examination did not have a material impact on results of
operations in 2007 as these amounts had been previously accrued
for.
As previously disclosed, in October 2006, the CRA issued Old
Merck a notice of reassessment containing adjustments related to
certain intercompany pricing matters. In February 2009, Old
Merck and the CRA negotiated a settlement agreement in regard to
these matters. In accordance with the settlement, Old Merck paid
an additional tax of approximately $300 million
(U.S. dollars) and interest of approximately
$360 million (U.S. dollars) with no
94
additional amounts or penalties due on this assessment. The
settlement was accounted for in the first quarter of 2009. Old
Merck had previously established reserves for these matters. A
significant portion of the taxes paid is expected to be
creditable for U.S. tax purposes. The resolution of these
matters did not have a material effect on financial position or
liquidity, other than with respect to the associated collateral
as discussed below.
In addition, in July 2007 and November 2008, the CRA proposed
additional adjustments for 1999 and 2000, respectively, relating
to other intercompany pricing matters. The adjustments would
increase Canadian tax due by approximately $312 million
(U.S. dollars) plus $314 million (U.S. dollars)
of interest through December 31, 2009. It is possible that
the CRA will propose similar adjustments for later years. The
Company disagrees with the positions taken by the CRA and
believes they are without merit. The Company intends to contest
the assessments through the CRA appeals process and the courts
if necessary. Management believes that resolution of these
matters will not have a material effect on the Companys
financial position or liquidity.
In connection with the appeals process for the matters discussed
above, during 2007, Old Merck pledged collateral to two
financial institutions, one of which provided a guarantee to the
CRA and the other to the Quebec Ministry of Revenue representing
a portion of the tax and interest assessed. As a result of the
settlement noted above, guarantees required to appeal the
disputes were reduced or eliminated and approximately
$960 million of associated collateral was released. Certain
of the cash and investments continue to be collateralized for
guarantees required to appeal other Canadian tax disputes. The
collateral is included in Deferred income taxes and other
current assets and Other assets in the Consolidated
Balance Sheet and totaled approximately $290 million and
$1.2 billion at December 31, 2009 and 2008,
respectively.
The IRS is examining Old Mercks 2002 to 2005 federal
income tax returns. In addition, various state and foreign tax
examinations are in progress. For most of its other significant
tax jurisdictions (both U.S. state and foreign), the
Companys income tax returns are open for examination for
the period 1999 through 2009.
During the second quarter of 2007, the IRS completed its
examination of Schering-Ploughs
1997-2002
federal income tax returns. The Company is seeking resolution of
an issue raised during this examination through the IRS
administrative appeals process. In July 2007, Schering-Plough
made a payment of $98 million to the IRS pertaining to the
1997-2002
examination. The Companys income tax returns remain open
with the IRS for the
1997-2009
tax years. During 2008, the IRS commenced its examination of the
2003-2006
federal income tax returns. This examination is expected to be
completed in 2010. For most of its other significant tax
jurisdictions (both U.S. state and foreign), the
Companys income tax returns are open for examination for
the period 2002 through 2009.
The Companys contractual obligations as of
December 31, 2009 are as follows:
Payments
Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Total
|
|
|
2010
|
|
|
2011 - 2012
|
|
|
2013 -2014
|
|
|
Thereafter
|
|
|
|
|
Purchase obligations
|
|
$
|
3,734.9
|
|
|
$
|
2,380.8
|
|
|
$
|
730.4
|
|
|
$
|
523.0
|
|
|
$
|
100.7
|
|
Loans payable and current portion of long-term debt
|
|
|
1,362.3
|
|
|
|
1,362.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
15,329.1
|
|
|
|
|
|
|
|
2,378.5
|
|
|
|
3,966.5
|
|
|
|
8,984.1
|
|
Interest related to debt obligations
|
|
|
9,665.4
|
|
|
|
778.3
|
|
|
|
1,422.1
|
|
|
|
1,243.3
|
|
|
|
6,221.7
|
|
Unrecognized tax benefits
(1)
|
|
|
324.0
|
|
|
|
324.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
944.8
|
|
|
|
281.6
|
|
|
|
393.4
|
|
|
|
195.1
|
|
|
|
74.7
|
|
|
|
|
|
$
|
31,360.5
|
|
|
$
|
5,127.0
|
|
|
$
|
4,924.4
|
|
|
$
|
5,927.9
|
|
|
$
|
15,381.2
|
|
|
|
|
(1) |
As of December 31, 2009, the Companys Consolidated
Balance Sheet reflects liabilities for unrecognized tax
benefits, interest and penalties of $5.7 billion, including
$324.0 million reflected as a current liability. Due to the
high degree of uncertainty regarding the timing of future cash
outflows of liabilities for unrecognized tax benefits beyond one
year, a reasonable estimate of the period of cash settlement for
years beyond 2010 can not be made.
|
95
Purchase obligations consist primarily of goods and services
that are enforceable and legally binding and include obligations
for minimum inventory contracts, research and development and
advertising. Amounts reflected for research and development
obligations do not include contingent milestone payments. Loans
payable and current portion of long-term debt also reflects
$298.2 million of long-dated notes that are subject to
repayment at the option of the holders on an annual basis.
Required funding obligations for 2010 relating to the
Companys pension and other postretirement benefit plans
are not expected to be material. However, the Company currently
anticipates contributing approximately $950 million and
$50 million, respectively, to its pension plans and other
postretirement benefit plans during 2010.
On June 25, 2009, Old Merck closed an underwritten public
offering of $4.25 billion senior unsecured notes consisting
of $1.25 billion aggregate principal amount of
1.875% notes due 2011, $1.0 billion aggregate
principal amount of 4.00% notes due 2015,
$1.25 billion aggregate principal amount of
5.00% notes due 2019 and $750 million aggregate
principal amount of 5.85% notes due 2039. Interest on the
notes is payable semi-annually. The notes of each series are
redeemable in whole or in part at any time, at the
Companys option at the redemption prices specified in each
notes associated prospectus. Proceeds from the notes were used
to fund a portion of the cash consideration of the Merger.
In December 2009, the Company filed a securities registration
statement with the Securities and Exchange Commission
(SEC) under the automatic shelf registration process
available to well-known seasoned issuers which is
effective for three years.
Also, in connection with the Merger, on March 8, 2009, Old
Merck entered into a financing commitment letter with JPMorgan
Chase Bank, N.A. and J.P. Morgan Securities Inc.
(collectively JPMorgan), under which JPMorgan
committed to provide $7 billion of financing. On
May 6, 2009, Old Merck entered into a $3 billion
364-day
senior unsecured interim term loan facility (the bridge
loan facility); a $3 billion
364-day
asset sale revolving credit facility (the asset sale
facility); and a $1 billion
364-day
corporate revolving credit facility (the incremental
facility). In connection with the above $4.25 billion
offering, the bridge loan facility was terminated and the
commitment of the lenders under the
364-day
asset sale facility was reduced. Upon completion of the sale of
Merial to sanofi-aventis (see Note 10 to the consolidated
financial statements), the asset sale facility was terminated.
The incremental facility is available to backstop commercial
paper and for general corporate purposes. This facility has not
been drawn on and will expire in November 2010. Merck has
incurred commitment fees of approximately $150 million
associated with these facilities which are being amortized over
the commitment period.
In April 2009, Old Merck amended its $1.5 billion,
5-year
revolving credit facility maturing in April 2013 to allow the
facility to remain in place after the Merger. The Companys
existing $2.0 billion credit facility maturing in August
2012 remains outstanding. These facilities provide backup
liquidity for the Companys commercial paper borrowing
facility and are for general corporate purposes. The Company has
not drawn funding from either facility.
Also, in connection with the Merger, effective as of
November 3, 2009, New Merck executed a full and
unconditional guarantee of the then existing debt of Old Merck
and Old Merck executed a full and unconditional guarantee of the
then existing debt of New Merck (excluding commercial paper),
including for payments of principal and interest.
The Companys long-term credit ratings assigned by
Moodys Investors Service and Standard &
Poors are Aa3 with a stable outlook and AA- with a
positive outlook, respectively. These ratings continue to allow
access to the capital markets and flexibility in obtaining funds
on competitive terms. The Company continues to maintain a
conservative financial profile. The Company places its cash and
investments in instruments that meet high credit quality
standards, as specified in its investment policy guidelines.
These guidelines also limit the amount of credit exposure to any
one issuer. Despite this strong financial profile, certain
contingent events, if realized, which are discussed in
Note 12 to the consolidated financial statements, could
have a material adverse impact on the Companys liquidity
and capital resources. The Company does not participate in any
off-balance sheet arrangements involving unconsolidated
subsidiaries that provide financing or potentially expose the
Company to unrecorded financial obligations.
In November 2009 and February 2010, the Board of Directors
declared a quarterly dividend of $0.38 per share on the
Companys common stock for the first and second quarter of
2010, respectively, and declared a
96
quarterly dividend of $3.75 per share on the 6% mandatory
convertible preferred stock for the first and second quarter of
2010, respectively.
In November 2009, the Board of Directors approved purchases over
time of up to $3.0 billion of Mercks common stock for
its treasury. No purchases of treasury stock were made in 2009.
Old Merck purchased $2.7 billion and $1.4 billion of
treasury stock in 2008 and 2007, respectively, under a previous
program approved by Old Mercks Board of Directors in July
2002.
Financial
Instruments Market Risk Disclosures
The Company manages the impact of foreign exchange rate
movements and interest rate movements on its earnings, cash
flows and fair values of assets and liabilities through
operational means and through the use of various financial
instruments, including derivative instruments.
A significant portion of the Companys revenues and
earnings in foreign affiliates is exposed to changes in foreign
exchange rates. The objectives and accounting related to the
Companys foreign currency risk management program, as well
as its interest rate risk management activities are discussed
below.
Foreign
Currency Risk Management
A significant portion of the Companys revenues are
denominated in foreign currencies. Merck relies on sustained
cash flows generated from foreign sources to support its
long-term commitment to U.S. dollar-based research and
development. To the extent the dollar value of cash flows is
diminished as a result of a strengthening dollar, the
Companys ability to fund research and other dollar-based
strategic initiatives at a consistent level may be impaired. The
Company has established revenue hedging and balance sheet risk
management programs to protect against volatility of future
foreign currency cash flows and changes in fair value caused by
volatility in foreign exchange rates at its U.S. functional
currency entities.
The objective of the revenue hedging program is to reduce the
potential for longer-term unfavorable changes in foreign
exchange to decrease the U.S. dollar value of future cash
flows derived from foreign currency denominated sales, primarily
the euro and Japanese yen. To achieve this objective, the
Company will partially hedge forecasted foreign currency
denominated third party and intercompany distributor entity
sales that are expected to occur over its planning cycle,
typically no more than three years into the future. The Company
will layer in hedges over time, increasing the portion of third
party and intercompany distributor sales hedged as it gets
closer to the expected date of the forecasted foreign currency
denominated sales, such that it is probable the hedged
transaction will occur. The portion of sales hedged is based on
assessments of cost-benefit profiles that consider natural
offsetting exposures, revenue and exchange rate volatilities and
correlations, and the cost of hedging instruments. The hedged
anticipated sales are a specified component of a portfolio of
similarly denominated foreign currency-based sales transactions,
each of which responds to the hedged risk in the same manner.
The Company manages its anticipated transaction exposure
principally with purchased local currency put options, which
provide the Company with a right, but not an obligation, to sell
foreign currencies in the future at a predetermined price. If
the U.S. dollar strengthens relative to the currency of the
hedged anticipated sales, total changes in the options
cash flows offset the decline in the expected future
U.S. dollar cash flows of the hedged foreign currency
sales. Conversely, if the U.S. dollar weakens, the
options value reduces to zero, but the Company benefits
from the increase in the value of the anticipated foreign
currency cash flows. The Company also utilizes forward contracts
in its revenue hedging program. If the U.S. dollar
strengthens relative to the currency of the hedged anticipated
sales, the increase in the fair value of the forward contracts
offsets the decrease in the expected future U.S. dollar
cash flows of the hedged foreign currency sales. Conversely, if
the U.S. dollar weakens, the decrease in the fair value of
the forward contracts offsets the increase in the value of the
anticipated foreign currency cash flows. While a weaker
U.S. dollar would result in a net benefit, the market value
of Mercks hedges would have declined by
$245.0 million and $194.7 million, respectively, from
a uniform 10% weakening of the U.S. dollar at
December 31, 2009 and 2008. The market value was determined
using a foreign exchange option pricing model and holding all
factors except exchange rates constant. Because Merck
principally uses purchased local currency put options, a uniform
weakening of the U.S. dollar will yield the largest overall
potential loss in the market value of these options. The
sensitivity measurement assumes that a change in one foreign
currency relative to the U.S. dollar would not affect other
foreign currencies relative to the U.S. dollar. Although
not predictive in nature, the Company believes that a
97
10% threshold reflects reasonably possible near-term changes in
Mercks major foreign currency exposures relative to the
U.S. dollar. The cash flows from these contracts are
reported as operating activities in the Consolidated Statement
of Cash Flows.
Where the U.S. dollar is the functional currency of the
Companys foreign subsidiaries, the primary objective of
the balance sheet risk management program is to protect the
U.S. dollar value of foreign currency denominated net
monetary assets from the effects of volatility in foreign
exchange that might occur prior to their conversion to
U.S. dollars. In these instances, Merck principally
utilizes forward exchange contracts, which enable the Company to
buy and sell foreign currencies in the future at fixed exchange
rates and economically offset the consequences of changes in
foreign exchange on the amount of U.S. dollar cash flows
derived from the net assets. Where the U.S. dollar is not
the functional currency of the Companys foreign
subsidiaries, Merck executes spot trades to convert foreign
currencies into U.S. dollars based on short-term forecast
needs. These U.S. dollar proceeds are then invested until
required by the Companys foreign subsidiaries. Merck
routinely enters into contracts to offset the effects of
exchange on exposures denominated in developed country
currencies, primarily the euro and Japanese yen. For exposures
in developing country currencies, the Company will enter into
forward contracts to partially offset the effects of exchange on
exposures when it is deemed economical to do so based on a
cost-benefit analysis that considers the magnitude of the
exposure, the volatility of the exchange rate and the cost of
the hedging instrument. The Company will also minimize the
effect of exchange on monetary assets and liabilities by
managing operating activities and net asset positions at the
local level. When applicable, the Company uses forward contracts
to hedge the changes in fair value of certain foreign currency
denominated
available-for-sale
securities attributable to fluctuations in foreign currency
exchange rates. A sensitivity analysis to changes in the value
of the U.S. dollar on foreign currency denominated
derivatives, investments and monetary assets and liabilities
indicated that if the U.S. dollar uniformly strengthened by
10% against all currency exposures of the Company at
December 31, 2009, Income before taxes would have
declined by $11.4 million in 2009. Because the Company is
in a net long position relative to its major foreign currencies
after consideration of forward contracts, a uniform
strengthening of the U.S. dollar will yield the largest
overall potential net loss in earnings due to exchange. At
December 31, 2008, Old Merck was in a net short position
relative to its major foreign currencies after consideration of
forward contracts, therefore a uniform 10% weakening of the
U.S. dollar would have reduced Income before taxes
by $15.8 million. This measurement assumes that a
change in one foreign currency relative to the U.S. dollar
would not affect other foreign currencies relative to the
U.S. dollar. Although not predictive in nature, the Company
believes that a 10% threshold reflects reasonably possible
near-term changes in Mercks major foreign currency
exposures relative to the U.S. dollar. The cash flows from
these contracts are reported as operating activities in the
Consolidated Statement of Cash Flows.
The Venezuelan economy was recently determined to be
hyperinflationary which requires the Company to remeasure its
local currency operations there to U.S. dollars. Accordingly, in
accordance with U.S. GAAP, the Company will remeasure its
monetary assets and liabilities for those operations in earnings
in the first quarter. Effective January 11, 2010, the
Venezuelan government devalued its currency from BsF at 2.15 per
U.S. dollar to a two-tiered official exchange rate at
(1) the essentials rate at BsF 2.60 per
U.S. dollar and (2) the non-essentials
rate at BsF 4.30 per U.S. dollar. The Companys
products are expected to be classified as essentials
and anticipates that the majority of its transactions will be
settled at the essential rate of BsF 2.60 per U.S. dollar.
These actions will have an adverse effect on the Companys
results of operations, financial position and cash flows.
Interest
Rate Risk Management
In addition to the revenue hedging and balance sheet risk
management programs, the Company may use interest rate swap
contracts on certain investing and borrowing transactions to
manage its net exposure to interest rate changes and to reduce
its overall cost of borrowing. The Company does not use
leveraged swaps and, in general, does not leverage any of its
investment activities that would put principal capital at risk.
At December 31, 2009, the Company was a party to seven
pay-floating, receive-fixed interest rate swap contracts
designated as fair value hedges of fixed-rate notes in which the
notional amounts match the amount of the hedged fixed-rate
notes. There are two swaps maturing in 2011 with notional
amounts of $125 million each that effectively convert the
Companys $250 million, 5.125% fixed-rate notes due
2011 to floating rate instruments and five swaps maturing in
2015 with notional amounts of $150 million each that
effectively convert $750 million of the Companys
$1.0 billion, 4.0% fixed-rate notes due 2015 to floating
rate instruments. The fair value changes in the notes
attributable to changes in the benchmark interest rate are
recorded in interest expense and offset by the fair value
changes in the swap
98
contracts. In 2008, Old Merck terminated four interest rate swap
contracts with notional amounts of $250 million each, and
terminated one interest rate swap contract with a notional
amount of $500 million. These swaps had effectively
converted its $1.0 billion, 4.75% fixed-rate notes due 2015
and its $500 million, 4.375% fixed-rate notes due 2013 to
variable rate debt. As a result of the swap terminations, Old
Merck received $128.3 million in cash, excluding accrued
interest which was not material. The corresponding gains related
to the basis adjustment of the debt associated with the
terminated swap contracts were deferred and are being amortized
as a reduction of interest expense over the remaining term of
the notes. The cash flows from these contracts are reported as
operating activities in the Consolidated Statement of Cash Flows.
The Companys investment portfolio includes cash
equivalents and short-term investments, the market values of
which are not significantly affected by changes in interest
rates. The market value of the Companys medium- to
long-term fixed-rate investments is modestly affected by changes
in U.S. interest rates. Changes in medium- to long-term
U.S. interest rates have a more significant impact on the
market value of the Companys fixed-rate borrowings, which
generally have longer maturities. A sensitivity analysis to
measure potential changes in the market value of Mercks
investments, debt and related swap contracts from a change in
interest rates indicated that a one percentage point increase in
interest rates at December 31, 2009 and 2008 would have
positively affected the net aggregate market value of these
instruments by $990.1 million and $98.9 million,
respectively. A one percentage point decrease at
December 31, 2009 and 2008 would have negatively affected
the net aggregate market value by $1,152.7 million and
$156.3 million, respectively. The increased sensitivity to
interest rate movements from the prior year is attributable to
the sale or redemption of long-term fixed rate investments to
fund the merger, as well as an increase in debt, which included
existing Schering-Plough debt as well as debt issued in 2009 to
fund the Merger. The fair value of Mercks debt was
determined using pricing models reflecting one percentage point
shifts in the appropriate yield curves. The fair values of the
Mercks investments were determined using a combination of
pricing and duration models.
Critical
Accounting Policies and Other Matters
The Companys consolidated financial statements include
certain amounts that are based on managements best
estimates and judgments. Estimates are used when accounting for
amounts recorded in connection with mergers and acquisitions,
including fair value determinations of assets and liabilities.
Additionally, estimates are used in determining such items as
provisions for sales discounts and returns, depreciable and
amortizable lives, recoverability of inventories, including
those produced in preparation for product launches, amounts
recorded for contingencies, environmental liabilities and other
reserves, pension and other postretirement benefit plan
assumptions, share-based compensation assumptions, restructuring
costs, impairments of long-lived assets (including intangible
assets and goodwill) and investments, and taxes on income.
Because of the uncertainty inherent in such estimates, actual
results may differ from these estimates. Application of the
following accounting policies result in accounting estimates
having the potential for the most significant impact on the
financial statements.
Mergers
and Acquisitions
On January 1, 2009, new guidance issued by the FASB was
adopted which changes the way in which the acquisition method is
to be applied in a business combination and also changes the way
assets and liabilities are recognized in purchase accounting on
a prospective basis. The acquisition method of accounting
requires that the assets acquired and liabilities assumed be
recorded at the date of acquisition at their respective fair
values with limited exceptions. Assets acquired and liabilities
assumed in a business combination that arise from contingencies
are recognized at fair value if fair value can reasonably be
estimated. If the acquisition date fair value of an asset
acquired or liability assumed that arises from a contingency
cannot be determined, the asset or liability is recognized if
probable and reasonably estimable; if these criteria are not
met, no asset or liability is recognized. Fair value is defined
as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an
orderly transaction between market participants on the
measurement date. Accordingly, the Company may be required to
value assets at fair value measures that do not reflect the
Companys intended use of those assets. Any excess of the
purchase price (consideration transferred) over the estimated
fair values of net assets acquired is recorded as goodwill.
Transaction costs and costs to restructure the acquired company
are expensed as incurred. If the Company determines the asset
acquired does not meet the definition of a business under the
acquisition method of accounting, the transaction will
99
be accounted for as an acquisition of assets rather than a
business combination, and therefore, no goodwill will be
recorded. The fair value of intangible assets, including
acquired in-process research and development, is based on
significant judgments made by management, and accordingly, for
significant items, the Company typically obtains assistance from
third party valuation specialists. Amounts are allocated to
acquired in-process research and development are capitalized and
accounted for similar to indefinite-lived intangible assets,
subject to impairment testing until completion or abandonment of
the projects. Upon successful completion of each project, Merck
will make a separate determination as to the then useful life of
the asset and begin amortization. The valuations and useful life
assumptions are based on information available near the merger
or acquisition date and are based on expectations and
assumptions that are deemed reasonable by management. The
judgments made in determining estimated fair values assigned to
assets acquired and liabilities assumed, as well as asset lives,
can materially affect the Companys results of operations.
The fair values of identifiable intangible assets related to
currently marketed products and product rights are primarily
determined by using an income approach, through
which fair value is estimated based on each assets
discounted projected net cash flows. The Companys
estimates of market participant net cash flows consider
historical and projected pricing, margins and expense levels;
the performance of competing products where applicable; relevant
industry and therapeutic area growth drivers and factors;
current and expected trends in technology and product life
cycles; the time and investment that will be required to develop
products and technologies; the ability to obtain marketing and
regulatory approvals; the ability to manufacture and
commercialize the products; the extent and timing of potential
new product introductions by the Companys competitors; and
the life of each assets underlying patent, if any. The net
cash flows are then probability-adjusted where appropriate to
consider the uncertainties associated with the underlying
assumptions, as well as the risk profile of the net cash flows
utilized in the valuation. The probability-adjusted future net
cash flows of each product are then discounted to present value
utilizing an appropriate discount rate.
The fair values of identifiable intangible assets related to
IPR&D are determined using an income approach, through
which fair value is estimated based on each assets
probability adjusted future net cash flows, which reflect the
different stages of development of each product and the
associated probability of successful completion. The net cash
flows are then discounted to present value using an appropriate
discount rate.
Revenue
Recognition
Revenues from sales of products are recognized at the time of
delivery and when title and risk of loss passes to the customer.
Recognition of revenue also requires reasonable assurance of
collection of sales proceeds and completion of all performance
obligations. Domestically, sales discounts are issued to
customers as direct discounts at the
point-of-sale
or indirectly through an intermediary wholesaler, known as
chargebacks, or indirectly in the form of rebates. Additionally,
sales are generally made with a limited right of return under
certain conditions. Revenues are recorded net of provisions for
sales discounts and returns, which are established at the time
of sale.
The provision for aggregate indirect customer discounts covers
chargebacks and rebates. Chargebacks are discounts that occur
when a contracted customer purchases directly through an
intermediary wholesaler. The contracted customer generally
purchases product at its contracted price plus a
mark-up from
the wholesaler. The wholesaler, in turn, charges the Company
back for the difference between the price initially paid by the
wholesaler and the contract price paid to the wholesaler by the
customer. The provision for chargebacks is based on expected
sell-through levels by the Companys wholesale customers to
contracted customers, as well as estimated wholesaler inventory
levels. Rebates are amounts owed based upon definitive
contractual agreements or legal requirements with private sector
and public sector (Medicaid and Medicare
Part D) benefit providers, after the final dispensing
of the product by a pharmacy to a benefit plan participant. The
provision is based on expected payments, which are driven by
patient usage and contract performance by the benefit provider
customers.
The Company uses historical customer segment mix, adjusted for
other known events, in order to estimate the expected provision.
Amounts accrued for aggregate indirect customer discounts are
evaluated on a quarterly basis through comparison of information
provided by the wholesalers, health maintenance organizations,
pharmacy benefit managers and other customers to the amounts
accrued. Adjustments are recorded when trends or significant
events indicate that a change in the estimated provision is
appropriate.
100
The Company continually monitors its provision for aggregate
indirect customer discounts. There were no material adjustments
to estimates associated with the aggregate indirect customer
discount provision in 2009, 2008 or 2007.
Summarized information about changes in the aggregate indirect
customer discount accrual is as follows:
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
Balance, January 1
|
|
$
|
616.3
|
|
|
$
|
699.4
|
|
Current provision
|
|
|
2,541.9
|
|
|
|
2,037.5
|
|
Schering-Plough accrual assumed in the Merger
|
|
|
584.1
|
|
|
|
|
|
Adjustments to prior years
|
|
|
(22.3
|
)
|
|
|
(13.7
|
)
|
Payments
|
|
|
(2,347.4
|
)
|
|
|
(2,106.9
|
)
|
|
|
Balance, December 31
|
|
$
|
1,372.6
|
|
|
$
|
616.3
|
|
|
Accruals for chargebacks are reflected as a direct reduction to
accounts receivable and accruals for rebates as current
liabilities. The accrued balances relative to these provisions
included in Accounts receivable and Accrued and other
current liabilities were $115.0 million and
$1,257.6 million, respectively, at December 31, 2009
and $55.6 million and $560.7 million, respectively, at
December 31, 2008.
The Company maintains a returns policy that allows its customers
to return product within a specified period prior to and
subsequent to the expiration date (generally, three to six
months before and twelve months after product expiration). The
estimate of the provision for returns is based upon historical
experience with actual returns. Additionally, the Company
considers factors such as levels of inventory in the
distribution channel, product dating and expiration period,
whether products have been discontinued, entrance in the market
of additional generic competition, changes in formularies or
launch of
over-the-counter
products, among others. The product returns provision, as well
as actual returns, were less than 1.0% of net sales in 2009,
2008 and 2007.
Through its distribution programs with U.S. wholesalers,
the Company encourages wholesalers to align purchases with
underlying demand and maintain inventories below specified
levels. The terms of the programs allow the wholesalers to earn
fees upon providing visibility into their inventory levels as
well as by achieving certain performance parameters, such as,
inventory management, customer service levels, reducing shortage
claims and reducing product returns. Information provided
through the wholesaler distribution programs includes items such
as sales trends, inventory on-hand, on-order quantity and
product returns.
Wholesalers generally provide only the above mentioned data to
the Company, as there is no regulatory requirement to report lot
level information to manufacturers, which is the level of
information needed to determine the remaining shelf life and
original sale date of inventory. Given current wholesaler
inventory levels, which are generally less than a month, the
Company believes that collection of order lot information across
all wholesale customers would have limited use in estimating
sales discounts and returns.
Inventories
Produced in Preparation for Product Launches
The Company capitalizes inventories produced in preparation for
product launches sufficient to support estimated initial market
demand. Typically, capitalization of such inventory does not
begin until the related product candidates are in Phase III
clinical trials and are considered to have a high probability of
regulatory approval. The Company monitors the status of each
respective product within the regulatory approval process;
however, the Company generally does not disclose specific timing
for regulatory approval. If the Company is aware of any specific
risks or contingencies other than the normal regulatory approval
process or if there are any specific issues identified during
the research process relating to safety, efficacy,
manufacturing, marketing or labeling, the related inventory
would generally not be capitalized. Expiry dates of the
inventory are affected by the stage of completion. The Company
manages the levels of inventory at each stage to optimize the
shelf life of the inventory in relation to anticipated market
demand in order to avoid product expiry issues. For inventories
that are capitalized, anticipated future sales and shelf lives
support the realization of the inventory value as the inventory
shelf life is sufficient to meet initial product launch
requirements. Inventories produced in preparation for product
launches capitalized at December 31, 2009 and 2008 were not
significant.
101
Contingencies
and Environmental Liabilities
The Company is involved in various claims and legal proceedings
of a nature considered normal to its business, including product
liability, intellectual property and commercial litigation, as
well as additional matters such as antitrust actions. (See
Note 12 to the consolidated financial statements.) The
Company records accruals for contingencies when it is probable
that a liability has been incurred and the amount can be
reasonably estimated. These accruals are adjusted periodically
as assessments change or additional information becomes
available. For product liability claims, a portion of the
overall accrual is actuarially determined and considers such
factors as past experience, number of claims reported and
estimates of claims incurred but not yet reported. Individually
significant contingent losses are accrued when probable and
reasonably estimable.
Legal defense costs expected to be incurred in connection with a
loss contingency are accrued when probable and reasonably
estimable. As of December 31, 2008, Old Merck had an
aggregate reserve of approximately $4.379 billion (the
Vioxx Reserve) for the Settlement Program and
future legal defense costs worldwide related to (i) the
Vioxx Product Liability Lawsuits, (ii) the
Vioxx Shareholder Lawsuits, (iii) the Vioxx
Foreign Lawsuits, and (iv) the Vioxx
Investigations (collectively, the Vioxx
Litigation) (see Note 12 to the consolidated
financial statements). During 2009, Merck spent approximately
$244 million in the aggregate in legal defense costs
worldwide, including approximately $54 million in the
fourth quarter of 2009, related to the Vioxx Litigation.
In addition, during 2009, Old Merck paid an additional
$4.1 billion into the settlement funds in connection with
the Settlement Program. Also, during 2009, Merck recorded
charges of $75 million, including $35 million in the
fourth quarter, solely for its future legal defense costs for
the Vioxx Litigation. Consequently, as of
December 31, 2009, the aggregate amount of the Vioxx
Reserve was approximately $110 million, which is solely
for future legal defense costs for the Vioxx Litigation.
Some of the significant factors considered in the review of the
Vioxx Reserve were as follows: the actual costs incurred
by the Company; the development of the Companys legal
defense strategy and structure in light of the scope of the
Vioxx Litigation, including the Settlement Agreement and
the expectation that certain lawsuits will continue to be
pending; the number of cases being brought against the Company;
the costs and outcomes of completed trials and the most current
information regarding anticipated timing, progression, and
related costs of pre-trial activities and trials in the Vioxx
Litigation. The amount of the Vioxx Reserve as of
December 31, 2009 represents the Companys best
estimate of the minimum amount of defense costs to be incurred
in connection with the remaining aspects of the Vioxx
Litigation; however, events such as additional trials in the
Vioxx Litigation and other events that could arise in the
course of the Vioxx Litigation could affect the ultimate
amount of defense costs to be incurred by the Company. The
Company will continue to monitor its legal defense costs and
review the adequacy of the associated reserves and may determine
to increase the Vioxx Reserve at any time in the future
if, based upon the factors set forth, it believes it would be
appropriate to do so.
There are two U.S. Vioxx Product Liability Lawsuits
trials scheduled for 2010. The Company cannot predict the timing
of any other trials related to the Vioxx Litigation. The
Company believes that it has meritorious defenses to the
Vioxx Lawsuits and will vigorously defend against them.
In view of the inherent difficulty of predicting the outcome of
litigation, particularly where there are many claimants and the
claimants seek indeterminate damages, the Company is unable to
predict the outcome of these matters, and at this time cannot
reasonably estimate the possible loss or range of loss with
respect to the Vioxx Lawsuits not included in the
Settlement Program. The Company has not established any reserves
for any potential liability relating to the Vioxx
Lawsuits not included in the Settlement Program, other than a
reserve established in connection with the resolution of the
shareholder derivative lawsuits (see Note 12 to the
consolidated financial statements), or the Vioxx
Investigations. Unfavorable outcomes in the Vioxx
Litigation could have a material adverse effect on the
Companys financial position, liquidity and results of
operations.
As of December 31, 2008, the Old Merck had a remaining
reserve of approximately $33 million solely for its future
legal defense costs for the Fosamax Litigation. During
2009, Merck spent approximately $35 million and added
$40 million to its reserve. Consequently, as of
December 31, 2009, the Company had a reserve of
approximately $38 million solely for its future legal
defense costs for the Fosamax Litigation. Some of the
significant factors considered in the establishment of the
reserve for the Fosamax Litigation legal defense costs
were as follows: the actual costs incurred by the Company thus
far; the development of the Companys legal defense
strategy and structure in light of the creation of the
Fosamax multidistrict litigation; the number of cases
being brought against the Company; and the anticipated timing,
progression, and related costs of pre-trial activities in the
102
Fosamax Litigation. The Company will continue to monitor
its legal defense costs and review the adequacy of the
associated reserves. Due to the uncertain nature of litigation,
the Company is unable to estimate its costs beyond the third
quarter of 2010. The Company has not established any reserves
for any potential liability relating to the Fosamax
Litigation. Unfavorable outcomes in the Fosamax
Litigation could have a material adverse effect on the
Companys financial position, liquidity and results of
operations.
The Company and its subsidiaries are parties to a number of
proceedings brought under the Comprehensive Environmental
Response, Compensation and Liability Act, commonly known as
Superfund, and other federal and state equivalents. When a
legitimate claim for contribution is asserted, a liability is
initially accrued based upon the estimated transaction costs to
manage the site. Accruals are adjusted as site investigations,
feasibility studies and related cost assessments of remedial
techniques are completed, and as the extent to which other
potentially responsible parties who may be jointly and severally
liable can be expected to contribute is determined.
The Company is also remediating environmental contamination
resulting from past industrial activity at certain of its sites
and takes an active role in identifying and providing for these
costs. In the past, Old Merck performed a worldwide survey to
assess all sites for potential contamination resulting from past
industrial activities. Where assessment indicated that physical
investigation was warranted, such investigation was performed,
providing a better evaluation of the need for remedial action.
Where such need was identified, remedial action was then
initiated. As definitive information became available during the
course of investigations
and/or
remedial efforts at each site, estimates were refined and
accruals were established or adjusted accordingly. These
estimates and related accruals continue to be refined annually.
A similar process is being followed for legacy Schering-Plough
sites.
The Company believes that there are no compliance issues
associated with applicable environmental laws and regulations
that would have a material adverse effect on the Company.
Expenditures for remediation and environmental liabilities were
$16.6 million in 2009, and are estimated at
$55 million for the years 2010 through 2014. In
managements opinion, the liabilities for all environmental
matters that are probable and reasonably estimable have been
accrued and totaled $161.8 million and $89.5 million
at December 31, 2009 and December 31, 2008,
respectively. These liabilities are undiscounted, do not
consider potential recoveries from other parties and will be
paid out over the periods of remediation for the applicable
sites, which are expected to occur primarily over the next
15 years. Although it is not possible to predict with
certainty the outcome of these matters, or the ultimate costs of
remediation, management does not believe that any reasonably
possible expenditures that may be incurred in excess of the
liabilities accrued should exceed $170.0 million in the
aggregate. Management also does not believe that these
expenditures should result in a material adverse effect on the
Companys financial position, results of operations,
liquidity or capital resources for any year.
Share-Based
Compensation
The Company expenses all share-based payment awards to
employees, including grants of stock options, over the requisite
service period based on the grant date fair value of the awards.
The Company determines the fair value of certain share-based
awards using the Black-Scholes option-pricing model which uses
both historical and current market data to estimate the fair
value. This method incorporates various assumptions such as the
risk-free interest rate, expected volatility, expected dividend
yield and expected life of the options.
Pensions
and Other Postretirement Benefit Plans
Net pension and other postretirement benefit cost totaled
$511.1 million in 2009, $376.6 million in 2008 and
$489.3 million in 2007. The increase in 2009 as compared
with 2008 is primarily due to $118.2 million of costs
associated with Schering-Plough benefit plans from the date of
the Merger through December 31, 2009. The decrease in 2008
as compared with 2007 is primarily due to the lower amortization
of actuarial net losses and higher expected return on plan
assets which were partially offset by an increase in termination
benefits attributable to restructuring actions. Pension and
other postretirement benefit plan information for financial
reporting purposes is calculated using actuarial assumptions
including a discount rate for plan benefit obligations and an
expected rate of return on plan assets.
The Company reassesses its benefit plan assumptions on a regular
basis. For both the pension and other postretirement benefit
plans, the discount rate is evaluated on measurement dates and
modified to reflect the
103
prevailing market rate of a portfolio of high-quality
fixed-income debt instruments that would provide the future cash
flows needed to pay the benefits included in the benefit
obligation as they come due. At December 31, 2009, the
discount rates for the Companys U.S. pension and
other postretirement benefit plans ranged from 4.60% to 6.00%
compared with a range of 6.00% to 6.40% at December 31,
2008.
The expected rate of return for both the pension and other
postretirement benefit plans represents the average rate of
return to be earned on plan assets over the period the benefits
included in the benefit obligation are to be paid. In developing
the expected rate of return, the Company considers long-term
compound annualized returns of historical market data as well as
actual returns on the Companys plan assets. Using this
reference information, the Company develops forward-looking
return expectations for each asset category and a weighted
average expected long-term rate of return for a target portfolio
allocated across these investment categories. The expected
portfolio performance reflects the contribution of active
management as appropriate. As a result of this analysis, for
2010, the Companys expected rate of return will range from
8.00% to 8.75% compared to a range of 7.50% to 8.75% in 2009 for
its U.S. pension and other postretirement benefit plans.
The Company has established investment guidelines for its U.S.
pension and other postretirement plans to create an asset
allocation that is expected to deliver a rate of return
sufficient to meet the
long-term
obligation of each plan, given an acceptable level of risk. The
target investment portfolio of the Companys
U.S. pension and other postretirement benefit plans is
allocated 45% to 60% in U.S. equities, 20% to 30% in
international equities, 15% to 25% in fixed-income investments,
and up to 8% in cash and other investments. The portfolios
equity weighting is consistent with the long-term nature of the
plans benefit obligations. The expected annual standard
deviation of returns of the target portfolio, which approximates
13%, reflects both the equity allocation and the diversification
benefits among the asset classes in which the portfolio invests.
For
non-U.S. pension
plans, the targeted investment portfolio varies based on the
duration of pension liabilities and local government rules and
regulations. Although a significant percentage of plan assets
are invested in U.S. equities, concentration risk is
mitigated through the use of strategies that are diversified
within management guidelines.
Actuarial assumptions are based upon managements best
estimates and judgment. A reasonably possible change of plus
(minus) 25 basis points in the discount rate assumption,
with other assumptions held constant, would have an estimated
$54.3 million favorable (unfavorable) impact on its net
pension and postretirement benefit cost. A reasonably possible
change of plus (minus) 25 basis points in the expected rate
of return assumption, with other assumptions held constant,
would have an estimated $23.9 million favorable
(unfavorable) impact on its net pension and postretirement
benefit cost. Required funding obligations for 2010 relating to
the Companys pension and other postretirement benefit
plans are not expected to be material. The preceding
hypothetical changes in the discount rate and expected rate of
return assumptions would not impact the Companys funding
requirements.
Net loss amounts, which reflect experience differentials
primarily relating to differences between expected and actual
returns on plan assets as well as the effects of changes in
actuarial assumptions, are recorded as a component of
Accumulated other comprehensive income. Expected returns
for pension plans are based on a calculated market-related value
of assets. Under this methodology, asset gains/losses resulting
from actual returns that differ from the Companys expected
returns are recognized in the market-related value of assets
ratably over a five-year period. Also, net loss amounts in
Accumulated other comprehensive income in excess of
certain thresholds are amortized into net pension and other
postretirement benefit cost over the average remaining service
life of employees. Amortization of net losses for the
Companys U.S. plans at December 31, 2009 is
expected to increase net pension and other postretirement
benefit cost by approximately $53 million annually from
2010 through 2014.
Restructuring
Costs
Restructuring costs have been recorded in connection with
restructuring programs designed to reduce the cost structure,
increase efficiency and enhance competitiveness. As a result,
the Company has made estimates and judgments regarding its
future plans, including future termination benefits and other
exit costs to be incurred when the restructuring actions take
place. In connection with these actions, management also
assesses the recoverability of long-lived assets employed in the
business. In certain instances, asset lives have been shortened
based on changes in the expected useful lives of the affected
assets. Severance and other related costs are reflected within
Restructuring costs. Asset-related charges are reflected
within Materials and production costs and Research and
development expenses depending upon the nature of the asset.
104
Impairments
of Long-Lived Assets
The Company assesses changes in economic, regulatory and legal
conditions and makes assumptions regarding estimated future cash
flows in evaluating the value of the Companys property,
plant and equipment, goodwill and other intangible assets.
The Company periodically evaluates whether current facts or
circumstances indicate that the carrying values of its
long-lived assets to be held and used may not be recoverable. If
such circumstances are determined to exist, an estimate of the
undiscounted future cash flows of these assets, or appropriate
asset groupings, is compared to the carrying value to determine
whether an impairment exists. If the asset is determined to be
impaired, the loss is measured based on the difference between
the assets fair value and its carrying value. If quoted
market prices are not available, the Company will estimate fair
value using a discounted value of estimated future cash flows
approach.
The Company tests its goodwill for impairment at least annually
using a fair value based test. Goodwill represents the excess of
the consideration transferred over the fair value of net assets
of businesses purchased and is assigned to reporting units.
Other acquired intangibles (excluding in-process research and
development) are recorded at fair value and amortized on a
straight-line basis over their estimated useful lives. When
events or circumstances warrant a review, the Company will
assess recoverability from future operations using pretax
undiscounted cash flows derived from the lowest appropriate
asset groupings. Impairments are recognized in operating results
to the extent that the carrying value of the intangible asset
exceeds its fair value, which is determined based on the net
present value of estimated cash flows.
The Company tests its indefinite-lived intangibles, including
in-process research and development, for impairment at least
annually, through a one-step test that compares the fair value
of the indefinite lived intangible asset with the assets
carrying value. For impairment testing purposes, the Company may
combine separately recorded indefinite-lived intangible assets
into one unit of account based on the relevant facts and
circumstances. Generally, the Company will combine
indefinite-lived intangible assets for testing purposes if they
operate as a single asset and are essentially inseparable. If
the fair value is less than the carrying amount, an impairment
loss is recognized within the Companys operating results.
Impairments
of Investments
The Company reviews its investments for impairments based on the
determination of whether the decline in market value of the
investment below the carrying value is other-than-temporary. The
Company considers available evidence in evaluating potential
impairments of its investments, including the duration and
extent to which fair value is less than cost, and for equity
securities, the Companys ability and intent to hold the
investments. On April 1, 2009, new authoritative guidance
from the FASB was adopted which amended the
other-than-temporary
recognition guidance for debt securities. Pursuant to this new
guidance, an other-than-temporary impairment has occurred if the
Company does not expect to recover the entire amortized cost
basis of the debt security. If the Company does not intend to
sell the impaired debt security, and it is not more likely than
not it will be required to sell the debt security before the
recovery of its amortized cost basis, the amount of the
other-than-temporary
impairment recognized in earnings is limited to the portion
attributed to credit loss. The remaining portion of the
other-than-temporary
impairment related to other factors is recognized in other
comprehensive income.
Taxes on
Income
The Companys effective tax rate is based on pretax income,
statutory tax rates and tax planning opportunities available in
the various jurisdictions in which the Company operates. An
estimated effective tax rate for a year is applied to the
Companys quarterly operating results. In the event that
there is a significant unusual or one-time item recognized, or
expected to be recognized, in the Companys quarterly
operating results, the tax attributable to that item would be
separately calculated and recorded at the same time as the
unusual or one-time item. The Company considers the resolution
of prior year tax matters to be such items. Significant judgment
is required in determining the Companys tax provision and
in evaluating its tax positions. The recognition and measurement
of a tax position is based on managements best judgment
given the facts, circumstances and information available at the
reporting date. The Company evaluates tax positions to determine
whether the benefits of tax positions are more likely than not
of being sustained upon audit based on the technical merits of
the tax
105
position. For tax positions that are more likely than not of
being sustained upon audit, the Company recognizes the largest
amount of the benefit that is greater than 50% likely of being
realized upon ultimate settlement in the financial statements.
For tax positions that are not more likely than not of being
sustained upon audit, the Company does not recognize any portion
of the benefit in the financial statements. If the more likely
than not threshold is not met in the period for which a tax
position is taken, the Company may subsequently recognize the
benefit of that tax position if the tax matter is effectively
settled, the statute of limitations expires, or if the more
likely than not threshold is met in a subsequent period. (See
Note 17 to the consolidated financial statements.)
Tax regulations require items to be included in the tax return
at different times than the items are reflected in the financial
statements. Timing differences create deferred tax assets and
liabilities. Deferred tax assets generally represent items that
can be used as a tax deduction or credit in the tax return in
future years for which the Company has already recorded the tax
benefit in the financial statements. The Company establishes
valuation allowances for its deferred tax assets when the amount
of expected future taxable income is not likely to support the
use of the deduction or credit. Deferred tax liabilities
generally represent tax expense recognized in the financial
statements for which payment has been deferred or expense for
which the Company has already taken a deduction on the tax
return, but has not yet recognized as expense in the financial
statements. At December 31, 2009, foreign earnings of
$31.2 billion have been retained indefinitely by subsidiary
companies for reinvestment, therefore no provision has been made
for income taxes that would be payable upon the distribution of
such earnings.
Recently
Issued Accounting Standards
In June 2009, the FASB issued an amendment to the accounting and
disclosure requirements for transfers of financial assets, which
is effective January 1, 2010. The amendment eliminates the
concept of a qualifying special-purpose entity, changes the
requirements for derecognizing financial assets and requires
enhanced disclosures to provide financial statement users with
greater transparency about transfers of financial assets,
including securitization transactions, and an entitys
continuing involvement in and exposure to the risks related to
transferred financial assets. The effect of adoption on the
Companys financial position and results of operations is
not expected to be material.
Also in June 2009, the FASB amended the existing accounting and
disclosure guidance for the consolidation of variable interest
entities, which is effective January 1, 2010. The amended
guidance requires enhanced disclosures intended to provide users
of financial statements with more transparent information about
an enterprises involvement in a variable interest entity.
The effect of adoption on the Companys financial position
and results of operations is not expected to be material.
In October 2009, the FASB issued new guidance for revenue
recognition with multiple deliverables, which is effective for
revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, although
early adoption is permitted. This guidance eliminates the
residual method under the current guidance and replaces it with
the relative selling price method when allocating
revenue in a multiple deliverable arrangement. The selling price
for each deliverable shall be determined using vendor specific
objective evidence of selling price, if it exists, otherwise
third-party evidence of selling price shall be used. If neither
exists for a deliverable, the vendor shall use its best estimate
of the selling price for that deliverable. After adoption, this
guidance will also require expanded qualitative and quantitative
disclosures. The Company is currently assessing the impact of
adoption on its financial position and results of operations.
In January 2010, the FASB amended the existing disclosure
guidance on fair value measurements, which is effective
January 1, 2010, except for disclosures about purchases,
sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements, which is
effective January 1, 2011. Among other things, the updated
guidance requires additional disclosure for the amounts of
significant transfers in and out of Level 1 and
Level 2 measurements and requires certain Level 3
disclosures on a gross basis. Additionally, the updates amend
existing guidance to require a greater level of disaggregated
information and more robust disclosures about valuation
techniques and inputs to fair value measurements. Since the
amended guidance requires only additional disclosures, the
adoption will not affect the Companys financial position
or results of operations.
106
Cautionary
Factors That May Affect Future Results
This report and other written reports and oral statements made
from time to time by the Company may contain so-called
forward-looking statements, all of which are based
on managements current expectations and are subject to
risks and uncertainties which may cause results to differ
materially from those set forth in the statements. One can
identify these forward-looking statements by their use of words
such as expects, plans,
will, estimates, forecasts,
projects and other words of similar meaning. One can
also identify them by the fact that they do not relate strictly
to historical or current facts. These statements are likely to
address the Companys growth strategy, financial results,
product development, product approvals, product potential and
development programs. One must carefully consider any such
statement and should understand that many factors could cause
actual results to differ materially from the Companys
forward-looking statements. These factors include inaccurate
assumptions and a broad variety of other risks and
uncertainties, including some that are known and some that are
not. No forward-looking statement can be guaranteed and actual
future results may vary materially.
The Company does not assume the obligation to update any
forward-looking statement. One should carefully evaluate such
statements in light of factors, including risk factors,
described in the Companys filings with the Securities and
Exchange Commission, especially on
Forms 10-K,
10-Q and
8-K. In
Item 1A. Risk Factors of this annual report on
Form 10-K
the Company discusses in more detail various important risk
factors that could cause actual results to differ from expected
or historic results. The Company notes these factors for
investors as permitted by the Private Securities Litigation
Reform Act of 1995. One should understand that it is not
possible to predict or identify all such factors. Consequently,
the reader should not consider any such list to be a complete
statement of all potential risks or uncertainties.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk.
|
The information required by this Item is incorporated by
reference to the discussion under Financial Instruments
Market Risk Disclosures in Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
107
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
The consolidated balance sheet of Merck & Co., Inc.
and subsidiaries as of December 31, 2009 and 2008, and the
related consolidated statements of income, of equity and of cash
flows for each of the three years in the period ended
December 31, 2009, the notes to consolidated financial
statements, and the report dated February 26, 2010 of
PricewaterhouseCoopers LLP, independent registered public
accounting firm, are as follows:
Consolidated
Statement of Income
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Sales
|
|
$
|
27,428.3
|
|
|
$
|
23,850.3
|
|
|
$
|
24,197.7
|
|
|
|
Costs, Expenses and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials and production
|
|
|
9,018.9
|
|
|
|
5,582.5
|
|
|
|
6,140.7
|
|
Marketing and administrative
|
|
|
8,543.2
|
|
|
|
7,377.0
|
|
|
|
7,556.7
|
|
Research and development
|
|
|
5,845.0
|
|
|
|
4,805.3
|
|
|
|
4,882.8
|
|
Restructuring costs
|
|
|
1,633.9
|
|
|
|
1,032.5
|
|
|
|
327.1
|
|
Equity income from affiliates
|
|
|
(2,235.0
|
)
|
|
|
(2,560.6
|
)
|
|
|
(2,976.5
|
)
|
U.S. Vioxx Settlement Agreement charge
|
|
|
-
|
|
|
|
-
|
|
|
|
4,850.0
|
|
Other (income) expense, net
|
|
|
(10,669.5
|
)
|
|
|
(2,318.1
|
)
|
|
|
(75.2
|
)
|
|
|
|
|
|
12,136.5
|
|
|
|
13,918.6
|
|
|
|
20,705.6
|
|
|
|
Income Before Taxes
|
|
|
15,291.8
|
|
|
|
9,931.7
|
|
|
|
3,492.1
|
|
Taxes on Income
|
|
|
2,267.6
|
|
|
|
1,999.4
|
|
|
|
95.3
|
|
|
|
Net Income
|
|
|
13,024.2
|
|
|
|
7,932.3
|
|
|
|
3,396.8
|
|
|
|
Less: Net Income Attributable to Noncontrolling Interests
|
|
|
122.9
|
|
|
|
123.9
|
|
|
|
121.4
|
|
Net Income Attributable to Merck & Co., Inc.
|
|
|
12,901.3
|
|
|
|
7,808.4
|
|
|
|
3,275.4
|
|
|
|
Preferred Stock Dividends
|
|
|
2.1
|
|
|
|
-
|
|
|
|
-
|
|
Net Income Available to Common Shareholders
|
|
$
|
12,899.2
|
|
|
$
|
7,808.4
|
|
|
$
|
3,275.4
|
|
|
Basic Earnings per Common Share Available to Common Shareholders
|
|
|
$5.67
|
|
|
|
$3.65
|
|
|
|
$1.51
|
|
|
Earnings per Common Share Assuming Dilution Available to Common
Shareholders
|
|
|
$5.65
|
|
|
|
$3.63
|
|
|
|
$1.49
|
|
|
The accompanying notes are an integral part of this
consolidated financial statement.
108
Consolidated
Balance Sheet
Merck & Co., Inc. and Subsidiaries
December 31
($ in millions except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,311.4
|
|
|
$
|
4,368.3
|
|
Short-term investments
|
|
|
293.1
|
|
|
|
1,118.1
|
|
Accounts receivable (net of allowance for doubtful accounts of
$112.6 in
2009 and $58.5 in 2008)
|
|
|
6,602.9
|
|
|
|
2,907.7
|
|
Inventories (excludes inventories of $1,157.2 in 2009 and $587.3
in
|
|
|
|
|
|
|
|
|
2008 classified in Other assets see Note 8)
|
|
|
8,055.3
|
|
|
|
2,091.0
|
|
Deferred income taxes and other current assets
|
|
|
4,165.9
|
|
|
|
8,627.5
|
|
|
|
Total current assets
|
|
|
28,428.6
|
|
|
|
19,112.6
|
|
|
|
Investments
|
|
|
432.3
|
|
|
|
6,491.3
|
|
|
|
Property, Plant and Equipment (at cost)
|
|
|
|
|
|
|
|
|
Land
|
|
|
666.7
|
|
|
|
386.1
|
|
Buildings
|
|
|
12,210.3
|
|
|
|
9,767.4
|
|
Machinery, equipment and office furnishings
|
|
|
16,173.6
|
|
|
|
13,103.7
|
|
Construction in progress
|
|
|
1,817.5
|
|
|
|
871.0
|
|
|
|
|
|
|
30,868.1
|
|
|
|
24,128.2
|
|
Less allowance for depreciation
|
|
|
12,594.6
|
|
|
|
12,128.6
|
|
|
|
|
|
|
18,273.5
|
|
|
|
11,999.6
|
|
|
|
Goodwill
|
|
|
11,923.1
|
|
|
|
1,438.7
|
|
|
|
Other Intangibles, Net
|
|
|
47,655.8
|
|
|
|
525.4
|
|
|
|
Other Assets
|
|
|
5,376.4
|
|
|
|
7,628.1
|
|
|
|
|
|
$
|
112,089.7
|
|
|
$
|
47,195.7
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Loans payable and current portion of long-term debt
|
|
|
1,379.2
|
|
|
$
|
2,297.1
|
|
Trade accounts payable
|
|
|
2,236.9
|
|
|
|
617.6
|
|
Accrued and other current liabilities
|
|
|
9,453.8
|
|
|
|
9,174.1
|
|
Income taxes payable
|
|
|
1,285.2
|
|
|
|
1,426.4
|
|
Dividends payable
|
|
|
1,189.0
|
|
|
|
803.5
|
|
6% Mandatory convertible preferred stock, $1 par value
|
|
|
|
|
|
|
|
|
Authorized 11,500,000 shares; issued and
outstanding 855,422 shares
|
|
|
206.6
|
|
|
|
-
|
|
|
|
Total current liabilities
|
|
|
15,750.7
|
|
|
|
14,318.7
|
|
|
|
Long-Term Debt
|
|
|
16,074.9
|
|
|
|
3,943.3
|
|
|
|
Deferred Income Taxes and Noncurrent Liabilities
|
|
|
18,771.5
|
|
|
|
7,766.6
|
|
|
|
Merck & Co., Inc. Stockholders Equity
|
|
|
|
|
|
|
|
|
Common stock, $0.50 par value 2009;
$0.01 par value 2008
|
|
|
|
|
|
|
|
|
Authorized 6,500,000,000 shares
2009; 5,400,000,000 shares 2008
|
|
|
|
|
|
|
|
|
Issued 3,562,528,536 shares 2009;
2,983,508,675 2008
|
|
|
1,781.3
|
|
|
|
29.8
|
|
Other paid-in capital
|
|
|
39,682.6
|
|
|
|
8,319.1
|
|
Retained earnings
|
|
|
41,404.9
|
|
|
|
43,698.8
|
|
Accumulated other comprehensive loss
|
|
|
(2,766.5
|
)
|
|
|
(2,553.9
|
)
|
|
|
|
|
|
80,102.3
|
|
|
|
49,493.8
|
|
Less treasury stock, at cost:
|
|
|
|
|
|
|
|
|
454,305,985 shares 2009;
|
|
|
|
|
|
|
|
|
875,818,333 shares 2008
|
|
|
21,044.3
|
|
|
|
30,735.5
|
|
|
|
Total Merck & Co., Inc. stockholders equity
|
|
|
59,058.0
|
|
|
|
18,758.3
|
|
|
|
Noncontrolling Interests
|
|
|
2,434.6
|
|
|
|
2,408.8
|
|
|
|
Total equity
|
|
|
61,492.6
|
|
|
|
21,167.1
|
|
|
|
|
|
$
|
112,089.7
|
|
|
$
|
47,195.7
|
|
|
The accompanying notes are an integral part of this
consolidated financial statement.
109
Consolidated
Statement of Equity
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Other
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
controlling
|
|
|
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Stock
|
|
|
Interests
|
|
|
Total
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
29.8
|
|
|
$
|
7,166.5
|
|
|
$
|
39,095.1
|
|
|
$
|
(1,164.3
|
)
|
|
$
|
(27,567.4
|
)
|
|
$
|
2,406.1
|
|
|
$
|
19,965.8
|
|
|
|
Net income attributable to Merck & Co., Inc.
|
|
|
|
|
|
|
|
|
|
|
3,275.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,275.4
|
|
|
|
Total other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
338.2
|
|
|
|
|
|
|
|
|
|
|
|
338.2
|
|
Comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,613.6
|
|
|
|
Cumulative effect of adoption of guidance on accounting for
unrecognized tax benefits
|
|
|
|
|
|
|
|
|
|
|
81.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81.0
|
|
Cash dividends declared on common stock ($1.52 per share)
|
|
|
|
|
|
|
|
|
|
|
(3,310.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,310.7
|
)
|
Treasury stock shares purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,429.7
|
)
|
|
|
|
|
|
|
(1,429.7
|
)
|
Acquisition of NovaCardia, Inc.
|
|
|
|
|
|
|
366.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
366.4
|
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121.4
|
|
|
|
121.4
|
|
Distributions attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(120.8
|
)
|
|
|
(120.8
|
)
|
Share-based compensation plans and other
|
|
|
|
|
|
|
482.0
|
|
|
|
|
|
|
|
|
|
|
|
822.4
|
|
|
|
|
|
|
|
1,304.4
|
|
|
|
Balance at December 31, 2007
|
|
|
29.8
|
|
|
|
8,014.9
|
|
|
|
39,140.8
|
|
|
|
(826.1
|
)
|
|
|
(28,174.7
|
)
|
|
|
2,406.7
|
|
|
|
20,591.4
|
|
|
|
Net income attributable to Merck & Co., Inc.
|
|
|
|
|
|
|
|
|
|
|
7,808.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,808.4
|
|
Total other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,727.8
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,727.8
|
)
|
|
|
Comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,080.6
|
|
|
|
Cash dividends declared on common stock ($1.52 per share)
|
|
|
|
|
|
|
|
|
|
|
(3,250.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,250.4
|
)
|
Treasury stock shares purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,725.0
|
)
|
|
|
|
|
|
|
(2,725.0
|
)
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123.9
|
|
|
|
123.9
|
|
Distributions attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(121.8
|
)
|
|
|
(121.8
|
)
|
Share-based compensation plans and other
|
|
|
|
|
|
|
304.2
|
|
|
|
|
|
|
|
|
|
|
|
164.2
|
|
|
|
|
|
|
|
468.4
|
|
|
|
Balance at December 31, 2008
|
|
|
29.8
|
|
|
|
8,319.1
|
|
|
|
43,698.8
|
|
|
|
(2,553.9
|
)
|
|
|
(30,735.5
|
)
|
|
|
2,408.8
|
|
|
|
21,167.1
|
|
|
|
Net income attributable to Merck & Co.,
Inc.
|
|
|
|
|
|
|
|
|
|
|
12,901.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,901.3
|
|
Total other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(212.6
|
)
|
|
|
|
|
|
|
|
|
|
|
(212.6
|
)
|
|
|
Comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,688.7
|
|
|
|
Schering-Plough merger
|
|
|
1,752.0
|
|
|
|
30,860.7
|
|
|
|
|
|
|
|
|
|
|
|
(1,964.1
|
)
|
|
|
22.3
|
|
|
|
30,670.9
|
|
Cancellations of treasury stock
|
|
|
(4.9
|
)
|
|
|
|
|
|
|
(11,595.4
|
)
|
|
|
|
|
|
|
11,600.3
|
|
|
|
|
|
|
|
-
|
|
Preferred stock conversions
|
|
|
0.1
|
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.5
|
|
Cash dividends declared on common stock ($1.52 per share)
|
|
|
|
|
|
|
|
|
|
|
(3,597.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,597.7
|
)
|
Net income attributable to noncontrolling
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122.9
|
|
|
|
122.9
|
|
Distributions attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(119.4
|
)
|
|
|
(119.4
|
)
|
Share-based compensation plans and other
|
|
|
4.3
|
|
|
|
497.4
|
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
55.0
|
|
|
|
|
|
|
|
554.6
|
|
|
|
Balance at December 31, 2009
|
|
$
|
1,781.3
|
|
|
$
|
39,682.6
|
|
|
$
|
41,404.9
|
|
|
$
|
(2,766.5
|
)
|
|
$
|
(21,044.3
|
)
|
|
$
|
2,434.6
|
|
|
$
|
61,492.6
|
|
|
The accompanying notes are an integral part of this
consolidated financial statement.
110
Consolidated
Statement of Cash Flows
Merck & Co., Inc. and Subsidiaries
Years Ended December 31
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,024.2
|
|
|
$
|
7,932.3
|
|
|
$
|
3,396.8
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain related to Merck/Schering-Plough partnership
|
|
|
(7,529.6
|
)
|
|
|
-
|
|
|
|
-
|
|
Gain on disposition of interest in Merial Limited
|
|
|
(3,162.5
|
)
|
|
|
-
|
|
|
|
-
|
|
Gain on distribution from AstraZeneca LP
|
|
|
-
|
|
|
|
(2,222.7
|
)
|
|
|
-
|
|
Equity income from affiliates
|
|
|
(2,235.0
|
)
|
|
|
(2,560.6
|
)
|
|
|
(2,976.5
|
)
|
Dividends and distributions from equity affiliates
|
|
|
1,724.3
|
|
|
|
4,289.6
|
|
|
|
2,485.6
|
|
U.S. Vioxx Settlement Agreement charge
|
|
|
-
|
|
|
|
-
|
|
|
|
4,850.0
|
|
Depreciation and amortization
|
|
|
2,576.0
|
|
|
|
1,631.2
|
|
|
|
1,988.2
|
|
Deferred income taxes
|
|
|
1,820.2
|
|
|
|
530.1
|
|
|
|
(1,781.9
|
)
|
Share-based compensation
|
|
|
415.5
|
|
|
|
348.0
|
|
|
|
330.2
|
|
In-process research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
325.1
|
|
Taxes paid for Internal Revenue Service settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,788.1
|
)
|
Other
|
|
|
(534.2
|
)
|
|
|
607.8
|
|
|
|
(186.1
|
)
|
Net changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
165.2
|
|
|
|
(889.4
|
)
|
|
|
(290.7
|
)
|
Inventories
|
|
|
1,211.3
|
|
|
|
(452.1
|
)
|
|
|
(40.7
|
)
|
Trade accounts payable
|
|
|
(45.2
|
)
|
|
|
-
|
|
|
|
117.7
|
|
Accrued and other current liabilities
|
|
|
(4,003.5
|
)
|
|
|
(1,710.9
|
)
|
|
|
451.1
|
|
Income taxes payable
|
|
|
(364.8
|
)
|
|
|
(465.3
|
)
|
|
|
987.2
|
|
Noncurrent liabilities
|
|
|
231.3
|
|
|
|
(108.0
|
)
|
|
|
26.2
|
|
Other
|
|
|
98.8
|
|
|
|
(358.3
|
)
|
|
|
105.1
|
|
|
|
Net Cash Provided by Operating Activities
|
|
|
3,392.0
|
|
|
|
6,571.7
|
|
|
|
6,999.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(1,460.6
|
)
|
|
|
(1,298.3
|
)
|
|
|
(1,011.0
|
)
|
Purchases of securities and other investments
|
|
|
(3,070.8
|
)
|
|
|
(11,967.3
|
)
|
|
|
(10,132.7
|
)
|
Proceeds from sales of securities and other investments
|
|
|
10,941.9
|
|
|
|
11,065.8
|
|
|
|
10,860.2
|
|
Proceeds from sale of interest in Merial Limited
|
|
|
4,000.0
|
|
|
|
-
|
|
|
|
-
|
|
Schering-Plough merger, net of cash acquired
|
|
|
(12,842.6
|
)
|
|
|
-
|
|
|
|
-
|
|
Acquisitions of businesses, net of cash acquired
|
|
|
(130.0
|
)
|
|
|
-
|
|
|
|
(1,135.9
|
)
|
Distribution from AstraZeneca LP
|
|
|
-
|
|
|
|
1,899.3
|
|
|
|
-
|
|
Increase in restricted assets
|
|
|
5,547.6
|
|
|
|
(1,629.7
|
)
|
|
|
(1,401.1
|
)
|
Other
|
|
|
170.5
|
|
|
|
95.8
|
|
|
|
10.5
|
|
|
|
Net Cash Provided by (Used by) Investing Activities
|
|
|
3,156.0
|
|
|
|
(1,834.4
|
)
|
|
|
(2,810.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in short-term borrowings
|
|
|
(2,422.0
|
)
|
|
|
1,859.9
|
|
|
|
11.4
|
|
Proceeds from issuance of debt
|
|
|
4,228.0
|
|
|
|
-
|
|
|
|
-
|
|
Payments on debt
|
|
|
(25.3
|
)
|
|
|
(1,392.0
|
)
|
|
|
(1,195.3
|
)
|
Purchases of treasury stock
|
|
|
-
|
|
|
|
(2,725.0
|
)
|
|
|
(1,429.7
|
)
|
Dividends paid to stockholders
|
|
|
(3,215.0
|
)
|
|
|
(3,278.5
|
)
|
|
|
(3,307.3
|
)
|
Other dividends paid
|
|
|
(264.1
|
)
|
|
|
(121.8
|
)
|
|
|
(120.8
|
)
|
Proceeds from exercise of stock options
|
|
|
186.4
|
|
|
|
102.3
|
|
|
|
898.6
|
|
Other
|
|
|
(126.3
|
)
|
|
|
32.6
|
|
|
|
277.0
|
|
|
|
Net Cash Used by Financing Activities
|
|
|
(1,638.3
|
)
|
|
|
(5,522.5
|
)
|
|
|
(4,866.1
|
)
|
|
|
Effect of Exchange Rate Changes on Cash and Cash Equivalents
|
|
|
33.4
|
|
|
|
(182.6
|
)
|
|
|
98.3
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
4,943.1
|
|
|
|
(967.8
|
)
|
|
|
(578.6
|
)
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
4,368.3
|
|
|
|
5,336.1
|
|
|
|
5,914.7
|
|
|
|
Cash and Cash Equivalents at End of Year
|
|
$
|
9,311.4
|
|
|
$
|
4,368.3
|
|
|
$
|
5,336.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information (See Note 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of this
consolidated financial statement.
111
Notes to
Consolidated Financial Statements
Merck & Co., Inc. and Subsidiaries
($ in millions except per share amounts)
On November 3, 2009, Merck & Co., Inc. (Old
Merck) and Schering-Plough Corporation
(Schering-Plough) completed their
previously-announced merger (the Merger). In the
Merger, Schering-Plough acquired all of the shares of Old Merck,
which became a wholly-owned subsidiary of Schering-Plough and
was renamed Merck Sharp & Dohme Corp. Schering-Plough
continued as the surviving public company and was renamed
Merck & Co., Inc. (New Merck or the
Company). However, for accounting purposes only, the
Merger was treated as an acquisition with Old Merck considered
the accounting acquirer. Accordingly, the accompanying financial
statements reflect Old Mercks stand-alone operations as
they existed prior to the completion of the Merger. References
in these financial statements to Merck for periods
prior to the Merger refer to Old Merck and for periods after the
completion of the Merger to New Merck.
The results of Schering-Ploughs business have been
included in New Mercks financial statements only for
periods subsequent to the completion of the Merger. Therefore,
New Mercks financial results for 2009 do not reflect a
full year of legacy Schering-Plough operations. The Merger
resulted in the inclusion of Schering-Ploughs assets and
liabilities as of the merger date at their respective fair
values with limited exceptions. Accordingly, the Merger
materially affected Mercks results of operations and
financial position (see Note 3).
The Company is a global health care company that delivers
innovative health solutions through its medicines, vaccines,
biologic therapies, and consumer and animal products, which it
markets directly and through its joint ventures. The
Companys operations are principally managed on a products
basis and are comprised of one reportable segment, which is the
Pharmaceutical segment. The Pharmaceutical segment includes
human health pharmaceutical and vaccine products marketed either
directly by the Company or through joint ventures. Human health
pharmaceutical products consist of therapeutic and preventive
agents, sold by prescription, for the treatment of human
disorders. The Company sells these human health pharmaceutical
products primarily to drug wholesalers and retailers, hospitals,
government agencies and managed health care providers such as
health maintenance organizations, pharmacy benefit managers and
other institutions. Vaccine products consist of preventive
pediatric, adolescent and adult vaccines, primarily administered
at physician offices. The Company sells these human health
vaccines primarily to physicians, wholesalers, physician
distributors and government entities. The Companys
professional representatives communicate the effectiveness,
safety and value of its pharmaceutical and vaccine products to
health care professionals in private practice, group practices
and managed care organizations. The Company also has animal
health operations that discover, develop, manufacture and market
animal health products, including vaccines. The Companys
professional representatives communicate the safety and value of
the Companys animal health products to veterinarians,
distributors and animal producers. Additionally, the Company has
consumer health care operations that develop, manufacture and
market
Over-the-Counter,
foot care and sun care products, which are sold through
wholesale and retail drug, food chain and mass merchandiser
outlets in the United States and Canada.
|
|
2.
|
Summary
of Accounting Policies
|
Principles of Consolidation The consolidated
financial statements include the accounts of the Company and all
of its subsidiaries in which a controlling interest is
maintained. Intercompany balances and transactions are
eliminated. Controlling interest is determined by majority
ownership interest and the absence of substantive third-party
participating rights or, in the case of variable interest
entities, by majority exposure to expected losses, residual
returns or both. For those consolidated subsidiaries where Merck
ownership is less than 100%, the outside shareholders
interests are shown as Noncontrolling interests in
equity. Investments in affiliates over which the Company has
significant influence but not a controlling interest, such as
interests in entities owned equally by the Company and a third
party that are under shared control, are carried on the equity
basis.
Mergers and Acquisitions On January 1,
2009, new guidance issued by the Financial Accounting Standards
Board (FASB) was adopted which changes the way in
which the acquisition method is to be applied in a
112
business combination. The acquisition method of accounting
requires that the assets acquired and liabilities assumed be
recorded at the date of the merger or acquisition at their
respective fair values with limited exceptions. Assets acquired
and liabilities assumed in a business combination that arise
from contingencies are recognized at fair value if fair value
can reasonably be estimated. If the acquisition date fair value
of an asset acquired or liability assumed that arises from a
contingency cannot be determined, the asset or liability is
recognized if probable and reasonably estimable; if these
criteria are not met, no asset or liability is recognized. Fair
value is defined as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants
on the measurement date. Accordingly, the Company may be
required to value assets at fair value measures that do not
reflect the Companys intended use of those assets. Any
excess of the purchase price (consideration transferred) over
the estimated fair values of net assets acquired is recorded as
goodwill. Transaction costs and costs to restructure the
acquired company are expensed as incurred. The operating results
of the acquired business are reflected in the Companys
consolidated financial statements and results of operations
after the date of the merger or acquisition. If the Company
determines the assets acquired do not meet the definition of a
business under the acquisition method of accounting, the
transaction will be accounted for as an acquisition of assets
rather than a business combination, and therefore, no goodwill
will be recorded.
Foreign Currency Translation For
international subsidiaries where the local currencies have been
determined to be the functional currencies, the net assets of
these subsidiaries are translated into U.S. dollars using
current exchange rates. The U.S. dollar effects that arise
from translating the net assets of these subsidiaries at
changing rates are recorded in the foreign currency translation
account, which is included in Accumulated other comprehensive
income (loss) (AOCI) and reflected as a
separate component of equity. For those subsidiaries that
operate in highly inflationary economies and for those
subsidiaries where the U.S. dollar has been determined to
be the functional currency, non-monetary foreign currency assets
and liabilities are translated using historical rates, while
monetary assets and liabilities are translated at current rates,
with the U.S. dollar effects of rate changes included in
Other (income) expense, net.
Cash Equivalents Cash equivalents are
comprised of certain highly liquid investments with original
maturities of less than three months.
Inventories Inventories are valued at the
lower of cost or market. The cost of a substantial majority of
domestic pharmaceutical and vaccine inventories is determined
using the
last-in,
first-out (LIFO) method for both financial reporting
and tax purposes. The cost of all other inventories is
determined using the
first-in,
first-out (FIFO) method. Inventories consist of
currently marketed products and certain products awaiting
regulatory approval. In evaluating the recoverability of
inventories produced in preparation for product launches, the
Company considers the probability that revenue will be obtained
from the future sale of the related inventory together with the
status of the product within the regulatory approval process.
Investments Investments in marketable debt
and equity securities classified as
available-for-sale
are reported at fair value. Fair value of the Companys
investments is determined using quoted market prices in active
markets for identical assets or liabilities or quoted prices for
similar assets or liabilities or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Changes in fair value that are considered temporary are reported
net of tax in AOCI. For declines in the fair value of
equity securities that are considered
other-than-temporary,
impairment losses are charged to Other (income) expense, net.
The Company considers available evidence in evaluating potential
impairments of its investments, including the duration and
extent to which fair value is less than cost, and for equity
securities, the Companys ability and intent to hold the
investment.
On April 1, 2009, new guidance issued by the FASB was
adopted which amended the
other-than-temporary
recognition guidance for debt securities. Pursuant to this new
guidance, an other-than-temporary impairment has occurred if the
Company does not expect to recover the entire amortized cost
basis of the debt security. If the Company does not intend to
sell the impaired debt security, and it is not more likely than
not it will be required to sell the debt security before the
recovery of its amortized cost basis, the amount of the
other-than-temporary
impairment recognized in earnings, recorded in Other (income)
expense, net, is limited to the portion attributed to
113
credit loss. The remaining portion of the
other-than-temporary
impairment related to other factors is recognized in
AOCI. Realized gains and losses for both debt and equity
securities are included in Other (income) expense, net.
Revenue Recognition Revenues from sales of
products are recognized at the time of delivery and when title
and risk of loss passes to the customer. Recognition of revenue
also requires reasonable assurance of collection of sales
proceeds and completion of all performance obligations.
Domestically, sales discounts are issued to customers as direct
discounts at the
point-of-sale
or indirectly through an intermediary wholesaler, known as
chargebacks, or indirectly in the form of rebates. Additionally,
sales are generally made with a limited right of return under
certain conditions. Revenues are recorded net of provisions for
sales discounts and returns, which are established at the time
of sale. Accruals for chargebacks are reflected as a direct
reduction to accounts receivable and accruals for rebates are
recorded as current liabilities. The accrued balances relative
to these provisions included in Accounts receivable and
Accrued and other current liabilities were
$115.0 million and $1,257.6 million, respectively, at
December 31, 2009 and $55.6 million and
$560.7 million, respectively, at December 31, 2008.
The Company recognizes revenue from the sales of vaccines to the
Federal government for placement into stockpiles related to the
Pediatric Vaccine Stockpile in accordance with Securities and
Exchange Commission (SEC) Interpretation,
Commission Guidance Regarding Accounting for Sales of Vaccines
and BioTerror Countermeasures to the Federal Government for
Placement into the Pediatric Vaccine Stockpile or the Strategic
National Stockpile.
Depreciation Depreciation is provided over
the estimated useful lives of the assets, principally using the
straight-line method. For tax purposes, accelerated methods are
used. The estimated useful lives primarily range from 10 to
50 years for Buildings, and from 3 to 15 years for
Machinery, equipment and office furnishings.
Software Capitalization The Company
capitalizes certain costs incurred in connection with obtaining
or developing internal-use software including external direct
costs of material and services, and payroll costs for employees
directly involved with the software development. Capitalized
software costs are included in Property, plant and equipment
and amortized beginning when the asset is substantially
ready for use. Capitalized software costs associated with the
Companys multi-year implementation of an enterprise-wide
resource planning system are being amortized over 6 to
10 years. At December 31, 2009 and 2008, there was
approximately $428 million and $330 million,
respectively, of remaining unamortized capitalized software
costs associated with this initiative. All other capitalized
software costs are being amortized over periods ranging from 3
to 5 years. Costs incurred during the preliminary project
stage and post-implementation stage, as well as maintenance and
training costs, are expensed as incurred.
Goodwill Goodwill represents the excess of
the consideration transferred over the fair value of net assets
of businesses purchased. Goodwill is assigned to reporting units
and evaluated for impairment on at least an annual basis, using
a fair value based test. Goodwill increased substantially during
2009 as a result of the Merger (see Notes 3 and 9).
Acquired Intangibles Acquired intangibles
include products and product rights, tradenames and patents,
which are recorded at fair value and assigned an estimated
useful life, are amortized primarily on a straight-line basis
over their estimated useful lives ranging from 3 to
40 years (see Note 9). When events or circumstances
warrant a review, the Company will assess recoverability from
future operations of acquired intangibles using pretax
undiscounted cash flows derived from the lowest appropriate
asset groupings. Impairments are recognized in operating results
to the extent that carrying value of the intangible asset
exceeds its fair value, which is determined based on the net
present value of estimated future cash flows. Acquired
intangibles balances increased substantially during 2009 as a
result of the Merger (see Notes 3 and 9).
In-Process Research and Development
In-process research and development (IPR&D)
represents the fair value assigned to incomplete research
projects that the Company acquires through business
combinations, which at the time of acquisition, have not reached
technological feasibility. For transactions that closed prior to
2009, the fair value of such projects was expensed upon
acquisition. For transactions that closed during 2009, the fair
value of the research projects were recorded as intangible
assets on the Consolidated Balance Sheet rather than expensed.
The amounts capitalized are being accounted for as
indefinite-lived intangible assets, subject to impairment
testing until completion or abandonment of the projects. Upon
successful completion of each project,
114
Merck will make a determination as to the useful life of the
intangible asset and begin amortization. The Company tests its
indefinite-lived intangibles, including in-process research and
development, for impairment at least annually, through a
one-step test that compares the fair value of the
indefinite-lived intangible asset with the assets carrying
value. IPR&D increased as a result of the Merger (see
Notes 3 and 9).
Research and Development Research and
development is expensed as incurred. Upfront and milestone
payments due to third parties in connection with research and
development collaborations prior to regulatory approval are
expensed as incurred. Payments due to third parties upon or
subsequent to regulatory approval are capitalized and amortized
over the shorter of the remaining license or product patent
life. Nonrefundable advance payments for goods and services that
will be used in future research and development activities are
expensed when the activity has been performed or when the goods
have been received rather than when the payment is made.
Share-Based Compensation The Company expenses
all share-based payments to employees, including grants of stock
options, over the requisite service period based on the
grant-date fair value of the awards.
Restructuring Costs The Company records
liabilities for costs associated with exit or disposal
activities in the period in which the liability is incurred.
Costs for one-time termination benefits in which the employee is
required to render service until termination in order to receive
the benefits are recognized ratably over the future service
period. Employee termination costs are primarily recorded when
actions are probable and estimable.
Contingencies and Legal Defense Costs The
Company records accruals for contingencies and legal defense
costs expected to be incurred in connection with a loss
contingency when it is probable that a liability has been
incurred and the amount can be reasonably estimated.
Taxes on Income Deferred taxes are recognized
for the future tax effects of temporary differences between
financial and income tax reporting based on enacted tax laws and
rates. The Company evaluates tax positions to determine whether
the benefits of tax positions are more likely than not of being
sustained upon audit based on the technical merits of the tax
position. For tax positions that are more likely than not of
being sustained upon audit, the Company recognizes the largest
amount of the benefit that is greater than 50% likely of being
realized upon ultimate settlement in the financial statements.
For tax positions that are not more likely than not of being
sustained upon audit, the Company does not recognize any portion
of the benefit in the financial statements. The Company
recognizes interest and penalties and exchange gains and losses
associated with uncertain tax positions as a component of
Taxes on income in the Consolidated Statement of Income.
Use of Estimates The consolidated financial
statements are prepared in conformity with accounting principles
generally accepted in the United States (GAAP) and,
accordingly, include certain amounts that are based on
managements best estimates and judgments. Estimates are
used when accounting for amounts recorded in connection with
mergers and acquisitions, including fair value determinations of
assets and liabilities. Additionally, estimates are used in
determining such items as provisions for sales discounts and
returns, depreciable and amortizable lives, recoverability of
inventories, including those produced in preparation for product
launches, amounts recorded for contingencies, environmental
liabilities and other reserves, pension and other postretirement
benefit plan assumptions, share-based compensation assumptions,
restructuring costs, impairments of long-lived assets (including
intangible assets and goodwill) and investments, and taxes on
income. Because of the uncertainty inherent in such estimates,
actual results may differ from these estimates.
Reclassifications Certain reclassifications
have been made to prior year amounts to conform with the current
year presentation.
Recently Adopted Accounting Standards During
2009, several new accounting standards issued by the FASB were
adopted.
On January 1, 2009, new guidance on business combinations
was adopted which changes the way in which the acquisition
method is to be applied in a business combination. This guidance
requires an acquirer to recognize the assets acquired and
liabilities assumed at the acquisition date fair values with
limited exceptions. Additionally, the guidance requires that
contingent consideration be recorded at fair value on the
acquisition date, that acquired in-process research and
development be capitalized and recorded as intangible assets at
the acquisition
115
date, and also requires transaction costs and costs to
restructure the acquired company be expensed. On April 1,
2009, additional guidance was issued further amending the
accounting for contingencies in a business combination. The
Companys business combination transactions are now being
accounted for under this new guidance, including the Merger (see
Note 3).
On January 1, 2009, new guidance for the accounting,
reporting and disclosure of noncontrolling interests was adopted
which requires, among other things, that noncontrolling
interests be recorded as equity in the consolidated financial
statements. The adoption of this new guidance resulted in the
reclassification of $2.4 billion of Noncontrolling
interests (formerly referred to as minority interests) to a
separate component of equity on the Consolidated Balance Sheet
(see Note 13). Additionally, net income attributable to
noncontrolling interests is now shown separately from parent net
income in the Consolidated Statement of Income. Prior periods
have been restated to reflect the presentation and disclosure
requirements of the new guidance.
On January 1, 2009, new guidance was adopted requiring
enhanced disclosures about derivative instruments and hedging
activities to allow for a better understanding of their effects
on an entitys financial position, financial performance,
and cash flows. Among other things, the new guidance requires
disclosure of the fair values of derivative instruments and
associated gains and losses in a tabular format (see
Note 7). Since the new guidance requires only additional
disclosures about derivatives and hedging activities, the
adoption did not affect Mercks financial position or
results of operations.
On January 1, 2009, new guidance was adopted which
clarifies that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are considered participating securities
and shall be included in the computation of earnings per share
pursuant to the two class method. The effect of adoption was not
material to Mercks results of operations. The provisions
of the guidance are retrospective; therefore prior periods have
been restated (see Note 18).
On January 1, 2009, new guidance was adopted which defines
collaborative arrangements and establishes reporting
requirements for transactions between participants in a
collaborative arrangement and between participants in the
arrangement and third parties. The effect of adoption was not
material to Mercks financial position or results of
operations. See Note 6 for the associated disclosures of
the Companys collaborative arrangements.
On January 1, 2009, new guidance was adopted which
clarifies the accounting for certain transactions and impairment
considerations involving equity method investments and is
effective on a prospective basis.
On January 1, 2009, new guidance was adopted which
clarifies that a defensive intangible asset (an intangible asset
that the entity does not intend to actively use, but intends to
hold to prevent others from obtaining access to the asset)
should be accounted for as a separate unit of accounting and
should be assigned a useful life that reflects the entitys
consumption of the expected benefits related to the asset. This
guidance is effective on a prospective basis.
On April 1, 2009, new guidance was adopted which
establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.
This guidance was subsequently amended on February 24, 2010 to
no longer require disclosure of the date through which an entity
has evaluated subsequent events. The effect of adoption was not
material.
On April 1, 2009, new guidance was adopted which provides
additional guidelines for estimating fair value when there has
been a significant decrease in the volume and level of activity
for an asset or liability in relation to the normal market
activity for the asset or liability (or similar assets or
liabilities). In addition, the new guidance includes guidelines
for identifying circumstances that indicate a transaction for
the asset or liability is not orderly, in which case the entity
shall place little, if any, weight on that transaction price as
an indicator of fair value. The effect of adoption on
Mercks financial position and results of operations was
not material.
On April 1, 2009, new guidance was adopted which amended
the
other-than-temporary
recognition guidance for debt securities. The impairment model
for equity securities was not affected. An impairment exists
when the current fair value of an individual security is less
than its amortized cost basis. Pursuant to this new guidance, an
other-than-temporary impairment has occurred if the Company does
not expect to recover the entire amortized cost basis of the
debt security. If the Company does not intend to sell the
impaired debt security, and it is
116
not more likely than not it will be required to sell the debt
security before the recovery of its amortized cost basis, the
amount of the
other-than-temporary
impairment recognized in earnings is limited to the portion
attributed to credit loss. The remaining portion of the
other-than-temporary
impairment related to other factors is recognized in Other
comprehensive income (loss). In determining if credit losses
have occurred, the Company evaluates whether expected cash flows
to be received are sufficient to recover the amortized cost
basis of the security. The new guidance did not have a material
effect upon adoption or during the period from adoption through
December 31, 2009.
As of December 31, 2009, the Company adopted new guidance
amending existing authoritative literature which provides
guidance on an employers disclosures about plan assets of
defined pension or other postretirement benefit plans. The
amended guidance requires disclosures about plan assets
including how investment allocation decisions are made, the
major categories of plan assets, the inputs and valuation
techniques used to measure the fair value of plan assets, the
effect of fair value measurements using significant unobservable
inputs (Level 3) on changes in plan assets for the
period, and significant concentrations of risk within plan
assets. Since the amended guidance required only additional
disclosures about the Companys pension and other
postretirement plan assets (see Note 15), the adoption did
not affect the Companys financial position or results of
operations.
Recently Issued Accounting Standards During
2009, the FASB issued several new accounting pronouncements,
which are not yet effective for the Company.
In June 2009, the FASB issued an amendment to the accounting and
disclosure requirements for transfers of financial assets, which
is effective January 1, 2010. The amendment eliminates the
concept of a qualifying special-purpose entity, changes the
requirements for derecognizing financial assets and requires
enhanced disclosures to provide financial statement users with
greater transparency about transfers of financial assets,
including securitization transactions, and an entitys
continuing involvement in and exposure to the risks related to
transferred financial assets. The effect of adoption on the
Companys financial position and results of operations is
not expected to be material.
Also in June 2009, the FASB amended the existing accounting and
disclosure guidance for the consolidation of variable interest
entities, which is effective January 1, 2010. The amended
guidance requires enhanced disclosures intended to provide users
of financial statements with more transparent information about
an enterprises involvement in a variable interest entity.
The effect of adoption on the Companys financial position
and results of operations is not expected to be material.
In October 2009, the FASB issued new guidance for revenue
recognition with multiple deliverables, which is effective for
revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, although
early adoption is permitted. This guidance eliminates the
residual method under the current guidance and replaces it with
the relative selling price method when allocating
revenue in a multiple deliverable arrangement. The selling price
for each deliverable shall be determined using vendor specific
objective evidence of selling price, if it exists, otherwise
third-party evidence of selling price shall be used. If neither
exists for a deliverable, the vendor shall use its best estimate
of the selling price for that deliverable. After adoption, this
guidance will also require expanded qualitative and quantitative
disclosures. The Company is currently assessing the impact of
adoption on its financial position and results of operations.
In January 2010, the FASB amended the existing disclosure
guidance on fair value measurements, which is effective
January 1, 2010, except for disclosures about purchases,
sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements, which is
effective January 1, 2011. Among other things, the updated
guidance requires additional disclosure for the amounts of
significant transfers in and out of Level 1 and
Level 2 measurements and requires certain Level 3
disclosures on a gross basis. Additionally, the updates amend
existing guidance to require a greater level of disaggregated
information and more robust disclosures about valuation
techniques and inputs to fair value measurements. Since the
amended guidance requires only additional disclosures, the
adoption will not impact the Companys financial position
or results of operations.
117
|
|
3.
|
Merger
with Schering-Plough Corporation
|
On November 3, 2009, Old Merck and Schering-Plough
completed the Merger. In the Merger, Schering-Plough acquired
all of the shares of Old Merck, which became a wholly-owned
subsidiary of Schering-Plough and was renamed Merck
Sharp & Dohme Corp. Schering-Plough continued as the
surviving public company and was renamed Merck & Co.,
Inc. However, for accounting purposes only, the Merger was
treated as an acquisition with Old Merck considered the
accounting acquirer. Under the terms of the Merger agreement,
each issued and outstanding share of Schering-Plough common
stock was converted into the right to receive a combination of
$10.50 in cash and 0.5767 of a share of the common stock of New
Merck. Each issued and outstanding share of Old Merck common
stock was automatically converted into a share of the common
stock of New Merck. Based on the closing price of Old Merck
stock on November 3, 2009, the consideration received by
Schering-Plough shareholders was valued at $28.19 per share, or
$49.6 billion in the aggregate. The cash portion of the
consideration was funded with a combination of existing cash,
including from the sale of Old Mercks interest in Merial
Limited, the sale or redemption of investments and the issuance
of debt (see Note 11). Upon completion of the Merger, each
issued and outstanding share of Schering-Plough 6% Mandatory
Convertible Preferred Stock (Schering-Plough 6% preferred
stock) not converted in accordance with the terms of the
preferred stock remained outstanding as one share of Merck 6%
Mandatory Convertible Preferred Stock (6% preferred
stock) having the rights set forth in the New Merck
certificate of incorporation (see Note 13) which
rights were substantially similar to the rights of the
Schering-Plough 6% preferred stock.
The Merger expanded the Companys pipeline of product
candidates, broadened the Companys commercial portfolio,
expanded its global presence and increased its manufacturing
capabilities. Additionally, the Company expects to realize
substantial cost savings and synergies, including opportunities
for consolidation in both sales and marketing and research and
development.
Calculation
of Consideration Transferred
|
|
|
|
|
Schering-Plough common stock shares outstanding at
November 3, 2009 (net of treasury shares)
|
|
|
1,641.1
|
|
Units of merger consideration arising from conversion of 6%
preferred stock
|
|
|
74.7
|
(1)
|
|
|
Shares and units eligible
|
|
|
1,715.8
|
|
Cash per share/unit
|
|
$
|
10.50
|
|
|
|
Cash consideration for outstanding shares/units
|
|
$
|
18,015.6
|
|
6% preferred stock make-whole dividend payments
|
|
|
98.5
|
(2)
|
Value of Schering-Plough deferred stock units settled in cash
|
|
|
155.9
|
(3)
|
|
|
Total cash consideration
|
|
$
|
18,270.0
|
|
|
|
Shares and units eligible
|
|
|
1,715.8
|
|
Common stock exchange ratio per share/unit
|
|
|
0.5767
|
|
|
|
Equivalent New Merck shares
|
|
|
989.5
|
|
Shares issued to settle certain performance-based awards
|
|
|
0.7
|
|
|
|
New Merck shares issued
|
|
|
990.2
|
|
Old Merck common stock share price on November 3, 2009
|
|
$
|
30.67
|
|
|
|
Common stock equity consideration
|
|
$
|
30,370.0
|
|
|
|
Fair value of 6% preferred stock not converted
|
|
|
214.7
|
|
Fair value of other share-based compensation awards
|
|
|
525.2
|
(4)
|
Employee benefit related amounts payable as a result of the
Merger
|
|
|
191.9
|
|
|
|
Total consideration transferred
|
|
$
|
49,571.8
|
|
|
|
|
(1) |
Upon completion of the Merger and for a period of
15 days thereafter, holders of 6% preferred stock were
entitled to convert each share of 6% preferred stock into a
number of units of merger consideration equal to the
make-whole conversion rate of 8.2021 determined in
|
118
|
|
|
accordance with the terms of the
preferred stock. This amount represents the units of merger
consideration relating to the 6% preferred stock converted by
those holders in the
15-day
period following the Merger.
|
|
|
(2)
|
Represents the present value of all remaining future dividend
payments (from the conversion date through the mandatory
conversion date on August 13, 2010) paid to holders of
6% preferred stock that elected to convert in connection with
the Merger using the discount rate as stipulated in the terms of
the preferred stock.
|
|
(3)
|
Represents the cash consideration paid to holders of
Schering-Plough deferred stock units issued in 2007 and prior
which were converted into the right to receive cash as specified
in the Merger agreement attributable to precombination
services.
|
|
(4)
|
Represents the fair value of Schering-Plough stock option,
performance share unit and deferred stock unit replacement
awards attributable to precombination service issued to holders
of these awards in the Merger. The fair value of outstanding
Schering-Plough stock options and performance share units for
2007 awards and prior, which immediately vested at the effective
time of the Merger, was attributed to precombination service and
included in the consideration transferred. Stock option,
performance share unit and deferred stock unit awards for 2008
and 2009, did not immediately vest upon completion of the
Merger. For these awards, the fair value of the awards
attributed to precombination services was included as part of
the consideration transferred and the fair value attributed to
postcombination service is being recognized as compensation cost
over the requisite service period in the postcombination
financial statements of New Merck.
|
Preliminary
Allocation of Consideration Transferred to Net Assets
Acquired
The following amounts represent the preliminary determination of
the fair value of identifiable assets acquired and liabilities
assumed in the Merger. The final determination of fair value for
certain assets and liabilities will be completed in 2010 which
may result in adjustments to the preliminary values presented
below:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,427.4
|
|
Inventories
|
|
|
7,371.8
|
|
Other current assets
|
|
|
4,815.5
|
|
Property, plant and equipment
|
|
|
6,677.6
|
|
Other identifiable intangible assets:
(1)
|
|
|
|
|
Products and product rights
(10-year
weighted average useful life)
|
|
|
32,955.8
|
|
In-process research and development
(IPR&D)(2)
|
|
|
6,344.5
|
|
Tradenames
(26-year
weighted average useful life)
|
|
|
1,538.0
|
|
Other
|
|
|
74.0
|
|
Other noncurrent assets
|
|
|
982.1
|
|
Current liabilities
|
|
|
(6,864.0
|
)
|
Deferred income tax liabilities
|
|
|
(8,907.6
|
)
|
Long-term debt
|
|
|
(8,089.2
|
)
|
Other noncurrent liabilities
|
|
|
(3,238.2
|
)
|
|
|
Total identifiable net assets
|
|
|
39,087.7
|
|
Goodwill(3)
|
|
|
10,484.1
|
|
|
|
Estimated consideration transferred
|
|
$
|
49,571.8
|
|
|
|
|
(1)
|
In connection with the Merger, the Company obtained a
controlling interest in the Merck/Schering-Plough partnership.
The table above reflects Schering-Ploughs share of the
fair value of the Merck/Schering-Plough partnerships net
assets including intangibles and inventories. Not reflected in
this table are Mercks share of the fair value of the
Merck/Schering-Plough partnerships net assets recorded in
connection with the fair value adjustment to Mercks
previously held equity interest in the partnership (see
Merck/Schering-Plough Partnership below).
|
|
(2)
|
IPR&D represents the fair value assigned to incomplete
research projects, which at the time of the Merger, had not
reached technological feasibility. The amounts were capitalized
and are being accounted for as indefinite-lived intangible
assets, subject to impairment testing until completion or
abandonment of the projects. Upon successful completion of each
project, Merck will make a determination as to the useful life
of the asset and begin amortization (see In-Process
Research and Development below).
|
|
(3)
|
The goodwill recognized is largely attributable to
anticipated synergies expected to arise after the Merger.
Approximately $8.7 billion of the goodwill has been
allocated to the Pharmaceutical segment. The remainder of the
goodwill was allocated to other non-reportable segments. The
goodwill is not deductible for tax purposes.
|
In order to allocate the Merger consideration, the Company
estimated the fair value of the assets and liabilities of
Schering-Plough. No contingent assets or liabilities were
recognized at fair value as of the Merger date because the fair
value of such contingencies could not be determined. Contingent
liabilities were recorded to the
119
extent the amounts were probable and reasonably estimable (see
Note 12). For accounting and financial reporting purposes,
fair value is defined as the price that would be received upon
sale of an asset or the amount paid to transfer a liability in
an orderly transaction between market participants at the
measurement date. Market participants are assumed to be buyers
and sellers in the principal (most advantageous) market for the
asset or liability. Additionally, fair value measurements for an
asset assume the highest and best use of that asset by market
participants. Use of different estimates and judgments could
yield different results.
The fair values of identifiable intangible assets related to
currently marketed products and product rights were primarily
determined by using an income approach, through
which fair value is estimated based on each assets
discounted projected net cash flows. The Companys
estimates of market participant net cash flows considered
historical and projected pricing, margins and expense levels;
the performance of competing products where applicable; relevant
industry and therapeutic area growth drivers and factors;
current and expected trends in technology and product life
cycles; the time and investment that will be required to develop
products and technologies; the ability to obtain marketing and
regulatory approvals; the ability to manufacture and
commercialize the products; the extent and timing of potential
new product introductions by the Companys competitors; and
the life of each assets underlying patent, if any. The net
cash flows are then probability-adjusted where appropriate to
consider the uncertainties associated with the underlying
assumptions, as well as the risk profile of the net cash flows
utilized in the valuation. The probability-adjusted future net
cash flows of each product are then discounted to present value
utilizing an appropriate discount rate.
In-Process
Research and Development
In connection with the Merger, the Company recorded the fair
value of human and animal health research projects.
Approximately $5.0 billion of the consideration transferred
in the Merger was allocated to human health IPR&D projects
and $1.3 billion was allocated to animal health IPR&D
projects. The amounts were capitalized and are being accounted
for similar to indefinite-lived intangible assets, subject to
impairment testing until completion or abandonment of the
projects. Upon successful completion of a project, Merck will
make a determination as to the then useful life of the asset and
begin amortization.
The fair values of identifiable intangible assets related to
IPR&D were determined by using an income approach, through
which fair value is estimated based on each assets
probability adjusted future net cash flows, which reflect the
different stages of development of each product and the
associated probability of successful completion. The net cash
flows are then discounted to present value using discount rates
which range from 12% to 15%. Actual cash flows are likely to be
different than those assumed. All of the IPR&D projects are
subject to the inherent risks and uncertainties in drug
development and it is possible that the Company will not be able
to successfully develop and complete the IPR&D programs and
profitably commercialize the underlying product candidates.
Some of the more significant projects include Bridion,
vorapaxar and boceprevir, all of which are in Phase III
clinical development, as well as an ezetimibe/atorvastatin
combination product. Bridion (sugammadex) is a medication
designed to rapidly reverse the effects of certain muscle
relaxants used as part of general anesthesia. Bridion has
received regulatory approval in the European Union
(EU) and several other countries around the world to
date and is under regulatory review in other markets, including
the United States. Vorapaxar is being studied for the prevention
and treatment of atherothrombosis. Boceprevir is a
hepatitis C protease inhibitor currently in development.
Ezetimibe combined with atorvastatin is an investigational
medication for the treatment of dyslipidemia.
Merck/Schering-Plough
Partnership
Upon consummation of the Merger, the Company obtained a
controlling interest in the Merck/Schering-Plough partnership
(the MSP Partnership) and it is now owned 100% by
the Company. Previously the Company had a noncontrolling
interest. As a result of obtaining a controlling interest, the
Company was required to remeasure Mercks previously held
equity interest in the MSP Partnership at its Merger-date fair
value and recognized the resulting gain of $7.5 billion in
earnings in Other (income) expense, net. In conjunction
with this remeasurement, the Company recorded intangible assets
of approximately $7.3 billion, which included IPR&D
and approximately $0.3 billion of
step-up in
inventories.
120
Merger-Related
Costs
Merger-related costs are being expensed as incurred. For the
year ended December 31, 2009, Merck incurred
$136.2 million of transaction costs directly related to the
Merger (including advisory and legal fees), $233.8 million
of integration costs and $1.5 billion of restructuring
costs, including exit costs in connection with the Merger (see
Note 4). These costs were recognized within Marketing
and administrative expenses and Restructuring costs.
Additionally, $173.5 million of interest costs were
recognized in connection with debt that was issued to partially
fund the Merger (see Note 11).
Supplemental
Pro Forma Data
Schering-Ploughs results of operations have been included
in New Mercks financial statements for periods subsequent
to the completion of the Merger. Schering-Plough contributed
revenues of $3.4 billion and estimated losses of
$2.2 billion to New Merck for the period from the
consummation of the Merger through December 31, 2009. The
following unaudited supplemental pro forma data presents
consolidated information as if the Merger had been completed on
January 1, 2008:
|
|
|
|
|
|
|
|
|
Years Ended
December 31
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(Unaudited)
|
|
|
Sales
|
|
$
|
45,970.7
|
|
|
$
|
46,749.6
|
|
Earnings attributable to Merck & Co., Inc.
|
|
|
6,069.7
|
|
|
|
3,020.4
|
|
Earnings available to Merck & Co., Inc. common
shareholders
|
|
|
5,934.7
|
|
|
|
2,883.2
|
|
Basic earnings per common share available to common shareholders
|
|
|
1.91
|
|
|
|
0.92
|
|
Earning per common share assuming dilution available to common
shareholders
|
|
|
1.90
|
|
|
|
0.92
|
|
|
The unaudited supplemental pro forma data reflect the
application of the following adjustments:
|
|
|
The consolidation of the MSP Partnership which is now owned 100%
by the Company and the corresponding gain resulting from the
Companys remeasurement of its previously held equity
interest in the MSP Partnership;
|
|
|
Additional depreciation and amortization expense that would have
been recognized assuming fair value adjustments to inventory,
property, plant and equipment and intangible assets;
|
|
|
Additional interest expense and financing costs that would have
been incurred on borrowing arrangements and loss of interest
income on cash and short-term investments used to fund the
Merger;
|
|
|
Transaction costs associated with the Merger; and
|
|
|
Conversion of a portion of outstanding 6% preferred stock
|
The unaudited supplemental pro forma financial information does
not reflect the potential realization of cost savings relating
to the integration of the two companies. The pro forma data
should not be considered indicative of the results that would
have occurred if the Merger and related borrowings had been
consummated on January 1, 2008, nor are they indicative of
future results.
Merger
Restructuring Program
In February 2010, the Company announced the first phase of a new
global restructuring program (the Merger Restructuring
Program) in conjunction with the integration of the legacy
Merck and legacy Schering-Plough businesses. This Merger
Restructuring Program is intended to optimize the cost structure
of the combined Company. As part of the first phase of the
Merger Restructuring Program, by the end of 2012, the Company
expects to reduce its total workforce by approximately 15%
across all areas of the Company worldwide. The Company also
plans to eliminate 2,500 vacant positions as part of the first
phase of the program. These workforce reductions will primarily
come from the elimination of duplicative positions in sales,
administrative and headquarters organizations, as well as from
the consolidation of certain manufacturing facilities and
research and development operations. The Company will continue
to hire new employees in strategic growth areas of the business
during this period. Certain actions, such as the ongoing
reevaluation of manufacturing and research and development
facilities
121
worldwide have not yet been completed, but will be included
later in 2010 in other phases of the Merger Restructuring
Program. In connection with the Merger Restructuring Program,
separation costs under the Companys existing severance
programs worldwide were recorded in the fourth quarter of 2009
to the extent such costs were probable and reasonably estimable.
The Company recorded pretax restructuring costs of
$1.5 billion, primarily employee separation costs, related
to the Merger Restructuring Program in the fourth quarter of
2009. This first phase of the Merger Restructuring Program is
expected to be completed by the end of 2012 with the total
pretax costs estimated to be $2.6 billion to
$3.3 billion. Costs under voluntary programs and
enhancement programs will be recorded in 2010 as the relevant
criteria are met. The Company estimates that approximately 85%
of the cumulative pretax costs relate to cash outlays, primarily
related to employee separation expense. Approximately 15% of the
cumulative pretax costs are non-cash, relating primarily to the
accelerated depreciation of facilities to be closed or divested.
2008
Global Restructuring Program
In October 2008, Old Merck announced a global restructuring
program (the 2008 Restructuring Program) to reduce
its cost structure, increase efficiency, and enhance
competitiveness. As part of the 2008 Restructuring Program, the
Company expects to eliminate approximately 7,200 positions
6,800 active employees and 400 vacancies
across all areas of the Company worldwide by the end of 2011.
About 40% of these total reductions will occur in the United
States. As part of the 2008 Restructuring Program, the Company
is streamlining management layers by reducing its total number
of senior and mid-level executives globally. As of
December 31, 2009, approximately 4,910 positions have been
eliminated in connection with 2008 Restructuring Program,
comprised of employee separations and the elimination of
contractors and vacant positions. Merck is rolling out a new,
more customer-centric selling model designed to provide Merck
with a meaningful competitive advantage and help physicians,
patients and payers improve patient outcomes. The Company is now
operating its new commercial selling models in the United States
and other markets around the world. The Company is also making
greater use of outside technology resources, centralizing common
sales and marketing activities, and consolidating and
streamlining its operations. Mercks manufacturing division
will further focus its capabilities on core products and
outsource non-core manufacturing. During 2009, Merck continued
implementing a new model for its basic research global operating
strategy at legacy Merck Research Laboratories sites. The new
model will align franchise and function as well as align
resources with disease area priorities and balance capacity
across discovery phases to allow the Company to act upon those
programs with the highest probability of success. Additionally,
across all disease area priorities, the Companys strategy
is designed to expand access to worldwide external science and
incorporate external research as a key component of the
Companys early discovery pipeline in order to translate
basic research productivity into late-stage clinical success.
During 2009, basic research facilities in Pomezia, Italy and
Tsukuba, Japan were sold and the operations conducted at the
basic research facility in Seattle were closed. Merck has also
sold or closed certain other facilities and sold related assets
in connection with the 2008 Restructuring Program.
In connection with the 2008 Restructuring Program, separation
costs under existing severance programs worldwide were recorded
in the third quarter of 2008 to the extent such costs were
probable and estimable. Old Merck commenced accruing costs
related to one-time termination benefits offered to employees
under the 2008 Restructuring Program in the fourth quarter of
2008 as that is when the necessary criteria were met. Pretax
restructuring costs of $474.7 million and
$921.3 million, respectively, were recorded related to the
2008 Restructuring Program in 2009 and 2008. Since inception of
the 2008 Restructuring Program through December 31, 2009,
Merck has recorded total pretax accumulated costs of
$1.4 billion. The 2008 Restructuring Program is expected to
be completed by the end of 2011 with the total pretax costs
estimated to be $1.6 billion to $2.0 billion. The
Company estimates that two-thirds of the cumulative pretax costs
relate to cash outlays, primarily from employee separation
expense. Approximately one-third of the cumulative pretax costs
are non-cash, relating primarily to the accelerated depreciation
of facilities to be closed or divested.
2005
Global Restructuring Program
In November 2005, Old Merck announced a global restructuring
program (the 2005 Restructuring Program) designed to
reduce the cost structure, increase efficiency and enhance
competitiveness which was substantially complete at the end of
2008.
For segment reporting, restructuring charges are unallocated
expenses.
122
The following table summarizes the charges related to Merger
Restructuring Program and 2008 and 2005 Restructuring Program
activities by type of cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Separation
|
|
|
Accelerated
|
|
|
|
|
|
|
|
Year Ended December 31,
2009
|
|
Costs
|
|
|
Depreciation
|
|
|
Other
|
|
|
Total
|
|
|
|
|
Merger Restructuring Program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials and production
|
|
$
|
-
|
|
|
$
|
42.6
|
|
|
$
|
-
|
|
|
$
|
42.6
|
|
Research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Restructuring costs
|
|
|
1,338.3
|
|
|
|
-
|
|
|
|
78.7
|
|
|
|
1,417.0
|
|
|
|
|
|
|
1,338.3
|
|
|
|
42.6
|
|
|
|
78.7
|
|
|
|
1,459.6
|
|
|
|
2008 Restructuring Program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials and production
|
|
|
-
|
|
|
|
70.5
|
|
|
|
(5.6
|
)
|
|
|
64.9
|
|
Research and development
|
|
|
-
|
|
|
|
227.8
|
|
|
|
3.8
|
|
|
|
231.6
|
|
Restructuring costs
|
|
|
13.6
|
|
|
|
-
|
|
|
|
164.6
|
|
|
|
178.2
|
|
|
|
|
|
|
13.6
|
|
|
|
298.3
|
|
|
|
162.8
|
|
|
|
474.7
|
|
|
|
|
|
$
|
1,351.9
|
|
|
$
|
340.9
|
|
|
$
|
241.5
|
|
|
$
|
1,934.3
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Restructuring Program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials and production
|
|
$
|
-
|
|
|
$
|
33.7
|
|
|
$
|
25.0
|
|
|
$
|
58.7
|
|
Research and development
|
|
|
-
|
|
|
|
127.1
|
|
|
|
-
|
|
|
|
127.1
|
|
Restructuring costs
|
|
|
684.9
|
|
|
|
-
|
|
|
|
50.6
|
|
|
|
735.5
|
|
|
|
|
|
|
684.9
|
|
|
|
160.8
|
|
|
|
75.6
|
|
|
|
921.3
|
|
|
|
2005 Restructuring Program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials and production
|
|
|
-
|
|
|
|
55.0
|
|
|
|
9.5
|
|
|
|
64.5
|
|
Research and development
|
|
|
-
|
|
|
|
0.9
|
|
|
|
0.4
|
|
|
|
1.3
|
|
Restructuring costs
|
|
|
272.4
|
|
|
|
-
|
|
|
|
24.6
|
|
|
|
297.0
|
|
|
|
|
|
|
272.4
|
|
|
|
55.9
|
|
|
|
34.5
|
|
|
|
362.8
|
|
|
|
|
|
$
|
957.3
|
|
|
$
|
216.7
|
|
|
$
|
110.1
|
|
|
$
|
1,284.1
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Restructuring Program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials and production
|
|
$
|
-
|
|
|
$
|
460.6
|
|
|
$
|
22.5
|
|
|
$
|
483.1
|
|
Research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
Restructuring costs
|
|
|
251.4
|
|
|
|
-
|
|
|
|
75.7
|
|
|
|
327.1
|
|
|
|
|
|
$
|
251.4
|
|
|
$
|
460.6
|
|
|
$
|
98.1
|
|
|
$
|
810.1
|
|
|
Separation costs are associated with actual headcount
reductions, as well as those headcount reductions which were
probable and could be reasonably estimated. Approximately 3,300
positions were eliminated in 2009 of which approximately 3,160
related to the 2008 Restructuring Program and approximately 140
related to the Merger Restructuring Program. During 2009,
certain employees anticipated to be separated as part of planned
restructuring actions for the 2008 Restructuring Program were
instead transferred to the buyer in conjunction with the sale of
a facility. Accordingly, the accrual of separation costs
associated with these employees was reversed resulting in a
reduction to expenses. Approximately 5,800 positions were
eliminated in 2008 of which approximately 1,750 related to the
2008 Restructuring Program and 4,050 related to the 2005
Restructuring Program. Approximately
123
2,400 positions were eliminated in 2007 in connection with the
2005 Restructuring Program. These position eliminations are
comprised of actual headcount reductions, and the elimination of
contractors and vacant positions.
Accelerated depreciation costs primarily relate to manufacturing
and research facilities to be sold or closed as part of the
programs. All of the sites have and will continue to operate up
through the respective closure dates, and since future cash
flows were sufficient to recover the respective book values,
Merck was required to accelerate depreciation of the site assets
rather than write them off immediately. The site assets include
manufacturing and research facilities and equipment.
Other activity in 2009, 2008 and 2007 includes
$14.9 million, $29.4 million and $39.4 million,
respectively, of asset abandonment, shut-down and other related
costs. Additionally, other activity includes $82.3 million,
$68.4 million and $18.9 million in 2009, 2008 and
2007, respectively, related to curtailment, settlement and
termination charges on pension and other postretirement benefit
plans (see Note 15). Other activity also reflects pretax
losses resulting from sales of facilities and related assets in
2009 of $57.9 million and pretax gains on such sales in
2008 of $61.5 million.
Adjustments to the recorded amounts were not material in any
period.
The following table summarizes the charges and spending relating
to Merger Restructuring Program and 2008 and 2005 Restructuring
Program activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Separation
|
|
|
Accelerated
|
|
|
|
|
|
|
|
|
|
Costs
|
|
|
Depreciation
|
|
|
Other
|
|
|
Total
|
|
|
|
|
Merger Restructuring Program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring reserves as of January 1, 2009
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Expense
|
|
|
1,338.3
|
|
|
|
42.6
|
|
|
|
78.7
|
|
|
|
1,459.6
|
|
(Payments) receipts, net
|
|
|
(34.9
|
)
|
|
|
-
|
|
|
|
(58.4
|
)
|
|
|
(93.3
|
)
|
Non-cash activity
|
|
|
-
|
|
|
|
(42.6
|
)
|
|
|
(20.3
|
)
|
|
|
(62.9
|
)
|
|
|
Restructuring reserves as of December 31, 2009
(1)
|
|
$
|
1,303.4
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,303.4
|
|
|
2008 Restructuring Program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring reserves as of January 1, 2008
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Expense
|
|
|
684.9
|
|
|
|
160.8
|
|
|
|
75.6
|
|
|
|
921.3
|
|
(Payments) receipts, net
|
|
|
(77.2
|
)
|
|
|
-
|
|
|
|
(37.3
|
)
|
|
|
(114.5
|
)
|
Non-cash activity
|
|
|
-
|
|
|
|
(160.8
|
)
|
|
|
(38.3
|
)
|
|
|
(199.1
|
)
|
|
|
Restructuring reserves as of December 31, 2008
|
|
$
|
607.7
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
607.7
|
|
|
|
Expense
|
|
$
|
13.6
|
|
|
$
|
298.3
|
|
|
$
|
162.8
|
|
|
$
|
474.7
|
|
(Payments) receipts, net
|
|
|
(372.0
|
)
|
|
|
-
|
|
|
|
(154.5
|
)(2)
|
|
|
(526.5
|
)
|
Non-cash activity
|
|
|
-
|
|
|
|
(298.3
|
)
|
|
|
(8.3
|
)
|
|
|
(306.6
|
)
|
|
|
Restructuring reserves as of December 31, 2009
(1)
|
|
$
|
249.3
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
249.3
|
|
|
2005 Restructuring Program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring reserves as of January 1, 2008
|
|
$
|
231.5
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
231.5
|
|
|
|
Expense
|
|
$
|
272.4
|
|
|
$
|
55.9
|
|
|
$
|
34.5
|
|
|
$
|
362.8
|
|
(Payments) receipts, net
|
|
|
(389.1
|
)
|
|
|
-
|
|
|
|
(23.2
|
)(2)
|
|
|
(412.3
|
)
|
Non-cash activity
|
|
|
-
|
|
|
|
(55.9
|
)
|
|
|
(11.3
|
)
|
|
|
(67.2
|
)
|
|
|
Restructuring reserves as of December 31, 2008
|
|
$
|
114.8
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
114.8
|
|
|
|
(Payments) receipts, net
|
|
|
(77.2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(77.2
|
)
|
|
|
Restructuring reserves as of December 31,
2009(1)
|
|
$
|
37.6
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
37.6
|
|
|
|
|
(1)
|
The cash outlays associated with the first phase of the
Merger Restructuring Program are expected to be substantially
completed by the end of 2012. The cash outlays associated with
the remaining restructuring reserve for the 2008 Restructuring
Program are expected to be completed by the end of 2011. The
cash outlays associated with the remaining restructuring reserve
for the 2005 Restructuring Program are expected to be completed
by the end of 2010.
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(2)
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Includes proceeds from the sales of facilities in connection
with restructuring actions.
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Legacy
Schering-Plough Program
Prior to the Merger, Schering-Plough commenced a Productivity
Transformation Program which was designed to reduce and avoid
costs and increase productivity. For the post-Merger period
through December 31, 2009, the Company recorded
$46.4 million of costs related to this program, including
$38.7 million of employee separation costs included in
Restructuring costs and $7.7 million of accelerated
depreciation costs included in Materials and production
costs. The remaining reserve associated with this program
was $79.7 million at December 31, 2009. Approximately
225 positions were eliminated in connection with this program
for the post-merger period through December 31, 2009.
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5.
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Acquisitions,
Research Collaborations and License Agreements
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In December 2009, Merck and Avecia Investments Limited announced
a definitive agreement under which Merck would acquire the
biologics business of the Avecia group for a total purchase
price of $180 million. Avecia Biologics is a contract
manufacturing organization with specific expertise in
microbial-derived biologics. Under the terms of the agreement,
Merck would acquire Avecia Biologics Limited
(Avecia) and all of its assets, including all
Avecias process development and
scale-up,
manufacturing, quality and business support operations located
in Billingham, United Kingdom. This transaction closed on
February 1, 2010, and accordingly, the results of
operations of the acquired business will be included in
Mercks results of operations after the acquisition date.
In September 2009, Old Merck announced that it had entered into
an exclusive agreement with CSL Biotherapies (CSL),
a subsidiary of CSL Limited, to market and distribute
Afluria, CSLs seasonal influenza (flu) vaccine, in
the United States, for the 2010/2011-2015/2016 flu seasons.
Under the terms of the agreement, Merck will assume
responsibility for all aspects of commercialization of
Afluria in the United States. CSL will supply Afluria
to Merck and will retain responsibility for marketing the
vaccine outside the United States. Afluria is indicated
for the active immunization of persons ages 6 months
and older against influenza disease caused by influenza virus
subtypes A and type B present in the vaccine.
In July 2009, Old Merck and Portola Pharmaceuticals, Inc.
(Portola) signed an exclusive global collaboration
and license agreement for the development and commercialization
of betrixaban (MK-4448), an investigational oral Factor Xa
inhibitor anticoagulant currently in Phase II clinical
development for the prevention of stroke in patients with atrial
fibrillation. In return for an exclusive worldwide license to
betrixaban, Old Merck paid Portola an initial fee of
$50 million at closing, which was recorded in Research
and development expense. Portola is eligible to receive
additional cash payments totaling up to $420 million upon
achievement of certain development, regulatory and
commercialization milestones, as well as double-digit royalties
on worldwide sales of betrixaban, if approved. Merck will assume
all development and commercialization costs, including the costs
of Phase III clinical trials. Portola retained an option
(a) to co-fund Phase III clinical trials in
return for additional royalties and (b) to co-promote
betrixaban with Merck in the United States. The term of the
agreement commenced in August 2009 and, unless terminated
earlier, will continue until there are no remaining royalty
payment obligations in a country, at which time the agreement
will expire in its entirety in such country. The agreement may
be terminated by either party in the event of a material uncured
breach or bankruptcy of a party. The agreement may be terminated
by Merck in the event that the parties or Merck decide to cease
development of betrixaban for safety or efficacy. In addition,
Merck may terminate the agreement at any time upon 180 days
prior written notice. Portola may terminate the agreement in the
event that Merck challenges any Portola patent covering
betrixaban. Upon termination of the agreement, depending upon
the circumstances, the parties have varying rights and
obligations with respect to the continued development and
commercialization of betrixaban and, in the case of termination
for cause by Merck, certain royalty obligations.
In April 2009, Old Merck, Medarex, Inc. (Medarex)
and Massachusetts Biologic Laboratories (MBL) of the
University of Massachusetts Medical School announced an
exclusive worldwide license agreement for CDA-1 and CDB-1
(MK-3415A) (also known as MDX-066/MDX-1388 and
MBL-CDA1/MBL-CDB1), an investigational fully human monoclonal
antibody combination developed to target and neutralize
Clostridium difficile toxins A and B, for the treatment
of C. difficile infection. CDA-1 and CDB-1 were
co-developed by Medarex and MBL. Under the terms of the
agreement, Merck gained worldwide rights to develop and
commercialize CDA-1 and CDB-1. Medarex and MBL received an
aggregate upfront payment of $60 million upon closing,
which was recorded in Research and development expense,
and are potentially eligible to receive additional cash
125
payments up to $165 million in the aggregate upon
achievement of certain milestones associated with the
development and approval of a drug candidate covered by this
agreement. Upon commercialization, Medarex and MBL will also be
eligible to receive double-digit royalties on product sales and
milestones if certain sales targets are met. The term of the
agreement commenced on the closing date and, unless terminated
earlier, will continue until there are no remaining royalty
payment obligations in a country, at which time the agreement
will expire in its entirety in such country. Either party may
terminate this agreement for uncured material breach by the
other party, or bankruptcy or insolvency of the other party.
Merck may terminate this agreement at any time upon providing
180 days prior written notice to Medarex and MBL.
Also, in April 2009, Old Merck and Santen Pharmaceutical Co.,
Ltd. (Santen) announced a worldwide licensing
agreement for tafluprost (MK-2452), a prostaglandin analogue
under investigation in the United States. Tafluprost, preserved
and preservative-free formulations, has received marketing
approval for the reduction of elevated intraocular pressure in
open-angle glaucoma and ocular hypertension in several European
and Nordic countries as well as Japan and has been filed for
approval in additional European and Asia Pacific markets. Under
the terms of the agreement, Merck paid a fee, which was
capitalized and will be amortized to Materials and production
costs over the life of the underlying patent, and will pay
milestones and royalty payments based on future sales of
tafluprost (both preserved and preservative-free formulations)
in exchange for exclusive commercial rights to tafluprost in
Western Europe (excluding Germany), North America, South America
and Africa. Santen will retain commercial rights to tafluprost
in most countries in Eastern Europe, Northern Europe and Asia
Pacific, including Japan. Merck will provide promotion support
to Santen in Germany and Poland. If tafluprost is approved in
the United States, Santen has an option to co-promote it there.
The agreement between Merck and Santen expires on a
country-by-country
basis on the last to occur of (a) the expiry of the last to
expire valid patent claim; or (b) the expiration of the
last to expire royalty. Merck may terminate the agreement at any
time upon 90 days prior written notice and also at any time
upon 60 days prior written notice if Merck determines that
the product presents issues of safety or tolerability. In
addition, Merck may terminate the agreement in the event that
any of the enumerated agreements between Santen and the
co-owner/licensor of certain intellectual property terminate or
expire and this materially adversely affects Merck. If either
Merck or Santen materially breaches the agreement and fails to
cure after receiving notice, then the non-breaching party may
terminate the agreement. The agreement provides for termination
by the non-insolvent party due to bankruptcy by the other party.
Finally, the agreement will terminate if, during the term, Merck
develops or commercializes a competitive product (as that term
is defined in the agreement).
In addition, in April 2009, Old Merck and Cardiome Pharma Corp.
(Cardiome) announced a collaboration and license
agreement for the development and commercialization of
vernakalant (MK-6621), an investigational candidate for the
treatment of atrial fibrillation. The agreement provides Merck
with exclusive global rights to the oral formulation of
vernakalant (vernakalant (oral)) for the maintenance
of normal heart rhythm in patients with atrial fibrillation, and
provides a Merck affiliate, Merck Sharp & Dohme
(Switzerland) GmbH, with exclusive rights outside of the United
States, Canada and Mexico to the intravenous (IV)
formulation of vernakalant (vernakalant (IV)) for
rapid conversion of acute atrial fibrillation to normal heart
rhythm. Under the terms of the agreement, Old Merck paid
Cardiome an initial fee of $60 million upon closing, which
was recorded in Research and development expense. In
addition, Cardiome is eligible to receive up to
$200 million in payments based on achievement of certain
milestones associated with the development and approval of
vernakalant products (including $15 million for submission
for regulatory approval in Europe of vernakalant (IV), which Old
Merck paid in 2009 as a result of that submission, and
$20 million for initiation of a planned Phase III
program for vernakalant (oral)) and up to $100 million for
milestones associated with approvals in other subsequent
indications of both the intravenous and oral formulations. Also,
Cardiome will receive tiered royalty payments on sales of any
approved products and has the potential to receive up to
$340 million in milestone payments based on achievement of
significant sales thresholds. Cardiome has retained an option to
co-promote vernakalant (oral) with Merck through a
hospital-based sales force in the United States. Merck will be
responsible for all future costs associated with the
development, manufacturing and commercialization of these
candidates. Merck has granted Cardiome a secured,
interest-bearing credit facility of up to $100 million that
Cardiome may access in tranches over several years commencing in
2010. Cardiomes co-development partner in North America,
Astellas Pharma U.S., Inc., submitted an NDA with the FDA for
Kynapid (vernakalant hydrochloride) Injection in December 2006
that included results from two pivotal Phase III clinical
trials. In December 2007, the Cardiovascular and Renal Drugs
Advisory Committee recommended that the FDA approve vernakalant
(IV) for rapid conversion of atrial fibrillation. In
126
August 2008, the FDA issued an Approvable action letter
requesting additional information. A Phase IIb double-blind,
placebo-controlled, randomized, dose-ranging clinical trial in
patients at risk of recurrent atrial fibrillation showed that,
at the 500 mg dose, vernakalant (oral) significantly
reduced the rate of atrial fibrillation relapse as compared to
placebo. This agreement continues in effect until the expiration
of Cardiomes co-promotion rights and all royalty and
milestone payment obligations. This agreement may be terminated
in the event of insolvency or a material uncured breach by
either party. Additionally, the collaboration may be terminated
by Merck in the event that Merck determines (in good faith) that
it is not advisable to continue the development or
commercialization of a vernakalant product as a result of a
serious safety issue. In addition, Merck may terminate the
agreement at any time upon 12 months prior written notice.
Cardiome may terminate the agreement in the event that Merck
challenges any Cardiome patent covering vernakalant. Upon
termination of the agreement, depending upon the circumstances,
the parties have varying rights and obligations with respect to
the continued development and commercialization of vernakalant
and in some cases continuing royalty obligations.
In March 2009, Old Merck acquired Insmed Inc.s
(Insmed) portfolio of follow-on biologic therapeutic
candidates and its commercial manufacturing facilities located
in Boulder, Colorado. Under the terms of the agreement, Old
Merck paid Insmed an aggregate of $130 million in cash to
acquire all rights to the Boulder facilities and Insmeds
pipeline of follow-on biologic candidates. Insmeds
follow-on biologics portfolio includes two clinical candidates:
MK-4214, an investigational recombinant granulocyte-colony
stimulating factor (G-CSF) that will be evaluated
for its ability to prevent infections in patients with cancer
receiving chemotherapy, and MK-6302, a pegylated recombinant
G-CSF designed to allow for less frequent dosing. The
transaction was accounted for as a business combination;
accordingly, the assets acquired and liabilities assumed were
recorded at their respective fair values as of the acquisition
date. The determination of fair value requires management to
make significant estimates and assumptions. In connection with
the acquisition, substantially all of the purchase price was
allocated to Insmeds follow-on biologics portfolio
(MK-4214 and MK-6302) and an indefinite-lived intangible asset
was recorded. The fair value was determined based upon the
present value of expected future cash flows of new product
candidates resulting from Insmeds follow-on biologics
portfolio adjusted for the probability of their estimated
technical and marketing success utilizing an income approach
reflecting appropriate risk-adjusted discount rates. The ongoing
activity related to MK-4214 and MK-6302 is not expected to be
material to the Companys research and development expense.
The remaining net assets acquired were not material and there
were no other milestone or royalty obligations associated with
the acquisition. This transaction closed on March 31, 2009,
and accordingly, the results of operations of the acquired
business have been included in Mercks results of
operations beginning April 1, 2009.
In September 2008, Old Merck and Japan Tobacco Inc.
(JT) signed a worldwide licensing agreement to
develop and commercialize JTT-305 (MK-5442), an investigational
oral osteoanabolic (bone growth stimulating) agent for the
treatment of osteoporosis, a disease which reduces bone density
and strength and results in an increased risk of bone fractures.
JTT-305 is an investigational oral calcium sensing receptor
antagonist that is currently being evaluated by JT in
Phase II clinical trials in Japan for its effect on
increasing bone density and is in Phase I clinical trials
outside of Japan. Under the terms of the agreement, Merck gained
worldwide rights, except for Japan, to develop and commercialize
JTT-305 and certain other related compounds. JT received an
upfront payment of $85 million, which was recorded in
Research and development expense, and is eligible to
receive additional cash payments upon achievement of certain
milestones associated with the development and approval of a
drug candidate covered by this agreement. JT will also be
eligible to receive royalties from sales of any drug candidates
that receive marketing approval. The license agreement between
Merck and JT will remain in effect until expiration of all
royalty and milestone obligations, and may be terminated in the
event of an uncured material breach by the other party. The
agreement may also be terminated by Merck without cause before
initial commercial sale of JTT-305 by giving six months prior
notice to JT, and thereafter by giving one year prior notice
thereof to JT. The license agreement may also be terminated
immediately by Merck if Merck determines due to safety
and/or
efficacy concerns based on available scientific evidence to
cease development of JTT-305
and/or to
withdraw JTT-305 from the market on a permanent basis.
In September 2007, Old Merck completed the acquisition of
NovaCardia, Inc. (NovaCardia), a privately held
clinical-stage pharmaceutical company focused on cardiovascular
disease. Old Merck acquired all of the outstanding equity of
NovaCardia for a total purchase price of $366.4 million
(including $16.4 million of
127
cash and investments on hand at closing), which was paid through
the issuance of 7.3 million shares of Old Merck common
stock to the former NovaCardia shareholders based on Old
Mercks average closing stock price for the five days prior
to closing of the acquisition. In connection with the
acquisition, Old Merck recorded a charge of $325.1 million
for in-process research and development associated with
rolofylline (MK-7418), NovaCardias investigational
Phase III compound for acute heart failure, as at the
acquisition date, technological feasibility had not been
established and no alternative future use existed. The charge,
which is not deductible for tax purposes, was recorded in
Research and development expense and was determined based
upon the present value of expected future cash flows resulting
from this technology adjusted for the estimated probability of
its technical and marketing success at that time utilizing an
income approach reflecting an appropriate risk-adjusted discount
rate of 22.0%. The remaining purchase price was allocated to
cash and investments of $16.4 million, a deferred tax asset
relating to a net operating loss carryforward of
$23.9 million and other net assets of $1.0 million.
Because NovaCardia was a development stage company that had not
commenced its planned principal operations, the transaction was
accounted for as an acquisition of assets rather than as a
business combination and, therefore, goodwill was not recorded.
NovaCardias results of operations have been included in
Mercks consolidated financial results since the
acquisition date. In June 2009, Old Merck announced that
preliminary results for the pivotal Phase III study of
rolofylline showed that rolofylline did not meet the primary or
secondary efficacy endpoints. Old Merck terminated the clinical
development program for rolofylline.
Also in 2007, Old Merck and GTx, Inc. (GTx) entered
into an agreement providing for a research and development and
global strategic collaboration for selective androgen receptor
modulators (SARMs), a new class of drugs with the
potential to treat age-related muscle loss (sarcopenia) as well
as other musculoskeletal conditions. Merck has discontinued
internal development of
MK-2866
(which is a SARM) under this agreement, and is currently
discussing next steps with GTx. Also in 2007, Old Merck and
ARIAD Pharmaceuticals, Inc. (ARIAD) entered into a
global collaboration to jointly develop and commercialize
ridaforolimus (MK-8669), ARIADs novel mTOR inhibitor, for
use in cancer. These collaborations generally continue in effect
until the expiration of all royalty and milestone payment
obligations. These collaborations may generally be terminated in
the event of insolvency or a material uncured breach by either
party. Additionally, the collaboration agreement between Merck
and GTx may be terminated by Merck upon 90 days notice to GTx at
any time after December 18, 2009. The collaboration agreement
between Merck and ARIAD may be terminated by Merck upon the
failure of MK-8669 to meet certain developmental and safety
requirements or in the event Merck concludes it is not advisable
to continue the development of MK-8669 for use in a cancer
indication. In addition, Merck may terminate the ARIAD
collaboration agreement on or after the third anniversary of the
effective date by providing at least 12 months prior
written notice. Upon termination of the ARIAD collaboration
agreement, depending upon the circumstances, the parties have
varying rights and obligations with respect to the continued
development and commercialization of MK-8669 and continuing
royalty obligations.
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6.
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Collaborative
Arrangements
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The Company continues its strategy of establishing external
alliances to complement its substantial internal research
capabilities, including research collaborations, licensing
preclinical and clinical compounds and technology platforms to
drive both near- and long-term growth. The Company supplements
its internal research with an aggressive licensing and external
alliance strategy focused on the entire spectrum of
collaborations from early research to late-stage compounds, as
well as new technologies across a broad range of therapeutic
areas. These arrangements often include upfront payments and
royalty or profit share payments, contingent upon the occurrence
of certain future events linked to the success of the asset in
development, as well as expense reimbursements or payments to
the third party.
As discussed in Note 2, on January 1, 2009, new
guidance issued by the FASB was adopted which defines
collaborative arrangements and establishes reporting
requirements for transactions between participants in a
collaborative arrangement and between participants in the
arrangement and third parties. The Company reviewed its third
party arrangements to determine if any arrangement is within the
scope of this new guidance. Each arrangement is unique in nature
and the Companys most significant arrangements are
discussed below.
128
Cozaar/Hyzaar
In 1989, Old Merck and E.I. duPont de Nemours and Company
(DuPont) agreed to form a long-term research and
marketing collaboration to develop a class of therapeutic agents
for high blood pressure and heart disease, discovered by DuPont,
called angiotensin II receptor antagonists, which include
Cozaar and Hyzaar. In return, Old Merck provided
DuPont marketing rights in the United States and Canada to its
prescription medicines, Sinemet and Sinemet CR.
Pursuant to a 1994 agreement with DuPont, the Company has an
exclusive licensing agreement to market Cozaar and
Hyzaar, which are both registered trademarks of DuPont,
in return for royalties and profit share payments to DuPont. The
patents that provide U.S. marketing exclusivity for
Cozaar and Hyzaar expire in April 2010. In
addition, the patent for Cozaar will expire in a number
of major European markets in March 2010. Hyzaar lost
patent protection in a number of major European markets in
February 2010.
Remicade/Simponi
In 1998, a subsidiary of Schering-Plough entered into a
licensing agreement with Centocor, Inc. (Centocor),
now a Johnson & Johnson company, to market
Remicade, which is prescribed for the treatment of
inflammatory diseases. In 2005, Schering-Ploughs
subsidiary exercised an option under its contract with Centocor
for license rights to develop and commercialize Simponi
(golimumab), a fully human monoclonal antibody. The Company
has exclusive marketing rights to both products outside the
United States, Japan and certain Asian markets. In December
2007, Schering-Plough and Centocor revised their distribution
agreement regarding the development, commercialization and
distribution of both Remicade and Simponi,
extending the Companys rights to exclusively market
Remicade to match the duration of the Companys
exclusive marketing rights for Simponi. In addition,
Schering-Plough and Centocor agreed to share certain development
costs relating to Simponis auto-injector delivery
system. On October 6, 2009, the European Commission
approved Simponi as a treatment for rheumatoid arthritis
and other immune system disorders in two
presentations a novel auto-injector and a prefilled
syringe. As a result, the Companys marketing rights for
both products extend for 15 years from the first commercial
sale of Simponi in the EU following the receipt of
pricing and reimbursement approval within the EU. After
operating expenses and subject to certain adjustments, the
Company is entitled to receive an approximate 60% share of
profits on the Companys distribution in the Companys
marketing territory. Beginning in 2010, the share of profits
will change over time to a 50% share of profits by 2014 for both
products and the share of profits will remain fixed thereafter
for the remainder of the term. The Company may independently
develop and market Simponi for a Crohns disease
indication in its territories, with an option for Centocor to
participate. See Note 12 for a discussion of the
arbitration involving the Remicade/Simponi product rights.
Derivative
Instruments and Hedging Activities
The Company manages the impact of foreign exchange rate
movements and interest rate movements on its earnings, cash
flows and fair values of assets and liabilities through
operational means and through the use of various financial
instruments, including derivative instruments.
A significant portion of the Companys revenues and
earnings in foreign affiliates is exposed to changes in foreign
exchange rates. The objectives and accounting related to the
Companys foreign currency risk management program, as well
as its interest rate risk management activities are discussed
below.
Foreign
Currency Risk Management
A significant portion of the Companys revenues are
denominated in foreign currencies. Merck relies on sustained
cash flows generated from foreign sources to support its
long-term commitment to U.S. dollar-based research and
development. To the extent the dollar value of cash flows is
diminished as a result of a strengthening dollar, the
Companys ability to fund research and other dollar-based
strategic initiatives at a consistent level may be impaired. The
Company has established revenue hedging and balance sheet risk
management programs to protect against volatility of future
foreign currency cash flows and changes in fair value caused by
volatility in foreign exchange rates at its U.S. functional
currency entities.
The objective of the revenue hedging program is to reduce the
potential for longer-term unfavorable changes in foreign
exchange to decrease the U.S. dollar value of future cash
flows derived from foreign currency
129
denominated sales, primarily the euro and Japanese yen. To
achieve this objective, the Company will partially hedge
forecasted foreign currency denominated third party and
intercompany distributor entity sales that are expected to occur
over its planning cycle, typically no more than three years into
the future. The Company will layer in hedges over time,
increasing the portion of third party and intercompany
distributor entity sales hedged as it gets closer to the
expected date of the forecasted foreign currency denominated
sales, such that it is probable the hedged transaction will
occur. The portion of sales hedged is based on assessments of
cost-benefit profiles that consider natural offsetting
exposures, revenue and exchange rate volatilities and
correlations, and the cost of hedging instruments. The hedged
anticipated sales are a specified component of a portfolio of
similarly denominated foreign currency-based sales transactions,
each of which responds to the hedged risk in the same manner.
The Company manages its anticipated transaction exposure
principally with purchased local currency put options, which
provide the Company with a right, but not an obligation, to sell
foreign currencies in the future at a predetermined price. If
the U.S. dollar strengthens relative to the currency of the
hedged anticipated sales, total changes in the options
cash flows offset the decline in the expected future
U.S. dollar cash flows of the hedged foreign currency
sales. Conversely, if the U.S. dollar weakens, the
options value reduces to zero, but the Company benefits
from the increase in the value of the anticipated foreign
currency cash flows. The Company also utilizes forward contracts
in its revenue hedging program. If the U.S. dollar
strengthens relative to the currency of the hedged anticipated
sales, the increase in the fair value of the forward contracts
offsets the decrease in the expected future U.S. dollar
cash flows of the hedged foreign currency sales. Conversely, if
the U.S. dollar weakens, the decrease in the fair value of
the forward contracts offsets the increase in the value of the
anticipated foreign currency cash flows.
These derivative instruments are designated as cash flow hedges
and the fair value of these contracts are recorded as either
assets (gain positions) or liabilities (loss positions) in the
Consolidated Balance Sheet. Accordingly, the effective portion
of the unrealized gains or losses on these contracts is recorded
in AOCI and reclassified into Sales when the
hedged anticipated revenue is recognized. The hedge relationship
is highly effective and hedge ineffectiveness has been de
minimis. The cash flows from these contracts are reported as
operating activities in the Consolidated Statement of Cash Flows.
Where the U.S. dollar is the functional currency of the
Companys foreign subsidiaries, the primary objective of
the balance sheet risk management program is to protect the
U.S. dollar value of foreign currency denominated net
monetary assets from the effects of volatility in foreign
exchange that might occur prior to their conversion to
U.S. dollars. In these instances, Merck principally
utilizes forward exchange contracts, which enable the Company to
buy and sell foreign currencies in the future at fixed exchange
rates and economically offset the consequences of changes in
foreign exchange on the amount of U.S. dollar cash flows
derived from the net assets. Where the U.S. dollar is not
the functional currency of the Companys foreign
subsidiaries, Merck executes spot trades to convert foreign
currencies into U.S. dollars based on short-term forecast
needs. These U.S. dollar proceeds are then invested until
required by the Companys foreign subsidiaries. Merck
routinely enters into contracts to offset the effects of
exchange on exposures denominated in developed country
currencies, primarily the euro and Japanese yen. For exposures
in developing country currencies, the Company will enter into
forward contracts to partially offset the effects of exchange on
exposures when it is deemed economical to do so based on a
cost-benefit analysis that considers the magnitude of the
exposure, the volatility of the exchange rate and the cost of
the hedging instrument. The Company will also minimize the
effect of exchange on monetary assets and liabilities by
managing operating activities and net asset positions at the
local level.
Foreign currency denominated monetary assets and liabilities are
remeasured at spot rates in effect on the balance sheet date
with the effects of changes in spot rates reported in Other
(income) expense, net. The forward contracts are not
designated as hedges and are marked to market through Other
(income) expense, net. Accordingly, fair value changes in
the forward contracts help mitigate the changes in the value of
the remeasured assets and liabilities attributable to changes in
foreign currency exchange rates, except to the extent of the
spot-forward differences. These differences are not significant
due to the short-term nature of the contracts, which typically
have average maturities at inception of less than one year.
When applicable, the Company uses forward contracts to hedge the
changes in fair value of certain foreign currency denominated
available-for-sale
securities attributable to fluctuations in foreign currency
exchange rates. These derivative contracts are designated and
qualify as fair value hedges. Accordingly, changes in the fair
value of the hedged securities due to fluctuations in spot rates
are recorded in Other (income) expense, net, and
130
offset by the fair value changes in the forward contracts
attributable to spot rate fluctuations. Changes in the
contracts fair value due to spot-forward differences are
excluded from the designated hedge relationship and recognized
in Other (income) expense, net. These amounts, as well as
hedge ineffectiveness, were not significant for the years ended
December 31, 2009, 2008 or 2007. The cash flows from these
contracts are reported as operating activities in the
Consolidated Statement of Cash Flows.
Foreign exchange risk is also managed through the use of foreign
currency debt. The Companys senior unsecured
euro-denominated notes and euro-denominated term loan have been
designated as, and are effective as, economic hedges of the net
investment in a foreign operation. Accordingly, foreign currency
transaction gains or losses on the euro-denominated debt
instruments are included in foreign currency translation
adjustment within comprehensive income.
Interest
Rate Risk Management
At December 31, 2009, the Company was a party to seven
pay-floating, receive-fixed interest rate swap contracts
designated as fair value hedges of fixed-rate notes in which the
notional amounts match the amount of the hedged fixed-rate
notes. There are two swaps maturing in 2011 with notional
amounts of $125 million each that effectively convert the
Companys $250 million, 5.125% fixed-rate notes due
2011 to floating rate instruments and five swaps maturing in
2015 with notional amounts of $150 million each that
effectively convert $750 million of the Companys
$1.0 billion, 4.0% fixed-rate notes due 2015 to floating
rate instruments. The interest rate swap contracts are
designated hedges of the fair value changes in the notes
attributable to changes in the benchmark London Interbank
Offered Rate (LIBOR) swap rate. The fair value
changes in the notes attributable to changes in the benchmark
interest rate are recorded in interest expense and offset by the
fair value changes in the swap contracts. During 2008, Old Merck
terminated four interest rate swap contracts with notional
amounts of $250 million each, and terminated one interest
rate swap contract with a notional amount of $500 million.
These swaps had effectively converted its $1.0 billion,
4.75% fixed-rate notes due 2015 and its $500 million,
4.375% fixed-rate notes due 2013 to variable rate debt. As a
result of the swap terminations, Old Merck received
$128.3 million in cash, excluding accrued interest which
was not material. The corresponding gains related to the basis
adjustment of the debt associated with the terminated swap
contracts were deferred and are being amortized as a reduction
of interest expense over the remaining term of the notes. The
cash flows from these contracts are reported as operating
activities in the Consolidated Statement of Cash Flows.
Presented in the table below is the fair value of derivatives
segregated between those derivatives that are designated as
hedging instruments and those that are not designated as hedging
instruments as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Derivative
|
|
|
U.S. Dollar
|
|
|
|
Balance Sheet Caption
|
|
Asset
|
|
|
Liability
|
|
|
Notional
|
|
|
|
|
Derivatives Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts (current)
|
|
Deferred income taxes and other current assets
|
|
$
|
139.3
|
|
|
$
|
-
|
|
|
$
|
3,050.5
|
|
Foreign Exchange Contracts (non-current)
|
|
Other assets
|
|
|
152.6
|
|
|
|
-
|
|
|
|
2,118.1
|
|
Foreign Exchange Contracts (current)
|
|
Accrued and other current liabilities
|
|
|
-
|
|
|
|
34.0
|
|
|
|
658.6
|
|
Interest Rate Swaps (non-current)
|
|
Other assets
|
|
|
26.7
|
|
|
|
-
|
|
|
|
1,000.0
|
|
|
|
|
|
|
|
$
|
318.6
|
|
|
$
|
34.0
|
|
|
$
|
6,827.2
|
|
|
Derivatives Not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts (current)
|
|
Deferred income taxes and other current assets
|
|
$
|
60.3
|
|
|
$
|
-
|
|
|
$
|
2,841.7
|
|
Foreign Exchange Contracts (current)
|
|
Accrued and other current liabilities
|
|
|
-
|
|
|
|
38.6
|
|
|
|
2,104.3
|
|
|
|
|
|
|
|
$
|
60.3
|
|
|
$
|
38.6
|
|
|
$
|
4,946.0
|
|
|
|
|
|
|
|
$
|
378.9
|
|
|
$
|
72.6
|
|
|
$
|
11,773.2
|
|
|
131
The table below provides information on the location and pretax
(gain) or loss amounts for derivatives that are:
(i) designated in a fair value hedging relationship,
(ii) designated in a cash flow hedging relationship, and
(iii) not designated in a hedging relationship for the year
ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of
|
|
|
Amount of
|
|
|
|
Amount of
|
|
|
Amount of
|
|
|
Pretax
|
|
|
Pretax
|
|
|
|
Gain (Loss)
|
|
|
Gain (Loss)
|
|
|
(Gain) Loss
|
|
|
(Gain) Loss
|
|
|
|
Recognized in
|
|
|
Recognized in
|
|
|
Reclassified
|
|
|
Recognized
|
|
|
|
Earnings on
|
|
|
Earnings on
|
|
|
from AOCI
|
|
|
in OCI on
|
|
|
|
Derivatives(1)
|
|
|
Hedged
Item(1)
|
|
|
into
Earnings(2)
|
|
|
Derivatives
|
|
|
|
|
Derivatives designated in fair value hedging
relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
$
|
2.8
|
|
|
$
|
(2.8
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Foreign exchange contracts
|
|
|
5.2
|
|
|
|
(9.1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
$
|
8.0
|
|
|
$
|
(11.9
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Derivatives designated in cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
60.5
|
|
|
$
|
310.1
|
|
Derivatives not designated in a hedging relationship:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange
contracts(3)
|
|
$
|
(40.8
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
(1)
|
Recognized in Other (income) expense, net.
|
|
(2)
|
Recognized in Sales.
|
|
(3)
|
These derivative contracts mitigate changes in the value of
remeasured foreign currency denominated monetary assets and
liabilities attributable to changes in foreign currency exchange
rates.
|
At December 31, 2009, the Company estimates
$65.6 million of pretax net unrealized loss on derivatives
maturing within the next 12 months that hedge foreign
currency denominated sales over that same period will be
reclassified from AOCI to Sales. The amount
ultimately reclassified to Sales may differ as foreign
exchange rates change. Realized gains and losses are ultimately
determined by actual exchange rates at maturity.
Fair
Value Measurements
Fair value is defined as the exchange price that would be
received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market
participants on the measurement date. Entities are required to
use a fair value hierarchy which maximizes the use of observable
inputs and minimizes the use of unobservable inputs when
measuring fair value. There are three levels of inputs that may
be used to measure fair value:
Level 1 Quoted prices in active markets
for identical assets or liabilities. The Companys
Level 1 assets include equity securities that are traded in
an active exchange market.
Level 2 Observable inputs other than
Level 1 prices, such as quoted prices for similar assets or
liabilities, or other inputs that are observable or can be
corroborated by observable market data for substantially the
full term of the assets or liabilities. The Companys
Level 2 assets and liabilities primarily include debt
securities with quoted prices that are traded less frequently
than exchange-traded instruments, corporate notes and bonds,
U.S. and foreign government and agency securities, certain
mortgage-backed and asset-backed securities, municipal
securities, commercial paper and derivative contracts whose
values are determined using pricing models with inputs that are
observable in the market or can be derived principally from or
corroborated by observable market data.
Level 3 Unobservable inputs that are
supported by little or no market activity and that are financial
instruments whose values are determined using pricing models,
discounted cash flow methodologies, or similar techniques, as
well as instruments for which the determination of fair value
requires significant judgment or estimation. The Companys
Level 3 assets mainly include certain mortgage-backed and
asset-
132
backed securities, as well as certain corporate notes and bonds
with limited market activity. At December 31, 2009,
$71.5 million, or approximately 7.3%, of the Companys
investment securities were categorized as Level 3 assets
(all of which were pledged under certain collateral arrangements
(see Note 17)). All of the assets classified as
Level 3 at December 31, 2009 were acquired when Old
Merck elected to be
redeemed-in-kind
from a short-term fixed income fund that restricted cash
redemptions as described below.
If the inputs used to measure the financial assets and
liabilities fall within more than one level described above, the
categorization is based on the lowest level input that is
significant to the fair value measurement of the instrument.
Financial
Assets and Liabilities Measured at Fair Value on a Recurring
Basis
Financial assets and liabilities measured at fair value on a
recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
Fair Value Measurements Using
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
In Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
In Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
-
|
|
|
$
|
215.6
|
|
|
$
|
-
|
|
|
$
|
215.6
|
|
|
$
|
-
|
|
|
$
|
2,885.7
|
|
|
$
|
-
|
|
|
$
|
2,885.7
|
|
Corporate notes and bonds
|
|
|
-
|
|
|
|
205.2
|
|
|
|
-
|
|
|
|
205.2
|
|
|
|
-
|
|
|
|
3,093.2
|
|
|
|
-
|
|
|
|
3,093.2
|
|
Municipal securities
|
|
|
-
|
|
|
|
186.7
|
|
|
|
-
|
|
|
|
186.7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Mortgage-backed securities
(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
723.9
|
|
|
|
-
|
|
|
|
723.9
|
|
Commercial paper
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
133.0
|
|
|
|
-
|
|
|
|
133.0
|
|
Asset-backed securities
(1)
|
|
|
-
|
|
|
|
36.0
|
|
|
|
-
|
|
|
|
36.0
|
|
|
|
-
|
|
|
|
306.7
|
|
|
|
-
|
|
|
|
306.7
|
|
Foreign government bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
319.4
|
|
|
|
-
|
|
|
|
319.4
|
|
Equity securities
|
|
|
39.4
|
|
|
|
39.1
|
|
|
|
-
|
|
|
|
78.5
|
|
|
|
71.1
|
|
|
|
73.6
|
|
|
|
-
|
|
|
|
144.7
|
|
Other debt securities
|
|
|
-
|
|
|
|
3.4
|
|
|
|
-
|
|
|
|
3.4
|
|
|
|
-
|
|
|
|
2.8
|
|
|
|
-
|
|
|
|
2.8
|
|
|
|
|
|
|
39.4
|
|
|
|
686.0
|
|
|
|
-
|
|
|
|
725.4
|
|
|
|
71.1
|
|
|
|
7,538.3
|
|
|
|
-
|
|
|
|
7,609.4
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held for employee compensation
|
|
|
107.7
|
|
|
|
14.2
|
|
|
|
-
|
|
|
|
121.9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other assets
(2)
|
|
|
-
|
|
|
|
55.1
|
|
|
|
71.5
|
|
|
|
126.6
|
|
|
|
-
|
|
|
|
2,877.9
|
|
|
|
96.6
|
|
|
|
2,974.5
|
|
|
|
|
|
|
107.7
|
|
|
|
69.3
|
|
|
|
71.5
|
|
|
|
248.5
|
|
|
|
-
|
|
|
|
2,877.9
|
|
|
|
96.6
|
|
|
|
2,974.5
|
|
|
|
Derivative assets
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased currency options
|
|
|
-
|
|
|
|
291.9
|
|
|
|
-
|
|
|
|
291.9
|
|
|
|
-
|
|
|
|
451.3
|
|
|
|
-
|
|
|
|
451.3
|
|
Forward exchange contracts
|
|
|
-
|
|
|
|
60.3
|
|
|
|
-
|
|
|
|
60.3
|
|
|
|
-
|
|
|
|
73.2
|
|
|
|
-
|
|
|
|
73.2
|
|
Interest rate swaps
|
|
|
-
|
|
|
|
26.7
|
|
|
|
-
|
|
|
|
26.7
|
|
|
|
-
|
|
|
|
23.9
|
|
|
|
-
|
|
|
|
23.9
|
|
|
|
|
|
|
-
|
|
|
|
378.9
|
|
|
|
-
|
|
|
|
378.9
|
|
|
|
-
|
|
|
|
548.4
|
|
|
|
-
|
|
|
|
548.4
|
|
|
|
Total assets
|
|
$
|
147.1
|
|
|
$
|
1,134.2
|
|
|
$
|
71.5
|
|
|
$
|
1,352.8
|
|
|
$
|
71.1
|
|
|
$
|
10,964.6
|
|
|
$
|
96.6
|
|
|
$
|
11,132.3
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written currency options
|
|
$
|
-
|
|
|
$
|
0.3
|
|
|
$
|
-
|
|
|
$
|
0.3
|
|
|
$
|
-
|
|
|
$
|
1.9
|
|
|
$
|
-
|
|
|
$
|
1.9
|
|
Forward exchange contracts
|
|
|
-
|
|
|
|
72.3
|
|
|
|
-
|
|
|
|
72.3
|
|
|
|
-
|
|
|
|
273.1
|
|
|
|
-
|
|
|
|
273.1
|
|
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
72.6
|
|
|
$
|
-
|
|
|
$
|
72.6
|
|
|
$
|
-
|
|
|
$
|
275.0
|
|
|
$
|
-
|
|
|
$
|
275.0
|
|
|
|
|
(1)
|
Substantially all of the asset-backed securities are
highly-rated (Standard & Poors rating of AAA and
Moodys Investors Service rating of Aaa), secured primarily
by credit card, auto loan, and home equity receivables, with
weighted-average lives of primarily 5 years or less.
Mortgage-backed securities represent AAA-rated securities issued
or unconditionally guaranteed as to payment of principal and
interest by U.S. government agencies.
|
|
(2)
|
Other assets represent a portion of the pledged collateral
discussed below and in Note 17. At December 31, 2009,
Level 2 other assets are comprised of $39.5 million of
asset-backed securities, $11.6 million of mortgage backed
securities and $4.0 million of corporate notes and bonds.
At December 31, 2008, Level 2 other assets are
comprised of $987.4 million of corporate notes and bonds,
$792.5 million of municipal securities, $357.3 million
of commercial paper, $276.0 million of mortgage-backed
securities, $240.1 million of U.S. government and agency
securities and $224.6 million of asset-backed
securities.
|
|
(3)
|
The fair value determination of derivatives includes an
assessment of the credit risk of counterparties to the
derivatives and the Companys own credit risk, the effects
of which were not significant.
|
133
As of December 31, 2009, the Company had approximately
$8.5 billion of cash equivalents.
Level 3
Valuation Techniques
Financial assets are considered Level 3 when their fair
values are determined using pricing models, discounted cash flow
methodologies or similar techniques and at least one significant
model assumption or input is unobservable. Level 3
financial assets also include certain investment securities for
which there is limited market activity such that the
determination of fair value requires significant judgment or
estimation. The Companys Level 3 investment
securities at December 31, 2009, primarily include certain
mortgage-backed and asset-backed securities, as well as certain
corporate notes and bonds for which there was a decrease in the
observability of market pricing for these investments. These
securities were valued primarily using pricing models for which
management understands the methodologies. These models
incorporate transaction details such as contractual terms,
maturity, timing and amount of future cash inflows, as well as
assumptions about liquidity and credit valuation adjustments of
marketplace participants at December 31, 2009.
The table below provides a summary of the changes in fair value,
including net transfers in
and/or out,
of all financial assets measured at fair value on a recurring
basis using significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Available-
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
for-Sale
|
|
|
Other
|
|
|
|
|
|
Debt
|
|
|
Other
|
|
|
|
|
|
|
Investments
|
|
|
Assets
|
|
|
Total
|
|
|
Securities
|
|
|
Assets
|
|
|
Total
|
|
|
|
|
Beginning balance January 1
|
|
$
|
-
|
|
|
$
|
96.6
|
|
|
$
|
96.6
|
|
|
$
|
314.5
|
|
|
$
|
958.6
|
|
|
$
|
1,273.1
|
|
Net transfers in to (out of)
Level 3(1)
|
|
|
26.7
|
|
|
|
14.5
|
|
|
|
41.2
|
|
|
|
(314.5
|
)
|
|
|
(684.5
|
)
|
|
|
(999.0
|
)
|
Purchases, sales, settlements, net
|
|
|
(26.9
|
)
|
|
|
(48.8
|
)
|
|
|
(75.7
|
)
|
|
|
-
|
|
|
|
(132.8
|
)
|
|
|
(132.8
|
)
|
Total realized and unrealized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings(2)
|
|
|
0.5
|
|
|
|
(4.5
|
)
|
|
|
(4.0
|
)
|
|
|
-
|
|
|
|
(43.6
|
)
|
|
|
(43.6
|
)
|
Comprehensive income
|
|
|
(0.3
|
)
|
|
|
13.7
|
|
|
|
13.4
|
|
|
|
-
|
|
|
|
(1.1
|
)
|
|
|
(1.1
|
)
|
|
|
Ending balance at December 31
|
|
$
|
-
|
|
|
$
|
71.5
|
|
|
$
|
71.5
|
|
|
$
|
-
|
|
|
$
|
96.6
|
|
|
$
|
96.6
|
|
|
|
Losses recorded in earnings for Level 3 assets still held
at December 31
|
|
$
|
-
|
|
|
$
|
3.3
|
|
|
$
|
3.3
|
|
|
$
|
-
|
|
|
$
|
(44.3
|
)
|
|
$
|
(44.3
|
)
|
|
|
|
(1)
|
Transfers in and out of Level 3 are deemed to occur at
the beginning of the quarter in which the transaction takes
place.
|
|
(2)
|
Amounts are recorded in Other (income) expense, net.
|
On January 1, 2008, Old Merck had $1,273.1 million
invested in a short-term fixed income fund (the
Fund). Due to market liquidity conditions, cash
redemptions from the Fund were restricted. As a result of this
restriction on cash redemptions, Old Merck did not consider the
Fund to be traded in an active market with observable pricing on
January 1, 2008 and these amounts were categorized as
Level 3. On January 7, 2008, Old Merck elected to be
redeemed-in-kind
from the Fund and received its share of the underlying
securities of the Fund. As a result, the majority of the
underlying securities were transferred out of Level 3 as it
was determined that these securities had observable markets. On
December 31, 2009, $71.5 million of the investment
securities associated with the
redemption-in-kind
were classified in Level 3 as the securities contained at
least one significant input which was unobservable. These
securities account for the entire balance of the Companys
Level 3 assets at December 31, 2009. During 2009,
Level 3 investments in the aggregate amount of
$26.7 million, which were no longer pledged as collateral,
were reclassified from Other assets to
available-for-sale
investments.
Financial
Instruments not Measured at Fair Value
Some of the Companys financial instruments are not
measured at fair value on a recurring basis but are recorded at
amounts that approximate fair value due to their liquid or
short-term nature, such as cash and cash equivalents,
receivables and payables.
134
The estimated fair value of loans payable and long-term debt
(including current portion) at December 31, 2009 was
$17.7 billion compared with a carrying value of
$17.5 billion and at December 31, 2008 was
$6.3 billion compared with a carrying value of
$6.2 billion. Fair value was estimated using quoted dealer
prices.
A summary of the December 31 gross unrealized gains and
losses on
available-for-sale
investments, including those pledged as collateral,
recorded in AOCI is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Fair
|
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
|
Value
|
|
|
Cost
|
|
|
Gains(1)
|
|
|
Losses(1)
|
|
|
Value
|
|
|
Cost
|
|
|
Gains(1)
|
|
|
Losses(1)
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
215.6
|
|
|
$
|
215.7
|
|
|
$
|
1.1
|
|
|
$
|
(1.2
|
)
|
|
$
|
3,125.8
|
|
|
$
|
3,061.6
|
|
|
$
|
67.4
|
|
|
$
|
(3.2
|
)
|
Corporate notes and bonds
|
|
|
209.2
|
|
|
|
207.1
|
|
|
|
3.3
|
|
|
|
(1.2
|
)
|
|
|
4,124.7
|
|
|
|
4,158.4
|
|
|
|
31.6
|
|
|
|
(65.3
|
)
|
Municipal securities
|
|
|
186.7
|
|
|
|
184.8
|
|
|
|
2.9
|
|
|
|
(1.0
|
)
|
|
|
792.5
|
|
|
|
764.4
|
|
|
|
28.4
|
|
|
|
(0.3
|
)
|
Mortgage-backed securities
|
|
|
79.4
|
|
|
|
65.9
|
|
|
|
13.8
|
|
|
|
(0.3
|
)
|
|
|
1,031.9
|
|
|
|
1,024.4
|
|
|
|
12.5
|
|
|
|
(5.0
|
)
|
Asset-backed securities
|
|
|
79.3
|
|
|
|
69.2
|
|
|
|
10.1
|
|
|
|
-
|
|
|
|
551.7
|
|
|
|
571.8
|
|
|
|
0.6
|
|
|
|
(20.7
|
)
|
Foreign government bonds
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
319.4
|
|
|
|
305.9
|
|
|
|
13.5
|
|
|
|
-
|
|
Commercial paper
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
490.3
|
|
|
|
490.3
|
|
|
|
-
|
|
|
|
-
|
|
Other debt securities
|
|
|
21.7
|
|
|
|
19.3
|
|
|
|
9.4
|
|
|
|
(7.0
|
)
|
|
|
46.7
|
|
|
|
48.6
|
|
|
|
1.5
|
|
|
|
(3.4
|
)
|
Equity securities
|
|
|
181.6
|
|
|
|
161.4
|
|
|
|
28.4
|
|
|
|
(8.2
|
)
|
|
|
100.9
|
|
|
|
86.3
|
|
|
|
17.7
|
|
|
|
(3.1
|
)
|
|
|
|
|
$
|
973.9
|
|
|
$
|
923.8
|
|
|
$
|
69.0
|
|
|
$
|
(18.9
|
)
|
|
$
|
10,583.9
|
|
|
$
|
10,511.7
|
|
|
$
|
173.2
|
|
|
$
|
(101.0
|
)
|
|
|
|
(1) |
At December 31, 2009, gross unrealized gains and gross
unrealized losses related to amounts pledged as collateral (see
below and Note 17) were $25.6 million and
$(0.3) million, respectively. At December 31, 2008,
gross unrealized gains and gross unrealized losses related to
amounts pledged as collateral were $36.1 million and
$(30.3) million, respectively.
|
Available-for-sale
debt securities included in Short-term investments
totaled $293.1 million at December 31, 2009. Of
the remaining debt securities, $141.9 million mature within
five years. There were no debt securities pledged as collateral
included in current assets at December 31, 2009. Debt
securities pledged as collateral maturing within five years
totaled $37.1 million.
Letter of
Credit
In August 2008, Old Merck executed a $4.1 billion letter of
credit agreement with a financial institution, which satisfied
certain conditions set forth in the U.S. Vioxx
Settlement Agreement (see Note 12). Old Merck pledged
collateral to the financial institution of approximately
$5.1 billion pursuant to the terms of the letter of credit
agreement. Although the amount of assets pledged as collateral
was set by the letter of credit agreement and such assets were
held in custody by a third party, the assets were managed by Old
Merck. Old Merck considered the assets pledged under the letter
of credit agreement to be restricted. The letter of credit
amount and required collateral balances declined as payments
(after the first $750 million) under the Settlement
Agreement were made. As of December 31, 2008,
$3.8 billion was recorded within Deferred income taxes
and other current assets and $1.3 billion was
classified as Other assets. During 2009, Old Merck made
all remaining payments into the Vioxx settlement funds
pursuant to the U.S. Vioxx Settlement Agreement.
Accordingly, the letter of credit agreement was terminated and
the collateral was released.
Concentrations
of Credit Risk
On an ongoing basis, the Company monitors concentrations of
credit risk associated with corporate issuers of securities and
financial institutions with which it conducts business. Credit
exposure limits are established to limit a concentration with
any single issuer or institution. Cash and investments are
placed in instruments that meet high credit quality standards,
as specified in the Companys investment policy guidelines.
Derivative financial instruments are executed under
International Swaps and Derivatives Association master
agreements. The master agreements with several of the
Companys financial institution counterparties also include
credit support annexes. These annexes contain provisions that
require collateral to be exchanged depending on the value of the
derivative assets and liabilities, the Companys credit
rating, and the credit rating of the counterparty. As of
December 31, 2009, Cash and cash equivalents
includes cash collateral of $69.2 million
135
received from various counterparties with a corresponding offset
included in Accrued and other current liabilities. The
Company had not advanced any cash collateral to counterparties
as of December 31, 2009.
The Companys four largest U.S. customers, McKesson
Corporation, Cardinal Health, Inc., AmerisourceBergen
Corporation and Medco Health Solutions, Inc., represented, in
aggregate, approximately one-fifth of accounts receivable at
December 31, 2009. The Company monitors the
creditworthiness of its customers to which it grants credit
terms in the normal course of business. Bad debts have been
minimal. The Company does not normally require collateral or
other security to support credit sales.
Inventories at December 31 consisted of:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Finished goods
|
|
$
|
2,475.5
|
|
|
$
|
432.6
|
|
Raw materials and work in process
|
|
|
6,580.9
|
|
|
|
2,147.1
|
|
Supplies
|
|
|
322.8
|
|
|
|
98.6
|
|
|
|
Total (approximates current cost)
|
|
|
9,379.2
|
|
|
|
2,678.3
|
|
Reduction to LIFO costs
|
|
|
(166.7
|
)
|
|
|
-
|
|
|
|
|
|
$
|
9,212.5
|
|
|
$
|
2,678.3
|
|
|
|
Recognized as:
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
8,055.3
|
|
|
$
|
2,091.0
|
|
Other assets
|
|
|
1,157.2
|
|
|
|
587.3
|
|
|
The increase in inventories in 2009 is primarily due to the
Merger, including $2.3 billion at December 31, 2009 of
remaining purchase accounting adjustments to inventories. These
adjustments will be recognized as a component of Materials
and production costs as the related inventories are sold.
Inventories valued under the LIFO method comprised approximately
21% and 56% of inventories at December 31, 2009 and 2008,
respectively. Amounts recognized as Other assets are
comprised almost entirely of raw materials and work in process
inventories.
|
|
9.
|
Goodwill
and Other Intangibles
|
As a result of the Merger (see Note 3), the Company
recorded $10.5 billion of goodwill and $40.9 billion
of acquired identifiable intangible assets, including acquired
IPR&D. The Company recorded an additional $7.3 billion
of intangible assets in conjunction with the remeasurement of
Mercks previously held equity interest in the MSP
Partnership.
The following table summarizes goodwill activity by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
|
|
|
|
|
|
|
Pharmaceutical
|
|
|
Other
|
|
|
Total
|
|
|
|
|
Goodwill balance as of January 1, 2008
|
|
$
|
1,115.2
|
|
|
$
|
339.6
|
|
|
$
|
1,454.8
|
|
Other
|
|
|
(16.1
|
)
|
|
|
-
|
|
|
|
(16.1
|
)
|
|
|
Goodwill balance as of December 31, 2008
|
|
|
1,099.1
|
|
|
|
339.6
|
|
|
|
1,438.7
|
|
|
|
Additions
|
|
|
8,736.0
|
|
|
|
1,748.4
|
|
|
|
10,484.4
|
|
|
|
Goodwill balance as of December 31, 2009
|
|
$
|
9,835.1
|
|
|
$
|
2,088.0
|
|
|
$
|
11,923.1
|
|
|
136
Other intangibles at December 31 consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
|
|
Products and product rights
|
|
$
|
41,413.8
|
|
|
$
|
2,301.5
|
|
|
$
|
39,112.3
|
|
|
$
|
1,629.1
|
|
|
$
|
1,501.2
|
|
|
$
|
127.9
|
|
In-process research and
development(1)
|
|
|
6,650.7
|
|
|
|
|
|
|
|
6,650.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
|
|
1,599.8
|
|
|
|
52.1
|
|
|
|
1,547.7
|
|
|
|
64.0
|
|
|
|
37.5
|
|
|
|
26.5
|
|
Other
|
|
|
816.3
|
|
|
|
471.2
|
|
|
|
345.1
|
|
|
|
742.5
|
|
|
|
371.5
|
|
|
|
371.0
|
|
|
|
Total identifiable intangible assets
|
|
$
|
50,480.6
|
|
|
$
|
2,824.8
|
|
|
$
|
47,655.8
|
|
|
$
|
2,435.6
|
|
|
$
|
1,910.2
|
|
|
$
|
525.4
|
|
|
|
|
(1) |
Amounts capitalized as in-process research and development
are accounted for as indefinite-lived intangible assets, subject
to impairment testing until completion or abandonment of the
projects. Upon successful completion of each project, the
Company will make a separate determination as to the useful life
of the assets and begin amortization.
|
Aggregate amortization expense was $921.8 million in 2009,
$186.1 million in 2008 and $235.8 million in 2007. The
estimated aggregate amortization expense for each of the next
five years is as follows: 2010, $4.8 billion; 2011,
$4.8 billion; 2012, $4.7 billion; 2013,
$4.7 billion; 2014, $4.4 billion.
|
|
10.
|
Joint
Ventures and Other Equity Method Affiliates
|
Equity income from affiliates reflects the performance of the
Companys joint ventures and other equity method affiliates
and was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December
31
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Merck/Schering-Plough
|
|
$
|
1,195.5
|
|
|
$
|
1,536.3
|
|
|
$
|
1,830.8
|
|
AstraZeneca LP
|
|
|
674.3
|
|
|
|
598.4
|
|
|
|
820.1
|
|
Other(1)
|
|
|
365.2
|
|
|
|
425.9
|
|
|
|
325.6
|
|
|
|
|
|
$
|
2,235.0
|
|
|
$
|
2,560.6
|
|
|
$
|
2,976.5
|
|
|
|
|
(1) |
Primarily reflects results from Merial Limited until
disposition on September 17, 2009, Sanofi Pasteur MSD and
Johnson & Johnson°Merck Consumer Pharmaceuticals
Company.
|
Merck/Schering-Plough
Partnership
In 2000, Old Merck and Schering-Plough (collectively the
Partners) entered into an agreement to create an
equally-owned partnership to develop and market in the United
States new prescription medicines for cholesterol management.
This agreement generally provided for equal sharing of
development costs and for co-promotion of approved products by
each company. In 2001, the cholesterol-management partnership
was expanded to include all the countries of the world,
excluding Japan. In 2002, ezetimibe, the first in a new class of
cholesterol-lowering agents, was launched in the United States
as Zetia (marketed as Ezetrol outside the United
States). In 2004, a combination product containing the active
ingredients of both Zetia and Zocor, was approved
in the United States as Vytorin (marketed as Inegy
outside of the United States).
The cholesterol agreements provided for the sharing of operating
income generated by the MSP Partnership based upon percentages
that varied by product, sales level and country. In the
U.S. market, the Partners shared profits on Zetia
and Vytorin sales equally, with the exception of the
first $300 million of annual Zetia sales on which
Schering-Plough received a greater share of profits. Operating
income included expenses that the Partners contractually agreed
to share, such as a portion of manufacturing costs, specifically
identified promotion costs (including
direct-to-consumer
advertising and direct and identifiable
out-of-pocket
promotion) and other agreed upon costs for specific services
such as on-going clinical research, market support, market
research, market expansion, as well as a specialty sales force
and physician education programs. Expenses incurred in support
of the MSP Partnership but not shared between the Partners, such
as marketing and administrative expenses (including certain
sales force costs), as well as certain manufacturing costs, were
not included in Equity income from affiliates.
137
However, these costs were reflected in the overall results of
each company. Certain research and development expenses were
generally shared equally by the Partners, after adjusting for
earned milestones.
As a result of the Merger (see Note 3), the MSP Partnership
is now owned 100% by the Company. The results of the MSP
Partnership through the date of the Merger are reflected in
Equity income from affiliates. Activity resulting from
the sale of MSP Partnership products after the Merger has been
consolidated with Mercks results.
See Note 12 for information with respect to litigation
involving the MSP Partnership and the Partners related to the
sale and promotion of Zetia and Vytorin.
Summarized financial information for the MSP Partnership is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
January 1,
|
|
|
|
|
|
|
through
|
|
|
Years Ended
|
|
|
|
November 3,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Sales
|
|
$
|
3,387.2
|
|
|
$
|
4,561.1
|
|
|
$
|
5,186.2
|
|
|
|
Vytorin
|
|
|
1,689.5
|
|
|
|
2,360.0
|
|
|
|
2,779.1
|
|
Zetia
|
|
|
1,697.7
|
|
|
|
2,201.1
|
|
|
|
2,407.1
|
|
Materials and production costs
|
|
|
144.4
|
|
|
|
176.3
|
|
|
|
216.0
|
|
Other expense, net
|
|
|
848.7
|
|
|
|
1,230.1
|
|
|
|
1,307.2
|
|
|
|
Income before taxes
|
|
$
|
2,394.1
|
|
|
$
|
3,154.7
|
|
|
$
|
3,663.0
|
|
|
|
Mercks share of income before
taxes(1)
|
|
$
|
1,197.7
|
|
|
$
|
1,489.5
|
|
|
$
|
1,832.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
(2)
|
|
|
|
|
|
$
|
608.0
|
|
|
|
|
|
Total liabilities
(2)
|
|
|
|
|
|
|
488.0
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Old Mercks share of the MSP Partnerships income
before taxes differs from the equity income recognized from the
MSP Partnership primarily due to the timing of recognition of
certain transactions between Old Merck and the MSP Partnership
during the periods presented, including milestone payments.
|
(2)
|
Amounts are comprised almost entirely of current balances.
|
AstraZeneca
LP
In 1982, Old Merck entered into an agreement with Astra AB
(Astra) to develop and market Astras products
under a royalty-bearing license. In 1993, Old Mercks total
sales of Astra products reached a level that triggered the first
step in the establishment of a joint venture business carried on
by Astra Merck Inc. (AMI), in which Old Merck and
Astra each owned a 50% share. This joint venture, formed in
1994, developed and marketed most of Astras new
prescription medicines in the United States including
Prilosec, the first of a class of medications known as
proton pump inhibitors, which slows the production of acid from
the cells of the stomach lining.
In 1998, Old Merck and Astra completed the restructuring of the
ownership and operations of the joint venture whereby Old Merck
acquired Astras interest in AMI, renamed KBI Inc.
(KBI), and contributed KBIs operating assets
to a new U.S. limited partnership, Astra Pharmaceuticals
L.P. (the Partnership), in exchange for a 1% limited
partner interest. Astra contributed the net assets of its wholly
owned subsidiary, Astra USA, Inc., to the Partnership in
exchange for a 99% general partner interest. The Partnership,
renamed AstraZeneca LP (AZLP) upon Astras 1999
merger with Zeneca Group Plc (the AstraZeneca
merger), became the exclusive distributor of the products
for which KBI retained rights.
While maintaining a 1% limited partner interest in AZLP, Merck
has consent and protective rights intended to preserve its
business and economic interests, including restrictions on the
power of the general partner to
138
make certain distributions or dispositions. Furthermore, in
limited events of default, additional rights will be granted to
the Company, including powers to direct the actions of, or
remove and replace, the Partnerships chief executive
officer and chief financial officer. Merck earns ongoing revenue
based on sales of current and future KBI products and such
revenue was $1.4 billion, $1.6 billion and
$1.7 billion in 2009, 2008 and 2007, respectively,
primarily relating to sales of Nexium, as well as
Prilosec. In addition, Merck earns certain Partnership
returns which are recorded in Equity income from affiliates
as reflected in the table above. Such returns include a
priority return provided for in the Partnership Agreement,
variable returns based, in part, upon sales of certain former
Astra USA, Inc. products, and a preferential return representing
Mercks share of undistributed AZLP GAAP earnings. The
AstraZeneca merger triggered a partial redemption in March 2008
of Old Mercks interest in certain AZLP product rights.
Upon this redemption, Old Merck received $4.3 billion from
AZLP. This amount was based primarily on a multiple of Old
Mercks average annual variable returns derived from sales
of the former Astra USA, Inc. products for the three years prior
to the redemption (the Limited Partner Share of Agreed
Value). Old Merck recorded a $1.5 billion pretax gain
on the partial redemption in 2008. The partial redemption of Old
Mercks interest in the product rights did not result in a
change in Old Mercks 1% limited partnership interest.
In conjunction with the 1998 restructuring, Astra purchased an
option (the Asset Option) for a payment of
$443.0 million, which was recorded as deferred income, to
buy Old Mercks interest in the KBI products, excluding the
gastrointestinal medicines Nexium and Prilosec
(the Non-PPI Products). AstraZeneca can exercise
the Asset Option in the first half of 2010 at an exercise price
of $647 million which represents the net present value as
of March 31, 2008 of projected future pretax revenue to be
received by Old Merck from the Non-PPI Products (the
Appraised Value). On February 26, 2010, AstraZeneca
notified the Company that it was exercising the Asset Option.
Old Merck also had the right to require Astra to purchase such
interest in 2008 at the Appraised Value. In February 2008, Old
Merck advised AstraZeneca that it would not exercise the Asset
Option, thus the $443.0 million remains deferred but will
be recognized when the Asset Option is consummated. In addition,
in 1998 Old Merck granted Astra an option (the
Shares Option) to buy Old Mercks common
stock interest in KBI, and, therefore, Old Mercks interest
in Nexium and Prilosec, exercisable two years
after Astras exercise of the Asset Option. Astra can also
exercise the Shares Option in 2017 or if combined annual
sales of the two products fall below a minimum amount provided,
in each case, only so long as AstraZenecas Asset Option
has been exercised in 2010. The exercise price for the
Shares Option is based on the net present value of
estimated future net sales of Nexium and Prilosec
as determined at the time of exercise, subject to certain
true-up
mechanisms.
The AstraZeneca merger constituted a Trigger Event under the KBI
restructuring agreements. As a result of the merger, in exchange
for Old Mercks relinquishment of rights to future Astra
products with no existing or pending U.S. patents at the
time of the merger, Astra paid $967.4 million (the
Advance Payment). The Advance Payment was deferred
as it remained subject to a
true-up
calculation (the
True-Up
Amount) that was directly dependent on the fair market
value in March 2008 of the Astra product rights retained by Old
Merck. The calculated
True-Up
Amount of $243.7 million was returned to AZLP in March 2008
and Old Merck recognized a pretax gain of $723.7 million
related to the residual Advance Payment balance.
Under the provisions of the KBI restructuring agreements,
because a Trigger Event has occurred, the sum of the Limited
Partner Share of Agreed Value, the Appraised Value and the
True-Up
Amount was guaranteed to be a minimum of $4.7 billion.
Distribution of the Limited Partner Share of Agreed Value less
payment of the
True-Up
Amount resulted in cash receipts to Old Merck of
$4.0 billion and an aggregate pretax gain of
$2.2 billion which is included in Other (income)
expense, net in 2008. AstraZenecas purchase of Old
Mercks interest in the Non-PPI Products is contingent upon
the exercise of the Asset Option by AstraZeneca in 2010 and,
therefore, payment of the Appraised Value may or may not occur.
Also, in March 2008, the $1.38 billion outstanding loan
from Astra plus interest through the redemption date was
settled. As a result of these transactions, Old Merck received
net proceeds from AZLP of $2.6 billion.
139
Summarized financial information for AZLP is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December
31
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Sales
|
|
$
|
5,743.6
|
|
|
$
|
5,450.4
|
|
|
$
|
6,345.4
|
|
Materials and production costs
|
|
|
3,136.6
|
|
|
|
2,682.4
|
|
|
|
3,364.0
|
|
Other expense, net
|
|
|
1,194.2
|
|
|
|
1,408.1
|
|
|
|
1,090.1
|
|
Income before taxes
|
|
|
1,412.8
|
|
|
|
1,359.9
|
|
|
|
1,891.3
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2009
|
|
|
2008
|
|
|
|
|
Current assets
|
|
$
|
2,956.2
|
|
|
$
|
2,023.9
|
|
Noncurrent assets
|
|
|
294.5
|
|
|
|
359.0
|
|
Total liabilities (all current)
|
|
|
3,489.3
|
|
|
|
3,054.4
|
|
|
Merial
Limited
In 1997, Old Merck and Rhône-Poulenc S.A. (now
sanofi-aventis) combined their animal health businesses to
form Merial Limited (Merial), a fully
integrated animal health company, which was a stand-alone joint
venture, 50% owned by each party. Merial provides a
comprehensive range of pharmaceuticals and vaccines to enhance
the health, well-being and performance of a wide range of animal
species.
On September 17, 2009, Old Merck sold its 50% interest in
Merial to sanofi-aventis for $4 billion in cash. The sale
resulted in the recognition of a $3.2 billion gain in 2009
reflected in Other income (expense), net.
Also, in connection with the sale of Merial, Old Merck,
sanofi-aventis and Schering-Plough signed a call option
agreement. Under the terms of the call option agreement,
following the closing of the Merger, sanofi-aventis has an
option to require the Company to combine its
Intervet/Schering-Plough Animal Health business with Merial to
form an animal health joint venture that would be owned equally
by the Company and sanofi-aventis. As part of the call option
agreement, the value of Merial has been fixed at
$8 billion. The minimum total value received by the Company
for contributing Intervet/Schering-Plough to the combined entity
would be $9.25 billion (subject to customary transaction
adjustments), consisting of a floor valuation of
Intervet/Schering-Plough which is fixed at a minimum of
$8.5 billion (subject to potential upward revision based on
a valuation exercise by the two parties) and an additional
payment by sanofi-aventis of $750 million. Based on the
valuation exercise of Intervet/Schering-Plough and the customary
transaction adjustments, if Merial and Intervet/Schering-Plough
are combined, a payment may be required to be paid by either
party to make the joint venture equally owned by the Company and
sanofi-aventis. This payment would
true-up the
value of the contributions so that they are equal. Any formation
of a new animal health joint venture with sanofi-aventis is
subject to customary closing conditions including antitrust
review in the United States and Europe. Prior to the closing of
the Merger, the agreements provided Old Merck with certain
rights to terminate the call option for a fee of
$400 million. The recognition of the termination fee was
deferred until the fourth quarter of 2009 when the conditions
that could have triggered its payment lapsed. The amount is
reflected in Other (income) expense, net.
Merial sales were $1.8 billion for the period from
January 1, 2009 until the September 17, 2009
divestiture date, $2.6 billion for 2008 and
$2.4 billion for 2007.
Sanofi
Pasteur MSD
In 1994, Old Merck and Pasteur Mérieux Connaught (now
Sanofi Pasteur S.A.) established an equally-owned joint venture
to market vaccines in Europe and to collaborate in the
development of combination vaccines for distribution in Europe.
Joint venture vaccine sales were $1.6 billion for 2009,
$1.9 billion for 2008 and $1.4 billion for 2007.
Johnson &
Johnson°Merck Consumer Pharmaceuticals Company
In 1989, Old Merck formed a joint venture with
Johnson & Johnson to develop and market a broad range
of nonprescription medicines for U.S. consumers. This 50%
owned venture was subsequently expanded into Canada. Significant
joint venture products are Pepcid AC, an
over-the-counter
form of the Companys ulcer
140
medication Pepcid, as well as Pepcid Complete, an
over-the-counter
product which combines the Companys ulcer medication with
antacids. Sales of products marketed by the joint venture were
$203.2 million for 2009, $212.1 million for 2008 and
$219.7 million for 2007.
Investments in affiliates accounted for using the equity method,
including the above joint ventures, totaled $0.9 billion at
December 31, 2009 and $1.4 billion at
December 31, 2008. These amounts are reported in Other
assets. Amounts due from the above joint ventures included
in Deferred income taxes and other current assets were
$338.8 million at December 31, 2009 and
$623.4 million at December 31, 2008.
Summarized information for those affiliates (excluding the MSP
Partnership and AZLP disclosed separately above) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December
31
|
|
2009(1)
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Sales
|
|
$
|
3,767.0
|
|
|
$
|
4,860.4
|
|
|
$
|
4,218.6
|
|
Materials and production costs
|
|
|
1,225.3
|
|
|
|
1,553.6
|
|
|
|
1,346.9
|
|
Other expense, net
|
|
|
1,564.1
|
|
|
|
2,297.9
|
|
|
|
1,995.2
|
|
Income before taxes
|
|
|
977.6
|
|
|
|
1,008.9
|
|
|
|
876.5
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2009
|
|
|
2008
|
|
|
|
|
Current assets
|
|
$
|
757.2
|
|
|
$
|
1,935.8
|
|
Noncurrent assets
|
|
|
270.7
|
|
|
|
1,174.4
|
|
Current liabilities
|
|
|
601.3
|
|
|
|
1,152.6
|
|
Noncurrent liabilities
|
|
|
84.3
|
|
|
|
266.5
|
|
|
|
|
(1) |
Includes information for Merial until divestiture on
September 17, 2009.
|
|
|
11.
|
Loans
Payable, Long-Term Debt and Other Commitments
|
Loans payable at December 31, 2009 included
$739.1 million of Euro-denominated notes due in 2010 and
short-term foreign borrowing of $235.9 million. Also
included in loans payable at December 31, 2009 was
$106.0 million of long-dated notes that are subject to
repayment at the option of the holders beginning in 2010 that
were reclassified from long-term debt during 2009. Additionally,
loans payable at December 31, 2009 included
$298.2 million of long-dated notes that are subject to
repayment at the option of the holders on an annual basis. Loans
payable at December 31, 2008 included $1.9 billion of
commercial paper borrowings, $322.2 million of long-dated
notes that are subject to repayment at the option of the holders
on an annual basis and $68 million of short-term foreign
borrowing.
141
Long-term debt at December 31 consisted of:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
5.375% euro-denominated notes due 2014
|
|
$
|
2,349.6
|
|
|
$
|
|
|
5.30% notes due 2013
|
|
|
1,362.7
|
|
|
|
|
|
6.50% notes due 2033
|
|
|
1,314.4
|
|
|
|
|
|
1.875% notes due 2011
|
|
|
1,249.8
|
|
|
|
|
|
5.00% notes due 2019
|
|
|
1,242.5
|
|
|
|
|
|
6.55% notes due 2037
|
|
|
1,147.3
|
|
|
|
|
|
6.00% notes due 2017
|
|
|
1,118.3
|
|
|
|
|
|
4.75% notes due 2015
|
|
|
1,065.5
|
|
|
|
1,078.3
|
|
4.00% notes due 2015
|
|
|
1,004.4
|
|
|
|
|
|
5.85% notes due 2039
|
|
|
748.5
|
|
|
|
|
|
Floating rate euro-denominated term loan due 2012
|
|
|
650.0
|
|
|
|
|
|
4.375% notes due 2013
|
|
|
522.7
|
|
|
|
530.0
|
|
6.4% debentures due 2028
|
|
|
499.4
|
|
|
|
499.3
|
|
5.75% notes due 2036
|
|
|
497.8
|
|
|
|
497.8
|
|
5.95% debentures due 2028
|
|
|
497.4
|
|
|
|
497.2
|
|
5.125% notes due 2011
|
|
|
268.5
|
|
|
|
273.7
|
|
6.3% debentures due 2026
|
|
|
248.2
|
|
|
|
248.0
|
|
Other
|
|
|
287.9
|
|
|
|
319.0
|
|
|
|
|
|
$
|
16,074.9
|
|
|
$
|
3,943.3
|
|
|
The Company was a party to interest rate swap contracts which
effectively convert the 5.125% fixed-rate notes and
$750 million of the 4.00% fixed-rate notes to floating-rate
instruments (see Note 7).
Other (as presented in the table above) at December 31,
2009 and 2008 consisted primarily of $186.7 million and
$292.7 million of borrowings at variable rates averaging
0.0% and 1.1%, respectively. Of these borrowings,
$158.7 million is subject to repayment at the option of the
holders beginning in 2011. In both years, Other also included
foreign borrowings at varying rates up to 11.7%.
On June 25, 2009, Old Merck closed an underwritten public
offering of $4.25 billion senior unsecured notes consisting
of $1.25 billion aggregate principal amount of
1.875% notes due 2011, $1.0 billion aggregate
principal amount of 4.00% notes due 2015,
$1.25 billion aggregate principal amount of
5.00% notes due 2019 and $750 million aggregate
principal amount of 5.85% notes due 2039. Interest on the
notes is payable semi-annually. The notes of each series are
redeemable in whole or in part at any time, at the
Companys option at the redemption prices specified in each
notes associated prospectus. Proceeds from the notes were used
to fund a portion of the cash consideration of the Merger.
In connection with the Merger, the Company recorded long-term
debt with a fair value of $8.0 billion at December 31,
2009, which included $745.8 million representing the
remaining excess of the fair value over the recorded value of
debt which is being amortized to interest expense over the
remaining lives of the underlying debt obligations.
The 5.00% euro-denominated notes due 2010, the 5.375%
euro-denominated notes due 2014, the 5.30% notes due 2013,
the 6.50% notes due 2033, the 6.00% notes due 2017 and
the 6.55% notes due 2037 are redeemable in whole or in
part, at Mercks option at any time, at the redemption
prices specified in each notes associated prospectus. With
respect to the euro-denominated notes, the 6.00% notes and
the 6.55% notes, if a change of control triggering event
(as defined therein) occurs, under certain circumstances, as
defined in each notes associated prospectus, holders of the
notes will have the right to require Merck to repurchase all or
any part of the notes for a cash payment equal to 101% of the
aggregate principal amount of the notes repurchased plus accrued
and unpaid interest, if any, to the date of purchase.
142
The 5.30% notes due 2013 and the 6.50% notes due 2033
were subject to interest rate adjustment provisions in the event
that the rating assigned to a particular series of notes by
either Moodys Investors Service, Inc. or Standard and
Poors Rating Services dropped below a predetermined level.
Prior to the Merger, this interest rate adjustment was triggered
and consequently, at the time of the Merger, the
5.30% notes due 2013 were paying an interest rate of 5.55%
and the 6.50% notes due 2033 were paying an interest rate
of 6.75%. Following the closing of the Merger, the ratings on
each of these series of notes were upgraded such that, pursuant
to the terms of the indenture, the interest rates payable on
these notes reverted back to their stated amounts effective as
of December 1, 2009 and the interest rate adjustment
provisions on these notes no longer apply.
Also, in connection with the Merger, effective as of
November 3, 2009, New Merck executed a full and
unconditional guarantee of the existing debt of Old Merck and
Old Merck executed a full and unconditional guarantee of the
existing debt of New Merck (excluding commercial paper),
including for payments of principal and interest.
The aggregate maturities of long-term debt for each of the next
five years are as follows: 2010, $748.6 million; 2011,
$1.6 billion; 2012, $674.2 million; 2013,
$1.9 billion; 2014, $2.4 billion.
Also, in connection with the Merger, on March 8, 2009, Old
Merck entered into a financing commitment letter with JPMorgan
Chase Bank, N.A. and J.P. Morgan Securities Inc.
(collectively JPMorgan), under which JPMorgan
committed to provide $7 billion of financing. On
May 6, 2009, Old Merck entered into a $3 billion
364-day
senior unsecured interim term loan facility (the bridge
loan facility); a $3 billion
364-day
asset sale revolving credit facility (the asset sale
facility); and a $1 billion
364-day
corporate revolving credit facility (the incremental
facility). In connection with the above $4.25 billion
offering, the bridge loan facility was terminated and the
commitment of the lenders under the
364-day
asset sale facility was reduced. Upon completion of the sale of
Merial to sanofi-aventis (see Note 10), the asset sale
facility was terminated. The incremental facility is available
to backstop commercial paper and for general corporate purposes.
This facility has not been drawn on and will expire in November
2010. Merck has incurred commitment fees of approximately
$150 million associated with these facilities which are
being amortized over the commitment period.
In April 2009, Old Merck amended its $1.5 billion,
5-year
revolving credit facility maturing in April 2013 to allow the
facility to remain in place after the Merger. The Companys
existing $2.0 billion credit facility maturing in August
2012 remains outstanding. Both facilities provide backup
liquidity for the Companys commercial paper borrowing
facility and are to be used for general corporate purposes. The
Company has not drawn funding from either facility.
Rental expense under operating leases, net of sublease income,
was $236.6 million in 2009, $222.4 million in 2008 and
$197.5 million in 2007. The minimum aggregate rental
commitments under noncancellable leases are as follows: 2010,
$281.6 million; 2011, $231.0 million; 2012,
$162.4 million; 2013, $114.3 million and thereafter,
$155.4 million. The Company has no significant capital
leases.
|
|
12.
|
Contingencies
and Environmental Liabilities
|
The Company is involved in various claims and legal proceedings
of a nature considered normal to its business, including product
liability, intellectual property and commercial litigation, as
well as additional matters such as antitrust actions. The
Company records accruals for contingencies when it is probable
that a liability has been incurred and the amount can be
reasonably estimated. These accruals are adjusted periodically
as assessments change or additional information becomes
available. For product liability claims, a portion of the
overall accrual is actuarially determined and considers such
factors as past experience, number of claims reported and
estimates of claims incurred but not yet reported. Individually
significant contingent losses are accrued when probable and
reasonably estimable. Legal defense costs expected to be
incurred in connection with a loss contingency are accrued when
probable and reasonably estimable.
The Companys decision to obtain insurance coverage is
dependent on market conditions, including cost and availability,
existing at the time such decisions are made. As a result of a
number of factors, product liability insurance has become less
available while the cost has increased significantly. The
Company has evaluated its risks and has determined that the cost
of obtaining product liability insurance outweighs the likely
benefits of the
143
coverage that is available and as such, has no insurance for
certain product liabilities effective August 1, 2004,
including liability for legacy Merck products first sold after
that date. The Company will continue to evaluate its insurance
needs and the costs, availability and benefits of product
liability insurance in the future.
Vioxx
Litigation
Product
Liability Lawsuits
As previously disclosed, individual and putative class actions
have been filed against Old Merck in state and federal courts
alleging personal injury
and/or
economic loss with respect to the purchase or use of
Vioxx. All such actions filed in federal court are
coordinated in a multidistrict litigation in the
U.S. District Court for the Eastern District of Louisiana
(the MDL) before District Judge Eldon E. Fallon. A
number of such actions filed in state court are coordinated in
separate coordinated proceedings in state courts in New Jersey,
California and Texas, and the counties of Philadelphia,
Pennsylvania and Washoe and Clark Counties, Nevada. As of
December 31, 2009, the Company had been served or was aware
that it had been named as a defendant in approximately 9,100
pending lawsuits, which include approximately 19,400 plaintiff
groups, alleging personal injuries resulting from the use of
Vioxx, and in approximately 44 putative class actions
alleging personal injuries
and/or
economic loss. (All of the actions discussed in this paragraph
and in Other Lawsuits below are collectively
referred to as the Vioxx Product Liability
Lawsuits.) Of these lawsuits, approximately 7,350 lawsuits
representing approximately 15,525 plaintiff groups are or are
slated to be in the federal MDL and approximately 10 lawsuits
representing approximately 10 plaintiff groups are included in a
coordinated proceeding in New Jersey Superior Court before Judge
Carol E. Higbee.
Of the plaintiff groups described above, most are currently in
the Vioxx Settlement Program, described below. As of
December 31, 2009, 80 plaintiff groups who were otherwise
eligible for the Settlement Program have not participated and
their claims remain pending against Old Merck. In addition, the
claims of approximately 275 plaintiff groups who are not
eligible for the Settlement Program remain pending against Old
Merck. A number of these 275 plaintiff groups are subject to
various motions to dismiss for failure to comply with
court-ordered deadlines. Since December 31, 2009, certain
of these plaintiff groups have since been dismissed. In
addition, the claims of over 35,600 plaintiffs had been
dismissed as of December 31, 2009, the vast majority of
which were dismissed as a result of the settlement process
discussed below.
On November 9, 2007, Old Merck announced that it had
entered into an agreement (the Settlement Agreement)
with the law firms that comprise the executive committee of the
Plaintiffs Steering Committee (PSC) of the
federal Vioxx MDL, as well as representatives of
plaintiffs counsel in the Texas, New Jersey and California
state coordinated proceedings, to resolve state and federal
myocardial infarction (MI) and ischemic stroke
(IS) claims filed as of that date in the United
States. The Settlement Agreement applies only to U.S. legal
residents and those who allege that their MI or IS occurred in
the United States. The Settlement Agreement provided for Old
Merck to pay a fixed aggregate amount of $4.85 billion into
two funds ($4.0 billion for MI claims and $850 million
for IS claims).
Interim and final payments have been made to certain qualifying
claimants. It is expected that the remainder of the full
$4.85 billion will be distributed in the first half of
2010. The Company has completed making payments into the
settlement funds.
There are two U.S. Vioxx Product Liability Lawsuits
currently scheduled for trial in 2010. Old Merck has previously
disclosed the outcomes of several Vioxx Product Liability
Lawsuits that were tried prior to 2010.
Of the cases that went to trial, the McDarby matter was
resolved in the fourth quarter of 2009, leaving only two
unresolved post-trial appeals: Ernst v. Merck and
Garza v. Merck.
As previously reported, in September 2006, Old Merck filed a
notice of appeal of the August 2005 jury verdict in favor of the
plaintiff in the Texas state court case, Ernst v.
Merck. On May 29, 2008, the Texas Court of Appeals
reversed the trial courts judgment and issued a judgment
in favor of Old Merck. The Court of Appeals found the evidence
to be legally insufficient on the issue of causation. Plaintiff
filed a motion for rehearing en banc in the Court of
Appeals. On June 4, 2009, in response to plaintiffs
motion for rehearing, the Court of Appeals issued a new opinion
reversing the jurys verdict and rendered judgment for Old
Merck. On September 8, 2009, plaintiff
144
filed a second motion for rehearing en banc, which the
Court of Appeals denied on November 19, 2009. On
December 7, 2009, plaintiff filed another motion for
rehearing, which the Court of Appeals again denied. Plaintiff
filed a petition for review with the Supreme Court of Texas on
February 3, 2010.
As previously reported, in April 2006, in Garza v. Merck,
a jury in state court in Rio Grande City, Texas returned a
verdict in favor of the family of decedent Leonel Garza. The
jury awarded a total of $7 million in compensatory damages
to Mr. Garzas widow and three sons. The jury also
purported to award $25 million in punitive damages even
though under Texas law, in this case, potential punitive damages
were capped at $750,000. In May 2008, the San Antonio Court
of Appeals reversed the judgment and rendered a judgment in
favor of Old Merck. In December 2008, the Court of Appeals, on
rehearing, vacated its prior ruling and issued a replacement. In
the new ruling, the court ordered a take-nothing judgment for
Old Merck on the design defect claim, but reversed and remanded
for a new trial as to the strict liability claim because of
juror misconduct. In January 2009, Old Merck filed a petition
for review with the Texas Supreme Court. The Texas Supreme Court
granted Old Mercks petition for review and oral argument
was held on January 20, 2010.
Other
Lawsuits
Approximately 190 claims by individual private third-party
payors were filed in the New Jersey court and in federal court
in the MDL. On September 15, 2009, Old Merck announced it
had finalized a settlement agreement, which it had previously
disclosed, to resolve all pending lawsuits in which
U.S.-based
private third-party payors (TPPs) sought
reimbursement for covering Vioxx purchased by their plan
members. Certain other claimants participated in the resolution
as well. The agreement provided that Old Merck did not admit
wrongdoing or fault. Under the settlement agreement, Old Merck
paid a fixed total of $80 million. This amount includes a
settlement fund that will be divided among the TPPs (insurers,
employee benefit plans and union welfare funds) participating in
the resolution in accordance with a formula that is based on
product volume and a provision for potential payment of
attorneys fees. In return, the settling TPPs will dismiss
their lawsuits and release their claims against Old Merck.
Stipulated dismissals of the settled TTP actions were filed in
New Jersey and the MDL in December 2009. Old Merck recorded a
charge of $80 million in the second quarter of 2009 related
to the settlement and paid the $80 million in the fourth
quarter of 2009. Since the settlement, one additional TPP case
has been filed which is pending in the MDL proceeding.
Separately, there are also still pending in various
U.S. courts putative class actions purportedly brought on
behalf of individual purchasers or users of Vioxx and
seeking reimbursement of alleged economic loss. In the MDL
proceeding, 33 such class actions remain. In 2005, Old Merck
moved to dismiss a master complaint that includes these cases,
but the MDL court has not yet ruled on that motion.
On March 17, 2009, the New Jersey Superior Court denied
plaintiffs motion for class certification in
Martin-Kleinman v. Merck, a putative consumer class
action. Plaintiffs moved for leave to appeal the decision to the
New Jersey Supreme Court on November 6, 2009. On
January 12, 2010, the New Jersey Supreme Court denied
plaintiffs request for appellate review of the denial of
class certification.
On June 12, 2008, a Missouri state court certified a class
of Missouri plaintiffs seeking reimbursement for
out-of-pocket
costs relating to Vioxx. The plaintiffs do not allege any
personal injuries from taking Vioxx. The Missouri Court
of Appeals affirmed the trial courts certification of a
class on May 12, 2009, and the Missouri Supreme Court
denied Old Mercks application for review of that decision
on September 1, 2009. Trial has been set for April 11,
2011. In addition, in Indiana, plaintiffs have filed a motion to
certify a class of Indiana Vioxx purchasers in a case
pending before the Circuit Court of Marion County, Indiana;
discovery in that case is ongoing. Briefing is complete on
plaintiffs motion to certify a class of Kentucky Vioxx
purchasers before the Circuit Court of Pike County,
Kentucky. A hearing on this matter was held on February 26,
2010. A judge in Cook County, Illinois has consolidated three
putative class actions brought by Vioxx purchasers. The
plaintiffs in those actions recently voluntarily dismissed their
lawsuits.
Plaintiffs also filed a class action in California state court
seeking certification of a class of California third-party
payors and end-users. The trial court denied the motion for
class certification on April 30, 2009, and the Court of
Appeal affirmed that ruling on December 15, 2009. On
January 25, 2010, plaintiffs filed a petition for review
with the California Supreme Court.
145
Old Merck has also been named as a defendant in twenty-one
separate lawsuits brought by government entities, including the
Attorneys General of thirteen states, five counties, the City of
New York, and private citizens (who have brought qui tam
and taxpayer derivative suits). These actions allege that
Old Merck misrepresented the safety of Vioxx and seek:
(i) recovery of the cost of Vioxx purchased or
reimbursed by the government entity and its agencies;
(ii) reimbursement of all sums paid by the government
entity and its agencies for medical services for the treatment
of persons injured by Vioxx; (iii) damages under
various common law theories;
and/or
(iv) remedies under various state statutory theories,
including state consumer fraud
and/or fair
business practices or Medicaid fraud statutes, including civil
penalties. Nine of the thirteen cases are pending in the MDL
proceeding, two are subject to conditional orders transferring
them to the MDL proceeding, and two were remanded to state
court. One of the lawsuits brought by the counties is a class
action filed by Santa Clara County, California on behalf of
all similarly situated California counties.
Old Mercks motion for summary judgment was granted in
November 2009 in a case brought by the Attorney General of Texas
that was scheduled to go to trial in early 2010. The Texas
Attorney General did not appeal. In the Michigan Attorney
General case, Old Merck is currently seeking appellate review of
the trial courts order denying Old Mercks motion to
dismiss. The trial court has entered a stay of proceedings
(including discovery) pending the result of that appeal.
Finally, the Attorney General actions in the MDL described in
the previous paragraph are in the discovery phase. The Louisiana
Attorney General case is currently scheduled for trial in the
MDL court on April 12, 2010.
Shareholder
Lawsuits
As previously disclosed, in addition to the Vioxx Product
Liability Lawsuits, Old Merck and various current and former
officers and directors are defendants in various putative class
actions and individual lawsuits under the federal securities
laws and state securities laws (the Vioxx
Securities Lawsuits). All of the Vioxx Securities
Lawsuits pending in federal court have been transferred by the
Judicial Panel on Multidistrict Litigation (the
JPML) to the U.S. District Court for the
District of New Jersey before District Judge Stanley R. Chesler
for inclusion in a nationwide MDL (the Shareholder
MDL). Judge Chesler has consolidated the Vioxx
Securities Lawsuits for all purposes. The putative class
action, which requested damages on behalf of purchasers of Old
Merck stock between May 21, 1999 and October 29, 2004,
alleged that the defendants made false and misleading statements
regarding Vioxx in violation of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, and sought
unspecified compensatory damages and the costs of suit,
including attorneys fees. The complaint also asserted
claims under Section 20A of the Securities and Exchange Act
against certain defendants relating to their sales of Old Merck
stock and under Sections 11, 12 and 15 of the Securities
Act of 1933 against certain defendants based on statements in a
registration statement and certain prospectuses filed in
connection with the Old Merck Stock Investment Plan, a dividend
reinvestment plan. On April 12, 2007, Judge Chesler granted
defendants motion to dismiss the complaint with prejudice.
Plaintiffs appealed Judge Cheslers decision to the
U.S. Court of Appeals for the Third Circuit. On
September 9, 2008, the Third Circuit issued an opinion
reversing Judge Cheslers order and remanding the case to
the District Court. Old Merck filed a petition for a writ of
certiorari with the United States Supreme Court on
January 15, 2009, which the Supreme Court granted on
May 26, 2009. Oral argument was held on November 30,
2009 and a decision is expected in the first half of 2010. While
the petition for certiorari was pending, plaintiffs filed their
Consolidated and Fifth Amended Class Action Complaint in
the District Court. Old Merck filed a motion to dismiss that
complaint on May 1, 2009, following which the District
Court proceedings were stayed pending the outcome of the Supreme
Court appeal. The motion to dismiss in the District Court has
been withdrawn without prejudice to Old Mercks right to
re-file such a motion pending the outcome of the Supreme Court
appeal.
In October 2005, a Dutch pension fund filed a complaint in the
District of New Jersey alleging violations of federal securities
laws as well as violations of state law against Old Merck and
certain officers. Pursuant to the Case Management Order
governing the Shareholder MDL, the case, which is based on the
same allegations as the Vioxx Securities Lawsuits, was
consolidated with the Vioxx Securities Lawsuits.
Defendants motion to dismiss the pension funds
complaint was filed on August 3, 2007. In September 2007,
the Dutch pension fund filed an amended complaint rather than
responding to defendants motion to dismiss. In addition,
in 2007, six new complaints were filed in the District of New
Jersey on behalf of various foreign institutional investors also
alleging violations of federal securities laws as well as
violations of state law against Old Merck and certain officers.
By stipulation,
146
defendants are not required to respond to these complaints until
the resolution of any motion to dismiss in the consolidated
securities action.
In addition, as previously disclosed, various putative class
actions filed in federal court under the Employee Retirement
Income Security Act (ERISA) against Old Merck and
certain current and former officers and directors (the
Vioxx ERISA Lawsuits and, together with the
Vioxx Securities Lawsuits and the Vioxx Derivative
Lawsuits described below, the Vioxx Shareholder
Lawsuits) have been transferred to the Shareholder MDL and
consolidated for all purposes. The consolidated complaint
asserts claims for breach of fiduciary duty on behalf of certain
of Old Mercks current and former employees who are
participants in certain of Old Mercks retirement plans.
The complaint makes similar allegations with respect to Vioxx
to the allegations contained in the Vioxx Securities
Lawsuits. On July 11, 2006, Judge Chesler granted in part
and denied in part defendants motion to dismiss the ERISA
complaint. On October 19, 2007, plaintiffs moved for
certification of a class of individuals who were participants in
and beneficiaries of Old Mercks retirement savings plans
at any time between October 1, 1998 and September 30,
2004 and whose plan accounts included investments in the Old
Merck Common Stock Fund
and/or Old
Merck common stock. On February 9, 2009, the court denied
the motion for certification of a class as to one count and
granted the motion as to the remaining counts. The court also
excluded from the class definition those individuals who
(i) were not injured in connection with their investments
in Old Merck stock and (ii) executed post-separation
settlement agreements that released their claims under ERISA. On
March 23, 2009, Judge Chesler denied defendants
motion for a judgment on the pleadings. On May 11, 2009,
Judge Chesler entered an order denying plaintiffs motion
for partial summary judgment against certain individual
defendants, which had been filed on December 24, 2008.
As previously disclosed, on October 29, 2004, two
individual shareholders made a demand on Old Mercks Board
to take legal action against Mr. Raymond Gilmartin, former
Chairman, President and Chief Executive Officer, and other
individuals for allegedly causing damage to Old Merck with
respect to the allegedly improper marketing of Vioxx. In
December 2004, the Special Committee of the Board of Directors
retained the Honorable John S. Martin, Jr. of
Debevoise & Plimpton LLP to conduct an independent
investigation of, among other things, the allegations set forth
in the demand. Judge Martins report was made public in
September 2006. Based on the Special Committees
recommendation made after careful consideration of the Martin
report and the impact that derivative litigation would have on
Old Merck, the Board rejected the demand. On October 11,
2007, two shareholders filed a shareholder derivative lawsuit
purportedly on Old Mercks behalf in state court in
Atlantic County, New Jersey against current and former officers
and directors of Old Merck. Plaintiffs alleged that the
Boards rejection of their demand was unreasonable and
improper, and that the defendants breached various duties to Old
Merck in allowing Vioxx to be marketed. The parties
reached a proposed settlement and, on February 8, 2010, the
court issued an order preliminarily approving the settlement,
requiring that notice of the proposed settlement be made to
Mercks shareholders, and setting a hearing to consider
final approval of the settlement on March 22, 2010. On
February 9, 2010, Merck notified shareholders of the
proposed settlement and its terms. Under the proposed
settlement, Merck has agreed to make certain corporate
governance changes and supplement policies and procedures
previously established by the Company, and has agreed to pay an
award of fees and expenses to plaintiffs attorneys in an
amount to be determined by the court, not to exceed
$12.15 million. In addition, Merck, the plaintiffs and the
individual defendants will exchange full, mutual releases of all
claims that were, or could have been, asserted in the derivative
actions. The proposed settlement does not constitute an
admission of liability or wrongful conduct by Merck or by any of
the defendants named in the actions. If approved by the court,
this proposed settlement will also resolve the federal
consolidated shareholder derivative action described below.
As previously disclosed, various shareholder derivative actions
filed in federal court were transferred to the Shareholder MDL
and consolidated for all purposes by Judge Chesler (the
Vioxx Derivative Lawsuits). On May 5,
2006, Judge Chesler granted defendants motion to dismiss
on the grounds that plaintiffs had failed to demonstrate that
demand should be excused and denied plaintiffs request for
leave to amend their complaint. Plaintiffs appealed, arguing
that Judge Chesler erred in denying plaintiffs leave to
amend their complaint with documents acquired by stipulation of
the parties. On July 18, 2007, the United States Court of
Appeals for the Third Circuit reversed the District Courts
decision on the grounds that Judge Chesler should have allowed
plaintiffs to seek leave to amend their complaint using the
documents acquired by stipulation, and remanded the case for the
District Courts consideration of whether, even with the
additional materials, plaintiffs proposed amendment
147
would be futile. Plaintiffs filed their brief in support of
their request for leave to amend their complaint, along with
their proposed amended complaint, on November 9, 2007. The
Court denied the motion on June 17, 2008, and again
dismissed the case. One of the plaintiffs appealed Judge
Cheslers decision to the United States Court of Appeals
for the Third Circuit. Oral argument on the appeal was held on
July 15, 2009. On November 10, 2009, before any
decision was issued, the appeal was stayed pending approval of a
settlement reached in the derivative action pending in the New
Jersey Superior Court that would resolve all state and federal
shareholder derivative claims relating to Vioxx.
International
Lawsuits
As previously disclosed, in addition to the lawsuits discussed
above, Old Merck has been named as a defendant in litigation
relating to Vioxx in various countries (collectively, the
Vioxx Foreign Lawsuits) in Europe, as well as
Canada, Brazil, Argentina, Australia, Turkey, Israel, The
Philippines and Singapore.
In November 2006, the Superior Court in Quebec authorized the
institution of a class action on behalf of all individuals who,
in Quebec, consumed Vioxx and suffered damages arising
out of its ingestion. On May 7, 2009, the plaintiffs served
an introductory motion for a class action based upon that
authorization, and the case remains in preliminary stages of
litigation. On May 30, 2008, the provincial court of
Queens Bench in Saskatchewan, Canada entered an order
certifying a class of Vioxx users in Canada, except those
in Quebec. Old Merck appealed the certification order and on
March 30, 2009, the Court of Appeal granted Old
Mercks appeal and quashed the certification order. On
October 22, 2009, the Supreme Court of Canada dismissed
plaintiffs appeal application and decided not to review
the judgment of the Saskatchewan Court of Appeal. On
July 28, 2008, the Superior Court in Ontario denied Old
Mercks motion to stay class proceedings in Ontario and
decided to certify an overlapping class of Vioxx users in
Canada, except those in Quebec and Saskatchewan, who allege
negligence and an entitlement to elect to waive the tort. On
February 13, 2009, the Ontario Divisional Court dismissed
the appeal from the order denying the stay and, on May 15,
2009, the Ontario Court of Appeal denied leave to appeal. On
October 22, 2009, the Supreme Court of Canada dismissed Old
Mercks application and decided not to review the judgment
of the Ontario Court of Appeal. After the Court of Appeal for
Saskatchewan quashed the multi-jurisdictional certification
order entered in that province, Old Merck applied to the Ontario
Court of Appeal for leave to appeal from the Ontario
certification order. Leave to appeal was granted, the appeal was
filed on May 20, 2009 and, in accordance with the
courts decision, Old Merck sought leave to appeal to the
Divisional Court, which was denied on December 7, 2009.
These procedural decisions in the Canadian litigation do not
address the merits of the plaintiffs claims and litigation
in Canada remains in an early stage.
A trial in a representative action in Australia commenced on
March 30, 2009, in the Federal Court of Australia. The
named plaintiff, who alleges he suffered an MI, seeks to
represent others in Australia who ingested Vioxx and
suffered an MI, thrombotic stroke, unstable angina, transient
ischemic attack or peripheral vascular disease. On
March 30, 2009, the trial judge entered an order directing
that, in advance of all other issues in the proceeding, the
issues to be determined during the trial are those issues of
fact and law in the named plaintiffs individual case, and
those issues of fact and law that the trial judge finds, after
hearing the evidence, are common to the claims of the group
members that the named plaintiff has alleged that he represents.
The trial in this representative action concluded on
June 25, 2009, and the trial judge reserved decision.
Insurance
As previously disclosed, the Company has Directors and Officers
insurance coverage applicable to the Vioxx Securities
Lawsuits and Vioxx Derivative Lawsuits with stated upper
limits of approximately $190 million. The Company has
Fiduciary and other insurance for the Vioxx ERISA
Lawsuits with stated upper limits of approximately
$275 million. As a result of the previously disclosed
arbitration, additional insurance coverage for these claims
should also be available, if needed, under upper-level excess
policies that provide coverage for a variety of risks. There are
disputes with the insurers about the availability of some or all
of the Companys insurance coverage for these claims and
there are likely to be additional disputes. The amounts actually
recovered under the policies discussed in this paragraph may be
less than the stated upper limits.
148
Investigations
As previously disclosed, Old Merck has received subpoenas from
the U.S. Department of Justice (the DOJ)
requesting information related to Old Mercks research,
marketing and selling activities with respect to Vioxx in
a federal health care investigation under criminal statutes.
This investigation includes subpoenas for witnesses to appear
before a grand jury. As previously disclosed, in March 2009, Old
Merck received a letter from the U.S. Attorneys
Office for the District of Massachusetts identifying it as a
target of the grand jury investigation regarding Vioxx.
Further, as previously disclosed, investigations are being
conducted by local authorities in certain cities in Europe in
order to determine whether any criminal charges should be
brought concerning Vioxx. The Company is cooperating with
these governmental entities in their respective investigations
(the Vioxx Investigations). The Company
cannot predict the outcome of these inquiries; however, they
could result in potential civil
and/or
criminal remedies.
In addition, Old Merck received a subpoena in September 2006
from the State of California Attorney General seeking documents
and information related to the placement of Vioxx on
Californias Medi-Cal formulary. The Company is cooperating
with the Attorney General in responding to the subpoena.
Reserves
As discussed above, on November 9, 2007, Old Merck entered
into the Settlement Agreement with the law firms that comprise
the executive committee of the PSC of the federal Vioxx
MDL as well as representatives of plaintiffs counsel
in the Texas, New Jersey and California state coordinated
proceedings to resolve state and federal MI and IS claims filed
as of that date in the United States. In 2007, as a result of
entering into the Settlement Agreement, Old Merck recorded a
pretax charge of $4.85 billion which represents the fixed
aggregate amount to be paid to plaintiffs qualifying for payment
under the Settlement Program.
There are two U.S. Vioxx Product Liability Lawsuit
trials scheduled for trial in 2010. The Company cannot predict
the timing of any other trials related to the Vioxx
Litigation. The Company believes that it has meritorious
defenses to the Vioxx Product Liability Lawsuits,
Vioxx Shareholder Lawsuits and Vioxx Foreign
Lawsuits (collectively the Vioxx Lawsuits)
and will vigorously defend against them. In view of the inherent
difficulty of predicting the outcome of litigation, particularly
where there are many claimants and the claimants seek
indeterminate damages, the Company is unable to predict the
outcome of these matters, and at this time cannot reasonably
estimate the possible loss or range of loss with respect to the
Vioxx Lawsuits not included in the Settlement Program.
The Company has not established any reserves for any potential
liability relating to the Vioxx Lawsuits not included in
the Settlement Program, other than a reserve established in
connection with the resolution of the shareholder derivative
lawsuits discussed above, or the Vioxx Investigations.
Unfavorable outcomes in the Vioxx Litigation could have a
material adverse effect on the Companys financial
position, liquidity and results of operations.
Legal defense costs expected to be incurred in connection with a
loss contingency are accrued when probable and reasonably
estimable. As of December 31, 2008, Old Merck had an
aggregate reserve of approximately $4.379 billion (the
Vioxx Reserve) for the Settlement Program and
future legal defense costs related to the Vioxx
Litigation.
During 2009, Merck spent approximately $244 million in the
aggregate in legal defense costs worldwide, including
approximately $54 million in the fourth quarter of 2009,
related to (i) the Vioxx Product Liability Lawsuits,
(ii) the Vioxx Shareholder Lawsuits, (iii) the
Vioxx Foreign Lawsuits, and (iv) the Vioxx
Investigations (collectively, the Vioxx
Litigation). In addition, during 2009, Old Merck paid
an additional $4.1 billion into the settlement funds in
connection with the Settlement Program. Also, during 2009, Merck
recorded $75 million of charges, including $35 million
in the fourth quarter, solely for its future legal defense costs
for the Vioxx Litigation. Consequently, as of
December 31, 2009, the aggregate amount of the Vioxx
Reserve was approximately $110 million, which is solely
for future legal defense costs for the Vioxx Litigation.
Some of the significant factors considered in the review of the
Vioxx Reserve were as follows: the actual costs incurred
by the Company; the development of the Companys legal
defense strategy and structure in light of the scope of the
Vioxx Litigation, including the Settlement Agreement and
the expectation that certain lawsuits will continue to be
pending; the number of cases being brought against the Company;
the costs and outcomes of completed trials and the most current
information regarding anticipated timing, progression, and
related costs of pre-trial activities and trials in
149
the Vioxx Litigation. The amount of the Vioxx
Reserve as of December 31, 2009 represents the
Companys best estimate of the minimum amount of defense
costs to be incurred in connection with the remaining aspects of
the Vioxx Litigation; however, events such as additional
trials in the Vioxx Litigation and other events that
could arise in the course of the Vioxx Litigation could
affect the ultimate amount of defense costs to be incurred by
the Company.
The Company will continue to monitor its legal defense costs and
review the adequacy of the associated reserves and may determine
to increase the Vioxx Reserve at any time in the future
if, based upon the factors set forth, it believes it would be
appropriate to do so.
Other
Product Liability Litigation
Fosamax
As previously disclosed, Old Merck is a defendant in product
liability lawsuits in the United States involving Fosamax
(the Fosamax Litigation). As of
December 31, 2009, approximately 978 cases, which include
approximately 1,356 plaintiff groups, had been filed and were
pending against Old Merck in either federal or state court,
including one case which seeks class action certification, as
well as damages
and/or
medical monitoring. In these actions, plaintiffs allege, among
other things, that they have suffered osteonecrosis of the jaw,
generally subsequent to invasive dental procedures, such as
tooth extraction or dental implants
and/or
delayed healing, in association with the use of Fosamax.
In addition, plaintiffs in approximately five percent of these
actions allege that they sustained stress
and/or low
energy femoral fractures in association with the use of
Fosamax. On August 16, 2006, the JPML ordered that
the Fosamax product liability cases pending in federal
courts nationwide should be transferred and consolidated into
one multidistrict litigation (the Fosamax
MDL) for coordinated pre-trial proceedings. The Fosamax
MDL has been transferred to Judge John Keenan in the
U.S. District Court for the Southern District of New York.
As a result of the JPML order, approximately 771 of the cases
are before Judge Keenan. Judge Keenan issued a Case Management
Order (and various amendments thereto) setting forth a schedule
governing the proceedings which focused primarily upon resolving
the class action certification motions in 2007 and completing
fact discovery in an initial group of 25 cases by
October 1, 2008. Briefing and argument on plaintiffs
motions for certification of medical monitoring classes were
completed in 2007 and Judge Keenan issued an order denying the
motions on January 3, 2008. On January 28, 2008, Judge
Keenan issued a further order dismissing with prejudice all
class claims asserted in the first four class action lawsuits
filed against Old Merck that sought personal injury damages
and/or
medical monitoring relief on a class wide basis. Daubert
motions were filed in May 2009 and Judge Keenan conducted a
Daubert hearing in July 2009. On July 27, 2009,
Judge Keenan issued his ruling on the parties respective
Daubert motions. The ruling denied the Plaintiff Steering
Committees motion and granted in part and denied in
part Old Mercks motion. The first MDL
trial Boles v. Merck began
on August 11, 2009, and ended on September 2, 2009. On
September 11, 2009, the MDL court declared a mistrial in
Boles because the eight person jury could not reach a
unanimous verdict and, consequently, the Boles case is
set to be retried on June 2, 2010. The second MDL case set
for trial Flemings v. Merck
was scheduled to start on January 12, 2010,
but Judge Keenan granted Old Mercks motion for summary
judgment and dismissed the case on November 23, 2009. The
next MDL case set for trial Maley v. Merck
is currently scheduled to start on
April 19, 2010. Old Merck filed a motion for summary
judgment in Maley, which the MDL court granted in part
and denied in part on January 27, 2010 and, as a result,
the Company expects that the trial will commence as currently
scheduled on April 19. On February 1, 2010, Judge
Keenan selected a new bellwether case Judith
Graves v. Merck to replace the Flemings
bellwether case, which the MDL court dismissed when it
granted summary judgment in favor of Old Merck. The MDL court
has set the Graves trial to begin on September 13,
2010. A trial in Alabama is currently scheduled to begin on
May 3, 2010 and a trial in Florida is currently scheduled
to begin on June 21, 2010.
In addition, in July 2008, an application was made by the
Atlantic County Superior Court of New Jersey requesting that all
of the Fosamax cases pending in New Jersey be considered
for mass tort designation and centralized management before one
judge in New Jersey. On October 6, 2008, the New Jersey
Supreme Court ordered that all pending and future actions filed
in New Jersey arising out of the use of Fosamax and
seeking damages for existing dental and jaw-related injuries,
including osteonecrosis of the jaw, but not solely seeking
medical monitoring, be designated as a mass tort for centralized
management purposes before Judge Higbee in Atlantic County
Superior Court. As of December 31, 2009, approximately 189
cases were pending against Old
150
Merck in the New Jersey coordinated proceeding. On July 20,
2009, Judge Higbee entered a Case Management Order (and various
amendments thereto) setting forth a schedule that contemplates
completing fact discovery in an initial group of 10 cases by
February 28, 2010, followed by expert discovery in five of
those cases, and a projected trial date of July 12, 2010
for the first case to be tried in the New Jersey coordinated
proceeding.
Discovery is ongoing in the Fosamax MDL litigation, the
New Jersey coordinated proceeding, and the remaining
jurisdictions where Fosamax cases are pending. The
Company intends to defend against these lawsuits.
As of December 31, 2008, the Company had a remaining
reserve of approximately $33 million solely for its future
legal defense costs for the Fosamax Litigation. During
2009, the Company spent approximately $35 million and added
$40 million to its reserve. Consequently, as of
December 31, 2009, the Company had a reserve of
approximately $38 million solely for its future legal
defense costs for the Fosamax Litigation. Some of the
significant factors considered in the establishment of the
reserve for the Fosamax Litigation legal defense costs
were as follows: the actual defense costs incurred thus far; the
development of the Companys legal defense strategy and
structure in light of the creation of the Fosamax MDL;
the number of cases being brought against the Company; and the
anticipated timing, progression, and related costs of pre-trial
activities in the Fosamax Litigation. The Company will
continue to monitor its legal defense costs and review the
adequacy of the associated reserves. Due to the uncertain nature
of litigation, the Company is unable to reasonably estimate its
costs beyond the third quarter of 2010. The Company has not
established any reserves for any potential liability relating to
the Fosamax Litigation. Unfavorable outcomes in the
Fosamax Litigation could have a material adverse effect
on the Companys financial position, liquidity and results
of operations.
NuvaRing
Beginning in May 2007, a number of complaints were filed in
various jurisdictions asserting claims against the
Companys subsidiaries Organon USA, Inc., Organon
Pharmaceuticals USA, Inc., Organon International (collectively,
Organon), and Schering-Plough arising from
Organons marketing and sale of NuvaRing, a combined
hormonal contraceptive vaginal ring. The plaintiffs contend that
Organon and Schering-Plough failed to adequately warn of the
alleged increased risk of venous thromboembolism
(VTE) posed by NuvaRing,
and/or
downplayed the risk of VTE. The plaintiffs seek damages for
injuries allegedly sustained from their product use, including
some alleged deaths, heart attacks and strokes. The majority of
the cases are currently pending in a federal Multidistrict
litigation venued in Missouri and in New Jersey state court.
Other cases are pending in other states.
Vetsulin
On December 28, 2009, Schering-Plough Animal Health was
named as a defendant in a putative class action lawsuit filed in
the U.S. District Court for the Northern District of Ohio.
In that lawsuit, entitled Friedman v. Schering-Plough
Animal Health, the individual plaintiff seeks to represent a
class of people who purchased Vetsulin for their
household pets and the suit alleges the Vetsulin was
contaminated or improperly manufactured. Vetsulin is an
insulin product administered to diabetic dogs and cats.
Plaintiff seeks compensatory and punitive damages based on
theories of negligence, violation of consumer sales practices
acts, breach of warranty, and product liability due to allegedly
defective manufacturing. Merck intends to defend this lawsuit
vigorously.
Commercial
Litigation
AWP
Litigation and Investigations
As previously disclosed, Old Merck was joined in ongoing
litigation alleging manipulation by pharmaceutical manufacturers
of Average Wholesale Prices (AWP), which are
sometimes used in calculations that determine public and private
sector reimbursement levels. The complaints allege violations of
federal and state law, including fraud, Medicaid fraud and
consumer protection violations, among other claims. The outcome
of these litigations and investigations could include
substantial damages, the imposition of substantial fines,
penalties and injunctive or administrative remedies. In 2002,
the JPML ordered the transfer and consolidation of all pending
federal AWP cases to federal court in Boston, Massachusetts.
Plaintiffs filed one consolidated class action complaint, which
aggregated the claims previously filed in various federal
district court actions and also expanded the number of
manufacturers to include some which, like Old Merck, had not
been defendants in any prior pending case. In May 2003, the
court granted Old Mercks motion to dismiss the
consolidated class action and dismissed Old
151
Merck from the class action case. Old Merck and many other
pharmaceutical manufacturers are defendants in similar
complaints pending in federal and state court including cases
brought individually by a number of counties in the State of New
York. Fifty of the county cases have been consolidated in New
York state court. Old Merck was dismissed from the Suffolk
County case, which was the first of the New York county cases to
be filed. In addition to the New York county cases, as of
December 31, 2008, Old Merck was a defendant in state cases
brought by the Attorneys General of eleven states, all of which
are being defended. In February 2009, the Kansas Attorney
General filed suit against Old Merck and several other
manufacturers. AWP claims brought by the Attorney General of
Arizona against Old Merck were dropped in 2009. The court in the
AWP cases pending in Hawaii listed Old Merck and others to be
set for trial in mid-2010.
In 2009, Schering-Plough reached settlements of claims relating
to AWP. In August 2009, Schering-Plough and five other
pharmaceutical companies settled all claims brought on behalf of
the Alabama Medicaid program for a combined total of
$89 million. In addition, in July 2009, Schering-Plough
reached a settlement with the Relator, acting on behalf of the
United States in a non-intervened AWP qui tam action
pending in the U.S. Federal District Court of Massachusetts
and with the States of California and Florida for a combined
total of $69 million. That settlement resolved all claims
brought on behalf of the Medicaid programs for the States of
California and Florida and has been approved by the
U.S. District Court for the District of Massachusetts and
held to be preclusive of all claims for the federal share of any
alleged Medicaid overpayment in all remaining states consistent
with applicable precedent. In January 2010, the
U.S. District Court for the District of Massachusetts held
that a unit of Schering-Plough and eight other drug makers
overcharged New York City and 42 New York counties for certain
generic drugs. The court has reserved the issue of damages and
any penalties for future proceedings.
The Company continues to respond to litigation brought by
certain states and private payors and to investigations
initiated by the Department of Health and Human Services, the
Department of Justice and several states regarding AWP. The
Company is cooperating with these investigations.
Centocor
Distribution Agreement
On May 27, 2009, Centocor, now a wholly owned subsidiary of
Johnson & Johnson, delivered to Schering-Plough a
notice initiating an arbitration proceeding to resolve whether,
as a result of the Merger, Centocor is permitted to terminate
the Companys rights to distribute and commercialize
Remicade and Simponi. Sales of Remicade and
Simponi included in the Companys results for the
post-Merger period were $430.7 million and
$3.9 million, respectively. Sales of Remicade
recognized by Schering-Plough in 2009 prior to the Merger
were $1.9 billion. The arbitration process involves a
number of steps, including the selection of independent
arbitrators, information exchanges and hearings, before a final
decision will be reached. A hearing in the arbitration is
scheduled to commence in late September 2010. An unfavorable
outcome in the arbitration would have a material adverse effect
on the Companys financial position, liquidity and results
of operations.
Governmental
Proceedings
As previously disclosed, in February 2008, Old Merck entered
into a Corporate Integrity Agreement (CIA) with the
U.S. Department of Health and Human Services Office of
Inspector General (HHS-OIG) for a five-year term.
The CIA requires, among other things, that Old Merck maintain
its ethics training program and policies and procedures
governing promotional practices and Medicaid price reporting.
Further, as required by the CIA, Old Merck has retained an
Independent Review Organization (IRO) to conduct a
systems review of its promotional policies and procedures and to
conduct, on a sample basis, transactional reviews of Old
Mercks promotional programs and certain Medicaid pricing
calculations. Old Merck is also required to provide regular
reports and certifications to the HHS-OIG regarding its
compliance with the CIA.
Similarly, as previously disclosed by Schering-Plough, in 2004
Schering-Plough entered into a CIA with HHS-OIG for a five-year
term, and in August 2006, it entered into an addendum to the CIA
also effective for five years. The requirements of Old Merck and
Schering-Plough CIAs are similar, although not identical.
Failure to comply with the CIAs requirements can result in
financial penalties or exclusion from participation in federal
health care programs. The Company believes that its promotional
practices and Medicaid price reports meet the requirements of
each of the CIAs.
152
Vytorin/Zetia
Litigation
As previously disclosed, the legacy companies have received
several letters from the House Committee on Energy and Commerce,
its Subcommittee on Oversight and Investigations
(O&I), and the Ranking Minority Member of the
Senate Finance Committee, collectively seeking a combination of
witness interviews, documents and information on a variety of
issues related to the ENHANCE clinical trial, the sale and
promotion of Vytorin, as well as sales of stock by
corporate officers. In addition, as previously disclosed, since
August 2008, Old Merck and Schering-Plough received three
additional letters each from O&I, including identical
letters dated February 19, 2009, seeking certain
information and documents related to the SEAS clinical trial. As
previously disclosed, the legacy companies received subpoenas
from the New York State Attorney Generals Office and a
letter from the Connecticut Attorney General seeking similar
information and documents, and on July 15, 2009, the legacy
companies announced that they reached a civil settlement with
the Attorneys General representing 35 states and the
District of Columbia to resolve a previously disclosed
investigation by that group into whether the legacy companies
violated state consumer protection laws when marketing
Vytorin and Zetia. As part of the settlement, the
legacy companies agreed to reimburse the investigative costs of
the 35 states and the District of Columbia which totaled
$5.4 million, and to make voluntary assurances of
compliance related to the promotion of Vytorin and
Zetia, including agreeing to continue to comply with the
Food, Drug and Cosmetic Act, the U.S. Food and Drug
Administration Amendments Act, and other laws requiring the
truthful and non-misleading marketing of pharmaceutical
products. The settlement did not include any admission of
misconduct or liability by the legacy companies. Furthermore, as
previously disclosed, in September 2008, the legacy companies
received letters from the Civil Division of the DOJ informing
them that the DOJ is investigating whether their conduct
relating to the promotion of Vytorin caused false claims
to be submitted to federal health care programs. The Company is
cooperating with these investigations and responding to the
inquiries.
As previously disclosed, the legacy companies have become aware
of or been served with approximately 145 civil class action
lawsuits alleging common law and state consumer fraud claims in
connection with the MSP Partnerships sale and promotion of
Vytorin and Zetia. Certain of those lawsuits
alleged personal injuries
and/or
sought medical monitoring. The lawsuits against Old Merck and
Schering-Plough were consolidated in a single multi-district
litigation docket before Judge Cavanaugh of the District of New
Jersey, In re Vytorin/Zetia Marketing Sales Practices and
Products Liability Litigation. On August 5, 2009, Old
Merck and Schering-Plough jointly announced that their
cholesterol joint venture, entered into agreements to resolve,
for a total fixed amount of $41.5 million, these civil
class action lawsuits. The MSP Partnership recorded these
charges in the second quarter of 2009. On February 9, 2010,
Judge Cavanaugh granted final approval of the settlements.
Also, as previously disclosed, on April 3, 2008, an Old
Merck shareholder filed a putative class action lawsuit in
federal court in the Eastern District of Pennsylvania alleging
that Old Merck and its Chairman, President and Chief Executive
Officer, Richard T. Clark, violated the federal securities laws.
This suit has since been withdrawn and re-filed in the District
of New Jersey and has been consolidated with another federal
securities lawsuit under the caption In re Merck &
Co., Inc. Vytorin Securities Litigation. An amended
consolidated complaint was filed on October 6, 2008, and
names as defendants Old Merck; Merck/Schering-Plough
Pharmaceuticals, LLC; and certain of the Companys current
and former officers and directors. Specifically, the complaint
alleges that Old Merck delayed releasing unfavorable results of
the ENHANCE clinical trial regarding the efficacy of Vytorin
and that Old Merck made false and misleading statements
about expected earnings, knowing that once the results of the
Vytorin study were released, sales of Vytorin
would decline and Old Mercks earnings would suffer. On
December 12, 2008, Old Merck and the other defendants moved
to dismiss this lawsuit on the grounds that the plaintiffs
failed to state a claim for which relief can be granted. On
September 2, 2009, the court issued an opinion and order
denying the defendants motion to dismiss this lawsuit, and
on October 19, 2009, Old Merck and the other defendants
filed an answer to the amended consolidated complaint. There is
a similar consolidated, putative class action securities lawsuit
pending in the District of New Jersey, filed by a
Schering-Plough shareholder against Schering-Plough and its
former Chairman, President and Chief Executive Officer, Fred
Hassan, under the caption In re Schering-Plough
Corporation/ENHANCE Securities Litigation. The amended
consolidated complaint was filed on September 15, 2008 and
names as defendants Schering-Plough, Merck/Schering-Plough
Pharmaceuticals, LLC; certain of the Companys current and
former officers and directors; and underwriters who participated
in an August 2007 public offering of Schering-Ploughs
common and preferred stock. On December 10, 2008,
Schering-Plough
153
and the other defendants filed motions to dismiss this lawsuit
on the grounds that the plaintiffs failed to state a claim for
which relief can be granted. On September 2, 2009, the
court issued an opinion and order denying the defendants
motion to dismiss this lawsuit, and on September 17, 2009,
the defendants filed a motion for reconsideration of the
courts September 2, 2009 opinion and order denying
the motion to dismiss. The motion for reconsideration was fully
briefed on October 13, 2009 and a decision remains pending.
The defendants filed an answer to the consolidated amended
complaint on November 18, 2009.
As previously disclosed, on April 22, 2008, a member of an
Old Merck ERISA plan filed a putative class action lawsuit
against Old Merck and certain of the Companys current and
former officers and directors alleging they breached their
fiduciary duties under ERISA. Since that time, there have been
other similar ERISA lawsuits filed against Old Merck in the
District of New Jersey, and all of those lawsuits have been
consolidated under the caption In re Merck & Co.,
Inc. Vytorin ERISA Litigation. A consolidated amended
complaint was filed on February 5, 2009, and names as
defendants Old Merck and various current and former members of
the Companys Board of Directors. The plaintiffs allege
that the ERISA plans investment in Old Merck stock was
imprudent because Old Mercks earnings are dependent on the
commercial success of its cholesterol drug Vytorin and
that defendants knew or should have known that the results of a
scientific study would cause the medical community to turn to
less expensive drugs for cholesterol management. On
April 23, 2009, Old Merck and the other defendants moved to
dismiss this lawsuit on the grounds that the plaintiffs failed
to state a claim for which relief can be granted. On
September 1, 2009, the court issued an opinion and order
denying the defendants motion to dismiss this lawsuit. On
November 9, the plaintiffs moved to strike certain of the
defendants affirmative defenses. That motion was fully
briefed on December 4, 2009 and is pending before the court.
There is a similar consolidated, putative class action ERISA
lawsuit currently pending in the District of New Jersey, filed
by a member of a Schering-Plough ERISA plan against
Schering-Plough and certain of its current and former officers
and directors, alleging they breached their fiduciary duties
under ERISA, and under the caption In re Schering-Plough
Corp. ENHANCE ERISA Litigation. The consolidated amended
complaint was filed on October 1, 2009 and names as
defendants Schering-Plough, various current and former members
of Schering-Ploughs Board of Directors and current and
former members of committees of Schering-Ploughs Board of
Directors. On November 6, 2009, the Company and the other
defendants filed a motion to dismiss this lawsuit on the grounds
that the plaintiffs failed to state a claim for which relief can
be granted. The plaintiffs opposition to the motion to
dismiss was filed on December 16, 2009, and the motion was
fully briefed on January 15, 2010. A decision remains
pending.
On November 5, 2009, a stockholder of the Company filed a
shareholder derivative lawsuit, In re Local No, 38
International Brotherhood of Electrical Workers Pension Fund
v. Clark (Local No. 38), in
the District of New Jersey, on behalf of the nominal defendant,
the Company, and all shareholders of the Company, against the
Company; certain of the Companys officers, directors and
alleged insiders; and certain of the predecessor companies
former officers, directors and alleged insiders for alleged
breaches of fiduciary duties, waste, unjust enrichment and gross
mismanagement. A similar shareholder derivative lawsuit, Cain
v. Hassan, was filed by a Schering-Plough stockholder
and is currently pending in the District of New Jersey. An
amended complaint was filed on May 13, 2008, by the
Schering-Plough stockholder on behalf of the nominal defendant,
Schering-Plough, and all Schering-Plough shareholders. The
lawsuit is against Schering-Plough, Schering-Ploughs
then-current Board of Directors, and certain of
Schering-Ploughs current and former officer, directors and
alleged insiders. The plaintiffs in both Local No. 38
and Cain v. Hassan allege that the
defendants withheld the ENHANCE study results and made false and
misleading statements, thereby deceiving and causing harm to the
Company and Schering-Plough, respectively, and to the investing
public, unjustly enriching insiders and wasting corporate
assets. The defendants in Local No. 38 intend to
move to dismiss the plaintiffs complaint. The defendants
in Cain v. Hassan moved to dismiss the amended
complaint on July 14, 2008, and that motion was fully
briefed on October 15, 2008. A decision remains pending.
The Company intends to defend the lawsuits referred to in this
section. Unfavorable outcomes resulting from the government
investigations or the civil litigations could have a material
adverse effect on the Companys financial position,
liquidity and results of operations.
154
In November 2008, the individual shareholder who had previously
delivered a letter to Old Mercks Board of Directors
demanding that the Board take legal action against the
responsible individuals to recover the amounts paid by Old Merck
in 2007 to resolve certain governmental investigations delivered
another letter to the Board demanding that the Board or a
subcommittee thereof commence an investigation into the matters
raised by various civil suits and governmental investigations
relating to Vytorin.
Securities
and Class Action Litigation
Federal
Securities Litigation
Following Schering-Ploughs announcement on
February 15, 2001 that the FDA had been conducting
inspections of its manufacturing facilities in New Jersey and
Puerto Rico and had issued reports citing deficiencies
concerning compliance with current Good Manufacturing Practices,
and had delayed approval of Clarinex, several lawsuits
were filed against Schering-Plough and certain named officers.
These lawsuits allege that the defendants violated the federal
securities law by allegedly failing to disclose material
information and making material misstatements. Specifically,
they allege that Schering-Plough failed to disclose an alleged
serious risk that a new drug application for Clarinex
would be delayed as a result of these manufacturing issues,
and they allege that the Company failed to disclose the alleged
depth and severity of its manufacturing issues. These complaints
were consolidated into one action in the U.S. District
Court for the District of New Jersey, and a consolidated amended
complaint was filed on October 11, 2001, purporting to
represent a class of shareholders who purchased shares of
Schering-Plough stock from May 9, 2000 through
February 15, 2001. The complaint sought compensatory
damages on behalf of the class. On February 18, 2009, the
court signed an order preliminarily approving a settlement
agreement under which Schering-Plough would provide for a
settlement fund in the amount of $165 million to resolve
all claims by the class, which funds were placed in escrow at
that time. The vast majority of the settlement was covered by
insurance. On December 31, 2009, the District Court granted
final approval of the settlement. The settlement is due to be
consummated after the expiration of the appeal period from that
final approval decision.
ERISA
Litigation
On March 31, 2003, Schering-Plough was served with a
putative class action complaint filed in the U.S. District
Court in New Jersey alleging that Schering-Plough, its Employee
Savings Plan (the Plan) administrator, several
current and former directors, and certain former corporate
officers breached their fiduciary obligations to certain
participants in the Plan. The complaint seeks damages in the
amount of losses allegedly suffered by the Plan. The complaint
was dismissed on June 29, 2004. The plaintiffs appealed. On
August 19, 2005 the U.S. Court of Appeals for the
Third Circuit reversed the dismissal by the District Court and
the matter has been remanded back to the District Court for
further proceedings. On September 30, 2008, the District
Court entered an order granting in part, and denying in part,
the named putative class representatives motion for class
certification. Schering-Plough thereafter petitioned the
U.S. District Court of Appeals for the Third Circuit for
leave to appeal the class certification decision.
Schering-Ploughs petition was granted on December 10,
2008. On December 21, 2009, the Third Circuit vacated the
District Courts order and remanded the case for further
proceedings consistent with the courts ruling.
K-DUR
Antitrust Litigation
In June 1997 and January 1998, Schering-Plough settled patent
litigation with Upsher-Smith, Inc. (Upsher-Smith)
and ESI Lederle, Inc. (Lederle), respectively,
relating to generic versions of K-DUR, Schering-Ploughs
long-acting potassium chloride product supplement used by
cardiac patients, for which Lederle and
Upsher-Smith
had filed Abbreviated New Drug Applications. Following the
commencement of an administrative proceeding by the United
States Federal Trade Commission (the FTC) alleging
anti-competitive effects from those settlements (which has been
resolved in Schering-Ploughs favor), alleged class action
suits were filed in federal and state courts on behalf of direct
and indirect purchasers of K-DUR against Schering-Plough,
Upsher-Smith and Lederle. These suits claim violations of
federal and state antitrust laws, as well as other state
statutory and common law causes of action. These suits seek
unspecified damages. In February 2009, a special master
recommended that the U.S. District Court for the District
of New Jersey dismiss the class action lawsuits on summary
judgment. The U.S. District Court judge has not yet ruled
on the recommendation.
155
Third-party
Payor Actions
As discussed above, in July 2004, in connection with the
settlement of an investigation with the DOJ and the
U.S. Attorneys Office for the Eastern District of
Pennsylvania, Schering-Plough entered into a five-year CIA. The
CIA was amended in August 2006 in connection with the
$435 million settlement of an investigation by the State of
Massachusetts involving certain of Schering-Ploughs sales,
marketing and clinical trial practices and programs
(Massachusetts Investigation). Several purported
class action litigations have been filed following the
announcement of the settlement of the Massachusetts
Investigation. Plaintiffs in these actions seek damages on
behalf of third-party payors resulting from the allegations of
off-label promotion and improper payments to physicians that
were at issue in the Massachusetts Investigation. The actions
have been consolidated in a multidistrict litigation in federal
District Court for the District of New Jersey. In July 2009, the
District Court dismissed the consolidated class action complaint
but granted plaintiffs leave to refile. In September 2009,
plaintiffs filed amended complaints, and the Companys
motion to dismiss those complaints is pending.
Vaccine
Litigation
As previously disclosed, Old Merck is a party to individual and
class action product liability lawsuits and claims in the United
States involving pediatric vaccines (e.g., hepatitis B vaccine)
that contained thimerosal, a preservative used in vaccines. As
of December 31, 2009, there were approximately 200
thimerosal related lawsuits pending in which Old Merck is a
defendant, although the vast majority of those lawsuits are not
currently active. Other defendants include other vaccine
manufacturers who produced pediatric vaccines containing
thimerosal as well as manufacturers of thimerosal. In these
actions, the plaintiffs allege, among other things, that they
have suffered neurological injuries as a result of exposure to
thimerosal from pediatric vaccines. There are no cases currently
scheduled for trial. The Company will defend against these
lawsuits; however, it is possible that unfavorable outcomes
could have a material adverse effect on the Companys
financial position, liquidity and results of operations.
Old Merck has been successful in having cases of this type
either dismissed or stayed on the ground that the action is
prohibited under the National Childhood Vaccine Injury Act (the
Vaccine Act). The Vaccine Act prohibits any person
from filing or maintaining a civil action (in state or federal
court) seeking damages against a vaccine manufacturer for
vaccine-related injuries unless a petition is first filed in the
United States Court of Federal Claims (hereinafter the
Vaccine Court). Under the Vaccine Act, before filing
a civil action against a vaccine manufacturer, the petitioner
must either (a) pursue his or her petition to conclusion in
Vaccine Court and then timely file an election to proceed with a
civil action in lieu of accepting the Vaccine Courts
adjudication of the petition or (b) timely exercise a right
to withdraw the petition prior to Vaccine Court adjudication in
accordance with certain statutorily prescribed time periods. Old
Merck is not a party to Vaccine Court proceedings because the
petitions are brought against the United States Department of
Health and Human Services.
The Company is aware that there are approximately 5,000 cases
pending in the Vaccine Court involving allegations that
thimerosal-containing vaccines
and/or the
M-M-R II vaccine cause autism spectrum disorders. Not all
of the thimerosal-containing vaccines involved in the Vaccine
Court proceeding are Company vaccines. The Company is the sole
source of the M-M-R II vaccine domestically. The Special
Masters presiding over the Vaccine Court proceedings held
hearings in three test cases involving the theory that the
combination of M-M-R II vaccine and thimerosal in
vaccines causes autism spectrum disorders. On February 12,
2009, the Special Masters issued decisions in each of those
cases, finding that the theory was unsupported by valid
scientific evidence and that the petitioners in the three cases
were therefore not entitled to compensation. Two of those three
cases are currently on appeal. The Special Masters have held
similar hearings in three different test cases involving the
theory that thimerosal in vaccines alone causes autism spectrum
disorders. Decisions have not been issued in this second set of
test cases. The Special Masters had previously indicated that
they would hold similar hearings involving the theory that
M-M-R II alone causes autism spectrum disorders, but they
have stated that they no longer intend to do so. The Vaccine
Court has indicated that it intends to use the evidence
presented at these test case hearings to guide the adjudication
of the remaining autism spectrum disorder cases.
156
Patent
Litigation
From time to time, generic manufacturers of pharmaceutical
products file ANDAs with the FDA seeking to market generic
forms of the Companys products prior to the expiration of
relevant patents owned by the Company. Generic pharmaceutical
manufacturers have submitted ANDAs to the FDA seeking to
market in the United States generic forms of Fosamax, Nexium,
Singulair, Emend and Cancidas, respectively,
prior to the expiration of Old Mercks (and
AstraZenecas in the case of Nexium) patents
concerning these products. In addition, an ANDA has been
submitted to the FDA seeking to market in the United States a
generic form of Zetia and an ANDA has been submitted to
the FDA seeking to market in the United States a generic form of
Vytorin, both prior to the expiration of
Schering-Ploughs patent concerning that product. The
generic companies ANDAs generally include
allegations of non-infringement, invalidity and unenforceability
of the patents. The Company has filed patent infringement suits
in federal court against companies filing ANDAs for
generic alendronate (Fosamax) and montelukast
(Singulair) and AstraZeneca and the Company have filed
patent infringement suits in federal court against companies
filing ANDAs for generic esomeprazole (Nexium).
Also, the Company and Schering-Plough have filed patent
infringement suits in federal court against companies filing
ANDAs for generic versions of ezetimibe (Zetia) and
ezetimibe/simvastatin (Vytorin). Also, Schering Corp.
(Schering), a subsidiary of the Company, has filed
patent infringement suits in federal court against generic
companies filing ANDAs for generic versions of
Temodar, Integrilin, Levitra and
Nasonex. Similar patent challenges exist in certain
foreign jurisdictions. The Company intends to vigorously defend
its patents, which it believes are valid, against infringement
by generic companies attempting to market products prior to the
expiration dates of such patents. As with any litigation, there
can be no assurance of the outcomes, which, if adverse, could
result in significantly shortened periods of exclusivity for
these products.
In February 2007, Schering-Plough received a notice from a
generic company indicating that it had filed an ANDA for
Zetia and that it is challenging the U.S. patents
that are listed for Zetia. Prior to the Merger, the
Company marketed Zetia through a joint venture, MSP
Singapore Company LLC. On March 22, 2007, Schering-Plough
and MSP Singapore Company LLC filed a patent infringement suit
against Glenmark Pharmaceuticals Inc., USA and its parent
corporation (Glenmark). The lawsuit automatically
stays FDA approval of Glenmarks ANDA until October 2010 or
until an adverse court decision, if any, whichever may occur
earlier. The trial in this matter is scheduled to commence on
May 3, 2010.
As previously disclosed, in February 2007, Old Merck received a
notice from Teva Pharmaceuticals, Inc. (Teva), a
generic company, indicating that it had filed an ANDA for
montelukast and that it is challenging the U.S. patent that
is listed for Singulair. On April 2, 2007, Old Merck
filed a patent infringement action against Teva. A trial in this
matter was held in February 2009. On August 19, 2009, the
court issued a decision upholding the validity of Old
Mercks Singulair patent and ordered that
Tevas ANDA could not be approved prior to expiry of Old
Mercks exclusivity rights in August 2012. Teva had
appealed the decision, however, in January 2010, Teva withdrew
its appeal of the trial courts decision upholding the
validity of Old Mercks Singulair patent. In
addition, in May 2009, the United States Patent and Trademark
Office granted a petition by Article One Partners LLC to
reexamine Old Mercks Singulair patent. On
December 15, 2009, the United States Patent and Trademark
Office issued a notice indicating that it will allow the claims
of the Companys Singulair patent. Product
exclusivity is accordingly expected to be maintained until
August 2012.
In May 2005, the Federal Court of Canada Trial Division issued a
decision refusing to bar the approval of generic alendronate on
the grounds that Old Mercks patent for weekly alendronate
was likely invalid. This decision cannot be appealed and generic
alendronate was launched in Canada in June 2005. In July 2005,
Old Merck was sued in the Federal Court of Canada by Apotex
Corp. (Apotex) seeking damages for lost sales of
generic weekly alendronate due to the patent proceeding. In
October 2008, the Federal Court of Canada issued a decision
awarding Apotex its lost profits for its generic alendronate
product for the period of time that it was held off the market
due to Old Mercks lawsuit. In June 2009, the trial court
decision was upheld in part and both companies sought leave to
appeal to the Supreme Court of Canada. In January 2010, the
Supreme Court of Canada declined to hear the appeal, leaving
intact the decision that Apotex is entitled to damages for the
discrete period of time that its market entry was postponed due
to the litigation launched by Old Merck.
157
As previously disclosed, in September 2004, Old Merck appealed a
decision of the Opposition Division of the European Patent
Office (EPO) that revoked the Companys patent
in Europe that covers the once-weekly administration of
alendronate. On March 14, 2006, the Board of Appeal of the
EPO upheld the decision of the Opposition Division revoking the
patent. On March 28, 2007, the EPO issued another patent in
Europe to Old Merck that covers the once-weekly administration
of alendronate. Under its terms, this new patent is effective
until July 2018. Old Merck has sued multiple parties in European
countries asserting its European patent covering once-weekly
dosing of Fosamax. Decisions have been rendered in the
Netherlands and Belgium invalidating the patent in those
countries. Old Merck has appealed these decisions. Oppositions
have been filed in the EPO against this patent. In a hearing
held March
17-19, 2009,
the Opposition Division of the EPO issued an appealable decision
revoking this patent. Old Merck has appealed the decision.
In addition, as previously disclosed, in Japan after a
proceeding was filed challenging the validity of Old
Mercks Japanese patent for the once-weekly administration
of alendronate, the patent office invalidated the patent. The
decision is under appeal.
In October 2008, the U.S. patent for dorzolamide, covering
both Trusopt and Cosopt, expired, after which Old
Merck experienced a significant decline in U.S. sales of
these products. The Company is involved in litigation
proceedings of the corresponding patents in Canada and Great
Britain and Germany. In November 2009, the trial court in Great
Britain issued a decision finding Old Mercks Cosopt
patent invalid. In Canada a trial was held in December 2009
regarding the Companys Canadian Trusopt and
Cosopt patents. The Company is awaiting a decision.
Old Merck and AstraZeneca received notice in October 2005 that
Ranbaxy had filed an ANDA for esomeprazole magnesium. The ANDA
contains Paragraph IV challenges to patents on
Nexium. In November 2005, Old Merck and AstraZeneca sued
Ranbaxy in the U.S. District Court in New Jersey. As
previously disclosed, AstraZeneca, Old Merck and Ranbaxy have
entered into a settlement agreement which provides that Ranbaxy
will not bring its generic esomeprazole product to market in the
United States until May 27, 2014. The Company and
AstraZeneca each received a CID from the FTC in July 2008
regarding the settlement agreement with Ranbaxy. The Company is
cooperating with the FTC in responding to this CID.
Old Merck and AstraZeneca received notice in January 2006 that
IVAX Pharmaceuticals, Inc. (IVAX), subsequently
acquired by Teva, had filed an ANDA for esomeprazole magnesium.
The ANDA contains Paragraph IV challenges to patents on
Nexium. In March 2006, Old Merck and AstraZeneca sued
Teva in the U.S. District Court in New Jersey. On
January 7, 2010, AstraZeneca, Old Merck and Teva/IVAX
entered into a settlement agreement which provides that
Teva/IVAX will not bring its generic esomeprazole product to
market in the United States until May 27, 2014. In
addition, in January 2008, Old Merck and AstraZeneca sued
Dr. Reddys Laboratories
(Dr. Reddys) in the District Court in New
Jersey based on Dr. Reddys filing of an ANDA for
esomeprazole magnesium. The trial, which had been scheduled for
January 2010 with respect to both IVAXs and
Dr. Reddys ANDAs, has been postponed and no new trial
date has been set. Also, Old Merck and AstraZeneca received
notice in December 2008 that Sandoz Inc. (Sandoz)
had filed an ANDA for esomeprazole magnesium. The ANDA contains
Paragraph IV challenges to patents on Nexium. In
January 2009, Old Merck and AstraZeneca sued Sandoz in the
District Court in New Jersey based on Sandozs filing of an
ANDA for esomeprazole magnesium. In addition, Old Merck and
AstraZeneca received notice in September 2009 that Lupin Ltd.
(Lupin) had filed an ANDA for esomeprazole
magnesium. The ANDA contains Paragraph IV challenges to
patents on Nexium. In October 2009, Old Merck and
AstraZeneca sued Lupin in the District Court in New Jersey based
on Lupins filing of an ANDA for esomeprazole magnesium.
In January 2009, Old Merck received notice from Sandoz that it
had filed an ANDA and that it was challenging five Old Merck
patents listed in the FDA Orange Book for Emend. In
February 2009, Old Merck filed a patent infringement suit
against Sandoz. The lawsuit automatically stays FDA approval of
Sandozs ANDA until July 2011 or until an adverse court
decision, if any, whichever may occur earlier. The case is
scheduled to go to trial in December 2010.
In Europe, Old Merck is aware of various companies seeking
registration for generic losartan (the active ingredient for
Cozaar and Hyzaar). Old Merck has patent rights to
losartan via license from E.I. du Pont de Nemours
158
and Company (du Pont). Old Merck and du Pont have
filed patent infringement proceedings against various companies
in Portugal, Spain, Norway, Finland, Belgium, the Netherlands
and Austria.
In October 2009, Old Merck received notice from Teva Parenteral
Medicines (TPM) that it filed an ANDA for
caspofungin acetate and that it was challenging five patents
listed in the FDA Orange Book for Cancidas. On
November 25, 2009, the Company filed a patent infringement
suit against TPM. The lawsuit automatically stays FDA approval
of TPMs ANDA until April 2012 or until an adverse court
decision, if any, whichever may occur earlier.
In November 2009, Schering received notice from Apotex that it
filed an ANDA for mometasone furoate nasal spray and that it was
challenging two patents listed in the FDA Orange Book for
Nasonex. On December 18, 2009, Schering filed a
patent infringement suit against Apotex. The lawsuit
automatically stays FDA approval of Apotexs ANDA until May
2012 or until an adverse court decision, if any, whichever may
occur earlier.
In November 2009, Schering-Plough received notice from Mylan
that it filed an ANDA for ezetimibe/simvastatin and that it was
challenging two patents listed in the FDA Orange Book for
Vytorin. On December 16, 2009, Schering-Plough filed
a patent infringement suit against Mylan. The lawsuit
automatically stays FDA approval of Mylans ANDA until May
2012 or until an adverse court decision, if any, whichever may
occur earlier.
In July 2007, Schering and its licensor, Cancer Research
Technologies, Limited (CRT), received notice from
Barr Laboratories (Barr) (now a subsidiary of Teva)
that Barr had filed an ANDA for Temodar and that it was
challenging CRTs patent for temozolomide. In July 2007,
Schering and CRT filed a patent infringement action against
Barr. In January 2010, the court issued a decision finding the
CRT patent unenforceable on grounds of prosecution laches and
inequitable conduct. Schering and CRT are in the process of
appealing the decision.
In January 2009, Schering and its licensor, Millennium, received
notice from Teva that it filed an ANDA for eptifibatide and that
it was challenging three Millennium patents listed in the FDA
Orange Book for Integrilin. On February 18, 2009,
Schering and Millennium filed patent infringement actions
against Teva. The lawsuit automatically stays FDA approval of
Tevas ANDA until August 2011 or until an adverse court
decision, if any, whichever may occur earlier.
In May 2009, Schering, Bayer Schering Pharma AG, and Bayer
Healthcare Pharmaceuticals received notice from Teva that it
filed an ANDA for vardenofil and that it was challenging
Bayers patent listed in the FDA Orange Book for
Levitra. On June 30, 2009, Schering and Bayer filed
a patent infringement action against Teva. The lawsuit
automatically stays FDA approval of Tevas ANDA until
November 2011 or until an adverse court decision, if any,
whichever may occur earlier.
Legal
Proceedings Related to the Merger
In connection with the Merger, separate class action lawsuits
were brought against Old Merck and Schering-Plough challenging
the Merger and seeking other forms of relief. As previously
disclosed, both lawsuits have been settled pending court
approval.
These settlements, if approved by the court, will resolve and
release all claims that were or could have been brought by any
shareholder of Old Merck or Schering-Plough challenging any
aspect of the proposed merger, including any merger disclosure
claims.
Other
Litigation
French
Matter
Based on a complaint to the French competition authority from a
competitor in France and pursuant to a court order, the French
competition authority has obtained documents from a French
subsidiary of the Company relating to Subutex, one of the
products that the subsidiary markets and sells. Any resolution
of this matter adverse to the French subsidiary could result in
the imposition of civil fines and injunctive or administrative
remedies. On July 17, 2007, the Juge des Libertés et
de la Détention ordered the annulment of the search and
seizure on procedural grounds. On July 19, 2007, the French
authority appealed the order to the French Supreme Court. On
May 20, 2009, the French Supreme Court overturned that
annulment and remanded the case to the Paris Court of Appeal on
the
159
basis that the Juge des Libertés et de la Détention
had not examined each document to assess whether it should have
been seized and whether it had been lawfully seized. The case is
now pending before the Paris Court of Appeal.
In April 2007, the competitor also requested interim relief, a
portion of which was granted by the French competition authority
in December 2007. The interim relief required the Companys
French subsidiary to publish in two specialized newspapers
information including that the generic has the same quantitative
and qualitative composition and the same pharmaceutical form as,
and is substitutable for, Subutex. In February 2008, the
Paris Court of Appeal confirmed the decision of the French
competition authority. In January 2009, the French Supreme Court
confirmed the decision of the French competition authority.
Other
There are various other legal proceedings, principally product
liability and intellectual property suits involving the Company,
that are pending. While it is not feasible to predict the
outcome of such proceedings or the proceedings discussed in this
Note, in the opinion of the Company, all such proceedings are
either adequately covered by insurance or, if not so covered,
should not ultimately result in any liability that would have a
material adverse effect on the financial position, liquidity or
results of operations of the Company, other than proceedings for
which a separate assessment is provided in this Note.
Environmental
Matters
The Company and its subsidiaries are parties to a number of
proceedings brought under the Comprehensive Environmental
Response, Compensation and Liability Act, commonly known as
Superfund, and other federal and state equivalents. These
proceedings seek to require the operators of hazardous waste
disposal facilities, transporters of waste to the sites and
generators of hazardous waste disposed of at the sites to clean
up the sites or to reimburse the government for cleanup costs.
The Company has been made a party to these proceedings as an
alleged generator of waste disposed of at the sites. In each
case, the government alleges that the defendants are jointly and
severally liable for the cleanup costs. Although joint and
several liability is alleged, these proceedings are frequently
resolved so that the allocation of cleanup costs among the
parties more nearly reflects the relative contributions of the
parties to the site situation. The Companys potential
liability varies greatly from site to site. For some sites the
potential liability is de minimis and for others the
final costs of cleanup have not yet been determined. While it is
not feasible to predict the outcome of many of these proceedings
brought by federal or state agencies or private litigants, in
the opinion of the Company, such proceedings should not
ultimately result in any liability which would have a material
adverse effect on the financial position, results of operations,
liquidity or capital resources of the Company. The Company has
taken an active role in identifying and providing for these
costs and such amounts do not include any reduction for
anticipated recoveries of cleanup costs from former site owners
or operators or other recalcitrant potentially responsible
parties.
As previously disclosed, approximately 2,200 plaintiffs have
filed an amended complaint against Old Merck and 12 other
defendants in U.S. District Court, Eastern District of
California asserting claims under the Clean Water Act, the
Resource Conservation and Recovery Act, as well as negligence
and nuisance. The suit seeks damages for personal injury,
diminution of property value, medical monitoring and other
alleged real and personal property damage associated with
groundwater and soil contamination found at the site of a former
Old Merck subsidiary in Merced, California. Old Merck intends to
defend itself against these claims.
In managements opinion, the liabilities for all
environmental matters that are probable and reasonably estimable
have been accrued and totaled $161.8 million and
$89.5 million at December 31, 2009 and 2008,
respectively. These liabilities are undiscounted, do not
consider potential recoveries from other parties and will be
paid out over the periods of remediation for the applicable
sites, which are expected to occur primarily over the next
15 years. Although it is not possible to predict with
certainty the outcome of these matters, or the ultimate costs of
remediation, management does not believe that any reasonably
possible expenditures that may be incurred in excess of the
liabilities accrued should exceed $170.0 million in the
aggregate. Management also does not believe that these
expenditures should result in a material adverse effect on the
Companys financial position, results of operations,
liquidity or capital resources for any year.
160
In accordance with the New Merck certificate of incorporation
there are 6,500,000,000 shares of common stock and
20,000,000 shares of preferred stock authorized. Of the
authorized shares of preferred stock, there is a series of
11,500,000 shares which is designated as 6% mandatory
convertible preferred stock.
6%
Mandatory Convertible Preferred Stock
Prior to the Merger, on August 15, 2007, Schering-Plough
issued 10,000,000 shares of Schering-Plough 6% preferred
stock. In connection with the Merger, holders of the
Schering-Plough 6% preferred stock received 6% preferred stock
(which rights were substantially similar to the rights of the
Schering-Plough 6% preferred stock) in accordance with the New
Merck Restated Certificate of Incorporation. As a result of the
Merger, the 6% preferred stock became subject to the
make-whole acquisition provisions of the preferred
stock effective as of November 3, 2009. During the
make-whole acquisition conversion period that ended on
November 19, 2009, the 6% preferred stock was convertible
at a make-whole conversion rate of 8.2021. For each share of
preferred stock that was converted during this period, the
holder received $86.12 in cash and 4.7302 New Merck common
shares. Holders also received a dividend make-whole payment of
between $10.79 and $10.82 depending on the date of the
conversion. A total of 9,110,423 shares of 6% preferred
stock were converted into 43,093,881 shares of New Merck
common stock and cash payments of approximately
$785 million were made to those holders who converted. In
addition, make-whole dividend payments of $98.5 million
were made to those holders who converted representing the
present value of all remaining future dividend payments from the
conversion date through the mandatory conversion date on
August 13, 2010 using the discount rate as stipulated in
the preferred stock designations.
As of December 31, 2009, 855,422 shares of 6%
preferred stock remained issued and outstanding. These
outstanding shares will automatically convert into common shares
of the Company and cash on August 13, 2010, pursuant to the
provisions of the New Merck Restated Certificate of
Incorporation. The holders may also elect to convert at any time
prior to August 13, 2010. The 6% preferred stock of
$206.6 million at December 31, 2009 has been
classified as a current liability because all conversions will
be settled as a combination of cash and common stock.
Additionally, under certain conditions, the Company may elect to
cause the conversion of all, but not less than all, of the Merck
6% preferred stock then outstanding.
The 6% preferred stock accrues dividends at an annual rate of 6%
on shares outstanding. The dividends are cumulative from the
date of issuance and, to the extent the Company is legally
permitted to pay dividends and the Board of Directors declares a
dividend payable, the Company will pay dividends on each
dividend payment date. The remaining dividend payment dates are
February 15, May 15 and August 13, 2010.
Capital
Stock
A summary of common stock and treasury stock transactions
(shares in millions) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Common
|
|
|
Treasury
|
|
|
Common
|
|
|
Treasury
|
|
|
Common
|
|
|
Treasury
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
|
|
Balance as of January 1
|
|
|
2,983.5
|
|
|
|
875.8
|
|
|
|
2,983.5
|
|
|
|
811.0
|
|
|
|
2,976.2
|
|
|
|
808.4
|
|
Issuances of shares in connection with the Merger
|
|
|
1,054.3
|
|
|
|
64.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances of shares in connection with the acquisition of
NovaCardia, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.3
|
|
|
|
|
|
Other issuances
(1)
|
|
|
8.7
|
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
(4.7
|
)
|
|
|
|
|
|
|
(23.9
|
)
|
Purchases of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69.5
|
|
|
|
|
|
|
|
26.5
|
|
Cancellations of treasury stock
(2)
|
|
|
(484.0
|
)
|
|
|
(484.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31
|
|
|
3,562.5
|
|
|
|
454.3
|
|
|
|
2,983.5
|
|
|
|
875.8
|
|
|
|
2,983.5
|
|
|
|
811.0
|
|
|
|
|
(1)
|
Issuances primarily reflect activity under share-based
compensation plans.
|
(2)
|
Pursuant to the Merger agreement, certain of Old Mercks
treasury shares were cancelled.
|
161
Noncontrolling
Interests
In connection with the 1998 restructuring of AMI, Old Merck
assumed a $2.4 billion par value preferred stock obligation
with a dividend rate of 5% per annum, which is carried by KBI
and included in Noncontrolling interests. While a small
portion of the preferred stock carried by KBI is convertible
into KBI common shares, none of the preferred securities are
convertible into the Companys common shares and,
therefore, are not included as common shares issuable for
purposes of computing Earnings per common share assuming
dilution available to common shareholders (see Note 18).
|
|
14.
|
Share-Based
Compensation Plans
|
The Company has share-based compensation plans under which
employees, non-employee directors and employees of certain of
the Companys equity method investees may be granted
options to purchase shares of Company common stock at the fair
market value at the time of grant. In addition to stock options,
the Company grants performance share units (PSUs)
and restricted stock units (RSUs) to certain
management level employees. These plans were approved by the
Companys shareholders.
As a result of the Merger, the Schering-Plough 2006 Stock
Incentive Plan (Schering-Plough 2006 SIP) was
amended and restated. Share-based compensation instruments
remain available for future grant under the Schering-Plough 2006
SIP to New Merck employees who were employees of Schering-Plough
prior to the Merger. As such, there are outstanding share-based
compensation instruments, as well as share-based compensation
instruments available for future grant, under Old Merck and New
Merck incentive plans.
Also, as a result of the Merger, certain share-based
compensation instruments previously granted under the
Schering-Plough 2006 SIP and other legacy Schering-Plough
incentive plans were exchanged for New Merck replacement awards.
Other awards related to precombination services became payable
in cash. In addition, certain stock options under
Schering-Plough legacy incentive plans contain a
lock-in feature whereby an award holder can elect to
receive a cash payment for those stock options at a fixed amount
based on the price of Schering-Ploughs common stock
60 days prior to the Merger. The liability associated with
this provision was $246.4 million at December 31,
2009. Upon expiration of the exercise period associated with the
lock-in feature, the amount was reclassified from
liabilities to equity. The fair value of replacement awards
attributable to precombination service was $525.2 million
and is included in the calculation of consideration transferred
(see Note 3). A significant portion of the legacy
Schering-Plough awards vested in the opening balance sheet at
the time of the Merger. Those Schering-Plough share-based
compensation instruments that did not immediately vest upon
completion of the Merger were exchanged for New Merck
replacement awards that generally vest on the same basis as the
original grants made under the Schering-Plough legacy incentive
plans and will immediately vest if the employee is terminated by
the Company within two years of the Merger under certain
circumstances. The fair value of New Merck replacement awards
attributed to postcombination services is being recognized as
compensation cost subsequent to the Merger over the requisite
service period of the awards.
At December 31, 2009, 134.0 million shares
collectively were authorized for future grants under the
Companys share-based compensation plans. Prior to the
Merger, employee share-based compensation awards were settled
primarily with treasury shares. Subsequent to the Merger, these
awards are being settled with newly issued shares.
Employee stock options are granted to purchase shares of Company
stock at the fair market value at the time of grant. These
awards generally vest one-third each year over a three-year
period, with a contractual term of
7-10 years.
RSUs are stock awards that are granted to employees and entitle
the holder to shares of common stock as the awards vest, as well
as non-forfeitable dividend equivalents. The fair value of the
stock option and RSU awards is determined and fixed on the grant
date based on the Companys stock price. PSUs are stock
awards where the ultimate number of shares issued will be
contingent on the Companys performance against a pre-set
objective or set of objectives. The fair value of each PSU is
determined on the date of grant based on the Companys
stock price. The fair value of stock option, RSU and PSU
replacement awards was determined and fixed at the time of the
Merger. Over the PSU performance period, the number of shares of
stock that are expected to be issued will be adjusted based on
the probability of achievement of a performance target and final
compensation expense will be recognized
162
based on the ultimate number of shares issued. RSU and PSU
distributions will be in shares of Company stock after the end
of the vesting or performance period, generally three years,
subject to the terms applicable to such awards.
Total pretax share-based compensation cost recorded in 2009,
2008 and 2007 was $415.5 million, $348.0 million and
$330.2 million, respectively, with related income tax
benefits of $132.4 million, $107.5 million and
$104.1 million, respectively.
The Company uses the Black-Scholes option pricing model for
determining the fair value of option grants. In applying this
model, the Company uses both historical data and current market
data to estimate the fair value of its options. The
Black-Scholes model requires several assumptions including
expected dividend yield, risk-free interest rate, volatility,
and term of the options. The expected dividend yield is based on
historical patterns of dividend payments. The risk-free rate is
based on the rate at grant date of zero-coupon
U.S. Treasury Notes with a term equal to the expected term
of the option. Expected volatility is estimated using a blend of
historical and implied volatility. The historical component is
based on historical monthly price changes. The implied
volatility is obtained from market data on the Companys
traded options. The expected life represents the expected amount
of time that options granted are expected to be outstanding,
based on historical and forecasted exercise behavior.
The weighted average fair value of options granted in 2009, 2008
and 2007 was $4.02, $9.80 and $9.51 per option, respectively,
and were determined using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December
31
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Expected dividend yield
|
|
|
6.3
|
%
|
|
|
3.5
|
%
|
|
|
3.4
|
%
|
Risk-free interest rate
|
|
|
2.2
|
%
|
|
|
2.7
|
%
|
|
|
4.4
|
%
|
Expected volatility
|
|
|
33.8
|
%
|
|
|
31.0
|
%
|
|
|
24.6
|
%
|
Expected life (years)
|
|
|
6.1
|
|
|
|
6.1
|
|
|
|
5.7
|
|
|
Summarized information relative to stock option plan activity
(options in thousands) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
of Options
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
|
|
Balance as of January 1, 2009
|
|
|
247,651.3
|
|
|
$
|
51.50
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
34,279.2
|
|
|
|
24.31
|
|
|
|
|
|
|
|
|
|
Replacement awards
|
|
|
66,611.8
|
|
|
|
28.23
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(8,548.1
|
)
|
|
|
21.80
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(26,139.4
|
)
|
|
|
68.10
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2009
|
|
|
313,854.8
|
|
|
$
|
43.02
|
|
|
|
4.95
|
|
|
$
|
1,102.7
|
|
|
Exercisable as of December 31, 2009
|
|
|
235,353.6
|
|
|
$
|
46.48
|
|
|
|
3.90
|
|
|
$
|
531.4
|
|
|
Additional information pertaining to stock option plans is
provided in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December
31
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Total intrinsic value of stock options exercised
|
|
$
|
119.1
|
|
|
$
|
40.3
|
|
|
$
|
301.2
|
|
Fair value of stock options
vested(1)
|
|
$
|
311.2
|
|
|
$
|
259.0
|
|
|
$
|
251.1
|
|
Cash received from the exercise of stock options
|
|
$
|
186.4
|
|
|
$
|
102.3
|
|
|
$
|
898.6
|
|
|
|
|
(1) |
The fair value of stock options vested excludes the fair
value of options that vested as a result of the Merger
attributable to precombination service.
|
163
A summary of nonvested RSU and PSU activity (shares in
thousands) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
|
|
|
PSUs
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Grant Date
|
|
|
Number
|
|
|
Grant Date
|
|
|
|
of Shares
|
|
|
Fair Value
|
|
|
of Shares
|
|
|
Fair Value
|
|
|
|
|
Nonvested as of January 1, 2009
|
|
|
6,292.2
|
|
|
$
|
39.41
|
|
|
|
1,621.4
|
|
|
$
|
41.86
|
|
Granted
|
|
|
2,818.5
|
|
|
|
26.78
|
|
|
|
726.4
|
|
|
|
24.20
|
|
Replacement awards
|
|
|
8,105.6
|
|
|
|
30.67
|
|
|
|
2,049.9
|
|
|
|
30.67
|
|
Vested
|
|
|
(1,896.6
|
)
|
|
|
34.18
|
|
|
|
(1,063.7
|
)
|
|
|
32.10
|
|
Forfeited
|
|
|
(201.0
|
)
|
|
|
36.81
|
|
|
|
(1,011.4
|
)
|
|
|
31.46
|
|
|
|
Nonvested at December 31, 2009
|
|
|
15,118.7
|
|
|
$
|
33.06
|
|
|
|
2,322.6
|
|
|
$
|
35.46
|
|
|
At December 31, 2009, there was $521.8 million of
total pretax unrecognized compensation expense related to
nonvested stock options, RSU and PSU awards which will be
recognized over a weighted average period of 1.5 years. For
segment reporting, share-based compensation costs are
unallocated expenses.
|
|
15.
|
Pension
and Other Postretirement Benefit Plans
|
The Company has defined benefit pension plans covering eligible
employees in the United States and in certain of its
international subsidiaries. Pension benefits in the United
States are based on a formula that considers final average pay
and years of credited service. In addition, the Company provides
medical, dental and life insurance benefits, principally to its
eligible U.S. retirees and similar benefits to their
dependents, through its other postretirement benefit plans. The
Company uses December 31 as the year-end measurement date for
all of its pension plans and other postretirement benefit plans.
The net cost for pension and other postretirement benefit plans
consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
|
|
Pension Benefits
|
|
|
Benefits
|
|
Years Ended December
31
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Service cost
|
|
$
|
398.4
|
|
|
$
|
344.1
|
|
|
$
|
377.2
|
|
|
$
|
75.3
|
|
|
$
|
73.2
|
|
|
$
|
90.8
|
|
Interest cost
|
|
|
449.7
|
|
|
|
414.2
|
|
|
|
379.9
|
|
|
|
108.3
|
|
|
|
113.8
|
|
|
|
107.7
|
|
Expected return on plan assets
|
|
|
(649.2
|
)
|
|
|
(559.4
|
)
|
|
|
(491.4
|
)
|
|
|
(98.0
|
)
|
|
|
(129.0
|
)
|
|
|
(130.5
|
)
|
Net amortization
|
|
|
122.8
|
|
|
|
70.4
|
|
|
|
149.4
|
|
|
|
18.9
|
|
|
|
(22.6
|
)
|
|
|
(16.8
|
)
|
Termination benefits
|
|
|
88.7
|
|
|
|
62.3
|
|
|
|
25.6
|
|
|
|
9.6
|
|
|
|
11.2
|
|
|
|
7.7
|
|
Curtailments
|
|
|
(6.2
|
)
|
|
|
5.7
|
|
|
|
1.1
|
|
|
|
(9.9
|
)
|
|
|
(15.9
|
)
|
|
|
(16.8
|
)
|
Settlements
|
|
|
2.7
|
|
|
|
8.6
|
|
|
|
5.4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Net pension and other postretirement cost
|
|
$
|
406.9
|
|
|
$
|
345.9
|
|
|
$
|
447.2
|
|
|
$
|
104.2
|
|
|
$
|
30.7
|
|
|
$
|
42.1
|
|
|
Net pension and other postretirement benefit cost totaled
$511.1 million in 2009, $376.6 million in 2008 and
$489.3 million in 2007. The increase in 2009 as compared
with 2008 is primarily due to $118.2 million of costs
associated with Schering-Plough benefit plans from the date of
the Merger through December 31, 2009.
The net pension cost attributable to U.S. plans included in
the above table was $288.7 million in 2009,
$226.4 million in 2008 and $302.2 million in 2007.
In connection with restructuring actions (see Note 4),
termination charges were recorded in 2009, 2008 and 2007 on
pension and other postretirement benefit plans related to
expanded eligibility for certain employees exiting Merck. Also,
in connection with these restructuring activities, net
curtailment gains were recorded in 2009 and curtailment losses
were recorded in 2008 and 2007 on pension plans and net
curtailment gains were recorded in 2009, 2008 and 2007 on other
postretirement benefit plans.
164
In addition, settlement losses were recorded in 2009, 2008 and
2007 on certain of its domestic and international pension plans.
Employee benefit plans are an exception to the recognition and
fair value measurement principles in business combinations.
Employee benefit plan obligations are recognized and measured in
accordance with the existing authoritative literature for
accounting for benefit plans rather than at fair value.
Accordingly, the Company remeasured the benefit plans sponsored
by Schering-Plough and recognized an asset or liability for the
funded status of these plans as of the Merger date.
Summarized information about the changes in plan assets and
benefit obligation, the funded status and the amounts recorded
at December 31, 2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Postretirement Benefits
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Fair value of plan assets at January 1
|
|
$
|
5,887.6
|
|
|
$
|
7,385.4
|
|
|
$
|
1,088.4
|
|
|
$
|
1,577.6
|
|
Actual return on plan assets
|
|
|
1,450.2
|
|
|
|
(1,959.4
|
)
|
|
|
311.4
|
|
|
|
(512.0
|
)
|
Company contributions
|
|
|
868.7
|
|
|
|
1,190.8
|
|
|
|
88.8
|
|
|
|
99.5
|
|
Schering-Plough merger
|
|
|
3,041.2
|
|
|
|
-
|
|
|
|
107.2
|
|
|
|
-
|
|
Effects of exchange rate changes
|
|
|
72.9
|
|
|
|
(90.3
|
)
|
|
|
-
|
|
|
|
-
|
|
Benefits paid
|
|
|
(511.0
|
)
|
|
|
(643.2
|
)
|
|
|
(73.2
|
)
|
|
|
(76.7
|
)
|
Other
|
|
|
25.1
|
|
|
|
4.3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Fair value of plan assets at December 31
|
|
$
|
10,834.7
|
|
|
$
|
5,887.6
|
|
|
$
|
1,522.6
|
|
|
$
|
1,088.4
|
|
|
Benefit obligation at January 1
|
|
$
|
7,140.1
|
|
|
$
|
7,049.4
|
|
|
$
|
1,747.3
|
|
|
$
|
1,936.8
|
|
Service cost
|
|
|
398.4
|
|
|
|
344.1
|
|
|
|
75.3
|
|
|
|
73.2
|
|
Interest cost
|
|
|
449.7
|
|
|
|
414.2
|
|
|
|
108.3
|
|
|
|
113.8
|
|
Schering-Plough merger
|
|
|
5,029.7
|
|
|
|
-
|
|
|
|
586.1
|
|
|
|
-
|
|
Actuarial losses (gains)
|
|
|
517.9
|
|
|
|
325.8
|
|
|
|
121.1
|
|
|
|
(129.8
|
)
|
Benefits paid
|
|
|
(511.0
|
)
|
|
|
(643.2
|
)
|
|
|
(73.2
|
)
|
|
|
(76.7
|
)
|
Effects of exchange rate changes
|
|
|
88.2
|
|
|
|
(158.0
|
)
|
|
|
5.9
|
|
|
|
(6.6
|
)
|
Plan amendments
|
|
|
1.8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(180.6
|
)
|
Curtailments
|
|
|
(32.6
|
)
|
|
|
(249.6
|
)
|
|
|
33.7
|
|
|
|
6.0
|
|
Termination benefits
|
|
|
88.7
|
|
|
|
62.3
|
|
|
|
9.6
|
|
|
|
11.2
|
|
Other
|
|
|
12.4
|
|
|
|
(4.9
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
Benefit obligation at December 31
|
|
$
|
13,183.3
|
|
|
$
|
7,140.1
|
|
|
$
|
2,614.1
|
|
|
$
|
1,747.3
|
|
|
Funded status at December 31
|
|
$
|
(2,348.6
|
)
|
|
$
|
(1,252.5
|
)
|
|
$
|
(1,091.5
|
)
|
|
$
|
(658.9
|
)
|
|
Recognized as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
402.0
|
|
|
$
|
142.4
|
|
|
$
|
220.1
|
|
|
$
|
147.7
|
|
Accrued and other current liabilities
|
|
|
(248.7
|
)
|
|
|
(46.8
|
)
|
|
|
(9.2
|
)
|
|
|
(3.4
|
)
|
Deferred income taxes and noncurrent liabilities
|
|
|
(2,501.9
|
)
|
|
|
(1,348.1
|
)
|
|
|
(1,302.4
|
)
|
|
|
(803.2
|
)
|
|
The fair value of U.S. pension plan assets included in the
preceding table was $6.1 billion in 2009 and
$3.5 billion in 2008. The pension projected benefit
obligation of U.S. plans included in this table was
$7.6 billion in 2009 and $4.6 billion in 2008. The
increase in the fair value and the pension projected benefit
obligation of the U.S. plans was primarily related to the
Merger. Approximately 42% of the Companys pension
projected benefit obligation relates to international defined
benefit plans, of which each individual plan is not significant
relative to the total benefit obligation.
165
At December 31, 2009 and 2008, the accumulated benefit
obligation was $10.7 billion and $5.7 billion,
respectively, for all pension plans. At December 31, 2009
and 2008, the accumulated benefit obligation for
U.S. pension plans was $6.0 billion and
$3.4 billion, respectively.
For pension plans with benefit obligations in excess of plan
assets at December 31, 2009 and 2008, the fair value of
plan assets was $4.9 billion and $4.8 billion,
respectively, and the benefit obligation was $7.7 billion
and $6.2 billion, respectively. For those plans with
accumulated benefit obligations in excess of plan assets at
December 31, 2009 and 2008, the fair value of plan assets
was $3.5 billion and $414.5 million, respectively, and
the accumulated benefit obligation was $5.1 billion and
$880.0 million, respectively.
As discussed in Note 2, as of December 31, 2009, the
Company adopted new authoritative guidance issued by the FASB
which revised the disclosure requirements for plan assets of
defined pension and other postretirement plans. This amended
guidance requires disclosure of how investment allocation
decisions are made, the major categories of plan assets, the
inputs and valuation techniques used to measure the fair value
of plan assets, the effect of fair value measurements using
significant unobservable inputs (Level 3) on changes
in plan assets for the period, and significant concentrations of
risk within plan assets.
Entities are required to use a fair value hierarchy which
maximizes the use of observable inputs and minimizes the use of
unobservable inputs when measuring fair value. There are three
levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets
for identical assets or liabilities. The plans
Level 1 assets primarily include registered investment
companies (mutual funds) and equity securities.
Level 2 Observable inputs other than
Level 1 prices, such as quoted prices for similar assets or
liabilities; or other inputs that are observable or can be
corroborated by observable market data for substantially the
full term of the assets or liabilities. The plans
Level 2 assets primarily include investments in
common/collective trusts and certain fixed income investments
such as government and agency securities and corporate
obligations.
Level 3 Unobservable inputs that are
supported by little or no market activity and that are financial
instruments whose values are determined using pricing models,
discounted cash flow methodologies, or similar techniques, as
well as instruments for which the determination of fair value
requires significant judgment or estimation. The plans
Level 3 assets primarily include investments in insurance
contracts and real estate funds which are valued using
methodologies that management understands. The plans
Level 3 investments in insurance contracts are generally
valued using a crediting rate that approximates market returns
and invest in underlying securities whose market values are
unobservable and determined using pricing models, discounted
cash flow methodologies, or similar techniques. The plans
Level 3 investments in real estate are generally valued by
market appraisals which may be infrequent in nature. At
December 31, 2009, $568.2 million, or approximately
5.1%, of the Companys pension investments were categorized
as Level 3 assets.
If the inputs used to measure the financial assets fall within
more than one level described above, the categorization is based
on the lowest level input that is significant to the fair value
measurement of the instrument.
166
The fair values of the Companys pension plan assets at
December 31, 2009 by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
In Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
95.9
|
|
|
$
|
544.1
|
|
|
$
|
-
|
|
|
$
|
640.0
|
|
Securities lending collaterial in short-term investments
|
|
|
-
|
|
|
|
280.5
|
|
|
|
-
|
|
|
|
280.5
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
469.6
|
|
|
|
1,805.5
|
|
|
|
-
|
|
|
|
2,275.1
|
|
U.S. small/mid cap
|
|
|
625.3
|
|
|
|
744.5
|
|
|
|
-
|
|
|
|
1,369.8
|
|
Non-U.S.
developed markets
|
|
|
1,274.2
|
|
|
|
1,077.3
|
|
|
|
-
|
|
|
|
2,351.5
|
|
Emerging markets
|
|
|
93.3
|
|
|
|
449.0
|
|
|
|
-
|
|
|
|
542.3
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government and agency obligations
|
|
|
70.3
|
|
|
|
1,599.7
|
|
|
|
-
|
|
|
|
1,670.0
|
|
Corporate obligations
|
|
|
71.2
|
|
|
|
819.0
|
|
|
|
0.9
|
|
|
|
891.1
|
|
Mortgage and asset backed securities
|
|
|
-
|
|
|
|
287.8
|
|
|
|
3.0
|
|
|
|
290.8
|
|
Other fixed income obligations
|
|
|
-
|
|
|
|
22.6
|
|
|
|
-
|
|
|
|
22.6
|
|
Other types of investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance contracts
|
|
|
-
|
|
|
|
139.2
|
|
|
|
310.0
|
|
|
|
449.2
|
|
Real estate
|
|
|
-
|
|
|
|
8.7
|
|
|
|
190.4
|
|
|
|
199.1
|
|
Derivatives
|
|
|
-
|
|
|
|
70.6
|
|
|
|
-
|
|
|
|
70.6
|
|
Other
|
|
|
-
|
|
|
|
2.2
|
|
|
|
63.9
|
|
|
|
66.1
|
|
|
|
|
|
$
|
2,699.8
|
|
|
$
|
7,850.7
|
|
|
$
|
568.2
|
|
|
$
|
11,118.7
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for the return of collateral for securities loaned
|
|
$
|
-
|
|
|
$
|
280.5
|
|
|
$
|
-
|
|
|
$
|
280.5
|
|
|
The table below provides a summary of the changes in fair value,
including net transfers in
and/or out,
of all financial assets measured at fair value using significant
unobservable inputs (Level 3) during 2009 for the
Companys pension plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual Return on Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relating to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
Assets Still
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
|
|
Balance at
|
|
|
Held at
|
|
|
Relating to
|
|
|
Purchases,
|
|
|
Schering-
|
|
|
Balance at
|
|
|
|
January 1,
|
|
|
December 31,
|
|
|
Assets Sold
|
|
|
Sales,
|
|
|
Plough
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
During 2009
|
|
|
Settlements, Net
|
|
|
Merger
|
|
|
2009
|
|
|
|
|
Insurance Contracts
|
|
$
|
182.0
|
|
|
$
|
19.5
|
|
|
$
|
-
|
|
|
$
|
(18.0
|
)
|
|
$
|
126.5
|
|
|
$
|
310.0
|
|
Real Estate
|
|
|
52.6
|
|
|
|
(9.4
|
)
|
|
|
-
|
|
|
|
(0.3
|
)
|
|
|
147.5
|
|
|
|
190.4
|
|
Other
|
|
|
0.2
|
|
|
|
1.2
|
|
|
|
0.1
|
|
|
|
1.1
|
|
|
|
65.2
|
|
|
|
67.8
|
|
|
|
Total
|
|
$
|
234.8
|
|
|
$
|
11.3
|
|
|
$
|
0.1
|
|
|
$
|
(17.2
|
)
|
|
$
|
339.2
|
|
|
$
|
568.2
|
|
|
167
The fair values of the Companys other postretirement
benefit plan assets at December 31, 2009 by asset category
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
In Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1.7
|
|
|
$
|
58.1
|
|
|
$
|
-
|
|
|
$
|
59.8
|
|
Securites lending collateral in short-term investments
|
|
|
-
|
|
|
|
65.0
|
|
|
|
-
|
|
|
|
65.0
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
25.2
|
|
|
|
436.4
|
|
|
|
-
|
|
|
|
461.6
|
|
U.S. small/mid cap
|
|
|
85.5
|
|
|
|
271.6
|
|
|
|
-
|
|
|
|
357.1
|
|
Non-U.S.
developed markets
|
|
|
187.3
|
|
|
|
95.5
|
|
|
|
-
|
|
|
|
282.8
|
|
Emerging markets
|
|
|
31.2
|
|
|
|
80.7
|
|
|
|
-
|
|
|
|
111.9
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate obligations
|
|
|
1.6
|
|
|
|
137.9
|
|
|
|
-
|
|
|
|
139.5
|
|
Government and agency obligations
|
|
|
4.3
|
|
|
|
66.5
|
|
|
|
-
|
|
|
|
70.8
|
|
Mortgage and asset backed securities
|
|
|
3.4
|
|
|
|
27.8
|
|
|
|
-
|
|
|
|
31.2
|
|
Other fixed income obligations
|
|
|
-
|
|
|
|
6.0
|
|
|
|
-
|
|
|
|
6.0
|
|
|
|
Total investments
|
|
$
|
340.2
|
|
|
$
|
1,245.5
|
|
|
$
|
-
|
|
|
$
|
1,585.7
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for the return of collateral for securities loaned
|
|
$
|
-
|
|
|
$
|
65.0
|
|
|
$
|
-
|
|
|
$
|
65.0
|
|
|
Total pension and other postretirement benefit plan assets
excluded from the fair value hierarchy include short-term
payables and receivables related to the purchase and sale of
investments, respectively.
The Company has established investment guidelines for its
U.S. pension and other postretirement plans to create an
asset allocation that is expected to deliver a rate of return
sufficient to meet the long-term obligation of each plan, given
acceptable level of risk. The target investment portfolio of the
Companys U.S. pension and other postretirement
benefit plans is allocated 45% to 60% in U.S. equities, 20%
to 30% in international equities, 15% to 25% in fixed-income
investments, and up to 8% in cash and other investments. The
portfolios equity weighting is consistent with the
long-term nature of the plans benefit obligations. The
expected annual standard deviation of returns of the target
portfolio, which approximates 13%, reflects both the equity
allocation and the diversification benefits among the asset
classes in which the portfolio invests. For
non-U.S. pension
plans, the targeted investment portfolio varies based on the
duration of pension liabilities and local government rules and
regulations. Although a significant percentage of plan assets
are invested in U.S. equities, concentration risk is
mitigated through the use of strategies that are diversified
within management guidelines.
Contributions to the pension plans and other postretirement
benefit plans during 2010 are expected to be approximately
$950 million and $50 million, respectively.
168
Expected benefit payments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Pension
|
|
|
Postretirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
|
|
2010
|
|
$
|
639.6
|
|
|
$
|
119.3
|
|
2011
|
|
|
521.3
|
|
|
|
127.4
|
|
2012
|
|
|
565.7
|
|
|
|
134.2
|
|
2013
|
|
|
593.1
|
|
|
|
142.7
|
|
2014
|
|
|
617.0
|
|
|
|
151.2
|
|
2015 2019
|
|
|
4,018.4
|
|
|
|
898.6
|
|
|
Expected benefit payments are based on the same assumptions used
to measure the benefit obligations and include estimated future
employee service.
Net loss amounts reflect experience differentials primarily
relating to differences between expected and actual returns on
plan assets as well as the effects of changes in actuarial
assumptions. Net loss amounts in excess of certain thresholds
are amortized into net pension and other postretirement benefit
cost over the average remaining service life of employees. The
following amounts were reflected as components of Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
|
|
Pension Plans
|
|
|
Benefit Plans
|
|
Years Ended December
31
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Net gain (loss) arising during the period
|
|
$
|
302.5
|
|
|
$
|
(2,586.0
|
)
|
|
$
|
269.1
|
|
|
$
|
70.9
|
|
|
$
|
(509.3
|
)
|
|
$
|
(16.5
|
)
|
Prior service (cost) credit arising during the period
|
|
|
(0.5
|
)
|
|
|
10.6
|
|
|
|
21.4
|
|
|
|
(23.5
|
)
|
|
|
157.7
|
|
|
|
(21.2
|
)
|
|
|
|
|
$
|
302.0
|
|
|
$
|
(2,575.4
|
)
|
|
$
|
290.5
|
|
|
$
|
47.4
|
|
|
$
|
(351.6
|
)
|
|
$
|
(37.7
|
)
|
|
Net loss amortization included in benefit cost
|
|
$
|
127.5
|
|
|
$
|
50.8
|
|
|
$
|
139.3
|
|
|
$
|
67.7
|
|
|
$
|
26.1
|
|
|
$
|
26.6
|
|
Prior service cost (credit) amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included in benefit cost
|
|
|
8.7
|
|
|
|
7.6
|
|
|
|
12.1
|
|
|
|
(48.8
|
)
|
|
|
(48.7
|
)
|
|
|
(43.4
|
)
|
|
|
|
|
$
|
136.2
|
|
|
$
|
58.4
|
|
|
$
|
151.4
|
|
|
$
|
18.9
|
|
|
$
|
(22.6
|
)
|
|
$
|
(16.8
|
)
|
|
The estimated net loss and prior service cost (credit) amounts
that will be amortized from AOCI into net pension and
postretirement benefit cost during 2010 are $169.6 million
and $8.7 million, respectively, for pension plans and are
$56.9 million and $(47.2) million, respectively, for
other postretirement benefit plans.
169
The Company reassesses its benefit plan assumptions on a regular
basis. The weighted average assumptions used in determining
pension plan and U.S. pension and other postretirement
benefit plan information are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension and Other
|
|
|
|
|
|
|
Postretirement
|
|
|
|
Pension Plans
|
|
|
Benefit Plans
|
|
December 31
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Net cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.80%
|
|
|
|
5.90%
|
|
|
|
5.35%
|
|
|
|
6.15%
|
|
|
|
6.50%
|
|
|
|
6.00%
|
|
Expected rate of return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on plan assets
|
|
|
7.90%
|
|
|
|
7.65%
|
|
|
|
7.65%
|
|
|
|
8.75%
|
|
|
|
8.75%
|
|
|
|
8.75%
|
|
Salary growth rate
|
|
|
4.30%
|
|
|
|
4.30%
|
|
|
|
4.20%
|
|
|
|
4.50%
|
|
|
|
4.50%
|
|
|
|
4.50%
|
|
|
|
Benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.50%
|
|
|
|
5.75%
|
|
|
|
5.90%
|
|
|
|
5.90%
|
|
|
|
6.20%
|
|
|
|
6.50%
|
|
Salary growth rate
|
|
|
4.15%
|
|
|
|
4.25%
|
|
|
|
4.30%
|
|
|
|
4.50%
|
|
|
|
4.50%
|
|
|
|
4.50%
|
|
|
The 2009 net cost rates in the preceding table include costs
associated with the Schering-Plough benefit plans from the date
of the Merger through December 31, 2009.
The expected rate of return for both the pension and other
postretirement benefit plans represents the average rate of
return to be earned on plan assets over the period the benefits
included in the benefit obligation are to be paid and is
determined on a country basis. In developing the expected rate
of return within each country, long-term historical returns data
is considered as well as actual returns on the plan assets and
other capital markets experience. Using this reference
information, the long-term return expectations for each asset
category and a weighted average expected return for each
countrys target portfolio is developed, according to the
allocation among those investment categories. The expected
portfolio performance reflects the contribution of active
management as appropriate. For 2010, the Companys expected
rate of return will range from 8.0% to 8.75% compared to a range
of 7.50% to 8.75% in 2009 for its U.S. pension and other
postretirement benefit plans.
The health care cost trend rate assumptions for other
postretirement benefit plans are as follows:
|
|
|
|
|
|
|
|
|
December 31
|
|
2009
|
|
|
2008
|
|
|
|
|
Health care cost trend rate assumed for next year
|
|
|
8.6
|
%
|
|
|
9.0
|
%
|
Rate to which the cost trend rate is assumed to decline
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Year that the trend rate reaches the ultimate trend rate
|
|
|
2018
|
|
|
|
2016
|
|
|
A one percentage point change in the health care cost trend rate
would have had the following effects:
|
|
|
|
|
|
|
|
|
|
|
One Percentage
|
|
|
|
Point
|
|
|
|
Increase
|
|
|
Decrease
|
|
|
|
|
Effect on total service and interest cost components
|
|
$
|
33.5
|
|
|
$
|
(26.5
|
)
|
Effect on benefit obligation
|
|
$
|
387.9
|
|
|
$
|
(315.8
|
)
|
|
The Company also maintains defined contribution savings plans in
the United States, including plans assumed in connection with
the Merger. The Company matches a percentage of each
employees contributions consistent with the provisions of
the plan for which the employee is eligible. Total employer
contributions to these plans in 2009, 2008, and 2007 were
$111.5 million, $104.0 million, and
$110.0 million, respectively.
170
|
|
16.
|
Other
(Income) Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December
31
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Interest income
|
|
$
|
(210.2
|
)
|
|
$
|
(631.4
|
)
|
|
$
|
(741.1
|
)
|
Interest expense
|
|
|
458.0
|
|
|
|
251.3
|
|
|
|
384.3
|
|
Exchange (gains) losses
|
|
|
(12.4
|
)
|
|
|
147.4
|
|
|
|
(54.3
|
)
|
Other, net
|
|
|
(10,904.9
|
)
|
|
|
(2,085.4
|
)
|
|
|
335.9
|
|
|
|
|
|
$
|
(10,669.5
|
)
|
|
$
|
(2,318.1
|
)
|
|
$
|
(75.2
|
)
|
|
The decline in interest income in 2009 as compared with 2008 is
primarily the result of lower interest rates and a change in the
investment portfolio mix toward cash and shorter-dated
securities in anticipation of the Merger. The increase in
interest expense in 2009 is largely due to $174 million of
commitment fees and incremental interest expense related to the
financing of the Merger. Included in other, net in 2009 was a
$7.5 billion gain resulting from recognizing Mercks
previously held equity interest in the MSP Partnership at fair
value as a result of obtaining control of the MSP Partnership in
the Merger (see Note 3). Also included in other, net in
2009 was a $3.2 billion gain on the sale of Old
Mercks interest in Merial (see Note 10),
$231 million of investment portfolio recognized net gains,
and an $80 million charge related to the settlement of the
Vioxx third-party payor litigation in the United States.
Included in other, net in 2008 was an aggregate gain on
distribution from AZLP of $2.2 billion (see Note 10),
a gain of $249 million related to the sale of the remaining
worldwide rights to Aggrastat, a $300 million
expense for a contribution to the Merck Company Foundation,
$117 million of investment portfolio recognized net losses
and a $58 million charge related to the resolution of an
investigation into whether Old Merck violated state consumer
protection laws with respect to the sales and marketing of
Vioxx.
The fluctuation in exchange losses (gains) in 2008 from 2007 is
primarily due to the higher cost of foreign currency contracts
due to lower U.S. interest rates and unfavorable impacts of
period-to-period
changes in foreign currency exchange rates on net long or net
short foreign currency positions, considering both net monetary
assets and related foreign currency contracts. The change in
other, net for 2008 primarily reflects an aggregate gain in 2008
from AZLP of $2.2 billion, the impact of a
$671 million charge in 2007 related to the resolution of
certain civil governmental investigations, and a 2008 gain of
$249 million related to the sale of the remaining worldwide
rights to Aggrastat, partially offset by a
$300 million expense for a contribution to the Merck
Company Foundation, higher investment portfolio recognized net
losses of $153 million and a $58 million charge
related to the resolution of an investigation into whether Old
Merck violated consumer protection laws with respect to the
sales and marketing of Vioxx.
Interest paid was $351.4 million in 2009,
$247.0 million in 2008 and $406.4 million in 2007,
respectively, which excludes commitment fees.
171
A reconciliation between the effective tax rate and the
U.S. statutory rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Amount
|
|
|
Tax Rate
|
|
|
Amount
|
|
|
Tax Rate
|
|
|
Amount
|
|
|
Tax Rate
|
|
|
|
|
U.S. statutory rate applied to income before taxes
|
|
$
|
5,352.2
|
|
|
|
35.0
|
%
|
|
$
|
3,476.1
|
|
|
|
35.0
|
%
|
|
$
|
1,222.3
|
|
|
|
35.0
|
%
|
Differential arising from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on equity investments
|
|
|
(2,539.7
|
)
|
|
|
(16.6
|
)
|
|
|
29.0
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
Foreign earnings
|
|
|
(1,189.0
|
)
|
|
|
(7.8
|
)
|
|
|
(1,269.9
|
)
|
|
|
(12.9
|
)
|
|
|
(1,196.0
|
)
|
|
|
(34.3
|
)
|
Tax rate change
|
|
|
(198.0
|
)
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State tax settlements
|
|
|
(108.0
|
)
|
|
|
(0.7
|
)
|
|
|
(191.6
|
)
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
Foreign tax credit utilization
|
|
|
|
|
|
|
|
|
|
|
(192.0
|
)
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
Amortization of purchase accounting adjustments
|
|
|
760.0
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
264.0
|
|
|
|
1.7
|
|
|
|
114.7
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
State taxes
|
|
|
185.1
|
|
|
|
1.2
|
|
|
|
310.9
|
|
|
|
3.2
|
|
|
|
11.6
|
|
|
|
0.3
|
|
In-process research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113.8
|
|
|
|
3.3
|
|
Other
(1)
|
|
|
(259.0
|
)
|
|
|
(1.7
|
)
|
|
|
(277.8
|
)
|
|
|
(2.7
|
)
|
|
|
(56.4
|
)
|
|
|
(1.6
|
)
|
|
|
|
|
$
|
2,267.6
|
|
|
|
14.8
|
%
|
|
$
|
1,999.4
|
|
|
|
20.1
|
%
|
|
$
|
95.3
|
|
|
|
2.7
|
%
|
|
|
|
(1) |
Other includes the tax effect of contingency reserves,
research credits, export incentives and miscellaneous items.
|
The 2007 tax rate reconciliation percentage of (34.3)% for
foreign earnings reflects the change in mix of foreign and
domestic earnings primarily resulting from the
$4.85 billion U.S. Vioxx Settlement Agreement
charge.
Income (loss) before taxes consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December
31
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Domestic
|
|
$
|
5,319.5
|
|
|
$
|
5,210.1
|
|
|
$
|
(2,525.8
|
)
|
Foreign
|
|
|
9,972.3
|
|
|
|
4,721.6
|
|
|
|
6,017.9
|
|
|
|
|
|
$
|
15,291.8
|
|
|
$
|
9,931.7
|
|
|
$
|
3,492.1
|
|
|
Taxes on income consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December
31
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Current provision
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(55.2
|
)
|
|
$
|
1,053.6
|
|
|
$
|
988.1
|
|
Foreign
|
|
|
495.4
|
|
|
|
292.4
|
|
|
|
687.0
|
|
State
|
|
|
7.2
|
|
|
|
123.3
|
|
|
|
202.2
|
|
|
|
|
|
|
447.4
|
|
|
|
1,469.3
|
|
|
|
1,877.3
|
|
|
Deferred provision
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
2,094.7
|
|
|
|
419.0
|
|
|
|
(1,671.5
|
)
|
Foreign
|
|
|
(437.3
|
)
|
|
|
55.8
|
|
|
|
157.2
|
|
State
|
|
|
162.8
|
|
|
|
55.3
|
|
|
|
(267.7
|
)
|
|
|
|
|
|
1,820.2
|
|
|
|
530.1
|
|
|
|
(1,782.0
|
)
|
|
|
|
|
$
|
2,267.6
|
|
|
$
|
1,999.4
|
|
|
$
|
95.3
|
|
|
172
Deferred income taxes at December 31 consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
Other intangibles
|
|
$
|
-
|
|
|
$
|
8,503.6
|
|
|
$
|
-
|
|
|
$
|
124.9
|
|
Inventory related
|
|
|
509.9
|
|
|
|
176.7
|
|
|
|
248.6
|
|
|
|
-
|
|
Accelerated depreciation
|
|
|
46.5
|
|
|
|
1,458.2
|
|
|
|
-
|
|
|
|
1,045.1
|
|
Unremitted foreign earnings
|
|
|
-
|
|
|
|
2,991.1
|
|
|
|
-
|
|
|
|
16.7
|
|
Equity investments
|
|
|
-
|
|
|
|
177.9
|
|
|
|
-
|
|
|
|
75.1
|
|
Pensions and other postretirement benefits
|
|
|
1,345.7
|
|
|
|
103.1
|
|
|
|
796.5
|
|
|
|
129.9
|
|
Compensation related
|
|
|
735.8
|
|
|
|
-
|
|
|
|
347.5
|
|
|
|
-
|
|
Vioxx Litigation reserve
|
|
|
42.0
|
|
|
|
-
|
|
|
|
1,755.1
|
|
|
|
-
|
|
Unrecognized tax benefits
|
|
|
730.0
|
|
|
|
-
|
|
|
|
984.1
|
|
|
|
-
|
|
Net operating losses and other tax credit carryforwards
|
|
|
1,247.3
|
|
|
|
-
|
|
|
|
224.7
|
|
|
|
-
|
|
Other
|
|
|
2,201.1
|
|
|
|
58.4
|
|
|
|
1,012.9
|
|
|
|
95.9
|
|
|
|
Subtotal
|
|
|
6,858.3
|
|
|
|
13,469.0
|
|
|
|
5,369.4
|
|
|
|
1,487.6
|
|
Valuation allowance
|
|
|
(195.6
|
)
|
|
|
|
|
|
|
(94.2
|
)
|
|
|
|
|
|
|
Total deferred taxes
|
|
$
|
6,662.7
|
|
|
$
|
13,469.0
|
|
|
$
|
5,275.2
|
|
|
$
|
1,487.6
|
|
|
|
Net deferred income taxes
|
|
|
|
|
|
$
|
6,806.3
|
|
|
$
|
3,787.6
|
|
|
|
|
|
|
Recognized as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes and other current assets
|
|
$
|
1,657.9
|
|
|
|
|
|
|
$
|
2,436.9
|
|
|
|
|
|
Other assets
|
|
|
500.8
|
|
|
|
|
|
|
|
1,666.7
|
|
|
|
|
|
Income taxes payable
|
|
|
|
|
|
$
|
167.8
|
|
|
|
|
|
|
$
|
3.8
|
|
Deferred income taxes and noncurrent liabilities
|
|
|
|
|
|
|
8,797.2
|
|
|
|
|
|
|
|
312.2
|
|
|
Increases in deferred tax assets relating to pensions and other
postretirement benefits, compensation related, and net operating
losses and other tax credit carryforwards, as well as increases
in deferred tax liabilities relating to other intangibles and
unremitted foreign earnings primarily reflect the impact of
deferred taxes recorded in conjunction with the Merger.
The Company has net operating loss (NOL)
carryforwards in several jurisdictions. As of the
December 31, 2009, the most significant NOL carryforwards
are approximately $668 million in the United States that
will begin to expire in 2024 and $360 million in the
Netherlands that will expire in 2017 if unused. The Company also
has other tax credit carryforwards for U.S. research and
development tax credits, U.S. foreign tax credits and
federal alternative minimum tax (AMT) credit
carryforwards. At December 31, 2009, the Company had
$250 million of research and development credit
carryforwards that will begin to expire in 2022;
$705 million of foreign tax credit carryforwards that will
begin to expire in 2011; and $43 million of AMT credit
carryforwards that have an indefinite life. The valuation
allowance in 2009 primarily relates to various foreign entity
NOL carryforwards resulting primarily from losses generated by
restructuring actions.
Income taxes paid in 2009, 2008 and 2007 were
$957.5 million, $1.8 billion and $3.5 billion,
respectively. Stock option exercises reduced income taxes paid
by $138.4 million in 2007. Stock option exercises did not
have a significant impact on taxes paid in 2009 or 2008.
173
On January 1, 2007, new authoritative guidance issued by
the FASB for the accounting and reporting of uncertain tax
positions was adopted. A reconciliation of the beginning and
ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Balance as of January 1
|
|
$
|
3,665.0
|
|
|
$
|
3,689.5
|
|
|
$
|
5,008.4
|
|
Additions related to current year positions
|
|
|
333.0
|
|
|
|
269.4
|
|
|
|
284.5
|
|
Additions related to prior year positions
|
|
|
48.9
|
|
|
|
64.2
|
|
|
|
187.8
|
|
Additons related to the merger with Schering-Plough
|
|
|
1,176.0
|
|
|
|
-
|
|
|
|
-
|
|
Reductions for tax positions of prior years
|
|
|
(547.4
|
)
|
|
|
(310.5
|
)
|
|
|
(87.0
|
)
|
Settlements
(1)
|
|
|
(331.8
|
)
|
|
|
(38.8
|
)
|
|
|
(1,703.5
|
)
|
Lapse of statute of limitations
|
|
|
(2.6
|
)
|
|
|
(8.8
|
)
|
|
|
(0.7
|
)
|
|
|
Balance as of December 31
|
|
$
|
4,341.1
|
|
|
$
|
3,665.0
|
|
|
$
|
3,689.5
|
|
|
|
|
|
(1) |
|
Reflects the settlement with the
Internal Revenue Service in 2007 discussed
below.
|
If the Company were to recognize the unrecognized tax benefits
of $4.3 billion at December 31, 2009, the income tax
provision would reflect a favorable net impact of
$3.7 billion.
The amount of unrecognized tax benefits will change in the next
12 months due primarily to the anticipated closure of
various tax examinations. The Company estimates that the change
could result in a reduction in unrecognized tax benefits of
approximately $760 million.
Interest and penalties associated with uncertain tax positions
amounted to a (benefit) expense of $(163) million in 2009,
$101 million in 2008 and $270 million in 2007.
Liabilities for accrued interest and penalties were
$1.4 billion and $1.7 billion as of December 31,
2009 and 2008, respectively.
As previously disclosed, the Internal Revenue Service
(IRS) has completed its examination of Old
Mercks tax returns for the years 1993 to 2001. As a result
of the examination, Old Merck made an aggregate payment of
$2.79 billion in February 2007. This payment was offset by
(i) a tax refund of $165 million received in 2007 for
amounts previously paid for these matters and (ii) a
federal tax benefit of approximately $360 million related
to interest included in the payment, resulting in a net cash
cost to Old Merck of approximately $2.3 billion in 2007.
The impact for years subsequent to 2001 for items reviewed as
part of the examination was included in the payment although
those years remain open in all other respects. The closing of
the IRS examination did not have a material impact on Old
Mercks results of operations in 2007 as these amounts had
been previously accrued for.
Old Merck reported the results of the IRS adjustments for the
years 1993 through 2001 to various state tax authorities. This
resulted in additional tax, as well as interest and penalty
payments of $20 million and $9 million, respectively,
in 2008 and $57 million and $67 million, respectively,
in 2007, and an equivalent reduction in the balances of
unrecognized tax benefits, accrued interest and penalties.
In October 2001, IRS auditors asserted that two interest rate
swaps that Schering-Plough entered into with an unrelated party
should be recharacterized as loans from affiliated companies,
resulting in additional tax liability for the 1991 and 1992 tax
years. In September 2004, Schering-Plough made payments to the
IRS in the amount of $194 million for income taxes and
$279 million for interest. Schering-Plough filed refund
claims for the taxes and interest with the IRS in December 2004.
Following the IRSs denial of Schering-Ploughs claims
for a refund, Schering-Plough filed suit in May 2005 in the
U.S. District Court for the District of New Jersey for
refund of the full amount of taxes and interest.
Schering-Ploughs tax reserves were adequate to cover the
above mentioned payments. A decision in favor of the government
was announced in August 2009. Schering-Plough has filed a motion
for a retrial and if that motion in not granted, Schering-Plough
intends to file an appeal to the
3rd
circuit.
As previously disclosed, in October 2006, the Canada Revenue
Agency (CRA) issued Old Merck a notice of
reassessment containing adjustments related to certain
intercompany pricing matters. In February 2009, Old Merck and
the CRA negotiated a settlement agreement in regard to these
matters. In accordance with the settlement, Old Merck paid an
additional tax of approximately $300 million
(U.S. dollars) and interest of approximately
$360 million (U.S. dollars) with no additional amounts
or penalties due on this assessment. The settlement was
accounted for in the first quarter of 2009. Old Merck had
previously established reserves for these
174
matters. A significant portion of the taxes paid is expected to
be creditable for U.S. tax purposes. The resolution of
these matters did not have a material effect on Old Mercks
financial position or liquidity, other than with respect to the
associated collateral as discussed below.
In addition, in July 2007 and November 2008, the CRA proposed
additional adjustments for 1999 and 2000, respectively, relating
to other intercompany pricing matters. The adjustments would
increase Canadian tax due by approximately $312 million
(U.S. dollars) plus $314 million (U.S. dollars)
of interest through December 31, 2009. It is possible that
the CRA will propose similar adjustments for later years. The
Company disagrees with the positions taken by the CRA and
believes they are without merit. The Company intends to contest
the assessments through the CRA appeals process and the courts
if necessary. Management believes that resolution of these
matters will not have a material effect on the Companys
financial position or liquidity.
In connection with the appeals process for the matters discussed
above, during 2007, Old Merck pledged collateral to two
financial institutions, one of which provided a guarantee to the
CRA and the other to the Quebec Ministry of Revenue representing
a portion of the tax and interest assessed. As a result of the
settlement noted above, guarantees required to appeal the
disputes were reduced or eliminated and approximately
$960 million of associated collateral was released. Certain
of the cash and investments continue to be collateralized for
guarantees required to appeal other Canadian tax disputes. The
collateral is included in Deferred income taxes and other
current assets and Other assets in the Consolidated
Balance Sheet and totaled approximately $290 million and
$1.2 billion at December 31, 2009 and 2008,
respectively.
The IRS is examining Old Mercks 2002 to 2005 federal
income tax returns. In addition, various state and foreign tax
examinations are in progress. For most of its other significant
tax jurisdictions (both U.S. state and foreign), the
Companys income tax returns are open for examination for
the period 1999 through 2009.
During the second quarter of 2007, the IRS completed its
examination of the Schering-Ploughs
1997-2002
federal income tax returns. The Company is seeking resolution of
an issue raised during this examination through the IRS
administrative appeals process. In July 2007, Schering-Plough
made a payment of $98 million to the IRS pertaining to the
1997-2002
examination. The Companys income tax returns remain open
with the IRS for the
1997-2009
tax years. During 2008, the IRS commenced its examination of the
2003-2006
federal income tax returns. This examination is expected to be
completed in 2010. For most of its other significant tax
jurisdictions (both U.S. state and foreign), the
Companys income tax returns are open for examination for
the period 2002 through 2009.
At December 31, 2009, foreign earnings of
$31.2 billion have been retained indefinitely by subsidiary
companies for reinvestment, therefore no provision has been made
for income taxes that would be payable upon the distribution of
such earnings. In addition, the Company has subsidiaries
operating in Puerto Rico and Singapore under tax incentive
grants that begin to expire in 2013.
As discussed in Note 2, effective January 1, 2009, new
guidance issued by the FASB was adopted which clarifies that
unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or
unpaid) are considered participating securities and shall be
included in the computation of earnings per share pursuant to
the two-class method. The provisions of this new guidance are
retrospective; therefore prior periods have been restated. The
two-class method is an earnings allocation formula that
determines earnings per share for common stock and participating
securities according to dividends declared and participation
rights in undistributed earnings. Under this method, all
earnings (distributed and undistributed) are allocated to common
shares and participating securities based on their respective
rights to receive dividends. RSUs and certain PSUs granted to
certain management level employees (see
Note 14) participate in dividends on the same basis as
common shares and are nonforfeitable by the holder. As a result,
these RSUs and PSUs meet the definition of a participating
security.
175
The calculations of earnings per share under the two-class
method are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Basic Earnings per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to Merck & Co., Inc. common
shareholders
|
|
$
|
12,899.2
|
|
|
$
|
7,808.4
|
|
|
$
|
3,275.4
|
|
Less: Income allocated to participating securities
|
|
|
46.3
|
|
|
|
20.8
|
|
|
|
8.6
|
|
|
|
Net income allocated to common shareholders
|
|
$
|
12,852.9
|
|
|
$
|
7,787.6
|
|
|
$
|
3,266.8
|
|
|
|
Average common shares outstanding
|
|
|
2,268.2
|
|
|
|
2,135.8
|
|
|
|
2,170.5
|
|
|
|
|
|
$
|
5.67
|
|
|
$
|
3.65
|
|
|
$
|
1.51
|
|
|
Earnings per Common Share Assuming Dilution
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to Merck & Co., Inc. common
shareholders
|
|
$
|
12,899.2
|
|
|
$
|
7,808.4
|
|
|
$
|
3,275.4
|
|
Less: Income allocated to participating securities
|
|
|
46.2
|
|
|
|
20.8
|
|
|
|
8.6
|
|
|
|
Net income allocated to common shareholders
|
|
$
|
12,853.0
|
|
|
$
|
7,787.6
|
|
|
$
|
3,266.8
|
|
|
|
Average common shares outstanding
|
|
|
2,268.2
|
|
|
|
2,135.8
|
|
|
|
2,170.5
|
|
Common shares issuable
(1)
|
|
|
5.0
|
|
|
|
6.7
|
|
|
|
19.3
|
|
|
|
Average common shares outstanding assuming dilution
|
|
|
2,273.2
|
|
|
|
2,142.5
|
|
|
|
2,189.8
|
|
|
|
|
|
$
|
5.65
|
|
|
$
|
3.63
|
|
|
$
|
1.49
|
|
|
|
|
|
(1) |
|
Issuable primarily under
share-based compensation plans. |
In 2009, 2008 and 2007, 228.0 million, 201.2 million
and 123.7 million, respectively, of common shares issuable
under share-based compensation plans were excluded from the
computation of earnings per common share assuming dilution
because the effect would have been antidilutive.
176
The components of Other comprehensive income (loss) are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2009
|
|
Pretax
|
|
|
Tax
|
|
|
After Tax
|
|
|
|
|
Net unrealized loss on derivatives
|
|
$
|
(316.1
|
)
|
|
$
|
124.9
|
|
|
$
|
(191.2
|
)
|
Net loss realization
|
|
|
61.2
|
|
|
|
(24.1
|
)
|
|
|
37.1
|
|
|
|
Derivatives
|
|
|
(254.9
|
)
|
|
|
100.8
|
|
|
|
(154.1
|
)
|
|
|
Net unrealized gain on investments
|
|
|
208.3
|
|
|
|
(31.2
|
)
|
|
|
177.1
|
|
Net gain realization
|
|
|
(230.5
|
)
|
|
|
23.6
|
|
|
|
(206.9
|
)
|
|
|
Investments
|
|
|
(22.2
|
)
|
|
|
(7.6
|
)
|
|
|
(29.8
|
)
|
|
|
Benefit plan net (loss) gain and prior service cost (credit),
net of amortization
|
|
|
504.5
|
|
|
|
(219.0
|
)
|
|
|
285.5
|
|
|
|
Cumulative translation adjustment
(1)
|
|
|
(314.2
|
)
|
|
|
-
|
|
|
|
(314.2
|
)
|
|
|
|
|
$
|
(86.8
|
)
|
|
$
|
(125.8
|
)
|
|
$
|
(212.6
|
)
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on derivatives
|
|
$
|
291.0
|
|
|
$
|
(116.0
|
)
|
|
$
|
175.0
|
|
Net gain realization
|
|
|
(38.8
|
)
|
|
|
15.4
|
|
|
|
(23.4
|
)
|
|
|
Derivatives
|
|
|
252.2
|
|
|
|
(100.6
|
)
|
|
|
151.6
|
|
|
|
Net unrealized loss on investments
|
|
|
(212.9
|
)
|
|
|
79.2
|
|
|
|
(133.7
|
)
|
Net loss realization
|
|
|
116.9
|
|
|
|
(63.7
|
)
|
|
|
53.2
|
|
|
|
Investments
|
|
|
(96.0
|
)
|
|
|
15.5
|
|
|
|
(80.5
|
)
|
|
|
Benefit plan net (loss) gain and prior service cost (credit),
net of amortization
|
|
|
(2,891.2
|
)
|
|
|
1,129.5
|
|
|
|
(1,761.7
|
)
|
|
|
Cumulative translation adjustment
(1)
|
|
|
(37.2
|
)
|
|
|
-
|
|
|
|
(37.2
|
)
|
|
|
|
|
$
|
(2,772.2
|
)
|
|
$
|
1,044.4
|
|
|
$
|
(1,727.8
|
)
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on derivatives
|
|
$
|
(50.5
|
)
|
|
$
|
20.7
|
|
|
$
|
(29.8
|
)
|
Net loss realization
|
|
|
43.0
|
|
|
|
(17.6
|
)
|
|
|
25.4
|
|
|
|
Derivatives
|
|
|
(7.5
|
)
|
|
|
3.1
|
|
|
|
(4.4
|
)
|
|
|
Net unrealized gain on investments
|
|
|
106.2
|
|
|
|
(24.5
|
)
|
|
|
81.7
|
|
Net gain realization
|
|
|
(36.1
|
)
|
|
|
12.4
|
|
|
|
(23.7
|
)
|
|
|
Investments
|
|
|
70.1
|
|
|
|
(12.1
|
)
|
|
|
58.0
|
|
|
|
Benefit plan net gain (loss) and prior service cost (credit),
net of amortization
|
|
|
387.4
|
|
|
|
(147.1
|
)
|
|
|
240.3
|
|
|
|
Cumulative translation adjustment
(1)
|
|
|
34.4
|
|
|
|
9.9
|
|
|
|
44.3
|
|
|
|
|
|
$
|
484.4
|
|
|
$
|
(146.2
|
)
|
|
$
|
338.2
|
|
|
|
|
|
(1) |
|
The increase in the cumulative
translation adjustment in 2009 is due to the Merger. Amounts in
2008 and 2007 represent cumulative translation adjustments
related to equity investees. |
The components of Accumulated other comprehensive loss
are as follows:
|
|
|
|
|
|
|
|
|
December 31
|
|
2009
|
|
|
2008
|
|
|
|
|
Net unrealized (loss) gain on derivatives
|
|
$
|
(42.2
|
)
|
|
$
|
111.9
|
|
Net unrealized gain on investments
|
|
|
33.3
|
|
|
|
63.1
|
|
Pension plan net loss
|
|
|
(2,191.3
|
)
|
|
|
(2,440.7
|
)
|
Other postretirement benefit plan net loss
|
|
|
(521.4
|
)
|
|
|
(596.5
|
)
|
Pension plan prior service cost
|
|
|
(20.7
|
)
|
|
|
(26.4
|
)
|
Other postretirement benefit plan prior service cost
|
|
|
264.3
|
|
|
|
309.0
|
|
Cumulative translation adjustment
|
|
|
(288.5
|
)
|
|
|
25.7
|
|
|
|
|
|
$
|
(2,766.5
|
)
|
|
$
|
(2,553.9
|
)
|
|
177
Included in the cumulative translation adjustment are gains of
$78.2 million for the post-Merger period from
euro-denominated debt which have been designated as, and are
effective as, economic hedges of the net investment in a foreign
operation.
The Companys operations are principally managed on a
products basis and are comprised of one reportable segment,
which is the Pharmaceutical segment. The Pharmaceutical segment
includes human health pharmaceutical and vaccine products
marketed either directly by the Company or through joint
ventures. Human health pharmaceutical products consist of
therapeutic and preventive agents, sold by prescription, for the
treatment of human disorders. The Company sells these human
health pharmaceutical products primarily to drug wholesalers and
retailers, hospitals, government agencies and managed health
care providers such as health maintenance organizations,
pharmacy benefit managers and other institutions. Vaccine
products consist of preventive pediatric, adolescent and adult
vaccines, primarily administered at physician offices. The
Company sells these human health vaccines primarily to
physicians, wholesalers, physician distributors and government
entities. A large component of pediatric and adolescent vaccines
is sold to the U.S. Centers for Disease Control and
Prevention Vaccines for Children program, which is funded by the
U.S. government. The Company also has animal health
operations that discover, develop, manufacture and market animal
health products, including vaccines. Additionally, the Company
has consumer health care operations that develop, manufacture
and market OTC, foot care and sun care products in the United
States and Canada. Segment composition reflects certain
managerial changes that have been implemented. Segment
disclosures for prior periods have been recast on a comparable
basis with 2009.
All other includes other non-reportable segments, including
animal health and consumer health care, as well as revenue from
the Companys relationship with AZLP. The accounting
policies for the segments described above are the same as those
described in Note 2. Revenues and profits for these
segments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pharmaceutical
|
|
|
All Other
|
|
|
Total
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues
|
|
$
|
25,236.5
|
|
|
$
|
2,114.0
|
|
|
$
|
27,350.5
|
|
Segment profits
|
|
|
15,714.6
|
|
|
|
1,735.1
|
|
|
|
17,449.7
|
|
Included in segment profits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity income from affiliates
|
|
|
1,330.1
|
|
|
|
751.7
|
|
|
|
2,081.8
|
|
Depreciation and amortization
|
|
|
(92.6
|
)
|
|
|
-
|
|
|
|
(92.6
|
)
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues
|
|
$
|
22,081.3
|
|
|
$
|
1,694.1
|
|
|
$
|
23,775.4
|
|
Segment profits
|
|
|
14,110.3
|
|
|
|
1,691.0
|
|
|
|
15,801.3
|
|
Included in segment profits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity income from affiliates
|
|
|
1,655.8
|
|
|
|
668.4
|
|
|
|
2,324.2
|
|
Depreciation and amortization
|
|
|
(101.4
|
)
|
|
|
-
|
|
|
|
(101.4
|
)
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues
|
|
$
|
22,282.8
|
|
|
$
|
1,848.1
|
|
|
$
|
24,130.9
|
|
Segment profits
|
|
|
14,558.7
|
|
|
|
2,027.6
|
|
|
|
16,586.3
|
|
Included in segment profits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity income from affiliates
|
|
|
1,895.9
|
|
|
|
820.0
|
|
|
|
2,715.9
|
|
Depreciation and amortization
|
|
|
(137.1
|
)
|
|
|
-
|
|
|
|
(137.1
|
)
|
|
Segment profits are comprised of segment revenues less certain
elements of materials and production costs and operating
expenses, including components of equity income (loss) from
affiliates and depreciation and amortization expenses. For
internal management reporting presented to the chief operating
decision maker, Merck does not allocate production costs, other
than standard costs, research and development expenses and
general and administrative expenses, as well as the cost of
financing these activities. Separate divisions maintain
responsibility for monitoring and managing these costs,
including depreciation related to fixed assets utilized by these
divisions and, therefore, they are not included in segment
profits.
178
Sales(1) of
the Companys products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Pharmaceutical:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bone, Respiratory, Immunology and Dermatology
|
|
|
|
|
|
|
|
|
|
|
|
|
Singulair
|
|
$
|
4,659.7
|
|
|
$
|
4,336.9
|
|
|
$
|
4,266.3
|
|
Fosamax
|
|
|
1,099.8
|
|
|
|
1,552.7
|
|
|
|
3,049.0
|
|
Propecia
|
|
|
440.3
|
|
|
|
429.1
|
|
|
|
405.4
|
|
Remicade
|
|
|
430.7
|
|
|
|
-
|
|
|
|
-
|
|
Arcoxia
|
|
|
357.5
|
|
|
|
377.3
|
|
|
|
329.1
|
|
Nasonex
|
|
|
164.9
|
|
|
|
-
|
|
|
|
-
|
|
Clarinex
|
|
|
100.6
|
|
|
|
-
|
|
|
|
-
|
|
Asmanex
|
|
|
37.0
|
|
|
|
-
|
|
|
|
-
|
|
Cardiovascular
|
|
|
|
|
|
|
|
|
|
|
|
|
Vytorin
|
|
|
440.8
|
|
|
|
84.2
|
|
|
|
84.3
|
|
Zetia
|
|
|
402.9
|
|
|
|
6.4
|
|
|
|
6.5
|
|
Integrilin
|
|
|
45.9
|
|
|
|
-
|
|
|
|
-
|
|
Diabetes and Obesity
|
|
|
|
|
|
|
|
|
|
|
|
|
Januvia
|
|
|
1,922.1
|
|
|
|
1,397.1
|
|
|
|
667.5
|
|
Janumet
|
|
|
658.4
|
|
|
|
351.1
|
|
|
|
86.4
|
|
Infectious Disease
|
|
|
|
|
|
|
|
|
|
|
|
|
Isentress
|
|
|
751.8
|
|
|
|
361.1
|
|
|
|
41.3
|
|
Primaxin
|
|
|
688.9
|
|
|
|
760.4
|
|
|
|
763.5
|
|
Cancidas
|
|
|
616.7
|
|
|
|
596.4
|
|
|
|
536.9
|
|
Invanz
|
|
|
292.9
|
|
|
|
265.0
|
|
|
|
190.2
|
|
Crixivan/Stocrin
|
|
|
206.1
|
|
|
|
275.1
|
|
|
|
310.2
|
|
PegIntron
|
|
|
148.7
|
|
|
|
-
|
|
|
|
-
|
|
Avelox
|
|
|
66.2
|
|
|
|
-
|
|
|
|
-
|
|
Rebetol
|
|
|
36.1
|
|
|
|
-
|
|
|
|
-
|
|
Mature Brands
|
|
|
|
|
|
|
|
|
|
|
|
|
Cozaar/Hyzaar
|
|
|
3,560.7
|
|
|
|
3,557.7
|
|
|
|
3,350.1
|
|
Zocor
|
|
|
558.4
|
|
|
|
660.1
|
|
|
|
876.5
|
|
Vasotec/Vaseretic
|
|
|
310.8
|
|
|
|
356.7
|
|
|
|
494.6
|
|
Proscar
|
|
|
290.9
|
|
|
|
323.5
|
|
|
|
411.0
|
|
Claritin Rx
|
|
|
71.1
|
|
|
|
-
|
|
|
|
-
|
|
Proventil
|
|
|
26.2
|
|
|
|
-
|
|
|
|
-
|
|
Neurosciences and Ophthalmology
|
|
|
|
|
|
|
|
|
|
|
|
|
Maxalt
|
|
|
574.5
|
|
|
|
529.2
|
|
|
|
467.3
|
|
Cosopt/Trusopt
|
|
|
503.5
|
|
|
|
781.2
|
|
|
|
786.8
|
|
Remeron
|
|
|
38.5
|
|
|
|
-
|
|
|
|
-
|
|
Subutex/Suboxone
|
|
|
36.3
|
|
|
|
-
|
|
|
|
-
|
|
Oncology
|
|
|
|
|
|
|
|
|
|
|
|
|
Emend
|
|
|
313.1
|
|
|
|
259.7
|
|
|
|
201.7
|
|
Temodar
|
|
|
188.1
|
|
|
|
-
|
|
|
|
-
|
|
Caelyx
|
|
|
46.5
|
|
|
|
-
|
|
|
|
-
|
|
Intron A
|
|
|
38.4
|
|
|
|
-
|
|
|
|
-
|
|
Vaccines(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
ProQuad/M-M-R
II/Varivax
|
|
|
1,368.5
|
|
|
|
1,268.5
|
|
|
|
1,347.1
|
|
Gardasil
|
|
|
1,118.4
|
|
|
|
1,402.8
|
|
|
|
1,480.6
|
|
RotaTeq
|
|
|
521.9
|
|
|
|
664.5
|
|
|
|
524.7
|
|
Pneumovax
|
|
|
345.6
|
|
|
|
249.3
|
|
|
|
233.2
|
|
Zostavax
|
|
|
277.4
|
|
|
|
312.4
|
|
|
|
236.0
|
|
Womens Health and Endocrine
|
|
|
|
|
|
|
|
|
|
|
|
|
Follistim/Puregon
|
|
|
96.5
|
|
|
|
-
|
|
|
|
-
|
|
NuvaRing
|
|
|
88.3
|
|
|
|
-
|
|
|
|
-
|
|
Other
Pharmaceutical(3)
|
|
|
1,294.9
|
|
|
|
922.9
|
|
|
|
1,136.6
|
|
|
|
|
|
|
25,236.5
|
|
|
|
22,081.3
|
|
|
|
22,282.8
|
|
|
|
Other segment
revenues(4)
|
|
|
2,114.0
|
|
|
|
1,694.1
|
|
|
|
1,848.1
|
|
|
|
Total segment revenues
|
|
|
27,350.5
|
|
|
|
23,775.4
|
|
|
|
24,130.9
|
|
|
|
Other
(5)
|
|
|
77.8
|
|
|
|
74.9
|
|
|
|
66.8
|
|
|
|
|
|
$
|
27,428.3
|
|
|
$
|
23,850.3
|
|
|
$
|
24,197.7
|
|
|
|
|
|
(1) |
|
Sales of legacy Schering-Plough
products only reflect results for the post-merger period through
December 31, 2009. Sales of MSP Partnership products
Zetia and Vytorin
represent sales for the post-Merger period through
December 31, 2009. Prior to the Merger, sales of Zetia
and Vytorin were primarily recognized by the MSP
Partnership and the results of Old Mercks interest in the
MSP Partnership were recorded in Equity income from
affiliates. Sales of Zetia and Vytorin in 2008
and 2007 reflect Old Mercks sales of these products in
Latin America which was not part of the MSP Partnership.
|
|
(2) |
|
These amounts do not reflect
sales of vaccines sold in most major European markets through
the Companys joint venture, Sanofi Pasteur MSD, the
results of which are reflected in
Equity income from
affiliates. These amounts do, however, reflect supply sales
to Sanofi Pasteur MSD.
|
|
(3) |
|
Other pharmaceutical primarily
includes sales of other human pharmaceutical products, including
products within the franchises not listed separately. |
|
(4) |
|
Reflects other non-reportable
segments, including animal health and consumer health care, and
revenue from the Companys relationship with AZLP primarily
relating to sales of
Nexium, as well
as Prilosec. Revenue from AZLP was $1.4 billion,
$1.6 billion and $1.7 billion in 2009, 2008 and 2007,
respectively.
|
|
(5) |
|
Other revenues are primarily
comprised of miscellaneous corporate revenues, third-party
manufacturing sales, sales related to divested products or
businesses and other supply sales not included in segment
results. |
179
Consolidated revenues by geographic area where derived are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December
31
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
United States
|
|
$
|
14,401.2
|
|
|
$
|
13,370.5
|
|
|
$
|
14,690.9
|
|
Europe, Middle East and Africa
|
|
|
7,093.1
|
|
|
|
5,773.8
|
|
|
|
5,159.0
|
|
Japan
|
|
|
2,425.6
|
|
|
|
1,823.5
|
|
|
|
1,533.2
|
|
Other
|
|
|
3,508.4
|
|
|
|
2,882.5
|
|
|
|
2,814.6
|
|
|
|
|
|
$
|
27,428.3
|
|
|
$
|
23,850.3
|
|
|
$
|
24,197.7
|
|
|
A reconciliation of total segment profits to consolidated
Income before taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December
31
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Segment profits
|
|
$
|
17,449.7
|
|
|
$
|
15,801.3
|
|
|
$
|
16,586.3
|
|
Other profits
|
|
|
(136.7
|
)
|
|
|
(92.3
|
)
|
|
|
(56.2
|
)
|
Adjustments
|
|
|
372.0
|
|
|
|
424.7
|
|
|
|
367.7
|
|
Unallocated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
210.2
|
|
|
|
631.4
|
|
|
|
741.1
|
|
Interest expense
|
|
|
(458.0
|
)
|
|
|
(251.3
|
)
|
|
|
(384.3
|
)
|
Equity income from affiliates
|
|
|
153.2
|
|
|
|
236.5
|
|
|
|
260.6
|
|
Depreciation and amortization
|
|
|
(1,569.6
|
)
|
|
|
(1,529.8
|
)
|
|
|
(1,851.0
|
)
|
Research and development
|
|
|
(5,845.0
|
)
|
|
|
(4,805.3
|
)
|
|
|
(4,882.8
|
)
|
Amortization of purchase accounting adjustments
|
|
|
(2,285.9
|
)
|
|
|
-
|
|
|
|
-
|
|
Gain related to MSP Partnership
|
|
|
7,529.5
|
|
|
|
-
|
|
|
|
-
|
|
Gain on Merial divestiture
|
|
|
3,162.5
|
|
|
|
-
|
|
|
|
-
|
|
Gain on distribution from AstraZeneca LP
|
|
|
-
|
|
|
|
2,222.7
|
|
|
|
-
|
|
U.S. Vioxx Settlement Agreement charge
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,850.0
|
)
|
Other expenses, net
|
|
|
(3,290.1
|
)
|
|
|
(2,706.2
|
)
|
|
|
(2,439.3
|
)
|
|
|
|
|
$
|
15,291.8
|
|
|
$
|
9,931.7
|
|
|
$
|
3,492.1
|
|
|
Other profits are primarily comprised of miscellaneous corporate
profits as well as operating profits related to divested
products or businesses and other supply sales. Adjustments
represent the elimination of the effect of double counting
certain items of income and expense. Equity income from
affiliates includes taxes paid at the joint venture level and a
portion of equity income that is not reported in segment
profits. Other expenses, net, include expenses from corporate
and manufacturing cost centers and other miscellaneous income
(expense), net.
Property, plant and equipment, net by geographic area where
located is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
United States
|
|
$
|
11,785.2
|
|
|
$
|
9,023.2
|
|
|
$
|
9,249.1
|
|
Europe, Middle East and Africa
|
|
|
2,863.3
|
|
|
|
1,649.0
|
|
|
|
1,625.0
|
|
Japan
|
|
|
283.9
|
|
|
|
362.0
|
|
|
|
459.0
|
|
Other
|
|
|
3,341.1
|
|
|
|
965.4
|
|
|
|
1,012.9
|
|
|
|
|
|
$
|
18,273.5
|
|
|
$
|
11,999.6
|
|
|
$
|
12,346.0
|
|
|
The Company does not disaggregate assets on a products and
services basis for internal management reporting and, therefore,
such information is not presented.
180
Report
of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Merck &
Co., Inc.:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income, of equity and of
cash flows present fairly, in all material respects, the
financial position of Merck & Co., Inc. and its
subsidiaries at December 31, 2009 and December 31,
2008, and the results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America. Also in our
opinion, Merck maintained, in all material respects, effective
internal control over financial reporting as of
December 31, 2009, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Mercks management is responsible for
these financial statements, for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in Managements Report under Item 9A. Our
responsibility is to express opinions on these financial
statements and on Mercks internal control over financial
reporting based on our integrated audits. We conducted our
audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of
material misstatement and whether effective internal control
over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
As discussed in Note 17 to the consolidated financial
statements, Merck changed the manner in which it accounts for
unrecognized tax benefits in 2007.
As discussed in Note 3 and Note 5 to the consolidated
financial statements, Merck changed the manner in which it
accounts for business combinations in 2009.
As discussed in Note 13 to the consolidated financial
statements, Merck changed the manner in which it accounts for
noncontrolling interests in 2009.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 26, 2010
181
Selected quarterly financial data for 2009 and 2008 are
contained in the Condensed Interim Financial Data table below.
Condensed
Interim Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions except per share
amounts)
|
|
4th Q
(1),(2),(3)
|
|
|
3rd Q
(3),(4)
|
|
|
2nd Q
(3),(5)
|
|
|
1st Q
(3),(6)
|
|
|
|
2009
(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
$10,093.5
|
|
|
|
$6,049.7
|
|
|
|
$5,899.9
|
|
|
|
$5,385.2
|
|
Materials and production costs
|
|
|
4,900.8
|
|
|
|
1,430.3
|
|
|
|
1,353.9
|
|
|
|
1,333.8
|
|
Marketing and administrative expenses
|
|
|
3,455.2
|
|
|
|
1,725.5
|
|
|
|
1,729.5
|
|
|
|
1,632.9
|
|
Research and development expenses
|
|
|
1,971.5
|
|
|
|
1,254.0
|
|
|
|
1,395.3
|
|
|
|
1,224.2
|
|
Restructuring costs
|
|
|
1,489.8
|
|
|
|
42.4
|
|
|
|
37.4
|
|
|
|
64.3
|
|
Equity income from affiliates
|
|
|
(373.8
|
)
|
|
|
(688.2
|
)
|
|
|
(587.1
|
)
|
|
|
(585.8
|
)
|
Other (income) expense, net
|
|
|
(7,814.8
|
)
|
|
|
(2,791.1
|
)
|
|
|
3.6
|
|
|
|
(67.2
|
)
|
Income before taxes
|
|
|
6,464.8
|
|
|
|
5,076.8
|
|
|
|
1,967.3
|
|
|
|
1,783.0
|
|
Net income available to common shareholders
|
|
|
6,493.6
|
|
|
|
3,424.3
|
|
|
|
1,556.3
|
|
|
|
1,425.0
|
|
Basic earnings per common share available to common
shareholders
|
|
|
$2.36
|
|
|
|
$1.62
|
|
|
|
$0.74
|
|
|
|
$0.67
|
|
Earnings per common share assuming dilution available to
common shareholders
|
|
|
$2.35
|
|
|
|
$1.61
|
|
|
|
$0.74
|
|
|
|
$0.67
|
|
|
|
2008
(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
$6,032.4
|
|
|
|
$5,943.9
|
|
|
|
$6,051.8
|
|
|
|
$5,822.1
|
|
Materials and production costs
|
|
|
1,470.0
|
|
|
|
1,477.9
|
|
|
|
1,396.5
|
|
|
|
1,238.1
|
|
Marketing and administrative expenses
|
|
|
1,862.1
|
|
|
|
1,730.3
|
|
|
|
1,930.2
|
|
|
|
1,854.4
|
|
Research and development expenses
|
|
|
1,386.6
|
|
|
|
1,171.1
|
|
|
|
1,169.3
|
|
|
|
1,078.3
|
|
Restructuring costs
|
|
|
103.1
|
|
|
|
757.5
|
|
|
|
102.2
|
|
|
|
69.7
|
|
Equity income from affiliates
|
|
|
(720.0
|
)
|
|
|
(665.6
|
)
|
|
|
(523.0
|
)
|
|
|
(652.1
|
)
|
Other (income) expense, net
|
|
|
(26.8
|
)
|
|
|
30.6
|
|
|
|
(112.8
|
)
|
|
|
(2,209.2
|
)
|
Income before taxes
|
|
|
1,957.4
|
|
|
|
1,442.1
|
|
|
|
2,089.4
|
|
|
|
4,442.9
|
|
Net income available to common shareholders
|
|
|
1,644.8
|
|
|
|
1,092.7
|
|
|
|
1,768.3
|
|
|
|
3,302.6
|
|
Basic earnings per common share available to common shareholders
|
|
|
$0.78
|
|
|
|
$0.51
|
|
|
|
$0.82
|
|
|
|
$1.52
|
|
Earnings per common share assuming dilution available to common
shareholders
|
|
|
$0.78
|
|
|
|
$0.51
|
|
|
|
$0.82
|
|
|
|
$1.52
|
|
|
|
|
|
(1) |
|
Amounts for 2009 include a gain on the fair value adjustment
to Mercks previously held interest in the MSP Partnership
(see Note 3). |
|
(2) |
|
The fourth quarter 2008 tax provision reflects the favorable
impact of foreign exchange rate changes and a benefit relating
to the U.S. research and development tax credit. |
|
(3) |
|
Amounts for third and fourth quarter 2009 and fourth quarter
2008 include the impact of additional Vioxx legal defense
reserves (see Note 12). Amounts for third quarter and
second quarter 2009 and first quarter 2008 include the impact of
additional Fosamax legal defense reserves (see
Note 12). |
|
(4) |
|
Amounts for 2009 include a gain on the sale of Old
Mercks interest in Merial Limited (see Note 10). |
|
(5) |
|
Amounts for 2008 reflect the favorable impact of tax
settlements. |
|
(6) |
|
Amounts for 2008 include a gain on distribution from
AstraZeneca LP (see Note 10), a gain related to the sale of
the remaining worldwide rights to Aggrastat, the
realization of foreign tax credits and an expense for a
contribution to the Merck Company Foundation. |
|
(7) |
|
Amounts for 2009 include the impacts of the Merger, including
amortization of intangible assets and merger-related costs (see
Note 3). Amounts for 2009 and 2008 include the impact of
restructuring actions (see Note 4). |
182
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
Prior to the Merger, Old Mercks historical financial
statements were audited by PricewaterhouseCoopers LLP
(PwC) and Schering-Ploughs historical
financial statements were audited by Deloitte & Touche
LLP (Deloitte).
On the closing date of the Merger, the Board of Directors of the
Company dismissed Deloitte as the Companys independent
registered public accounting firm.
The audit reports of Deloitte on the financial statements of
Schering-Plough as of and for each of the two fiscal years ended
December 31, 2008 and 2007 did not contain any adverse
opinion or disclaimer of opinion, and were not qualified or
modified as to uncertainty, audit scope, or accounting
principles. During Schering-Ploughs fiscal years ended
December 31, 2008 and 2007, and during
Schering-Ploughs subsequent interim period from
January 1, 2009 through the closing date of the Merger, the
date of the dismissal of Deloitte, with regard to the financial
statements referred to above, (i) there were no
disagreements with Deloitte on any matter of accounting
principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not
resolved to Deloittes satisfaction, would have caused
Deloitte to make reference to the subject matter of the
disagreement in connection with its report, and (ii) there
were no reportable events of the type described in
Item 304(a)(1)(v) of
Regulation S-K.
|
|
Item 9A.
|
Controls
and Procedures.
|
Management of the Company, with the participation of its Chief
Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the Companys disclosure controls and
procedures. Based on their evaluation, as of the end of the
period covered by this
Form 10-K,
the Companys Chief Executive Officer and Chief Financial
Officer have concluded that the Companys disclosure
controls and procedures (as defined in
Rules 13a-15(e)
or 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
Act)) are effective.
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in
Rule 13a-15(f)
of the Act. Management conducted an evaluation of the
effectiveness of internal control over financial reporting based
on the framework in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Based on this
evaluation, management concluded that internal control over
financial reporting was effective as of December 31, 2009.
The effectiveness of the Companys internal control over
financial reporting as of December 31, 2009, has been
audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report which appears
herein.
In November 2009, Merck & Co, Inc. and Schering-Plough
Corporation completed the planned merger of the two entities.
During the 2009 period leading up to the Merger, there were no
changes to either companys internal controls over
financial reporting that were reasonably likely to have a
material effect. For the post-Merger period, management
maintained the operational integrity of each companys
legacy controls over financial reporting. In addition,
management designed and tested new controls over financial
reporting which supported the accuracy of the financial
presentation of the merged Companys operations. To support
business integration plans, a process for evaluating and
addressing necessary changes to the control environment over
financial reporting was adopted. As Old Merck has previously
disclosed, it is in the process of a multi-year implementation
of an enterprise wide resource planning system. The Company
intends to implement this system in the United States in 2010
and further implementation plans are under revision to address
the combined Companys requirements. In 2009, Old Merck
entities implemented a worldwide employee data management
system. The implementation of this system included modifications
to the design and operation of controls validating components of
employee master data.
Managements
Report
Managements
Responsibility for Financial Statements
Responsibility for the integrity and objectivity of the
Companys financial statements rests with management. The
financial statements report on managements stewardship of
Company assets. These statements
183
are prepared in conformity with generally accepted accounting
principles and, accordingly, include amounts that are based on
managements best estimates and judgments. Nonfinancial
information included in the Annual Report on
Form 10-K
has also been prepared by management and is consistent with the
financial statements.
To assure that financial information is reliable and assets are
safeguarded, management maintains an effective system of
internal controls and procedures, important elements of which
include: careful selection, training and development of
operating and financial managers; an organization that provides
appropriate division of responsibility; and communications aimed
at assuring that Company policies and procedures are understood
throughout the organization. A staff of internal auditors
regularly monitors the adequacy and application of internal
controls on a worldwide basis.
To ensure that personnel continue to understand the system of
internal controls and procedures, and policies concerning good
and prudent business practices, the Company periodically
conducts the Managements Stewardship Program for key
management and financial personnel. This program reinforces the
importance and understanding of internal controls by reviewing
key corporate policies, procedures and systems. In addition, the
Company has compliance programs, including an ethical business
practices program to reinforce the Companys long-standing
commitment to high ethical standards in the conduct of its
business.
The financial statements and other financial information
included in the Annual Report on
Form 10-K
fairly present, in all material respects, the Companys
financial condition, results of operations and cash flows. Our
formal certification to the Securities and Exchange Commission
is included in this
Form 10-K
filing.
Managements
Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in
Rule 13a-15(f)
under the Securities Exchange Act of 1934. The Companys
internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles in the United States of America.
Management conducted an evaluation of the effectiveness of
internal control over financial reporting based on the framework
in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, management
concluded that internal control over financial reporting was
effective as of December 31, 2009.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
The effectiveness of the Companys internal control over
financial reporting as of December 31, 2009, has been
audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report which appears
herein.
|
|
|
|
|
|
|
|
|
|
|
|
Richard T. Clark
Chairman, President
and Chief Executive Officer
|
|
Peter N. Kellogg
Executive Vice President
and Chief Financial Officer
|
|
|
|
|
Item 9B.
|
Other
Information.
|
None.
184
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
The required information on directors and nominees is
incorporated by reference from the discussion under Item 1.
Election of Directors of the Companys Proxy Statement for
the Annual Meeting of Shareholders to be held May 25, 2010.
Information on executive officers is set forth in Part I of
this document on pages 54 through 57.
The required information on compliance with Section 16(a)
of the Securities Exchange Act of 1934 is incorporated by
reference from the discussion under the heading
Section 16(a) Beneficial Ownership Reporting
Compliance of the Companys Proxy Statement for the
Annual Meeting of Shareholders to be held May 25, 2010.
The Company has adopted a Code of Conduct Our
Values and Standards applicable to all employees, including
the principal executive officer, principal financial officer,
and principal accounting officer. The Code of Conduct is
available on the Companys website at
www.merck.com/about/110605_us.pdf. The
Company intends to post on this website any amendments to, or
waivers from, its Code of Conduct. A printed copy will be sent,
without charge, to any stockholder who requests it by writing to
the Chief Ethics Officer of Merck & Co., Inc., One
Merck Drive, Whitehouse Station, NJ
08889-0100.
The required information on the identification of the audit
committee and the audit committee financial expert is
incorporated by reference from the discussion under the heading
Board Committees of the Companys Proxy
Statement for the Annual Meeting of Shareholders to be held
May 25, 2010.
|
|
Item 11.
|
Executive
Compensation.
|
The information required on executive compensation is
incorporated by reference from the discussion under the headings
Compensation Discussion and Analysis, Summary
Compensation Table, All Other Compensation
table, Grants of Plan-Based Awards Table,
Outstanding Equity Awards at Fiscal Year-End Table,
Option Exercises and Stock Vested Table, Retirement
Plan Benefits and related Pension Benefits table,
Nonqualified Deferred Compensation and related tables, Potential
Payments Upon Termination or
Change-in-Control,
including the discussion under the subheadings
Separation, Separation Plan Payment and
Benefit Estimates table, Individual
Agreements, Change in Control and Change
in Control Payment and Benefit Estimates table, as well as
all footnote information to the various tables, of the
Companys Proxy Statement for the Annual Meeting of
Shareholders to be held May 25, 2010.
The required information on director compensation is
incorporated by reference from the discussion under the heading
Director Compensation and related Director
Compensation table and Schedule of Director
Fees table of the Companys Proxy Statement for the
Annual Meeting of Shareholders to be held May 25, 2010.
The required information under the headings Compensation
Committee Interlocks and Insider Participation and
Compensation and Benefits Committee Report is
incorporated by reference from the Companys Proxy
Statement for the Annual Meeting of Shareholders to be held
May 25, 2010.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
Information with respect to securities authorized for issuance
under equity compensation plans is incorporated by reference
from the discussion under the heading Equity Compensation
Plan Information of the Companys Proxy Statement for
the Annual Meeting of Shareholders to be held May 25, 2010.
Information with respect to security ownership of certain
beneficial owners and management is incorporated by reference
from the discussion under the heading Security Ownership
of Certain Beneficial Owners and Management of the
Companys Proxy Statement for the Annual Meeting of
Shareholders to be held May 25, 2010.
185
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The required information on transactions with related persons is
incorporated by reference from the discussion under the heading
Related Person Transactions of the Companys
Proxy Statement for the Annual Meeting of Shareholders to be
held May 25, 2010.
The required information on director independence is
incorporated by reference from the discussion under the heading
Independence of Directors of the Companys
Proxy Statement for the Annual Meeting of Shareholders to be
held May 25, 2010.
|
|
Item 14.
|
Principal
Accountant Fees and Services.
|
The information required for this item is incorporated by
reference from the discussion under Audit Committee
beginning with the caption Pre-Approval Policy for
Services of Independent Registered Public Accounting Firm
through All Other Fees of the Companys Proxy
Statement for the Annual Meeting of Shareholders to be held
May 25, 2010.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules.
|
(a) The following documents are filed as part of this
Form 10-K
Consolidated statement of income for the years
ended December 31, 2009, 2008 and 2007
Consolidated statement of retained earnings
for the years ended December 31, 2009, 2008 and 2007
Consolidated statement of comprehensive income
for the years ended December 31, 2009, 2008 and 2007
Consolidated balance sheet as of
December 31, 2009 and 2008
Consolidated statement of cash flows for the
years ended December 31, 2009, 2008 and 2007
Notes to consolidated financial statements
Report of PricewaterhouseCoopers LLP,
independent registered public accounting firm
186
Partnership Combined Financial Statements
|
|
|
|
2.
|
Financial Statement Schedules
|
|
|
|
|
|
Merck/Schering-Plough Cholesterol Partnership Combined Financial
Statements
|
Merck/Schering-Plough Cholesterol Partnership
Combined Statements of Net Sales and Contractual Expenses
Years Ended December 31,
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Net sales
|
|
$
|
4,561
|
|
|
$
|
5,186
|
|
|
|
Cost of sales
|
|
|
176
|
|
|
|
216
|
|
Selling, general and administrative
|
|
|
1,062
|
|
|
|
1,151
|
|
Research and development
|
|
|
168
|
|
|
|
156
|
|
|
|
|
|
|
1,406
|
|
|
|
1,523
|
|
|
|
Income from operations
|
|
$
|
3,155
|
|
|
$
|
3,663
|
|
|
Merck/Schering-Plough Cholesterol Partnership
Combined Balance Sheet
December 31,
($ in millions)
|
|
|
|
|
|
|
2008
|
|
|
|
|
Assets
|
Cash and cash equivalents
|
|
$
|
204
|
|
Accounts receivable, net
|
|
|
311
|
|
Inventories
|
|
|
79
|
|
Prepaid expenses and other assets
|
|
|
14
|
|
|
|
Total assets
|
|
$
|
608
|
|
|
Liabilities and Partners Capital
|
Rebates payable
|
|
$
|
263
|
|
Payable to Merck, net
|
|
|
81
|
|
Payable to Schering-Plough, net
|
|
|
100
|
|
Accrued expenses and other liabilities
|
|
|
44
|
|
|
|
Total liabilities
|
|
|
488
|
|
Commitments and contingent liabilities (notes 3 and 5)
|
|
|
|
|
Partners capital
|
|
|
120
|
|
|
|
Total liabilities and Partners capital
|
|
$
|
608
|
|
|
The accompanying notes are an integral part of these combined
financial statements.
187
Merck/Schering-Plough Cholesterol Partnership
Combined Statements of Cash Flows
Years Ended December 31,
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
3,155
|
|
|
$
|
3,663
|
|
Adjustments to reconcile income from operations to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
91
|
|
|
|
(109
|
)
|
Inventories
|
|
|
26
|
|
|
|
(18
|
)
|
Prepaid expenses and other assets
|
|
|
2
|
|
|
|
(2
|
)
|
Rebates payable
|
|
|
(114
|
)
|
|
|
106
|
|
Payable to Merck and Schering-Plough, net
|
|
|
(53
|
)
|
|
|
1
|
|
Accrued expenses and other liabilities
|
|
|
(1
|
)
|
|
|
38
|
|
Non-cash charges
|
|
|
68
|
|
|
|
60
|
|
|
|
Net cash provided by operating activities
|
|
|
3,174
|
|
|
|
3,739
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Contributions from Partners
|
|
|
407
|
|
|
|
722
|
|
Distributions to Partners
|
|
|
(3,868
|
)
|
|
|
(4,006
|
)
|
|
|
Net cash used for financing activities
|
|
|
(3,461
|
)
|
|
|
(3,284
|
)
|
|
|
Net increase/(decrease) in cash and cash equivalents
|
|
|
(287
|
)
|
|
|
455
|
|
Cash and cash equivalents, beginning of period
|
|
|
491
|
|
|
|
36
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
204
|
|
|
$
|
491
|
|
|
The accompanying notes are an integral part of these combined
financial statements.
188
Merck/Schering-Plough Cholesterol Partnership
Combined Statements of Partners Capital (Deficit)
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schering-
|
|
|
|
|
|
|
|
|
|
Plough
|
|
|
Merck
|
|
|
Total
|
|
|
|
|
Balance, January 1, 2007
|
|
|
2
|
|
|
|
(83
|
)
|
|
|
(81
|
)
|
Contributions from Partners
|
|
|
276
|
|
|
|
506
|
|
|
|
782
|
|
Income from operations
|
|
|
1,831
|
|
|
|
1,832
|
|
|
|
3,663
|
|
Distributions to Partners
|
|
|
(1,944
|
)
|
|
|
(2,062
|
)
|
|
|
(4,006
|
)
|
|
|
Balance, December 31, 2007
|
|
|
165
|
|
|
|
193
|
|
|
|
358
|
|
Contributions from Partners
|
|
|
143
|
|
|
|
264
|
|
|
|
407
|
|
Income from operations
|
|
|
1,665
|
|
|
|
1,490
|
|
|
|
3,155
|
|
Distributions to Partners
|
|
|
(1,964
|
)
|
|
|
(1,836
|
)
|
|
|
(3,800
|
)
|
|
|
Balance, December 31, 2008
|
|
$
|
9
|
|
|
$
|
111
|
|
|
$
|
120
|
|
|
The accompanying notes are an integral part of these combined
financial statements.
189
Merck/Schering-Plough Cholesterol Partnership
Notes to Combined Financial Statements
|
|
1.
|
Description
of Business and Basis of Presentation
|
Description
of Business
In May 2000, Merck & Co., Inc. (Merck) and
Schering-Plough Corporation (Schering-Plough)
(collectively the Partners) entered into agreements
(the Agreements) to jointly develop and market in
the United States, Schering-Ploughs then investigational
cholesterol absorption inhibitor (CAI) ezetimibe
(marketed today in the United States as ZETIA and as EZETROL in
most other countries) (the Cholesterol
Collaboration) and a fixed-combination tablet containing
the active ingredients montelukast sodium and loratadine (the
Respiratory Collaboration). Montelukast sodium, a
leukotriene receptor antagonist, is sold by Merck as SINGULAIR
and loratadine, an antihistamine, is sold by Schering-Plough as
CLARITIN, both of which are indicated for the relief of symptoms
of allergic rhinitis. The Respiratory Collaboration was
terminated in 2008 in accordance with the applicable agreements,
following the receipt of a not-approvable letter from the
U.S. Food and Drug Administration (FDA) for the
fixed-combination tablet.
The Cholesterol Collaboration is formally referred to as the
Merck/Schering-Plough Cholesterol Partnership (the
Partnership). In December 2001, the Cholesterol
Collaboration Agreements were expanded to include all countries
of the world, except Japan. The Cholesterol Collaboration
Agreements provide for ezetimibe to be developed and marketed in
the following forms:
|
|
|
|
|
Ezetimibe, a once daily CAI, non-statin cholesterol reducing
medicine used alone or co-administered with any statin
drug, and
|
|
|
|
Ezetimibe and simvastatin (Mercks existing ZOCOR statin
cholesterol modifying medicine) combined into one tablet
(marketed today in the United States as VYTORIN and as INEGY in
most other countries).
|
VYTORIN and ZETIA were approved by the FDA in July 2004 and
October 2002, respectively. Together, these products, whether
marketed as VYTORIN, ZETIA or under other trademarks locally,
are referred to as the Cholesterol Products.
Under the Cholesterol Collaboration Agreements, the Partners
established jointly-owned, limited purpose legal entities based
in Canada and the United States through which to carry out the
contractual activities of the Partnership in these countries. An
additional jointly-owned, limited purpose legal entity based in
Singapore was established to own the rights to the intellectual
property and to fund and oversee research and development and
manufacturing activities of the Cholesterol Collaboration. In
all other markets except Latin America, subsidiaries of Merck or
Schering-Plough perform marketing activities for the Cholesterol
Products under contract with the Partnership. These legal entity
and subsidiary operations are collectively referred to as the
Combined Companies. In Latin America, the
Partnership sells directly to Schering-Plough and Mercks
Latin American subsidiaries and Schering-Plough and Merck
compete against one another in the cholesterol market.
Consequently, selling, promotion and distribution activities for
the Cholesterol Products within Latin America are not included
in the Combined Companies.
The Partnership is substantially reliant on the infrastructures
of Merck and Schering-Plough. There are a limited number of
employees of the legal entities of the Partnership and most
activities are performed by employees of either Merck or
Schering-Plough under service agreements with the Partnership.
Profits, which are shared by the Partners under differing
arrangements in countries around the world, are generally
defined as net sales minus (1) agreed upon manufacturing
costs and expenses incurred by the Partners and invoiced to the
Partnership, (2) direct promotion expenses incurred by the
Partners and invoiced to the Partnership, (3) expenses for
a limited specialty sales force in the United States incurred by
the Partners and invoiced to the Partnership, and certain
amounts for sales force physician detailing of the Cholesterol
Products in the United States, Puerto Rico, Canada and Italy,
(4) administration expenses based on a percentage of
Cholesterol Product net sales, which are invoiced by one of the
Partners, and (5) other costs and expenses incurred by the
Partners that were not contemplated when the Cholesterol
Collaboration Agreements were entered into but that were
subsequently agreed to by both Partners.
190
Agreed upon research and development expenses incurred by the
Partners and invoiced to the Partnership are shared equally by
the Partners, after adjusting for special allocations in the
nature of milestones due to one of the Partners.
The Partnerships future results of operations, financial
position, and cash flows may differ materially from the
historical results presented herein because of the risks and
uncertainties related to the Partnerships business. The
Partnerships future operating results and cash flows are
dependent on the Cholesterol Products. Any events that adversely
affect the market for those products could have a significant
impact on the Partnerships results of operations and cash
flows. These events could include loss of patent protection,
increased costs associated with manufacturing, increased
competition from the introduction of new, more effective
treatments, exclusion from government reimbursement programs,
discontinuation or removal from the market of a product for
safety or other reason, and the results of future clinical or
outcomes studies (Note 5).
Basis of
Presentation
The accompanying combined balance sheet and combined statements
of net sales and contractual expenses, cash flows and
partners capital (deficit) include the Cholesterol and
Respiratory Collaboration activities of the Combined Companies.
The Respiratory Collaboration activities primarily pertained to
clinical development work and pre-launch marketing activities.
Spending on respiratory-related activities ceased in 2008
following termination of the collaboration, and is not material
to the income from operations in any of the years presented.
Net sales include the net sales of the Cholesterol Products sold
by the Combined Companies. Expenses include amounts that Merck
and Schering-Plough have contractually agreed to directly
invoice to the Partnership, or are shared through the
contractual profit sharing arrangements between the Partners, as
described above.
The accompanying combined financial statements were prepared for
the purpose of complying with certain rules and regulations of
the Securities and Exchange Commission and reflect the
activities of the Partnership based on the contractual
agreements between the Partners. Such combined financial
statements include only the expenses agreed by the Partners to
be shared or included in the calculation of profits under the
contractual agreements of the Partnership, and are not intended
to be a complete presentation of all of the costs and expenses
that would be incurred by a stand-alone pharmaceutical company
for the discovery, development, manufacture, distribution and
marketing of pharmaceutical products.
Under the Cholesterol Collaboration Agreements, certain
activities are charged to the Partnership by the Partners based
on contractually agreed upon allocations of Partner-incurred
expenses as described below. In the opinion of management, any
allocations of expenses described below are made on a basis that
reasonably reflects the actual level of support provided. All
other expenses are expenses of the Partners and are reflected in
their separate consolidated financial statements.
As described above, the profit sharing arrangements under the
Cholesterol Collaboration Agreements provide that only certain
Partner-incurred costs and expenses be invoiced to the
Partnership by the Partners and therefore become part of the
profit sharing calculation. The following paragraphs list the
typical categories of costs and expenses that are generally
incurred in the discovery, development, manufacture,
distribution and marketing of the Cholesterol Products and
provide a description of how such costs and expenses are treated
in the accompanying combined statements of net sales and
contractual expenses, and in determining profits under the
contractual agreements.
|
|
|
|
|
Manufacturing costs and expenses All contractually
agreed upon manufacturing plant costs and expenses incurred by
the Partners related to the manufacture of the Cholesterol
Products are included as Cost of sales in the accompanying
combined statements of net sales and contractual expenses,
including direct production costs, certain production variances,
expenses for plant services and administration, warehousing,
distribution, materials management, technical services, quality
control, and asset utilization. All other manufacturing costs
and expenses incurred by the Partners not agreed to be included
in the determination of profits under the contractual agreements
are not invoiced to the Partnership and, therefore, are excluded
from the accompanying combined financial statements. These costs
and expenses include, but are not limited to, yield gains and
losses in excess of jointly agreed upon yield rates and
excess/idle capacity of manufacturing plant assets.
|
191
|
|
|
|
|
Direct promotion expenses Direct promotion
represents direct and identifiable out-of-pocket expenses
incurred by the Partners on behalf of the Partnership including,
but not limited to, contractually agreed upon expenses related
to market research, detailing aids, agency fees,
direct-to-consumer advertising, meetings and symposia, trade
programs, launch meetings, special sales force incentive
programs and product samples. All such contractually agreed upon
expenses are included in Selling, general and administrative in
the accompanying combined statements of net sales and
contractual expenses. All other promotion expenses incurred by
the Partners not agreed to be included in the determination of
profits under the contractual agreements are excluded from the
accompanying combined financial statements.
|
|
|
|
Selling expenses In the United States, Canada,
Puerto Rico and other markets outside the United States
(primarily Italy), the general sales forces of the Partners
provide a majority of the physician detail activity at an agreed
upon cost which is included in Selling, general and
administrative in the accompanying combined statements of net
sales and contractual expenses. In addition, the agreed upon
costs of a limited specialty sales force for the United States
market that calls on opinion leaders in the field of cholesterol
medicine are also included in Selling, general and
administrative. All other selling expenses incurred by the
Partners not agreed to be included in the determination of
profits under the contractual agreements are excluded from the
accompanying combined financial statements. These expenses
include the total costs of the general sales forces of the
Partners detailing the Cholesterol Products in most countries
other than the United States, Canada, Puerto Rico and Italy.
|
|
|
|
Administrative expenses Administrative support is
primarily provided by one of the Partners. The contractually
agreed upon expenses for support are determined based on a
percentage of the net sales of the Cholesterol Products. Such
amounts are included in Selling, general and administrative in
the accompanying combined statements of net sales and
contractual expenses. Selected contractually agreed upon direct
costs of employees of the Partners for support services and
out-of-pocket expenses incurred by the Partners on behalf of the
Partnership are also included in Selling, general and
administrative. All other expenses incurred by the Partners not
agreed to be included in the determination of profits under the
contractual agreements are excluded from the accompanying
combined financial statements. These expenses include, but are
not limited to, certain U.S. managed care services,
Partners subsidiary management in most international
markets, and other indirect expenses such as corporate overhead
and interest.
|
|
|
|
Research and development (R&D)
expenses R&D activities are performed by the
Partners and agreed upon costs and expenses are invoiced to the
Partnership. These agreed upon expenses generally represent an
allocation of each Partners estimate of full time
equivalents devoted to pre-clinical and post-marketing clinical
development and regulatory activities and include grants and
other third-party expenses. These contractually agreed upon
allocated costs are included in Research and development in the
accompanying combined statements of net sales and contractual
expenses. All other R&D costs that are incurred by the
Partners but not jointly agreed upon, are excluded from the
accompanying combined financial statements.
|
|
|
2.
|
Summary
of Significant Accounting Policies
|
Principles
of Combination
The accompanying combined balance sheet and combined statements
of net sales and contractual expenses, cash flows and
partners capital (deficit) include the Cholesterol and
Respiratory Collaboration activities of the Combined Companies.
Interpartnership balances and profits are eliminated.
Use of
Estimates
The combined financial statements are prepared based on
contractual agreements between the Partners, as described above,
and include certain amounts that are based on managements
best estimates and judgments. Estimates are used in determining
such items as provisions for sales discounts and returns and
government and managed care rebates. Because of the uncertainty
inherent in such estimates, actual results may differ from these
estimates.
192
Foreign
Currency Translation
The net assets of the Partnerships foreign operations are
translated into U.S. dollars at current exchange rates. The
U.S. dollar effects arising from translating the net assets
of these operations are included in Partners capital, and
are not significant.
Cash and
Cash Equivalents
Cash and cash equivalents primarily consist of highly liquid
money market instruments with original maturities of less than
three months. In 2007, the Partnership changed certain cash
management practices, increasing the amount of cash held by the
Partnership. The Partnerships cash, which is primarily
invested in highly liquid money market instruments, is used to
fund trade obligations coming due in the month and for
distributions to the Partners. Interest income earned on cash
and cash equivalents is reported as a reduction to Selling,
general and administrative in the accompanying combined
statements of net sales and contractual expenses and amounted to
$10 million and $8 million in 2008 and 2007,
respectively.
Inventories
Substantially all inventories are valued at the lower of first
in, first out cost or market.
Intangible
Assets
Intangible assets consist of licenses, trademarks and trade
names owned by the Partnership. These intangible assets were
recorded at the Partners historical cost at the date of
contribution, at a nominal value.
Revenue
Recognition, Rebates, Returns and Allowances
Revenues from sales of Cholesterol Products are recognized when
title and risk of loss pass to the customer. Recognition of
revenue also requires reasonable assurance of collection of
sales proceeds and completion of all performance obligations.
Net sales of VYTORIN/INEGY and ZETIA/EZETROL for the years ended
December 31 are as follows:
|
|
|
|
|
|
|
|
|
$ in millions
|
|
2008
|
|
|
2007
|
|
|
|
|
Vytorin/Inegy
|
|
$
|
2,360
|
|
|
$
|
2,779
|
|
Zetia/Ezetrol
|
|
|
2,201
|
|
|
|
2,407
|
|
|
|
Total
|
|
$
|
4,561
|
|
|
$
|
5,186
|
|
|
In the United States, sales discounts are issued to customers as
direct discounts at the point-of-sale or indirectly through an
intermediary wholesale purchaser, known as chargebacks, or
indirectly in the form of rebates. Additionally, sales are
generally made with a limited right of return under certain
conditions. Sales are recorded net of provisions for sales
discounts and returns for which reliable estimates can be made
at the time of sale. Reserves for chargebacks, discounts and
returns and allowances are reflected as a direct reduction to
accounts receivable and amounted to $34 million at
December 31, 2008. Accruals for rebates are reflected as
Rebates payable, shown separately in the combined balance sheet.
Income
Taxes
Generally, taxable income or losses of the Partnership are
allocated to the Partners and included in each Partners
income tax return. In some states and other jurisdictions, the
Partnership is subject to an income tax, which is included in
the combined financial statements and shared between the
Partners. Except for these income taxes, which are not
significant to the combined financial statements, no provision
has been made for federal, foreign or state income taxes. At
December 31, 2008, the Partnership had $49 million of
deferred tax assets comprised solely of net operating loss
carryforwards (NOLs) generated by a branch of a
legal entity of the Partnership. These NOLs expire between 2009
and 2015, and carry a full valuation allowance. In January 2007,
the Partnership adopted Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48). Adoption of FIN 48
had no impact on the Partnerships financial statements.
Concentrations
of Credit Risk & Segment Information
The Partnerships concentrations of credit risk consist
primarily of accounts receivable. The Partnership does not
normally require collateral or other security to support credit
sales. Bad debts for the years ended
193
December 31, 2008 and 2007 have been minimal. At
December 31, 2008, three customers each represented 25%,
19% and 17% of Accounts receivable, net. The same three
customers each accounted for more than 10% of Net sales as shown
in the table below.
|
|
|
|
|
|
|
|
|
|
|
Percent of Net Sales
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
McKesson Drug Company
|
|
|
24
|
%
|
|
|
28
|
%
|
Cardinal Health, Inc.
|
|
|
21
|
%
|
|
|
26
|
%
|
Amerisourcebergen Corp.
|
|
|
16
|
%
|
|
|
17
|
%
|
The Partnership derived approximately 65% and 75% of its
combined Net sales from the United States in 2008 and 2007,
respectively.
Termination
of the Respiratory Collaboration
The Respiratory Collaboration was terminated in 2008 in
accordance with the applicable agreements, following the receipt
of a not-approvable letter from the FDA for the proposed
montelukast/loratadine combination tablet. As a result of
termination, Schering-Plough received $105 million in
incremental allocations of Partnership profits in 2008. Except
for the allocation of certain profits, termination had no other
impact on the Cholesterol Collaboration.
Inventories at December 31 consisted of:
|
|
|
|
|
$ in millions
|
|
2008
|
|
|
|
|
Finished goods
|
|
$
|
31
|
|
Raw materials and work in process
|
|
|
48
|
|
|
|
Total
|
|
$
|
79
|
|
|
The Partnership has entered into long-term agreements with the
Partners for the supply of active pharmaceutical ingredients
(API) and for the formulation and packaging of the Cholesterol
Products at an agreed upon cost. In connection with these supply
agreements, the Partnership has entered into capacity agreements
under which the Partnership has committed to take a specified
annual minimum supply of API and formulated tablets or pay a
penalty. These capacity agreements are in effect for a period of
seven years following the first full year of production by one
of the Partners and expire beginning in 2009. The Partnership
had no payment obligation under the capacity agreements at
December 31, 2008.
|
|
4.
|
Related
Party Transactions
|
The Partnership receives substantially all of its goods and
services, including pharmaceutical product, manufacturing
services, sales force services, administrative services and
R&D services, from its Partners. The Partnership had a net
payable to Merck and Schering-Plough for these services of
$81 million and $100 million, respectively, at
December 31, 2008.
Selling, general and administrative expense includes
contractually defined costs for physician detailing provided by
Schering-Plough and Merck of $223 million and
$201 million, respectively, in 2008 and $242 million
and $197 million, respectively, in 2007. These expenses are
not necessarily reflective of the actual cost of the
Partners sales efforts in the countries in which the
amounts are contractually defined. Included in these amounts are
$68 million and $60 million in 2008 and 2007,
respectively, relating to contractually defined costs of
physician detailing in Italy. These amounts were not invoiced or
paid by the Partnership to the Partners, but are a component of
the profit sharing calculation.
Cost of sales and selling, general and administrative expense
also include contractually defined costs for distribution and
administrative services provided by Merck and Schering-Plough of
$39 million and $34 million in 2008 and 2007,
respectively. These amounts are not necessarily reflective of
the actual costs for such distribution and administrative
services.
194
The Partnership also sells Cholesterol Products directly to the
Partners, principally to Merck and Schering-Plough affiliates in
Latin America. In Latin America, where the Partners compete with
one another in the cholesterol market, Merck and Schering-Plough
purchase Cholesterol Products from the Partnership and sell
directly to third parties. Sales to the Partners are included in
Net sales at their invoiced price in the accompanying combined
statements of net sales and contractual expenses and totaled
$74 million and $82 million in 2008 and 2007,
respectively.
|
|
5.
|
Legal and
Other Matters
|
The Partnership may become party to claims and legal proceedings
of a nature considered normal to its business, including product
liability and intellectual property. The Partnership records a
liability in connection with such matters when it is probable a
liability has been incurred and an amount can be reasonably
estimated. Legal costs associated with litigation and
investigation activities are expensed as incurred.
The Partnership maintains insurance coverage with deductibles
and self-insurance as management believes is cost beneficial.
The Partnership self-insures all of its risk as it relates to
product liability and accrues an estimate of product liability
claims incurred but not reported.
In February 2007, Schering-Plough received a notice from
Glenmark Pharmaceuticals Inc. USA (Glenmark), a
generic pharmaceutical company, indicating that it had filed an
Abbreviated New Drug Application (ANDA) for a
generic form of ZETIA and that it is challenging the
U.S. patents that are listed for ZETIA. In March 2007,
Schering-Plough and the Partnership filed a patent infringement
suit against Glenmark and its parent company. The lawsuit
automatically stays FDA approval of Glenmarks ANDA until
the earlier of October 2010 or an adverse court decision, if
any. Schering-Plough and the Partnership intend to vigorously
defend its patents, which they believe are valid, against
infringement by generic companies attempting to market products
prior to the expiration dates of such patents. As with any
litigation, there can be no assurances of the outcomes which, if
adverse, could result in significantly shortened periods of
exclusivity.
In January 2008, the Partners announced the results of the
Effect of Combination Ezetimibe and High-Dose Simvastatin vs.
Simvastatin Alone on the Atherosclerotic Process in Patients
with Heterozygous Familial Hypercholesterolemia
(ENHANCE) clinical trial, an imaging trial in
720 patients with heterozygous familial
hypercholesterolemia, a rare genetic condition that causes very
high levels of LDL bad cholesterol and greatly
increases the risk for premature coronary artery disease.
Despite the fact that ezetimibe/simvastatin 10/80 mg (VYTORIN)
significantly lowered LDL bad cholesterol more than
simvastatin 80 mg alone, there was no significant
difference between treatment with ezetimibe/simvastatin and
simvastatin alone on the pre-specified primary endpoint, a
change in the thickness of carotid artery walls over two years
as measured by ultrasound. There also were no significant
differences between treatment with ezetimibe/simvastatin and
simvastatin on the four pre-specified key secondary endpoints:
percent of patients manifesting regression in the average
carotid artery intima-media thickness (CA IMT);
proportion of patients developing new carotid artery plaques
>1.3 mm; changes in the average maximum CA IMT; and changes
in the average CA IMT plus in the average common femoral artery
IMT. In ENHANCE, when compared to simvastatin alone,
ezetimibe/simvastatin significantly lowered LDL bad
cholesterol, as well as triglycerides and C-reactive protein
(CRP). Ezetimibe/simvastatin is not indicated for
the reduction of CRP. In the ENHANCE study, the overall safety
profile of ezetimibe/simvastatin was generally consistent with
the product label. The ENHANCE study was not designed nor
powered to evaluate cardiovascular clinical events. The Improved
Reduction in High-Risk Subjects Presenting with Acute Coronary
Syndrome (IMPROVE-IT) trial is underway and is
designed to provide cardiovascular outcomes data for
ezetimibe/simvastatin in patients with acute coronary syndrome.
No incremental benefit of ezetimibe/simvastatin on
cardiovascular morbidity and mortality over and above that
demonstrated for simvastatin has been established. In March
2008, the results of ENHANCE were reported at the annual
Scientific Session of the American College of Cardiology. In
January 2009, the FDA announced that it had completed its review
of the final clinical study report of ENHANCE. The FDA stated
that the results from ENHANCE did not change its position that
an elevated LDL cholesterol is a risk factor for cardiovascular
disease and that lowering LDL cholesterol reduces the risk for
cardiovascular disease. The FDA also stated that, based on
current available data, patients should not stop taking VYTORIN
or other cholesterol lowering medications and should talk to
their doctor if they have any questions about VYTORIN, ZETIA, or
the ENHANCE trial.
195
On July 21, 2008, efficacy and safety results from the
Simvastatin and Ezetimibe in Aortic Stenosis (SEAS)
study were announced. SEAS was designed to evaluate whether
intensive lipid lowering with VYTORIN 10/40 mg would reduce the
need for aortic valve replacement and the risk of cardiovascular
morbidity and mortality versus placebo in patients with
asymptomatic mild to moderate aortic stenosis who had no
indication for statin therapy. VYTORIN failed to meet its
primary end point for the reduction of major cardiovascular
events. There also was no significant difference in the key
secondary end point of aortic valve events; however, there was a
reduction in the group of patients taking VYTORIN compared to
placebo in the key secondary end point of ischemic
cardiovascular events. VYTORIN is not indicated for the
treatment of aortic stenosis. No incremental benefit of VYTORIN
on cardiovascular morbidity and mortality over and above that
demonstrated for simvastatin has been established. In the study,
patients in the group who took VYTORIN 10/40 mg had a higher
incidence of cancer than the group who took placebo. There was
also a nonsignificant increase in deaths from cancer in patients
in the group who took VYTORIN versus those who took placebo.
Cancer and cancer deaths were distributed across all major organ
systems. The Partners and the Partnership believe the cancer
finding in SEAS is likely to be an anomaly that, taken in light
of all the available data, does not support an association with
VYTORIN. In August 2008, the FDA announced that it was
investigating the results from the SEAS trial. In this
announcement, the FDA also cited interim data from two large
ongoing cardiovascular trials of VYTORIN the Study
of Heart and Renal Protection (SHARP) and the
IMPROVE-IT clinical trials in which there was no
increased risk of cancer with the combination of simvastatin
plus ezetimibe. The SHARP trial is expected to be completed in
2010. The IMPROVE-IT trial is scheduled for completion around
2012. The FDA determined that, as of that time, these findings
in the SEAS trial plus the interim data from ongoing trials
should not prompt patients to stop taking VYTORIN or any other
cholesterol lowering drug.
The Partners and the Partnership are committed to working with
regulatory agencies to further evaluate the available data and
interpretations of those data, and do not believe that changes
in the clinical use of VYTORIN are warranted.
As previously disclosed, since December 2007, Merck and
Schering-Plough have received several letters addressed to both
companies from the House Committee on Energy and Commerce, its
Subcommittee on Oversight and Investigations
(O&I), and the Ranking Minority Member of the
Senate Finance Committee, collectively seeking a combination of
witness interviews, documents and information on a variety of
issues related to the ENHANCE clinical trial, the sale and
promotion of VYTORIN, as well as sales of stock by corporate
officers of Merck and Schering-Plough. In addition, since August
2008, the Partners have received three additional letters from
O&I, including one dated February 19, 2009, seeking
certain information and documents related to the SEAS clinical
trial. Also, as previously disclosed, the Partners and the
Partnership have received subpoenas from the New York and New
Jersey State Attorneys General Offices and a letter from the
Connecticut Attorney General seeking similar information and
documents. In addition, the Partners and the Partnership have
received five Civil Investigative Demands (CIDs)
from a multistate group of 35 State Attorneys General who are
jointly investigating whether violations of state consumer
protection laws occurred when marketing VYTORIN. Finally, in
September 2008, Merck and Schering-Plough received a letter from
the Civil Division of the U.S. Department of Justice
(DOJ) informing them that the DOJ is investigating
whether the companies conduct relating to the promotion of
VYTORIN caused false claims to be submitted to federal health
care programs. The Partners and the Partnership are cooperating
with these investigations and responding to the inquiries. In
addition, the Partners and the Partnership have become aware of
or been served with approximately 145 civil class action
lawsuits alleging common law and state consumer fraud claims in
connection with the Partnerships sale and promotion of
VYTORIN and ZETIA. Certain of those lawsuits allege personal
injuries
and/or seek
medical monitoring. These actions, which have been filed in or
transferred to federal court, are coordinated in a multidistrict
litigation in the U.S. District Court for the District
Court of New Jersey before District Judge Dennis M. Cavanaugh.
The parties are presently engaged in motions practice and
briefing.
While it is not feasible to predict the outcome of the
investigations or lawsuits arising from the ENHANCE and SEAS
clinical trials, unfavorable outcomes could have a significant
adverse effect on the Partnerships financial position,
results of operations and cash flows.
196
INDEPENDENT
AUDITORS REPORT
The Partners of the Merck/Schering-Plough Cholesterol Partnership
We have audited the accompanying combined balance sheet of the
Merck/Schering-Plough Cholesterol Partnership (the
Partnership) as of December 31, 2008, as
described in Note 1, and the related combined statements of
net sales and contractual expenses, partners capital
(deficit) and cash flows, as described in Note 1, for each
of the two years in the period ended December 31, 2008.
These financial statements are the responsibility of the
management of the Partnership, Merck & Co., Inc., and
Schering-Plough Corporation. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards as established by the Auditing Standards
Board (United States) and in accordance with the auditing
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Partnership is not required to have, nor were we engaged to
perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Partnerships internal control over financial
reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
The accompanying statements were prepared for the purpose of
complying with certain rules and regulations of the Securities
and Exchange Commission and, as described in Note 1, are
not intended to be a complete presentation of the financial
position, results of operations or cash flows of all the
activities of a stand-alone pharmaceutical company involved in
the discovery, development, manufacture, distribution and
marketing of pharmaceutical products.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the combined financial
position of the Merck/Schering-Plough Cholesterol Partnership,
as described in Note 1, as of December 31, 2008, and
the combined results of its net sales and contractual expenses
and its combined cash flows, as described in Note 1, for
each of the two years in the period ended December 31,
2008, in conformity with accounting principles generally
accepted in the United States of America.
Deloitte & Touche LLP
Parsippany, New Jersey
February 26, 2009
197
Schedules other than those listed above have been omitted
because they are either not required or not applicable.
Financial statements of other affiliates carried on the equity
basis have been omitted because, considered individually or in
the aggregate, such affiliates do not constitute a significant
subsidiary.
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
2
|
.1
|
|
|
|
Master Restructuring Agreement dated as of June 19, 1998
between Astra AB, Merck & Co., Inc., Astra Merck Inc.,
Astra USA, Inc., KB USA, L.P., Astra Merck Enterprises, Inc.,
KBI Sub Inc., Merck Holdings, Inc. and Astra Pharmaceuticals,
L.P. (Portions of this Exhibit are subject to a request for
confidential treatment filed with the Commission)
Incorporated by reference to Old Mercks
Form 10-Q
Quarterly Report for the period ended June 30, 1998
|
|
2
|
.2
|
|
|
|
Agreement and Plan of Merger by and among Merck & Co.,
Inc., Spinnaker Acquisition Corp., a wholly owned subsidiary of
Merck & Co., Inc. and Sirna Therapeutics, Inc., dated
as of October 30, 2006 Incorporated by
reference to Old Mercks Current Report on
Form 8-K
dated October 30, 2006
|
|
2
|
.3
|
|
|
|
Agreement and Plan of Merger by and among Merck & Co.,
Inc., Schering-Plough Corporation, Blue, Inc. and Purple, Inc.
dated as of March 8, 2009 Incorporated by
reference to Schering-Ploughs Current Report on
Form 8-K
filed March 11, 2009
|
|
2
|
.4
|
|
|
|
Share Purchase Agreement, dated July 29, 2009, by and among
Merck & Co., Inc., Merck SH Inc., Merck
Sharp & Dohme (Holdings) Limited and
sanofi-aventis Incorporated by reference to Old
Mercks Current Report on
Form 8-K
dated July 31, 2009
|
|
3
|
.1
|
|
|
|
Restated Certificate of Incorporation of Merck & Co.,
Inc. (November 3, 2009) Incorporated by
reference to Current Report on
Form 8-K
filed November 4, 2009
|
|
3
|
.2
|
|
|
|
By-Laws of Merck & Co., Inc. (effective
November 3, 2009) Incorporated by reference to
Current Report on
Form 8-K
filed November 4, 2009
|
|
4
|
.1
|
|
|
|
Indenture, dated as of April 1, 1991, between
Merck & Co., Inc. and Morgan Guaranty
Trust Company of New York, as Trustee
Incorporated by reference to Exhibit 4 to Old Mercks
Registration Statement on
Form S-3
(No. 33-39349)
|
|
4
|
.2
|
|
|
|
First Supplemental Indenture between Merck & Co., Inc.
and First Trust of New York, National Association, as
Trustee Incorporated by reference to
Exhibit 4(b) to Old Mercks Registration Statement on
Form S-3
(No. 333-36383)
|
|
4
|
.3
|
|
|
|
Second Supplemental Indenture, dated November 3, 2009,
among Merck Sharp & Dohme Corp., Merck &
Co., Inc. and U.S. Bank Trust National Association, as
Trustee Incorporated by reference to
Exhibit 4.3 to Current Report on
Form 8-K
filed November 4, 2009
|
|
4
|
.4
|
|
|
|
1.875% Notes due 2011 Officers Certificate of the
Company dated June 25, 2009, including form of the 2011
Notes Incorporated by reference to Old Mercks
Current Report on
Form 8-K
dated June 25, 2009
|
|
4
|
.5
|
|
|
|
4.000% Notes due 2015 Officers Certificate of the
Company dated June 25, 2009, including form of the 2015
Notes Incorporated by reference to Old Mercks
Current Report on
Form 8-K
dated June 25, 2009
|
|
4
|
.6
|
|
|
|
5.000% Notes due 2019 Officers Certificate of the
Company dated June 25, 2009, including form of the 2019
Notes Incorporated by reference to Old Mercks
Current Report on
Form 8-K
dated June 25, 2009
|
|
4
|
.7
|
|
|
|
5.850% Notes due 2039 Officers Certificate of the
Company dated June 25, 2009, including form of the 2039
Notes Incorporated by reference to Old Mercks
Current Report on
Form 8-K
dated June 25, 2009
|
|
4
|
.8
|
|
|
|
Indenture, dated November 26, 2003, between Schering-Plough
and The Bank of New York as Trustee Incorporated by
reference to Exhibit 4.1 to Schering-Ploughs Current
Report on
Form 8-K
filed November 28, 2003
|
198
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
4
|
.9
|
|
|
|
First Supplemental Indenture (including Form of Note), dated
November 26, 2003 Incorporated by reference to
Exhibit 4.2 to Schering-Ploughs Current Report on
Form 8-K
filed November 28, 2003
|
|
4
|
.10
|
|
|
|
Second Supplemental Indenture (including Form of Note), dated
November 26, 2003 Incorporated by reference to
Exhibit 4.3 to Schering-Ploughs Current Report on
Form 8-K
filed November 28, 2003
|
|
4
|
.11
|
|
|
|
5.30% Global Senior Note, due 2013 Incorporated by
reference to Exhibit 4(c)(iv) to Schering-Ploughs
Form 10-K
Annual Report for the fiscal year ended December 31, 2003
|
|
4
|
.12
|
|
|
|
6.50% Global Senior Note, due 2033 Incorporated by
reference to Exhibit 4(c)(v) to Schering-Ploughs
Form 10-K
Annual Report for the fiscal year ended December 31, 2003
|
|
4
|
.13
|
|
|
|
Third Supplemental Indenture (including Form of Note), dated
September 17, 2007 Incorporated by reference to
Exhibit 4.1 to Schering-Ploughs Current Report on
Form 8-K
filed September 17, 2007
|
|
4
|
.14
|
|
|
|
Fourth Supplemental Indenture (including Form of Note), dated
October 1, 2007 Incorporated by reference to
Exhibit 4.1 to Schering-Ploughs Current Report on
Form 8-K
filed October 2, 2007
|
|
4
|
.15
|
|
|
|
Fifth Supplemental Indenture, dated November 3, 2009, among
Merck Sharp & Dohme Corp., Merck & Co., Inc.
and The Bank of New York Mellon, as Trustee
Incorporated by reference to Exhibit 4.4 to Current Report
on
Form 8-K
filed November 4, 2009
|
|
*10
|
.1
|
|
|
|
Executive Incentive Plan (as amended effective February 27,
1996) Incorporated by reference to Old Mercks
Form 10-K
Annual Report for the fiscal year ended December 31, 1995
|
|
*10
|
.2
|
|
|
|
Merck Sharp & Dohme Corp. Deferral Program, including
Base Salary Deferral Plan (effective as amended and restated as
of November 3, 2009) Incorporated by reference
to Exhibit 10.15 to Current Report on
Form 8-K
filed November 4, 2009
|
|
*10
|
.3
|
|
|
|
Merck Sharp & Dohme Corp. 1996 Incentive Stock Plan
(amended and restated as of November 3, 2009)
Incorporated by reference to Exhibit 10.10 to Current
Report on
Form 8-K
filed November 4, 2009
|
|
*10
|
.4
|
|
|
|
Merck Sharp & Dohme Corp. 2001 Incentive Stock Plan
(amended and restated as of November 3, 2009)
Incorporated by reference to Exhibit 10.9 to Current Report
on
Form 8-K
filed November 4, 2009
|
|
*10
|
.5
|
|
|
|
Merck Sharp & Dohme Corp. 2004 Incentive Stock Plan
(amended and restated as of November 3, 2009)
Incorporated by reference to Exhibit 10.8 to Current Report
on
Form 8-K
filed November 4, 2009
|
|
*10
|
.6
|
|
|
|
Merck Sharp & Dohme Corp. 2007 Incentive Stock Plan
(effective as amended and restated as of November 3,
2009) Incorporated by reference to Exhibit 10.7
to Current Report on
Form 8-K
filed November 4, 2009
|
|
*10
|
.7
|
|
|
|
Amendment One to the Merck Sharp & Dohme Corp. 2007
Incentive Stock Plan (effective February 15,
2010) Incorporated by reference to Exhibit 10.2 to
Current Report on Form 8-K filed February 18, 2010
|
|
*10
|
.8
|
|
|
|
Merck & Co., Inc. Change in Control Separation
Benefits Plan Incorporated by reference to Current
Report on
Form 8-K
dated November 23, 2009
|
|
*10
|
.9
|
|
|
|
Amendment One to Merck & Co., Inc. Change in Control
Separation Benefits Plan (effective February 15,
2010) Incorporated by reference to Exhibit 10.1
to Current Report on
Form 8-K
filed February 18, 2010
|
|
*10
|
.10
|
|
|
|
MSD Separation Benefits Plan for Nonunion Employees (amended and
restated effective as of November 3, 2009)
|
|
*10
|
.11
|
|
|
|
MSD Special Separation Program for Separated
Employees (effective as of November 3, 2009)
|
|
*10
|
.12
|
|
|
|
MSD Special Separation Program for Bridged Employees
(effective as of November 3, 2009)
|
|
*10
|
.13
|
|
|
|
MSD Special Separation Program for Separated Retirement
Eligible Employees (effective as of November 3, 2009)
|
199
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
*10
|
.14
|
|
|
|
Merck & Co., Inc. 1996 Non-Employee Directors Stock
Option Plan (amended and restated as of November 3,
2009) Incorporated by reference to
Exhibit 10.12 to Current Report on
Form 8-K
filed November 4, 2009
|
|
*10
|
.15
|
|
|
|
Merck & Co., Inc. 2001 Non-Employee Directors Stock
Option Plan (amended and restated as of November 3,
2009) Incorporated by reference to
Exhibit 10.11 to Current Report on
Form 8-K
filed November 4, 2009
|
|
*10
|
.16
|
|
|
|
Merck & Co., Inc. 2006 Non-Employee Directors Stock
Option Plan (amended and restated as of November 3,
2009) Incorporated by reference to Exhibit 10.5
to Current Report on
Form 8-K
filed November 4, 2009
|
|
*10
|
.17
|
|
|
|
Retirement Plan for the Directors of Merck & Co., Inc.
(amended and restated June 21, 1996)
Incorporated by reference to Old Mercks
Form 10-Q
Quarterly Report for the period ended June 30, 1996
|
|
*10
|
.18
|
|
|
|
Merck & Co., Inc. Plan for Deferred Payment of
Directors Compensation (effective as amended and restated
as of November 3, 2009) Incorporated by
reference to Exhibit 10.6 to Current Report on
Form 8-K
filed November 4, 2009
|
|
*10
|
.19
|
|
|
|
Merck & Co., Inc. Schering-Plough 2006 Stock Incentive
Plan (amended and restated as of November 3,
2009 Incorporated by reference to Exhibit 10.13
to Current Report on
Form 8-K
filed November 4, 2009
|
|
*10
|
.20
|
|
|
|
Offer Letter between Merck & Co., Inc. and Peter S.
Kim, dated December 15, 2000 Incorporated by
reference to Old Mercks
Form 10-K
Annual Report for the fiscal year ended December 31, 2003
|
|
*10
|
.21
|
|
|
|
Offer Letter between Merck & Co., Inc. and Peter N.
Kellogg, dated June 18, 2007 Incorporated by
reference to Old Mercks Current Report on
Form 8-K
dated June 28, 2007
|
|
*10
|
.22
|
|
|
|
1997 Stock Incentive Plan Incorporated by reference
to Exhibit 10 to Schering-Ploughs
10-Q for the
period ended September 30, 1997
|
|
*10
|
.23
|
|
|
|
Amendment to 1997 Stock Incentive Plan (effective
February 22, 1999) Incorporated by reference to
Exhibit 10(a) to Schering-Ploughs
10-Q for the
period ended March 31, 1999
|
|
*10
|
.24
|
|
|
|
Amendment to the 1997 Stock Incentive Plan (effective
February 25, 2003) Incorporated by reference to
Exhibit 10(c) to Schering-Ploughs
10-K for the
year ended December 31, 2002
|
|
*10
|
.25
|
|
|
|
2002 Stock Incentive Plan (as amended to February 25,
2003) Incorporated by reference to
Exhibit 10(d) to Schering-Ploughs
10-K for the
year ended December 31, 2002
|
|
*10
|
.26
|
|
|
|
Merck & Co., Inc. Schering-Plough 2006 Stock Incentive
Plan (as amended and restated, effective November 3, 2009)
Incorporated by reference to Exhibit 10.13 to
Current Report on
Form 8-K
filed November 4, 2009
|
|
*10
|
.27
|
|
|
|
Letter agreement dated November 4, 2003 between Robert
Bertolini and Schering-Plough Incorporated by
reference to Exhibit 10(e)(iii) to Schering-Ploughs
10-K for the
year ended December 31, 2003
|
|
*10
|
.28
|
|
|
|
Employment Agreement effective upon a change of control dated as
of December 19, 2006 between Robert Bertolini and
Schering-Plough Corporation Incorporated by
reference to Exhibit 99.1 to Schering-Ploughs
8-K filed
December 21, 2006
|
|
*10
|
.29
|
|
|
|
Amendment to Letter Agreement and Employment Agreement between
Schering-Plough Corporation and Robert J. Bertolini, dated
December 9, 2008 Incorporated by reference to
Exhibit 99.1 to Schering-Ploughs
8-K filed
December 12, 2008
|
|
*10
|
.30
|
|
|
|
Employment Agreement dated as of May 12, 2003 between
Carrie Cox and Schering-Plough Incorporated by
reference to Exhibit 99.6 to Schering-Ploughs
8-K filed
May 13, 2003
|
|
*10
|
.31
|
|
|
|
Amendment to Employment Agreement between Schering-Plough
Corporation and Carrie S. Cox, dated December 9,
2008 Incorporated by reference to Exhibit 99.2
to Schering-Ploughs
8-K filed
December 12, 2008
|
|
*10
|
.32
|
|
|
|
Employment Agreement dated as of April 20, 2003 between
Fred Hassan and Schering-Plough Incorporated by
reference to Exhibit 99.2 to Schering-Ploughs
8-K filed
April 21, 2003
|
200
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
*10
|
.33
|
|
|
|
Amendment to Employment Agreement between Schering-Plough
Corporation and Fred Hassan, dated December 9,
2008 Incorporated by reference to Exhibit 99.3
to Schering-Ploughs
8-K filed
December 12, 2008
|
|
*10
|
.34
|
|
|
|
Employment Agreement dated as of December 19, 2006 between
Thomas P. Koestler, Ph.D. and Schering-Plough
Incorporated by reference to Exhibit 10(e)(v) to
Schering-Ploughs
10-K for the
year ended December 31, 2006
|
|
*10
|
.35
|
|
|
|
Amendment to Employment Agreement between Schering-Plough
Corporation and Thomas P. Koestler, dated December 9,
2008 Incorporated by reference to Exhibit 99.4
to Schering-Ploughs
8-K filed
December 12, 2008
|
|
*10
|
.36
|
|
|
|
Form of employment agreement effective upon a change of control
between Schering-Plough and certain executives for new
agreements beginning in January 1, 2008
Incorporated by reference to Exhibit 10(e)(xv) to
Schering-Ploughs
10-K for the
year ended December 31, 2008
|
|
*10
|
.37
|
|
|
|
Operations Management Team Incentive Plan (as amended and
restated effective June 26, 2006) Incorporated
by reference to Exhibit 10(m)(ii) to Schering-Ploughs
10-Q for the
period ended September 30, 2006
|
|
*10
|
.38
|
|
|
|
Cash Long-Term Incentive Plan (as amended and restated effective
January 24, 2005) Incorporated by reference to
Exhibit 10(n) to Schering-Ploughs
10-K for the
year ended December 31, 2004
|
|
*10
|
.39
|
|
|
|
Long-Term Performance Share Unit Incentive Plan (as amended and
restated effective January 24, 2005)
Incorporated by reference to Exhibit 10(o) to
Schering-Ploughs
10-K for the
year ended December 31, 2004
|
|
*10
|
.40
|
|
|
|
Transformational Performance Contingent Shares
Program Incorporated by reference to
Exhibit 10(p) to Schering-Ploughs
10-K for the
year ended December 31, 2003
|
|
*10
|
.41
|
|
|
|
Schering-Plough Corporation Severance Benefit Plan (as amended
and restated effective November 3, 2009)
|
|
*10
|
.42
|
|
|
|
Schering-Plough Corporation Savings Advantage Plan (as amended
and restated effective November 4, 2009)
|
|
*10
|
.43
|
|
|
|
Schering-Plough Corporation Supplemental Executive Retirement
Plan (as amended and restated effective November 4, 2009)
|
|
*10
|
.44
|
|
|
|
Schering-Plough Retirement Benefits Equalization Plan (as
amended and restated effective November 4, 2009)
|
|
*10
|
.45
|
|
|
|
Executive Incentive Plan (as amended and restated to
October 1, 2000) Incorporated by reference to
Exhibit 10(a)(i) to Schering-Ploughs
10-K for the
year ended December 31, 2000
|
|
*10
|
.46
|
|
|
|
Schering-Plough Corporation Executive Life Insurance Direct
Payment Program (as amended and restated effective
November 4, 2009)
|
|
*10
|
.47
|
|
|
|
Amended and Restated Defined Contribution Trust
Incorporated by reference to Exhibit 10(a)(ii) to
Schering-Ploughs
10-K for the
year ended December 31, 2000
|
|
*10
|
.48
|
|
|
|
Amended and Restated SERP Rabbi Trust Agreement
Incorporated by reference to Exhibit 10(g) to
Schering-Ploughs
10-K for the
year ended December 31, 1998
|
|
10
|
.49
|
|
|
|
Share Purchase Agreement between Akzo Nobel N.V.,
Schering-Plough International C.V., and Schering-Plough
Corporation Incorporated by reference to
Exhibit 10.1 to Schering-Ploughs
8-K filed
October 2, 2007
|
|
10
|
.50
|
|
|
|
Amended and Restated License and Option Agreement dated as of
July 1, 1998 between Astra AB and Astra Merck
Inc. Incorporated by reference to Old Mercks
Form 10-Q
Quarterly Report for the period ended June 30, 1998
|
|
10
|
.51
|
|
|
|
KBI Shares Option Agreement dated as of July 1, 1998
by and among Astra AB, Merck & Co., Inc. and Merck
Holdings, Inc. Incorporated by reference to Old
Mercks
Form 10-Q
Quarterly Report for the period ended June 30, 1998
|
|
10
|
.52
|
|
|
|
KBI-E Asset Option Agreement dated as of July 1, 1998 by
and among Astra AB, Merck & Co., Inc., Astra Merck
Inc. and Astra Merck Enterprises Inc. Incorporated
by reference to Old Mercks
Form 10-Q
Quarterly Report for the period ended June 30, 1998
|
201
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
10
|
.53
|
|
|
|
KBI Supply Agreement dated as of July 1, 1998 between Astra
Merck Inc. and Astra Pharmaceuticals, L.P. (Portions of this
Exhibit are subject to a request for confidential treatment
filed with the Commission). Incorporated by
reference to Old Mercks
Form 10-Q
Quarterly Report for the period ended June 30, 1998
|
|
10
|
.54
|
|
|
|
Second Amended and Restated Manufacturing Agreement dated as of
July 1, 1998 among Merck & Co., Inc., Astra AB,
Astra Merck Inc. and Astra USA, Inc. Incorporated by
reference to Old Mercks
Form 10-Q
Quarterly Report for the period ended June 30, 1998
|
|
10
|
.55
|
|
|
|
Limited Partnership Agreement dated as of July 1, 1998
between KB USA, L.P. and KBI Sub Inc. Incorporated
by reference to Old Mercks
Form 10-Q
Quarterly Report for the period ended June 30, 1998
|
|
10
|
.56
|
|
|
|
Distribution Agreement dated as of July 1, 1998 between
Astra Merck Enterprises Inc. and Astra Pharmaceuticals,
L.P. Incorporated by reference to Old Mercks
Form 10-Q
Quarterly Report for the period ended June 30, 1998
|
|
10
|
.57
|
|
|
|
Agreement to Incorporate Defined Terms dated as of June 19,
1998 between Astra AB, Merck & Co., Inc., Astra Merck
Inc., Astra USA, Inc., KB USA, L.P., Astra Merck Enterprises
Inc., KBI Sub Inc., Merck Holdings, Inc. and Astra
Pharmaceuticals, L.P. Incorporated by reference to
Old Mercks
Form 10-Q
Quarterly Report for the period ended June 30, 1998
|
|
10
|
.58
|
|
|
|
Master Agreement, dated as of December 18, 2001, by and
among MSP Technology (U.S.) Company LLC, MSP Singapore Company,
LLC, Schering Corporation, Schering-Plough Corporation, and
Merck & Co., Inc. (Portions of this Exhibit are
subject to a request for confidential treatment filed with the
Commission) Incorporated by reference to Old
Mercks
Form 10-Q
Quarterly Report for the period ended June 30, 2008
|
|
10
|
.59
|
|
|
|
Form of Voting Agreement made and entered into as of
October 30, 2006 by and between Merck & Co., Inc.
and Sirna Therapeutics, Inc. Incorporated by
reference to Old Mercks Current Report on
Form 8-K
dated October 30, 2006
|
|
10
|
.60
|
|
|
|
Settlement Agreement, dated November 9, 2007, by and
between Merck & Co., Inc. and The Counsel Listed on
the Signature Pages Hereto, including the exhibits
thereto Incorporated by reference to Old
Mercks Current Report on
Form 8-K
dated November 9, 2007
|
|
10
|
.61
|
|
|
|
Commitment Letter by and among Merck & Co., Inc.,
J.P. Morgan Securities Inc. and JPMorgan Chase Bank, N.A.
dated as of March 8, 2009 Incorporated by
reference to Old Mercks Current Report on
Form 8-K
dated March 8, 2009
|
|
10
|
.62
|
|
|
|
Stock option terms for a non-qualified stock option under the
Merck Sharp & Dohme Corp. 2007 Incentive Stock Plan
and the Schering-Plough 2006 Stock Incentive Plan
Incorporated by reference to Exhibit 10.3 to Current Report
on
Form 8-K
filed February 15, 2010
|
|
10
|
.63
|
|
|
|
Restricted stock unit terms for annual grant under the Merck
Sharp & Dohme Corp. 2007 Incentive Stock Plan and the
Schering-Plough 2006 Stock Incentive Plan
Incorporated by reference to Exhibit 10.4 to Current Report
on
Form 8-K
filed February 15, 2010
|
|
10
|
.64
|
|
|
|
Restricted stock unit terms for Leader Shares grant under the
Merck & Co., Inc. 2007 Incentive Stock
Plan Incorporated by reference to Old Mercks
Form 10-Q
Quarterly Report for the period ended March 31, 2009
|
|
10
|
.65
|
|
|
|
Incremental Credit Agreement dated as of May 6, 2009, among
Merck & Co., Inc., the Guarantors and Lenders party
thereto, and JPMorgan Chase Bank, N.A., as Administrative
Agent Incorporated by reference to Old Mercks
Current Report on
Form 8-K
dated May 6, 2009
|
|
10
|
.66
|
|
|
|
Asset Sale Facility Agreement dated as of May 6, 2009,
among Merck & Co., Inc., the Guarantors and Lenders
party thereto, and JPMorgan Chase Bank, N.A., as Administrative
Agent Incorporated by reference to Old Mercks
Current Report on
Form 8-K
dated May 6, 2009
|
|
10
|
.67
|
|
|
|
Bridge Loan Agreement dated as of May 6, 2009, among
Merck & Co., Inc., the Guarantors and Lenders party
thereto, and JPMorgan Chase Bank, N.A., as Administrative
Agent Incorporated by reference to Old Mercks
Current Report on
Form 8-K
dated May 6, 2009
|
202
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
10
|
.68
|
|
|
|
Amendment No. 1 to Amended and Restated Five-Year Credit
Agreement dated as of April 20, 2009 among
Merck & Co., Inc., the Lenders party thereto and
Citicorp USA, Inc., as Administrative Agent
Incorporated by reference to Exhibit 10.1 to Current Report
on
Form 8-K
filed November 4, 2009
|
|
10
|
.69
|
|
|
|
Guarantee and Joinder Agreement dated as of November 3,
2009 by Merck & Co., Inc., the Guarantor, for the
benefit of the Guaranteed Parties Incorporated by
reference to Exhibit 10.3 to Current Report on
Form 8-K
filed November 4, 2009
|
|
10
|
.70
|
|
|
|
Guarantor Joinder Agreement dated as of November 3, 2009,
by Merck & Co., Inc., the Guarantor and JPMorgan Chase
Bank, N.A., as Administrative Agent Incorporated by
reference to Exhibit 10.4 to Current Report on
Form 8-K
filed November 4, 2009
|
|
10
|
.71
|
|
|
|
Call Option Agreement, dated July 29, 2009, by and among
Merck & Co., Inc., Schering-Plough Corporation and
sanovi-aventis Incorporated by reference to Old
Mercks Current Report on
Form 8-K
dated July 31, 2009
|
|
10
|
.72
|
|
|
|
Termination Agreement, dated as of September 17, 2009, by
and among Merck & Co., Inc., Merck SH Inc., Merck
Sharp & Dohme (Holdings) Limited, sanofi-aventis,
sanofi 4 and Merial Limited Incorporated by
reference to Old Mercks Current Report on
Form 8-K
dated September 21, 2009
|
|
10
|
.73
|
|
|
|
Cholesterol Governance Agreement, dated as of May 22, 2000,
by and among Schering-Plough, Merck & Co., Inc. and
the other parties signatory thereto Incorporated by
reference to Exhibit 99.2 to Schering-Ploughs Current
Report on
Form 8-K
dated October 21, 2002
|
|
10
|
.74
|
|
|
|
First Amendment to the Cholesterol Governance Agreement, dated
as of December 18, 2001, by and among Schering-Plough,
Merck & Co., Inc. and the other parties signatory
thereto Incorporated by reference to
Exhibit 99.3 to Schering-Ploughs Current Report on
Form 8-K
filed October 21, 2002
|
|
10
|
.75
|
|
|
|
Master Agreement, dated as of December 18, 2001, by and
among Schering-Plough, Merck & Co., Inc. and the other
parties signatory thereto Incorporated by reference
to Exhibit 99.4 to Schering-Ploughs Current Report on
Form 8-K
filed October 21, 2002
|
|
10
|
.76
|
|
|
|
Letter Agreement dated April 14, 2003 relating to Consent
Decree Incorporated by reference to
Exhibit 99.3 to Schering-Ploughs
10-Q for the
period ended March 31, 2003
|
|
10
|
.77
|
|
|
|
Distribution agreement between Schering-Plough and Centocor,
Inc., dated April 3, 1998 Incorporated by reference
to Exhibit 10(u) to Schering-Ploughs Amended
10-K for the
year ended December 31, 2003, filed May 3, 2004
|
|
10
|
.78
|
|
|
|
Amendment Agreement to the Distribution Agreement between
Centocor, Inc., CAN Development, LLC, and Schering-Plough
(Ireland) Company Incorporated by reference to
Exhibit 10.1 to Schering-Ploughs Current Report on
Form 8-K
filed December 21, 2007
|
|
12
|
|
|
|
|
Computation of Ratios of Earnings to Fixed Charges
|
|
21
|
|
|
|
|
Subsidiaries of Merck & Co., Inc.
|
|
23
|
.1
|
|
|
|
Consent of Independent Registered Public Accounting
Firm Contained on page 206 of this Report
|
|
23
|
.2
|
|
|
|
Independent Auditors Consent Contained on
page 207 of this Report
|
|
31
|
.1
|
|
|
|
Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer
|
|
31
|
.2
|
|
|
|
Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer
|
|
32
|
.1
|
|
|
|
Section 1350 Certification of Chief Executive Officer
|
|
32
|
.2
|
|
|
|
Section 1350 Certification of Chief Financial Officer
|
|
101
|
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The following materials from Merck & Co., Inc.s
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009, formatted in
XBRL (Extensible Business Reporting Language):(i) the
Consolidated Statement of Income, (ii) the Consolidated
Balance Sheet, (iii) the Consolidated Statement of Cash
Flow, and (iv) Notes to Consolidated Financial Statements,
tagged as blocks of text.
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* |
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Management contract or
compensatory plan or arrangement. |
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Certain portions of the exhibit
have been omitted pursuant to a request for confidential
treatment. The non-public information has been filed separately
with the Securities and Exchange Commission pursuant to
rule 24b-2
under the Securities Exchange Act of 1934, as amended. |
203
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: March 1, 2010
MERCK & CO., INC.
Richard T. Clark
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
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Signatures
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Title
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Date
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/s/ Richard
T. Clark
Richard
T. Clark
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Chairman, President, Chief Executive Officer;
Principal Executive Officer; Director
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March 1, 2010
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/s/ Peter
N. Kellogg
Peter
N. Kellogg
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Executive Vice President and Chief Financial
Officer; Principal Financial Officer
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March 1, 2010
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/s/ John
Canan
John
Canan
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Senior Vice President and Global Controller;
Principal Accounting Officer
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March 1, 2010
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/s/ Leslie
A. Brun
Leslie
A. Brun
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Director
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March 1, 2010
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/s/ Thomas
R. Cech
Thomas
R. Cech
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Director
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March 1, 2010
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/s/ Thomas
H. Glocer
Thomas
H. Glocer
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Director
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March 1, 2010
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/s/ Steven
F. Goldstone
Steven
F. Goldstone
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Director
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March 1, 2010
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/s/ William
B. Harrison, Jr.
William
B. Harrison, Jr.
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Director
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March 1, 2010
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Harry
R. Jacobson
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Director
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March 1, 2010
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/s/ William
N. Kelley
William
N. Kelley
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Director
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March 1, 2010
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/s/ C.
Robert Kidder
C.
Robert Kidder
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Director
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March 1, 2010
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204
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Signatures
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Title
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Date
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/s/ Rochelle
B. Lazarus
Rochelle
B. Lazarus
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Director
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March 1, 2010
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Carlos
E. Represas
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Director
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March 1, 2010
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/s/ Patricia
F. Russo
Patricia
F. Russo
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Director
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March 1, 2010
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/s/ Thomas
E. Shenk
Thomas
E. Shenk
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Director
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March 1, 2010
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/s/ Anne
M. Tatlock
Anne
M. Tatlock
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Director
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March 1, 2010
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/s/ Samuel
O. Thier
Samuel
O. Thier
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Director
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March 1, 2010
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/s/ Craig
B. Thompson
Craig
B. Thompson
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Director
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March 1, 2010
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/s/ Wendell
P. Weeks
Wendell
P. Weeks
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Director
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March 1, 2010
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/s/ Peter
C. Wendell
Peter
C. Wendell
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Director
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March 1, 2010
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205
Exhibit 23.1
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-3 (Nos. 333-164482, 333-163546
and 333-163858) and on Form S-8 (Nos. 333-162882, 333-162883,
333-162884, 333-162885, 333-162886, 033-57111, 333-112421,
333-134281, 333-121089, 333-30331, 333-87077, 333-153542,
333-162007, 333-91440 and 333-105567) of Merck & Co., Inc.
of our report dated February 26, 2010 relating to the
financial statements and the effectiveness of internal control
over financial reporting, which appears in this Form 10-K.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 26, 2010
206
Exhibit 23.2
INDEPENDENT
AUDITORS CONSENT
We consent to the incorporation by reference in Registration
Statement
Nos. 333-164482,
333-163546,
333-163858,
333-145055,
333-12909
and
333-30355 on
Form S-3
and Registration Statement Nos.
333-162882,
333-162883,
333-162884,
333-162885,
333-162886,
033-57111,
333-112421,
333-134281,
333-121089,
333-30331,
333-87077,
333-153542,
333-162007,
333-91440,
333-105567,
2-84723, 2-83963,
333-105568,
333-104714
and 33-50606
on
Form S-8
of Merck & Co., Inc. of our report dated
February 26, 2009, relating to the combined financial
statements of the Merck/Schering-Plough Cholesterol Partnership
appearing in this Annual Report on
Form 10-K
of Merck & Co., Inc. for the year ended
December 31, 2009.
Deloitte & Touche LLP
Parsippany, New Jersey
February 26, 2010
207
EXHIBIT
INDEX
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
2
|
.1
|
|
|
|
Master Restructuring Agreement dated as of June 19, 1998
between Astra AB, Merck & Co., Inc., Astra Merck Inc.,
Astra USA, Inc., KB USA, L.P., Astra Merck Enterprises, Inc.,
KBI Sub Inc., Merck Holdings, Inc. and Astra Pharmaceuticals,
L.P. (Portions of this Exhibit are subject to a request for
confidential treatment filed with the Commission)
Incorporated by reference to Old Mercks
Form 10-Q
Quarterly Report for the period ended June 30, 1998
|
|
2
|
.2
|
|
|
|
Agreement and Plan of Merger by and among Merck & Co.,
Inc., Spinnaker Acquisition Corp., a wholly owned subsidiary of
Merck & Co., Inc. and Sirna Therapeutics, Inc., dated
as of October 30, 2006 Incorporated by
reference to Old Mercks Current Report on
Form 8-K
dated October 30, 2006
|
|
2
|
.3
|
|
|
|
Agreement and Plan of Merger by and among Merck & Co.,
Inc., Schering-Plough Corporation, Blue, Inc. and Purple, Inc.
dated as of March 8, 2009 Incorporated by
reference to Schering-Ploughs Current Report on
Form 8-K
filed March 11, 2009
|
|
2
|
.4
|
|
|
|
Share Purchase Agreement, dated July 29, 2009, by and among
Merck & Co., Inc., Merck SH Inc., Merck
Sharp & Dohme (Holdings) Limited and
sanofi-aventis Incorporated by reference to Old
Mercks Current Report on
Form 8-K
dated July 31, 2009
|
|
3
|
.1
|
|
|
|
Restated Certificate of Incorporation of Merck & Co.,
Inc. (November 3, 2009) Incorporated by
reference to Current Report on
Form 8-K
filed November 4, 2009
|
|
3
|
.2
|
|
|
|
By-Laws of Merck & Co., Inc. (effective
November 3, 2009) Incorporated by reference to
Current Report on
Form 8-K
filed November 4, 2009
|
|
4
|
.1
|
|
|
|
Indenture, dated as of April 1, 1991, between
Merck & Co., Inc. and Morgan Guaranty
Trust Company of New York, as Trustee
Incorporated by reference to Exhibit 4 to Old Mercks
Registration Statement on
Form S-3
(No. 33-39349)
|
|
4
|
.2
|
|
|
|
First Supplemental Indenture between Merck & Co., Inc.
and First Trust of New York, National Association, as
Trustee Incorporated by reference to
Exhibit 4(b) to Old Mercks Registration Statement on
Form S-3
(No. 333-36383)
|
|
4
|
.3
|
|
|
|
Second Supplemental Indenture, dated November 3, 2009,
among Merck Sharp & Dohme Corp., Merck &
Co., Inc. and U.S. Bank Trust National Association, as
Trustee Incorporated by reference to
Exhibit 4.3 to Current Report on
Form 8-K
filed November 4, 2009
|
|
4
|
.4
|
|
|
|
1.875% Notes due 2011 Officers Certificate of the
Company dated June 25, 2009, including form of the 2011
Notes Incorporated by reference to Old Mercks
Current Report on
Form 8-K
dated June 25, 2009
|
|
4
|
.5
|
|
|
|
4.000% Notes due 2015 Officers Certificate of the
Company dated June 25, 2009, including form of the 2015
Notes Incorporated by reference to Old Mercks
Current Report on
Form 8-K
dated June 25, 2009
|
|
4
|
.6
|
|
|
|
5.000% Notes due 2019 Officers Certificate of the
Company dated June 25, 2009, including form of the 2019
Notes Incorporated by reference to Old Mercks
Current Report on
Form 8-K
dated June 25, 2009
|
|
4
|
.7
|
|
|
|
5.850% Notes due 2039 Officers Certificate of the
Company dated June 25, 2009, including form of the 2039
Notes Incorporated by reference to Old Mercks
Current Report on
Form 8-K
dated June 25, 2009
|
|
4
|
.8
|
|
|
|
Indenture, dated November 26, 2003, between Schering-Plough
and The Bank of New York as Trustee Incorporated by
reference to Exhibit 4.1 to Schering-Ploughs Current
Report on
Form 8-K
filed November 28, 2003
|
|
4
|
.9
|
|
|
|
First Supplemental Indenture (including Form of Note), dated
November 26, 2003 Incorporated by reference to
Exhibit 4.2 to Schering-Ploughs Current Report on
Form 8-K
filed November 28, 2003
|
|
4
|
.10
|
|
|
|
Second Supplemental Indenture (including Form of Note), dated
November 26, 2003 Incorporated by reference to
Exhibit 4.3 to Schering-Ploughs Current Report on
Form 8-K
filed November 28, 2003
|
|
4
|
.11
|
|
|
|
5.30% Global Senior Note, due 2013 Incorporated by
reference to Exhibit 4(c)(iv) to Schering-Ploughs
Form 10-K
Annual Report for the fiscal year ended December 31, 2003
|
208
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
4
|
.12
|
|
|
|
6.50% Global Senior Note, due 2033 Incorporated by
reference to Exhibit 4(c)(v) to Schering-Ploughs
Form 10-K
Annual Report for the fiscal year ended December 31, 2003
|
|
4
|
.13
|
|
|
|
Third Supplemental Indenture (including Form of Note), dated
September 17, 2007 Incorporated by reference to
Exhibit 4.1 to Schering-Ploughs Current Report on
Form 8-K
filed September 17, 2007
|
|
4
|
.14
|
|
|
|
Fourth Supplemental Indenture (including Form of Note), dated
October 1, 2007 Incorporated by reference to
Exhibit 4.1 to Schering-Ploughs Current Report on
Form 8-K
filed October 2, 2007
|
|
4
|
.15
|
|
|
|
Fifth Supplemental Indenture, dated November 3, 2009, among
Merck Sharp & Dohme Corp., Merck & Co., Inc.
and The Bank of New York Mellon, as Trustee
Incorporated by reference to Exhibit 4.4 to Current Report
on
Form 8-K
filed November 4, 2009
|
|
*10
|
.1
|
|
|
|
Executive Incentive Plan (as amended effective February 27,
1996) Incorporated by reference to Old Mercks
Form 10-K
Annual Report for the fiscal year ended December 31, 1995
|
|
*10
|
.2
|
|
|
|
Merck Sharp & Dohme Corp. Deferral Program, including
Base Salary Deferral Plan (effective as amended and restated as
of November 3, 2009) Incorporated by reference
to Exhibit 10.15 to Current Report on
Form 8-K
filed November 4, 2009
|
|
*10
|
.3
|
|
|
|
Merck Sharp & Dohme Corp. 1996 Incentive Stock Plan
(amended and restated as of November 3, 2009)
Incorporated by reference to Exhibit 10.10 to Current
Report on
Form 8-K
filed November 4, 2009
|
|
*10
|
.4
|
|
|
|
Merck Sharp & Dohme Corp. 2001 Incentive Stock Plan
(amended and restated as of November 3, 2009)
Incorporated by reference to Exhibit 10.9 to Current Report
on
Form 8-K
filed November 4, 2009
|
|
*10
|
.5
|
|
|
|
Merck Sharp & Dohme Corp. 2004 Incentive Stock Plan
(amended and restated as of November 3, 2009)
Incorporated by reference to Exhibit 10.8 to Current Report
on
Form 8-K
filed November 4, 2009
|
|
*10
|
.6
|
|
|
|
Merck Sharp & Dohme Corp. 2007 Incentive Stock Plan
(effective as amended and restated as of November 3,
2009) Incorporated by reference to Exhibit 10.7
to Current Report on
Form 8-K
filed November 4, 2009
|
|
*10
|
.7
|
|
|
|
Amendment One to the Merck Sharp & Dohme Corp. 2007
Incentive Stock Plan (effective February 15,
2010) Incorporated by reference to Exhibit 10.2 to
Current Report on Form 8-K filed February 18, 2010
|
|
*10
|
.8
|
|
|
|
Merck & Co., Inc. Change in Control Separation
Benefits Plan Incorporated by reference to Current
Report on
Form 8-K
dated November 23, 2009
|
|
*10
|
.9
|
|
|
|
Amendment One to Merck & Co., Inc. Change in Control
Separation Benefits Plan (effective February 15,
2010) Incorporated by reference to Exhibit 10.1
to Current Report on
Form 8-K
filed February 18, 2010
|
|
*10
|
.10
|
|
|
|
MSD Separation Benefits Plan for Nonunion Employees (amended and
restated effective as of November 3, 2009)
|
|
*10
|
.11
|
|
|
|
MSD Special Separation Program for Separated
Employees (effective as of November 3, 2009)
|
|
*10
|
.12
|
|
|
|
MSD Special Separation Program for Bridged Employees
(effective as of November 3, 2009)
|
|
*10
|
.13
|
|
|
|
MSD Special Separation Program for Separated Retirement
Eligible Employees (effective as of November 3, 2009)
|
|
*10
|
.14
|
|
|
|
Merck & Co., Inc. 1996 Non-Employee Directors Stock
Option Plan (amended and restated as of November 3,
2009) Incorporated by reference to
Exhibit 10.12 to Current Report on
Form 8-K
filed November 4, 2009
|
|
*10
|
.15
|
|
|
|
Merck & Co., Inc. 2001 Non-Employee Directors Stock
Option Plan (amended and restated as of November 3,
2009) Incorporated by reference to
Exhibit 10.11 to Current Report on
Form 8-K
filed November 4, 2009
|
|
*10
|
.16
|
|
|
|
Merck & Co., Inc. 2006 Non-Employee Directors Stock
Option Plan (amended and restated as of November 3,
2009) Incorporated by reference to Exhibit 10.5
to Current Report on
Form 8-K
filed November 4, 2009
|
209
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
*10
|
.17
|
|
|
|
Retirement Plan for the Directors of Merck & Co., Inc.
(amended and restated June 21, 1996)
Incorporated by reference to Old Mercks
Form 10-Q
Quarterly Report for the period ended June 30, 1996
|
|
*10
|
.18
|
|
|
|
Merck & Co., Inc. Plan for Deferred Payment of
Directors Compensation (effective as amended and restated
as of November 3, 2009) Incorporated by
reference to Exhibit 10.6 to Current Report on
Form 8-K
filed November 4, 2009
|
|
*10
|
.19
|
|
|
|
Merck & Co., Inc. Schering-Plough 2006 Stock Incentive
Plan (amended and restated as of November 3,
2009 Incorporated by reference to Exhibit 10.13
to Current Report on
Form 8-K
filed November 4, 2009
|
|
*10
|
.20
|
|
|
|
Offer Letter between Merck & Co., Inc. and Peter S.
Kim, dated December 15, 2000 Incorporated by
reference to Old Mercks
Form 10-K
Annual Report for the fiscal year ended December 31, 2003
|
|
*10
|
.21
|
|
|
|
Offer Letter between Merck & Co., Inc. and Peter N.
Kellogg, dated June 18, 2007 Incorporated by
reference to Old Mercks Current Report on
Form 8-K
dated June 28, 2007
|
|
*10
|
.22
|
|
|
|
1997 Stock Incentive Plan Incorporated by reference
to Exhibit 10 to Schering-Ploughs
10-Q for the
period ended September 30, 1997
|
|
*10
|
.23
|
|
|
|
Amendment to 1997 Stock Incentive Plan (effective
February 22, 1999) Incorporated by reference to
Exhibit 10(a) to Schering-Ploughs
10-Q for the
period ended March 31, 1999
|
|
*10
|
.24
|
|
|
|
Amendment to the 1997 Stock Incentive Plan (effective
February 25, 2003) Incorporated by reference to
Exhibit 10(c) to Schering-Ploughs
10-K for the
year ended December 31, 2002
|
|
*10
|
.25
|
|
|
|
2002 Stock Incentive Plan (as amended to February 25,
2003) Incorporated by reference to
Exhibit 10(d) to Schering-Ploughs
10-K for the
year ended December 31, 2002
|
|
*10
|
.26
|
|
|
|
Merck & Co., Inc. Schering-Plough 2006 Stock Incentive
Plan (as amended and restated, effective November 3, 2009)
Incorporated by reference to Exhibit 10.13 to
Current Report on
Form 8-K
filed November 4, 2009
|
|
*10
|
.27
|
|
|
|
Letter agreement dated November 4, 2003 between Robert
Bertolini and Schering-Plough Incorporated by
reference to Exhibit 10(e)(iii) to Schering-Ploughs
10-K for the
year ended December 31, 2003
|
|
*10
|
.28
|
|
|
|
Employment Agreement effective upon a change of control dated as
of December 19, 2006 between Robert Bertolini and
Schering-Plough Corporation Incorporated by
reference to Exhibit 99.1 to Schering-Ploughs
8-K filed
December 21, 2006
|
|
*10
|
.29
|
|
|
|
Amendment to Letter Agreement and Employment Agreement between
Schering-Plough Corporation and Robert J. Bertolini, dated
December 9, 2008 Incorporated by reference to
Exhibit 99.1 to Schering-Ploughs
8-K filed
December 12, 2008
|
|
*10
|
.30
|
|
|
|
Employment Agreement dated as of May 12, 2003 between
Carrie Cox and Schering-Plough Incorporated by
reference to Exhibit 99.6 to Schering-Ploughs
8-K filed
May 13, 2003
|
|
*10
|
.31
|
|
|
|
Amendment to Employment Agreement between Schering-Plough
Corporation and Carrie S. Cox, dated December 9,
2008 Incorporated by reference to Exhibit 99.2
to Schering-Ploughs
8-K filed
December 12, 2008
|
|
*10
|
.32
|
|
|
|
Employment Agreement dated as of April 20, 2003 between
Fred Hassan and Schering-Plough Incorporated by
reference to Exhibit 99.2 to Schering-Ploughs
8-K filed
April 21, 2003
|
|
*10
|
.33
|
|
|
|
Amendment to Employment Agreement between Schering-Plough
Corporation and Fred Hassan, dated December 9,
2008 Incorporated by reference to Exhibit 99.3
to Schering-Ploughs
8-K filed
December 12, 2008
|
|
*10
|
.34
|
|
|
|
Employment Agreement dated as of December 19, 2006 between
Thomas P. Koestler, Ph.D. and Schering-Plough
Incorporated by reference to Exhibit 10(e)(v) to
Schering-Ploughs
10-K for the
year ended December 31, 2006
|
|
*10
|
.35
|
|
|
|
Amendment to Employment Agreement between Schering-Plough
Corporation and Thomas P. Koestler, dated December 9,
2008 Incorporated by reference to Exhibit 99.4
to Schering-Ploughs
8-K filed
December 12, 2008
|
210
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
*10
|
.36
|
|
|
|
Form of employment agreement effective upon a change of control
between Schering-Plough and certain executives for new
agreements beginning in January 1, 2008
Incorporated by reference to Exhibit 10(e)(xv) to
Schering-Ploughs
10-K for the
year ended December 31, 2008
|
|
*10
|
.37
|
|
|
|
Operations Management Team Incentive Plan (as amended and
restated effective June 26, 2006) Incorporated
by reference to Exhibit 10(m)(ii) to Schering-Ploughs
10-Q for the
period ended September 30, 2006
|
|
*10
|
.38
|
|
|
|
Cash Long-Term Incentive Plan (as amended and restated effective
January 24, 2005) Incorporated by reference to
Exhibit 10(n) to Schering-Ploughs
10-K for the
year ended December 31, 2004
|
|
*10
|
.39
|
|
|
|
Long-Term Performance Share Unit Incentive Plan (as amended and
restated effective January 24, 2005)
Incorporated by reference to Exhibit 10(o) to
Schering-Ploughs
10-K for the
year ended December 31, 2004
|
|
*10
|
.40
|
|
|
|
Transformational Performance Contingent Shares
Program Incorporated by reference to
Exhibit 10(p) to Schering-Ploughs
10-K for the
year ended December 31, 2003
|
|
*10
|
.41
|
|
|
|
Schering-Plough Corporation Severance Benefit Plan (as amended
and restated effective November 3, 2009)
|
|
*10
|
.42
|
|
|
|
Schering-Plough Corporation Savings Advantage Plan (as amended
and restated effective November 4, 2009)
|
|
*10
|
.43
|
|
|
|
Schering-Plough Corporation Supplemental Executive Retirement
Plan (as amended and restated effective November 4, 2009)
|
|
*10
|
.44
|
|
|
|
Schering-Plough Retirement Benefits Equalization Plan (as
amended and restated effective November 4, 2009)
|
|
*10
|
.45
|
|
|
|
Executive Incentive Plan (as amended and restated to
October 1, 2000) Incorporated by reference to
Exhibit 10(a)(i) to Schering-Ploughs
10-K for the
year ended December 31, 2000
|
|
*10
|
.46
|
|
|
|
Schering-Plough Corporation Executive Life Insurance Direct
Payment Program (as amended and restated effective
November 4, 2009)
|
|
*10
|
.47
|
|
|
|
Amended and Restated Defined Contribution Trust
Incorporated by reference to Exhibit 10(a)(ii) to
Schering-Ploughs
10-K for the
year ended December 31, 2000
|
|
*10
|
.48
|
|
|
|
Amended and Restated SERP Rabbi Trust Agreement
Incorporated by reference to Exhibit 10(g) to
Schering-Ploughs
10-K for the
year ended December 31, 1998
|
|
10
|
.49
|
|
|
|
Share Purchase Agreement between Akzo Nobel N.V.,
Schering-Plough International C.V., and Schering-Plough
Corporation Incorporated by reference to
Exhibit 10.1 to Schering-Ploughs
8-K filed
October 2, 2007
|
|
10
|
.50
|
|
|
|
Amended and Restated License and Option Agreement dated as of
July 1, 1998 between Astra AB and Astra Merck
Inc. Incorporated by reference to Old Mercks
Form 10-Q
Quarterly Report for the period ended June 30, 1998
|
|
10
|
.51
|
|
|
|
KBI Shares Option Agreement dated as of July 1, 1998
by and among Astra AB, Merck & Co., Inc. and Merck
Holdings, Inc. Incorporated by reference to Old
Mercks
Form 10-Q
Quarterly Report for the period ended June 30, 1998
|
|
10
|
.52
|
|
|
|
KBI-E Asset Option Agreement dated as of July 1, 1998 by
and among Astra AB, Merck & Co., Inc., Astra Merck
Inc. and Astra Merck Enterprises Inc. Incorporated
by reference to Old Mercks
Form 10-Q
Quarterly Report for the period ended June 30, 1998
|
|
10
|
.53
|
|
|
|
KBI Supply Agreement dated as of July 1, 1998 between Astra
Merck Inc. and Astra Pharmaceuticals, L.P. (Portions of this
Exhibit are subject to a request for confidential treatment
filed with the Commission). Incorporated by
reference to Old Mercks
Form 10-Q
Quarterly Report for the period ended June 30, 1998
|
|
10
|
.54
|
|
|
|
Second Amended and Restated Manufacturing Agreement dated as of
July 1, 1998 among Merck & Co., Inc., Astra AB,
Astra Merck Inc. and Astra USA, Inc. Incorporated by
reference to Old Mercks
Form 10-Q
Quarterly Report for the period ended June 30, 1998
|
211
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
10
|
.55
|
|
|
|
Limited Partnership Agreement dated as of July 1, 1998
between KB USA, L.P. and KBI Sub Inc. Incorporated
by reference to Old Mercks
Form 10-Q
Quarterly Report for the period ended June 30, 1998
|
|
10
|
.56
|
|
|
|
Distribution Agreement dated as of July 1, 1998 between
Astra Merck Enterprises Inc. and Astra Pharmaceuticals,
L.P. Incorporated by reference to Old Mercks
Form 10-Q
Quarterly Report for the period ended June 30, 1998
|
|
10
|
.57
|
|
|
|
Agreement to Incorporate Defined Terms dated as of June 19,
1998 between Astra AB, Merck & Co., Inc., Astra Merck
Inc., Astra USA, Inc., KB USA, L.P., Astra Merck Enterprises
Inc., KBI Sub Inc., Merck Holdings, Inc. and Astra
Pharmaceuticals, L.P. Incorporated by reference to
Old Mercks
Form 10-Q
Quarterly Report for the period ended June 30, 1998
|
|
10
|
.58
|
|
|
|
Master Agreement, dated as of December 18, 2001, by and
among MSP Technology (U.S.) Company LLC, MSP Singapore Company,
LLC, Schering Corporation, Schering-Plough Corporation, and
Merck & Co., Inc. (Portions of this Exhibit are
subject to a request for confidential treatment filed with the
Commission) Incorporated by reference to Old
Mercks
Form 10-Q
Quarterly Report for the period ended June 30, 2008
|
|
10
|
.59
|
|
|
|
Form of Voting Agreement made and entered into as of
October 30, 2006 by and between Merck & Co., Inc.
and Sirna Therapeutics, Inc. Incorporated by
reference to Old Mercks Current Report on
Form 8-K
dated October 30, 2006
|
|
10
|
.60
|
|
|
|
Settlement Agreement, dated November 9, 2007, by and
between Merck & Co., Inc. and The Counsel Listed on
the Signature Pages Hereto, including the exhibits
thereto Incorporated by reference to Old
Mercks Current Report on
Form 8-K
dated November 9, 2007
|
|
10
|
.61
|
|
|
|
Commitment Letter by and among Merck & Co., Inc.,
J.P. Morgan Securities Inc. and JPMorgan Chase Bank, N.A.
dated as of March 8, 2009 Incorporated by
reference to Old Mercks Current Report on
Form 8-K
dated March 8, 2009
|
|
10
|
.62
|
|
|
|
Stock option terms for a non-qualified stock option under the
Merck Sharp & Dohme Corp. 2007 Incentive Stock Plan
and the Schering-Plough 2006 Stock Incentive Plan
Incorporated by reference to Exhibit 10.3 to Current Report
on
Form 8-K
filed February 15, 2010
|
|
10
|
.63
|
|
|
|
Restricted stock unit terms for annual grant under the Merck
Sharp & Dohme Corp. 2007 Incentive Stock Plan and the
Schering-Plough 2006 Stock Incentive Plan
Incorporated by reference to Exhibit 10.4 to Current Report
on
Form 8-K
filed February 15, 2010
|
|
10
|
.64
|
|
|
|
Restricted stock unit terms for Leader Shares grant under the
Merck & Co., Inc. 2007 Incentive Stock
Plan Incorporated by reference to Old Mercks
Form 10-Q
Quarterly Report for the period ended March 31, 2009
|
|
10
|
.65
|
|
|
|
Incremental Credit Agreement dated as of May 6, 2009, among
Merck & Co., Inc., the Guarantors and Lenders party
thereto, and JPMorgan Chase Bank, N.A., as Administrative
Agent Incorporated by reference to Old Mercks
Current Report on
Form 8-K
dated May 6, 2009
|
|
10
|
.66
|
|
|
|
Asset Sale Facility Agreement dated as of May 6, 2009,
among Merck & Co., Inc., the Guarantors and Lenders
party thereto, and JPMorgan Chase Bank, N.A., as Administrative
Agent Incorporated by reference to Old Mercks
Current Report on
Form 8-K
dated May 6, 2009
|
|
10
|
.67
|
|
|
|
Bridge Loan Agreement dated as of May 6, 2009, among
Merck & Co., Inc., the Guarantors and Lenders party
thereto, and JPMorgan Chase Bank, N.A., as Administrative
Agent Incorporated by reference to Old Mercks
Current Report on
Form 8-K
dated May 6, 2009
|
|
10
|
.68
|
|
|
|
Amendment No. 1 to Amended and Restated Five-Year Credit
Agreement dated as of April 20, 2009 among
Merck & Co., Inc., the Lenders party thereto and
Citicorp USA, Inc., as Administrative Agent
Incorporated by reference to Exhibit 10.1 to Current Report
on
Form 8-K
filed November 4, 2009
|
|
10
|
.69
|
|
|
|
Guarantee and Joinder Agreement dated as of November 3,
2009 by Merck & Co., Inc., the Guarantor, for the
benefit of the Guaranteed Parties Incorporated by
reference to Exhibit 10.3 to Current Report on
Form 8-K
filed November 4, 2009
|
|
10
|
.70
|
|
|
|
Guarantor Joinder Agreement dated as of November 3, 2009,
by Merck & Co., Inc., the Guarantor and JPMorgan Chase
Bank, N.A., as Administrative Agent Incorporated by
reference to Exhibit 10.4 to Current Report on
Form 8-K
filed November 4, 2009
|
212
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
10
|
.71
|
|
|
|
Call Option Agreement, dated July 29, 2009, by and among
Merck & Co., Inc., Schering-Plough Corporation and
sanovi-aventis Incorporated by reference to Old
Mercks Current Report on
Form 8-K
dated July 31, 2009
|
|
10
|
.72
|
|
|
|
Termination Agreement, dated as of September 17, 2009, by
and among Merck & Co., Inc., Merck SH Inc., Merck
Sharp & Dohme (Holdings) Limited, sanofi-aventis,
sanofi 4 and Merial Limited Incorporated by
reference to Old Mercks Current Report on
Form 8-K
dated September 21, 2009
|
|
10
|
.73
|
|
|
|
Cholesterol Governance Agreement, dated as of May 22, 2000,
by and among Schering-Plough, Merck & Co., Inc. and
the other parties signatory thereto Incorporated by
reference to Exhibit 99.2 to Schering-Ploughs Current
Report on
Form 8-K
dated October 21, 2002
|
|
10
|
.74
|
|
|
|
First Amendment to the Cholesterol Governance Agreement, dated
as of December 18, 2001, by and among Schering-Plough,
Merck & Co., Inc. and the other parties signatory
thereto Incorporated by reference to
Exhibit 99.3 to Schering-Ploughs Current Report on
Form 8-K
filed October 21, 2002
|
|
10
|
.75
|
|
|
|
Master Agreement, dated as of December 18, 2001, by and
among Schering-Plough, Merck & Co., Inc. and the other
parties signatory thereto Incorporated by reference
to Exhibit 99.4 to Schering-Ploughs Current Report on
Form 8-K
filed October 21, 2002
|
|
10
|
.76
|
|
|
|
Letter Agreement dated April 14, 2003 relating to Consent
Decree Incorporated by reference to
Exhibit 99.3 to Schering-Ploughs
10-Q for the
period ended March 31, 2003
|
|
10
|
.77
|
|
|
|
Distribution agreement between Schering-Plough and Centocor,
Inc., dated April 3, 1998 Incorporated by reference
to Exhibit 10(u) to Schering-Ploughs Amended
10-K for the
year ended December 31, 2003, filed May 3, 2004
|
|
10
|
.78
|
|
|
|
Amendment Agreement to the Distribution Agreement between
Centocor, Inc., CAN Development, LLC, and Schering-Plough
(Ireland) Company Incorporated by reference to
Exhibit 10.1 to Schering-Ploughs Current Report on
Form 8-K
filed December 21, 2007
|
|
12
|
|
|
|
|
Computation of Ratios of Earnings to Fixed Charges
|
|
21
|
|
|
|
|
Subsidiaries of Merck & Co., Inc.
|
|
23
|
.1
|
|
|
|
Consent of Independent Registered Public Accounting
Firm Contained on page 206 of this Report
|
|
23
|
.2
|
|
|
|
Independent Auditors Consent Contained on
page 207 of this Report
|
|
31
|
.1
|
|
|
|
Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer
|
|
31
|
.2
|
|
|
|
Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer
|
|
32
|
.1
|
|
|
|
Section 1350 Certification of Chief Executive Officer
|
|
32
|
.2
|
|
|
|
Section 1350 Certification of Chief Financial Officer
|
|
101
|
|
|
|
|
The following materials from Merck & Co., Inc.s
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009, formatted in
XBRL (Extensible Business Reporting Language):(i) the
Consolidated Statement of Income, (ii) the Consolidated
Balance Sheet, (iii) the Consolidated Statement of Cash
Flow, and (iv) Notes to Consolidated Financial Statements,
tagged as blocks of text.
|
|
|
|
* |
|
Management contract or
compensatory plan or arrangement. |
|
|
|
Certain portions of the exhibit
have been omitted pursuant to a request for confidential
treatment. The non-public information has been filed separately
with the Securities and Exchange Commission pursuant to
rule 24b-2
under the Securities Exchange Act of 1934, as amended. |
213